McRae v Commissioner of Taxation (Cth) [1969] HCA 19

High Court of Australia Kitto, Menzies and Owen JJ. McRae v Commissioner of Taxation (Cth) [1969] HCA 19

ORDER Order that the questions in the case stated be answered as follows:—

Question 1: Upon the facts appearing in the stated case his Honour is at liberty to find that the appellant's proportion of any profit included in the proceeds received in the relevant years of income from sales of shares in Kurrajong Pty. Ltd. was profit arising to her from the carrying out of a profit-making scheme, and that as such it forms part of her assessable income of those years.

Question 2: Yes.

Question 3: No.

Costs of the case stated to be in the discretion of the Justice disposing of the appeal.

Cur. adv. vult.

The Court delivered the following written judgment:—

May 23 Kitto, Menzies and Owen JJ.

Dr. F. G. N. Stephens owned in 1958 a parcel of land upon which was erected a building comprising twenty-three flats, three shops and a basement garage, all let to tenants. The value of the property was considered by the Valuer-General, after some negotiation, to be only £35,000. It would have been substantially greater, however, had the property not been subject to certain controlling provisions in landlord and tenant legislation; and consequently, if the property had been owned by a company the articles of association of which had divided the shares into groups and attached to each group a right to occupy a particular portion of the building as a "home unit", the shares would almost certainly have had a much higher aggregate value, indeed a value of at least £60,000.

Dr. Stephens did not want to form such a company and get in so large an amount. He was well on in years and was concerned about the duties that might become payable on his death. He would be content to have £35,000 and to let his six children share the excess over that amount; but of course a gift would attract a liability of gift duty. So he got his accountants to prepare a plan of action, with a view to avoiding these pitfalls, and his children, of whom the appellant was one, joined with him in carrying it out. A company called Kurrajong Pty. Ltd. was formed with an authorized capital of £60,000 divided into 60,000 shares of £1 each. The children took up 35,002 of the shares: each of two children held one signatory share and took 5,833 additional shares; each of two others took 5,833 shares, and each of the other two took 5,834 shares. Each child obtained the money with which to pay for his or her non-signatory shares by borrowing it from Dr. Stephens. The company, being thus equipped with £35,000 in cash, used it to buy the property from Dr. Stephens for that amount. Dr. Stephens's cheques for the loan moneys and the company's cheque for the price of the property were paid over on the one day. Then, within a year, the company, having taken the property into its books at cost, wrote up its value in the books to £61,000, put the increase of £26,000 to the credit of an assets revaluation reserve account, and capitalized £24,998 of it by declaring thereout a dividend of that amount to be satisfied by paying in full for 24,998 unissued shares to be distributed to the shareholders in proportion to their existing holdings. The distribution resulted in the six children holding 10,000 fully paid shares each. The articles of association were forthwith altered so as (inter alia) to divide the 60,000 shares in the company's capital into twenty-seven groups, each group entitling the holder to the exclusive right, subject to the articles, to use and occupy a unit consisting of a particular flat or shop or the basement garage. Since the groups would naturally command different prices, and as equality as between the children was of the essence of the plan, a deed of trust the terms of which had been agreed upon from the beginning was executed between the children as trustees and the children as beneficiaries, under which each of them declared that he or she held his or her 10,000 shares in the company upon trust for all the beneficiaries in equal shares as tenants in common. Thereafter a number of the groups of shares were sold for prices payable by instalments, and in each of the years ended 30th June, 1960 and 1961 certain instalments of purchase money were received by the trustees.