FEDERAL COURT OF AUSTRALIA McNeil v Commissioner of Taxation [2004] FCA 420 INCOME TAX – test case involving applicant as individual shareholder in listed public company – announcement of buy back by listed public company of 5% of its issued share capital – sell back rights issued to shareholders – existing holding of shares not revenue asset in applicant's hands – sell back rights listed on ASX for limited period of trading – applicant elected not to include her sell back rights in ASX listing – at conclusion of limited period of trading applicant entitled to share in proceeds of sale of sell back rights according to pre-existing formula – whether share of proceeds of sale of sell back rights income according to ordinary concepts in shareholder's hands CAPITAL GAINS TAX – alternatively whether stock market value of applicant's unrealised sell back rights based on share market price of first day's listing of sell back rights subject to capital gains tax Income Tax Assessment Act 1997 s 6-5, 104-1D, 104-155, 116-20, 118-20 Income Tax Assessment Act 1936 s 25(1) Income Tax Assessment Act 1915-1918 (NSW) s 14 Income Tax (Management) 1928 (NSW) s 11(b) McNeil v Commissioner of Taxation (2003) FCA 958 Abbott v Philbin [1961] AC 352 Donaldson v Federal Commissioner of Taxation (1974) 3 ALR 516 Eisner v Macomber (1920) 252 US 189 Federal Commissioner of Taxation v Montgomery (1999) 198 CLR 639 Scott v Federal Commissioner of Taxation (1935) 35 SR (NSW) 215 Webb v Federal Commissioner of Taxation (1922) 30 CLR 450 Commissioner of Taxation (NSW) v Stephenson (1937) 59 CLR 80 Federal Commissioner of Taxation v Blakely (1951) 82 CLR 388 Gibb v Commissioner of Taxation (1966)118 CLR 628 Federal Commissioner of Taxation v Miranda (1976) 11 ALR 85 Macmine Pty Ltd v Federal Commissioner of Taxation (1979) 24 ALR 217 Hepples v Commissioner of Taxation (1991-1992) 173 CLR 492 Workers' Compensation Board (Qld) v Technical Products Pty Ltd (1988) 165 CLR 642 Australian Securities Commission v Bank Leumi Le-Israel (Switzerland) and Others (1996) 69 FCR 531 Parsons, Income Taxation in Australia (1985) Farrands, The Law of Options (1992) HELEN MARY McNEIL v COMMISSIONER OF TAXATION N 1169 OF 2002 CONTI J 14 APRIL 2004 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 1169 OF 2002 BETWEEN: HELEN MARY McNEIL APPLICANT AND: COMMISSIONER OF TAXATION RESPONDENT JUDGE: CONTI J DATE OF ORDER: 14 APRIL 2004 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The application be allowed. 2. The objection decision dated 31 October 2002 be set aside and the objection of the applicant dated 19 June 2002 be allowed. 3. The matter be remitted to the respondent for reassessment according to law. 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 N 1169 OF 2002 BETWEEN: HELEN MARY McNEIL APPLICANT AND: COMMISSIONER OF TAXATION RESPONDENT JUDGE: CONTI J DATE: 14 APRIL 2004 PLACE: SYDNEY REASONS FOR JUDGMENT The nature of and context to the proceedings 1 The proceedings are in the nature of a test case relating to the assessability or otherwise to income tax or capital gains tax of the proceeds of realisation by shareholders of sell back rights in St George Bank Limited ('SGL'), being sell back rights acquired pursuant to an off-market share buy back scheme implemented during the months of January 2001 to April 2001 in relation to approximately 5% (that is, 22.8 million) of SGL's issued ordinary shares. The facts and circumstances reproduced below were mutually agreed between the parties, or essentially so, and accordingly the submissions of the parties related to the issues of taxation law arising. The Commissioner had originally proposed to adduce certain testimony from a chartered accountant, purportedly of an expert nature, relating to the nature or character of the sell back rights. At a preliminary hearing on 11 September 2003, I ruled that testimony to be inadmissible (McNeil v Commissioner of Taxation (2003) FCA 958). 2 SGL is a well-known Australian bank, which converted constitutionally from a building society to a corporation in 1992. As a consequence of that restructure, shares held in the former building society were converted into shares in the newly established bank, in each case in the same or corresponding numbers. The ordinary shares in SGL have been listed since that time for quotation on the Australian Stock Exchange ('ASX'). Business volumes and profitability of SGL increased over the years following that constitutional change, and for the financial year ended 30 September 2000 in particular, impressive financial results were achieved. A media release issued by SGL on 8 November 2000 announced a substantial increase in operating profit above that achieved in the preceding financial year, and more relevantlythe following: 'Planned capital management initiatives include an ordinary share buy back of $370 million… expected to be completed by 31 March 2001.' 3 On or about 12 January 2001, SGL formally announced by news release the foreshadowed share buy back as part of 'its intention to implement a number of capital management initiatives designed to enhance returns to shareholders'. The number of ordinary shares the subject of the buy back announcement was said to be 22,786,937, representing approximately 5% of SGL's then issued capital. The buy back price was set by SGL at $16.50 per ordinary share, and the aggregate cash outlay required on the part of SGL was thus in the order of $375 million. That buy back price of $16.50 represented an 18.9% premium to the ASX share price of $13.88 obtained on 10 January 2001, and a 17% premium over the historically high share price nevertheless prevailing of $14.10. Registered shareholders as at 5.00 pm on 23 January 2001 became entitled to participate in the share buy-back. Excluded from direct participation were shareholders having a registered address outside Australia or New Zealand and employees of SGL under an employee share plan, for both classes whereof more limited arrangements were made for their participation indirectly in the buy-back. They were then and are hereafter referred to as 'excluded shareholders'. 4 The announcement included the following statement: 'The buy-back is to be implemented through a 1 for 20 issue of Sell Back Rights. Each Sell Back will entitle the holder to sell one ordinary share in St George for $16.50. … The Record Date for determining shareholder entitlements to the Sell Back Rights will be 5.00 pm on Tuesday 23 January 2001. To allow shareholders to trade the Sell Back Rights, Sell Back Rights will be listed on the Australian Stock Exchange, with the trading period expected to commence on Monday, 17 February 2001 and end on Tuesday 13 March 2001. The issue of Sell Back Rights is designed to give all shareholders an equal opportunity to participate in the benefits of the buy back. Shareholders not wishing to sell St George shares can either sell their Sell back Rights on ASX or have their Sell Back Rights sold to CSFB and receive the net proceeds (if any) of their sale on ASX or exercise under the Sale Mechanism.' The reference above to 'CSFB' was to Credit Suisse First Boston Australia Equities limited, the well-known merchant bank, whose role as sole broker to the buy back will be later explained in more detail; it is hereafter also referred to as CSFB. 5 Following the calculation of the number of shareholder sell back rights or entitlements completed by SGL on 23 January 2001, which were found to total 22,788,461, apportioned as to 22,555,790 in relation to shareholders other than excluded shareholders, and 232,671 in relation to excluded shareholders, an information memorandum (comprising a booklet titled 'Buy Back') and a direction form were dispatched to each shareholder recorded on the share register, other than an excluded shareholder. The direction form required shareholders wishing to exercise or sell any of their sell back rights to complete the relevant section of the direction form and return it to SGL by 5.00 pm 16 February 2001. Although bearing date 12 January 2001, being the date those documents were required to be lodged with the ASX, the same were not issued to shareholders until 29 January 2001, in order to allow time for the calculation of the sell back entitlements of each so-called record date shareholder. The information memorandum also contained the following: 'The structure of the issue gives all St George Shareholders the opportunity to benefit from the Sell Back Rights. The directors are pleased to provide Shareholders flexibility in how they choose to participate in the benefits of the issue. Shareholders who do not wish to sell their Shares may choose to do nothing and still benefit from the Sell Back Rights. Shareholders who choose to do nothing will receive proceeds (if any) equal to the Sale Mechanism Price from the sale or exercise of Sell Back Rights. Shareholders with registered addresses outside Australia and New Zealand or employees who hold Shares under any St George share plan will not receive Sell Back Rights, but will receive the same benefit as Shareholders who choose to do nothing.' And under the heading 'What if I do nothing?', the information memorandum explained: 'If you do nothing, your Sell Back Rights will be sold to CSFB for participation in the Sale Mechanism. You will receive proceeds (if any) equal to the Sale Mechanism Price, multiplied by the number of Sell back Rights to which you are entitled.' SGL further stated in the information memorandum that it intended to finance the buy back from existing cash resources and expected those resources to be substantially replaced by the issue of new preference shares. 