Commissioner of Taxation v Mcneil

• Jurisdiction: Australia Federal only
• Judge: Gummow ACJ,Hayne,Heydon,Crennan JJ.,Callinan J.
• Judgment Date: 22 February 2007
• Neutral Citation: 2007-0222 HCA A,[2007] HCA 5
• Docket Number: S56/2006
• Court: High Court
• Date: 22 February 2007

[2007] HCA 5

HIGH COURT OF AUSTRALIA

Gummow ACJ, Hayne, Callinan, Heydon and Crennan JJ

S56/2006

Commissioner of Taxation

Appellant

and

Helen Mary Mcneil

Respondent

Representation

B J Shaw QC with G J Davies QC and S H Steward for the appellant (instructed by Australian Government Solicitor)

D H Bloom QC with W G Muddle and K J Deards for the respondent (instructed by Mallesons Stephen Jaques)

Corporations Law, Ch 2J, ss 257A-257J.

Income Tax Assessment Act 1936 (Cth), Pt III, Div 2, subdiv D.

Income Tax Assessment Act 1997 (Cth), s 6-5.

Commissioner of Taxation v McNeil

Income tax — Derivation of income — Respondent acquired shares which were later the subject of a buy-back arrangement that gave the respondent ‘sell-back rights’ — The sell-back rights were held on trust and sold for the absolute benefit of the respondent — The increase in value of the sell-back rights was subject to capital gains tax upon sale — Whether the remaining income from the sale was subject to either income tax or capital gains tax — Whether the remaining proceeds of sale amounted to a derivation of income according to ordinary concepts — Whether character of receipt as income to be determined according to its quality in the hands of the recipient or the character of the expenditure by the other party — Whether sell-back rights can be treated as being ‘severed’ or ‘detached’ from the respondent's shares for taxation purposes.

Income tax — Statutory interpretation — Whether subdiv D of Div 2 of Pt III of the Income Tax Assessment Act 1936 (Cth) formed a ‘code’ regarding taxation of receipts by shareholders from companies.

Words and phrases — ‘for the absolute benefit of’, ‘income’, ‘in satisfaction’, ‘code’, ‘sell-back right’.

ORDER

1. Appeal allowed.

2. Set aside order 1 of the Full Court of the Federal Court made on 8 August 2005 and in its place order that the appeal to that Court be allowed, the orders of Conti J made on 14 April 2004 be set aside, and the appeal by the taxpayer against the objection decision of the Commissioner made on 31 October 2002 be dismissed.

3. The appellant pay the costs of the respondent of this appeal.

1 Gummow ACJ, Hayne, Heydon AND Crennan JJ. The respondent (‘the taxpayer’) is a widow of advanced years who has lived all her life in Australia. The amount of income tax at stake in this appeal is less than $600. The year of income in question is that which ended on 30 June 2001. The litigation has been treated as a test case, in the circumstances which are more fully described later in these reasons, and is said by the appellant (‘the Commissioner’) to affect more than 80,000 taxpayers.

2 The taxpayer succeeded at first instance in the Federal Court (Conti J) 1 and an appeal by the Commissioner was dismissed by the Full Court (French and Dowsett JJ; Emmett J dissenting) 2. No order for costs was made by Conti J. An agreement was made between the parties that there be no order as to costs in the Full Court. It was a condition of the grant to the Commissioner of special leave to appeal to this Court that the Commissioner pay the costs of the appeal in any event and not seek to disturb the position respecting costs in the Federal Court.

The SGL buy-back scheme

3 In 1987, the taxpayer acquired a parcel of shares in St George Building Society Ltd. In 1992, these were converted into ordinary shares in St George Bank Ltd (‘SGL’) upon its change from a building society to a corporation carrying on the business of banking. Since 1992, shares in SGL have been listed for quotation on the Australian Stock Exchange (‘ASX’). In the years following 1992, the profitability of SGL increased. As a result of rights issues, share-rounding plans and other events, at the time of the critical announcement by SGL on 12 January 2001 (‘the record date’), the taxpayer's shareholding comprised 5,450 ordinary shares.

4 On the record date, SGL announced an off-market buy-back of ordinary shares to the approximate value of $375 million; the buy-back was said to be designed to enhance returns to shareholders and to be the first step in proposals to convert existing preference shares to ordinary shares and issue new preference shares. The buy-back was to be funded by SGL from existing cash resources which, in turn, were to be replaced substantially by the issue of the new preference shares.

