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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.

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