Commissioner of Taxation v Consolidated Media Holdings Ltd
[2012] HCATrans 282
[2012] HCATrans 282
IN THE HIGH COURT OF AUSTRALIA
Office of the Registry
Sydney No S228 of 2012
B e t w e e n -
COMMISSIONER OF TAXATION
Appellant
and
CONSOLIDATED MEDIA HOLDINGS LTD (ACN 009 071 167)
Respondent
FRENCH CJ
HAYNE J
CRENNAN J
BELL J
GAGELER J
TRANSCRIPT OF PROCEEDINGS
AT CANBERRA ON TUESDAY, 13 NOVEMBER 2012, AT 10.15 AM
Copyright in the High Court of Australia
MR B.J. SULLIVAN, SC: May it please the Court, I appear with my learned friend, MR T.M. THAWLEY, SC, for the appellant. (instructed by Australian Government Solicitor)
MR D.H. BLOOM, QC: May it please the Court, I appear with my learned friends, MS K.J. DEARDS and MS C.A. BURNETT, for the respondent. (instructed by King & Wood Mallesons)
FRENCH CJ: Yes, Mr Sullivan.
MR SULLIVAN: Thank you, your Honour. Your Honours, in 2002, Crown Melbourne Ltd, a wholly owned subsidiary of the respondent, carried out an off-market share buy-back by which it bought back 840,336,000 shares held by the respondent for a consideration of $1 billion. As found by the primary judge and also by the Full Court, the buy-back was effected using $1 billion of share capital, and the share capital of Crown was reduced by that amount.
However, in the accounts of Crown a debit entry was made not to the account titled “Shareholders Equity Account” but to one titled “Share Buy-Back Reserve Account”. Shortly put, the issue in the case is whether there is any magic in the title to that account and whether it had the consequence that the buy-back consideration was deemed to be a dividend, notwithstanding that it represented a return by Crown of paid-out capital.
Your Honours, the taxation consequences to the respondent of the share buy-back were governed by Division 16K of Part III of the Income Tax Assessment Act 1936 (Cth). In particular, section 159GZZZP is the relevant provision as the buy-back was an off-market purchase. The issue of statutory construction, and the sole issue in the case, is whether the buy‑back consideration of $1 billion was, in the language of 159GZZZP:
debited against amounts standing to the credit of:
(i)the company’s share capital account –
The appellant contends, and the primary judge held, that the entire buy‑back consideration was so debited. The respondent contends, and the Full Court held, that none of it was so debited. If I may take your Honours, in the appellant’s folder of authorities, to tab 1, which contains the relevant legislation as at the 2002 year. If I can take your Honours to division 16K, there is some ‑ ‑ ‑
FRENCH CJ: Do you say Justice Emmett got it right at paragraphs 72 to 73?
MR SULLIVAN: Yes, we do, your Honour.
FRENCH CJ: You rely on that reason?
MR SULLIVAN: We do, your Honour, although we do have an additional argument as well which was not perhaps directly considered by his Honour. We submit that the reasoning in those paragraphs is correct.
If I can take your Honours to Division 16K as at the 2002 year. It is in the first tab of the authorities. There is some legislation which precedes it, but if your Honours will go to a page that should be behind a yellow divider headed “Division 16K”. It is towards the end of the first tab. There is a page number, 115, at the bottom right‑hand corner of the page. If I can briefly direct your Honours to section 159GZZZJ, dealing with matters of interpretation. The definition of “buy‑back”, it is said, has the meaning given by paragraph (a) of 159GZZZK. I might have said “K”; I meant taking your Honours to 159GZZZJ. The definition of:
off‑market purchase has the meaning given by 159GZZZK(d).
The next section, GZZZK:
Explanation of terms
. . . where a company buys a share in itself from a shareholder in the company;
(a) the purchase is a buy‑back; and
(b) the shareholder is the seller; and
(c) if:
(i)the share is listed for quotation in the official list of a stock exchange in Australia or elsewhere; and
(ii)the buy‑back is made in the ordinary course of trading on that stock exchange;
the buy‑back is an on‑market purchase –
That was not the case here, where, within paragraph (d):
if the buy‑back is not covered by paragraph (c)—the buy‑back is an off‑market purchase.
That was the case in this transaction. GZZZM:
For the purposes of this Division, the purchase price in respect of a buy‑back of a share is:
(a)if the seller has received or is entitled to receive an amount or amounts of money . . . that amount of the sum of those amounts; or
(b)if the seller has received or is entitled to receive property . . . [then it is] the market value of that property . . .
FRENCH CJ: In this case there was an assignment of debts to the value of $1 billion, is that right?
MR SULLIVAN: That is correct. Then if I can take your Honours to the next page, and the critical provision, 159GZZZP, subsection (1) provides, in relation to off‑market purchases:
For the purposes of this Act, but subject to subsection (1A), where a buy‑back of a share or non‑share equity interest by a company is an off‑market purchase –
This language, your Honours, becomes a little bit clumsy, but I am just trying to leave out some words and get some sense to it –
the difference between:
(a)the purchase price; and
(b)the part (if any) . . . which is debited against amounts standing to the credit of:
(i)the company’s share capital account –
Then skipping down a few more words:
is taken to be a dividend paid by the company –
So, the effect of those paragraphs and subparagraphs is that to the extent that the purchase price is debited against amounts standing to the credit of the share capital account, it will not be deemed to be a dividend, but any other amount will be deemed to be a dividend. And by paragraph (c), it is taken to be a dividend paid by the company “to the seller as shareholder”, by paragraph (d) “out of profits derived by the company”, and paragraph (e) “on the day the by‑back occurs”.
So, section 159GZZZP(1) has the result, for present purposes, that the extent that the purchase consideration was debited against amount standing to the credit of Crown’s share capital account it would be taken into account for capital gains tax purposes. Alternatively, to the extent that it was not so debited, it would be deemed to be a dividend.
Your Honours, consistently with what has been said by the Court in Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 at 384 and Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (Northern Territory) (2009) 239 CLR at paragraph 47, it is necessary to construe section 159GZZZP by commencing with the consideration of the statutory language and giving effect to the statutory intention as revealed by that language and, if appropriate, the context, the general purpose and policy of the provision. The statutory language, of course, makes it necessary to determine how much of the buy‑back purchase price was debited against amounts standing to the credit of Crown’s share capital account.
Your Honours, I will return to the facts to explain the basis upon which the appellant submits that the debiting to the account titled “Share Buy‑Back Account” was a debiting against amounts standing to the credit of Crown Share Capital account, but first it is necessary to address the statutory context of section 159GZZZP. Your Honours, arrangements known as share buy‑back transactions were first permitted under amendments made in 1989 to the Companies Act1981. At the same time, the Taxation Laws Amendment Act 3 (1990) introduced Division 16K into Part III of the Income Tax Assessment Act (1936) to deal with the taxation consequences of share buy‑backs.
At that time, your Honours will recollect, shares still had a par value and companies could still have share premium accounts. If I can take your Honours to tab 4 in the folder of authorities, your Honours will see there section 159GZZZP in its original form. This is the form before the abolition of par value in relation to shares. Your Honours will see that the section then provided:
where a buy‑back of a share by a company is an off‑market purchase, so much of the purchase price as exceeds the sum of:
(a)the amount to which the share was paid‑up immediately before the buy‑back; and
(b)the part (if any) . . . which is debited against amounts standing to the credit of a share premium account of the company;
is taken to be a dividend paid by the company:
There was, in effect, your Honours, by those provisions – first in paragraph (a) – a statutory presumption that the first amount paid back would be the share capital paid up on the share. The operation of the section was to take that amount of share capital and to also take such amount of the purchase price as was debited against the amount standing to the credit of the share premium account, and any excess above those two amounts was deemed to be a dividend.
Your Honours, to understand the context in which Division 16K was enacted it is necessary also to understand the history of some litigation which occurred at prior times in relation to informal liquidations and returns of capital which ultimately led up to changes in 1967 to the definition of “dividend” following the decision of this Court in Commissioner of Taxation v Uther.