6 The information memorandum provided the following indicative timeline of events as follows: 'EVENT DATE Determination of how many Sell Back Rights you have (Record Date) 5.00 pm 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) 5.00 pm on Friday, 16 February 2001 Trading of Sell Back Rights starts on a deferred settlement basis (Quotation Date) Monday, 19 February 2001 Last day to have your broker buy or sell Sell Back Rights (end of Trading Period) Tuesday, 13 March 2001 Trading of Sell Back Rights on a T + 3 basis starts on ASX Tuesday, 27 February 2001 Final date for exercise of Sell Back Rights (Cut-Off Date) 5.00 pm on Tuesday, 20 March 2001 Completion of the Buy-Back and St. George announces the number of Shares it has bought back 5.00 pm on Wednesday, 28 March 2001 Proceeds to be despatched to participants in the Buy-Back Monday, 2 April 2001.' 7 As foreshadowed, excluded shareholders were not permitted to exercise their sell back rights or request the transfer to them of their sell back rights. What was sent to excluded shareholders was the information memorandum, together with a letter advising that their sell back rights would be transferred to CSFB, which would either sell or exercise the same, and further that the proceeds (if any) of the sale or the outcome of the exercise, would be sent or notified (as the case may be) to the excluded shareholders. 8 At the time of the buy back announcement on 12 January 2001 (hereafter referred to as the 'record date'), the applicant's shareholding in SGL comprised 5450 shares, which had been acquired by her in the following circumstances: Calendar Year No. Consideration (approx) Circumstances 1987 3,300 $4,950.00 Originally shares in St. George Building Society Ltd which were converted into shares in SGL in 1992 when the Society was converted from a building society into a bank 1992 660 $3,036.00 Rights issue 1994 40 $259.20 Share rounding plan 1994 666 $3,729.60 Rights issue 1995 34 $159.46 Share rounding plan 1997 750 Partial consideration for the cancellation of shares held by the Applicant in Advance Bank Limited Total: 5,450 9 The applicant additionally acquired in May 1996, at a cost of $8,280, 552 converting preference shares in SGL. Those preference shares were converted into 552 ordinary shares in SGL in March 2001, which was subsequent to the record date, and are thus outside the ambit of the issues presently arising. 10 Since about 1987, when the applicant was 72 years of age, her principal sources of income have been dividends from shares, interest from term deposits and debentures, and an annuity/pension income from SAS Trustee Corporation Limited. The applicant has been a widow since 1975, and has lived all of her life in Australia. She retained her shareholding in SGL, upon its conversion from a building society to a bank, for the purpose of derivation of the dividend income expected to flow therefrom, and upon which she depended for her living expenses, along with dividend income from fourteen other listed public companies in which she then held relatively modest holdings. In maintaining her public company share portfolio, the applicant sought a source of income rather than future capital growth with a view to disposal, the applicant having never traded in shares or securities. Particulars of those shareholdings in listed public companies were furnished in evidence, as were the prior dispositions of shares on her part which had previously occurred since her retirement, being dispositions mainly referrable to or arising as a consequence of mergers and takeovers. The applicant accounted to the Commissioner for all such disposals of securities as had so occurred upon the basis of the capital gains tax provisions of the Tax Act. She was not cross-examined in the proceedings. 11 On the day of the announcement of the share buy back, namely 12 January 2001, four deed polls were executed, one called Sell Back Right Deed Poll executed by SGL alone, another called Deed Poll (Shareholders) executed by SGL and St George Custodial Pty Limited ('Custodial'), a third called Deed Poll (Excluded Shareholders) also executed by SGL and Custodial, and a fourth called CSFB Deed Poll executed by Custodial and CSFB. 12 The various Deed Polls stipulated between them eight dates material to the implementation of the buy back scheme, set out below by reference to the chronological sequence of intended occurrence, rather than in the alphabetical order appearing in dictionaries to each Deed; this chronology largely duplicates what appears in [6] above, but provides more simplicity and precision of descriptions: Record Date means Tuesday, 23 January 2001. Election Date means Friday, 16 February 2001. Listing Date means Monday, 19 February 2001. Trading Period means the period commencing at the opening of trading on the Listing Date and ending at the close of trading on Tuesday, 13 March 2001. Cut Off Date means Tuesday, 20 March 2001. Buy Back Date means Wednesday, 28 March 2001. Final Payment Date means Monday, 2 April 2001. 13 The Sell Back Right Deed Poll was expressed to be made by SGL in favour of each participant. It provided for the grant of sell back rights by SGL to Custodial, once listing on the ASX was to be granted, for the 'absolute' benefit of shareholders, on the following terms and according to the following procedures: (i) each sell back right, being in the nature of a put option, was to relate to each parcel or number of 20 ordinary shares in SGL held by the shareholder on the record date, and was to oblige SGL to purchase one SGL share out of each such parcel or number at the buy back price of $16.50 per share, subject to the right conferred upon SGL to revoke the grant of sell back rights at any time prior to the listing date, and subject to the agreement of the ASX to officially list the sell-back rights prior to that time; counsel for the Commissioner referred me to the definition of a put option contained in The Law of Options by Farrands (LBC 1992) page 2, namely an option given by a grantor of the option to the grantee, the latter being the owner of an asset, to require that person to acquire the asset. (ii) the dispatch of the direction forms to participating shareholders, which provided for either the exercise of their prospective entitlements to the sell back rights at the buy back price of $16.50 for each twenty ordinary shares held in SGL, or alternatively for those shareholders to have all or some of their respective entitlements to sell back rights vested in them in specie during the trading period; those participating shareholders were required to provide directions on or before 5.00 pm on the election date; (iii) in the case of those participating shareholders who directed the transfer in their favour of their respective sell back rights in specie, but who did not thereafter exercise or dispose of the totality thereof, in either case by the cut off date, their unsold sell back rights would be deemed to be transferred by Custodial to CSFB, in return for net proceeds of sale to be determined according to a formula which afforded an equitable sharing therein pro rata; and (iv) in the case of those shareholders who did not give any such direction in respect of the sell back rights allocated to them, each became classified as a 'Remaining Shareholder' in relation to those non-directed rights, and did not obtain an interest in the sell back rights not so taken up, receiving instead an entitlement to the 'proceeds (if any) equal to the Sale Mechanism Price for [their] Sell Back Rights'. 14 The so-called Deed Poll (Shareholders), being the second deed poll was expressed to be made between SGL of the one part and Custodial as trustee of the other part, and contained the declaration of Custodial that it would hold each participating shareholder's entitlement (that is, the entitlement of shareholders other than excluded shareholders) as at 23 January 2001 on separate trusts absolutely for each such participating shareholder, unless and until directed by a participating shareholder to transfer any or all of that participating shareholder's sell back rights. 