SHIU WING LTD. AND OTHERS v. THE COMMISSIONER OF ESTATE DUTY

1997, No. MP 1282

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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JUDGMENT

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The Background

1. Mr Pong Ten Un died on 23 January 1993. On 25 January 1990 and 24 October 1990, and, therefore, less than 3 years before his death, Mr Pong transferred some shares in Hong Kong private companies and two pieces of land in Hong Kong to the first plaintiff. The plaintiffs seek a declaration that no estate duty is payable on this property.

Some Details

2. The property concerned was sold by Mr Pong to the first plaintiff, a Manx company incorporated on 18 December 1989 and controlled through the second and third plaintiffs by Madam Hong Siu Chu, who is Mr Pong's widow, and their seven children.

3. The first plaintiff bought the property from Mr Pong in its capacity as sole trustee of five trusts set up in the Isle of Man in December 1989. In order to pay the price, the first plaintiff borrowed the money from Madam Hong, who borrowed it from a bank in Macau.

4. The money from the sale of one landed property (Hillview) was donated by Mr Pong to the second and third plaintiffs as joint trustees of the Pong Ding Yuen Trust, a discretionary trust of which Mr Pong was a beneficiary.

5. The money from the other sales, including the other piece of land, was lent by Mr Pong to the second or third plaintiffs in their capacities as trustees of seven trusts for the benefit of the children. The debts resulting from these loans were recorded in deeds, which were delivered to the Isle of Man and were there at the time of Mr Pong's death.

6. The money received by the second and third plaintiffs was used to subscribe for units in the Manx trusts. The money received by the first plaintiff in this respect was used to repay its loan from Madam Pong, who used it to repay the bank in Macau.

7. On 25 January 1990, Mr Pong made a will in which he waived payment of the debts due to him by the second and third plaintiffs. In fact, in October 1991 and October 1992, during his lifetime, he forgave the debts.

8. All these events, other than the transaction involving the second piece of land (the YTIL property) took place on 25 January 1990. It seems that the transaction regarding the YTIL property was planned to take place on the same day, but, for reasons not made apparent in this case, it did not take place until 24 October 1990. Nothing of significance turns on this delayed implementation.

9. As I have said, the money used to finance these transactions came from a bank in Macau. It was borrowed by Madam Hong, lent to the first plaintiff, paid by the first plaintiff to Mr Pong, paid by Mr Pong to the second and third plaintiffs, paid by the second and third plaintiffs to the first plaintiff, paid by the first plaintiff to Madam Hong, and returned by Madam Hong to the bank. All this was done by crediting and debiting the accounts of the parties with the bank on the same day.

The Plaintiff's Case

10. Duty is payable on death on, amongst other things, gifts made by the deceased within three years of his death, but this duty is not payable in respect of property "situate outside Hong Kong".

11. The plaintiffs' case is that, in respect of Hillview, the gift was of the sale proceeds, and these proceeds were property situated outside Hong Kong, and, in respect of the other gifts, these were by waiver of the debts due to him, which were also situated outside Hong Kong.

The Defendant's Case

12. The defendant argues that the law, for one reason or another, sees the underlying reality of the transactions for estate duty purposes as immediate gifts by Mr Pong of the property purportedly sold by him.

The Statutory Provisions

13. The statutory provisions relevant to this case are contained in the Estate Duty Ordinance (Chapter 111). These are -

14. Under section 5, estate duty is payable on the value "of all property passing on the death".

15. Section 6 provides -

"(1) Property passing on the death of the deceased shall be deemed to include the property following-

(c) . . . taken under a disposition made by him, purporting to operate as an immediate gift inter vivos, whether by way of transfer, delivery, declaration of trust, or otherwise, which shall not have been bona fide made 3 years before the death . ."

16. But section 10 provides that -

"Estate duty shall not be payable in respect of -

(a)

(b)

(c) property situate outside Hong Kong;

. . ."

