Devuba Pty Limited and Commissioner of Taxation
[2015] AATA 255
•24 April 2015
[2015] AATA 255
Division TAXATION APPEALS DIVISION File Number(s)
2014/2557
Re
Devuba Pty Limited
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Professor R Deutsch, Deputy President
Date 24 April 2015 Place Sydney The Decision under review is set aside and in substitution the Tribunal allows the objection in full.
........................................................................
Professor R Deutsch, Deputy President
CATCHWORDS
TAXATION – capital gains tax – capital gains tax business concession – whether share sale gave rise to capital gain – impact of dividend access share – small business participation percentage – decision set aside
LEGISLATION
Corporations Act 2001 (Cth) s 140
Income Tax Assessment Act 1997 (Cth) div 152, ss 152-10(1)(2), 152-55, 152-60, 152-65, 152-70, 152-75
Taxation Administration Act 1953 (Cth) sch 1, div 284, ss 284-15, 284-75(2), 284-90, 298-20CASES
Electricity Generation Corporation the Woodside Energy Limited (2014) 251 CLR 640
Federal Commissioner of Taxation v Casuarina Pty Limited (1971) 127 CLR 62
REASONS FOR DECISION
Professor R Deutsch, Deputy President
24 April 2015
INTRODUCTION
This case is about a share sale in 2010 that gave rise to a capital gain to Devuba Pty Limited (“the Applicant” being the vendor in this case) which the Applicant asserts can be reduced to nil by virtue of the capital gains tax (CGT) small business concessions contained in div 152 of the Income Tax Assessment Act 1997 (Cth) (the Act).
By contrast, the Respondent asserts that the CGT small business concessions are not available in the factual circumstances largely because of the existence of a dividend access share (DAS).
The issue is whether the mere existence of that DAS at the relevant time causes the failure of a key condition for the availability of the CGT small business concessions.
THE RELEVANT FACTS
General
This case involves the sale of shares in Primacy Underwriting Agency Pty Ltd (Primacy) by the Applicant. Attached to this decision is a diagram (Appendix A) which shows the relevant shareholdings and distributions which are further described below.
The Shares in Primacy
On 19 May 2010, the Applicant, as vendor, entered into a share acquisition agreement with Allianz Australia Insurance Ltd, as purchaser, where the Applicant sold its 404,545 ordinary shares in Primacy Underwriting Agency Pty Ltd (Primacy) for a consideration of $4,381,645. Just before 19 May 2010, the Applicant held 45% of the issued share capital of Primacy.
The Applicant’s 2010 Tax Return
In the Applicant’s income tax return for the year ended 30 June 2010 (year of income), a capital gain of $4,376,896 was returned. This capital gain was reduced to nil in the CGT Schedule that accompanied the Applicant’s income tax return for the year of income. The following small business CGT concessions were claimed:
·the small business active asset reduction: ($2,188,448);
·the small business retirement exemption: ($662,500);
·the small business roll over: ($1,525,948).
Thus, according to the relevant tax return, the net capital gain was reduced to nil.
The Shares in the Applicant
Just before 19 May 2010, the issued shares of the Applicant comprised the following shares:
·one ordinary share held by John van der Vegt (Mr Van der Vegt);
·one ordinary share held by VDV Nominees Pty Ltd (VDV Nominees) as trustee of the Van der Vegt Family Trust (Trust);
·one DAS held by Sloane van der Vegt (Mrs Van der Vegt).
Mr and Mrs Van der Vegt are husband and wife.
Distributions from VDV Nominees
VDV Nominees as trustee of the Trust made the following distributions in the 2010 year of income:
·to Mr Van der Vegt – 20% of the income and capital of the Trust;
·to Mrs Van der Vegt – 70% of the income and capital of the Trust.
·to the Applicant – 10% of the income and capital of the Trust
Dividends from the Applicant
In the 2010 year of income, the Applicant declared a dividend of $800,000 to the holders of the ordinary shares. No dividend was paid (or could be paid) to Mrs Van der Vegt as the holder of the dividend access share.
No capital was distributed by the Applicant in the year of income. In particular, no capital was distributed (or could be distributed) to Mrs Van der Vegt as the holder of the dividend access share.
