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05 Dec 12 Commissioner's appeal on share capital account upheld - Consolidated Media

The High Court (French CJ, Hayne, Crennan, Bell and Gageler JJ) has upheld the Commissioner's appeal from the decision of the Full Federal Court in Consolidated Media Holdings Ltd v FCT [2012] FCAFC 36 (Stone, Greenwood and Logan JJ, 20 March 2012).

In that earlier decision, the Full Federal Court had upheld the taxpayer's appeal from the decision of Emmett J in Consolidated Media Holdings Limited v FCT [2011] FCA 367. The effect of the High Court's decision is to reinstate Emmet J's original order that the taxpayer's appeal against the Commissioner's objection decision be dismissed.

In his decision, Emmett J held that a payment of $1,000,000,000 made by Crown Melbourne Limited ("Crown") to the taxpayer for the buy-back of shares in Crown held by the taxpayer was not a dividend for the purposes of s 159GZZZP ITAA 1936, and was not therefore rebatable, because it had been debited against amounts standing to the credit of Crown's share capital amount. Accordingly, Emmett J held that the transaction resulted in an assessable capital gain of $402,461,564 (the cost base in the shares being $597,538,436), rather than a rebatable dividend.

Before Emmett J, the taxpayer argued that the payment had not been debited against amounts standing to the credit of Crown's share capital amount (labelled "Shareholders Equity Account), because it had been debited to an account labelled "Share Buy-Back Reserve Account", and it was the only entry in that account. However, Emmett J held that that account was part of the account kept by Crown of its share capital within the meaning of the former s 6D ITAA 1936.

On appeal to the Full Federal Court, the taxpayer submitted that s 6D had no application, having regard to the purpose for which it was inserted into the ITAA 1936, namely, to avoid unintended outcomes from the operation of the "tainting" rules following the amendments to the ITAA 1936 and the Corporations Act abolishing the concept of a par value of a share. The Full Federal Court agreed with this submission. It also held that even if, contrary to its view, s 6D applied, there was no "debiting" against the credit in Crown's share capital account, as required by s 159GZZZP(1)(b) of the 1936 Act.

The High Court has now held that an account that is a record of a transaction into which a company has entered in relation to its share capital, or that is a record of a company's financial position in relation to its share capital, is a "share capital account" within the meaning of s 6D(1). It also held that s 6D(2) required all share capital accounts to be treated as a combined "share capital account". Accordingly, the $1 billion consideration the taxpayer received under the share buy-back agreement was debited against amounts standing to the credit of Crown's "share capital account" and the Commissioner was correct to have assessed the taxpayer as having made a capital gain.

The High Court said, at paras 46 and 47:

"Crown's Share Buy-Back Reserve Account in which, as corrected, the only entry as at 30 June 2002 was a $1 billion debit was a record of the transaction by which Crown had on 28 June 2002 entered into an executory contract to reduce its share capital by that amount. As illustrated by the derivation of the figure for 'Contributed Equity' later shown in Crown's audited financial statements, the financial position of Crown in relation to its share capital as at 30 June 2002 could only be understood by subtracting the $1 billion debit balance in its Share Buy-Back Reserve Account from the credit balance of just over $2.4 billion in its Shareholders Equity Account. On either basis, the Share Buy-Back Reserve Account answered the description of an account which Crown kept of its share capital within s 6D(1)(a). The Share Buy-Back Reserve Account was therefore a share capital account...
 
As Crown's Share Buy-Back Reserve Account, along with its Shareholders Equity Account, was, as at 30 June 2002, a share capital account, the Share Buy-Back Reserve Account and the Shareholders Equity Account were, by the operation of s 6D(2), to be taken for the purposes of s 159GZZZP(1) of the ITAA 1936 to be Crown's single combined share capital account. Taken as a single account, Crown's combined share capital account had an amount of just over $2.4 billion standing to its credit and a debit of $1 billion to the same combined share capital account. To characterise that debit as a debit 'against' the amount standing to the credit of the combined share capital account is not to extend the fiction created by s 6D(2), but to apply it."

FCT v Consolidated Media Holdings Ltd [2012] HCA 55 (High Court; French CJ, Hayne, Crennan, Bell and Gageler JJ; 5 December 2012)

 


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