Dickinson and Commissioner of Taxation
[2013] AATA 25
•21 January 2013
[2013] AATA 25
Division TAXATION APPEALS DIVISION File Number(s)
2011/1732
Re
Matthew Dickinson
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Professor R Deutsch, Deputy President
Date 21 January 2013 Place Sydney The Tribunal sets aside the decision under review and substitutes a decision that scrip for scrip roll-over relief is available under s 124-780.
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Professor R Deutsch, Deputy President
CATCHWORDS
TAXATION – income tax - capital gains tax - sale of shares pursuant to share purchase agreement – whether scrip for scrip roll-over relief available – section 124-780 – whether share exchanges resulted from single arrangements – whether pre-contractual offers, dealings or circumstances form part of final arrangement - whether participation on substantially same terms in share exchanges were available to owners of interests of a particular type – decision set aside.
LEGISLATION
Income Tax Assessment Act 1997 ss 995-1, 124-780
REASONS FOR DECISION
Professor R Deutsch, Deputy President
Date: 21 January 2013
THE FACTUAL BACKGROUND
The relevant facts in this case concern a company known as iMega Pty Limited (‘iMega’) which was previously known as India-Sioux Pty Limited. As at May 2006 the shares in iMega were all of the same class, being fully paid ordinary shares, and they were held as follows:
The Applicant 5,000 (50%)
Mrs Janina Fabig 3,230 (32.3%)
Robekesh Pty Ltd and Kezweazel Pty Ltd jointly 1,630 (16.3%)
Global Interactive Pty Ltd 140 (1.4%)
The Shareholders Agreement
On 22 May 2006 India-Sioux (as it was then known), the then shareholders of India-Sioux (‘the Shareholders’) and the Board of Directors of India-Sioux entered into a Shareholders Agreement (‘the Shareholders Agreement’).
Clause 31.1 of the Shareholders Agreement provided that in respect of any shares in India-Sioux sold within thirty-six months of execution of the Shareholders Agreement, any consideration paid or payable upon the sale of the shares by the Shareholders, up to the amount of $34,167,500, would be distributed as follows:
The Applicant 80%
Janina Fabig 15.5%
Robekesh and Kezweazel 2.25%
Global Interactive 2.25%
The Shareholders Agreement also provided that if the consideration exceeded the amount of $34,167,500 the excess would be distributed in accordance with the actual shareholdings held.
Share Purchase Agreement
On 3 July 2006 a share purchase agreement was entered into with a company known as Photon Group Ltd (‘Photon’) (‘the Share Purchase Agreement’) pursuant to which Photon purchased 90 per cent of the shares in iMega from the Shareholders, as follows:
The Applicant 4500 ordinary shares
Fabig 2907 ordinary shares
Robekesh and Kezweazel 1467 ordinary shares; and
Global Interactive 126 ordinary shares
The acquisition was in proportion to each Shareholder’s holding so that each Shareholder agreed to sell 90 per cent of his/her or its shareholding in iMega to Photon under the Share Purchase Agreement. Completion of the Share Purchase Agreement was conditional on, inter alia, the Shareholders providing option agreements in favour of Photon in respect of the retained shares.
Under the Share Purchase Agreement the purchase price was $8 million, plus a further sum referred to as the earn-out price which would be paid in future years based on future earnings.
The $8 million component was to be satisfied by:
·paying Janina Fabig $1,190,000 and issuing her with 11,792 fully paid ordinary shares in Photon;
·paying the Applicant $6,100,000 and issuing the Applicant with 70,755 fully paid ordinary shares in Photon;
·paying Global Interactive $180,000 only; and
·paying Robekesh and Kezweazel $100,000 and issuing them 18,868 fully paid ordinary shares in Photon.
The share price of each Photon share was set at $4.24 which was an agreed price based on an agreed formula. This meant that the consideration of $8m was satisfied by the following allocations:
Total
Applicant $6,100,000 plus $300,001 (ie 70,755 x $4.24) $6,400,001
Fabig $1,190,000 plus $49,998 (ie 11,792 x $4.24) $1,239,998
Robekesh/Kezweazel $100,000 plus $80,000 (ie 18,868 x $4.24) $ 180,000
Global Interactive $180,000 $ 180,000
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$7,999,999 ---------------On those figures in relation to that part of the purchase price, the Applicant received 80 per cent of the consideration, Mrs Fabig 15.5 per cent and the other two Shareholders 2.25 per cent each in circumstances where the Applicant had only 50 per cent of the shares, Mrs Fabig had 32.3 per cent, Kezweazel and Robekesh 16.3 per cent and Global Interactive 1.4 per cent. This arose as a direct result of the Shareholders Agreement and it is this discrepancy that is at the heart of the issue in this case.