The Memorandum and Articles of the Applicant
At the time of its incorporation the Applicant adopted its own Memorandum and Articles of Association. Articles 124 through to 131 of the Articles of Association of the Applicant outline the rights of holders of shares in the company and in particular the rights of different classes of shares.
Of particular significance in this context is Article 129 which confers power on the directors of the company to declare dividends as follows:
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 with interim or otherwise may be paid, and distribution of capitalised profits made on the shares or on any one or more class or classes of shares to the exclusion of the shares of any other class or classes the and if it 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 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…
Article 81 of the Articles of Association is to the effect that shares shall be under the control of the directors who may allot shares on such terms and conditions and at such times as the directors think fit and further provides as follows:
... 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 and 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.
Article 83 of the Articles of Association also provides for the rights attaching to any class of shares to be varied with the consent in writing of the holders of three fourths of the issued shares of that class.
The Dividend Access Share
On 1 May 2007, the directors of the Applicant resolved pursuant to Article 81 to issue a new class of shares, namely dividend access shares.
The rights of the holders of dividend access shares are outlined in minutes of a director’s meeting of the Applicant held on 1 May 2007. The minutes record the following:
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” shall not be entitled to:
(i) any vote in respect of any such shares held by them at any meeting of the Company but shall be entitled to receive notice of such meetings and 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 such shares, such dividends, capital or other distribution (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.
The minutes record the issue of one DAS to Mrs Van der Vegt.
Pursuant to the exercise of this power, on 1 September 2008 there was a variation to the rights attaching to the DAS previously issued to Mrs Van der Vegt.
By way of a resolution of the directors of the Applicant dated 1 September 2008, there was a variation to the rights of the holders of the dividend access shares in that:
… 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 a payment of a dividend.
Steps following the lodgement of the 2010 Tax Return
The Applicant’s income tax return for the year of income was subject to an audit by the Respondent which resulted in the Respondent issuing a letter dated 25 June 2013 proposing certain adjustments and outlining the Respondent’s reasons for such adjustments. The Applicant responded to the Respondent’s letter dated 25 June 2013, enclosing a joint opinion by AH Slater QC and BL Jones.
By letter dated 15 October 2013, the Respondent advised that the audit was completed. Subsequently, the following notices were issued to the Applicant:
·notice of amended assessment for the year of income;
·notice of assessment of shortfall penalty in relation to the year of income.
(collectively referred to as the Notices)
By letter dated 21 November 2013, the Applicant objected to the Notices.
By letter dated 6 May 2014, the Respondent disallowed the notice of objection lodged for the year of income. By application for review of decision dated 13 May 2014, the Applicant requested the Administrative Appeals Tribunal to review the Respondent’s notice of objection decision for the year of income.
THE RELEVANT LAW
The relevant statutory law in relation to the CGT small business concessions is essentially to be found in div 152 of the Act and most particularly ss 152-10 (1) and (2) which provide as follows:
(1)A capital gain (except a capital gain from CGT event K7) you make may be reduced or disregarded under this Division if the following basic conditions are satisfied for the gain:
(a) a CGT event happens in relation to a CGT asset of yours in an income year;
(b) the event would (apart from this Division) have resulted in the gain;
(c) at least one of the following applies:
(i) you are a small business entity for the income year;
(ii) you satisfy the maximum net asset value test (see section 152 – 15);
(iii) you are a partner in a partnership that is a small business entity from the income year and the CGT asset is an interest in an asset of the partnership;
(iv) the conditions mentioned in subsection (1A) or (1B) are satisfied in relation to the CGT asset in the income year;
(d) the CGT asset satisfies the active asset test (see section 152 – 35).
(2)If the CGT asset is a share in a company or an interest in a trust (the object company or trust), one of these additional basic conditions must be satisfied just before the CGT event:
(a) you are a CGT concession stakeholders in the object company or trust; or
(b) CGT concession stakeholders in the object company or trust together have a small business participation percentage in view of at least 90%.
Section 152 – 60 then helpfully provides that :
An individual is a “CGT concession stakeholder” in a company or trust at a time if the individual is:
(a) a significant individual in the company or trust; or
(b) a spouse of a significant individual in the company or trust, if the spouse has a small business participation percentage in the company or trust at that time that is greater than zero.