HAYNE J: Why do we have to go back there? What do we get out of it?
MR SULLIVAN: Your Honour, we get out of it the treatment that the Act has accorded returns of capital. What we submit, your Honour, is that there is a consistency between the scheme of the Act in relation to returns of capital and what was done in 1990 in the enactment of section 159GZZZP. So in that sense ‑ ‑ ‑
HAYNE J: Albeit so, so what? What follows from that?
MR SULLIVAN: That 159GZZZP does not stand alone, that it is consistent with the general scheme of the Act in relation to returns of capital.
FRENCH CJ: What is the constructional consequence?
MR SULLIVAN: Its context, your Honour.
FRENCH CJ: That is to help us to make a choice about the way in which the text is construed. What is the choice?
MR SULLIVAN: Choice? I am not sure ‑ ‑ ‑
FRENCH CJ: What is the construction which is assisted by this history? Why do we need it?
MR SULLIVAN: The phrase that we are seeking to construe, your Honour, is in 159GZZZP, the expression “debited against amounts standing to the credit” of the share capital account.
HAYNE J: What is the particular difficulty about that phrase that we are presently grappling with?
MR SULLIVAN: Its interpretation divided the primary judge in the Full Court. The primary judge looked at the circumstances that involved, as he found, a return of capital, and then he recognised that it was necessary for Crown to make a record that recognised the return of capital and as a consequence he said that, notwithstanding that the Share Buy‑Back Reserve Account was not, by its title, described as a share capital account, the fact that the record was made to record a return of share capital had the consequence that there was a debiting against amounts standing to the credit of the share capital account.
HAYNE J: But do you not begin from the proposition that a company raises share capital? It records its receipt of the share capital so raised in its books. It may choose to record it in its books in a number of ways, perhaps. Whether there is only one way is neither here nor there. There is then a buy‑back. What further facts does one need to apply 159GZZZP than the observation that X‑dollars of capital was raised and Y‑dollars of money was paid out in the buy‑back?
MR SULLIVAN: That accords with our view, your Honour.
HAYNE J: Well, it may or may not, but we seem to be embroidering the problem. Perhaps the embroidery is all necessary stitch by stitch, but for my own part, I would like to have a little better fixed in my mind than I presently do whether the Commissioner’s case is any more complex than the case I have identified.
MR SULLIVAN: Essentially, no, your Honour. If I can put it at its simplest, it is, as your Honour said, there was subscribed share capital. It was returned to the shareholder. There was an entry made to record the return of share capital. The primary judge said that is therefore a debiting of the amount against the share capital account and, as a consequence, section 159GZZZP is satisfied. In respect of such a debiting, it is not deemed to be a dividend. The result is on capital gains account. That is our case in a nutshell.
FRENCH CJ: But you say it does not matter whether you label it as a share buy‑back reserve or have a different piece of paper under that heading. It is, in substance, a share capital account.
MR SULLIVAN: Yes, your Honour. Our case is the simple one. On the other hand, the Full Court ‑ ‑ ‑
HAYNE J: That is an appeal to judicial indolence, which is often very tempting.
MR SULLIVAN: I would not expect it here, your Honour.
GAGELER J: What divided the trial judge and the Full Court was the construction of section 6D of the Act. Are you going to take us to that and tell us what you say about it?
MR SULLIVAN: Yes, I am, your Honour. I had a few other things that I contemplated covering first, but I am not sure ‑ ‑ ‑
FRENCH CJ: The text is always a good place to start, and we have not done all the text yet if we have not done 6D.
MR SULLIVAN: I had proposed to take your Honours through the history of the ‑ ‑ ‑
FRENCH CJ: We have read that.
MR SULLIVAN: In that case I will abbreviate the oral submissions by leaving out the references to Blakely’s Case and Uther’s Case and the 1967 amendments to the definition. All of that, your Honours, as you will have seen from the written submissions, is simply for the purpose of trying to point out there is a consistency between what we put in relation to the construction of 159GZZZP and the general scheme of the Act in relation to returns of capital that have to be addressed with respect to the definition of “dividend” in section 6(1).
HAYNE J: The premise that the Act has always followed a singular logically coherent purpose is itself a premise that might occupy us for a day or three, Mr Sullivan. Let us look at the text.
MR SULLIVAN: Mr Thawley reminds me that I should point out to your Honours that our primary argument is one that does not depend upon section 6D, responding to Justice Gageler’s question. Our primary argument is that regardless of whether or not the share buy‑back reserve account was a share capital account within the meaning of section 6D, nevertheless, the debiting to the account was against amount standing to the credit of the share capital account.
FRENCH CJ: You say you do not have to have it in the share capital account?
MR SULLIVAN: Yes, that is so, your Honour.
HAYNE J: That seems to be a point that reads ZZZP and its references to share capital account as specific to the bookkeeping of the taxpayer, and how the taxpayer has, whether in accordance with GARP or not in accordance with GARP, kept its books. Why would one read the Act in that way?
MR SULLIVAN: Yes, your Honour. The Act has its own purposes and, in our submission, matters of accounting cannot govern the operation of the Act. What would govern the operation of the Act and the construction of the provisions is the achievement of the legislative purposes of the Act. In our submission, there is a clear legislative purpose in respect of 159GZZZP that returns of share capital are not intended to be deemed to be dividends.
FRENCH CJ: I wonder whether your first point does not really collapse into your second, anyway, so perhaps it is a good time to go to 6D.
MR SULLIVAN: Yes, they do perhaps coalesce. If I can take your Honours then to section 6D, it is also set out at tab 1 of the authorities and there is a page after about a half a dozen pages and I think three divider tabs, there is page numbered 43 in the bottom right hand corner and section 6D appears at the bottom of the page, 6D(1). It provides that:
(1) 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.
Then (2) provides that:
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.
Now, your Honours, that was the second definition of share capital account to be inserted in the Act. There was one that did not last very long. That was inserted in 1999 and in the judgment of the Full Court in the appeal book at page 451 at about line 45, your Honours will see there is a definition of “share capital account” and that was the definition that was first introduced into the Act when the changes in 1990 – sorry, the changes in 1998 occurred in conjunction with the abolition of par value shares. Your Honours will see that it is a negative definition:
Share capital account, for the purposes of the Act . . . does not include an account that is tainted for the purposes of Division 7B of Part IIIAA.
So, that does not tell you what a share capital account is, merely one thing which is not. Now, there were seen to be, as a consequence of the amendments made in 1998 when par value was abolished, some unintended consequences in relation to what was called “tainting of accounts”. Now, I will leave that to one side for the moment, but I should come back to it later.
Tainting of accounts, just in very short order, occurs where profits are transferred into a share capital account and the account is then said to be “tainted”, and the reason for dealing with it is so that profits cannot be disguised as share capital and achieve a preferential taxation upon distribution out of the share capital account. That is what tainting is all about. But, leaving that to one side and coming back to the history of the definitions ‑ ‑ ‑
GAGELER J: But, why? Why are we going back to the history?
MR SULLIVAN: Sorry, it is only the history of “share capital account” definition, your Honour. So, the first definition was the one set out at appeal book, page 451 I think it was I took you, your Honour. That lasted only a year. This definition was then introduced in connection with the changes to overcome what was said to be unintended tainting consequences, and there are provisions in an explanatory memorandum at tab 16.
FRENCH CJ: But, you do not say that that history constrains the application of the definition to section 159GZZZP?
MR SULLIVAN: That is so, your Honour.
FRENCH CJ: Because, I think your opponent suggests that you are bringing one thing for one purpose into a section created for another purpose. But, we are looking at the text.
MR SULLIVAN: We are, your Honour, and our submission is that the matter that the 1999 changes were particularly directed at, which was described as being the delayed crediting of share capital to the share capital account in ways that are described in the explanatory memorandum, the provisions of paragraph (b) of section 6D were directed at overcoming that problem, delayed crediting of the share capital account. The provisions of 6D(1)(a), in our submission, are perfectly general.