Clause 4.3 of the Share Purchase Agreement provided for the ‘earn-out price’ to be paid to the Shareholders in three stages, the first no later than 31 July 2007, the second no later than 31 July 2008 and the third no later than 31 July 2009.
Again there was to be a significant difference between the percentage of the shares held and the percentage consideration received as a result of the earn-out. Again this was the direct result of the Shareholder Agreement.
Before the final terms of the Share Purchase Agreement were finalised there were a number of earlier drafts submitted which had different allocations of consideration as between the Shareholders. In evidence it was suggested that this was because Photon did not know how to break-up the consideration as between the Shareholders.
The Deed of Variation
On 2 November 2006 the parties to the Share Purchase Agreement entered into a deed of variation (the Deed of Variation) which relevantly:
·amended the Share Purchase Agreement by removing the earn-out payments payable under clause 4.3 and substituting them with a cash payment to each Shareholder;
·cancelled the option agreements for the sale of the remaining shares; and
·provided for the sale of the Retained Shares.
The consideration payable by Photon for the Retained Shares under the Deed of Variation comprised:
·a cash consideration of $1,224,943.64;
·shares in Photon to the value of $13,259,829.35 (calculated using the Volume Weighted Average Price of the Australian Stock Exchange share price in the preceding 20 days); and
·an earn-out detailed in a schedule to the Deed of Variation.
The cash consideration and the issuing of the Photon shares were both allocated in a manner which was consistent with the Shareholders Agreement as varied by the parties to that agreement.
On completion the shares in Photon were issued to the Shareholders.
At all times the only shares on issue in iMega were ordinary shares and all the issued shares carried the same voting rights.
At all times, the Applicant and Photon were dealing with each other at arm’s length.
THE ISSUE
In this case, the Applicant chose scrip for scrip roll-over relief under Division 124–M of the Income Tax Assessment Act 1997 (‘ITAA 97’) in relation to the exchanges of shares, pursuant to the Share Purchase Agreement and the Deed of Variation, and this was reflected in the way the Applicant’s tax return for the year ended 30 June 2007 was prepared and lodged.
The issue that arises in this case is whether, in respect of both of those exchanges, scrip for scrip roll-over relief under Division 124–M is available. More specifically, in order for it to be so available, each exchange must be in consequence of a single arrangement, where that arrangement is one in which participation was available on substantially the same terms for all of the owners of interests of a particular type in the original entity (see s 124-780(2)(c) below.
Thus, in relation to the exchange arising from the Share Purchase Agreement, the question is whether the exchange by the Applicant of his shares in iMega for shares in Photon is in consequence of a single arrangement, where that arrangement is one in which participation was available on substantially the same terms for all of the owners of interests of a particular type in iMega.
In relation to the exchange arising from the Deed of Variation, the question is whether the exchange by the Applicant of his retained shares in iMega for shares in Photon is in consequence of a single arrangement, where that arrangement is one in which participation was available on substantially the same terms for all of the owners of interests of a particular type in iMega.
THE STATUTORY FRAMEWORK
The relevant statutory provisions are ss 124-780(1) and (2)
124‑780 Replacement of shares
(1)There is a roll‑over if:
(a)an entity (the original interest holder) exchanges:
(i)a *share (the entity’s original interest) in a company (the original entity) for a share (the holder’s replacement interest) in another company; or
(ii)an option, right or similar interest (also the holder’s original interest) issued by the original entity that gives the holder an entitlement to acquire a share in the original entity for a similar interest (also the holder’s replacement interest) in another company; and
(b)the exchange is in consequence of a single *arrangement that satisfies subsection (2) or (2A); and
(c)the conditions in subsection (3) are satisfied; and
(d)if subsection (4) applies, the conditions in subsection (5) are satisfied.