Section 152 – 55 provides that:
An individual is a significant individual in a company or trust at a time if, at that time, the individual has a small business participation percentage in the company or trust of at least 20%
Section 152 – 65 provides that:
An entity’s small business participation percentage in another entity at a time is the percentage that is sum of:
(a) the entity’s direct small business participation percentage in the other entity at that time; and
(b) the entity’s indirect small business participation percentage in the other entity at that time.
An entity holds a direct small business participation percentage at the relevant time in an entity equal to the percentage worked out using the table provided in s 152 – 70. Without quoting the table in full, it relevantly provides that an entity has a direct small business participation percentage in a company equivalent to the smallest of the following percentages which the entity has because of its holding of the legal and equitable interests in shares in the company:
…(a) the percentage of the voting power in the company;
(b) the percentage of any dividend that the company may pay; or
(c )he percentage of any distribution of capital the company may make…
Section 152 – 75 explains the calculation of the indirect small business participation percentage as follows:
(1) work out the indirect small business participation percentage that an entity (the holding entity) holds at a particular time in another entity (the test entity) by multiplying:
(a) the holding entity’s direct small business participation percentage (if any) in another entity (the intermediate entity) at that time; by
(b) the sum of :
(i) the intermediate entity’s direct small business participation percentage (if any) in the test entity at that time; and
(ii) the intermediate entity’s indirect small business participation percentage (if any) in the test entity at that time(as worked out under one or more other applications of this section).
(2) If there is more than one intermediate entity to which paragraph (1) (a) applies at that time, the holding entity’s indirect small business participation percentage is that some of the percentages worked out under subsection (1) in relation to each of those intermediate entities.
In addition, certain provisions of the Corporations Act 2001 (Cth) ( the CA) are relevant most particularly s 140 which provides that:
(1) A company’s constitution (if any) and any replaceable rules that apply to the company have effect as a contract:
(a) between the company and each member; and
(b) between the company and each director and company secretary; and
(c) between a member and each other member;
under which each person agrees to observe and perform the constitution and rules so far as they apply to that person.
The relevant law in relation to the penalty issues is to be found in div 284 contained in sch 1 to the Taxation Administration Act 1953 (Cth) ( the TAA Act). More particularly, s 284 – 75 (2) provides as follows:
You are liable to an administrative penalty if:
(a) you make a statement to the Commissioner or to an entity that is exercising powers or performing functions under an income tax law or the petroleum resource rent tax law; and
(b) in the statement, you treated an income tax law, or the petroleum resource rent tax law, as applying to a matter or identical matters in a particular way that was not reasonably arguable; and
(d) item 4, 5 or 6 of the table in subsection 284 – 90 (1) applies to you.
The relevant item number in the table in s 284 – 90 is item number 4 and it provides that if:
you have a shortfall amount, all or part of which resulted from you or your agent treating an income tax law or the petroleum resource rent tax law as applying to the matter or identical matters in a particular way that was not reasonably arguable and that amount is more than your reasonably arguable threshold
The base penalty amount is 25% of your shortfall amount.
Section 284 – 90 (3) provides that an entity’s reasonably arguable threshold for an income year in a case where the entity is a company is the greater of $10,000 or 1% of the income tax payable by the entity of the income year worked out on the basis of the entity’s income tax return.
Section 284 – 15 relevantly provides the definition content to the concept of when a matter is reasonably arguable. It provides as follows:
(1) A matter is reasonably arguable if it would be concluded in the circumstances, having regard to the relevant authorities, that what is argued for is about as likely to be correct as incorrect, or is more likely to be correct and incorrect.
(2) To the extent that the matter involves an assumption about the way in which the Commissioner will exercise a discretion, the matter is only reasonably arguable if, at the Commissioner exercise the discretion in the way assumed, a court would be about as likely as not to decide the exercise of the discretion was in accordance with law.
(3) Without limiting subsection (one), these authorities are relevant:
(a) a taxation law;
(b) material for the purposes of subsection 15AB (1) of the Acts Interpretation Act 1901;
(c) a decision of a court (whether or not an Australian court), the AAT or a Board of Review;
(d) a public ruling.
