Federal Commissioner of Taxation v Sun Alliance Investments Pty Ltd (in liq)

The High Court of Australia considered an appeal by the Federal Commissioner of Taxation against Sun Alliance Investments Pty Ltd (in liq) concerning the calculation of capital gains tax. The dispute arose from the disposal of shares in two wholly owned subsidiaries by Royal and Sun Alliance Insurance Australia Holdings Limited ("RSA"), which had acquired these shares by operation of section 160ZZS of the *Income Tax Assessment Act 1936* (Cth) ("the 1936 Act") upon a merger. The subsidiaries had declared dividends to RSA, which attracted a tax rebate, and RSA subsequently claimed capital losses on the disposal of its shares.

The central legal issues before the High Court were whether the consideration for RSA's deemed acquisition of the shares should be reduced under section 160ZK of the 1936 Act by a rebatable dividend adjustment, and whether dividends distributed by the subsidiaries were attributable to profits derived before RSA's deemed acquisition. This involved determining whether unrealised accretions to asset values must have a permanent character to be considered profits, and whether unrealised profits could be considered as "derived" for the purposes of the Act.

The High Court reasoned that section 160ZK required a reduction in the consideration for the deemed acquisition where a dividend was paid out of profits derived by the company before the deemed acquisition. The Court held that "profits" for the purposes of this section did not require a permanent character and that unrealised accretions to asset values could constitute profits. Furthermore, the Court found that profits could be considered "derived" even if they were unrealised at the time of the deemed acquisition, provided they were profits of the company at that time. Consequently, the dividends paid by the subsidiaries were properly attributable to profits derived before RSA's deemed acquisition, and the consideration for that acquisition should be reduced accordingly.

The High Court allowed the appeal with costs, setting aside the orders of the Full Court of the Federal Court and dismissing the appeal to that Court with costs. The cross-appeal was also dismissed with costs.