Commissioner of Taxation v Devuba Pty Ltd
[2015] FCAFC 168
•30 November 2015
FEDERAL COURT OF AUSTRALIA
Commissioner of Taxation v Devuba Pty Ltd [2015] FCAFC 168
Citation: Commissioner of Taxation v Devuba Pty Ltd [2015] FCAFC 168 Appeal from: Devuba Pty Limited v Commissioner of Taxation [2015] AATA 255 Parties: COMMISSIONER OF TAXATION v DEVUBA PTY LTD File number: NSD 586 of 2015 Judges: GREENWOOD, JAGOT AND PAGONE JJ Date of judgment: 30 November 2015 Catchwords: INCOME TAX – capital gains tax – small business concessions – sale of shares giving rise to capital gain – claimed entitlement to reduce capital gain to nil by utilising small business concessions – whether CGT concession stakeholders in company held requisite small business participation percentage – whether significant individual – Dividend Access Share – whether taxpayer permitted to pay dividend to holder of Dividend Access Share – consideration of Memorandum and Articles of Association – effect of resolutions in relation to Dividend Access Share Legislation: Corporations Act 2001 (Cth) s 140
Income Tax Assessment Act 1997 (Cth) ss 152-10(2)(b), 152-55, 152-60, 152-65, 152-70(1)Cases cited: Australian Broadcasting Commission v Australasian Performing Right Association (1973) 129 CLR 99
Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640
Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited [2015] HCA 37Date of hearing: 16 November 2015 Place: Sydney Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 11 Counsel for the Applicant: Mr NJ Williams SC with Mr DFC Thomas and Ms E Bathurst Solicitor for the Applicant: Australian Taxation Office, Review and Dispute Resolution Counsel for the Respondent: Mr AH Slater QC with Mr AJ O’Brien Solicitor for the Respondent: Ganz Legal Pty Ltd
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 586 of 2015
ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL
BETWEEN: COMMISSIONER OF TAXATION
ApplicantAND: DEVUBA PTY LTD
Respondent
JUDGES:
GREENWOOD, JAGOT AND PAGONE JJ
DATE OF ORDER:
30 NOVEMBER 2015
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.The appeal be dismissed.
2.The applicant pay the respondent’s costs as agreed or taxed.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 586 of 2015
ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL
BETWEEN: COMMISSIONER OF TAXATION
ApplicantAND: DEVUBA PTY LTD
Respondent
JUDGES:
GREENWOOD, JAGOT AND PAGONE JJ
DATE:
30 NOVEMBER 2015
PLACE:
SYDNEY
REASONS FOR JUDGMENT
THE COURT:
This appeal turns upon whether Devuba Pty Ltd (“Devuba”) was able to pay a dividend immediately before 19 May 2010 to the holder of a Dividend Access Share which had been issued to Mrs Sloane van der Vegt (“Mrs van der Vegt”). The issue arises in the context of a claim that Devuba satisfied the small business CGT concessions in div 152 of the Income Tax Assessment Act 1997 (“the 1997 Act”).
On 19 May 2010 Devuba sold 404,545 ordinary shares in Primacy Underwriting Agency Pty Ltd (“Primacy”) for $4,381,645. Devuba accepted that it made a capital gain of $4,376,896 by reason of the sale of the shares in Primacy, but has claimed an entitlement to reduce that gain to nil under div 152 of the 1997 Act. The division provides relief to small businesses from capital gains tax where specified conditions are satisfied. One of the conditions to be satisfied under s 152-10(2)(b) was that “CGT concession stakeholders” in Primacy together had a “small business participation percentage” in Devuba of at least 90%. The meaning of “CGT concession stakeholder” was supplied by s 152-60 to mean, relevantly, either (a) a significant individual in the company or (b) a spouse of a significant individual in the company if the spouse has a small business participation percentage in the company that is greater than zero. The meaning of “significant individual” was supplied by s 152-55 to mean an individual in a company having at the time a “small business participation percentage” in the company of at least 20%.