Section 298 – 20 provides as follows:
(1) The Commissioner may remit all or a part of the penalty.
(2) If the Commissioner decides:
(a) not to remit the penalty; or
(b) to remit only part of the penalty;
the Commissioner must give written notice of the decision and the reasons for the decision to the entity.
(3) If:
(a) the Commissioner refuses to any extent to remit an amount of penalty; and
(b) the amount of penalty payable after the refusal is more than two penalty units; and
(c) the entity is dissatisfied with the decision;
the entity may object against the decision in the manner set out Part IVC.
THE RELEVANT ISSUES
The parties are in broad agreement that the Applicant satisfied the conditions found in paras 152-10(1)(a), (b), (c) and (d) of the Act. In the present case, the critical question is whether the Applicant satisfied the additional basic conditions for shares in a company found in subsection 152-10(2) of the Act.
Thus, the key issue for resolution is: just before 19 May 2010, did CGT concession stakeholders in Primacy have a small business participation percentage in the Applicant of at least 90%? This can be described as the Primary Tax Issue.
This raises two specific questions relating to the imposition of the primary tax namely:
·Who are CGT concession stakeholders in Primacy just before 19 May 2010; and
·Did the CGT concession stakeholders in Primacy together have a small business participation percentage in the Applicant of at least 90% just before 19 May 2010?
If tax was properly payable there is a further issue as to whether the tax shortfall penalties imposed under subsection 284-75(2) of sch 1 of the TAA, in relation to the year of income at 25% of the tax shortfall amount for treating an income tax law as applying to a matter in a particular way that was not reasonably arguable, was correctly imposed? This can be described as the Tax Shortfall Penalty Issue.
If the penalty was correctly imposed there is a further issue as to whether the discretion under s 298-20 of sch1 of the TAA to remit the tax shortfall penalties, in part of in full, should have been exercised? This can be described as the Tax Shortfall Penalty Remission Issue.
THE PRIMARY TAX ISSUE
Just before 19 May 2010, did CGT concession stakeholders in Primacy have a small business participation percentage in the Applicant of at least 90%?
As indicated earlier this leads to two distinct questions which need to be resolved:
·Who are CGT concession stakeholders in Primacy just before 19 May 2010; and
·Did the CGT concession stakeholders in Primacy together have a small business participation percentage (“SBPP”) in the Applicant of at least 90% just before 19 May 2010?
Who are CGT concession stakeholders in Primacy just before 19 May 2010?
The Applicant
From the definition in s 152-60 of the Act it is apparent and agreed by the parties that the Applicant cannot be a CGT concession stakeholder in Primacy as it is a company and only an individual can fall within the definition.
Mr Van der Vegt
Mr Van der Vegt is an individual so it is possible that he could be a CGT concession stakeholder in Primacy provided that he is a significant individual in Primacy.
He will be a significant stakeholder in Primacy if at the relevant time he has a small business participation in Primacy of at least 20%.
Ignoring the DAS, it is clear that Mr Van der Vegt holds:
·a 50% direct SBPP in the Applicant due to the one share he holds in the Applicant;
·a 20% direct SBPP in the Trust due to the distribution he received from the Trust;
·no direct SBPP in Primacy;
·a 26.5% indirect SBPP in Primacy made up of the following:
oa 22.5% indirect SBPP in Primacy through the Applicant as an intermediate entity. This arises because Mr Van der Vegt holds 50% of the shares in the Applicant and the Applicant holds 45% of the shares in Primacy.
oa 4.5% indirect SBPP in Primacy through the Trust and the Applicant as intermediate entities. This arises because Mr Van der Vegt holds a 20% interest in the Trust, the Trust holds a 50% interest in the Applicant and the Applicant holds a 45% interest in Primacy.
Thus, Mr Van der Vegt had an SBPP in Primacy of 21%
Mrs Van der Vegt
Having regard to s 152-60(b) of the Act, Mrs Van der Vegt is an individual who is the spouse of a significant individual in Primacy, so it is possible that she could be a CGT concession stakeholder in Primacy provided that she has a SBPP in Primacy at the relevant time that is greater than zero.
