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The Federal Court (Kiefel J) has upheld the Commissioner's appeal against a decision of the AAT, which had held that shares distributed to the taxpayer, a shareholder of the Hewlett-Packard Company, were not assessable as a dividend because they were not wholly paid out of profits of Hewlett Packard as required by s 44(1)(a) ITAA 1936. The shares in question were shares in a subsidiary company that Hewlett-Packard "spun off" following a restructure of its business.

In coming to its decision, the AAT had regard to the fact that the market value of the shares distributed exceeded the amount debited to Hewlett Packard's retained earnings, and concluded that the distribution was not paid wholly out of the profits of Hewlett-Packard, and that apportionment was not possible.

In upholding the Commissioner's appeal, the Court said at paras 32-33:

"There was no reason in the present case to doubt that profits by way of retained earnings had been utilised to fund the distribution. There was no evidence of other assets or sums involved in the distribution...The Tribunal did not properly address the question posed by s 44(1)(a). It introduced into it the irrelevant consideration of the market value of the shares. This led it incorrectly to seek to identify non-profit sources for the distribution. And it had regard to the nature of the receipt from the taxpayer’s point of view, when the question posed by the subsection requires only consideration from the company’s viewpoint."

The Court held that the distributed shares were assessable as a dividend paid out of profits: FCT v Condell [2006] FCA 1047 (Federal Court, Kiefel J, 15 August 2006).

For a copy of the decision, go here

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