Classic Texts in Australian and International Taxation Law

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33. Chapter 24: Appendix A: The Base of an Integrated Estate and Gift Duty

24.A1. In this appendix the term ‘estate duty’ is used to refer to the tax that may be imposed in relation to the estate of the taxpayer on his death and the term ‘gift duty’ is used to refer to the tax that may be imposed on a disposition of property by a taxpayer made during his life. The Committee has recommended that gift duty and estate duty be fully integrated. It follows that the base for each should correspond as closely as possible.

24.A2. One of the inequities of the present Commonwealth estate and gift duties is that it is relatively easy so to arrange one's affairs that the tax is reduced to a small amount or avoided completely. The intention of the Committee is that the estate and gift duties recommended by it should have a tax base sufficiently broad to remove this inequity. The Committee concedes that some of its recommendations for defining the tax base are arbitrary to a degree. The very diversity of the legal techniques available to taxpayers who seek to avoid tax does not always allow of a demonstrably fair and consistent approach.

24.A3. All real and personal property owned by a taxpayer at the date of his death should form part of his estate subject to estate duty and, in addition, the base must be broad enough to include the extensions recommended by the Committee.

24.A4. A gift for purposes of gift duty should include the conferring of any property, benefit or advantage on another person otherwise than by will (whether with or without an instrument in writing, and whether as a result of any action or inaction) without consideration in money or money's worth or for a consideration less than the value of the property, benefit or advantage that is the subject of the gift. The extent of the gift should be:

(a) the value of the property, benefit or advantage given, where there is no consideration; or
(b) the amount by which the value of the property, benefit or advantage exceeds the consideration, where the consideration is less than the value of the property, benefit or advantage given.

The definition must be broad enough to cover the extensions to the tax base recommended by the Committee.

I. Powers Over Property

24.A5. Where a taxpayer has power (for example, under a trust, will or contract) to acquire property, whether on or prior to death, such property should be treated as property of the taxpayer. Examples include property the taxpayer can acquire by the exercise of a power of appointment or by the revocation of a trust. It is arguable that such a principle is too wide and that it is unfair to impose a tax in relation to property if the taxpayer has not enjoyed the ownership of the property or at least the yield of income from it. The answer to such an argument is that it was always open to the taxpayer, had he so chosen, to acquire the ownership of the property.

24.A6. A power to appoint property may be described as a power held by a person which enables that person to determine the entitlement to property. The grant of such

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a power may be seen as a disposition of the property to which it relates and may constitute a gift by the grantor. Where the holder of a power can appoint the property to himself, the grant of the power may be seen as a disposition to the holder of the power coupled with a power in the holder to divest himself of the property in favour of any other person who may be considered under the power. Once it is accepted that a power to acquire property must be regarded as equivalent to ownership of the property for the purpose of imposing a tax, then property subject to a power held by a taxpayer, which enables him to appoint to himself, should be treated as property of that taxpayer for duty purposes.

24.A7. The Committee thus sees justification for imposing a tax in relation to the exercise or failure to exercise a power where the holder of the power can appoint to himself. A taxpayer should, however, be regarded as being able to appoint to himself if he can appoint to his creditors, and thereby discharge his debts, or to a company he controls or of which he is a shareholder or debenture-holder, or to a trustee of a trust (including a discretionary trust) in which he has an interest, or to his estate. The provision should extend to the cases where a company or a trustee holds a power and, by way of illustration, the company can appoint to its major shareholder or the trustee can appoint to a person who has power to remove him from office. If a taxpayer can appoint property between, say, three other persons and the relevant instrument provides that the property shall pass to the taxpayer if no appointment is made, the taxpayer should be treated as being able to appoint to himself.

24.A8. Assuming that a taxpayer has a power under which he may appoint to himself, questions arise as to the manner in which tax should be assessed in each of the following cases:

(a) the exercise of the power, whether during life or on death by will;
(b) the relinquishing or disclaimer of the power;
(c) a valid assignment or a similar dealing with the power;
(d) the expiry of the power by effluxion of time, the power not having been exercised; or
(e) the death of the holder of the power, the power not having been exercised.

In case (e), the property should be treated as part of the deceased's dutiable estate. On each of the other occasions, the holder should be deemed to have made a disposition of so much of the property concerned as does not pass to him. Subject to the following exceptions, the disposal should be treated as being a disposal for no consideration. If the holder is required to pay any consideration on the exercise of the power in his own favour, then, in determining the extent of the gift, such consideration ought to be set off against the value of the property. If the holder is paid a sum in consideration of his exercising or failing to exercise the power or his relinquishing or assigning the power, the consideration ought to be set off against the value of the property in question in determining the amount of the gift.

24.A9. Special provisions are required in relation to a settlement of property that is subject to a power in the settlor to appoint the property to himself, or to revoke the settlement except where the revocation is for the purpose of re-settling the property on trusts under which the settlor is not a beneficiary. A power to revoke in these circumstances is a power to appoint property to oneself. The Committee considers that, in determining the amount of the gift involved in making the settlement, one should ignore the power to appoint or revoke. The manner in which the amount subject to tax

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should be determined, at a later time, in any of the circumstances considered in paragraph 24.A8 will require that the amount be limited to any increase in the value of the property between the date on which it was settled and the date of exercise, relinquishment, assignment, expiry or death.

24.A10. A power to appoint income should be treated in the same way as a power to appoint capital. If A can appoint income to himself or to B or C and appoints the relevant income to B, A should be treated as having made a gift to B of the income appointed, irrespective of how the income may be treated under income tax legislation.

24.A11. There remain questions as to powers exercisable jointly or exercisable only with the consent of another person. If one or more of the holders of a power are members of the class of possible beneficiaries, then each such holder should be treated as owning a part of the property that is subject to the power, such part being the whole of the property divided by the number of holders. For example, if A and B hold a power jointly and the possible beneficiaries are A, C and D, the whole of the property subject to the power should be taxed in A's hands and not in those of B; if A and B hold a power jointly and the possible beneficiaries of the power are A, B, C and D, half the property should be taxed in A's hands and half in B's. A more sophisticated approach would be to determine the dominant party, where possible. The United States legislation attempts to do this. However, joint powers that include one of the holders as a possible beneficiary are fairly unusual, and the Committee doubts if the additional complications that would be involved in adopting the United States approach are justified.

24.A12. A consent may be required to the exercise of a power or to the selection of the objects or to both exercise and objects. The power is, in one view, tantamount to a joint power. On the other hand, it may be thought inappropriate to treat a right to withhold consent in the same way as a power under a joint power. The Committee prefers the former view, that a consent to the exercise of a power, where the person whose consent is required is an object of the power, ought to be recognised as equivalent to a power to appoint to oneself. The other view affords opportunity for avoidance.

24.A13. There should be a provision by which, if certain conditions are met, a power to appoint or a power to consent will be disregarded for the purpose of the taxing Act. The conditions would be that a taxpayer who has become the holder, or one of several holders, of a power to appoint or consent has, within a reasonable time after becoming aware of the existence of the power, taken all necessary steps to disclaim the power.