Again ignoring the DAS, it is clear that Mrs Van der Vegt holds:
·no direct SBPP in the Applicant;
·a 70% direct SBPP in the Trust due to the distribution she received from the Trust;
·no direct SBPP in Primacy; and
·a 12.25% indirect SBPP in Primacy through the Trust and the Applicant as intermediate entities. This arises because Mrs Van der Vegt holds a 70 % interest in the Trust, the Trust holds a 50% interest in the Applicant and the Applicant holds a 45% interest in Primacy.
Thus, on this basis Mrs Van der Vegt had at the relevant time an SBPP in Primacy of 15.75%.
Conclusion as to who are a CGT concession stakeholders in Primacy
Consequently on this basis both Mr and Mrs Van der Vegt are CGT concession stakeholders in Primacy as Mr Vander Vegt had an SBPP in Primacy greater than 20% (namely 26.5% ) and Mrs van der Vegt was and is the spouse of a significant individual in Primacy (namely Mr Van der Vegt) and Mrs Van der Vegt had a SBPP in Primacy that was greater than zero (namely 15.75%).
Did the CGT concession stakeholders in Primacy together have a SBPP in the Applicant of at least 90% just before 19 May 2010?
Again ignoring the DAS, it is clear that at the relevant time:
·Mr Van der Vegt had a direct SBPP of 50% in the Applicant and an indirect SBPP of 10% in the Applicant through the Trust ( i.e. 20% of 50%) – a total SBPP in the Applicant of 60% ;
·Mrs Van der Vegt had no direct SBPP in the Applicant and an indirect SBPP of 35% in the Applicant through the Trust (i.e. 70% of 50%) – a total SBPP in the Applicant of 35%.
Conclusion as to whether the CGT concession stakeholders meet the 90% requirement
Consequently on this basis the CGT concession stakeholders together had a SBPP in the Applicant of 95%. As this exceeds the required 90%, the condition would be satisfied and the concessions in question would all be available to the Applicant.
The DAS and its effect
However, the unresolved matter is the effect of the DAS held by Mrs Van der Vegt on the above analysis.
In the view of the Applicant it has no effect and so the conclusions reached above stand.
In the view of the Respondent, the directors of the Applicant had discretion to pay a dividend on the DAS and could use their powers to pay a dividend on the DAS to the exclusion of all and any of the other classes of shares. Accordingly, the holders of the ordinary shares might obtain a zero distribution. As a result, for the purposes of the test contained in item 1 of the s 152-70, the “percentage of any dividend that the company (namely the Applicant) may pay” on the ordinary shares is nil. The consequence of such a finding would be that the SBPPs held by Mr Van der Vegt and the Trust in the Applicant would be zero and the Applicant would not be entitled to any relief under div 152.
The issue comes down to this – what is the effect of the words “the percentage of any dividend the company may pay” as those words are used in the Table in s 152-70(1) of the Act when read in the context of the DAS.
More fully stated when formulated as a continuing statement and looking only at the dividend part of the definition and applying it specifically to Mr Van der Vegt and his holding in the Applicant, s 152- 70 is to the effect that Mr Van der Vegt holds a direct SBPP at the relevant time in the Applicant equal to the percentage of any dividend that the Applicant may pay where Mr Van der Vegt has that percentage because of holding the legal and equitable interests in shares in the Applicant.
When one looks at the terms of s 152 – 10 (2) it is readily apparent that the CGT stakeholder test that is the subject of that subsection needs to be satisfied “just before the CGT event”. Similarly, in s 152 – 70 the direct SBPP is to be worked out “at the relevant time” which again is just before the CGT event. It would seem to follow from this that the rights of shareholders in the Applicant and for that matter in Primacy are to be assessed at the same time namely just before the CGT event.
At that time being the moment just before 19 May 2010 logic would suggest that the only shares that carried any rights to dividends that may be paid in the Applicant were the ordinary shares. Those ordinary shares and no other shares at that time carried all the rights not only in respect of dividends but also in respect of voting and in respect of rights to distribution of surpluses on a winding up.
The consequence is that it cannot be said that at the relevant time (i.e. just before 19 May 2010), the DAS holder may be paid a dividend.
In reaching this conclusion the Applicant relies heavily on the decision of the High Court in Federal Commissioner of Taxation v Casuarina Pty Limited (1971) 127 CLR 62.