They are not affected by the amendments that were made in 1999 to deal with those unintended tainting consequences, and we therefore submit that the expression “an account which the company keeps of its share capital” is a perfectly general expression and we submit that it can embrace any collection of accounting records which a company creates for the purpose of keeping its share capital, and in particular, and this is where we part company with the reasoning of the Full Court, we submit that if a company creates an account which contains only debit entries and those debit entries are made for the purpose of recording returns of share capital, then that account will be an account which the company keeps of its share capital.
FRENCH CJ: Even though it not be the complete account?
MR SULLIVAN: Even though it is not a complete account, and even though it is only debit entries. And, as Mr Thawley reminds me, any other accounts would not be complete account either. It is only by an amalgamation that one gets the complete account. Now, the reasoning of the Full Court would not accept ‑ ‑ ‑
GAGELER J: I am sorry, the amalgamation occurs by virtue of section 6D(2), does it not?
MR SULLIVAN: That is correct, your Honour.
GAGELER J: So each account, whether it is in debit or in credit, on your argument, is an account that falls within section 6D(1)(a) and those accounts, however many they may be, become a combined share capital account for the purposes of the Act by operation of section 6D(2), is that the way it works?
MR SULLIVAN: That is the way it works, in our submission, your Honour, yes. In particular, it does not matter for the purposes of 6D(1)(a), we submit, that if it is – that is an account that contains only debit entries but – if I can take your Honours to the reasoning of the Full Court about that matter. It is in the appeal book commencing at page 460. One of the problems we encounter, your Honours, is that the reasoning of the Full Court in relation to what is a share capital account was bound up with its view of the tainting provisions.
It is a complication that in our submission was unnecessary and in fact misled the court, but in addressing what the Full Court said we are left with the problem that we have to wrestle with these tainting provisions. It starts with, at page 460 at line 10, paragraph 38, with the Full Court putting what it described as an “anomaly”. In our submission, it is not an anomaly but the way in which it was described by the Full Court was:
In the course of oral argument, the following anomaly was submitted by counsel for –
the respondent The example was:
Suppose after a year of income, an amount were to be transferred from a profit account to a reserve account of a company.
If I may add there, it would seem that the Full Court assumed that this reserve account would be a share capital account:
On the construction of s 6D adopted below –
insert the word “if”, I think, to make it read –
[if] that reserve account and an equity account would together constitute the “share capital account” of a company the transfer of year end profits from the profit account to the reserve account would “taint” the entire share capital account –
In our submission, that is correct and that is precisely what the tainting provisions were intended to achieve. If profits are transferred to a share capital account, the share capital account is tainted, and that means that the combined share capital account by virtue of section 6D(2) is tainted and, indeed, if your Honours will look back to section 6D(2) at tab 1 of the authorities, there is a note after subsection (2). It says that:
Because the accounts are taken to be a single account (the combined share capital account) tainting of any of the accounts has the effect of tainting the combined share capital account.
In our submission, the Full Court erred in describing that as anomaly but what it led to was the reasoning in paragraph 40. Their Honours said:
The construction of s 6D of the 1936 Act promoted by CMH in its submissions would obviate the anomaly. That promoted by the Commissioner would not. In particular, reading that section in the wider context described above, it does not strain the language of s 6D(1)(a) to read that paragraph as a reference to the company account, however described, to which the paid up capital of the company was originally credited.
So what their Honours have done is limited. For the purpose of obviating this anomaly, a piece of reverse reasoning is applied. To obviate this anomaly their Honours gave 6D(1)(a) a very narrow construction and said we will only read it as referring to the:
account, however described, to which the paid up capital of the company was originally credited.
So only that one account, on that construction, can come within section 6D(1)(a). Then if I can take your Honours to paragraph 43 on page 461, they continued:
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 –
Then, going down to about line 42:
So construed and as SMH submitted, s 6D avoids unintended adverse “tainting” consequences.
FRENCH CJ: You just say that is an unwarranted gloss on the language?
MR SULLIVAN: We do, your Honour. It is applying a degree of reverse reasoning and it starts from an incorrect premise that there was an anomaly that had to be eliminated in some way and by process of those two things the Full Court arrived at a very narrow construction of section 6D(1)(a) which, in our submission, is at odds with the ordinary language, in our submission, the clear intent of the provision. The Full Court thought that “an account” is an expression in the singular. In our submission, “an account” is an expression that might contemplate any number of accounts.
CRENNAN J: On that construction it would be difficult, if not impossible, would it not, to determine whether the funding for the buy‑back was in fact out of paid up capital or out of profits, which is the whole point of the deeming provision in relation to dividends?
MR SULLIVAN: Yes.
CRENNAN J: Is that not right?
MR SULLIVAN: Yes, your Honour. Well, it has two consequences.
CRENNAN J: That old idea of a disguised dividend being paid out of profits rather than a buy‑back being effected through a return of share capital.
MR SULLIVAN: It has a consequence not only in relation to 159GZZZP, but it also has, your Honour, a more perhaps fundamental consequence. If I can direct your Honours’ attention to the definition of “dividend” in tab 1 – it is about the first of the material in tab 1 – at the bottom of the page, numbered 6 at the bottom:
dividend includes:
(a) any distribution made by a company –
et cetera –
but does not include:
then if I can take your Honours to the next page, paragraph (d) –
moneys paid –
and then skipping down a few lines:
where the amount of the moneys paid or credited . . . is debited against an amount standing to the credit of the share capital account of the company.
Now, that is an exclusion from the definition of “dividend” for the benefit of shareholders who receive distributions of share capital. The effect of the Full Court’s construction has been to, on the one hand, give rise to a dividend in this case but, on the other hand, to very severely limit the operation for the benefit of shareholders of that exclusion from the definition of “dividend” in paragraph (d).
Just while I have your Honours at paragraph (d), if I can also take your Honours to paragraph (e) which follows? Coming back to the point about the expression “debited against”, it is put by the respondent that the expression “debited against” contemplates a debiting in the account and the Full Court seems to have taken the same view. It is implicit in the Full Court’s reasoning that it had to be a debiting in the account.
GAGELER J: In which account?
MR SULLIVAN: In the share capital account. I am just adverting for the moment, your Honour, to our primary argument that it would not matter if the share buy‑back reserve was not a share capital account. There was still a debiting against that account. That was our first proposition, which we have sort of skipped over. I think it was Justice Hayne who observed that the arguments perhaps tend to coalesce about the two points we make.
GAGELER J: So which point are you making now?
MR SULLIVAN: I am just returning to the first point, that we submit that even if the share buy‑back reserve was not a share capital account, nevertheless, the entry in it was a debiting against the share capital account. The point that the respondent takes, and which the Full Court also seems to have taken, is that the debiting would have to be in the account. We stress the word “against”.
GAGELER J: What worth do you give that word?
MR SULLIVAN: “Against”, we say, has the consequence that the debiting does not need to be in the share capital account but only against amounts standing to the credit of it. It is in that regard that I am taking your Honour to paragraph (e).
GAGELER J: Implicit in that is that the word “against” has some meaning that can be expounded. What is that meaning?
MR SULLIVAN: Well, I suppose the best that I can say at the moment, your Honour – I may have to give some thought to try and refine it a little more neatly, but in circumstances where it is clear that there was a return of capital, and the records of Crown confirmed that there was a return of capital, then a debit entry was made which, let it be assumed, was not in the share capital account, the submission is that if the debit entry was made – and this is consistent with the reasoning of the primary judge – for the purpose of recording the return of capital, it was a debiting against the share capital account, even if not in it.
HAYNE J: All that proceeds from an understanding of share capital account not stated, not explained and not capable of support. I think you get yourself into all manner of tangles if you go down this path. Maybe you do not, but it seems to me you do.
MR SULLIVAN: I will say no more, your Honour, than to complete the point that I just wanted to take your Honours.
HAYNE J: You must first catch your share capital account, and that can be more than one account?
MR SULLIVAN: Yes.
HAYNE J: The book entry is made. It is not unimportant, but why is it determinate?
