26 Mar 12 Share buy-back amount not debited to share capital account - Consolidated Media Holdings
The Full Federal Court (Stone, Greenwood and Logan JJ) has upheld the taxpayer's appeal from the decision of Emmett J in Consolidated Media Holdings Limited v FCT  FCA 367.
In that case, 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, because it had been debited to an account entitled "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 s 6D ITAA 1936.
On appeal, 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, stating at para 43 as follows:
"Further, having regard to the wider context and purpose of the 1998 changes to the Corporations Act and the purpose or object of the successive, related amendments which were made to the 1936 Act in 1998 and 1999, the use of the singular in s 6D(1)(a) is no coincidence. That account is merely whichever one in which a company ordinarily keeps its share capital on contribution. In turn, s 6D(1)(b) picks up other accounts created after 30 June 1998 to which the first amount credited was an amount of share capital such as the proceeds of transfers from a share premium account or a capital reserve account the proceeds of which, in light of the 1998 company law changes, were regarded as part of a company’s share capital. Section 6D(2) of the 1936 Act treats each of those accounts as a single account thereby facilitating transfers between them. So construed and as CMH submitted, s 6D avoids unintended adverse 'tainting' consequences. There is no warrant to construe s 6D any more widely than this. The broad construction of the section for which the Commissioner contended is neither supported by construing its text in context and having regard to its evident purpose nor by reference to relevant secondary materials."
The Full Federal Court therefore held that (a) Crown's Shareholders Equity Account was, in terms of s 6D(1)(a) of the ITAA 1936, an account in which Crown kept its share capital; and (b) the Share Buy-Back Reserve Account was neither such an account nor was it an account to which s 6D(1)(b) of the ITAA 1936 applied.
In the alternative, the Full Court said, at para 46 as follows:
"In any event, even if the Share Buy-Back Reserve Account did fall within s 6D(1)(b) and, by virtue of s 6D(2), was taken with the Shareholders Equity Account to be a single account, for s 159GZZZP not to apply so as to deem a dividend to have been paid by Crown the consideration for the shares bought back must be debited against amounts standing to the credit of the share capital account. Section 6D(2) creates but one statutory fiction, not two. It deems multiple accounts to be a single account. It does not deem the act of debiting against one account to have occurred against an amount standing to the credit of another account. One does not extend by implication a statutory fiction when so to do would, as here, be subversive of the object of the 1998 amendment to s 159GZZZP and not in any way further the evident object of the 1999 amendment which introduced s 6D...Here, there was a debit entry in Crown’s Share Buy-Back Reserve Account. There was also a credit balance in Crown’s Shareholders Equity Account. That debit was never, in terms of s 159GZZZP(1)(b) of the 1936 Act, applied against that credit balance. It follows it ought to have been concluded that no part of the purchase price in respect of this off-market buy-back was debited against amounts standing to the credit of Crown’s share capital account and that the purchase price is, by virtue of s 159GZZZP, taken to be a dividend paid by Crown to CMH out of profits derived by Crown."
The taxpayer's appeal was upheld: Consolidated Media Holdings Ltd v FCT  FCAFC 36 (Full Federal Court; Stone, Greenwood and Logan JJ; 20 March 2012).