Section 152-65 provided that an entity’s “small business participation percentage” in another entity is the percentage that is the sum of (a) the entity’s direct small business participation percentage in the other entity and (b) the entity’s indirect small business participation percentage at the relevant time. Item 1(b) in s 152-70(1) provided that an entity has a direct small business participation percentage equivalent to the percentage that:
[…] the entity has because of holding the legal and equitable interests in shares in the company:
(a) the percentage of the voting power in the company; or
(b) the percentage of any dividend that the company may pay; or
(c) the percentage of any distribution of capital that the company may make
or, if they are different, the smaller or smallest.
The inquiry in this case called for by the application of this provision was into the dividends that Devuba may pay within the meaning of Item 1(b) in s 152-70(1) immediately before its sale on 19 May 2010 of its shares in Primacy. The Commissioner contended that the percentage of “any dividend that [Devuba] may pay” in Item 1(b) in s 152-70(1) included dividends payable by Devuba to Mrs van der Vegt. Devuba, in contrast, contended that no dividend was payable under the Dividend Access Share immediately before Devuba’s sale of its shares in Primacy. It was common ground between the parties that this condition was satisfied unless Devuba was able to pay a dividend to the holder of a Dividend Access Share immediately before 19 May 2010.
The issued shares of Devuba immediately before 19 May 2010 comprised (a) one ordinary share held by Mr John van der Vegt, (b) one ordinary share held by VDV Nominees Pty Ltd as trustee for the van der Vegt Family Trust, and (c) one Dividend Access Share held by Mrs van der Vegt. It was common ground between the parties at the appeal that the outcome of the appeal depended upon whether the proper construction of Devuba’s Memorandum and Articles of Association permitted declarations of dividends to Mrs van der Vegt on her Dividend Access Share just before 19 May 2010. Devuba, for its part, accepted that it would not satisfy the relevant condition for small business relief under div 152 if Devuba could declare a dividend to Mrs van der Vegt immediately before 19 May 2010. The case had been conducted somewhat differently in the Tribunal (from which the appeal was brought), but the Tribunal had decided that immediately before 19 May 2010 Devuba could have paid dividends only in favour of the ordinary shareholders and not to Mrs van der Vegt as the holder of the Dividend Access Share.
Devuba was incorporated on 10 February 1989 under the Companies (New South Wales) Code with, at the time, a registered share capital of $1 million divided into 1 million shares. Article 4 of the Memorandum of Association provided that the company was to be incorporated with power to increase or reduce the capital of the company and, amongst other things, with power to divide the shares in the original or increased capital into several classes with special rights or conditions. Article 63 of the Articles of Association gave the company discretion to declare dividends in the following terms:
The Company in general meeting may declare dividends, but no dividend shall exceed the amount recommended by the Directors and unless otherwise resolved by the Company the dividend shall be payable forthwith upon its declaration.
The directors, however, could pay interim dividends under Article 64.
Article 81 of the Articles of Association gave control to the directors of the issue of shares in the following terms:
The shares shall be under the control of the Directors who may allot, grant options over them or otherwise dispose of the same to such persons on such terms and conditions and either at a premium or at par or (subject to the provisions of the Companies Code) at a discount, and at such times as the Directors think fit. Subject to the provisions, if any, in that behalf of the Memorandum of Association and without prejudice to any special rights previously conferred on the holders of existing shares, any share may be issued with such preferred, deferred or other special rights or such restrictions whether in regard to dividend, voting, return of share capital or otherwise as the Company may from time to time by resolution determine and any preference share may with the sanction of a special resolution be issued on the terms that it is or at the option of the Company is liable to be redeemed.
On 1 May 2007 the directors resolved to create a new class of shares to be known as Dividend Access Shares and resolved also to allot one share at $1 to Mrs van der Vegt.
The resolution on 1 May 2007 creating the Dividend Access Share was in the following terms:
It was resolved that the following class of shares be inserted into the Memorandum and Articles of Association pursuant to Paragraph 4.
