The decision concerned the treatment of consideration received by Consolidated Media Holdings Ltd ("CMH") for an off-market buy back of the ordinary shares in Crown Limited ("Crown").
On the day of the buy back, Crown recorded a debit of $1 billion in a new account labelled "Share Buy-Back Reserve Account" created in its general ledger. Crown also maintained a "Shareholders Equity Account" which maintained a credit balance and in which no entry was recorded in relation to the share buy-back. The issue in the appeal was whether the $1 billion was debited against amounts standing to the credit of Crown's share capital account, within the meaning of s.159GZZZP (1) ITAA 1936, and was thus a capital payment, giving rise to a capital gain. CMH argued that it had not been debited against amounts standing to the credit of Crown's share capital account, and that it was therefore a rebatable dividend. The Full Federal Court agreed with CMH.
The Decision Impact Statement states:
"The High Court, in a unanimous decision, allowed the Commissioner's appeal. The court considered it was sufficient for an account to be a share capital account, under s.6D, for that account to be an account that was either a record of a transaction into which the company had entered in relation to its share capital, or a record of the financial position of the company in relation to its share capital.
The $1 billion debit entry made in the Share Buy-Back Reserve Account was a record of the transaction made by Crown on 28 June 2002 to reduce its share capital. The share capital of Crown could only be understood by reference to both the Shareholders Equity Account and its Share Buy-Back Reserve Account.
The court found that both accounts taken together constituted Crown's share capital. Accordingly, the debit of $1 billion in the Share Buy-Back Reserve account was a debit against the amount standing to the credit of the combined share capital account.
Consequently, none of the amount received by CMH was therefore a dividend. In these circumstances, CMH actually realised a capital gain on the disposal of its Crown shares.
This decision is consistent with the longstanding practice and policy of the ATO in relation to share buy-backs."
The Decision Impact Statement notes:
"On 21 October 2011 the Government released an Exposure Draft Bill concerning the Taxation of Share Buy Backs. The Exposure Draft seeks to amend the taxation law pertaining to share buy-backs. As presently drafted, the existing buy-back provisions considered by the High Court of Australia in this case are not relevantly altered. In particular, the capital component for a share remains that part of a purchase price debited against amounts standing to the credit of the company's share capital account."