Commissioner of Taxation v Consolidated Media Holdings Ltd

• Jurisdiction: Australia Federal only
• Judge: French CJ,Hayne,Crennan,Bell,Gageler JJ.
• Judgment Date: 05 December 2012
• Neutral Citation: 2012-1205 HCA C,[2012] HCA 55
• Docket Number: S228/2012
• Court: High Court
• Date: 05 December 2012

[2012] HCA 55

HIGH COURT OF AUSTRALIA

French CJ, Hayne, Crennan, Bell and Gageler JJ

S228/2012

Commissioner of Taxation

Appellant

and

Consolidated Media Holdings Ltd

Respondent

Representation

B J Sullivan SC with T M Thawley SC for the appellant (instructed by Australian Government Solicitor)

D H Bloom QC with K J Deards and C A Burnett for the respondent (instructed by King & Wood Mallesons)

Corporations Act 2001 (Cth), Pt 2J.1 of Ch 2J, Pt 2M.2 of Ch 2M.

Income Tax Assessment Act 1936 (Cth), ss 6D, 159GZZZP.

Commissioner of Taxation v Consolidated Media Holdings Ltd

Taxation — Income tax — Share buy-back — Off-market purchase — Company's financial record of transaction — Whether dividend or capital gain — Whether purchase price ‘debited against amounts standing to the credit of … the company's share capital account’ — Meaning of ‘share capital account’ — Relevance of legislative history.

Words and phrases — ‘account’, ‘buy-back’, ‘combined share capital account’, ‘debited against amounts standing to the credit of’, financial records’, ‘financial statements’, ‘purchase price’, ‘share capital account’.

ORDER

1. Appeal allowed with costs.

2. Set aside the orders made by the Full Court of the Federal Court of Australia on 20 March 2012 and in their place order that the appeal from the orders made by Emmett J on 14 April 2011 be dismissed with costs.

1 French CJ, Hayne, Crennan, Bell AND Gageler JJ. This appeal concerns the characterisation for income tax purposes of consideration received by the respondent, then Publishing and Broadcasting Ltd (‘PBL’), for shares sold to Crown Melbourne Ltd, then Crown Ltd (‘Crown’), in an off-market buy-back in the year of income ended 30 June 2002.

Legislative setting

2 The legislative setting for the off-market buy-back comprised the Corporations Act 2001 (Cth) (‘the Corporations Act’) as well as the Income Tax Assessment Act 1936 (Cth) (‘the ITAA 1936’) and the Income Tax Assessment Act 1997 (Cth) (‘the ITAA 1997’).

3 The Corporations Act allows a company to buy back its own shares if the buy-back does not materially prejudice the company's ability to pay its creditors and if the company follows procedures laid down in Div 2 of Pt 2J.1 of Ch 2J. The way a company accounts for a buy-back is governed by the general obligations of the company under Pt 2M.2 of Ch 2M. Under Pt 2M.2 of Ch 2M, the company has an obligation to keep ‘written financial records’ that ‘correctly record and explain its transactions and financial position and performance’ and that ‘would enable true and fair financial statements to be prepared and audited’ 1. The company also usually has an obligation to prepare an annual financial report, consisting of financial statements for a financial year as well as notes to those statements and a directors' declaration about those statements and notes 2. The financial statements and notes for a financial year must comply with accounting standards made for the purposes of the Corporations Act and any further requirements in regulations made under that Act 3 and must give a true and fair view of the financial position and performance of the company 4. The expression ‘financial records’ includes ‘documents of prime entry’ as well as ‘other documents needed to explain … the methods by which financial statements are made up … and … adjustments to be made in preparing financial statements’ 5.

4 For the purposes of the ITAA 1936 and the ITAA 1997, the effect of a company buying a share in itself from a shareholder in the company is addressed in Div 16K of Pt III of the ITAA 1936. Within Div 16K: such a ‘purchase’ is a ‘buy-back’ 6; the shareholder is the ‘seller’ 7; the amount or the sum of the amounts the seller is entitled to receive as a result of or in respect of the buy-back is the ‘purchase price’ 8; and, except where the buy-back is an ‘on-market purchase’ (made in the ordinary course of trading on a stock exchange on which the share is quoted in an official list), the buy-back is an ‘off-market purchase’ 9. The effect of an off-market purchase is addressed in Subdiv C.

5 The pivotal provision of Subdiv C of Div 16K of Pt III of the ITAA 1936 is s 159GZZZP. Section 159GZZZP(1) provides that, for the purposes of the ITAA 1936 and the ITAA 1997 10, where a buy-back of a share by a company is an off-market purchase, the difference between the purchase price and ‘the part (if any) of the purchase price … which is debited against amounts standing to the credit of … the company's share capital account’ is taken to be a dividend paid by the company to the seller on the day the buy-back occurs out of profits derived by the company. Section 159GZZZP(2) provides that the remainder of the purchase price is taken not to be a dividend.