II. Options

24.A14. The Committee proposes that special provisions should apply defining the tax base of the integrated estate and gift duty in relation to options. An option normally involves a right in the option holder to call on the owner of property to which it relates to convey the property to him on the option holder paying the consideration specified in the terms of the option. But for purposes of defining the tax base it should extend to rights that are the same in substance. In the following paragraphs, the term ‘option transaction’ refers to any contract or series of contracts by which a person has a right to acquire property if the completion of the contract (that is, the acquisition of the property) might occur more than six months after the making of the contract.

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24.A15. The application of any special provisions relating to option transactions should be limited. The special provisions should apply only where the parties to the option transaction are related and only where the option transaction is not an ‘ordinary commercial transaction’, by which is meant a transaction that people, dealing at arm's length in a bona fide commercial transaction, would be likely to enter into. The definition of ‘relative’ in section 6 (1) of the Income Tax Assessment Act may be used to determine if parties are related but should be supplemented so that a taxpayer is deemed to be related to a company in which he or his relatives hold shares or debentures and to a trust in which he or his relatives are beneficiaries.

24.A16. An option transaction, in the narrower sense referred to in paragraph 24.A14, may involve a gift by the person whose property is to be acquired if he receives inadequate consideration for the option. It may involve a gift by the person who takes the option if he pays an amount for it greater than its value. An option transaction amounting to a contract to buy property may constitute a gift by one or other of the parties to the contract if the amount agreed to be paid, taking into account the time at which it may be paid, is greater or less than the present value of the property. If it were sought in all cases to determine the amount of the gift at the time an option transaction is entered into, near impossible problems of valuation would arise. In the Committee's view, it is more appropriate to delay the determination until the option transaction is completed by the acquisition of the property or until the rights to acquire the property lapse. If, however, one of the parties dies before completion or lapse, the determination should be made at the time of death.

24.A17. Where property is acquired on completion of the option transaction, any gift will be calculated by comparing the total of amounts paid by the person acquiring the property with the value of the property at that time. Any amount paid before the time of completion should be treated as increased by the application of an appropriate rate of interest. (In calculations in succeeding paragraphs amounts paid for options that are allowed to lapse or are disposed of should be similarly valued.)

24.A18. If a right to acquire property under an option transaction is allowed to lapse by effluxion of time (other than by reason of a legal disability or impediment that prevents the person who has the right to acquire the property from completing the transaction), there will be a gift by the person who had the right to acquire the property. The gift will be (i) any amount by which the value of the property at the time of the lapse exceeds the amount payable by him at that time to acquire the property, plus (ii) the amount, if any, by which the value of what was paid for the option exceeds the amount in (i). The same principles should be applied when an option lapses by reason of the death of the person who had the right to acquire the property.

24.A19. If the person who has the right to acquire property under an option transaction dies and the option does not lapse on his death, the value of the right should be included in his estate plus the amount, if any, by which the value of what he paid for the option exceeds that value. The value of the right will be calculated by reference to the value of the property at the time of death.

24.A20. These principles will need modification if the person who has the right to acquire property under an option transaction disposes of his right. Where the disposition is in the course of a bona fide commercial transaction, a gift will arise if the amount received on the disposition is more or less than the value of the amount paid to acquire the option. Where it is more the gift will have been made by the person who gave the option. Where it is less the gift will have been made by the person who took the option. Thereafter, the special provisions will be inapplicable.

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24.A21. If the disposition is not in the course of a bona fide commercial transaction, the person who takes the option under the disposition will be treated as the person who originally acquired the option under the option transaction though the special provisions should not give rise to a gift by him if he completes the acquisition. They would, however, apply on completion to determine any gift made by the person who gave the option. Where the option lapses the gift by the holder of the option will be the value of the property less the amount payable at that time to acquire the property. If the option does not lapse upon death and the holder dies the value to be included in his estate will be similarly calculated.

24.A22. The disposition of the option referred to in the previous paragraph will involve a gift by the person making the disposition of the amount, if any, by which the value of the amount paid to acquire the option exceeds the value of the option at the time of disposition. There will also be a gift by that person of the amount, if any, by which the value of the option exceeds the amount of the consideration received. There will be a gift by the person who takes the option under the disposition of the amount, if any, by which the consideration given exceeds the value of the option.

24.A23. If the person whose property may be acquired by some other person by virtue of an option transaction dies, the value of the property, less any amounts already paid by that other person, should be included in his estate. Any amounts payable under the option transaction after the death of the owner should not be included.

24.A24. The gift, in each case, should be deemed to have occurred at the time of completion, lapse, disposition or death, and not at the time the option transaction was entered into.

III. Settled Property

24.A25. Under Australian law, it is possible to settle property on trusts lasting for many years. There are rules against lengthy accumulations and perpetuities; but generally there is no difficulty in creating a trust extending over two generations of a family, and sometimes a trust can be effectively extended into the third generation. While such a trust continues, the rights of the beneficiaries to income or to capital can be stated in precise terms (for example, to A for life, then to his children B and C for life and then to such of the children of B and C as live to attain 21 years) or can be left to be determined during the life of the trust under discretionary powers conferred upon the trustees or other persons. A trust can be created to last for upwards of 80 years under which the income is directed to be accumulated, or distributed among a specific class, such as the descendants of A, at the discretion of the trustee. Until the trust comes to an end, no beneficiary has any right, as a rule, to an identifiable part of the trust property, although he may receive some of the income or may expect to receive some of the capital. Clearly, such a device lends itself to tax avoidance.

24.A26. Generally, the creation of a trust, whether by settlement or will or otherwise, gives rise to no difficulties. (One exception is a settlement where the settlor retains an interest; this case is dealt with later in this appendix.) If the trust is created by will, the property subject to the trust will form part of the estate of the deceased; if created during the taxpayer's life, the property will be caught by the gift duty provisions. Thereafter, however, there is no easy solution to the problem of taxing property held in trust.

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Life Estates

24.A27. The Committee has come to the conclusion that, in determining the tax base, property the taxpayer did not own but whose yield of income he had the right to enjoy ought to be included. In the case of a life estate, this means that the corpus supporting the life estate should be taxed as part of the estate of the life tenant on his death. It can be argued that such a principle is too wide, that it is unfair to tax the corpus in the hands of the life tenant since he did not have the right to dispose of the corpus during his life and he was never the owner of it. A fairer solution, in the case of a life estate, might be to tax the life tenant on his death on part of the corpus, such part being the actuarial interest of the life tenant in the corpus when he first became entitled to the life estate. However, this solution would permit part only of the wealth subject to successive life estates held by members of successive generations to be taxed. If the life tenant is taxed on part only of the trust estate on his death, there is unlikely to be anyone else to whom the balance may be appropriately attributed. One cannot tax the persons ultimately entitled to the corpus, as they may not be known. To tax the trustee on the balance, the whole of the estate will be brought to charge but the aggregate of duty payable will usually differ from what would have been payable had the whole estate been taxed in the hands of the life tenant. The actual difference will depend on the rates. Unless a special rate is imposed on trustees, there will be a tax advantage in creating a life estate or a number of life estates. In the Committee's opinion, an estate bequeathed by X to his son for life and then to the son's children, should bear broadly the same duty as the estate would have borne had it been bequeathed by X to his son and had the son then bequeathed it to his children. The Committee recommends that, on the death of a life tenant, the assets supporting his life estate should form part of his dutiable estate and the duty on it should be paid out of those assets.