17. Section 3 provides the following definitions -

"disposition" . . . includes any trust, covenant, agreement or arrangement, whether made by a single operation or by associated operations, and also, in relation to shares in or debentures of a company, the extinguishment or any alteration of rights attaching thereto, whether effected by a single operation or by associated operations;

"associated operations" . . . means any 2 or more operations of any kind being-

(a) operations which affect the same property, or one of which effects some property and the other or others of which affect property which represents, whether directly or indirectly, that property or income arising from that property, or any property representing accumulations of any such income; or

(b) any 2 operations of which one is effected with reference to the other, or with a view to enabling it to be effected or to facilitating its being effected, and any third operation having a like relation to either of those two, and any fourth operation having a like relation to any of those three, and so on,

whether those operations are effected by the same person or by different persons, whether they are connected otherwise than as aforesaid or not, and whether they are contemporaneous or any of them precedes or follows any other;

"property" includes movable and immovable property and the proceeds of sale thereof respectively and any money or investment for the time being representing the proceeds of sale.

18. These statutory provisions are easy enough to understand. One might have thought that one did not need any tool of legislative construction to interpret them.

The Ramsay Principle

19. In arguing that the law sees the underlying reality of the transactions for estate duty purposes as immediate gifts by Mr Pong of the Hong Kong property purportedly sold by him, Mr Henderson relies, in the first place, on what is referred to as the Ramsay principle.

20. Mr Flesch argued that this principle can have no application to a statute that has self-contained tax avoidance provisions, such as our "associated operations" provision. I will deal with this argument later.

21. Stated simply, this principle, arising from the case of Ramsay v IRC [1982] AC 300 and subsequent cases, is that, where there is a single composite transaction into which steps are inserted that have no business purpose apart from tax avoidance, the inserted steps may be disregarded for tax purposes, and the charging provision applied to "the end result".

22. More fully described, the principle, as developed since Ramsay, appears from these extracts -

23. In Craven v White [1989] AC 398, at 514 F-H, Lord Oliver said -

"As the law currently stands, the essentials . . . appear to me to be four in number:

(1) That the series of transactions was, at the time when the intermediate transaction was entered into, pre-ordained in order to produce a given result;

(2) That that transaction had no other purpose than tax mitigation;

(3) That there was at that time no practical likelihood that the pre-planned events would not take place in the order ordained, so that the intermediate transaction was not even contemplated practically as having an independent life; and

(4) That the pre-ordained events did in fact take place.

In these circumstances the court can be justified in linking the beginning with the end so as to make a single composite whole to which the fiscal results of the single composite whole are to be applied."

24. Lord Browne-Wilkinson in Fitzwilliam v IRC [1993] STC 502, at 535 c -

"Whatever the exact scope of the principles laid down in [Ramsay, Furniss v Dawson [1984] AC 474 and Craven] the basic principle cannot be in doubt. The Commissioners or the court must identify the real transaction carried out by the taxpayers and, if this real transaction is carried through by a series of artificial steps, apply the words of the taxing provision to the real transaction, disregarding for fiscal purposes the steps artificially inserted. The provision of the taxing statute is to be construed as applying to the actual transaction the parties were effecting in the real world, not to the artificial forms in which the parties chose to clothe it in the surreal world of tax advisers."

25. In IRC v McGuckian [1997] STC 908, at 914e per Lord Browne-Wilkinson said -

". . . the statutory provisions are to be applied to the substance of the transaction, disregarding artificial steps in the composite transaction or series of transactions inserted only for the purpose of seeking to obtain a tax advantage. The question is not what was the effect of the insertion of the artificial steps but what was its purpose. Having identified the artificial steps inserted for that purpose and disregarded them, then what is left is to apply the statutory language of the taxing Act to the transaction carried through, stripped of the artificial steps."

26. The way in which the principle has developed since Ramsay is described by Lord Oliver in Craven at 501E -

"The Ramsay principle is simply that you look at the result which the parties actually intended to and did produce and apply to it the ordinary fiscal consequences which flow from the result. Furniss involved going a considerable step further than this and, by reconsistuting the actual constituent transactions into something that they were not in fact, attributing to the parties an intended result which they did not in fact intend. To that unintended result there are then attached the fiscal consequences which would have flowed if the transaction had actually taken the form into which it is deemed to be reconstituted. . . . The critical question is that of identifying the circumstances in which such a transaction [an actual exchange of shares] can simply be ignored and in which so radical a reconstruction of the actual events as that undertaken in Furniss v Dawson is permissible and is to be undertaken by the court . . ."

27. That this is the effect of Furniss is not a view that is unanimously held by the House. In Fitzwilliam, Lord Keith said, at 515a -

"No case applying the Ramsay principle has yet held it to be legitimate to alter the character of a particular transaction in a series or to pick bits out of it and reject other bits."