MR SULLIVAN: That is what we submit, your Honour. If I can just complete the point in relation to paragraph (e); it is a short one. The expression “debited against” can be contrasted with paragraph (e)(iii) of the definition of “dividend”, which refers to an amount which is:
debited to the company’s share capital account –
All that we do in pointing to that is to stress the apparently wider contemplation of “debited against” versus “debited to”, but I will not belabour that point any further, your Honours.
GAGELER J: But it is not debited against an account. It is debited against amounts standing to the credit of an account.
MR SULLIVAN: Yes. Certainly, that is so, your Honour – debited against the amount standing to the credit of.
GAGELER J: Which distinguishes it from paragraph (e) of the definition of “dividend”.
MR SULLIVAN: Yes. Your Honours, just backtracking over matters that were in the plan that I have not come to ‑ ‑ ‑
HAYNE J: You want to go back into the lion’s den and get your hat, do you, Mr Sullivan?
FRENCH CJ: You are relying on the text, are you not?
MR SULLIVAN: I am, your Honour.
FRENCH CJ: Is there anything more to be said, from your point of view?
MR SULLIVAN: Not a great deal. I certainly would not want to tax Justice Hayne.
HAYNE J: It is not a question of taxing me.
MR SULLIVAN: Perhaps I should just take your Honours briefly to some factual material in the appeal book, it will only be brief. We apprehend that the respondent contests the proposition that we put in our submissions that there was a return of $1 billion of share capital. I should just take your Honours to some of the evidentiary material, briefly, to deal with that. If I can commence just with a brief ‑ ‑ ‑
FRENCH CJ: Well, rather than evidentiary material, are there findings of fact?
MR SULLIVAN: There are, your Honour.
FRENCH CJ: Well, why do we not go ‑ ‑ ‑
MR SULLIVAN: At page 428 in the judgment of the primary judge at paragraph 70, beginning at about line 48. His Honour said:
The consequence of the share buy‑back was that the shares bought by Crown from the Taxpayer were cancelled and capital was returned to the Taxpayer. The cancelled shares were part of the share capital of Crown. Some record must be made by Crown of the fact that part of its share capital was returned –
So, there is the finding about return of capital, and at page 461 in the Full Court at paragraph 42, the Full Court said:
In a company law sense, it was correct for the primary judge to conclude . . . that the consequence of the share buy‑back resulted in a return of capital to CMH and a related reduction in Crown’s share capital.
Now, the findings of the primary ‑ ‑ ‑
HAYNE J: What is the strength of the next sentence:
Yet whether or not s 159GZZZP applied was not to be answered by the reaching of such a conclusion.
What is wrapped up in that proposition?
MR SULLIVAN: That was, your Honour, at the point in the middle of the reasoning about the anomaly on the prior page and the Full Court’s reasoning which led to a reading down of the definition of “share capital account” in 6D(1)(a), and that reasoning I have taken your Honours to at paragraphs 42 and 43. So, the statement that 159GZZZP was not to be – the application of it was not to be answered by that conclusion, appears to be a reference to the Full Court’s reasoning that it engaged in by reference to the operation of the tainting provisions.
HAYNE J: It seems to be, perhaps, connected with the conclusion in the middle of paragraph 40 which is a conclusion which seems depends upon identification of a singular count as the relevant account for tax purposes.
MR SULLIVAN: Yes, your Honour. The findings of fact in relation to the way in which the entries were made are set out in the judgment of the primary judge, and they were accepted by the Full Court, at page 414 of the appeal book. It is at paragraph 20 and 21, and if I can take your Honours to the pages. In paragraph 20, it commences:
Prior to 28 June 2002, the following accounts have been established in Crown’s general ledger:
· Shareholders Equity Account, number 310200 –
Now, that is at appeal book page 371. Your Honours will see at page 369 the description:
The following document is
Report showing entries in Shareholders Equity account of Crown for year ended 30 June 2002 –
Your Honours will see at page 371 entries described in the left-hand column as “Shareholders Equity” and the total closing balance on the bottom of the right-hand corner was an amount of some $2.4 billion as at the end of the year. It is not in dispute, your Honours, that that was a share capital account coming within section 6D(1)(a). Then, going back to page 414 of the primary judge, his Honour noted at about line 25:
On 28 June 2002, Share Buy‑Back Reserve Account, number 310250, was established in Crown’s general ledger.
Now, if I can take your Honours to page 374 of the appeal book, your Honours will see there the share buy‑back account for the 2002 year. The entry reads, from the left-hand side, “Share Buyback Reserve”, and then below that there is a reference to, “Share Buyback 28/6/02”, and going across a few columns there is a column headed “Debit” and there is an amount of $1 billion shown under the debit heading. There are not any credit entries, and there is a total closing balance of $1 billion shown at the foot of the right-hand column on the page and that is a debit balance of $1 billion.
Your Honours, there then follow copies of the share buy‑back reserve account out to the 2009 year and your Honours will see, looking at the pages from 375 through to 381, that the account remained in the same state until the end of 2009. So there were no further entries to the account, no credit entries and no further debit entries. If I can next take your Honours to some of the transaction documents, first at page ‑ ‑ ‑
HAYNE J: Establish what?
MR SULLIVAN: The references to - of confirmation that the transaction resulted in a return of capital.
GAGELER J: For what purpose?
MR SULLIVAN: Because while it was found by the primary judge and accepted by the Full Court that $1 billion of capital was returned, we apprehend that that is now disputed by the respondent. That seems to appear from paragraph 13(b) of the respondent’s submissions.
GAGELER J: You have taken us to the shareholder’s equity account which at the relevant date stood in credit at $2.4 billion, then you took us to the reserve account which at the relevant date stood in debit at $1 billion. Should you not then take us to the financial statements at page 160 and show us that the amount shown at that date for contributed equity was the difference between those two amounts?
MR SULLIVAN: Yes, your Honour.
GAGELER J: Do you need to go further?
MR SULLIVAN: If I can just briefly take your Honour to one other document first, just in chronological sequence. The first document is the “Statutory Notice to Shareholders” about the buy‑back, which is at appeal book page 252 to 254 and, in particular, at page 253 there is the statement at about line 11, 12:
The proposed share buy‑back will result in the return of capital to PBL which is in excess of the needs of the Company.
At about line 19:
The proposed share buy‑back will lead to:
(a) a reduction in the share capital of the Company –
On page 254 at line 20:
The main advantage for the Company, its directors and shareholders in authorising the Company to buy back the Shares is, in the directors’ opinion, the return of share capital which is excess to the needs of the Company –
Then, taking up your Honour Justice Gageler’s invitation, if I can take your Honours to the financial report for the 2002 year at page 148 of the appeal book. The “Annual Report” commences at page 139, and if I can take your Honours to the “Statement of Financial Position” at page 148 and at the foot of the page at about line 45 under the heading “Shareholders’ Equity”. Your Honours will see there is a reference to “Contributed Equity” and the next column across contains a reference to note 16 which we will go to in a moment. Ignore the next two columns, they state a consolidated position.
The last two columns on the right are headed “The Company” and the far right column relates to the 2001 year and the second‑last column relates to the 2002 year. Your Honours will see that “Contributed Equity” is shown for the 2001 year of being $2.4 billion, and for the 2002 year $1.4 billion. The difference is exactly $1 billion.
Reserves are shown as unchanged between the two years –
$123,060. So the share buy‑back reserve has not been taken into account as a reserve for those purposes. Then there are figures at the bottom of the page shown for total shareholders’ equity. Then if I can take your Honours to note 16, which is referred to in the second column, in relation to shareholders’ equity. That is at page 160. Note 16 states, in paragraph (a):
Issued and Paid Up Capital Ordinary shares fully paid
Again, the last two columns on the right are for the company. It shows a reduction from 2.4 billion to 1.4 billion, described as a change in paid up capital. On the next page, 161:
Movement in shares on issue –
FRENCH CJ: What is the point being made at 13(b), other than that something flowing from the fact that buy‑back was completed by way of an assignment debt – 13(b) of the respondent’s submissions?