15 The so-called Deed Poll (Excluded Shareholders), being the third deed poll, was also expressed to be made by SGL of the one part and Custodial as trustee of the other part and contained the declaration of Custodial that it would hold each excluded shareholder's entitlement (that is, the entitlement of each so-called foreign shareholder and so-called ESAS shareholder, the latter being shareholders subjected to SGL employee share plans) similarly on separate trusts absolutely for those particular classes of shareholder. 16 The fourth Deed Poll, being the so-called CSFB Deed Poll, was expressed to be made by CSFB, firstly in favour of each Gross Sale Mechanism Participant, and secondly in favour of SGL and Custodial, whereby CSFB: (i) consented to the sale by Custodial to it (ie CSFB) of the sell back rights of Custodial pursuant to the Deed Poll (Shareholders) and the Deed Poll (Excluded Shareholders) for the so-called Gross Sale Mechanism Participating Payment; (ii) undertook to use reasonable endeavours, during the relevant ASX trading period, subject to 'its legal obligations and market conditions', to promote the sale of the CSFB sell back rights (ie those rights transferred to it by Custodial by virtue of those latter two Deed Polls); and (iii) undertook to pay to each such Participant by the final payment date an amount equal to the Participant's entitlement. 17 The applicant contended that each shareholder, including each 'excluded shareholder', by virtue of the documentation applicable to that shareholder, obtained a chose in action in the nature of a right to compel the due administration of the trusts established by the buy back scheme, relating to inter alia that shareholder. That trust property was said to consist of sell back rights that did not become the subject of directions by participating shareholders. No monetary consideration was thus furnished by any SGL shareholder in return for the grant by SGL of sell back rights. 18 In the events which happened pursuant to or contemplated by the various Deed Polls: (i) on the first day of listing of the sell back rights, namely 19 February 2001, SGL granted to Custodial 22,788,461 sell back rights (inclusive of the 272 issued in respect of the applicant) upon the terms of the respectively applicable Deed Polls; (ii) the ordinary shares in SGL were traded on the ASX in the course of the first day of listing of the sell back rights in a range of prices between $14.45 to $14.64 per share; (iii) the sell back rights were traded on the ASX on that first listing day in a range of prices between $1.70 to $1.95 per sell back right; the volume weighted net selling price of sell back rights on that first day of listing was $1.89 (the parties agreed for the purposes of these proceedings that the market value thereof on that day was in fact $1.89); (iv) the average daily market price for the sell back rights during the period 19 February 2001 to 13 March 2001 fluctuated between $1.60 and $2.73; the volume-weighted net selling price on 19 February 2001 was agreed to be $1.89; (v) the applicant did not give a direction to Custodial to realise her sell back rights by the election date of 16 February 2001, and she therefore became, as at the listing date, a so-called non-directing or remaining shareholder; (vi) on or about 20 February 2001, Custodial transferred 11,243,558 sell back rights to CFSB on account of the non-directing or non-electing shareholders, inclusive of the applicant, and on account of the excluded shareholders, respectively; (vii) ASX listing of the buy back rights ceased at the close of trading on 13 March 2001, being of course the last day of the projected trading period; (viii) on or prior to the buy back date of 28 March 2001, SGL bought back 22,048,563 ordinary shares at a buy back price of $16.50 per share, the aggregate amount of the buy back price being debited by SGL to its share capital account; (ix) on or about the final payment date stipulated for payment by SGL of the sell back rights SGL acquired, namely 2 April 2001, the applicant received the sum of $576.64, being her share of the so-called 'sale mechanism price" (referred to in the formula below as 'SMP'), which was calculated in accordance with the following formula contained in clause 1.1 of the CSFB Deed Poll: 'SMP = A+B C Where: A = The aggregate of the amounts received by CSFB from the sale on the ASX: · of Sell Back Rights that were not the subject of a Direction by a Record Date Shareholder being a Participating Shareholder; and · of Sell Back Rights that were the subject of the Deed Poll (Excluded Shareholder) – ie, in relation to Excluded Shareholders. B = (The amount paid by SGL in buying back shares) – (the cost of acquiring those shares on the ASX); and C = The aggregate of the Sell Back Rights referred to in A.' The expression used in the foregoing formula of 'Record Date Shareholder' picks up the notion of the 'Record Date' of 23 January 2001, being thus synonymous with for instance 'participating shareholder' which I have chiefly adopted in these reasons; (x) in the case of a participating shareholder who did give a direction to SGL pursuant to the scheme, and thus obtained a transfer of the legal title to that shareholder's allocation of sell back rights, but who did not exercise or dispose of the same to a third party by 5.00 pm on the cut off date (ie 20 March 2001), those sell back rights were deemed to have been transferred by Custodial to CSFB, and the net proceeds of sale were thereafter accounted for to each participating shareholder; those net proceeds of sale were pursuant to the formula contained in clauses 2(c) and 8 of Schedule 1 of the SGL Deed Poll, and clause 9 of the CSFB Deed Poll; and (xi) on 2 April 2001 the total sum of $23,836,342.96 was paid by CSFB to excluded shareholders and shareholders (such as the applicant) who did not make an election, by way of cheque or direct debit to their nominated bank accounts, that sum representing the amount of $16.50 per ordinary share and the amount of $2.12 in respect of each sell back right. That sum was debited by SGL to its share capital account. The applicant received $576.64 in respect of her sell back rights. 19 I should record for completeness that at the close of argument, I invited the parties to correct any errors of fact contained in my earlier reasons for interlocutory judgment of 11 September 2003. Unfortunately the parties were unable to agree in relation to a schedule of corrections, and as a consequence, I have sought to pay regard to the affidavit and documentary evidence in assembling my narrative of the circumstances relevant or conceivably relevant to the issues arising. There was no cross-examination undertaken in respect of any of the deponents to the affidavit evidence, including of course, as earlier mentioned, the applicant herself. The Class Ruling released by the Commissioner 20 On 5 December 2001, the Commissioner released Class Ruling CR 2001/75, which set out the Commissioner's opinion on the way the taxing provisions applied to the so-called Record Date Shareholders (that is, participating shareholders) in respect of the subject year of income ended 30 June 2001. It is appropriate to summarise its contents, since the same do not wholly reflect the Commissioner's submissions to the Court in these proceedings, a matter which underlines the conceptual difficulty involved in the case which the Commissioner has sought to present. The expression 'Record Date' was of course 23 January 2001, to which reference has earlier been made as the date when the share buy back scheme took effect. CR 2001/75 was placed before me by way of attachment to the so-called Applicant's Amended Statement of Facts Issues and Contentions filed in Court on 10 December 2003. It purportedly addressed the application of the Tax Act as at two taxing points in relation to a Record Date Shareholder in the position of the applicant, namely: (i) the date of grant by SGL of the sell back rights to Custodial; and (ii) the date of sale by Custodial to CSFB of the unexercised sell back rights. 21 According to pars 33 and 34 of CR 2001/75, so far as was headed '[t]he grant of the Sell Back Rights to St George Custodial Pty Limited on 19 February 2001', what was described as the 'ordinary provisions' of the Tax Act were said to operate as follows: (i) the grant of a sell back right was assessable income of a Record Date Shareholder as ordinary income pursuant to section 6-5 of the Income Tax Assessment Act 1997 ('the 1997 Tax Act'), which was derived by shareholders on 19 February 2001, being the date the sell back right was granted; and (ii) the amount to be included in the assessable income of a Record Date Shareholder was the market value of each sell back right prevailing at that date of grant of 19 February 2001, namely $1.89. 