28. But, on the view of Lord Oliver, that is precisely what is done in the application of the Ramsay principle as developed in Furniss.

29. In Craven, Lord Oliver, at 502D, expressed a measure of discomfort with the decision in Furniss; a discomfort which I share. In seeking to rid himself of this feeling, Lord Oliver looks for the true rationale of that decision. He says -

". . . the true ratio of Furniss v Dawson is that it rests not on some fancied principle that anything done with a mind to minimising tax is to be struck down but upon the premise that the intermediate transfer . . . did not . . . constitute a disposal. . . in reaching that conclusion as a matter of construction, this House did not purport to be doing anything more than applying and explaining the principle . . . in Ramsay."

30. At 510A, Lord Oliver said - "Ramsay, as developed in Furniss, merely established that the fiscal consequences of a pre-ordained series of transactions carried to their pre-ordained conclusion are generally to be determined by looking at the pre-ordained end result of the series.". Here, Lord Oliver seems to be saying that the court should, generally, look at the end result as intended by the taxpayer.

The facts in Furniss were that the taxpayers wished to sell their holdings in two small family companies. They entered into a scheme to defer liability to pay capital gains tax on the sale. A Manx company bought the shares at a price to be satisfied be the issue of its own shares and sold these shares to another company. Lord Brightman held that the inserted introduction of the Manx company had no business purpose and was to be disregarded, with the effect that there had been a disposal by the taxpayers to the other company in consideration for the money paid to the Manx company. This conclusion was justified on the basis of an assumption that there was a tripartite contract under which the taxpayers contracted to sell their shares to the Manx company in return for shares in that company, and contracted to sell the same shares to the other company for cash. Under such a contract, Lord Brightman held, the taxpayers "would clearly have disposed of [their] shares . . . in favour of [the second company] in consideration of a sum of money paid by [the second company] with the concurrence of the [taxpayers] to [the Manx company].". In Craven, Lord Oliver saw this constructed tripartite contract as essential to the analysis justifying imposition of the tax.

31. In Craven v White, the taxpayer exchanged their shares in A for shares in B, a Manx company incorporated by the taxpayer. B then sold the shares in A to C. The Inspector of Taxes sought to charge the taxpayer for a capital gain on the basis that the share exchange with B was a fiscal nullity, and that the disposal of their shares in A to C gave rise to chargeable gains. The facts here, one might have thought, as Lord Templeman did and Lord Goff apparently did, were indistinguishable from those in Furniss, but the majority of the House found that, because the exchange of shares was not "pre-ordained" with the sale, and the exchange was in part for a commercial purpose, it was impossible to apply a Ramsay analysis.

32. Frankly, I find the various statements seeking to encapsulate the Ramsay principle, to explain it in the light of the facts in Furniss and other cases and to justify it as an exercise in statutory construction confusing and unsettling. I am also disturbed by the apparent inconsistencies in the application of the principle to the facts of the cases. In my respectful view, the Ramsay principle seems to be verging on making liability to tax subject to judicial discretion, rather than clear rules of law. I cannot see this judicial adventure as an exercise in statutory construction, other than in the sense that it states the obvious; that any case centred on applying a statute involves a search for the true meaning of the words of that statute. The Ramsay principle is, in truth, primarily a way of seeing the facts; of analysing the facts in order to arrive at the substance of the matter, ignoring the mere form in which the parties sought to express what they were doing.

The Purpose of the Transactions

33. It is clear from the Ramsay line of cases that the purpose for which the operations were performed is of importance. The cases say that, if a transaction was for a business purpose - which, it is accepted, means a non-tax avoidance purpose - that transaction cannot be disregarded, but, if it is for a purely fiscal reason, it may be disregarded although it may be real and have an enduring business effect.

34. Although it is accepted by the plaintiffs that there were estate planning reasons for the transactions, it is clear on the evidence that there were also non-tax avoidance reasons for the scheme. These were related to the uncertainty of the future of the family business and the uncertainty of the future of Hong Kong. The Commissioner and Mr Henderson have sought to chip away at these reasons, but I accept that they were genuine. Indeed, at the end of the day, Mr Henderson accepts, rightly I think, that these non-fiscal purposes did exist. He argues that, although there were family and other non-fiscal purposes for some of the elements in the composite transaction; namely, the transfer of the Hong Kong property offshore, the establishment of the trusts and the issuance of the units, the other elements in the composite transaction were not so motivated, and should be disregarded.