24.A28. A life tenant may bring his life estate to an end while he is alive by a surrender or a partition or by some other means. It would hardly be fair to tax assets subject to a life estate on the death of a life tenant but not to tax assets where a life tenant has surrendered his interest immediately before his death. In the Committee's opinion, where a life estate is teminated other than by disclaimer the life tenant should be taxed as if he had disposed of the whole of the assets subject to the life estate for a consideration equal to the consideration in fact received by him. The difference between the value of the assets and the consideration should be taxed as a gift.

24.A29. Where a life interest (whether vested or contingent) is disclaimed, there should be no such deemed disposal. A disclaimer is a rejection of an interest by a beneficiary before he takes any benefits to which he may be entitled by virtue of the interest. The Committee considers that this treatment of a disclaimed interest should be extended to a surrender by a beneficiary of an interest where the surrender is made within six months of the date on which the beneficiary receives the first benefits to which he was entitled under the interest. This treatment should only be available if all benefits received by virtue of the interest are repaid to the trustee to be held by the trustee as if the interest had been disclaimed.

24.A30. It seems arbitrary to treat an assignment differently to a surrender or a partition. An assignment, other than by charge, should be treated on the same basis as a surrender or partition; that is to say, the life tenant should be deemed to have disposed of the assets supporting his life estate for a sum equal to the consideration, if any, received by him from the assignee. The difference between the value of the assets and the consideration should be taxed as a gift.

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24.A31. The foregoing principles need to be supported by other rules:

(a) If there is a merger of the life estate by reason of the life tenant acquiring the remainder, the transaction should not attract any duty (unless the consideration paid is greater or less than the value of the remainder). Provided the assets comprising the corpus are still owned by the life tenant on his death, the whole will then be taxed.
(b) Sometimes a life estate is not in the whole of the assets held subject to the trust, but in part only of those assets. Where the part is a fraction of the whole, for example an interest in half the income from the estate for the life of X, the same fraction can be used to determine the extent of any liability for duty when the life tenant dies or deals with his interest in some way. Thus, if X is entitled to half the income from Blackacre during his life, half the value of Blackacre will be taxed on X's death. Sometimes the entitlement is fixed in money terms. For example, a settlor may direct that the first $5,000 of the income derived by the estate each year be paid to his daughter for her life, that half the balance be paid to his son for his life and that the remainder of the income be accumulated. The income from the estate may vary and, in a particular year, be less than $5,000. Where the entitlement is fixed in this way, the fraction A ÷ B should be employed to determine the interest in the corpus of the life tenant on his death or at some earlier point of time, where A is the total income that the life tenant became entitled to receive from the trust over the previous N years (or, if the entitlement has been for a lesser period, then that lesser period) and B is the total income derived by the estate during this period. The period of N years should be reasonably long—say ten years—to enable a clear picture to emerge. In applying the fraction, the income of the trust estate should be determined by principles of trust law rather than income tax law.
(c) For the purpose of applying the foregoing rules, distributions out of corpus should be disregarded unless there is undistributed income in the trust. Where there is undistributed income, applications from corpus should be deemed to be distributions of income to the extent of the amount of the undistributed income.

24.A32. If the assignment or surrender relates to a contingent life interest, that is to say, if a person assigns or surrenders his life interest before the interest vests, the transaction ought not to attract duty under the provisions recommended in paragraphs 24.A28 and 24.A30. If the consideration received on the assignment or surrender is greater or less than the value of the contingent interest at that time, there will be a gift of the difference.

24.A33. Once a life interest has been taxed, no further tax should be payable in relation to any subsequent dealings with the life interest for full consideration or on the death of the life concerned.

24.A34. The recovery of duty from the trustee of an estate in which a life interest is held is considered in paragraphs 24.64–24.65. Where the life tenant has died, it will be necessary to calculate what part of the estate duty is referable to the settled estate. In the Committee's view, the duty applicable to the settled estate should be the average rate of tax charged on the whole of the property owned or deemed to be owned or to have been disposed of by the deceased life tenant on his death. Where the person entitled to the estate next following that of the life tenant is a person in respect of whom an exemption is available, then so much of the exemption as is not absorbed by

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the actual estate of the deceased life tenant should be available against the duty charged on the corpus of the settlement.

Estates for a Term of Years or for the Life of Another Person

24.A35. Regard must be paid also to estates for a term of years and estates for the life of another person. If the legislation fails to deal with these kinds of interest, avenues of avoidance of the life estate provisions will be opened up. For example, instead of settling assets on his daughter (aged 30) for life, a settlor may provide her with an estate for a term of 60 years. Other illustrations are mentioned in the following paragraphs.

24.A36. One approach would be to treat the estate generally in a similar manner to a life estate, that is to say, to deem the relevant assets to have been disposed of by the holder of the estate on the expiration of the term or on an earlier assignment or surrender, but to bring to charge a fraction only of the assets. The fraction would be the ratio of the term of the interest to the life expectancy of the original holder of the interest at the time the interest was created, such fraction not to exceed one. An alternative approach would be to bring to tax the whole of the assets. This the Committee considers too drastic. It prefers that the former approach be adopted. There should be a provision, however, that if successive terms are created which have the effect of giving the holder of the terms a life estate, the whole of the assets will be taxed on the expiration, assignment or surrender of the last such term or on the death of the holder, credit being allowed for any tax paid on the expiration of the earlier terms. The rules mentioned in paragraphs 24.A28–24.A34 in relation to life estates should be applied to interests for terms of years and interests for the life of another.

Discretionary Trusts

24.A37. Discretionary trusts require further consideration. (‘Discretionary trust’ refers to a trust under which the trustee or some other person has a discretion as to how the trust income is to be distributed among persons entitled to be considered.) If

(a) a person is entitled to be considered in the exercise by another person of a discretion in relation to the distribution of income of a trust estate, and
(b) that entitlement ceases for any reason whatsoever (for example, the expiration of a term of years, the assignment of any future entitlement, the exercise of a discretion in relation to corpus or the death of the person entitled), and
(c) the person so entitled has received income as a result of the exercise of the discretion during a specified period of years (N years) preceding the date on which the entitlement ceases,

he should be deemed to have disposed of a fraction of the assets of the discretionary trust, such fraction being: (income received by that person over the N years) ÷ (total income of the discretionary trust during this period). The choice of an appropriate figure for N poses some difficulties. On the one hand, if N is small, say 5, one may expect that elderly beneficiaries will be phased out of income distributions as they advance in years, thus significantly reducing the fraction. But if the figure for N is large, there will be other problems. For example, if N is set at 50 and one person has received all the income from the estate during the last 20 years but little or nothing during the earlier 30 years, then only two-fifths of the assets would be brought to tax on the cessation or assignment of the interest. Conversely, it would seem somewhat unfair to tax the person who received the income during the earlier 30 years on a basis that would bring three-fifths of the value of the assets to tax at a date 20 years after he received the last benefit from the estate. In addition, a large figure for N will create

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administrative difficulties for the trustee and the Revenue. On balance, a smaller figure for N seems preferable, though it has to be recognised that this may encourage the establishment of discretionary trusts. The Committee suggests that a period of ten years be adopted; if the trust subsists for a lesser number of years, N should be equal to that number. For the purpose of determining the total income of the discretionary trust, concepts of trust law rather than income tax law should be employed and any applications from corpus should be deemed to be income to the extent that there is accumulated undistributed income in the trust.