MR SULLIVAN: Yes. We apprehended from that comment, your Honour, my learned friend will either – if I am wrong about this, correct me – but we apprehended that it was being put in issue as to whether or not the finding was correct, that $1billion of share capital was returned. The matter is not the subject of a notice of contention.
FRENCH CJ: It is disputed that it was common ground that the buy‑back was funded entirely out of share capital. That is the point that is being made.
MR SULLIVAN: Yes. That was the finding of the primary judge. It was accepted by the Full Court. These are the documents which, in our submission, your Honours, confirm that there was a $1 billion reduction in the share capital and the amount distributed of $1 billion represented a return of share capital.
The only other material that I would refer your Honours to – I will not tax your Honours by taking you to it at the moment – are the audit report by the auditor, Mr Long, at page 123 of the appeal book. That contains confirmation to the same effect. There is a table there showing a reduction in the share capital. There is evidence by Mr Long in cross‑examination at pages 78 and 79 of the appeal book.
In our submission, your Honours, that material confirms that the consequence of the buy‑back was that $1 billion of share capital was returned to the respondent and it resulted in a $1 billion reduction in the share capital of Crown.
HAYNE J: So much follows inevitably, does it not, from there being a buy‑back? It is simply the nature of a buy‑back. It is a form of reduction of capital.
MR SULLIVAN: In theory, your Honour, it would seem that it may be possible these days to effect a buy‑back purely out of profits without debiting share capital at all.
HAYNE J: You have still got to – in this case it was capital in excess of company’s needs?
MR SULLIVAN: Yes. That is certainly not this case, but it would seem theoretically possible.
FRENCH CJ: It was paid out of an asset of the company – that is to say, a debt is owed to it ‑ ‑ ‑
MR SULLIVAN: If it was debited, for example, to a profit account ‑ ‑ ‑
FRENCH CJ: ‑ ‑ ‑ by way of assignment.
MR SULLIVAN: If you had a profit reserve and you just made a debit to the profit reserve in respect of the share buy‑back.
GAGELER J: This is the very question to which 159GZZZP is directed, is it not?
MR SULLIVAN: Yes, your Honour.
GAGELER J: So we get back to the statutory language, do we not?
MR SULLIVAN: Yes. In our submission, it is clear what – I may just be repeating myself. Your Honour, we would say, is perfectly correct, with respect. It does come back to the statutory language. We have put our construction of the statutory language. It is consistent with the primary judge’s view, but the Full Court took a different view.
There is some material that I am not sure I should take your Honours to. The tainting provisions which preoccupied the Full Court have a level of some complexity. At its simplest, our submissions are that the Full Court fell into error in relation to the tainting provisions in two respects, firstly, by citing that anomaly and looking for a way to overcome it when all that the anomaly indicated was the ordinary consequence of the tainting provisions, namely, that if you transfer profits to a share capital account, it is tainted.
The second aspect of the tainting provisions in respect of which we submit that the Full Court went wrong was that material that I took your Honours to in relation to the reasoning about 6D(1)(a) being driven by the Full Court’s understanding of the purpose of the 1999 amendments to address the delayed crediting of the share capital account.
If I could direct your Honours’ attention, without reading it – if I could just simply direct your Honours’ attention to the explanatory memorandum comments in respect of the 1999 amendments that are at tab 16 of the folder of authorities. It is at the page numbered 9 at the bottom of the page and paragraphs 1.23 to 1.27. That was material that was in fact quoted by the Full Court in its judgment. It is our respectful submission that the Full Court misunderstood in one respect the 1999 amendments, and that was what led to the inappropriately narrow view that the Full Court took about the construction of 6D(1)(a).
In particular, paragraph 1.26 was a paragraph that the Full Court relied upon but it misunderstood, in our submission, that paragraph because when one looks at 6D(1)(a) and (1)(b) it is clear that 6D(1)(b), the definition of “share capital account”, is what paragraph 1.26 is speaking about. Section 6D(1)(b) was the provision directed at dealing with delayed crediting of share capital account. All of these paragraphs follow from the comment in paragraph 1.23:
the delayed crediting of share capital to the share capital account results in tainting the account.
It then talks about inconsistency with prior provisions in relation to share premium accounts. Paragraph 1.25 talks about:
To ensure that the delayed crediting . . . does not inappropriately taint –
Then you get to 1.26, and 1.26 is a reference to what is done by 6D(1)(b), but what the Full Court, in our submission, erroneously did was use that material to read down 6D(1)(a). In our submission, that is where the Full Court fell into error. I will not tax your Honours further with tainting, unless your Honours would be assisted by me dealing with it further. It is a matter which, in our submission, is not at the centre of this appeal, but it has been dragged in as a basis for, in our submission, inappropriately arriving at certain constructions.
Your Honours, there are just two further points that I should deal with. Firstly, there is a point made in the respondent’s submissions about 159GZZZP deeming the dividend to be out of profits, and if I can take your Honours back to GZZZP at tab 1.
FRENCH CJ: What part of the respondent’s submissions are you referring to, by the way?
MR SULLIVAN: Paragraph 58.
FRENCH CJ: Thank you.
MR SULLIVAN: Now, the Full Court also, at paragraph 44 of its reasons at page 462 of the appeal book, saw some significance in the fact that GZZZP not only deemed an amount to be a dividend but also deemed it to be paid out of profits. If I can take your Honours to page 462. At about line 10 their Honours said:
Yet further, it is to be recalled that s 159GZZZP(1) is a deeming provision (“is taken to be”). When s 159GZZZP(1) is engaged, the differential amount . . . is, inter alios, deemed to be a dividend paid “out of profits derived by a company”: s 159GZZZP(1)(d). It would be antithetical to that feature of the provision to construe s 159GZZZP as engaged only to the extent to which an off‑market buy‑back was in fact paid out of company profits yet that was the submission made on behalf of the Commissioner –
Now, our first observation would be in the Full Court describing it as being antithetical, that suggestion, we would submit, may be seen to lack some force when it is appreciated that 159GZZZP also deems the dividend to be paid to the seller as shareholder when clearly that must be the case. Your Honours, we would submit that the reason for the deeming of those matters is that it is now the case that routinely all provisions of the Act which deem amounts to be dividends, also deem them to be paid to the recipient as a shareholder and to be paid out of profits.
That has become standard in respect of such deeming provisions, hence the Full Court held in Commissioner of Taxation v Comber, which is at tab 9 of the folder of the authorities, that the failure of the former section 109 to deem those matters had the consequence that the amount in that case was not assessable pursuant to section 44(1). So, to avoid the possibility of that result arising, provisions which deem amounts to be dividends routinely deem them to be profits and paid to the shareholder.
There is another reason as well which, we would submit, was overlooked by the Full Court in that comment. It must be remembered that the amount received by a shareholder is received pursuant to a buy‑back. It is consideration for the disposal of the shares. Now, I did not take your Honours to those cases about the history of dividends, but Blakely’s Case, which is in the folder of authorities at tab 6, was an informal liquidation case where the shareholders just appropriated the assets and swanned off with them. The Commissioner assessed them on the basis that they had received dividends, but the finding of the court in respect of informal liquidation of that type at that time was that it did not come within the definition of dividend because it was a capital receipt and the investment in the company went out of existence.
It was Blakely and following that a similar approach taken in Uther’s Case which led to amendments and ultimately different view of the effect of the definition “dividend” was taken by this Court in Slater Holdings. But the point emerging out of all that, in relation to the argument about deeming it to be out of profits, is that in circumstances where the consideration is paid to a shareholder as consideration for disposal of the share, there would be, absent that deeming, at least the possibility of a Blakely type argument open to a shareholder that what they got was a capital receipt in respect of the disposal of the share, regardless of whether the payment was out of profits or anything else.
So, one can see that for those two reasons, firstly the routine nature of the deeming to be out of profits and to be paid to the shareholder as such, and also the possibility of eliminating a resuscitation of Blakely’s Case, that that is inappropriate deeming, and that the ‑ ‑ ‑
GAGELER J: Sorry, is this an explanation as to why the words are in section 159GZZZP(1)(d)?
MR SULLIVAN: Yes, your Honour. I am sorry it has taken so long.
