05 Dec 07 High Court dismisses taxpayer's appeal - BluebottleThe High Court (Gleeson CJ, Gummow, Kirby, Hayne and Crennan JJ) has dismissed the taxpayer's appeal from the decision of the New South Wales Court of Appeal in Bluebottle UK Limited & Ors v FCT.
The case concerned the issue of whether an Australian company ("Virgin Blue") had an obligation to retain and pay to the Commissioner tax on account of 2 non-resident shareholders of Virgin Blue (referred to as "Cricket" and "Holdings") under s 255 ITAA 1936. The dividend was declared on 11 November 2005 and payable to persons who were shareholders on 28 November 2005 ("the record date"). Cricket and Holdings were shareholders on that latter date. The dividend was payable on 15 December 2005.
On 12 December 2005, the Commissioner gave Virgin Blue 2 notices, each described as a notice under s 255 of the ITAA 1936 stating, amongst other things, that Virgin Blue "shall, when required by the Commissioner, pay the tax due and payable by the Taxpayer [Cricket in the one case; Holdings in the other] and [is], accordingly, authorised and required pursuant to section 255 of the Income Tax Assessment Act 1936 ... to retain [a specified amount] being the amount of tax that is due or will become due by the Taxpayer, from the amount [Virgin Blue has] receipt, control or disposal of belonging to the Taxpayer". The High Court refers to these notices as "the Commissioner's first notices".
On 13 December, Cricket and Holdings assigned, for value, their rights to the future dividend to another non-resident company, Bluebottle UK Limited (Bluebottle"). On the same day, Bluebottle executed an irrevocable direction to Virgin Blue requiring Virgin Blue to pay a stated amount of money to another company (Barfair Ltd). Notice of the assignments and the direction was given to Virgin Blue on 14 December 2005.
On 14 December 2005, the Commissioner issued and served notices of assessment on Cricket and Holdings in respect of the tax the subject of the s 255 notices.
Also on 14 December 2005, but after the assessments just described had issued and after Virgin Blue had received notice from Cricket and Holdings, Virgin Blue received letters from the Commissioner advising that "payment of any amount retained pursuant to [the Commissioner's first notices] is now required". These letters are referred to as "the Commissioner's second notices".
In essence, the High Court held 2 things.
First, notwithstanding the valid assignment of the dividends to Bluebottle, the dividend continued to be payable by Virgin Blue to Cricket and Holdings. The Court said, at para 69:
"...it follows that on and from the record date Cricket and Holdings, as members of Virgin Blue on the record date, had rights to receive the dividend which the directors had declared on 11 November 2005 and which was due for payment on 15 December 2005. The assignments each made of those rights created rights and obligations as between each assignor and Bluebottle as assignee. Those assignments did not, however, alter the force of the contractual stipulation deemed to exist between Virgin Blue and each of Cricket and Holdings that Virgin Blue could and in this case would deal with the dividend only with those who were its members on the record date. Virgin Blue therefore was and remained liable to pay the dividend to those who were its members on the record date."
Secondly, the Court rejected the Commissioner's argument that para (b) of s 255(1), in referring to tax "which is or will become due by the non-resident", can apply to tax which is yet to be assessed (in contrast with par (a) which refers to tax "due and payable by the non-resident"). The Court held that para (b) must be interpreted as referring to "an ascertained sum" (see paras 77 to 80). The Court said, at para 82:
"...the obligations to retain and to pay are seen as intersecting obligations. The point of their intersection is the specification of the tax which under par (a) is to be paid when required by the Commissioner, and which under par (b) is both the amount that may be retained (the controller "is hereby authorised") and the amount that must be retained (the controller "is hereby ... required"). Once this intersection between the operation of par (a) and par (b) of s 255(1) is identified, many of the issues that would otherwise arise on the construction urged by the Commissioner fall away."
On the basis of these findings, the Court concluded, at para 98:
"It follows that in the particular circumstances of this case, the Commissioner's first notices did not comply with s 255(1). At the time of the Commissioner's first notices, no assessment had issued to Cricket or to Holdings and there was then no "tax which is or will become due by the non-resident" within the meaning of s 255(1)(b). By contrast, when the Commissioner's second notices were given, assessments had issued to Cricket and to Holdings. There was then tax due and payable. Virgin Blue was then a "person having the receipt control or disposal of money belonging to" Cricket and to Holdings. Virgin Blue had receipt, control or disposal of money belonging to its shareholders because, within the meaning of s 255(2), it was then "liable to pay money", the declared dividend, to those who were its shareholders on the record date. In particular, despite the assignments, Virgin Blue remained liable to pay the declared dividend to Cricket and Holdings. Each of Cricket and Holdings was a non-resident who was said to have derived gains of a capital nature from a source in Australia. Virgin Blue was, therefore, obliged by the Commissioner's second notices to retain from the dividends otherwise due to be paid to Cricket and Holdings sufficient to pay the tax due under each assessment. Virgin Blue was personally liable for the tax due to the extent it should have retained funds. Virgin Blue was indemnified for all payments it made in pursuance of the Commissioner's requirements."
The taxpayer's appeal was dismissed: Bluebottle UK Limited v FCT  HCA 54 (High Court; Gleeson CJ, Gummow, Kirby, Hayne and Crennan JJ; 5 December 2007).
For a copy of the decision, go here