The Taxpayer and Commissioner of Taxation

[2006] AATA 14

Administrative

Appeals

Tribunal

 

DECISION AND REASONS FOR DECISION [2006] AATA 14

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          Nos:     NT2003/278

NT2004/209 and
NT2004/210

TAXATION APPEALS DIVISION		)
Re		THE TAXPAYER

Applicant

And COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal Senior Member Robin Hunt

Date11 January 2006

PlaceSydney

Decision

The Tribunal varies the objection decision of the Commissioner so as to find that the consideration the taxpayer received or was entitled to receive in respect of the disposal of the shares was:

(a) The amounts provided by clause 6.8(b) of the sale agreement;

(b) plus or minus any adjustment amount on finalisation of the               completion accounts as defined in the sale agreement;

(c) less any the taxpayer was required to pay pursuant to clause 8.9 of the sale agreement and/or 10.4 of the supplemental agreement.

[Sgd] Ms R Hunt
  Senior Member

ADMINISTRATIVE APPEALS TRIBUNAL )                    No NT2003/278
TAXATION APPEALS DIVISION                )  NT2004/209 and
  NT2004/210

Re:          THE TAXPAYER

Applicant

And:         COMMISSIONER OF TAXATION

Respondent

ORDER TO AMEND WRITTEN DECISION [2006] AATA 14

TribunalMs R Hunt, Senior Member

Date25 January 2006

PlaceSydney

WHEREAS:

1.The Tribunal released a written decision in this matter, which was dated 11 January 2006.

2.It has come to the Tribunal’s attention that there was an error in the decision.

3.The Tribunal wishes to amend the written decision so as to rectify this error and wishing to do so with the least cost and inconvenience to the parties, applies the provision of section 43AA of the Administrative Appeals Tribunal Act1975.

NOW THE TRIBUNAL THEREFORE ORDERS that the certification stamp at the end of the decision should be read as follows:

Date of Hearing  7 October 2005
Date of Decision  11 January 2006
Counsel for the Applicant             T. Bathurst QC
  S. Goodman
Solicitor for the Applicant            N. Mavrakis
Counsel for the Respondent         M. Richmond
Solicitor for the Respondent         S. Blakelock

..................................
  Ms R Hunt
   Senior Member

CATCHWORDS

TAXATION – capital gains tax – sale of shares – indemnity clause re overseas taxes – reimbursement of tax paid in overseas countries – effect on consideration paid - Commissioner treated indemnity payment as made under warranty - taxed as refund of purchase price -– settlement deed and release - taxpayer claimed retrospective reduction in income tax assessments - amended assessments of income tax resulted in increased tax – objection to assessments - burden of proving amended assessments excessive – objection upheld

LEGISLATION

Income Tax Assessment Act 1936 ss160U (1), (3) and (10), 160ZD(1), 170

CASES

Arthur Murray (NSW) Pty Ltd v Federal Commissioner of Taxation (1965) 114 CLR 314

Fielder (Inspector of Taxes) v Vedlynn Ltd [1992] STC 553

Marren (Inspector of Taxes) v Ingles [1980] 3 All ER 95

Federal Commissioner of Taxation v Sara Lee Household & Body Care (2000) 201 CLR 250

Kiwi Brands Pty Ltd v Commissioner of Taxation (1998) 90 FCR 64

Australian Broadcasting Commission v Australasian Performing Rights Association Ltd (1973) 129 CLR 99

Randall v Plumb [1975] 1 WLR 633

Garner v Pounds Ship Owners and Ship Breakers Limited [2000] 3 All ER 218

Aberdeen Construction Group Limited v Inland Revenue Commissioner [1978] AC 885

Commissioner of Taxation v Orica Limited (1998) 194 CLR 500

The Texas Company (Australasia) Ltd v Federal Commissioner of Taxation (1940) 63 CLR 382

Interlego AG v Croner Trading Pty Ltd (1992) 111 ALR 577

Hepples v Federal Commissioner of Taxation (1992) 173 CLR 492 at 539 per McHugh J.

CIC Insurance v Bankstown Football Club (1997) 187 CLR 3

Oscar Chess Ltd v Williams [1957] 1 WLR 370.