Conditions for arrangement
(2)The *arrangement must:
(a)result in:
(i)a company (the acquiring entity) that is not a member of a *wholly‑owned group becoming the owner of 80% or more of the *voting shares in the original entity; or
(ii)a company (also an acquiring entity) that is a member of such a group increasing the percentage of voting shares that it owns in the original entity, and that company or members of the group becoming the owner of 80% or more of those shares; and
(b)be one in which at least all owners of *voting shares in the original entity (except a company referred to in paragraph (a)) could participate; and
(c)be one in which participation was available on substantially the same terms for all of the owners of interests of a particular type in the original entity.
The only definition which requires more detailed analysis is the definition of ‘arrangement’ which is relevantly defined in s 995-1(1).
Section 995-1 Definitions
995-1(1)In this Act, except so far as the contrary intention appears:
arrangement means any arrangement , agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings
WHAT WAS THE ARRANGEMENT?
Having regard to the terms of s 124–780(1)(c) it is necessary to identify the arrangement in consequence of which the relevant exchange occurs. The first relevant exchange is the exchange of 90% of the Applicant’s shareholding in iMega for shares in Photon. The second relevant exchange was the exchange of the remaining 10% of the Applicant’s shareholding in iMega for shares in Photon.
It is the arrangement that led to each of these exchanges which needs to be identified, as it is that arrangement in each case which the relevant exchange must be in consequence of, and it is that arrangement in which all interest holders of a particular type must be entitled to participate on substantially the same terms. The arrangement must also result in a company (in this case Photon) becoming the owner of 80 per cent or more of the voting shares in the target company (in this case iMega).
The term arrangement is very broadly defined in s 995–1 of the ITAA 1997. There appears to be no reason to suggest that there is a contrary intention in respect of the definition of arrangement.
Clearly the definition extends well beyond formal agreements to include such things as unenforceable promises and understandings. Thus, it is clear that the arrangement that resulted in each of these two share exchanges can include more than just the Share Purchase Agreement and the Deed of Variation. So, for example, if the Share Purchase Agreement or the Deed of Variation could be shown not to have entirely covered the agreement between the relevant parties, the arrangement could be said to include those other matters that are not covered by the Share Purchase Agreement or the Deed of Variation. This might include some understanding or promise that is not recorded in the written contract or some particular conduct of one or both of the parties that is relevant.
One difficulty with this case is that the Applicant is suggesting that certain pre-contractual offers should be taken into account as part of the arrangement in consequence of which the exchanges took place, where those pre-contractual offers or dealings are inconsistent with the terms of either the Share Purchase Agreement or the Deed of Variation respectively.
In my view to the extent that pre-contractual offers are inconsistent with the final agreements, the terms of such pre-contractual offers cannot themselves be said to form part of the relevant arrangement for the purposes of s 124–780 of the ITAA 1997. They might well form part of a different arrangement, but they cannot be part of the arrangement in consequence of which the exchange takes place.
The Share Purchase Agreement and the Deed of Variation are comprehensive documents which constitute the terms of the arrangement.
However, while the arrangement cannot include terms which directly contradict the terms of either the Share Purchase Agreement of the Deed of Variation, the fact that there were a variety of offers made with different allocations of consideration and the reasons why they were made is relevant. Thus, the fact that there were other offers which were not accepted and the reasons for those offers being rejected are matters which may form part of the arrangement. The offers themselves cannot form part of the arrangement but the circumstances in which the offers were made and the fact that Photon was indifferent as to the break-up of the consideration can.
Therefore, even though the arrangement is broadly defined by the terms of the Share Purchase Agreement and the Deed of Variation, and cannot be contradicted by the terms of rejected offers, the general circumstances that led to the finalisation of those terms can be and are in this instance part of the arrangement. Critically, here the indifference of Photon as to the break-up between the Shareholders of the consideration is such a circumstance which is a relevant part of the arrangement.
Thus, the first arrangement in question here is broadly the Share Purchase Agreement together with the fact that the consideration to be paid by Photon was a global price in relation to which Photon is fundamentally indifferent as to the break-up between the Shareholders. That fact is a critical part of the single arrangement and the exchange is in consequence of that single arrangement.
The same reasoning applies by parity of reasoning to the Deed of Variation and the exchange arising therefrom. Again the arrangement is broad enough to encapsulate the broad circumstances whereby Photon is fundamentally indifferent to the break-up of the consideration as between the Shareholders.