Accumulating Income

24.A38. The foregoing rules do not deal with the case where income is accumulated. There are limitations in most jurisdictions on the extent to which income can be accumulated but some tax-haven countries have deliberately removed such limitations. To the extent that accumulation is permitted, the policy of levying duty at least once each generation is open to defeat since all the recommendations above depend on income being distributed.

24.A39. An estate may include non-income-producing assets such as works of art and land suitable for residential development purposes, or the gross income produced by or derived from an asset may be exactly set off by interest on borrowings or other outgoings. The concepts of income and outgoings can be defined by the relevant trust instrument in such a way that, though there is income for income tax purposes, there is no income for trust law purposes. A trust may have been established by a settlor with a view to deriving gains of a capital rather than of an income nature. The capital gains could be distributed to beneficiaries by means of distributions from time to time out of corpus. If the estate is wholly comprised of such assets, the rules suggested in paragraphs 24.A27–24.A37 will not be effective in relation to that estate.

24.A40. The Committee recommends that where during a relevant period (defined later) the trust has derived income and the income has not been wholly distributed during that period, the assets of the trust, or an appropriate part, should be brought to tax at the end of the relevant period. The fraction will be that part of the estate which is not brought to tax during the relevant period. Assume, for example, that a trustee has a discretion to accumulate the income or to make distributions to A or B during A's life and the trustee has, at all times, distributed one-third of the income to A and accumulated the balance. If A dies during the relevant period, one-third of the estate will be brought to tax on the death of A under the rule in paragraph 24.A37 and, at the end of the relevant period, the remaining two-thirds will be taxed. Alternatively, if A dies after the end of the relevant period, the whole estate will be brought to tax on the expiration of the relevant period. One-third will again be taxed on A's death, but here quick-succession relief will be available.

24.A41. In the case of a trust which, at any time during a relevant period, has held assets belonging to the class of assets described in the first sentence of paragraph 24.A39, the following rules should be applied:

(a) If a beneficiary who is a life tenant or who has an interest for the life of another has had the use or benefit of the asset during the term of his interest, the asset should be taxed on the expiry of his interest, or on a prior dealing, in the same way that it would have been taxed had the beneficiary received income from the asset.
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(b) In any other case, the whole or part of the asset should be brought to tax at the end of the relevant period. Tax should be levied on that part of the asset not brought to tax during the relevant period.

A beneficiary should be regarded as having the use and benefit of an asset if the asset is dealt with or used in accordance with the beneficiary's directions.

24.A42. In the case of trusts existing when any legislation giving effect to these recommendations comes into force, the first relevant period referred to in paragraphs 24.A40–24.A41 should be twenty-five years from date on which the legislation comes into force. In the case of trusts arising after any such legislation comes into force, the first relevant period should be twenty-five years from the date on which the trust comes into existence. The second relevant period would commence on the day following the last day of the first period and so on, each relevant period being twenty-five years. If the trust comes to an end and all the assets are distributed during any such period of twenty-five years, then the relevant period should end on that day. However, the deemed disposal should be part only of the fraction mentioned above, such part being: (number of years and fractions thereof in the relevant period) divided by 25.

24.A43. Rate of duty on assets brought to tax by virtue of the provisions recommended in paragraph 24.A40 and under (b) in paragraph 24.A41 should be set sufficiently high to discourage the use of trusts as a means of avoiding tax.

Special Cases

24.A44. Three cases that would be caught by the foregoing rules require special consideration.

24.A45. The first case relates to the situation where a taxpayer settles property on himself for life with the remainder to other persons. Where the life interest is in the whole of the settled property, the property will be taxed on the death of the settlor or on an earlier dealing by him with the life estate and no tax need be imposed when the settlement is created. If the life interest is not in the whole of the settled property, then the value of that part to which the interest does not relate should be taxed as a gift at the time of the settlement.

24.A46. The second case is where an existing interest is enlarged. For example, assume that A, B and C are each entitled to a third of the income from Blackacre during the life of C and that A and B are entitled to half of Blackacre on the death of C. Under the Committee's recommended rules, the whole or a fraction (greater than a third) of the value of Blackacre would be brought to tax on the death of C, half on the death of A and half on the death of B. The Committee recommends that where

(a) an interest (whether for life, for a term of years or for the life of another or as a potential beneficiary under a discretionary trust) is determined, and
(b) the whole or any part of the corpus is taxed to the person who was the holder of that interest, and
(c) that person is absolutely entitled to the whole or a fraction of the corpus,

the amount of the corpus brought to tax should be limited to the amount by which the corpus deemed to have been disposed of by that person exceeds the amount of corpus to which that person is actually entitled. Under this exception, in the example given above, a third only of Blackacre will be brought to tax on the death of C, and a half on

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each of the deaths of A and B. The exemption ought not to be available if the entitlement to corpus is contingent or can be defeated by some means.

24.A47. The third case is the protective trust. Such trusts are established for the benefit of a beneficiary (herein called the ‘protected beneficiary’) who is unable to manage his affairs properly or may be unduly influenced to his own disadvantage. Generally the trustee has a discretion as to distribution of income. If, on the death of a protected beneficiary who has had a life estate, three-quarters of the income derived during the life of the protected beneficiary has been distributed, three-quarters of the corpus will come to be taxed under the provisions recommended in paragraphs 24.A27 and 24.A31. In the meantime, the accumulated income will have resulted in tax being imposed by virtue of the provisions recommended in paragraph 24.A40. Such treatment, in the Committee's view, is inappropriate. In the case of a protective trust, the whole of the assets subject to the trust should be taxed on the occasion when the interest of the protected beneficiary is taxed under the provisions recommended in paragraph 24.A27. No tax should be imposed prior to this occasion by virtue of the provisions recommended in paragraph 24.A40.

24.A48. In this discussion of limited interests it has been assumed that the holder acquired the interest in circumstances that did not involve his giving any consideration for the interest: he may have acquired the interest under a will or in an inter vivos settlement. If purchased interests are excluded from the proposed provisions, opportunities for tax avoidance will be created. Assume, for example, that a grandfather is near death and is giving instructions in regard to his will. If, by his will, he leaves a life estate in property to his son with remainder to the grandson, estate duty will be paid on the full value of the property on the death of the grandfather and again on the death of the son. If, instead, the son acquires, by purchase, a life estate in the property from the grandfather, and the grandfather leaves a legacy to the son of the amount paid for the life estate and the remainder interest to the grandson, estate duty will be paid on the full value of the property (the value of the remainder plus the amount paid by the son for the life interest) on the death of the grandfather but no estate duty will be paid on the value of the property on the death of the son. In the Committee's view the treatment should not be varied merely because consideration was in fact given.

24.A49. Where a life estate or an estate for the life of another or an interest in a discretionary trust is assigned, the estate or interest will be taxed at that point. No further tax need be charged on the expiry of the estate or interest or on any further dealing with it for adequate consideration.

24.A50. The notion of limited interest is very wide and will include interests, for example that of a lessee of property, which arise in ordinary commercial transactions. It will be necessary to exclude from the operation of the proposed provisions interests that have been acquired by persons dealing with each other at arm's length in ordinary commercial transactions.