GAGELER J: How does that assist?
MR SULLIVAN: The point was made by the Full Court that they appeared to us to base the, on the deeming, the proposition that it is there because it may operate in respect to share capital. Our submission is that that was not the case, that the legislative purpose of 159GZZZP was also clear, that it was only intended to deem amounts that are funded out of profits to be dividends, not returns of capital. But, the Full Court used the deeming out of profits in a way in which, in our submission, it should not have been used.
GAGELER J: Look, on your own case you could have a tainted share capital account, could you not?
MR SULLIVAN: Yes. If it was a tainted share capital account at that time then it would have been different consequences, but it was not in this case. It is a possibility we do not have to wrestle with here. The final point that I should make, your Honours, arises again from the respondent’s submissions. At paragraph 21, the respondent appears to suggest that there is some significance in the fact that the transaction was not completed until 6 August 2002. That is that it was completed in the 2003 year.
Now, apprehending that some point about the time at which a deemed dividend might be taken, we would observe that the respondent prepared its income tax return on the basis that it received a dividend in the year ended 30 June 2002. It prepared its 2002 and also its 2003 accounts on the same basis, and there were in evidence the 2003 accounts and the annual report and consistently with the material that I took your Honours to in the 2002 accounts, the 2003 accounts continued to refer to the buy‑back transaction as having been completed in the 2002 year. I can hand that up if it would be of assistance to your Honours, but I do not want to unnecessarily be flitting pieces of paper around.
The Commissioner issued an amended assessment on the represented state of affairs but treating the dividend as a return of capital. The respondent did not object on the basis that the return of capital occurred in the 2003 year and, in that regard, if I can direct your Honours’ attention to page 18 of the appeal book where the notice of objection is set out.
It is the material at paragraphs E) and F) on page 18 that limit the issues being put in the objection to those which we have been discussing
today. There is no timing issue about 2003 versus 2002 year put there. The consequence of section 14ZZO of the Taxation Administration Act is that without the leave of the court, the taxpayer is confined to the grounds raised in its notice of objection.
The respondent did not conduct the trial on the basis that the dividend or return of capital was received in the 2003 year, and that appears from the appeal statement which is in the appeal book at pages 38 and 39. The respondent did not allege as a ground of appeal in the Full Court that the trial judge should have approached the case on the basis that there was a return of capital otherwise than in the 2002 year, and neither the primary judge nor the Full Court identified any difficulty in treating the transaction as effective in relation to the 2002 year, as the respondent had returned it. Finally, there is no cross appeal or notice of contention in these proceeding in relation to that matter.
The other matter that I would – in terms of the legislation to which I direct your Honours’ attention – is tab 1 of the folder of authorities going back to 159GZZZP(1) after paragraph (b):
is taken to be a dividend paid by the company:
. . .
(e) on the day the buy‑back occurs.
Now, the respondent has, for all purposes, treated the buy‑back as having occurred on 28 June 2002 in the 2002 year. In our submission, that may well be the correct interpretation but, in any event, it is too late now for the respondent to advance a different contention.
Your Honours, for those reasons, it is submitted that the result arrived at by the Full Court, being a deeming of a dividend in respect of a return of paid-up capital, was inconsistent with the legislative purpose underlying section 159GZZZP, and also antithetical to the general legislative intent that returns of share capital should not give rise to dividends. For the reasons we have advanced, we submit that the appeal should be allowed.
FRENCH CJ: Thank you, Mr Sullivan. Yes, Mr Bloom.
MR BLOOM: Thank you, your Honour. Your Honour, the Tax Act provisions with which the Court is concerned were enacted in response or reaction to various company law provisions. Tainting, for instance, was a tax reaction to the Corporations Law amendment in section 254S which permitted profits to be transferred to the share capital account. But the tainting provisions which came in in 160ARDM of the Tax Act was found to be overkill, and 6D was brought in to correct that overkill, and was actually made retrospective to 1998, so that 6D took effect as if it were in the Act when these other provisions came in.
Your Honours, the timing point we take is not a question of what is the correct year of assessment. Can I ask your Honours to go to the Share Buy-Back Agreement, to which I do not think my learned friend took your Honours. It is at 201 of the appeal book, and your Honours see it is made on 28 June. About point 8 of the page, there is a definition of “completion date”. That means:
1 August 2002 or such other date agreed in writing –
Then clause 5.1 in relation to completion says:
Completion must take place . . . on the Completion Date –
In fact, as your Honours know, completion took place on 6 August, which was in the 2003 tax year. Can I ask your Honours to go to section 257H of the Corporations Law as it stood in 2002?
HAYNE J: Sorry, which provision?
MR BLOOM: Section 257H of the Corporations Law – number 7, apparently, your Honours, on our original list. Section 257H:
(1)Once a company has entered into an agreement to buy back shares, all rights attaching to the shares are suspended. The suspension is lifted if the agreement is terminated.
That last sentence is a new sentence, not in previous provisions. Then:
(2)A company must not dispose of shares it buys back. An agreement entered into in contravention of this subsection is void.
(3)Immediately after the registration of the transfer to the company of the shares brought back, the shares are cancelled.
Now, your Honours, the Company Law Review Act 1998 which introduced section 257H commenced on 1 July 1998, immediately after the Taxation Laws Amendment (Company Law Review) Act of 1998 inserted section 159GZZZP in the form with which the Court is concerned. We will come back to the provisions of 257H and accompanying provisions, but I need to take your Honours to the predecessors. The first Corporations Law provisions dealing with share buy‑backs were in subdivision P of Part IV of Division 3A of the Corporations Law, taking effect on 1 November 1989. There behind tab 2 of the supplementary authorities. Can I take your Honours please to 133PA:
Where a company buys back shares, all rights attached to the shares are suspended:
(a)so long as the agreement constituting the buy‑backs is in effect; and
(b)if the agreement is discharged by performance – until the shares are transferred to the company pursuant to the agreement.
Subdivision PB dealt with inability to dispose. Subdivision PC, which is also not now in the current provisions, said this:
(1)Immediately after a transfer to a company of shares in the company is registered by the company:
(a)The shares are cancelled; and
(b)All rights attached to the shares are extinguished;
by force of this subsection.
Then, in a provision which no longer appears:
(2)Where shares are cancelled by force of subsection (1), the company’s issued share capital is reduced by the nominal value of the shares, but the company’s nominal share capital is not affected.
That is no longer there. Nor is 133PD any longer in the Act. That applied to require that the buy‑back premium, that is, the amount by which the buy‑back consideration exceeded the nominal – not paid up value but the nominal value of the shares had to be debited to two certain accounts. Firstly, share premium to the extent to which it was available and, once it was exhausted, distributable profits. So, the funds that were effectively used for a buy‑back under the original provisions, were share capital, because share capital was automatically reduced to the extent of nominal value, share premium and profits to the extent to which they existed.
HAYNE J: Well, all of that followed from notions of maintenance of capital that were then part of the Act, the Corporations Act.
MR BLOOM: Yes, your Honour. Two things happened, your Honour. Not only did the 1998 Act take all of that away, par value and merge share premium and all those sorts of things, but in 1995 there was concern that the buy‑back provisions were themselves too complicated and it turns out that the government took the view that it should not place restrictions on the funds that could be used for buy‑backs because it was deterring people from actually engaging in that bit of commerce.
HAYNE J: What is the end point that you are edging us towards, Mr Bloom, in this respect?
MR BLOOM: That under the current provisions, your Honour, there is not automatically a reduction in paid‑up capital as a consequence of the buy‑back, and that a buy‑back may proceed involving no return of paid‑up capital. We see what Justice Emmett, in particular, decided as not being a decision based on fact but on a misapprehension of the law in that regard.
CRENNAN J: Well, just putting to one side for a moment the various ways in which you wish to characterise the share buy‑back reserve account, am I wrong in the assumption that there is no dispute that the capital was in fact reduced at some point in time by $1 billion as a result of the transaction?