Photo Production Limited v Securicor Transport Limited [1980] 1 All ER 556

REASONS FOR DECISION

11 January 2006	Senior Member Robin Hunt
SUMMARY

1.      The Applicant company (the taxpayer), until about 27 June 1997, was the legal and beneficial owner of ordinary shares in X company.  In 1994, the Australian Taxation Office commenced an audit into the taxation affairs of these companies.  The audit continued over a period of years and a settlement deed between the parties was agreed to and acted upon in 2001.  The Commissioner issued an amended assessment of income tax in that year which reduced the capital gains tax payable by the taxpayer.

2.      The taxpayer, in 2002, made a further request for amendment of its 1998 assessment of income tax based on later post-settlement adjustments.  These mainly resulted from an indemnity clause requiring repayment of overseas taxes from the taxpayer to the purchaser of shares in X company.  The adjustments resulted in a lower capital gain attributable to the sale of the shares and hence less capital gains tax payable on the sale.  The Commissioner declined to make most of the adjustments requested. The taxpayer sought review of the Commissioner’s objection decision disallowing these adjustments.

3.      The tribunal found the precise consideration on the sale was not known on the date of the deemed disposal of the shares, that is, on the date of contract.  Its calculation was provided for in the terms of the contract.  The calculation of the consideration was made once tax liabilities associated with the shares sold were ascertainable.  Therefore, the tribunal has decided the consideration should be reduced in accordance with the contract and the income tax assessment amended as requested by the taxpayer.

background

4.      On 5 June 1997, the taxpayer agreed to sell shares in X company and S company (the purchaser) agreed to buy the shares.  All of the businesses involved in the transaction conducted operations in Australia and overseas.  The agreement between the parties for the sale and purchase of the shares was recorded in two documents, the “share and trademarks acquisition agreement” (or sale agreement) and a supplemental agreement.  These agreements provided that the consideration for the shares was $479,853,567 less any payments pursuant to cl.8.9 of the sale agreement and cl.10.4 of the supplemental agreement.  These clauses permitted adjustment of the price for any breach of warranty including tax claims and warranties. The taxpayer received a partial payment of consideration in the 1998 income year and lodged its income tax return in February 1999.  It disclosed a net capital gain on the sale of the shares of $26,591,129. On 15 February 1999, the Commissioner issued an assessment for the year in the amount of $166,844,844, which was consistent with the capital gain declared.

5.      X company had unresolved overseas tax obligations and completion accounts had not been furnished to the purchaser at the date of the disposal of the shares.  Subsequent to the furnishing of income tax returns and the issue of the Commissioner’s assessments of income tax for the 1998 year, the taxpayer made some reimbursement to the purchaser based on cl.8.9 of the sale agreement and cl.10.4 of the supplemental agreement as provided.  The consideration was adjusted and the effect was to reduce the taxable income of the taxpayer for the year ended 30 June 1998. 

6.      On 29 June 2001, the Commissioner, the taxpayer and other parties entered into a deed of settlement as a result of an ongoing audit and discussions.  The Commissioner at that time agreed to amended assessments for X company and issued it with an assessment for $5,694,539. On or about 31 July 2001, the Commissioner issued the taxpayer with a notice of amended assessment for the 1998 year reducing the taxable income from $166,844,844 to $146,195,859.  The Commissioner further acknowledged, in cl.2.5 of the settlement deed, that further adjustments might result from the sale agreements and the taxpayer might bring these to account. 

7.      On 27 September 2001, the taxpayer and other parties, not including the Commissioner, entered into an adjustment agreement.  In consequence, the taxpayer paid to the Commissioner the amended tax liability of $5,694,539 on behalf of X company.  X company paid the taxpayer $348,716, making the net amount outlaid by the taxpayer $5,345,539.  The taxpayer claimed this amount as a reduction to the purchase price of the shares and the net capital gain.

8.      On 19 February 2002, the taxpayer requested a further amended income tax assessment based on various post-settlement adjustments.  Acceptance of these claims would result in reduction of the capital gains attributable to the sale of the shares.  Involved were amounts paid by the taxpayer in connection with X company under the sale agreements.  The payments were made in accordance with the sale agreements. Bringing the payments to account reduced the consideration paid to the taxpayer. Brought to account for tax purposes in the year of disposal of shares, 1998, the adjustments substantially reduced the capital gains tax on the disposal.  These amounts represented a deposit held pending “completion accounts” as well as reimbursement of overseas taxes paid.  There was no dispute that these payments were properly recovered by the purchaser under the indemnity clauses in the sale agreements.  The taxpayer’s request for an amended assessment specified the amount of the Australian tax settlement of $5,345,823, the deposit of $1.5 million released to the purchaser, and reimbursement to the purchaser of $677,703 paid to the Malaysian tax authorities as well as accountant’s costs of $12,160 paid in connection with negotiations with the UK Inland Revenue authorities in respect of X’s liabilities.