IV. Annuities

24.A51. An annuity involves a right to payments of money during the life of the annuitant or for a term of years. Where the annuity is charged on the income to be derived from assets, it may be indistinguishable from a life estate or an estate for a term of years. Clearly it should not be possible to escape the operation of the limited interest provisions by describing rights as an annuity, and the provisions defining

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interests should be wide enough to cover any situation in which a person has a right to income from property.

24.A52. Where the limited interest provisions are not applicable, an annuity will be treated like any other valuable rights. Where a person purchases an annuity, a question arises as to the adequacy of the consideration he has paid. This should be determined and any gift taxed at that point. Particular attention should be paid to the situation where the annuity is purchased from a relative or from an entity in which a relative is interested. Tables of life expectancy give only an average figure for the whole population. They may present a distorted picture in a particular case and should not necessarily determine the value of the annuity.

24.A53. A person may be entitled to an annuity under a will or settlement. Estate duty or gift duty on the property of the deceased or the property settled will of course have been paid. Where the bequest or gift of the annuity takes the form of a direction to the trustee to purchase an annuity for the taxpayer, the annuity will clearly not involve a limited interest. If the direction takes any other form, the annuity may involve such an interest. Thus a direction to pay an annuity from income of the trust, but to have recourse to capital if necessary, should be treated as giving rise to a limited interest.

V. Gift of Services

24.A54. Gifts do not always take the form of a transaction in property. A person who provides his services for the benefit of another is making a gift as effectively as someone who gives a sum of money sufficient to procure the performance of the same services by a third party. The law should not be concerned with the provision of services for the maintenance, support or education of members of a taxpayer's family or with services for philanthropic organisations or, more generally, for those in need. But if, for example, a businessman acts as the full-time managing director of a company and draws an annual salary of $5,000, whereas an appropriate salary, negotiated at arm's length, would be of the order of $20,000, it cannot be disputed that he is making a gift to the shareholders of the company (or to whoever else will receive the benefits) of the difference between what he could obtain and what he is obtaining. The same may be said of comparable services provided to another individual, or to a trust, or to a partnership. If there are no provisions to deal with such cases, there must be some loss of equity, which taxpayers may be more conscious of under a system that allows a much lower annual exemption than the present system.

24.A55. The problem is to identify a gift of services with which the law ought to be concerned. The administration of the tax law cannot depend upon a determination of work value every time the provision of services is involved. It would be convenient to limit the operation of any provisions taxing a gift of services so that they apply only to the benefit of services performed for a related person. The notion of ‘related’ for this purpose would be wide enough to cover cases where one of the parties to the transaction involving services is an entity such as a trust, partnership or company and a relative of the other party has an interest in that entity or where a person has an interest in an entity which is one of the parties and a relative of his has an interest in an entity which is the other party.

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24.A56. Moreover, in view of the exemptions proposed by the Committee in paragraph 24.40, it would be appropriate to limit any provisions so as to apply only to services given to an individual, partnership, trust or company in relation to business operations conducted by that individual, partnership, trust or company.

24.A57. Nevertheless, the question remains whether the administrative costs of applying the provisions, notwithstanding these limitations on their operation, would be warranted. The Committee inclines to the view that the administrative costs in applying provisions extending to gifts of services involving all related persons would not be warranted.

VI. Use of Property

24.A58. Special provisions need to be made regarding the permitted use (as distinct from the right to use for a fixed term which a person may be entitled to) by one person of property owned by another where the former pays inadequate consideration for such use and the use does not fall within the exemption allowed for maintenance and support provided by a taxpayer for members of his family.

24.A59. Where, under a lease or some other legally binding arrangement, an owner gives another a right to use property for a fixed term, it is possible to determine the existence of a gift at the time the lease or arrangement is made. This approach is not appropriate, however, in the case where the right to use can be determined by the owner at will or on notice. The owner of a grazing property may make a gift by allowing a relative, or a partnership in which the relative is a partner, to work the property without any charge by way of rent. A father who buys a house and allows his daughter and son-in-law to have the exclusive use of the house at a nominal rent subject to one month's notice is making a gift no different from the father who gives to his daughter money to pay the rent of a house that she and her husband have leased. Of course, many such gifts will be exempt by reason of the operation of the annual exemption of $3,000.

24.A60. In cases of this latter kind, the gift is the value of the use of the asset during the actual period of use less any amount received by the owner for that use. It should be provided, however, that a gift will be deemed to be made in each year in respect of the use during that year.

24.A61. Where the party who receives the benefit of the use of the property is unrelated to the owner of the property, such use should be excluded from the provisions. The notion of ‘related’, for this purpose, should be wide enough to cover cases where one of the parties to a transaction involving use of property is an entity such as a trust, partnership or company and a relative of the other party has an interest in that entity or where a person has an interest in an entity which is one of the parties and a relative of his has an interest in an entity which is the other party. In addition to the normal exemptions, there should be an exemption where the use of property is allowed as an ordinary act of social or family duty.

24.A62. A gift may be made by a loan of money interest-free or at a low rate of interest. Similar principles should apply to such a gift as are applied to a gift of the use of property. If the loan is for a fixed term and the rate of interest cannot be varied by the lender, it is possible to determine the existence of a gift at the time the loan is made. The amount of the gift will depend on the rate of interest charged and the commercial rate prevailing for a loan of that kind at the time the loan is made.

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24.A63. Where the amount of the loan is repayable on demand or on notice given by the lender or the interest rate can be varied by the lender on notice to the borrower, it should be provided that a gift will be deemed to be made in each year in respect of the period of that year in which the loan subsists. The amount of the gift will depend on the rate of interest in fact charged for the loan and the commercial rate prevailing during the year for a loan of that kind.

24.A64. The exemption recommended in paragraph 24.A61 should apply in relation to all loans of money as well as to the use of property.

VII. Debts

24.A65. A taxpayer may lend a sum of money under a loan agreement which provides that the debt is repayable on demand made orally by the taxpayer or on a written demand signed by the taxpayer or, if no demand is made, by instalments over a long term. No gift duty is payable when the loan is made; however, if the taxpayer dies without having made a demand for repayment, the instalments remaining to be paid are discounted in determining the value of the debt included in the taxpayer's estate. This is a special instance of the kind of option considered in paragraph 24.A18. If the right to call for repayment of a debt is allowed to lapse, the creditor should be deemed to have made a gift equal to the difference between the value of the debt had the right been exercised and the value of the debt after the lapse. Thus, in the case of the loan agreement referred to above, the undiscounted amount of the unpaid instalments will be included in the estate.

24.A66. The release of a recoverable debt for inadequate consideration should constitute a gift of the amount of the debt by the creditor. A debt that becomes unenforceable should be deemed to have been released for no consideration at the time it becomes unenforceable if the Commissioner has reasonable grounds for believing that the debt was allowed by the creditor to become unenforceable in order to avoid gift duty. If, subsequently, the debtor makes a payment to his former creditor which, had the debt not become unenforceable, would have been consideration to which the creditor was entitled on account of the debt, the payment should not be deemed to be a gift by the debtor to the creditor. Any gift deemed to have been made by the creditor when the debt became unenforceable should be reduced by the amount of any such subsequent payment and an appropriate refund of tax allowed.

