CHIEF COMMISSIONER OF LAND TAX v MRC DEVELOPMENTS PTY LTD SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL HANDLEY, SHELLER and POWELL JJA 16 May 1995, 16 May 1995 [1995] NSWCA 73 Land Tax — Residential building — Owned by company — Reduction of land tax otherwise payable — When residential units occupied by persons owning shares — When person occupying has an exclusive right to occupy "by virtue of his shares". Words and Phrases — "by virtue of his shares" Land Tax Act 1956 s3A Powell JA At all material times, the Respondent, MRC Developments Pty Ltd, was registered as the proprietor of the lands upon which is erected a building known as 158 Wolseley Road, Point Piper, ("the subject land"), which building is a residential building which, prior to its being acquired by the Respondent, had been converted into two self-contained residential flats, occupying respectively the ground floor and the first floor, and a small area, apparently sub- divided into one or more rooms, located beneath two garages which were used by the occupiers of the residential flats. At all material times, the issued capital of the Respondent was $6,000.00 divided into 3000 shares of $2.00 each, those shares being held by Combe Martin Pty Ltd ("Combe Martin") and Messrs EA O' Halloran and R McLeod, Combe Martin holding some 2,998 such shares and Messrs O'Halloran and McLeod holding one share each, the latter shares having originally been the subscriber shares. At all material times, the 3,000 issued shares in the capital of the Respondent were divided into three classes known as "M" class, "R" class and "C" class, shares, but, despite being so divided, the several classes of shares had no differential rights which affect the outcome of the present Appeal. At all relevant times, the ground floor, and first floor, residential flats, to which I have earlier referred, were occupied respectively as his principal residence by Messrs JM Page - he being the person entitled to the beneficial interest in the "M" class - shares and CD Page - he being the person who had the beneficial interest in the "C" class shares. Mr R J Page - he being the person entitled to the beneficial interest in the "R" class shares - appears, at all relevant times, to have lived in Vaucluse. Each of Combe Martin and Messrs O' Halloran and McLeod held such shares as it, or he, did hold as a bare trustee for the persons beneficially entitled to the shares in question. Although the evidentiary material, which is contained in the Appeal Book, is not entirely clear, it would seem that, at no time since they commenced to live in the residential flats which they respectively occupy, has either Mr JM Page or Mr CD Page paid to the Respondent any form of rent, licence, or other occupation, fee, but that, at all material times, they have, between them, paid all rates, taxes and other like charges levied upon, or payable in respect of, the subject land. As at 22nd December 1989, the relevance of which date will shortly appear the Land Tax Act 1956 ("the Tax Act"), so far as is relevant, provided as follows: 2 UNREPORTED JUDGMENTS Levy of land tax after 31 December 1989 3AE. (1) Except as provided by subs(2), in respect of the taxable value of all the land owned by any person at midnight on 31 December in any year (commencing with 1989) there is to be charged, levied, collected and paid under the provisions of the principal Act and in the manner prescribed under that Act, land tax for the period of 12 months commencing on | January in the next succeeding year and at the rates set out in Schedule 6. Deduction to be made in respect of residential unit 3A. (1) In this section 'prescribed proportion' means, in relation to a residential unit - (a) the proportion specified in respect of that residential unit in the application made under subs(3); (2) Subject to this provision, but notwithstanding any other provisions of this Act, or the provisions of any other Act, the amount of land tax payable in respect of the period of twelve months commencing on the first day of January in the year one thousand nine hundred and seventy-four or in any succeeding year is the amount that, but for this sections, would be payable......... less - (b) where the land taxed is land owned by a company in which all the issued shares are owned by persons each of whom, by virtue of his shares, has an exclusive right to occupy a part of a building situated on land owned by the company - in respect of each residential unit in the building, an amount that bears the prescribed proportion to the amount that, but for this section, would be the tax payable in respect of the land on which the residential unit is situated. (3) A reduction under subs(2) does not apply in respect of a residential unit - (a) unless, in the building of which the residential unit forms part there is at least one other residential unit: (b) unless - (ii) where that land is land referred to in para(b) of that subsection - the secretary of or one or more shareholders in the company that owns