9.      Also during February 2002, Greek Revenue authorities commenced an audit into the taxation affairs of a Greek company which was part of the group whose shares were sold.  In May 2002, the purchaser paid Greek tax of $671,030 for the period ending 30 June 1997 and, in June 2002, demanded reimbursement from the taxpayer under the sale agreements.  On 1 August 2002, the taxpayer reimbursed the purchaser for this debt.

10.     On 15 August 2002, the taxpayer made a further request for adjustment to reflect the Greek tax reimbursement as well as the earlier adjustments.  On 6 December 2002, the Commissioner disallowed the requests.  The taxpayer lodged an objection which the Commissioner refused on 26 September 2003.  On 26 September 2003, the Commissioner allowed the taxpayer’s objection to the extent of subtracting $1.5 million from the consideration of the shares, but disallowed the remainder of the objection.  This decision was implemented by notice of amended assessment issued 8 October 2003. This is the decision before the tribunal.

issue

11. The taxpayer sought review of the objection decision of the Commissioner to disallow the requests for an amended assessment made under s.170 of the Income Tax Assessment Act 1936 (the 1936 Act).  The taxpayer argued that the payments should be treated as a reduction of the purchase price or consideration.  Alternatively, the taxpayer argued that it never actually received as consideration the money it had to reimburse in later years as it was received conditionally or “never vested in possession”.  The Commissioner argued that the only reduction in the consideration was $1.5 million, which arose on finalisation of the “completion accounts”.  The Commissioner further argued that the consideration was not determined at the date of the agreements, although this was the date of the disposal.  The Commissioner contended the date for calculation of the consideration was logically the last day of the financial year in which the deemed disposal transaction took place.  In the present case, he contended that execution and completion occurred in the same year so that the application of s.160U(10) of the 1936 Act did not arise.  Section 160U(10) permits amendment of an assessment.

analysis of evidence and findings

12.     This claim concerns treatment of consideration received on the disposal of an asset for capital gains tax.  The contracts in this case provided for an initial payment by the purchaser and anticipated later adjustments of the price depending on undetermined liabilities of the company whose shares were the subject of the sale.  There is no dispute about the date of disposal but about the time when consideration for the disposal is finalised for calculation of the gain.

13.     The requested amendments would reduce the taxable income of the taxpayer for the year ended 30 June 1998 by an amount of $5,224,386. On 5 June 1997, the taxpayer agreed to sell its shares in X company to S company, the purchaser.  The agreement provided for certain adjustments to be made to the purchase price in respect of liabilities which were either undisclosed or had not emerged or not crystallised prior to completion.  The items giving rise to the dispute are an Australian tax settlement amount of some $5m, the release of a deposit in an amount of $1.5m and payments in respect of settlement with taxation authorities in Malaysia, the United Kingdom and Greece.  With the exception of what is described as the “…deposit”, the Commissioner in effect declined to adjust the capital gain to give credit for those items.  There is no dispute as to whether the payments actually were made to the purchaser pursuant to the terms of the sale agreements, and that they were in fact paid. However, the payments were made after the furnishing of “completion accounts” to the purchaser.

14.     The tribunal has been asked to decide whether the taxpayer is entitled to reductions in its taxable income for the 1998 year to reflect subsequent payments it made to the purchaser under the sale agreements.  The first question is whether, for the purpose of calculating the consideration paid or received according to s.160ZD of the 1936 Act, the amounts should be deducted.  Section 160ZD sets out the consideration in respect of disposal of an asset for the purposes of capital gains tax.  The section covers a number of situations.  Under s.160ZD (1)(a) consideration is the amount the taxpayer receives or is entitled to receive.  If the taxpayer is successful on that issue the second issue won't arise.

15.     The second possible issue is whether, even if section 160ZD does not operate in those circumstances, the repayment amounts can be characterised as monies not received for the purpose of s.160ZF.  Section 160ZF allows for adjustment where consideration is not received and permits the amendment of an assessment, among other things.  The taxpayer argued the original payment of consideration was subject to the written agreement of the parties that it was dependent on the completion accounts and possible adjustment and indemnity.