22 According to pars 35-37 of CR 2001/75, what was described as 'the capital gains tax provisions' of the 1997 Tax Act operated as follows: (i) the grant of a sell back right constituted CGT Event H2 in relation to a Record Date Shareholder, and gave rise to a capital gain pursuant to section 104-155 of the 1997 Tax Act; (ii) the amount to be included in the assessable income of a 'Record Date Shareholder' as a capital gain was the market value of the sell back right at the time of grant thereof on 19 February 2001, namely $1.89, less any incidental costs; and (iii) on the basis that the grant of a sell back right was also assessable income under the ordinary provisions of the Tax Act, the capital gain was reduced to zero pursuant to section 118.20 of the 1997 Tax Act. 23 As to the sale by Custodial of sell back rights in February-March 2001, CR 2001/75 did not address the application of section 6-5 of the 1997 Tax Act to Record Date Shareholders in respect of the sale by Custodial of sell back rights to CSFB, and the receipt by the Record Date Shareholders of the proceeds of sale; however by pars 46 to 49 of CR 2001/75, the application of the capital gains tax provisions of the 1997 Tax Act in relation to the sale of sell back rights by a trustee was addressed as follows: '46. The sale of a Right by the Trustee to CSFB will be a CGT Event A1 to the Remaining Shareholders and the Excluded Shareholders pursuant to section 104-10 of the ITAA 1997. For the purposes of Division 116, the capital proceeds from the sale of each Right is the cash payment received from CSFB of $2.12. 47. For the purposes of Division 110 of the ITAA 1997, the first element of the cost base/reduced cost base of the Sell Back Right sold to CSFB will be the market value of the Right at the time the Right was granted. The market value of each Right is $1.89. 48. The sale of a Right by the Trustee will therefore give rise to a capital gain of $0.23. 49. The capital gain is not a discount capital gain pursuant to Subdivision 115-A.' The taxation return of the applicant and assessment processes put in place in relation thereto 24 The applicant furnished her income tax return for the year of income ended 30 June 2001 to the Commissioner on 26 October 2001, which was of course prior to the Commissioner releasing CR 2001/75 on 5 December 2001. 25 Presumably to avoid penalties, the applicant included in that income tax return amounts aggregating $576.00 by way of assessable income made up as follows: (a) The sum of $514.00 as ordinary income under section 6-5 of the 1997 Tax Act calculated as follows: Value of each sell back right on the date x Number of sell back rights of grant by SGL to Custodial on 19 February 2001 (ie the listing date) = $1.89 x 272 = $514 (b) The sum of $62.00 as a capital gain pursuant to CGT Event A1 (section 104-10 of the 1997 Tax Act) calculated as follows: Capital proceeds – cost base = ($2.12 x 272) – ($1.89 x 272) = $576.64 - $514 = $62. 26 By notice of assessment bearing date of 14 November 2001, the Commissioner assessed the applicant to tax on the basis of the return furnished by the applicant to the Commissioner on 26 October 2001 as summarised above. At the hearing of the proceedings however, the Commissioner's written submissions were to the effect that the applicant derived assessable income in the sum of $514, or in the sum of $576.64, in either case by way of income according to ordinary concepts, and alternatively that the applicant received a capital gain in the sum of $514 alone. 27 The applicant objected to the inclusion in her assessable income, that is, for the year ended 30 June 2001, of the whole of the above amount of $514.00, on the basis that it was not assessable as ordinary income under section 6-5 of the 1997 Tax Act, or as a capital gain under the capital gains tax provisions thereof. The applicant did not apparently object however to the inclusion in her assessable income of the above amount of $62.00 as a capital gain. 28 By notice of decision on objection dated 31 October 2002 the Commissioner disallowed the applicant's objection. In the accompanying reasons for decision, the Commissioner advised the applicant as follows: '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.' I have of course already summarised CR 2001/75. Issues framed by the applicant 29 Four issues were framed by the applicant for resolution by the Court as follows: Issue 1: As to the grant by SGL of the sell back rights to St George Custodial Pty Limited on 19 February 2001 Whether the amount of $514.00 is to be included in the assessable income of the applicant for the year of income ended 30 June 2001 pursuant to section 6-5 of the 1997 Tax Act. Issue 2: As to the grant by SGL of the sell back rights to Custodial on 19 February 2001 Whether in the alternative, the amount of $514.00 is to be included in the assessable income of the applicant for the year of income ended 30 June 2001 under the capital gains tax provisions pursuant to section 104-155 of the 1997 Tax Act. Issue 3: As to the sale by Custodial of the sell back rights to CSFB in February-March 2001 Whether in the alternative, the amount of $576.64, being the amount paid to the applicant on 2 April 2001, is to be included in the assessable income of the applicant for the year of income ended 30 June 2001 pursuant to section 6-5 of the 1997 Tax Act. Issue 4: As to the sale by St George Custodial Pty Limited of the sell back rights to CSFB in February-March 2001 Whether in the event the amount of $576.64 is to be included in the assessable income of the applicant for the year of income ended 30 June 2001 pursuant to section 6-5 of the 1997 Tax Act, the capital gain of $62.00, pursuant to CGT Event A1 (section 104-10 of the Tax Act), is to be reduced to zero pursuant to section 118-20 of the 1997 Tax Act. 30 The submissions advanced on behalf of the applicant in relation to those issues were summarised as follows: As to issue 1: The applicant contends the amount of $514.00 is not to be included in the assessable income of the applicant for the year of income ended 30 June 2001 pursuant to section 6-5 of the 1997 Tax Act. As to issue 2: The applicant contends that the amount of $514.00 is not to be included in the assessable income of the applicant for the year of income ended 30 June 2001 under the capital gains tax provisions contained in section 104-155 of the 1997 Tax Act. If however the amount of $514.00 is to be included in the assessable income of the applicant pursuant to section 6-5 of the 1997 Tax Act (Issue 1), and is also a capital gain (Issue 2), the capital gain of $514.00 is to be reduced to zero pursuant to section 118-20 of the 1997 Tax Act. As to issue 3: The applicant contends that the amount of $576.64 (inclusive of the above sum of $514) is not to be included in the assessable income of the applicant for the year of income ended 30 June 2001 pursuant to the provisions of section 6-5 of the 1997 Tax Act. As to issue 4: The applicant contends that if the amount of $576.64 is to be included in the assessable income of the applicant for the year of income ended 30 June 2001 pursuant to section 6-5 of the 1997 Tax Act (Issue 3), the capital gain of $62.00 included in the applicant's assessable income pursuant to CGT Event A1 is to be reduced to zero. The legislation 31 For ease of reference, I reproduce below the full text of the provisions of the 1997 Tax Act, so far as material, and in the sequence in which they appear in the legislation: '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 your 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. 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 … 118-20 Reducing capital gains if amount otherwise assessable (1) A capital gain you make from a CGT event is reduced if, because of the event, a provision of this Act (outside of this Part) includes an amount (for any income year) in: (a) your assessable income or exempt income; or (b) if you are a partner in a partnership, the assessable income or exempt income of the partnership. …' Resolution of the section 6-5 issues arising 32 Had the applicant sold any of her 5450 shares held in SGL prior to the record date, that is to say, prior to the commencement of the buy back scheme, it is sufficiently apparent that any proceeds of sale of those shares would not have attracted the application of section 6-5 of the 1997 Tax Act, in the light of her history of long term retention of listed public company shares for the evident dominant purpose of deriving dividend income therefrom in her retirement. 