Broadly, in that case the High Court had to apply a test, namely whether a shareholder at the end of the year of income:
·beneficially owned shares representing more than one half of the paid-up capital;
·was capable of controlling or obtaining control of more than one half of the voting power of the company;
·would be beneficially entitled to receive more than one half of any dividends paid by the company;
·would be beneficially entitled to receive more than one half of any distribution of capita, in the event of the winding up or of a reduction of capital of the company.
In Casuarina, the Commissioner sought to argue that because there was a right of redemption in respect of the relevant shares which might be exercised in the future, the shareholder in question could not be said to be beneficially entitled to receive any dividend or capital distribution and therefore the above test was not satisfied.
In considering this argument Walsh J (with whom Barwick CJ, Owen and Gibbs JJ agreed) stated the manner in which he considered the test should be applied and in doing so made the following comment at 95-96:
It was contended for the appellant that pars. (c) (entitlement to dividend) and (d) (entitlement to distributions of capital), although they are concerned with rights existing at the end of the year of income and not at some other time, must nevertheless be interpreted and applied in the sense which looks forward to prospective payments of dividends and to prospective distributions of capital. It was argued that in order that the paragraphs may be satisfied one must be able to affirm, as at the relevant date, that the rights of the public company (or companies) owning shares are such that it (or they) cannot lose in the future the entitlement to dividends subsequently declared and to capital subsequently distributed, otherwise than as the result of some voluntary act, such as the sale of the shares. In my opinion, that construction of the provisions should not be accepted. In applying paragraphs(c) and (d), no less than in applying paragraphs (a) and (b), it is necessary in my opinion to look to what would be the entitlement, at the particular time when the provisions themselves designated as the relevant time, or upon the hypothesis that a dividend or capital works then paid out of a company in which the shares are held. The use of the words ‘would be’, instead of the present tense used in pars. (a) and (b) was relied upon as supporting the argument for the appellant. But I do not think that it does so. The use of the words ‘would be’ is apt, because the criteria stated in pars. (c) and (d) depend upon setting up a hypothetical situation and asking what would be the company’s entitlement in that situation.
I have stated the view that night the right of Casuarina to redeem the preference shares nor the understanding that Forum would not interfere in the affairs of Casuarina had the consequence that par. (b) was not satisfied. Likewise, I am of the opinion that that right and that understanding did not have the consequence that par. (c) or par.(d) was not satisfied.
Applying the same reasoning, the Applicant takes the view that it is necessary to consider the legal and equitable interests in shares held in the Applicant just before 19 May 2010 and the dividend that may be paid to shareholders on the hypothesis that a dividend was to have been paid at that time. At that time the DAS did not carry any rights to dividends because the directors had not passed any resolution to the effect that they should have such a right. The hypothetical possibility that the directors of the Applicant may at some time after 19 May 2010 have resolved to grant the holder of the DAS certain rights to dividends is irrelevant in respect of this consideration.
To put it another way if one completely ignores the DAS, it is agreed that Mr Van der Vegt’s direct SBPP in the Applicant is 50%. That conclusion is not in the view of the Tribunal in any way diminished by the existence of what amounts to a discretionary dividend entitlement in the holder of the DAS. Equally it must follow that his indirect SBPP in the Applicant and his SBPP in Primacy is similarly unaffected.
The reliance which is placed by the Applicant upon the decision of the High Court in Casuarina is challenged by the Respondent. First, the Respondent points out that Casuarina was concerned with a very different legislative provision which was drafted in very different terms to that under consideration here. Secondly, the facts in Casuarina differ materially from the present case.
Both points are true but have no impact on the relevance of the reasoning and its application to the present circumstances. The law and the facts under consideration here are different to those in Casuarina. The key factual difference is that the facts in Casuarina called for a hypothetical redemption of shares but here all that would be required is a hypothetical resolution conferring an entitlement to the dividend on the DAS holder.
While it must be accepted that that is a clear factual difference, it is difficult to see that it is a material factual difference that would change the outcome in this case. Both a redemption of shares and a resolution conferring an entitlement to a dividend require steps to be taken that are purely hypothetical and I see no basis for suggesting that those differences mean that the logic of Walsh J’s decision should not apply.