the land, apply, in a form approved by the Chief Commissioner, for a reduction under this section, specifying the proportion that, in their opinion, is a fair and reasonable proportion of the adjusted value of the land to be attributed to that residential unit; On 22nd December 1989 each of the Messrs. Page and the Respondent executed a form of Agreement which, so far as is relevant, provided as follows: " 3. OCCUPANCY RIGHTS Unless otherwise agreed by the parties in writing, the rights of occupancy of the property from the date of this agreement until 30 November 1990 shall be as follows: (a) that C shareholder has the exclusive right to occupy the upper floor of the two storey brick resident situated on the property and the garage (excluding the room beneath the garage) situated on the western side of the property; (b) the M Shareholder has the exclusive right to occupy the ground floor of the two storey brick residence situated on the property, the garage (excluding the room beneath the garage) situated on the eastern side of the property and the garden areas and lawns on the property; and \WRUEF COMMISSIONER OF LAND TAX v MRC DEVELOPMENTS PTY LTD (Powell JAB (c) the R Shareholder has the exclusive right to occupy the rooms situated beneath the garages on the property. 4. AGREEMENT OF SHAREHOLDERS On or before 30 November in each year the Shareholders must sign an Exclusive Occupancy Notice setting out the exclusive occupancy rights of the Shareholders in respect of the property. 5. NEW SHAREHOLDERS The Company must not issue or register a transfer of shares to any person who is not a party to this agreement except on the condition that that person executes a copy of this agreement as evidence of its agreement to be bound by the provisions of this agreement. 8. ASSIGNMENT Neither the benefit of this agreement nor any of the rights, interests or obligations hereunder may be assigned by any of the parties hereto without the prior written consent of the other parties. " On 21st March 1990, the Appellant issued an Assessment, directed to the Respondent, of land tax on the lands held by the Respondent on 31st December 1989 - the lands being land at North Sydney and also the subject property - the total amount of land tax levied being $135,000 - an Amended Assessment was later issued in the sum of $100,930. After the issue of the first Assessment, the Messrs. Page, relying on the provisions of s3A(2)(b) of the Tax Act, applied to the Appellant for an appropriate reduction in the land tax which had been levied. Notwithstanding the provision of further information, that application was rejected by the Appellant, who also disallowed the objection which the Respondent thereafter lodged. In the letter advising of the disallowance of that objection, the Appellant wrote (inter alia): " S3A(2)(b) Land Tax Act, 1956 provides for a reduction from tax otherwise payable where a person, not being a company, by virtue of being the owner of issued shares, is entitled to occupy a part of a building on land owned by a company. It is not considered that any person was entitled to use and occupy a flat (as defined in s3 of the Land Tax Management Act, 1956) by reason of being the owner of shares in MRC Developments Pty Ltd conferring an exclusive right to occupy a part of a building situated on land owned by MRC Developments Pty Ltd." In the letter advising of the disallowance of that objection, the Appellant wrote (inter alia): " S3A(2)(b) Land Tax Act, 1956 provides for a reduction from tax otherwise payable where a person, not being a company, by virtue of being the owner of issued shares, is entitled to occupy a part of a building on land owned by a company. It is not considered that any person was entitled to sue and occupy a flat (as defined in s3 of the Land Tax Management Act, 1956) by reason of being the owner of shares in MR Developments Pty Ltd conferring an exclusive right to occupy a part of a building situated on land owned by MR Developments Pty Ltd." 4 UNREPORTED JUDGMENTS Thereafter, the Respondent, in reliance upon the provisions of s38A of the Land Tax Management Act 1956, sought from, and was granted by, the Appellant his approval in writing to an appeal by the Respondent to this Court against the Appellant's decision to disallow the objection. In the Summons which was filed to initiate that Appeal, the Respondent sought a Declaration that, in the circumstances, it was entitled to a reduction in the amount of land tax on the basis that: "the said land was, during that year, land owned by the plaintiff, being a company in which all the issued shares were owned by persons, each of whom by virtue of those shares had an exclusive right to occupy a part of the building situated on that land." When the matter came on for hearing before Brownie J, a number of grounds were taken by the Appellant in order to sustain his disallowance of the objection which had been raised by the Respondent. For present purposes I note only that, among those grounds, was a submission that "the