35. But Mr Henderson makes it clear that, although he accepts the inviolability of the elements of the transfer of the Hong Kong property offshore, the establishment of the trusts and the issuance of the units, he does not accept that I should treat them for what they purported to be. In particular, and most importantly, he does not accept that I should regard the transfer of the Hong Kong property offshore as a sale. I say that this is the most important aspect because if that transaction is not to be treated as a sale, it must be a gift, and a gift of Hong Kong property, and, on that basis, the Commissioner has made out his case. So, Mr Henderson argues, although I should not disregard the actual transfer, I should disregard the payment of the purchase price because this element was artificial; no "real" price was paid. In other words, I should accept the transaction, but disregard its nature.

36. I proceed on the basis that I should regard the elements of the scheme identified by Mr Henderson as the only inviolable aspects. I examine later his submission that I should, although accepting these, reconstruct their nature.

The Analysis of the Facts

The starting point when considering a matter of this nature must be the acceptance of the premise that a taxpayer is free to arrange his affairs so that he does not fall within the conditions prescribed by the taxing statute. A constant theme running through the Ramsay line of cases is that this principle is enduring, but it must be read in the light of those cases.

In the context of this case, a taxpayer is not, in principle, prohibited from -

1. Selling his property in Hong Kong, rather than donating it, so that his estate is not exposed to the risk being liable to estate duty on that property were he to die within three years;

2. Keeping the proceeds of that sale out of Hong Kong so that his estate is not potentially liable to estate duty on those proceeds; and

3. Donating those proceeds situated out of Hong Kong.

37. If it were so that Mr Pong had sold his Hong Kong property to an independent third party, received the proceeds into his Macau bank account, and then donated those proceeds to a home for orphans, it must be beyond argument that the Commissioner would have no arguable case.

38. What is it, then, that the Commissioner says took the transactions undertaken by Mr Pong over the boundary of legitimate tax avoidance so that what he ostensibly did must be ignored, and some other scenario constructed so that the property he sold is liable to estate duty?

39. On the papers, this is not clear. As far as one can see, the Commissioner says no more than, by some magical effect of the Ramsay principle, the substance of what Mr Pong did was to donate the Hong Kong property. This was because, the Commissioner says, the transactions entered into by Mr Pong were "circular and self-cancelling". The money used to finance the transactions certainly went from the bank, through the various parties, and back to the bank, but the transactions were not circular, and they were certainly not self-cancelling. Mr Henderson now accepts that the transactions were not self-cancelling.

40. In my view, Mr Henderson was right to make that concession. Mr Pong did not enter into circulating, self-cancelling transactions. There is no doubt that the money went full circle; from the bank and back to the bank, all, probably, in a matter of minutes. But there is nothing unusual in that. That is the way the payment of money works these days. But what the Commissioner was seeking to identify is a series of circular, self-cancelling transactions, not circulating, self-cancelling money. The transactions here were not circulating or self-cancelling. And I do not think it can even be said that the money, as it moved, was self-cancelling. The money, in the hands of each of the entities involved, was used for a different purpose, each independent of the other. None of those purposes or transactions was inconsistent with another, contradicting it and rendering it a nullity.

41. It is important, in my view, that the factors that are said to take this case over the line between legitimate tax mitigation into the area of illegitimate tax avoidance be properly identified. The plaintiffs, and other potential taxpayers, have a right to know what it is in this case that was done but should not have been done in order to avoid effectively estate duty. A tax should not be imposed by the courts; it should be made quite clear what it is specifically that the taxpayer did that renders him liable to the tax.

42. Was this line crossed when Mr Pong sold the property to the first plaintiff, which was connected to Mr Pong and his family, rather than an unconnected person? Was an illegitimate method adopted when the first plaintiff used borrowed money to pay for Hillview, rather than using its own funds? Or was it because it borrowed money from a person connected with Mr Pong? In other words, was it wrong for Madam Hong to borrow the money from the bank, and lend it to the first plaintiff, rather than the first plaintiff borrowing the price directly from the bank?