33 The Commissioner's first contention in relation to the section 6-5 issues, as advanced at the hearing of the proceedings, was that the sum of $514, representing the market value of her sell back rights as at 19 February 2003 (ie the date of commencement of trading in sell back rights on the ASX), was ordinary income, or assessable income as described under the 1936 precursor legislation, or as income according to ordinary concepts as often described in judicial precedents, and as now described in section 6-5. The Commissioner's second contention in relation to the section 6-5 issues is that in the alternative, the sum of $576.64, which was received by the applicant on 2 April 2001, constituted income of that description. Although of course the applicant carries the statutory onus of establishing that the assessment to income tax (inclusive of course of capital gains tax) is not sustainable, the convenient course is to first record the Commissioner's submissions in relation to the primary area of debate, namely that of income tax, particularly since senior counsel for the Commissioner acknowledged that he had not uncovered any judicial precedent precisely on point. 34 The threshold step advanced by the Commissioner in support of that contention was that the sell back rights were discrete items of property, thus existing separately from the shares to which they related, and constituting choses in action capable of being bought and sold, and being listed on the stock exchange to facilitate such trading transactions. I was referred to the principle enunciated by the majority of the House of Lords in Abbott v Philbin [1961] AC 352, and subsequently applied in Australia at first instance in Donaldson v Federal Commissioner of Taxation (1974) 3 ALR 516 at 531 (per Bowen CJ in Eq as he then was), in relation to legally effective rights granted by an employer to an employee, by way of an option to take up shares in the corporate employer. The principle so established is that the market value of the shares as at the time of grant of an option, to the extent exceeding the purchase price payable pursuant to any exercise of the option, may satisfy the character of income at the time of grant, notwithstanding the element of contingency as to subsequent exercise of the option. The context of employment of the taxpayer was fundamental to the acknowledgment of that principle in the circumstances of both cases. Thus Bowen CJ in Eq said at 532 that '… such benefits are regarded as being in the nature of a bonus or an addition to salary, and are of an income nature, where they are conferred in relation to … employment or to services rendered'. No such context of ongoing employment is of course involved in the circumstances of this litigation. 35 It was submitted by the Commissioner that the grant of the sell back rights to Custodial for the benefit of the applicant was a gain to the applicant, being a benefit entitling her to the payment of money 'which proceeded from her existing shareholding in [SGL] … and only because she held shares in SGL'. It was further submitted by the Commissioner that the grant of the sell back rights for the benefit of the applicant did not involve any distribution of capital to her or for her benefit, and was of a valuable, albeit ephemeral, nature which neither provided the applicant with any advantage of an enduring nature, nor provided her with any profit-making structure, but merely with 'items that were to be traded, that is, bought and sold' or 'realised for profit'. 36 Reliance was placed by the Commissioner on what was said by Pitney J in delivering the majority opinion of the Supreme Court of the United States of America in Eisner v Macomber (1920) 252 US 189 at 206-207, in the context of construing the Sixteenth Amendment to the United States Constitution in relation to the scope of direct taxation of stock dividends: '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 (Bouvier's Law Dict.; Standard Dict; Webster's Int. 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 labor, 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 meanings; 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.' 37 The above passage from Eisner was described by the majority judgment in the High Court in Federal Commissioner of Taxation v Montgomery (1999) 198 CLR 639 at 661-662 (Gaudron, Gummow, Kirby and Hayne JJ) as identifying [t]he core of the meaning of income in the context such as that presently before the Court, where the character of a gain derived from property is being considered. That passage from Eisner was earlier described by Professor Parsons in Income Taxation in Australia (LBC 1985) at 88 as reflective of a metaphor having its origin in the experience of the agricultural community. In so doing, the learned author identified what was described in the Memorandum of Dissent contained in the United Kingdom Royal Commission's Final Report on the Taxation of Profits and Income (1955, Cmd. 9474) as ' … the ancient constricted conception of income as something which recurrently emerges and is separated off from its perpetual source like the harvest from the soil, [which] has lingered in the tax code from times when, by and large, income was the harvest of the soil'. 38 Borrowing from the dictum extracted above from Eisner, senior counsel for the Commissioner described the benefit, to which the applicant became entitled in relation to the sell back rights, as 'a gain, a profit, something of exchangeable value "proceeding from" the shares which she owned in SGL, "severed from" those shares and "coming in" or "being derived" by the applicant for her separate use, benefit or disposal'. That benefit was further described as an entitlement in relation to payment from SGL for her sell back rights in the nature of 'a produce of her existing shareholding', neither 'the receipt of her entitlement nor her subsequent receipt of money involving any alteration to her shareholding or any distribution to her of capital by SGL.' It was further or alternatively submitted by the Commissioner that such entitlement reflected, not a benefit relating to the obtaining of rights, but a benefit relating to the receipt of money flowing from the trading in respect of her rights. 39 The Commissioner further submitted, specifically or at least primarily in relation to the sum of $576.64 (representing of course the proceeds of realisation of her sell back rights) that the benefit to which the applicant became so entitled from SGL, in relation to the sell back rights, constituted income according to ordinary concepts for the following reasons, being reasons not necessarily cumulative: (i) the money comprising the amount of $576.64 represented a gain made by the applicant as an incident of her existing shareholding; (ii) the applicant received that amount of money as part of the scheme established by SGL and implemented for the buy back of existing shares; (iii) the applicant's entitlement to receive the money arose because of her existing shareholding; (iv) save for remaining an existing shareholder, the applicant was required to do nothing, and in fact did nothing, in order to gain the money she received; (v) the money was a produce of her shareholding, which remained unaltered and unaffected by the buy back scheme; the feature built into the scheme was a value that could be made available to shareholders without SGL shareholders, such as the applicant, altering the nature of their capital assets; and (vi) the money the applicant 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. 40 By way of demonstration of the theme of those submissions in particular, the Commissioner referred to the letter of 12 January 2001 sent by the Chairman of SGL to each shareholder, in the context of the announcement of the sell back rights proposal to SGL shareholders, which contained the following: 'The Directors are pleased to issue the right to sell to St George one Share at a price of $16.50 per Share for every 20 Shares held (the 'Sell back Rights') for the benefit of each Shareholder on the register at 5.00pm on Tuesday, 23 January 2001. The structure of the issue gives all St George's Shareholders the opportunity to benefit from the Sell Back Rights. Shareholders who do not wish to sell their Shares may choose to do nothing and still benefit from the Sell Back Rights. Shareholders who choose to do nothing will receive proceeds (if any) equal to the Sale Mechanism Price from the sale or exercise of Sell Back Rights. Shareholders with registered addresses outside Australia and New Zealand or employees who hold Shares under any St George share plan will not receive Sell Back Rights, but will receive the same benefit as Shareholders who choose to do nothing.' The Commissioner additionally referred to the booklet attached to that letter, the opening text thereof reading as follows: 'Choices for Shareholders You have three choices 1. You can do nothing. If you do not wish to sell any of your shares, you can choose to do nothing. You will receive proceeds [if any] equal to the Sale Mechanism Price, from the sale of your Sell back Rights you do not direct to be transferred to you.' All that was said on behalf of the Commissioner to reflect the feature of this buy back plan, being the provision of 'a value that can be made available to shareholders without the shareholders altering the nature of their capital assets…'. 