rights of occupancy", if such they could be described, pursuant to which the Messrs Page occupied, or were entitled to occupy, the various parts of the building, to which I have earlier referred, did not arise "by virtue of" the shares of which the Messrs Page were ultimately the beneficial owners. That submission did not, nor did any of the other submissions which had been advanced on behalf of the Appellant, find favour with Brownie J, who therefore allowed the Appeal with costs and directed the Appellant to issue an Amended Assessment conformably with the reasons which his Honour had indicated in his judgment. In the Notice of Appeal, which was then filed by the Appellant, the various grounds which had earlier been taken before Brownie J were again raised. However, for present purposes, I am content to refer only to ground 4, which asserted that: "His Honour erred in holding that each of the 'C' shareholder, the 'M' shareholder and the 'R' shareholder" had by virtue of his shares an exclusive right to occupy a part of the building owned by the plaintiff within the meaning of s3A(2)(b) of the Land Tax Act 1956 in respect of the 1990 year". Ihave referred only to that ground since it seems to me that even if, as for the purpose of this Appeal I am prepared to do, I proceed upon the basis that each of the other grounds sought to be raised by the Appellant - and, in particular, the ground based on the submission that the word "owned", where appearing in s3A(2)(b) of the Tax Act, means "legally owned" rather than "beneficially owned" - is lacking in substance, for it seems to me that, even if one proceeds on that basis, the rights of occupancy which the Messrs Page claim to enjoy are not rights which they enjoy "by virtue of" the shares of which they claim to be the beneficial owners. In the absence of authority - and counsel have not been able to refer us to any authority which bears directly on the point - the matter is essentially one of impression. I must say that, for my own part, I construe the phrase "by virtue of his shares" in s3A(2)(b) of the Tax Act as meaning that the rights in question must be an incident of, or attached to, the shares themselves. If this be so, as I believe it to be, then, despite the arguments which have been skilfully advanced by Mr Justin Gleeson, on behalf of the Respondent, it seems to me that it cannot be said, in the present case, that the rights of occupancy claimed, and enjoyed, by the Messrs Page are rights arising "by virtue of his shares". On the contrary, as it seems to me, the rights in question are rights in personam, which are derived solely from the Agreement of 22nd December 1989. If any justification for this \WRUEF COMMISSIONER OF LAND TAX v MRC DEVELOPMENTS PTY LTD (Sheller JAB view be needed, it is, in my view, provided by the provisions of clauses in the Agreement to which I have referred, which demonstrate that the rights do not attach to the shares themselves and would not pass with the shares if the shares were to be transferred to another owner. Upon this simple ground, as it seems to me, with respect to Brownie J, his Honour fell into error. That being so, I would propose that the Appeal be upheld; that the Summons be dismissed; and that the Respondent pay the Appellant's costs of the Appeal and of the trial at first instance, the Respondent, if otherwise qualified, to have a certificate under the provisions of the Suitors Fund Act 1951. Handley JA I agree. Mr Gleeson, in a careful and thoughtful argument, has submitted that the occupiers of this residential building had exclusive rights of occupation by virtue of their shares, for the purpose of s3A(2)(b) of the Land Tax Act. However, it seems to me that the rights of occupation flow from the agreement of 22 December 1989. Those rights did not exist before that agreement was made and would not survive its expiration or determination. As a matter of title those rights flowed solely and exclusively from the agreement. No doubt the beneficial interest of the three brothers in the shares provided the occasion for the agreement and explains its existence and terms. However, the shares themselves conferred no such rights on the holders. The rights under the agreement would not be transmissible with the shares and did not form part of the rights attached to those shares. I agree therefore with the Orders proposed by Powell JA. Sheller JA I also agree with the reasons given by the other members of the Court and with the Orders proposed. Handley JA: The Orders of the Court will be as proposed bv Powell JA. * Appeal upheld. * Summons dismissed. * Respondent to pay Appellant's costs fo the Appeal and of the trial at first instance, the Respondent, if otherwise qualified, to have a certificate under the provisions of the Suitor's Fund Act 1951. Counsel for the appellant: RF Edmonds Solicitors for the appellant: IV Knight, Crown Solicitor for the State of New South Wales Counsel for the respondent: JT Gleeson Solicitors for the respondent: Freehill Hollingdale and Page