MR BLOOM: There is a dispute to that, but only in this sense. We say that equity was reduced and the accounts that were prepared after completion of the buy‑back and after the end of the year of income, that is the financial statements, talk about these changes in equity. Equity, of course, is not limited to share capital, but includes all of the things that go to assets and liabilities.
Now, there was definitely a change in the equity because the reserve account itself was part of shareholders’ equity, but there was not a reduction in capital and when the auditor said there was he too, we think, was proceeding under the same misapprehension, that there automatically was or had to be a reduction in capital.
HAYNE J: Once the consideration was satisfied what then is the state of accounts?
MR BLOOM: Then it was open to the company, we say, to transfer into the credit of the share buy‑back reserve whatever aspect of its equity it wished, including retained earnings. The only difficulty is, of course, that if it were to do that now it will take Toll share capital account if the Commissioner is right. If the Commissioner is wrong then tomorrow it could transfer in retained earnings, any other aspect of its equity.
HAYNE J: Does not the state of accounts recorded at page 414 of the appeal book, paragraphs 20 and 21, do no more than reflect the fact that balance day fell in the middle of the event?
MR BLOOM: Yes.
HAYNE J: And you say that is legally significant and important. I understand that branch of the argument, but the state of accounts reflected in 20 and 21 is a state of accounts that is driven by taking a snapshot as at balance date.
MR BLOOM: Yes. Well, as at 30 June being the tax balance day.
HAYNE J: Yes and may tend to obscure the undeniable fact that happens with any buy‑back that the company is basically dealing with itself and its shareholder.
MR BLOOM: Yes, and here it is 100 per cent shareholder.
HAYNE J: Yes.
MR BLOOM: So the odds are pretty much in favour of it going ahead, yes, your Honour.
HAYNE J: But slightly. But the state of accounts is not to be understood as reflecting the position that would obtain if the company had sold its asset, Blackacre, to AB, a third party. This is an unusual transaction in the sense that the company in a buy‑back is dealing with its capital.
MR BLOOM: It does not have to, of course, deal with its capital any more, that is the other ‑ ‑ ‑
HAYNE J: Well it is cancelling its shares. It is buying‑back shares. In that sense, at least, it is on any view dealing in its capital, is it not?
MR BLOOM: Dealing in its nominal but not necessarily paid‑up capital and that is the point. Under the current provisions you do not have to reduce paid‑up capital and that is an important matter, in our respectful submission – an important result because it is driven by the desire that people will do more buy‑backs, the 1995 simplification proposal and then the amendments in 1998 to abolish the maintenance of capital.
HAYNE J: You told us what good law this was, Mr Bloom. We have been taken to all of those explanatory papers.
MR BLOOM: Your Honour has. If your Honours please.
CRENNAN J: I must say I am having trouble with the idea that all the possibilities you talk about, about what might happen in relation to that reserve account does not really face, does it, the fact that at the completion of this buy‑back the amount was applied in reduction of capital.
MR BLOOM: Not in the accounts.
CRENNAN J: In other word you are, in a way, asking us to prefer the ambiguity of the reserve account to the clarity of the financial statements.
MR BLOOM: There is no reason why the reserve account cannot be left there. Because it is taken into account in shareholders’ equity as a liability,
it presents a true position to the shareholders and to people dealing with the company. The auditor said as much in his evidence which the trial judge referred to in paragraph 52, and I simply give your Honours a reference to it. But he said, I could have just put the share buy-back reserve in the accounts that I prepared and left it like that. So, nothing has to be credited in fact because shareholders’ equity will still represent the true position.
GAGELER J: The true position of what?
MR BLOOM: The true position of the company’s assets and liabilities and the difference between them.
GAGELER J: The true position of its share capital?
MR BLOOM: Share capital does not matter anymore. It is not a guarantee fund, your Honour recalls. Its significance is quite diminished.
HAYNE J: Not eliminated, I think, Mr Bloom, not eliminated.
MR BLOOM: Not eliminated, but as your Honours pointed out, in Songs of Gwalia people these days look more to assets minus liabilities, and this share buy-back reserve comes in as a liability and reduces the equity. So, you do not have to say I have got this particular amount of paid-up capital and you do not have to credit anything to the account. Nothing mandates that. But more particularly, the legislation, the corporate legislation now does not mandate that there is an actual reduction in the paid-up capital as a consequence of a share buy-back. It recognises that there may be share buy‑backs where there is no reduction of capital.
HAYNE J: Simply, that in the hands of the uninformed third party the notes of the financial statements at page 160 do present a little difficulty, do they not?
MR BLOOM: They do, and not just the uninformed party but the rest of us, if your Honours please.
FRENCH CJ: Yes, thank you, Mr Bloom. Yes, Mr Sullivan.
MR SULLIVAN: Thank you, your Honour. Your Honours, can I deal first with the suggestion that the accounts were in error. The position is that the auditor, Mr Long gave evidence. If it was to be suggested that in the course of this case that the accounts were in some way in error then, with respect, that should have been put to Mr Long when he gave evidence at first instance. It was not put to him and, in our submission, it is a contention that it is not open to the respondent to be raising now at this stage of the case for, I might say, the first time.
With respect to the auditor, can I take your Honours to page 123 of the appeal book, and this goes to my learned friend’s point about there being a reduction only in shareholders’ equity, and I think my learned friend took your Honours in the audit report to page 129, but there is material at page 123 that I referred your Honours to without taking you to earlier on, and it clarifies the particular nature of the reduction in shareholders’ equity. If your Honours see in the right hand column, “Statement of Financial Position”, the fourth line shows the total of “Shareholder’s Equity”, but the first line shows “Share capital”, and it shows the reduction of $1 billion in the share capital in the 2002 year. The other elements of shareholders’ equity are shown as “Reserves” and “Retained losses”.
So, with respect, that is evidence that makes it abundantly clear that yes, there was a reduction in shareholders’ equity, and it is confirmed by audited accounts, which it was not suggested to the auditor were incorrect, that the element of shareholders’ equity reduced by $1 billion was share capital. Now, as to the debiting, can I take your Honours to page 409 of the appeal book? On the last line of the page, the primary judge is referring to the provisions of the Corporations Act, and in the last sentence beginning on the last line, he said:
Under s 286, a company must keep written financial records that correctly record and explain its transactions and financial position and performance, and would enable true and fair financial statements to be prepared and audited.
His Honour then said, at page 428, in paragraph 70, the last three lines on the page:
The cancelled shares were part of the share capital of Crown. Some record must be made –
clearly, his Honour here is referring back to the requirements of section 286 –
by Crown of the fact that part of its share capital was returned to the Taxpayer. The sum of $1,000,000,000 was capital returned –
et cetera. So, the position is that this making of the debit was, in the view of the primary judge, not a matter in respect of which the respondent was at large – the respondent was making the debit in response to the requirement under section 286 of the Corporations Act and the debit was, in that context, and viewed against the whole of the evidence, clearly one that was made to reflect a return of $1 billion of paid‑up capital. The case that is really put by the respondent is that it was a debit against nothing. It is the appellant’s submission that it was not, in the context and having regard to the evidence, a debit against nothing.
My learned friend put a point that, as at 28 June, there was no compulsion on the respondent to use share capital. Well, your Honours will have seen the accounts and seen that there really is not anything else that could have satisfied the obligation to repay $1 billion. But in any event we would take issue with the lack of compulsion.
Can I take your Honours back, very briefly, to a document I took you to before lunch at page 252 or page 253? This is the statutory notice to shareholders, as the heading at page 252 indicates under section 257D of the Corporations Act. In paragraphs 4 and 5 of the statutory notice, it is made clear that the buy‑back will result in a return of capital. Then if I can take your Honours to page 212. At page 212 we have the written resolution by the sole member of the company under section 249B of the Corporations Act and the resolution as to the effect:
That the Share Buy‑Back Agreement between the Company and the sole member of the Company, Publishing and Broadcasting Limited, in the form annexed to the Statutory Notice to Shareholders be and is approved and that the Company is authorised to enter into the Share Buy‑Back Agreement.