VIII. Partnerships

24.A67. A partner who receives a return from a partnership which is less than a fair proportion of the profits of the partnership, having regard to his contribution of property and capital, has made gifts to the other partners. The provisions necessary in this context to identify and determine the amount of the gifts are special applications of the general principles that it is proposed should apply to gifts involving the use of property and loans of money for inadequate consideration.

24.A68. It is not uncommon for a partnership agreement to contain a clause that the interest in the partnership of a partner may be acquired by the remaining partners on his retirement or death at a price determined in accordance with the agreement. The provisions regarding options, outlined in paragraphs 24.A14–24.A24, would have some application. In the Committee's view, it is more appropriate that there should be special provisions to govern the effect of such a clause. These special provisions

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would follow the principles adopted in relation to limited interests and those proposed later, in paragraph 24.A89, in regard to shares. They would require that the clause by which the remaining partners are entitled to acquire the interest should be ignored in determining the value of the interest of the retiring or deceased partner.

24.A69. A partnership agreement may require that the value of goodwill should be ignored in fixing the price payable by the remaining partners in respect of the interest of the retiring or deceased partner. There is a strong argument that in the case of a professional partnership goodwill is personal to the retiring or deceased partner so that it adds nothing to the value of his interest in the partnership, whether or not the partnership agreement has any requirement that it be treated as having no value.

IX. Companies

Transfer of Assets to a Company

24.A70. One of the methods of minimising estate duty without incurring gift duty is for the taxpayer to transfer part of his property to a company for full consideration. The purchase price often remains outstanding as a debt due from the company and the amount of the debt is not varied as a consequence of fluctuations in the value of the property transferred. The benefit of an increase in value accrues to the company and thus to the equity shareholders, who commonly are the relatives or dependants of the taxpayer. (Of course this method of minimising duty carries the risk of defeat if the property transferred falls in value.) The taxpayer may effectively control the company, in which event he will continue to control the transferred assets. The taxpayer may procure for himself benefits from the assets during the remainder of his life.

24.A71. If the retention of control of the assets after the transfer and the receipt of benefits from the assets after the transfer are disregarded, there remains a sale of the taxpayer's assets for full consideration. If the purchase moneys are outstanding as a loan, the provisions proposed in paragraphs 24.A62–24.A64 will bring to tax any gift involved in the terms of the loan. There is, in the Committee's view no justification under an integrated estate and gift duty for seeking to trace the assets transferred and to tax at some later time any increase in their value. Tracing is, in any event, a near impossible exercise if it is to be done fairly. The company may not own the assets on the taxpayer's death: they may have been sold and the sale price merged with other moneys of the company, or they may have been given away. And even should the assets be owned by the company at the time of the taxpayer's death, the increase in their value may at least in part be due to improvements made by the company.

24.A72. The question remains whether there is need for special provisions in relation to the retention of control after transfer of assets to a company or the receipt of benefits after such transfers.

Power or Control in Relation to Companies

24.A73. The Committee has recommended that, where a person has power under an agreement or an instrument to acquire property for himself and fails to do so, he ought to be taxed as if he had acquired the property. Such a principle might be thought applicable to the power or control that a taxpayer may have over a company and thus over its assets. The nature of a company is such that its affairs can be controlled in many different ways. The problem is to identify what should be regarded as control for present purposes. It may be possible to spell out in legislation what constitutes control in a particular situation, but taxpayers will no doubt then organise their

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affairs so that they do not appear to have such ‘control’. While it is one matter—often very simple—to recognise the situation in which control of the affairs of a company is effectively held by a taxpayer, it is another matter to describe all such situations in general terms.

24.A74. In any case, it may be questioned whether the control of a company is an appropriate basis for the imposition of a tax any more than the control, for example, that attends the office of a trustee. The mere enjoyment of a power to do or refrain from doing some act is not an appropriate basis. To find any such basis one must look to the benefits that could have been obtained by the taxpayer. This raises its own problems which must now be considered.

Benefits from a Company

24.A75. On the principle asserted by the Committee in relation to settled property, a taxpayer can be deemed to be the owner of an asset actually owned by a company where the taxpayer is entitled to the benefits to be derived from that asset. In the context of shareholding in a company, this principle would involve including only the value of the shares carrying the entitlement. If the principle were to be extended to include benefits the taxpayer could have taken for himself by virtue of the powers he has over the company's affairs, substantial difficulties would arise in applying the principle, especially when the taxpayer does not receive any benefits, or receives some benefits and directs others elsewhere. These difficulties arise because directors and majority shareholders of companies are obliged to act bona fide for the benefit of the company as a whole. These duties must be taken to impose some limitation on the amount of benefits that a taxpayer could have directed to himself, though it is not uncommon for a taxpayer to treat a company he controls as his own and for the other shareholders to accept this situation without complaint. A general rule that a taxpayer who ‘controls’ a company in some defined sense is to be deemed to be entitled to all benefits to be derived from a company's assets cannot be reconciled with basic company law.

24.A76. The Committee does not, therefore, propose that any attempt be made to impose duty by reference to control of a company or the power to take benefits for oneself. Apart from the difficulties mentioned, there would be a major problem under an integrated estate and gift duty of determining the time at which duty should be imposed. No doubt a person relinquishes control or the power to take benefits when he dies, and it is possible to look to the situation that obtained during a period before death to determine what control or power he has relinquished. But a gift duty requires finding a moment of gift during life by the relinquishment of control or power. The Committee is aware that the United Kingdom has legislation that seeks to tax by reference to control and power. But this legislation has been criticised by the Courts and seems rarely to be invoked; moreover, it was introduced at a time when there was no gift duty in that country.

Gifts in Transactions Involving Companies

24.A77. Basically, there are seven ways in which a company may be used by a taxpayer to effect a gift:

(a) The taxpayer may make a gift to a company.
(b) The company may make a gift of part of its assets.
(c) The company may allot shares in its capital, such allotment being at an under-value.
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(d) The rights attaching to issued shares in the capital of the company may be changed.
(e) Rights attaching to issued shares in the company may change.
(f) An obligation may arise to sell shares in a company to specified persons at a price specially determined.
(g) The company may declare and pay dividends on some shares but not on others, so that the income of the company is directed to particular persons.

24.A78. Gift to a company. A taxpayer may make a gift of property to a company. There may be a gift by allowing the company to use property belonging to the taxpayer. There may be a gift arising from an interest-free loan. These gifts should be treated as any other gifts by the taxpayer. However, if the taxpayer has an interest in the company he will, to the extent of his interest, be making a gift to himself and some allowance might be made for his interest in the company in computing the amount of the gift. The Commissioner might be given a discretion in this regard.

24.A79. Gift by a company. The present Commonwealth Gift Duty Act expressly applies to companies (section 11). Gifts for most patriotic or charitable purposes are exempt (section 14, paragraphs (c), (d) and (h)) as are some gifts incurred in connection with the business of a company (section 14, paragraphs (a), (b) and (f)). All other gifts within the present definition of gift are caught and the company bears the tax.

24.A80. Subject to appropriate exemptions, a gift by a company should be taxed if it takes any of the forms of gift already considered in this appendix. Thus there may be a gift of property or a gift by allowing the use of the company's property or a gift by an interest-free loan or a loan at nominal interest. Several questions arise: On whom should the duty be imposed? If the duty is imposed on the company, what should be the rate?