16.     As the primary facts were not in dispute, alternative bases were no longer pressed by the taxpayer as to a claim for deduction under section 8(1) and as to whether there was an assessment for 2001/2002. This disposed of matters Nos. NT 2004/209 and NT 2004/210.

17.     The purchase agreement was dated 5 June 1997.  It made reference to the supplemental agreement and it also made reference to warranties as meaning the indemnities, warranties and representations by vendor set out in schedule 5.  This agreement also referred to “completion accounts” in paragraph 5.3.  The parties were required to prepare, within two months after the completion date, a balance sheet to reflect the transactions occurring on or before completion as contemplated by the agreement and adjustments specified.  In the subclauses under the completion accounts, the accounts must include all such reserves and provisions for tax as are materially necessary to cover all tax liabilities, whether or not assessed, of the vendor, the company and the subsidiaries up to the completion date.  These clauses made it plain that it was always in contemplation of the parties that there may be tax liabilities which would affect the balance sheet.  Further, under a later clause headed “Obligations of Purchaser …”, the purchaser was obliged to pay to the vendor and the vendor was obliged to refund to the purchaser certain amounts described by reference to other clauses of the agreement.  These involved a deposit held by a stakeholder and adjustments including the tax liabilities.  Clause 8.9 reads:

“Any monetary compensation received by the purchaser as a result of any breach by the vendor of any warranty shall be in reduction and refund of the purchase price of the asset most relevant to the breach of warranty.”

18.     Although ss.160U (1) and (3) provide that disposal occurs at the time of making the contract, counsel for the Commissioner conceded that it is only really at the time of completion that one can really work out what the consideration for the disposal actually is. It is upon completion that many contracts provide for the payment of the price as worked out with adjustments made and a figure becomes clear.  This is usually the case with commonplace sales of land. However, the Commissioner suggested that the most sensible date to select for this calculation was the last day of the year of income because by then the taxpayer’s taxable income must be determined as at the end of the year.

19. It is feasible that a taxpayer may have a contract of sale which is signed in one year of income and completed in the next. The legislation takes note of this and provides in s.160U(10) that an assessment may be amended. Specifically, the subsection provides that s.170 does not prevent the amendment of an assessment at any time to give effect to ss (3), that is, where the time of an acquisition or disposal is taken to have been before the making of the assessment. The Commissioner argued before me there could be no adjustment under s.160ZD in 2002 because the taxpayer actually received an amount within the year of income, 1998.

20.     The case of Arthur Murray (NSW) Pty Ltd v Federal Commissioner of Taxation (1965) 114 CLR 314, a case preceded the capital gains tax legislation, concerned unearned payments received ahead of services provided. It is authority for the proposition that such payments need not be brought to account until earned. The parties also made reference to two English cases, Marren (Inspector of Taxes) v Ingles [1980] 3 All ER 95 and Fielder (Inspector of Taxes) v Vedlynn Ltd [1992] STC 553.  In the Marren (supra) case, the taxpayer sold shares for an immediate ascertained cash sum and a further parcel for a conditional and unquantified amount payable at an unascertained future date. The future payment depended on whether or not shares were floated.  Lord Wilberforce found that the second parcel of shares was sold for a deferred consideration and that there was a disposal of the right to receive the deferred consideration when it was actually received.  That was the way in which it was brought to account rather than initially and upfront.  By contrast, the taxpayer in the present case sold all of the shares in one disposal although the consideration was calculated in subsequent steps and not upfront.  In both the Marren (supra) and Fielder (supra) cases, there were two sales of shares involved which was the reason why consideration was paid in two parcels.  This was not the situation in the case before me where the shares were sold in one transaction with provision form adjustment of the price for unascertained debts. I do not consider that any asset has been created in the present case by the indemnity provisions requiring repayments to the purchaser in the event of liabilities being discovered after the date of disposal of the shares.

