Condell v Commissioner of Taxation of the Commonwealth of Australia

• Jurisdiction: Australia Federal only
• Court: Full Federal Court (Australia)
• Judgment Date: 28 March 2007
• Neutral Citation: [2007] FCAFC 44
• Date: 28 March 2007

FEDERAL COURT OF AUSTRALIA

Condell v Commissioner of Taxation of the Commonwealth of Australia [2007] FCAFC 44

TAXATION – income tax – assessable income – company demerger – dealings between parent and subsidiary companies – distribution by parent of shares in subsidiary – whether dividends paid out of profits derived by parent – actual market value of shares greater than amount debited from profits account of parent company – from where profits derived – market value of shares irrelevant – nature of distribution considered only from parent company’s perspective – findings based on accounts – accounts accepted as true and fair

PRACTICE AND PROCEDURE – questions of law for purposes of appeal instituted under s 44(1) of Administrative Appeals Tribunal Act 1975 (Cth) – respondent filed notice of contention claiming judgment below should be affirmed on basis of ordinary income under s 6-5 of Income Tax Assessment Act 1997 (Cth) – power to allow amendment to questions of law – argument on notice of contention disallowed – issue whether ordinary income under s 6-5 never previously raised

Income Tax Assessment Act 1936 (Cth), ss 44(1)(a) and 6(1)

Administrative Appeals Tribunal Act 1975 (Cth), ss 44(1) and 44(7)

Commissioner of Taxation v McNeil [2007] HCA 5 noted

MacFarlane v Federal Commissioner of Taxation (1986) 13 FCR 356 referred to

Federal Commissioner of Taxation v Slater Holdings Ltd (1984) 156 CLR 447 cited

Davis Investments Pty Ltd v Commissioner of Stamp Duties (NSW) (1958) 100 CLR 392 referred to

Commissioner of Taxation v Condell [2006] FCA 1047 noted

Birdseye v Australian Securities and Investments Commission [2003] FCAFC 232 cited

Australian Securities and Investments Commission v Saxby Bridge Financial Planning Pty Ltd (2003) 133 FCR 290 cited

Australia Telecommunications Corporation v Lambroglou (1990) 12 AAR 515 cited

Comcare v Etheridge (2006) 149 FCR 522 cited

Coulton v Holcombe (1986) 162 CLR 1 referred to

Dismin Investments Pty Ltd v Federal Commissioner of Taxation (2001) 183 ALR 565 referred to

Ergon Energy Corporation Ltd v Commissioner of Taxation (2006) 153 FCR 551 referred to

Hope v Bathurst City Council (1980) 144 CLR 1 referred to

Evans v Deputy Federal Commissioner of Taxation (1936) 55 CLR 80 cited

Commissioner of Taxation v Sun Alliance Investments Pty Ltd (in liq) (2005) 222 ALR 286 cited

GREGORY CONDELL v COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

QUD 349 OF 2006

KENNY, GYLES AND ALLSOP JJ

28 march 2007

MELBOURNE

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	QUD 349 OF 2006

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:	GREGORY CONDELL Appellant
AND:	COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent

JUDGES:	KENNY, GYLES AND ALLSOP JJ
DATE OF ORDER:	28 MARCH 2007
WHERE MADE:	MELBOURNE

THE COURT ORDERS THAT:

1. The appeal be dismissed.

FURTHER NOTING THAT the Appellant was provided with funding under the ATO Test Case Litigation Program, to assist the Appellant to meet his costs of the proceedings:

BY CONSENT THE COURT FURTHER ORDERS THAT:

2. There be no order as to costs.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	QUD 349 OF 2006

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:	GREGORY CONDELL Appellant
AND:	COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent

JUDGES:	KENNY, GYLES AND ALLSOP JJ
DATE:	28 MaRCH 2007
PLACE:	MELBOURNE

REASONS FOR JUDGMENT

Kenny & Allsop JJ

1 We have had the advantage of reading the reasons for judgment of Gyles J in draft. His Honour’s reasons relieve us of the requirement to set out the background to the appeal and permit us to explain directly why we agree with the conclusion of the primary judge that s 44(1)(a) of the Income Tax Assessment Act 1936 (Cth) (the “ITAA 1936”) was satisfied.