24.A81. If the duty is imposed on the company, it follows that:

(i) The burden of the duty will be borne, in effect, by the shareholders of the company who are the real donors, though some of them may be involuntary ones.
(ii) If the rate structure of gift tax applying to a company is the same as that applying to an individual, a person who has made substantial gifts will be able to obtain a fiscal advantage by arranging his affairs so that subsequent gifts are made by a company (whose shares he may own) of property transferred for full consideration by him to the company for this purpose.
(iii) If the company is incorporated abroad and has no property inside Australia and the gift is made outside Australia, there will be no jurisdiction to tax the gift even though the company may have been set up by a person domiciled in this country to be the medium of his gifts.

Quite apart from the question of fairness raised in (i) or that of enforcement raised in (iii), the policy of an integrated estate and gift duty will be thwarted if taxpayers can make gifts through the medium of a company and the tax is imposed on the company. The use of a series of companies involves gift splitting which will defeat the progressive element in the rate scale. Gift splitting would be prevented if a high flat rate of duty were applied to company gifts. However, this might be thought unfair when one of the real donors is a minority shareholder who is an involuntary party to the gift.

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24.A82. An alternative approach is to deem the gift as being made by the person who controls the company. The problem of identifying control has already been discussed, and the Committee sees little merit in this approach. Fairness requires that the real donors be taxed as if they had made the gift. This is the approach in section 4 (11) of the Victorian Gift Duty Act. By virtue of section 4 (11), a gift will be made if:

(a) the total property or the value of the total property of a person (the donor) is diminished;
(b) the total property or the value of the total property of another person (the donee) is or may be increased; and
(c) such increase is the direct or indirect result of anything done or omitted to be done: (i) by a company of which the donor is a director, shareholder or creditor or in which the donor has a pecuniary interest; or (ii) by a donor as a director, shareholder or creditor of the company.

The Committee favours applying this approach generally. The possibility, under it, of giving some relief to the involuntary donor is considered later in this appendix.

24.A83. Provisions drafted on the Victorian model will not be wide enough to apply to cases where there has not been any actual diminution in the value of the donor's property. If the company allows the use of its property without charge, or lends money interest free, the donor's property will not have diminished in value: it will simply have failed to increase. In a case of this kind there seems no alternative to taxing the company at a deterrent rate.

24.A84. Allotment of shares. The present Commonwealth gift duty provides that an allotment of shares is a disposition of property which may constitute a gift. It has been held that an allotment of shares by a company at an under-value is a gift by the company. It seems to the Committee that this is a case where the duty should be imposed not on the company but on the real donor. Taxing the company is subject to all the objections raised in paragraph 24.A81. The provisions framed on the Victorian model referred to in paragraph 24.A82 should be wide enough to extend not only to an allotment of shares but also to any other kind of company restructure, including a redemption or forfeiture of shares.

24.A85. Variation in share rights. A taxpayer may acquire shares or other interests in a company and, later, the rights attaching to them may be varied in a way that diminishes their value and increases the value of other interests in the company. Where the variation is the result of company action taken during the life of the donor, there does not seem to be any serious problem in taxing the donor. The provisions proposed in paragraph 24.A82, drafted on the Victorian model, should be adequate to ensure that the real donor is taxed.

24.A86. Change in share rights without concurrent company action. A more difficult problem arises where there is a variation in the rights attached to the shares or other interests in a company, either by virtue of company action taken some time previously or by reason of the terms on which the shares were originally taken up. The most common example of this technique is to be found in the so-called ‘Robertson’ case: in that case the shares held by the deceased which were valuable prior to death become shares of little value on death by the operation of a provision in the articles of association of the company. The holder of the valuable shares is sometimes given the power to prevent the change in rights (and hence in value) taking place on his death, the power being exercisable only during his life. Clearly, it will be insufficient to make new provisions solely in relation to the situation where the rights change on death, as

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taxpayers will then arrange matters so that the change occurs at some other time. For example, a person in his fifties could subscribe for shares in a company which entitle him to all of the dividends and the voting power for the next thirty years. These shares will be worth, when they are taken up, slightly less than the value they would have if the rights were not subject to any change. On death, say 25 years later, the shares will be worth considerably less. Moreover, the provision should be wide enough to cover a case where the rights attaching to the shares do not themselves change, but are nonetheless affected in some way so as to diminish their value, for example by a change in the rights attaching to the other shares that increases the value of those other shares.

24.A87. The method proposed by the Committee for dealing with the ‘Robertson’ case is for the relevant shares to be valued on the footing that the rights attaching to them or to other shares have not changed and will not change. Clearly it is not sufficient merely to provide for the inclusion in the deceased's estate of the difference between the value before the change and the value after it. The shares immediately before the change will have been depressed in value by the prospect of the change. The method proposed could be adapted to meet the case where the rights change at some point prior to death by providing that the taxpayer will be deemed to have made a gift of an interest in the shares to the extent of the difference between the value of the shares assessed on the assumption just mentioned and the actual value. There should be an exception where the fall in value is due to a change in rights attaching to shares issued in an ordinary commercial transaction between persons dealing with each other at arm's length.

24.A88. The method proposed will be effective where the change in rights is to occur after death. The shares will be valued at death and on the occasion of any dealing in the shares before death as if they were not subject to the prospect of change.

24.A89. An obligation to sell shares to specified persons at a price specially determined. The Committee has recommended that a life interest should be treated as ownership of the assets supporting the life interest. The interest in a corporate enterprise represented by a share in the enterprise should, in some respects, be treated as part ownership of that enterprise. At least, it is appropriate that restrictions on the transfer of shares and on the price which can be obtained for shares should be ignored. The Committee has taken a similar approach in relation to restrictions on the disposal of an interest in a partnership.

24.A90. The Committee recommends that, where shares subject to restriction on transfer are dealt with by the shareholder or are included in his estate on his death, they should be valued on the assumption that they are not held subject to those restrictions.

24.A91. Declaration of dividends. Under company law it is possible to create and issue shares carrying all kinds of different entitlements to dividends: thus the directors of a company may be given a discretion to pay a dividend on some shares without at the same time paying a dividend on others. Under such a corporate structure, a company may be used by a person to make gifts of income to others (the income being what he himself would have derived, but for the arrangement) without incurring a liability for gift duty under the present Commonwealth legislation. Some State legislation attempts to deal with the problem but not, in the opinion of the Committee, in a wholly satisfactory manner.

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24.A92. Some would claim that arrangements of this kind are justified as constituting legitimate arrangements between members of a family. Such arrangements may be made with an aim that is not solely the reduction of taxation. However, it is apparent that, by this means, income tax payable is being significantly reduced and gifts effected in this way escape duty. If a taxpayer wishes to provide for members of his family, the Committee sees no reason why he should not do this by making a gift to the person concerned or establishing a trust for that person's benefit.