21.     I further note the judgment of Harmon J in Fielder (supra), half way down page 566, that certain guarantees generated no basis on which a separate and additional monetary value could be placed as part of the consideration to be added to the monetary price.  No such problem occurs with the indemnity in the present case as the amounts paid to overseas tax authorities are readily ascertainable albeit subsequent to the initial payment of consideration.  I do not agree that it is true to say that s.160ZD cannot apply because the amounts involved are unascertainable.  The entitlement of the taxpayer to receive reimbursement was varied according to an ascertainable fixed sum in respect of overseas taxing authorities.

the application of s.160ZD of the 1936 act

22. The date of deemed disposal under the agreements is 5 June 1997 as per s.160U(3). This is not disputed. It follows that consideration is assessed for capital gains tax purposes in the usual way at the date of the agreements, that is, 5 June 1997. Section 160ZD is the provision which governs the calculation of consideration in respect of a disposal. Subsection 160ZD(1)(a) provides that the consideration in respect of a disposal of an asset is, if the taxpayer has received or is entitled to receive an amount or amounts of money as a result of or in respect of the disposal, that amount or the sum of those amounts. Further, s.160U(10) provides that s.170 does not prevent the amendment of an assessment at any time. Section 160U(10) also sets out that the amendment of an assessment at any time is to give effect to s.160U(3), which is the subsection that provides that the time of disposal shall be taken to have been the time of making of the contract.

23.     It follows from these provisions that, however inconvenient it may be, the appropriate time of calculation of the consideration received by the taxpayer is nevertheless the date of contract.  The relevant enquiry is what amounts the taxpayer has received or was entitled to receive as a result of the disposal, in accordance with s.160ZD(1)(a).

24.     As is usual under contract arrangements, as at the contract date, 5 June 1997, the taxpayer received nothing but was entitled to receive amounts in accordance with the terms of the agreements entered into on that date.  On the proper construction of those agreements, the taxpayer was entitled to receive amounts determined in accordance with clause 6.8(b) of the sale agreement as adjusted in accordance with clause 8.9 of that agreement and clause 10.4 of the supplemental agreement.  It is therefore appropriate that the assessment should be amended to reflect the consideration calculated in accordance with those agreements.

25.     As the shares were disposed of under a contract, the time of disposal is the time of making of the contract, 5 June 1997: see s.160U and Federal Commissioner of Taxation v Sara Lee Household & Body Care (2000) 201 CLR 250. How the amount of the consideration is calculated is clearly set out in s.160ZD. This is also plain from the explanatory memorandum to the Income Tax Assessment Amendment (Capital Gains) Bill 1986 which provides that the consideration will be taken to be what is paid for the asset unless special circumstances apply to affect the amount (if any) paid. In addition, in the case of Kiwi Brands Pty Ltd v Commissioner of Taxation (1998) 90 FCR 64 at 72G, the Full Federal Court said:

“Where those dispositions are for consideration it is necessary to determine what the consideration in respect of that disposition is … it will be the amount of money which the taxpayer will have received or be entitled to receive, either as a result of the disposition or in respect of it.  It is only when it is known what the consideration is in respect of a particular disposition that it is possible to compute to the amount which is to be included in assessable income.”

26.     The source of the taxpayer’s entitlement and what the consideration for the disposition is, is the contract or contracts it made with the purchaser.  In this case, the written contracts set out the intention of the parties in an unambiguous fashion although it has taken some time for the last adjustments to have been made.  The written documents, therefore, are the source at which the Tribunal must look to discover the actual consideration to which the taxpayer is entitled.  See Gibbs J in Australian Broadcasting Commission v Australasian Performing Rights Association Ltd (1973) 129 CLR 99 at 109.

27.     The agreements executed on 5 June 1997 were part of the one transaction.  Clause 15 of the sale agreement sets out that “this agreement and the supplemental agreement contains the entire agreement of the parties with respect to their subject matter … “.  Several other clauses in both agreements indicate and support the expectation and intention of the parties that the two agreements form one instrument.  Construing these agreements as a whole and giving effect to the clauses set out, it is apparent that the taxpayer was entitled to receive the amounts provided by clause 6.8(b) of the sale agreement plus or minus any adjustments on finalisation of the completions accounts, less any amounts which the taxpayer was required to pay pursuant to clauses 8.9 of the sale of the sale agreement and 10.4 of the supplemental agreement.  The Commissioner has amended the assessment so that it takes into account the amounts provided by clause 6.8(b) plus or minus adjustments on finalisation of the completion accounts.  Although the Commissioner argues that the completion accounts indicate completion of the sale and permit no further adjustment after that date, this does not take into account the provision of clauses 8.9 and 10.4 as to possible further adjustments.  There is nothing in the agreements between the parties to indicate that completion accounts prevented the implementation of clauses 8.9 and 10.4 at any time.  In addition, s.160U(10) permits account to be taken of adjustments to a contract price at any time.