41 As earlier mentioned, the essence or substance of the SGL buy back scheme comprised the buy back of approximately 5% its issued capital. Not only did the buy back price of $16.50 exceed at least the then current share price, but the scheme facilitated a possible adjustment upwards of that buy back price to enable shareholders to participate in any favourable reactions in the marketplace which might occur over theperiod of time of trading on the ASX set by SGL for measuring market reactions to the buy back scheme. The Commissioner did not contend that the basic buy back price level of $16.50 per share represented other than an affair of capital in the hands of recipient shareholders, such as the applicant, who had not acquired their shareholdings in SGL as an adventure of trade. The issue arising for critical analysis in this first segment of the reasons for judgment is whether or not the pricing adjustment mechanism 'designed to give all shareholders an equal opportunity to participate in the benefits of the buy back', to cite the description contained in the SGL announcement of 12 January 2001, exposed any such benefits to taxation as 'ordinary income' within section 6-5 of the 1997 Act, irrespective of the assessability or otherwise of the buy back price of $16.50 per share. 42 The broad proposition advanced on behalf of the applicant was that the receipt of moneys by a shareholder, being moneys 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. Whether that broad proposition runs counter to the dicta which I haveearlier cited, in particular from the majority judgment in Eisner, and subsequently from the majority judgment in Montgomery, or otherwise, presently falls to be determined. It is first necessary and appropriate however that I consider the impact of the many authorities addressed in submissions by senior counsel for the applicant, being authorities decided in the context of the statutory precursors to section 6-5 of the 1997 Tax Act, the most recent being of course s 25(1) of the Income Tax Assessment Act 1936 ('the 1936 Tax Act'), which, so far as is material, reads as follows: 'The assessable income of a taxpayer shall include – (a) where the taxpayer is a resident – the gross income derived directly or indirectly from all sources whether in or out of Australia; and (b) … which is not exempt income.' The majority judgment in Montgomery, in the course of addressing the definitions of 'income from property' and 'income from personal exertion' contained in s 6 of the 1936 Tax Act, observed that the same '… begin by saying the term "means income" or, "means all income"…', and that '[b]oth definitions therefore presuppose that "income" has a meaning', and further that it followed that 'the question what is income cannot be answered simply by resorting to the words of these definitions'. A similar threshold observation may be made in relation to the operation of subsection (1) of section 6-5 of the 1997 Act, by reason of its non-exclusive use of the expression 'ordinary income', appearing under the subheading 'Income according to ordinary concepts…'. Further assistance may be gained in that regard from subsection (4) of section 6-5, reading as follows: '(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.' 43 That expression 'income according to ordinary concepts' has of course frequently appeared in reported authorities on income taxation in Australia. One instance is the dictum of Jordan CJ in Scott v Federal Commissioner of Taxation (1935) 35 SR (NSW) 215 at 219, cited by counsel for SGL in the present proceedings, as follows: '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.' Stephen and Street JJ concurred in the reasons for judgment of the Chief Justice. 44 The applicant pointed out it had not been suggested by the Commissioner that the sum here sought to be brought to tax as ordinary income pursuant to section 6-5, namely $514 or alternatively $576.64, comprised in whole or in part a dividend, and moreover no employment services on the part of the applicant were relevantly involved. Ordinarily, it was submitted on behalf of the applicant, a payment by a company to a shareholder in its capacity as such will be assessable only upon the footing that it comprises a dividend paid out of profits. No formal process of dividend declaration on the part of SGL was of course here involved, nor did any other form of purported detachment of profits of SGL occur in relation to that sum. I was referred to what was described as the normal process of detachment of profits necessary to constitute the payment of a dividend by a company to a shareholder, whether formally or informally. That element of profit detachment was said to be reflected in the reasons for judgment in early High Court decisions such as Webb v Federal Commissioner of Taxation (1922) 30 CLR 450 at 461 (per Knox CJ, Gavan, Duffy and Starke JJ) and Commissioner of Taxation (NSW) v Stephenson (1937) 59 CLR 80 at 99 (per Rich, Dixon and McTiernan JJ), which respectively concerned the operation of s 14 of the Income Tax Assessment Act 1915-1918 (NSW), and contained the expression 'profits or bonus credited or paid', and s 11(b) of the Income Tax (Management) 1928 (NSW), containing non-exclusive reference to 'dividend'. The principle here in operation was further said by the applicant to be illustrated in the reasons for judgment of Federal Commissioner of Taxation v Blakely (1951) 82 CLR 388, for instance at 406-407 (per Fullager J), as follows: 'I would not be prepared to deny that there was a "distribution" in this case. There was clearly a "distribution" in Stevenson's Case. But the point in this case is, as it was in Stevenson' Case, as to the nature of the receipt. There was not a distribution of profits, or a distribution out of profits. What was received was capital. There was no detachment or severance from the funds of the company of money or other assets as representing a profit made by the company.' Emphasis was placed by the applicant on the expression 'detachment or severance from the funds of the company of money or other assets as representing a profit' in the above passage cited from Blakely. 45 Ordinarily therefore, the applicant pointed out, something which comes from a company to a shareholder will be assessable to income tax because it constitutes a dividend, being a payment or other detachment out of the profits of the company. That situation was said to be distinguishable from a gift of funds, or a gift of a share in a fund, which is not assessable in principle, in the absence of the same being referable to services rendered, whether in the context of a business or of employment. In circumstances where a company makes a payment to a shareholder which is not a dividend, nor constitutes a reduction in capital, but represents part of the proceeds of a buy back of shares, or an adjusting payment related or incidental thereto, to adopt for a moment a neutral description, the same cannot in the submission of the applicant be characterised as income according to ordinary concepts. 46 Further examples of derivation of rights or choses, emanating or resulting from the holding of shares in a company, and not having the attribute or character of income in the ordinary or commercial sense, were distilled by senior counsel for the applicant from the following authorities: (i) Gibb v Commissioner of Taxation (1966)118 CLR 628, where a majority of the High Court (Barwick CJ, McTiernan, Taylor and Windeyer JJ) held that bonus shares issued by a company to its shareholders did not constitute income in the ordinary or commercial sense, nor were otherwise assessable income pursuant to the 1936 Tax Act, in circumstances where the profits of a company, duly applied in satisfaction of the paid-up capital of those bonus shares, arose from a revaluation in excess of the book value of assets of the company which had not been acquired for resale at a profit; and (ii) Federal Commissioner of Taxation v Miranda (1976) 11 ALR 85, where Rath J (sitting as a single judge) held that where a company revalued, above an existing book value, certain of its assets which had not been acquired for the purpose of resale at a profit, and credited that increase in value to shareholders funds, and thereafter applied those funds by way of payment in full of bonus shares thereupon issued to the shareholders, those bonus shares did not constitute income in the hands of the shareholders in any ordinary or commercial sense, nor was any other character of income attributable to those bonus shares in the hands of the recipient shareholders by the operation of the 1936 Tax Act; and (iii) Macmine Pty Ltd v Federal Commissioner of Taxation (1979) 24 ALR 217, where a majority of the High Court (Gibbs, Jacobs and Aickin JJ) found that the proceeds of sale of rights attaching to certain redeemable preference shares held by the appellant private company in a listed public company were not profits arising from the disposition of property previously acquired for the purpose of profit-making by sale; reference was made in particular to the reasons for judgment of Gibbs J (as he then was) at 226, where the following observations were made by his Honour: 'Before us, the Commissioner has not sought to challenge the correctness of the conclusions of Rath J [in Miranda]… However the Commissioner points out that in FCT v Miranda the taxpayer had no control or influence over the companies which made the new issues and submits, correctly in my opinion, that notwithstanding the decision in that case it is possible to hold, in appropriate circumstances, that a shareholder who sells rights to shares in a company whose activities he controls does so in the course of carrying out a profit-making scheme within the second limb of s 26(a).' In the present circumstances of course, the applicant had no such control over the activities of SGL. The focus of Miranda and Macmine upon the operation of the now superseded s 26(a) of the 1936 Tax Act does not of course derogate from the relevance of those authorities to the applicant's submissions upon the fiscal character of the sell back rights. 