The new share class is to be known as Dividend Access Shares (DIVV ACC) and will have the following rights:
The holders of “DIVV ACC” class of shares shall not be entitled to:-
(i)any vote in respect of any such shares held by them at any meetings of the Company but shall be entitled to receive notice of such meetings and to attend thereat; or
(ii)participate in a distribution of surplus assets (if any) remaining after payment of the amount paid up on all shares in the capital of the Company but shall be entitled to receive in respect of any such shares, such dividends, capital or other distributions (if any) other than on a winding-up as in respect of each class the Directors may from time to time determine to pay. The Directors may determine a dividend be paid on any one or more of such shares and any such declaration, payment or distribution shall be binding upon all members of the Company.
There are several aspects of this resolution which are open to debate but it was common ground that Mrs van der Vegt had the only Dividend Access Share issued pursuant to the resolution made in 2007. The critical question in dispute on the appeal was whether the terms upon which that share was issued permitted Devuba to declare a dividend immediately before 19 May 2010. The resolution creating the Dividend Access Shares was largely expressed in terms which restricted the rights of the holders of such shares. Thus, the holder was not entitled to vote or to participate in the distribution of surplus assets after payment of the amounts paid on all shares. The terms upon which the Dividend Access Share was created did entitle the holder to receive dividends but the entitlement was expressed to require a determination by the directors for dividends to be paid. The entitlement was expressed as an entitlement “to receive in respect of any such shares, such dividends, capital or other distributions (if any)…as in respect of each class the Directors may from time to time determine to pay.” It is not entirely clear from its terms whether the entitlement was intended to authorise payment by determination of the directors (as was authorised under Article 64 in relation to interim dividends) or whether the director’s determination was a pre-condition to a declaration by the company under Article 63.
The rights attaching to the Dividend Access Shares, however, were further restricted by resolution on 1 September 2008 pursuant to Article 83. Article 83 provided that the rights attaching to any class of share could be varied in accordance with its terms. Article 83 provided:
If at any time the share capital is divided into different classes of shares, the rights attached to any class (unless otherwise provided by the terms of issue shown later in these Articles) may be varied with the consent in writing of the holders of three-fourths of the issued shares of that class or with the sanction of a resolution passed at a separate general meeting of the holders of the shares of the class. To every such separate general meeting the provisions of these regulations relating to general meetings shall mutatis mutandis apply, but so that the necessary quorum shall be two (2) persons at least holding or representing by proxy one-third of the issued shares of the class and that any holder of shares of the class present in person or by proxy may demand a poll.
On 1 September 2008 a resolution was passed with the consent of Mrs van der Vegt as the only holder of the Dividend Access Shares varying the rights of the holders of the Dividend Access Shares as stated in the following resolution:
Resolved: that pursuant to Article 83 of the company’s constitution, the rights attached to Dividend Access Shares are varied so that the holders of the Dividend Access Shares have no right to payment of a dividend until such time as the directors of the company resolve that the holders of the Dividend Access Shares have a right to payment of a dividend.
The Commissioner contended that the 2008 variation had no effect and that the terms upon which the Dividend Access Share had been created permitted Devuba to declare dividends to Mrs van der Vegt immediately before 19 May 2010 pursuant to the 2007 resolution of the directors. The Tribunal had concluded that the 2008 resolution was ineffective and had no impact upon the nature and relevance of the rights of the holders of the Dividend Access Share but proceeded on the view that the terms of the 2007 resolution did not confer or create any rights in the holder of the Dividend Access Share such that Devuba could declare a dividend to Mrs van der Vegt immediately before 19 May 2010.