28.     Both the Commissioner and the taxpayer brought to the attention of the Tribunal cases decided in the United Kingdom.  While the tax legislation in the UK is not identical to the provisions which I am now required to examine, I have taken note of the cases brought to my attention.  The construction which the taxpayer urges is consistent with that taken in the case of Randall v Plumb [1975] 1 WLR 633. Mr Randall received £25,000 with a grant of a 20-year option to purchase land. The option included a term allowing the company to which the option was granted to call for repayment of the £25,000 if it was unable to obtain planning permission after 10 years. Mr Randall was assessed for capital gains tax on the amount of £25,000. The revenue authority argued that the contingency that Mr Randall might have to repay the £25,000 should not be taken into account. Walton J held otherwise. His Honour held at 637G that the contingency must be taken into account in establishing the amount of the consideration received by the taxpayer, this being the only possible method of arriving at a figure for the amount of the consideration which truly reflects the contingency to which the matter is subject. Randall v Plumb was approved unanimously by the House of Lords in Garner v Pounds Ship Owners and Ship Breakers Limited [2000] 3 All ER 218.

29.     By comparison to Randall, in the present case, the value of the contingency was not known at the date of the contract.  It is now known and may be taken into account in the manner in which the taxpayer seeks in order to amend its assessable income.

30.     The contractual arrangements, while inconvenient in terms of assessing income tax liabilities for the year 1998, accord with business practice.  The shares were sold in return for an amount exclusive of any pre-5 June 1997 tax liabilities.  The purchaser did not bear the risk should such liabilities arise but arranged to be recompensed for any pre-5 June 1997 tax liabilities.  Lord Wilberforce in Aberdeen Construction Group Limited v Inland Revenue Commissioner [1978] AC 885 at 892-893 commented that:

“But a guiding principle must underlie any interpretation of the Act namely, that its purpose is to tax capital gains and to make allowance for capital losses, each of which ought to be arrived at upon normal business principles.  No doubt anomalies may occur ….”

31.     This passage was adopted by Gummow J in Commissioner of Taxation v Orica Limited (1998) 194 CLR 500 at 545, where his Honour added:

“This suggests that, where there are several constructions of the legislation which are open, the Courts should where at all possible avoid slavishly following the provisions of that legislation if that produces a charge to tax on something other than a true gain.”

32.     I am persuaded that the true gain in the present case is represented by the final calculation made by the taxpayer after reimbursement of the purchaser in accordance with the agreements made on 5 June 1997.

Taxation Determination TD 93/45

33.     In TD 93/45, the Commissioner states that the consideration in respect of the disposal, where the parties renegotiate the price before settlement, is the renegotiated amount. The Commissioner takes this position although the renegotiation occurs after the date of the contract. He refers to s.160ZD(1) as the basis for this treatment. Although the price has not been renegotiated in the present case but adjusted due to subsequent events dealt with in the contract and in accordance with its terms, to treat the changed amount of consideration as irrelevant to the income tax assessment of the capital gain would be inconsistent with TD 93/45. The adjustment is a post contract date event similar to a renegotiated price. The interpretation of s.160ZD in accordance with the taxpayer’s request is consistent with the views expressed in TD 93/45.

Taxation Ruling TR 97/15

34.     Taxation Ruling 97/15 deals with conditional contracts for the sale of goods. The Commissioner at para. 59 of the ruling notes the comments of Dixon J in The Texas Company (Australasia) Ltd v Federal Commissioner of Taxation (1940) 63 CLR 382 at 465 and concludes that the amount of a liability which is inherently variable may not be finally determined until it is actually paid but this in no way impinges on the deductibility of the variable liability at the time it was incurred. Similarly, while the final amount of the consideration was not known at 5 June 1997, this does not impinge on its being calculated and adjusted in accordance with the contract terms for the purposes of calculation of the capital gain. The interpretation of s.160ZD in accordance with the taxpayer’s request is consistent with the views expressed in TR 97/15.

The Commissioner’s reasons for Decision

35.     The Commissioner, in his reasons for decision, set out several reasons for denying the taxpayer’s requests to amend the assessment. The first was that s.160ZD does not operate to reduce the amount of consideration received by the vendor where the vendor returns or refunds any of that consideration after settlement. This assumes that consideration is the amount received upon settlement. However, s.160ZD(1)(a) operates not only on actual receipt but also on the entitlement.  Further, the consideration is calculated according to the disposal at the date of the contract and as set out in s.160U.