43. I am left not knowing precisely the Commissioner's case on this, although it is clear that Mr Henderson believes that a crucial fact is that Mr Pong's property, after its transfer, "remained in the beneficial ownership of the family". He says, because of this, that it is not the position that Mr Pong sold the property to a third party and then made a settlement of the proceeds of sale. This argument involves the proposition that the court is entitled to regard a sale to an entity in which the seller's family has the beneficial interest as a fiscal nullity, and to treat a settlement of the proceeds to such an entity in the same way. As far as I can see, no case in the Ramsay line has gone this far. And I would regard a judicial intervention to reach this conclusion as totally unjustified. If it is so that dispositions that have the result of retaining the ultimate beneficial interest in property in the same family should be regarded as gifts or nullities, whatever the circumstances, that is something for the legislature, not the courts, to decide. In any event, if this is the way to go, the result is that nothing real happened at all; that what Mr Pong did has no effect for tax purposes, and the property should be regarded as still with him. That is not the Commissioner's case, and that has never been the Commissioner's case. The Commissioner says that there has been a chargeable donation within three years of death, not that there has been no real transfer by Mr Pong of his property at all.

44. Mr Henderson points out that the only difference between the Hillview transaction and the other transaction is that the proceeds of the Hillview sale were undoubtedly donated. The proceeds of the other sales were ostensibly lent to the second and third plaintiffs. Mr Henderson argues that these loans were "shams" or are to be ignored under the Ramsay principle. I assume this to be the case for the time being in order to see whether, on this basis, the Commissioner is able to make out his case.

45. So, assuming that the Ramsay principle is applicable to this case, and that such application has the effect contended for by Mr Henderson, the "end result" to which the charging provision must be applied is that Mr Pong transferred Hong Kong property to the first plaintiff, and the first plaintiff issued units, being property situated outside Hong Kong, to the second and third plaintiffs. The financial steps of loan, sale, gift, payment of subscription money and repayment of borrowings, Mr Henderson says, should be disregarded for fiscal purposes. The end result, Mr Henderson says, is that there was a gift of the Hong Kong property.

46. Mr Henderson accepts that there were family, non-fiscal purposes for some of the elements in the composite transaction. These were the transfer of the Hong Kong property offshore, the establishment of the trusts, and the issuance of the units.

47. The substance and reality of the matter, he says, was that Mr Pong made immediate gifts to his family of Hong Kong property through the issuance of the units in the unit trusts. He repeated he did not challenge the reality of the transfer of the assets abroad, the creation of the trusts and the issuance of the units, but this could have been achieved if Mr Pong had donated his Hong Kong assets, and they happened without any consideration passing to Mr Pong. The loan and sale elements were challenged as pure tax avoidance enabled by the artificially circulating money. The Hong Kong property was the underlying subject matter of the transaction, and this property continues to be held by the family. This theme of the family being the ultimate beneficiary was repeated by Mr Henderson several times.

48. Mr Henderson says that there was a single composite transaction here; Mr Pong sold Hong Kong property to the first plaintiff, Mr Pong received the proceeds offshore, he gave those proceeds to the second and third plaintiffs, who paid it back to the first plaintiff in return for "acquiring a beneficial interest in the property" sold to the first plaintiff. Mr Henderson argues that, if Mr Pong, the first plaintiff and the second and third plaintiffs had been bound contractually in one tripartite contract to perform these operations, "it would be obvious that the true subject matter of the gift was the Hong Kong property, not the proceeds of the sale.". I must say that this is not obvious to me. The fact of the matter is that the second and third plaintiffs did not acquire "a beneficial interest" in the Hong Kong property by acquiring the units. The trust provides explicitly that they do not acquire such an interest. What they acquired were only contractual rights against the first plaintiff. Of course, it must be so that the value of the units in the hands of the second and third plaintiffs was ultimately reflected, to some extent, in the value of property owned by the first plaintiff, including the Hong Kong property, but they had no right to any legal or equitable interest in that property. It might be said that the second and third plaintiffs were in a position similar to the holders of shares in a limited company.

49. I do not accept, as Mr Henderson argued, that it is legitimate for the court to find that a transaction was undertaken for non-fiscal purposes, and, therefore, cannot be disregarded, but to then disregard its nature and the obligations that were entered into under it. It would be a strange creature indeed that could emerge from such a judicial reconstruction of what the parties agreed if the court were free to pick and choose which rights and obligations should or should not be recognised. Any transaction is nothing but a bundle of rights and obligations. I do not understand on what principle it can be said that a court is entitled to say that it recognises the right of a taxpayer to enter into a particular transaction, but reserves the right, for tax purposes, to tell the taxpayer what rights and obligations should have been given and undertaken in that transaction.