47 The fiscal characterisation of the proceeds of realisation of the sell back rights granted to the applicant is in my opinion to be made in the light of the following factors: (i) as emphasised by senior counsel for the applicant, 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 applicant, 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 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. 48 There is no judicial precedent which bears directly upon the characterisation of the respective sums of $514 and $576.64 for income tax purposes in relation to the applicant as taxpayer. As pointed out by the majority judgment in Montgomery, the question as to what is income cannot be answered by resorting simply to the statutory definition (now of course section 6-5 of the 1997 Tax Act), which focuses of course upon the non-exclusive notion of 'income according to ordinary concepts'. Once it is seen that the derivation by the applicant of either sum is referrable entirely to her existing shareholding in SGL, the applicant'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 applicant, to which I have earlier referred, is I think decisive of the section 6-5 issue in favour of the applicant. 49 Whilst it is unnecessary to indicate any basis additional to that submitted on behalf of the applicant for resolution of the section 6-5 issue arising, there is I think much to be said in favour of the further view, as I observed in the course of argument, that the proceeds of disposal of the sell back rights in the applicant's hands should bear no different fiscal character to that of the principal sum of $16.50 per share proffered by SGL to the applicant 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 applicant subsequent to the sell back rights trading period (in that regard I refer again to the public announcement recorded in [4] above). 50 It follows my opinion that the proceeds of sale of the applicant's sell back rights were not assessable to income tax pursuant to section 6-5 of the 1997 Act. Resolution of the capital gains tax issues arising 51 Alternatively to the case for the derivation by the applicant of income according to ordinary precepts, the Commissioner contended that a capital gain arose in relation to the applicant as a result of the establishment and implementation of the SGL buy back scheme in respect of the entirety of the sum of $514, that sum representing, as earlier indicated in [25] above, the value of the applicant's unrealised sell back rights as at the first or initial ASX listing day in respect thereof, namely 19 February 2001. Pursuant to the capital gains provisions of section 104-155 of the 1997 Tax Act, upon which the Commissioner placed reliance, CGT event H2 crystallises upon an act, transaction or event if the act, transaction or event occurs in relation to a CGT asset, and the act transaction or event does not result in an adjustment being made to the cost base or the reduced cost base of that asset. As I have already indicated at [27] above, the applicant did not object to the inclusion in her assessable income of any capital gain derived from her involvement in the SGL share buy back scheme, but that concession was implicitly made on the sole basis that the scope of the assessable capital gain was limited to the extent of $62, which as previously indicated in [25] above, represented the difference between the amount ultimately paid by SGL to the applicant in relation to her sell back rights after the expiration of the buy back ASX trading period, namely $576.64, less the above amount of $514 calculated by reference to the level of ASX trading in SGL sell back rights on the first day of the buy back trading period. 52 It was submitted by the Commissioner that the grant of the sell back rights constituted an act, transaction or event which occurred in relation to the SGL shares already owned by the applicant, within the terms of section 104-155(1)(a) of the 1997 Tax Act, being an act transaction or event which did not result in an adjustment to the cost base of the applicant's SGL shares, with the consequence that section 104-155(1)(b) was satisfied. The Commissioner thereafter addressed the terms of section 104-155(5), which provides exceptions to the happening of CGT event H2, and which in particular by par (b) thereof excludes an act, transaction or event which requires the taxpayer to do something that is another CGT event that happens in relation to that taxpayer. It was pointed out by the Commissioner that the grant of the sell back rights to the applicant did not require her to do anything, and as a consequence, section 104-155(5)(b) had no application. 53 Pursuant to section 104-155, the Commissioner's submissions continued, the time of occurrence of the relevant act transaction or event relating to the applicant's shareholding in SGL was (as above foreshadowed) 19 February 2001, being the date when the sell back rights were transferred to Custodial as trustee for the applicant in accordance with the so-called transaction documents (ie the relevant deed polls). Section 104-155(3) provides that an entity makes a capital gain if the proceeds of a capital receipt, by reason of the CGT event, are more than the incidental costs incurred relating to the CGT event. Pursuant to section 116-20(2) of the 1997 Tax Act, the capital proceeds were said by the Commissioner to be, in the case of the applicant, the amount which the applicant was to receive pursuant to her entitlement to sell back rights, being an entitlement which at once crystallised as a result of the issue to her of the sell back rights. By virtue of the transaction documents, that entitlement was to be the sale mechanism price (see [18(ix)] above), multipliedby the number of the applicant's sell back rights. The resulting amount was asserted by the Commissioner to be not less than $514, calculated as at the date of listing of the SGL sell back rights on 19 February 2001, by reference to trading generally in SGL sell back rights on the ASX on that day. Since there was no evidence that the applicant incurred any incidental costs within section 110-35 on the grant to her of sell back rights, a particular factor not in dispute, the applicant was further said by the Commissioner to have made a capital gain of not less than that sum of $514 on the day of listing of the SGL sell back rights on the ASX. 54 The language of section 104-155 may well be clearer in expression than its predecessor s 160M(7) of the 1936 Tax Act, but its import retains some of the uncertainty of meaning and application. The example provided by the Tax Act of its intended application, set out within the text of section 104-155, is simple enough, albeit somewhat commercially unrealistic, the same reading as follows: 'You own land on which you intend to construct a manufacturing facility. A business promotion organisation pays you $50,000 as an inducement to start construction early. No contractual rights or obligations are created by the arrangement. The payment is made because of an event (the inducement to start construction early) in relation to your land. Note: This event does not apply if any other CGT event applies: see section 102-25.' 