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29 Mar 07 Taxpayer's appeal on demerger dividend dismissed - Condell

The Full Federal Court, by majority (Kenny and Allsop JJ, Gyles J dissenting) has dismissed the taxpayer's appeal from the decision of Kiefel J, who had held that shares distributed to the taxpayer, a shareholder of the Hewlett-Packard Company, were assessable as a dividend, having been 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 support of its submission that the shares were not paid out of profits, the taxpayer pointed to the fact that the market value of the shares distributed to shareholders exceeded the amount which Hewlett Packard debited to its retained earnings account. In rejecting this submission, Kenny and Allsop JJ said, at para 8:

"The shares were distributed out of a profit account. That was the complete explanation given by Hewlett-Packard for the distribution of shares. The difference between the market value of the shares and the extent of the adjustment in the accounts does not, in our view, require a further explanation of the source of that additional value to understand what, from the company’s perspective, is the source of the distribution of the shares. The terms of s 44(1)(a), applied here to the distribution in specie of shares, do not require that the source of the fund "liberated" or distributed (cf Davis Investments Pty Ltd v Commissioner of Stamp Duties (NSW) (1958) 100 CLR 392 at 407) in the hands of the shareholder be explained. Rather, one must ascertain, from the company’s perspective whether the shares were distributed out of profits. The accounts reveal the answer to that question - the retained earnings account."

Condell v FCT [2007] FCAFC 44 (Full Federal Court; Kenny, Gyles and Allsop JJ; 28 March 2007).

For a copy of the decision, go here

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