36.     The second reason given was that TD 93/45 did not apply to the present case because it was not a matter involving renegotiation prior to settlement. TD 93/45 nevertheless reflects a view that an agreed reduction in price may be taken into account in considering entitlement.

37.     The third reason refers to the introduction of s.116-50 of the Income Tax assessment Act 1997. The Commissioner says that s.116-50 was introduced to allow capital proceeds to be reduced by any amount repaid, to the extent that a deduction is not allowable for the repayment. He contends that the 1936 Act should thus e construed as not allowing for the adjustment of consideration where part of the consideration is repaid. The rewrite of tax laws in 1997 was not explained in this instance as overcoming such a mischief. It might equally be a restatement of the pre-existing position. It is a dubious way to interpret earlier legislation by reference to a later Act. See Interlego AG v Croner Trading Pty Ltd (1992) 111 ALR 577 at 672, per Gummow J and Hepples v Federal Commissioner of Taxation (1992) 173 CLR 492 at 539 per McHugh J.

38.     CIC Insurance v Bankstown Football Club (1997) 187 CLR 384 is case involving the interpretation of the Insurance Contracts Act and the modern approach to statutory interpretation. In a joint judgment of Sir Gerard Brennan CJ, Dawson, Toohey and Gummow JJ, on page 408 said:

“The modern approach to statutory interpretation insists that the context be considered in the first instance, not merely at some later stage when ambiguity might be thought to arise ... which by the steps identified above is reasonable and open and more closely conforms to the legislative intent.”

39.     The legislative intent was, in this instance, well set out by Gummow J in the Orica (supra).  It is to bring to account capital gains.  It is not to prevent the taxpayer from, as is common in commercial contracts, to fix a preliminary consideration subject to subsequent adjustments. It does not prevent subsequent adjustment of the price in accordance with the contract.

40.     The Commissioner’s fourth reason was that the adjustments were in truth damages for breach of warranty. Although the terminology “warranty” may be used in some clauses of the agreements between the taxpayer and the purchaser, the use of this term does not necessarily indicate that the payments made were a remedy for breach of warranty or damages.  The agreements indicate that the parties have agreed to sell and to purchase on the basis that the purchaser will have no further taxation liabilities to bear for the period prior to the sale.  They have further agreed that should tax liabilities arise, there is a mechanism for these liabilities to be met. No breach of warranty is inherent to these arrangements. These clauses, whatever label one puts on them, were contractual obligations to repay money in certain events which may or may not occur and which did in fact occur at a later date.  In context, the reimbursement clauses are no more than a contractual promise. See Oscar Chess Ltd v Williams [1957] 1 WLR 370. Further, if the dealings of the taxpayer did amount to a breach of warranty, the consequences of such a breach are dealt with in the written agreements between the parties which are the basis for the calculation of consideration. The agreed consequences were that the taxpayer would indemnify the purchaser and the indemnity payment would reduce the purchase price, that is, the consideration. Such an agreement is not unusual. See Photo Production Limited v Securicor Transport Limited [1980] 1 All ER 556 at 567 per Lord Diplock.

41.     For these reasons, I have decided that the Commissioner’s decision on the taxpayer’s objection should be set aside. The 1998 income tax assessment should be amended in accordance with the adjustments to the price paid to the taxpayer under the terms of the agreements made on 5 June 1997.

decision

42.     The tribunal varies the objection decision of the Commissioner so as to find that the consideration the taxpayer received or was entitled to receive in respect of the disposal of the shares was:

(a) the amounts provided by clause 6.8(b) of the sale agreement;

(b) plus or minus any adjustment amount on finalisation of the completion accounts as defined in the sale agreement;

(c) less any the taxpayer was required to pay pursuant to clause 8.9 of the sale agreement and/or 10.4 of the supplemental agreement.

I certify that the 42 preceding paragraphs are a true copy of the reasons for the decision herein of Ms Robin Hunt, Senior Member.

Signed:   Associate

Date/s of Hearing  7 October 2004
Date of Decision  11 January 2006
Counsel for the Applicant         T. Bathurst QC
Solicitor for the Applicant          N. Mavrakis
Counsel for the Respondent     M. Richmond
Solicitor for the Respondent     S. Blakelock