55 The applicant sought to exclude the operation of section 104-155 upon her circumstances largely on the footing of the expression 'in relation to' appearing in par (a) of subsection (1) thereof. I was referred by the applicant to three authorities which have considered the meaning of those words in other statutory contexts. The first was Workers Compensation Board (Qld) v Technical Products Pty Ltd (1988) 165 CLR 642, where in the joint judgment of Deane, Dawson and Toohey JJ at 653-4, it was said that the expression in respect of (and similarly in relation to) has a wide meaning, and '… gathers meaning from the context in which it appears and it is that context which will determine the matters to which it extends'. The second was Australian Securities Commission v Bank Leumi Le-Israel (Switzerland) and Others (1996) 69 FCR 531 at 547, where Lehane J (with whose reasons for judgment Lockhart and Foster JJ agreed) described the import of the words in relation to in s 742(2) of the Corporations Law as 'very much a matter of impression', and found that an order dealing with the proceeds of the sale of certain shares in controversy, such as by vesting them in the Australian Securities Commission, or by requiring payment of such proceeds into court, was not an order in relation to shares within that subsection. The third was Jeffrey James Prebble Pty Ltd v Federal Commissioner of Taxation (2003) ATC 4770, where Hill and Hely JJ observed at 4777, in the context of s 82AAA(i) of the 1936 Tax Act, as follows: '27. We find little assistance from the numerous cases which have concerned the word "in relation to" for the meaning of the expression must be found from the context in which it appears. To say that the words require "a relationship between two subject matters" will usually be true. This, however, does not necessarily lead to the conclusion here that (the) taxpayer and employee must be two separate persons.' 56 In my opinion the words in relation to do not assist to take the applicant's case the distance the applicant sought thereby to gain. The applicant continued of course to own all of her shares in SGL for capital gains tax purposes, from and after 23 January 2001, for the entire period of trading on the ASX of the SGL buy back rights. There occurred in the meantime, that is by the ASX listing date of 19 February 2001, the event of crystallisation of entitlement of the applicant to her allocation of sell back rights, the same having an acknowledged value of $514 on the basis of trading in SGL sell back rights on that day. The fact that it had been open to the applicant, from and after 23 January 2001 (on which earlier date the determination of the number of her sell back rights fell to be ascertained), to dispose of her shares, along with her sell back rights, would appear to me to provide no sufficient reason per se why a CGT event H2 would not otherwise happen from the time when her sell back rights could first be sold in the course of ASX trading. 57 The submission of the applicant was in any event to the effect there was no connection that permitted the Commissioner to postulate, in relation to the grant of the sell back rights for subsequent trading purposes on 19 February 2001, that there occurred thereby 'an act, transaction or event in relation to a CGT asset that you own', within par (a) of subsection 104-155(1), because by the time of commencement of trading in SGL sell back rights on that opening day, it was immaterial to any subsequent realisation of the applicant's sell back rights for her to have retained ownership of the shares in relation to which the sell back rights had crystallised in her favour. The requirement for a connection relevantly to SGL shareholdings of sell back rights to be issued by SGL, including that of the applicant, had crystallised earlier on 23 January 2001, when the determination referred to in the chronology reproduced in [6] above was required to be made. From that time, it would have been open to the applicant, so the applicant's submission continued, to have sold her SGL shares, but to have retained her sell back rights. 58 It was further emphasised by the applicant that since in any event, the applicant did not give the required direction to Custodial to realise her sell back rights by the election date of 16 February 2001, and thus she became categorised as a non-directing or remaining shareholder by the listing date of 19 February 2001, the sell back rights which had been previously allocated to her became vested in CFSB, and were thereafter open to be traded by CFSB alone during the period of time up to 13 March 2001 on account of non-directing or non-electing shareholders generally (such as the applicant). 59 For the reasons I have above recorded, the statutory notion in relation to was contended by the applicant not to have been satisfied. It was thus argued that for there to be ownership of a CGT asset within par (a) of subsection 104-155(1), that ownership must exist at the time of the act, transaction or event, and that it was immaterial to the operation of the buy back scheme whether or not a SGL shareholder had retained ownership of his or her SGL shares by the time trading in the sell back rights commenced on 19 February 2001. 60 Senior counsel for the applicant made the further submission that if, contrary to those initial submissions, par (a) of subsection 104-155 operated adversely to the applicant's case, par (b) of subsection 104-155(2) applied in any event to exclude the applicant from the consequences of potential exposure pursuant to par (a) because, to adopt the words of senior counsel's submission, '… the grant of the rights in relation to the applicant is to (Custodial) upon express terms requiring it to give them or transfer them to CSFB for sale or exercise by CSFB and [to provide] an accounting to the applicant of the net proceeds'. 61 The response of the Commissioner to the foregoing submissions of the applicant, in relation to the operation of par (a) of subsection 104-155(1) in the circumstances of the case, was that it was sufficient to satisfy the relationship thereby stipulated (being the relationship crystallising by the statutory expression in relation to) that the sell back rights of the applicant had been granted to her on 19 February 2001 in accordance with the so-called transaction documents, that is, the relevant deed polls. No temporal co-existence between the happening of the 'act, transaction or event' and the ownership of the shares was submitted by the Commissioner to be required by section 104-155, and in any event, so the submission continued, co-existence continued relevantly from the Record Date of 23 January 2001 until and including the Listing Date of 19 February 2001. The applicant's submissions, so the Commissioner's response continued, placed an unwarranted limitation on the operation of para (a) of subsection 104-155(1). 62 The response of the Commissioner, in relation to its operation of par (b) of subsection 104-155(1) in the circumstances of the case, was that the relevant act or event, being the grant to the applicant of the sell back rights on 19 February 2001 in accordance with the so-called transaction documents, did not require the applicant to do anything. What was required to be done '… were matters imposed upon the trustee by reason of the provisions of the transaction agreements and by reason of [the applicant] having failed to give a direction'. Thus, so the response concluded, '… the Act itself did not require something to be done'. 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 (already extracted in [54] above), 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' (see again [18(v)] above). 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). 64 I have therefore reached the conclusion that it was not within the objective intention of the Legislature that the issue of the subject sell back rights, in the circumstances of a SGL shareholder such as here involved, should qualify for capital gains exposure. I may put aside the conceptual difficulty inherent in attributing a CGT event in relation to the subject sell back rights in the hands of the applicant by reference to the value thereof emerging merely on the first day of a fifteen day trading period on the ASX. The analogy of the allotment or issue of sell backs rights, such as here involved, to that of share and unit issues, and options relating thereto, in relation to which section 104-155(5) is designed to affect, is I think a useful indication of the restricted scope of operation intended for section 104-155. It is in any event an operation having in my view no application to the circumstances relevantly of the applicant. 65 The relief sought by the applicant should be upheld and the assessment set aside to the extent evident in the conclusions to these reasons. Since the parties agreed in advance that each party would bear their own costs irrespective of the outcome, I shall make no order as to the costs of the proceedings. I certify that the preceding sixty-five (65) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Conti. Associate: Dated: 14 April 2004 Counsel for the Applicant: D H Bloom QC and J Momsen Solicitor for the Applicant: Mallesons Stephen Jaques Counsel for the Respondent: G J Davies QC and M K Moshinsky Solicitor for the Respondent: Australian Government Solicitor Date of Hearing: 30 October 2003 Date of Judgment: 14 April 2004