The proper construction of the 2007 and 2008 resolutions, and their impact upon Devuba’s ability to declare a dividend just before 19 May 2010, is not without difficulty. Article 129 was the primary source of Devuba’s ability to declare dividends at the relevant time and provided:
Where at any time there shall be more than one class of shares on issue, any dividend or distribution of capitalised profits may be declared by the Company in general meeting, and as the Directors from time to time recommend, and all dividends whether interim or otherwise may be paid, and distribution of capitalised profits made on the shares of any one or more class or classes of shares to the exclusion of the shares of any other class or classes and if at any meeting dividends are declared or distributions made on more than one class the dividend declared or distribution made on the shares of any such class may be at a higher or lower rate than or at the same rate as the dividend declared or distribution made on the shares of the other or others of such classes provided that the shares in each class shall inter se participate pari passu in any dividend declared or any distribution of capitalised profits made in respect of that class. It shall be no objection to any resolution which shall declare a higher rate of dividend or distribution on the shares of any class or classes than the dividend declared or distribution made on the shares of any other class or classes or which shall declare a dividend or make a distribution on the shares of any class or classes to the exclusion of the shares of any other class or classes that such resolution was passed by virtue of the votes of the holders of the shares of the class or classes to receive the higher rate of dividend or distribution or to receive the dividend or distribution (as the case may be) and that such resolution was opposed by the holders of the shares of the class or classes to receive the lower rate of dividend or distribution or to be excluded (as the case may be).
This Article, taken alone, would have entitled Devuba to declare dividends upon any class of shares which had been issued without regards to any restriction that other terms of the Articles might have imposed upon any class of shares. Its construction, however, must take into account all of the terms of the Memorandum and Articles of Association, including the 2007 and 2008 resolutions. Devuba’s constitution had effect as a contract between itself and its members, directors and company secretary, and between the members themselves: Corporations Act 2001 (Cth), s 140. The rights and liabilities under a contract “are determined objectively, by reference to its text, context (the entire text of the document as well as any contract, documentary or statutory provision referred to in the text of the contract) and purpose”: Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited [2015] HCA 37, [46], see also [47]-[52], and Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640, 656, [35], Australian Broadcasting Commission v Australasian Performing Right Association (1973) 129 CLR 99, 109-10. A fair reading of the Memorandum and Articles of Association, and of the 2007 and 2008 resolutions, is that the ability of Devuba to declare dividends under Article 129 was, and was intended to be, restricted.
The Memorandum and Articles of Association (before the 2007 and 2008 amendments) reveals a number of limitations upon the entitlement to dividends which were contemplated to attach to different classes of shares that need to be taken into account in considering how the power in Article 129 could be exercised. Article 67, for example, contemplated, since the incorporation of Devuba, that there might be “shares with special rights as to dividends”. Article 125(c) specifically contemplated the issue of shares carrying “no right to dividends”, and Article 131 made special provision attaching to the “J” class redeemable preference shares conferring upon the holder of those shares the right to payment of such non-cumulative dividends as the directors of the company may from time to time recommend and as the company declared pursuant to the Articles of Association. The discretion of the company to declare dividends under Article 129 was not, even from the date of incorporation, without restriction. The Dividend Access Share issued to Mrs van der Vegt pursuant to Article 81 by the 2007 resolution was similarly issued with restriction upon the declaration by the company of dividends. The Dividend Access Shares had been created in 2007 with an entitlement “to receive in respect of such shares, such dividends, […] as in respect of each class the directors may from time to time determine to pay”. Mrs van der Vegt, as the holder of the Dividend Access Share, had an entitlement under the 2007 resolution to be considered for payment of a discretionary dividend by the directors. The 2008 resolution took away that right and deprived the company of an ability to declare a dividend on her shares unless and until the directors first resolved that the holders of the Dividend Access Shares had a right to payment of a dividend. The 2008 resolution expressly limited Devuba’s ability to pay a dividend to the holder of the Dividend Access Share by excluding from the holder of the Dividend Access Share any right to a dividend “until such time as the directors of the company resolve[d] that the holders of the dividend access shares have a right to payment of a dividend”. Devuba’s ability “to pay” any dividend to the dividend access shareholder was made dependent upon the prior determination by the directors. Devuba’s ability to declare a dividend was correspondingly restricted. The determination of the directors contemplated by the 2008 resolution was not that the dividend be declared by the directors, but that the holder of the Dividend Access Share should be determined to become entitled to the future exercise of a discretion which had otherwise been removed. No such determination had been made by the directors in respect of the Dividend Access Share and, therefore, as at 19 May 2010 the company could not declare a dividend to the holder of that share.
Accordingly, the appeal should be dismissed.
I certify that the preceding eleven (11) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Greenwood, Jagot and Pagone. Associate:
Dated: 26 November 2015
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