6 The consequences of the classification of the purchase price by s 159GZZZP for the operation of the ITAA 1936 and the ITAA 1997, in respect of a seller that is an Australian resident company, can be sufficiently summarised for present purposes as follows. To the extent that the purchase price is taken by force of s 159GZZZP(1) to be a dividend, the amount of the purchase price is ordinarily included in the seller's assessable income 11 and the seller is ordinarily entitled to a corresponding rebate of income tax 12. To the extent that the

purchase price is taken by force of s 159GZZZP(2) not to be a dividend, and subject to adjustments, an amount equal to the purchase price is ordinarily taken to be the amount the seller has received or is entitled to receive as consideration in respect of the sale of the shares in determining whether the seller makes a capital gain or a capital loss in respect of the buy-back as worked out in accordance with Pts 3–1 and 3–3 of the ITAA 1997 13.

7 In the year of income ended 30 June 2002, ‘share capital account’ was defined in s 6D of the ITAA 1936. Section 6D(1) provided:

‘A share capital account is:

• (a) an account which the company keeps of its share capital; or

• (b) any other account (whether or not called a share capital account), created on or after 1 July 1998, where the first amount credited to the account was an amount of share capital.’

8 Section 6D(2) provided:

‘If a company has more than one account covered by subsection (1), the accounts are taken, for the purposes of this Act, to be a single account.’

9 Section 6D(3) qualified ss 6D(1) and 6D(2) by providing that an account that was ‘tainted’ for the purposes of Div 7B of Pt IIIAA of the ITAA 1936 was not a share capital account other than for specified purposes. A company's share capital account ordinarily became tainted for the purposes of Div 7B of Pt IIIAA if the company transferred ‘an amount to its share capital account from any of its other accounts’ 14. A note to s 6D(2), which formed part of the ITAA 1936 15, explained that ‘[b]ecause the accounts are taken to be a single account (the combined share capital account) tainting any of the accounts has the effect of tainting the combined share capital account’.

Buy-back

10 For the whole of the year ended 30 June 2002, PBL owned all of the nearly three billion issued and paid-up ordinary shares in Crown. On 28 June 2002, PBL and Crown entered into a share buy-back agreement which provided for the sale by PBL to Crown of just over 840 million of those shares for a purchase price of $1 billion (‘the share buy-back agreement’). The share buy-back agreement provided for completion on 1 August 2002 or such other date as might be agreed between the parties.

11 Before 28 June 2002, Crown had established accounts in its general ledger which included those labelled a ‘Shareholders Equity Account’ and an ‘Inter-company Loan (Payable) Account’. On 28 June 2002, Crown established a new account in its general ledger labelled a ‘Share Buy-Back Reserve Account’.

12 On 28 June 2002, Crown debited $1 billion to the newly established Share Buy-Back Reserve Account. On the same day, Crown made a corresponding credit entry in its ledger which, as subsequently corrected with effect from 30 June 2002, was shown as a $1 billion credit to the Inter-company Loan (Payable) Account. No entry was made in the Shareholders Equity Account, which retained a constant credit balance throughout the year ended 30 June 2002 in excess of $2.4 billion.

13 The share buy-back agreement was completed on 6 August 2002. On that date, amongst other things, PBL transferred to Crown the shares the subject of the share buy-back agreement for a consideration of $1 billion and Crown cancelled those shares.

14 Crown's audited financial statements for the financial year ended 30 June 2002 showed a reduction in ‘Contributed Equity’ of $1 billion from an opening figure of just over $2.4 billion (corresponding with the balance shown in the Shareholders Equity Account) to a closing figure of just over $1.4 billion. Notes against ‘Contributed Equity’ explained it to refer to issued and paid up capital comprising ordinary shares fully paid, and recorded that:

‘On 28 June 2002, 840,336,000 ordinary shares (28.6% of total shares on issue) were bought back by Crown … The shares were repurchased from [PBL] for a total consideration of $1,000,000,000.’

15 There is no dispute that Crown followed the procedures laid down in Div 2 of Pt 2J.1 of Ch 2J of the Corporations Act in entering into and giving effect to the share buy-back agreement. There was an unresolved dispute on the evidence at first instance as to whether the method of accounting for the share buy-back adopted by Crown was appropriate as a matter of accounting practice, but it was common ground that the method was neither expressly permitted nor expressly prohibited by the applicable accounting standards.

Assessment and appeal proceedings

16 The Commissioner of Taxation (‘the Commissioner’) took the...