WAS THE ARRANGEMENT ONE IN WHICH PARTICIPATION WAS AVAILABLE ON SUBSTANTIALLY THE SAME TERMS FOR ALL OF THE OWNERS OF INTERESTS OF A PARTICULAR TYPE IN IMEGA?
What is abundantly clear from all the evidence is that Photon made available an offer of cash plus shares for all the shares in iMega. How that would be split between the various vendors was of no interest and of no consequence to Photon. In terms of the relevant legislation, Photon was making available an offer to all the Shareholders for all the shares in iMega. That offer was available to all Shareholders on the same terms. How it would be accepted was entirely a matter for the Shareholders who could accept and did so on terms that would give some Shareholders more and others less consideration. So long as the total amount did not exceed the amount Photon was willing to pay, Photon was indifferent as to the allocation of the consideration among the Shareholders. The fact that the Shareholders decided to take the offer on the basis that more consideration would be paid to some Shareholders and less to others does not detract from the fact that participation was ‘available’ on substantially the same terms to all Shareholders.
The circumstances in this case do not appear to be materially different to the situation where two equal shareholders in a company are made an offer to buy all the shares in the company for $1 million. One shareholder is keen to accept the offer and the other less so. In order to encourage the reluctant shareholder, the more enthusiastic shareholder may offer to take only $470,000 with the less enthusiastic shareholder to receive $530,000. In these circumstances it would be difficult to sustain an argument that participation was not available on substantially the same terms. It is true that the arrangement may not be accepted on the same terms, but clearly all the shareholders were offered and could have participated on the same terms. In that sense participation was available on the same terms.
As pointed out by Counsel for the Applicant, it is difficult to see why the circumstances in the current case are any different.
In other words Photon was willing to buy out the Shareholders in iMega on the same terms for all and that offer could have been accepted on those terms. They do not have to accept on the same terms in order to conclude that participation was available on the same terms.
The situation would have been different if Photon had offered to buy the Applicant’s shares in iMega and pay a premium for that controlling interest and then offered to also buy the remaining shares but for a price with no premium included. In that situation it clearly would not be the case that participation was substantially available on the same terms, since the Applicant’s participation was available on terms which are substantially different to those available to the other Shareholders.
Clearly that is not what transpired in this case.
I would add that if the draftsman had wished to ensure that the roll-over is only applicable where participation is available and the exchange is effected on substantially the same terms for all participating shareholders of the disposing company the section would have read…‘the arrangement must be one in which participation was available on substantially the same terms for all of the owners of interests of a particular type in the original entity and the exchange occurred on substantially the same terms for all such owners who choose to participate’. The draftsman has not used that construction and has, instead, imposed the requirement simply on the basis that ‘the arrangement must be one in which participation was available on substantially the same terms for all of the owners of interests of a particular type in the original entity’. This construction makes it clear that the exchange does not necessarily have to take place substantially on the same terms so long as participation is available on substantially the same terms. In this case it is clear from all the evidence that participation was available on substantially the same terms, as Photon was entirely indifferent as to how consideration would be allocated.
Finally, I note that this transaction could have proceeded by Photon buying all the shares in iMega on exactly the same terms for each shareholder and then the Shareholders Agreement could be enforced independently of the share sale by net payments being made by the shareholders to each other. In that case it would be clearer that participation was on the same terms even though ancillary payments were made by the shareholders to each other. That might lead to a capital gain or loss arising by virtue of the Shareholders Agreement and the payments made thereunder but the roll-over would still be effective. In my view, the same result follows if the transaction is done by telescoping the two steps (ie first, a sale on the same terms for all shareholders and second, payments being made under the Shareholders Agreement) into one. The issue as to whether in doing the transaction in one step might also give rise to a capital gain or loss as a result of the Shareholders Agreement I leave to another day.
Accordingly, the Tribunal concludes that participation was available on substantially the same terms for all the Shareholders.
DECISION
The Tribunal sets aside the decision under review and substitutes a decision that scrip for scrip roll-over relief is available under s 124-780.
I certify that the preceding 43 (forty- three) paragraphs are a true copy of the reasons for the decision herein of
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Associate
Dated 21 January 2013
Date(s) of hearing 14 and 17 December 2012 Counsel for the Applicant James Hmelnitsky Solicitors for the Applicant Balazs Lazanas & Welch LPP Counsel for the Respondent Kristen Deards Solicitors for the Respondent Jill Gatland
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