24.A93. The identification of the donor where a differential dividend has been declared raises a number of issues. Under some legislation an endeavour is made to identify the donor as being the person who ‘controls’ the company or who instigates the payment of the dividend. This kind of endeavour carries with it a number of problems already discussed. The better approach, in the Committee's view, is to look to the persons whose property is affected. Where a dividend is paid by a company on shares whose rights to dividend in relation to other shares are not fixed by the company's constitution, or by agreement made when the shares were acquired, and the amount received by a shareholder is less than the amount he would have received had the dividend been paid to all shareholders in proportion to the capital paid by them, the shareholder should be treated as having made a gift of the difference. The notion of ‘fixed by the company's constitution’ may pose difficulties of definition but they should not be insurmountable. Differential dividend rights that serve an evident commercial purpose should be excluded from the operation of the provisions. There will be shareholders who were not consulted when the declaration and payment of the dividend were made, and could not have prevented the declaration and payment. The problem of the involuntary donor will thus arise here as under the Committee's proposals in paragraph 24.A82. Further observations in this regard are made in paragraph 24.A95.

Definition of a ‘Family’ or ‘Closely Controlled’ Company

24.A94. Estate and gift duty legislation in some Australian States and elsewhere seeks to define those companies (identified as ‘family’ or ‘closely controlled’ companies) which are likely to be used by a taxpayer or by a group of taxpayers to avoid or minimise their taxes, and to confine special provisions of the kind discussed in previous paragraphs to transactions involving such companies. These attempts have not achieved their purpose, and the Committee therefore proposes that its recommendations be applied to all companies. It believes that bona fide business transactions need not be prejudiced by its recommendations. In paragraph 24.A93 a specific provision is proposed in regard to ordinary commercial transactions. Specific provisions of this kind may also be helpful in other contexts involving companies: for example, in regard to a gift by allotment of shares.

X. Involuntary Gifts

24.A95. Several references have been made in previous paragraphs to the problem of the ‘involuntary donor’—a person who is treated as having made a gift though he has not intended this result. Most often the problem arises in a transaction involving a company; but there may be other occasions, for example in a transaction involving a partnership. The Committee considers that some relief should be given. The donee only should be liable for the tax, and the gift should not be aggregated with other gifts for the purpose of determining the rate of tax on subsequent gifts by the donor.

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XI. Insurance and Superannuation

24.A96. In the Committee's view, proceeds of life insurance policies and premiums paid in respect of such policies, under an integrated estate and gift duty, should be treated as follows:

(a) Where the deceased owned the policy on his life at the time of death, the whole of any proceeds should be taxed as part of his estate on his death, irrespective of who paid the premiums during his life.
(b) Where the policy was not owned by the deceased at the time of his death, the proceeds should not form part of his estate even though the deceased may have paid some or all of the premiums during his life.
(c) Premiums paid on a policy owned by another person should be treated as gifts and taxed accordingly.

24.A97. The Committee, in paragraph 24.37, rejects any concession for specific assets and in so doing rejects any general concessional treatment of superannuation benefits in relation to estate duty. A lump sum received by a beneficiary on the death of a member of a superannuation scheme should not be treated differently from a lump sum received by a member on retirement which forms part of his estate on death.

24.A98. There may, however, be justification for according special treatment to an annuity or a pension that becomes payable to one spouse on the death of another, whether under a life policy or a superannuation scheme. To tax the actuarial value of the annuity or pension may present liquidity problems and it is relevant that the annuity payments will be subject to income tax in the hands of the surviving spouse. The matter has already been considered in Chapter 21.

XII. Joint Ownership

24.A99. In the Committee's view, the interest of a joint tenant that passes to another joint tenant on the former's death should be included in his estate. Provided it is a beneficial interest, no part of the surviving joint tenant's interest should be included. Thus if husband and wife own a house as joint tenants, half only will be taxed on the death of the first spouse. Any gift that may have been made by the deceased joint tenant of funds applied in acquiring the surviving tenant's interest should be taxed when made and should not affect the manner in which a joint tenancy is taxed on death.

XIII. Exempt Transactions

24.A100. Certain transactions that might conceivably fall within the ambit of the tax base, as defined in earlier paragraphs, should be expressly exempt from tax.

24.A101. A disposition under a void contract should not constitute a gift. Further, where property is re-conveyed to the taxpayer under a void contract, no liability for duty should arise. However, the Committee recognises that these exemptions, if unqualified, could afford opportunity for avoidance. The exemptions should be available only where it is apparent that the contract was not entered into for the purpose of evading or avoiding duty.

24.A102. A contract for the sale of property may give rise to a gift and any such gift should be taxed at the point when the contract is made. There is usually an interval

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between the date of the contract and the date on which the transfer is effected. During this interval the property may have increased in value. In general, a transfer under a contract should not involve a gift of this increase in value. However, an exception to this principle is referred to in paragraph 24.A17.

24.A103. A disposition by a trustee to a beneficiary, whether giving effect to a resulting trust or otherwise, should not give rise to a gift where it is in accordance with the beneficiary's entitlement to the trust property. This exemption should be available in the case where assets are distributed in specie, even though the trust instrument calls for the trust assets to be converted into cash and for the cash to be distributed.

24.A104. Any transaction between a company and an associated company should be exempt from duty. An associated company ought, for this purpose, to be defined sufficiently widely so as at least to include:

(a) a company which is in substance the wholly-owned subsidiary of another company; and
(b) a company which is another wholly-owned subsidiary of the company of which the donor is a wholly-owned subsidiary.

Where there is a minority interest involved at any point, the principle in paragraph 24.A82 should apply.

XIV. Interrelation of Income Tax and Gift Tax

24.A105. In Chapter 7, the Committee has recorded its decision not to include gifts as such in the income tax base. In some circumstances, however, a donor may make a gift and the property given or benefit conferred will be income of the donee under existing principles. The fact that the property or benefit is taxed as income does not preclude the liability of the gift to gift duty. A number of situations may be distinguished:

(a) Where there is an assignment to a donee of royalties or interest, each payment to the assignee should be treated as a gift of the amount of the payment, reduced by the amount of the income tax that would be payable by the donee.
(b) The donor who carries on a business may make an excessive payment to the donee for goods supplied or services rendered by the latter. The gift is the amount by which the payment exceeds the consideration given, diminished by an amount equal to the income tax payable by the donee.
(c) The donor who does not carry on a business may make an excessive payment to the donee for services supplied by the donee. The fairest outcome will follow if the Commissioner does not treat the excess remuneration as income of the donee (assuming that it is open to him to go behind the form of the transaction), in which case the amount of the excess is the gift.
(d) The donor may supply goods for an inadequate price to a donee who carries on a business. In this case the amount by which the value of the goods exceeds the consideration should be treated as a gift, diminished by any income tax assessed against the donee.
(e) The profits distributed to a member of a partnership may exceed a fair return for the partner's contribution of capital or the use of his property. The

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amount of the excess, after deducting the income tax payable by that partner, should be treated as a gift by the other partner.
(f) Differential dividends paid within a company may operate to divert income from one shareholder to another. The gift should be determined in accordance with the rule proposed in paragraphs 24.A91–24.A93, but the deemed gift should be reduced by the amount of the income tax payable by the shareholder receiving the dividend.

Some of the foregoing illustrations are likely to be part of an income splitting arrangement. The Commissioner may, in certain of these cases, have power to deny the reduction in income tax sought by the arrangement. Nevertheless, if the gift tax legislation is to be effective, gifts of the kinds described above must be subjected to gift tax, irrespective of what action the Commissioner may be empowered to take in relation to the gift under income tax legislation.

The University of Sydney- Classic Texts in Australian and International Taxation Law