50. I have already mentioned Lord Keith's view on this in Fitzwilliam at 515a -

"No case applying the Ramsay principle has yet held it to be legitimate to alter the character of a particular transaction in a series or to pick bits out of it and reject other bits."

51. I agree, with respect, that this is the law, even if some statements in the Ramsay line of cases might be taken to mean otherwise. It is my view that it is not legitimate to reconstruct an obligation under an inviolable transaction in this way unless, perhaps, taken with another obligation under another transaction in the composite scheme, that first obligation can be said to have been cancelled out by the other obligation. For example, an obligation to pay a price might be rendered a nullity by a parallel obligation to return that price. I can understand a court finding that, where a party agrees to sell a property, but, as part of a composite scheme, the purchaser covenants to return that price a week later, that there is, in truth, no sale at all, but a gift. That is not the position in the case before me. Although the Commissioner rested his case initially on the argument that the transactions by Mr Pong were "circular and self-cancelling", Mr Henderson now accepts that they were not self-cancelling.

52. Even on Mr Henderson's argument, one cannot construe the three inviolable elements as independent. They are part of the composite scheme. So, a tripartite contract between the parties would say something like this - "I, Mr Pong, will transfer my Hong Kong property to you, the first plaintiff. In return, I, the first plaintiff, will issue units to the second and third plaintiffs in terms of the trust deed that does not give the second and third plaintiffs any direct rights to that Hong Kong property. We, the second and third plaintiffs, will accept these units on those terms." I agree with Mr Flesch that there is no other way of constructing the tripartite contract that Lord Oliver saw as essential to this sort of analysis. And that reconstituted contract, in my view, amounts to a disposition by Mr Pong of his Hong Kong property for value - not a gift - and a gift by Mr Pong of the units, situated outside Hong Kong, to the second and third plaintiffs. Neither of those two transactions is caught by the charging provision. I cannot see how one could construe that constructed tripartite contract to read, in effect, that Mr Pong had agreed to donate his Hong Kong property. Even if one were to assume that Mr Pong and the plaintiffs were, in reality, the same person, one cannot reach the result sought by the Commissioner. That assumption would result in a finding that Mr Pong had, in reality, not transferred his Hong Kong properties at all, but remained the real owner of them for estate duty purposes.

53. On the basis of this argument, I find that the Commissioner has not shown that there is any disposition subject to a charge to estate duty.

Associated Operations

54. The Commissioner's second argument is based on the definition of "associated operations" in the Ordinance. I have already recited this provision.

55. The question here is: Was the property situated in Hong Kong taken "under a disposition made by [Mr Pong], purporting to operate as an immediate gift inter vivos", that disposition being by an "arrangement . . . by associated operations"?

56. Mr Henderson submits that, for this purpose, the releases of the debts in October 1991 and October 1992 must be considered associated operations. Therefore, he argues, all the transactions should be considered on the same footing; that is, that Mr Pong made an immediate gift inter vivos.

57. That much I can understand. But this, I believe, takes the Commissioner nowhere because the charge to duty is in respect of property situated in Hong Kong. Mr Henderson recognises this, and argues further that the property that was given by Mr Pong was the property situated in Hong Kong. One cannot, he submits, conclude that the subject of the gifts was the units in the unit trusts, or, I suppose, the forgiveness of the debts, because that would involve focusing on only one operation when the statute requires the consideration of all the operations together.

58. I cannot accept this argument.

59. The effect of applying the concept of associated operations to a disposition is that the disposition is to be taken as affected by all the associated operations. In the context of the case before me, the disposition is by the transfer of the property to the first plaintiff, the transfer of proceeds of that first transfer to the second and third plaintiffs (being an operation which affects "property which represents, whether directly or indirectly, that [first] property") and the forgiving of the loans in October 1991 and 1992. But, at the end of the day, the only gift that one can identify from these associated operations, taking them together, is that of property situated outside Hong Kong.

60. The only way in which one can come to the conclusion that there was gift of the Hong Kong property is by construing the statutory provisions as saying that the proceeds of the sale of the Hong Kong property is to be treated as if it were the Hong Kong property. I cannot read the statute as saying that. Indeed, that construction would create a liability if Mr Pong had sold his Hong Kong property to an independent third party and then donated the proceeds payable outside Hong Kong to an unassociated charity. That cannot be what the statute intended.