In our submission, once that statutory notice to shareholders was approved by the resolution of the sole shareholder then the position is that there was a compulsion to go ahead with the buy‑back consistently with the terms of the statutory notice.
Now, with respect to my learned friend’s point to the effect of reliance upon the Corporations Law to contend that a debit was not possible as at 28 June, in our submission, this is a point which is misconceived insofar as it relies on Corporations Law provisions. I took your Honours before lunch briefly to – and if I can take you back to – 159GZZZP, which is at tab 1 of the authorities, subsection (1), paragraph (e), which is the timing provision. It provides that the deemed dividend is on the day the buy‑back occurs.
Now, my learned friend has referred in his comments to your Honours to the capital gains tax timing provision in respect of the disposal, section 104‑10(3)(a). For capital gains tax the Assessment Act does not fix upon the date of completion; it fixes upon the date of agreement. This is just an example of the way in which the Income Tax Assessment Act goes about doing things cussedly, in its own preferred manner. In our submission, paragraph (e) is another example. It is the Assessment Act fixing on its own preferred timing for taxation purposes, in this case, for the purposes of a buy‑back, and the time fixed upon is the day when the buy‑back occurs.
If this issue had been raised below, there might have been evidence and argument about when the buy‑back occurred. Can I simply direct your Honours to one statement about that matter, going back to the accounts? It is at page 161 of the appeal book, note 16 to the accounts. Paragraph (b) of note 16 contains the statement after the table saying:
On 28 June 2002, 840,336,000 ordinary shares . . . were bought back by Crown Limited –
So there is a statement there to the effect that the buy‑back occurred on 28 June. The accounting entries were consistent with the representation that the buy‑back occurred on 28 June. The accounting reporting here was consistent with the statement that the buy‑back occurred on 28 June. The tax return was consistent with that contention. The appeal statement in the proceedings was consistent with that contention. In the notice of appeal to the Full Court, which is at page 436, it was not contended to the contrary of that. The matter was not considered by the Full Court and, finally, there is no notice of contention here to the effect that the buy‑back occurred on some date other than 28 June.
Taking all of those matters into account, it is our submission that at this stage of the proceedings it is appropriate for the Court to treat the matter as having proceeded on the basis of a concession at all times up until today that the buy‑back occurred on 28 June, and the respondent is bound by its admissions in that regard.
Again, so far as the argument by my learned friend is based upon Corporations Act provisions, those provisions, in our submission, must give way to 159GZZZP(1)(e). My learned friend suggested, in effect, that things all even out at the end of the day and he took your Honours to some material about capital losses and GZZZQ. May I take your Honours to page 8 of the appeal book.
I will come in a moment to the capital loss, but the capital loss is a little more subtle than it might have seemed from my learned friend’s comments. As your Honours will see at page 8 of the appeal book, this is the adjustment sheet. The amount included in assessable income there is a net capital gain of $402 million. So, the assessment is on the basis of eliminating a $1 billion dividend and then what was left was a net capital gain of $402 million.
Now, so far as GZZZQ is concerned and its addressing of a loss, GZZZQ is a provision that can be a little bit difficult to get your mind around, but it is a provision with the disposal consideration in relation to the shares. That is, once you dispose of the shares, it is necessary to work out a gain or loss for either capital gains tax or revenue account purposes. It provides, prima facie, that the shareholder is taken to have received on disposal an amount equal to the buy-back purchase price.
That could, of course, lead to an unjust result because if the purchase price is also deemed to be a dividend included in assessable income the taxpayer might assert that there had been double taxation, so it is in that regard that GZZZQ provides for the reduction amount in respect of the disposal consideration. So this is a reduction amount to bring down the disposal consideration where the buy‑back sale price has been treated as a dividend. GZZZQ(4) deals with the calculation of the reduction amount. It says first identify the amount of the dividend, then identify how much of it is included in assessable income and that much is the reduction amount.
So in this case the dividend was $1.4 billion, the amount included in assessable income on the Commission’s contention was $1.4 billion, so the reduction amount was $1.4 billion, so the net result is for disposal purposes you get a deemed disposal consideration of zero. That is what may give rise to a capital loss as opposed to the adjustment sheet capital gain of $402 million if there was no dividend. So what GZZZQ(8) does, which my learned friend took you to, is to say, well if you get a capital loss because you have had a reduction amount reducing the sale price then we’ll illuminate that capital loss.
So, it is in that context that your Honours should understand that there has been an elimination of capital losses. Just to clarify, things do not all even‑out in the wash, there is a $402 million capital gain here and the operation of ZZQ in relation to the elimination of capital losses is only in that context that I have just described. Now, with respect to section 6D, my learned friend suggested that the primary judge relied on the provisions of section 6D to come to his conclusions. With respect, we think that that is not really an appropriate characterisation of the primary judge’s reasoning.
At paragraph 70 of his Honour’s reasoning at page 428 of the appeal book, and I took your Honours to this this morning, his Honour’s reasoning in relation to the conclusion that the share buy‑back reserve was a share capital account was really based upon his Honour’s view that that was clearly a recording made in respect of a return of share capital, that is evident in the last four lines on page 428 and so far as section 6D is concerned, all that you can get out of his Honour’s reasoning is that he was of the view that it was a share capital account within the meaning of section 6D(1)(a) because it was an account which the company kept of its share capital.
Now, with respect to section 6D, my learned friend again put a proposition in relation to the delayed crediting argument and the one share capital account that, we would submit, was based upon a misconception. In this regard, the misconception is section 1446 of the Corporations Act. My learned friend suggested that the effect of section 1446 was to create – I think he called it a ‑ ‑ ‑
CRENNAN J: An amalgamation of accounts.
MR SULLIVAN: Yes, a single or amalgamated share capital account. But, if your Honours look at the wording of section 1446 which is at tab 4 of my learned friend’s supplementary authorities, it says that:
Immediately after commencement, any amount standing to the credit of the company’s share premium account and capital redemption reserve becomes part of the company’s share capital.
It does not say that there is some amalgamated share capital account. It just says that those two other accounts become part of share capital. Now, there may be, in respect of any company, a range or a collection of different share capital accounts. Section 1446 did not merge them into a single composite share capital account. In that regard, we submit, that it was not the case that the language of section 6D(1)(a), in referring to an account that the company should keep of its share capital was, somehow, linked to a contended amalgamation effect of section 1446.
Section 6D(1)(a), in referring to “an account which the company keeps of its share capital”, in our submission, was language which was there to pick up whatever collection or variety of share capital accounts a company might have had at the time when the provision first came into operation or which it might subsequently have created. My learned friend took your Honours to the 1999 explanatory memorandum to the No 7 amending Act and I merely briefly reprise the comments that I made to your Honours this morning, that the paragraph there ‑ ‑ ‑
HAYNE J: We did listen I think, Mr Sullivan. We did listen.
MR SULLIVAN: I apologise, your Honour. I certainly was not inferring to the contrary. Finally, insofar as anomalies are concerned, in our submission, there is one glaring anomaly which is left here on the basis of the decision of the Full Court, and that is that if your Honours look to the definition of “paid‑up share capital” which is at tab 1 of our folder of authorities, it is at page number 13 in the bottom right hand corner in tab 1:
paid‑up share capital of a company means the amount standing to the credit of the company’s share capital account reduced by:
(a)the amount (if any) that represents amount unpaid on shares; and
(b)the tainting amount (if any).
Now, the problem or the true anomaly that is left here is that by virtue of that definition, if the share buy-back reserve is not treated as the share capital account, then the respondent Crown, having repaid $1 billion of share capital to its shareholders, still has for taxation purposes, by virtue of that definition, paid up share capital of $2.4 billion. That has consequences potentially for other provisions of the Act that may ultimately depend upon ascertaining the amount of share capital. That, in our submission, is the true anomaly that is left in this case, not the anomaly which was identified by the Full Court, which we submit is not a true anomaly at all. If it please the Court.
FRENCH CJ: Thank you, Mr Sullivan. The Court will reserve its decision. The Court adjourns until 10.15 am tomorrow.
AT 3.24 PM THE MATTER WAS ADJOURNED
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