5 The number of ordinary shares the subject of the announcement represented approximately 5 per cent of the then issued capital of SGL. For every 20 ordinary shares held at the record date and rounded down to the nearest whole number, SGL on 19 February 2001 (‘the listing date’) would issue to St George Custodial Pty Ltd (‘Custodial’) as trustee for the shareholder one ‘sell-back right’. This would yield 272 sell-back rights for the taxpayer. The term ‘buy-back’ was used from the perspective of SGL, while ‘sell-back’ was used from the perspective of shareholders. Each sell-back right was to be a put option to oblige SGL to buy back one share for $16.50. Excluded from direct participation on the same terms as other ordinary shareholders were shareholders having a registered address outside Australia and New Zealand, and employees of SGL who held shares under certain employee share benefits schemes. More limited arrangements were made for these ‘excluded shareholders’ to participate indirectly in the buy-back. The taxpayer was not an excluded shareholder.

6 Implementation of the proposed share buy-back was governed, as a matter of company law, by what was then Div 2 (ss 257A-257J) of Pt 2J-1 of Ch 2J of the Corporations Law 3. Chapter 2J was headed ‘Transactions Affecting Share Capital’ and in various respects replaced or qualified the previous law respecting reductions in share capital, in particular the prohibition upon the purchase by a company of its own shares 4. An appreciation of this change in the underlying company law is important when considering various of the revenue decisions to which the Court was referred in argument in this case.

7 Section 257A of the Corporations Law permitted a company to buy back its own shares if the buy-back did not materially prejudice the ability of the company to pay creditors and the company followed the procedures laid down in Div 2. Section 257B(1) specified the procedures appurtenant to different types of buy-backs. In respect of what were classed as ‘selective buy-backs’, s 257D stipulated special requirements for the obtaining of shareholder approval, beyond those requirements for ‘equal access schemes’ (see s 257B(2)). No issue arises respecting compliance with Div 2. It is unnecessary to resolve apparent differences in submissions of the parties respecting the classification of the SGL buy-back scheme as a ‘selective’ or ‘equal access’ scheme.

8 The arrangements announced by SGL on the record date were implemented and controlled by a series of interconnected deeds poll, to which further reference will be made. Each of these documents was executed on the record date, 12 January 2001. On 10 January, ordinary shares in SGL had been traded at $13.88; the highest price at which shares had previously been traded was $14.10. On the listing date, 19 February, the share price was between $14.45 and $14.64 per share. The right to require SGL to purchase a share for $16.50 had a value represented by the amount by which that sum exceeded the market value. The parties agreed for the purposes of these proceedings that on that date the market value of one sell-back right was $1.89. Accordingly, the market value of the taxpayer's sell-back rights at the listing date was $514.

9 On the listing date, SGL granted to Custodial more than 22 million sell-back rights to be held on the terms of the arrangements made by the deeds poll.

10 The taxpayer and the other shareholders who had wished to obtain legal title to all or some of their sell-back rights so as to be able personally to sell their shares back to SGL or sell the sell-back rights on the market had been obliged to give a direction to Custodial before 5.00 pm on 16 February (‘the election date’), that is to say, before the grant of those rights on 19 February. The taxpayer gave no such direction. The result of the controlling instruments in cases where no direction was given was that, on the grant by SGL on 19 February of 272 sell-back rights to be held for the taxpayer by Custodial as trustee, Custodial was obliged to sell those rights to a merchant bank, Credit Suisse First Boston Australia Equities Ltd (‘CSFB’). CSFB was required to trade or exercise those rights and to account to Custodial as trustee for the taxpayer.

11 From the issue date, the sell-back rights were listed and traded on the ASX and this continued until 13 March 2001 (‘the listing period’). In this way, there was created a market in the sell-back rights themselves. This was important for those shareholders who did not wish to exercise the legal title to some or all of their sell-back rights or who, like the taxpayer, stood by and took no steps before the election date to acquire that legal title. The existence of this market also would help facilitate attainment of SGL's announced intentions of effecting a buy-back to the extent of about 5 per cent of its issued capital.

12 The explanatory material sent by SGL to shareholders made it plain that shareholders not wishing to do so did not have to sell any shares to SGL. But the material also told shareholders that they could purchase additional sell-back rights on the ASX and thereby increase the number of shares they could oblige SGL to acquire. In this way, the sell-back rights are more readily seen to have been separate and detached from the shares in respect of which they had been granted by SGL; the rights were objects of commerce and by reason of acquisition by another shareholder could be...