61. Even if one takes the will of Mr Pong made on 25 January 1990 as also an "associated operation", which it probably is, this does not alter that analysis.

62. I do not think that applying the concept of "associated operations" can alter the nature of the operations. A sale must remain a sale, not a gift, and a gift of one property must remain a gift of that property, not some other property. This must be so, at least, where the operations are not self-cancelling. If, for example, Mr Pong had sold the property to the first plaintiff and, in an associated operation, the first plaintiff covenanted to return the price, one might say that the agreement to pay the price and the agreement to return the price result in the transfer of the property being a gift. This is not the case before me. As I have said, Mr Henderson now concedes that the transactions were not self-cancelling.

63. Accordingly, I find that the defendant's argument based on the definition of "associated operations" also fails.

Other Points

64. It is not necessary to deal with some of the arguments raised in this case because I have proceeded on the basis of Mr Henderson's submission that the Ramsay principle does apply to this case, and that all the dispositions should be treated in the same way; that is, that the so-called loans by Mr Pong to the second and third plaintiffs, and the consequent specialty debts owing by them, should be ignored, and the scheme treated as if, as in the Hillview transaction, Mr Pong had made gifts of the proceeds.

65. However, I will express my views on these matters.

Does the Ramsay Principle Apply?

66. I believe that it does. In my view, the only justification for not applying the principle to this case would be based on the proposition that the statute excludes it. That would be so if the statute makes its own provision for the construction of the statute that does not sit with the Ramsay principle. That is not the case here. The "associated operations" provision goes some of the way towards the end provided by Ramsay, and, in relation to the transactions to be taken into account, goes beyond it, but they are not in conflict. One can apply both the "associated operations" and the Ramsay principle to this case without difficulty.

67. Mr Flesch has drawn my attention to decisions in which courts in Australia and Canada have declined to apply the Ramsay principle because the relevant statute already contained tax-avoidance provisions. I decline to follow them. I suspect that part of the motivation for this approach was an unhappiness with what the Ramsay cases were doing under the heading of statutory interpretation and fact finding.

The Debts

68. In relation to the property other than Hillview, the Commissioner argues that the position is the same as Hillview because Mr Pong never intended to enforce the debts.

69. As a matter of fact, that is probably so. Indeed, Mr Flesch concedes that, as matter of probability, Mr Pong always intended to forgive the debts. But, Mr Flesch says, Mr Pong intended to keep his options open, and he might have changed his mind if circumstances changed. I accept this. And this does not mean that this intent should be taken as implemented for the purposes of holding that Mr Pong did, make of gift of the proceeds under the Ramsay principle. I have already said that, under the "associated operations" provision, one should take the will and the gifts actually made as part of the disposition, but this does not get the Commissioner home.

70. Alternatively, the Commissioner maintains, the loans and the debts were a "sham". In Ramsay, Lord Fraser said, at 337B -

"The meaning of the word "sham" was considered by Diplock LJ in Snook v London and West Riding Investments Ltd. [1967] 2 QB 786, 802, where he said that:

"it means acts done or documents executed by the parties to the 'sham' which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create .""

71. In that passage, Diplock LJ, went on to say -

"But one thing, I think, is clear in legal principle, morality and the authorities . . . that for acts or documents to be a "sham", with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating. No unexpressed intentions of a "shammer" affect the rights of a party whom he deceived."

72. In this context, I do not think that it can be said that the loans and debts were "shams". It cannot legitimately be said that, because Mr Pong probably intended to release the debts at some time, that they were to be treated as nullities.

Comment

73. In case it may be thought that I am in sympathy with what was done by Mr Pong in this matter, I should say that I have no view of the morality of the scheme. My conclusion is based on the law as I see it. If it is thought by those who decide these things that estate duty should be paid in these circumstances, that is something that should be attended to by the lawmaker, not the courts.

The Result

74. In the result, the plaintiffs are entitled to the declaration sought, and I grant it.

The Costs

75. The matter of costs has not been argued, but it seems, of the face of it, that there is no obvious reason why costs should not follow the event. I make an order nisi that the defendant pay the plaintiffs' costs.

JK FINDLAY

Judge of the High Court
Court of First Instance