The refusal of leave to rely upon the notice of contention

2 Before dealing with the substance of the appeal we express our agreement with the account of Gyles J of the reasons of the Court for the refusal by the Court at the hearing of the appeal to give leave to the respondent to rely upon Commissioner of Taxation v McNeil [2007] HCA 5 in support of a notice of contention.

The substance of the appeal

3 The primary judge concluded that there was no reason for the Tribunal to doubt that the Hewlett-Packard accounts and notes accurately reflected what had occurred within Hewlett-Packard and its subsidiaries or to doubt the statements made by Hewlett-Packard that the retained earnings represented profits. Her Honour said that the relevant question was to understand the source of the distribution of shares, that is, how the company accounted for the making of the distribution. It did so by debiting one account only, the retained earnings account. That being so, the dividend was paid (that is the shares were distributed) out of (that is only out of) profits.

4 We agree with this approach.

5 There was no issue on appeal about the distribution of shares in specie being a dividend. “Dividend” is defined in s 6(1) of the ITAA 1936 to include any distribution made by a company to any of its shareholders whether in money or other property. There was no issue on appeal that the only account of Hewlett-Packard debited by reason of the distribution of the shares in Agilent to the Hewlett-Packard shareholders was an account representing profits. There was no suggestion that the Hewlett-Packard accounts in evidence were other than true and fair and completed according to proper United States accounting principles and practice. This was not a case where there was an issue about the legitimacy of the accounts or about the need to rewrite or “look through” the accounts to ascertain the true source, from the company’s perspective, of the payment of the dividend, or, here, the distribution of the shares: cf MacFarlane v Federal Commissioner of Taxation (1986) 13 FCR 356.

6 Against that background, the relevant question is whether the shares (the dividend) were distributed (“paid” in s 44(1)(a) being defined in s 6(1) in relation to dividends as including distributed) out of profits derived by the company.

7 The correct perspective to answer the above question is the identification of the source, from Hewlett-Packard’s point of view, from which the distribution of shares was made: Federal Commissioner of Taxation v Slater Holdings Ltd (1984) 156 CLR 447 at 457. It was accepted in argument that the dividend must be paid (that is here, the shares must be distributed) wholly out of profits: cf Slater Holdings 156 CLR at 459. The accounts of Hewlett-Packardreveal that the source, from its point of view, of the distribution of the shares was, and was only, the retained earnings account. That account was debited with somewhat over US$4 billion. The market value of the shares distributed on the day of distribution was somewhat over US$29 billion. It can be readily concluded, and it was the basis upon which the parties approached the appeal, that this discrepancy did not represent any inadequacy, error or lack of truth and fairness in the accounts. Rather, the shares in Agilent and the assets that were transferred to Agilent had been carried in Hewlett-Packard’s books and accounts at less than current market value. That wholly unremarkable state of affairs did not alter the fact that from the point of view of Hewlett-Packard the distribution of the shares in Agilent had its source in retained earnings. To use the words of Hewlett-Packardin the notes to the audited accounts filed with the United States Securities and Exchange Commission:

“HP distributed substantially all of its remaining interest in Agilent Technologies through a stock dividend to HP stockholders on June 2, 2000, resulting in the elimination of the net assets of discontinued operations and a $4.2 billion reduction of retained earnings…”

8 The shares were distributed out of a profit account. That was the complete explanation given by Hewlett-Packard for the distribution of shares. The difference between the market value of the shares and the extent of the adjustment in the accounts does not, in our view, require a further explanation of the source of that additional value to understand what, from the company’s perspective, is the source of the distribution of the shares. The terms of s 44(1)(a), applied here to the distribution in specie of shares, do not require that the source of the fund “liberated” or distributed (cf Davis Investments Pty Ltd v Commissioner of Stamp Duties (NSW) (1958) 100 CLR 392 at 407) in the hands of the shareholder be explained. Rather, one must ascertain, from the company’s perspective whether the shares were distributed out of profits. The accounts reveal the answer to that question – the retained earnings account.

9 A question arose in argument concerning s 44(7) of the Administrative Appeals Tribunal Act 1975 (Cth). It is clear that her Honour properly addressed the two questions (set out in the reasons of Gyles J) arising on the appeal under s 44(1). In so doing, her Honour held that the Tribunal had regard to an irrelevant consideration (the market value of the distributed Agilent shares) and asked itself the wrong question (what was the nature of the receipt from the taxpayer’s perspective). Having so concluded, it followed, on the evidence before the Tribunal and the facts it found, that the dividend was necessarily paid out of the...