The Respondent also put the argument on the basis that the reference to “the percentage of any dividend that the company may pay” in the definition of direct SBPP emphasises potentiality rather than actuality. By this the Respondent is suggesting that what matters is what might potentially happen in the future, namely at some time after 19 May 2010 in this case rather than the actual position immediately before 19 May 2010.
This view would, if accepted, give to the words “may pay” a meaning which is so broad that virtually every corporate situation would give rise to a failure to meet the requisite SBPP test. Depending on the company constitution, virtually every company may redeem shares, buyback shares, issue new shares, issue a new class of shares or resolve to confer a right to a dividend on an existing class of shares at any time in the future.
This reading of the provisions is tantamount to suggesting that the words “may pay” are effectively to be read as “may pay at any time in the future under any circumstances”.
The decision of the High Court in Casuarina would seem to suggest that it is more a case of testing a hypothetical dividend which may be paid by the company based on the facts as they exist just before 19 May 2010.
Consequently, the Tribunal concludes that in this case the relevant time to which the relevant provision takes us is just before 19 May 2010. It is at that time that the hypothetical needs to be posed – namely if a dividend were to be declared at that time the dividend would not and could not have been paid in favour of anyone other than the ordinary shareholders. At that time, Mr Van der Vegt had a direct SBPP in the Applicant of 50% and that is not diminished by the existence of discretionary entitlements in the DAS holder. The fact that at some hypothetical future time, a dividend could have been resolved and paid in favour of the DAS holder is, based on the reasoning of the High Court in Casuarina, not to the point and is largely irrelevant to the question at hand.
What if anything is the effect of the 1 May 20017 and the 1 September 2008 resolutions?
The resolution of 1 September 2008 provided as follows:
… 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 a payment of a dividend.
As discussed previously, it is clear that the terms of the 1 May 2007 resolution did not confer or create any rights on the DAS holder, even though the wording of the 1 September 2008 resolution suggests to the contrary. The earlier resolution merely conferred an entitlement on the DAS as a class to have the directors favourably exercise their discretion pursuant to article 129 so as to pay a dividend on the DAS.
Despite its rather vague and ambiguous terms, it seems that the resolution passed on 1 September 2008 must be ineffective to the extent that it seeks to vary non-existent rights held by the DAS holder. Arguably, the 1 September 2008 resolution merely sought no more than to remove any doubt as to whether the DAS holder has any entitlement whatsoever.
This conclusion is consistent with what must have been intended by the parties given all the surrounding circumstances and to construe the resolution of 1 September 2008 as meaning to take away a right to a dividend, which was never conferred on the DAS in the first place, would be to rob the resolution of any meaning or operation. The High Court in Electricity Generation Corporation the Woodside Energy Limited (2014) 251 CLR 640, 656 at [35] affirmed that commercial contracts should be construed taking into account the surrounding circumstances and the commercial objects or purposes sought to be achieved so as to avoid it being “commercial nonsense”.
In my view the 1 September 2008 resolution has no impact in determining the nature and the relevance of the DAS.
THE TAX SHORTFALL AND REMISSION ISSUES
As the Tribunal has found in favour of the Applicant on the Primary Tax Issue, the penalty shortfall falls away and it is not necessary for these issues to be considered any further.
DECISION
The Decision under review is set aside and in substitution the Tribunal allows the objection in full.
I certify that the preceding 84 (eighty -four) paragraphs are a true copy of the reasons for the decision herein of Professor R Deutsch, Deputy President ...........................[sgd].............................................
Associate
Dated 24 April 2015
Date(s) of hearing 4 December 2014 Counsel for the Applicant Mr A J O'Brien Solicitors for the Applicant Mr G Ganz, Ganz Legal Pty Ltd Counsel for the Respondent Mr D Thomas Solicitors for the Respondent Ms W L Su, Review and Dispute Resolution, ATO APPENDIX A INTERESTS JUST BEFORE 19 MAY 2010
Key Legal Topics
Areas of Law
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Taxation Law
Legal Concepts
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Capital Gains Tax
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CGT Concessions
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Small Business Participation Percentage
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Statutory Interpretation
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