The Taxpayer and Commissioner of Taxation
[2005] AATA 538
•8 June 2005
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2005] AATA 538
ADMINISTRATIVE APPEALS TRIBUNAL )
) No QT2004/156
TAXATION APPEALS DIVISION )
Re THE TAXPAYER
Applicant
And
COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal Senior Member Peter M McDermott Date8 June 2005
PlaceBrisbane
Decision The Tribunal sets aside the decision under review and the objection of the applicant is allowed. The dividend paid to the applicant is not assessable income. ..................[Sgd]......................
P McDermott
Senior Member
Administrative
Appeals
Tribunal
ADMINISTRATIVE APPEALS TRIBUNAL )
) No QT2004/156
TAXATION APPEALS DIVISION )
Re THE TAXPAYER
Applicant
And
COMMISSIONER OF TAXATION
Respondent
CORRIGENDUM [2005] AATA 538
Tribunal Senior Member Peter M McDermott Date15 June 2005
PlaceBrisbane
I DIRECT that the Tribunal‘s Reasons for Decision handed down on 8 June 2005 be amended as follows:
In paragraph 21 the first sentence which commences “Apart from this definition” should be deleted and replaced with the following sentence:
“Apart from this definition in section 6, it is clear that, on general principles, it is not the case that a dividend is only taxable if it is paid in the form of money.”
........................................
P McDermott
Senior Member
CATCHWORDS
TAXATION – Income tax – distribution of shares from a US company following a “spin-off” – whether share distribution received by the applicant is assessable income – distribution of shares was a dividend – whether distribution of shares received by the applicant was from profits – amount of profits do not need to be formally recorded in the accounts of a company before a dividend is accessible – distribution of shares must be wholly from profits to be assessable income – distribution of shares received by the applicant was not wholly from profits – distribution of shares was not a “transaction” – decision under review set aside.
Income Tax Assessment Act 1936 s 6, 6BA, 21, 21A, 44, 51
New Business Tax System (Debt and Equity) Act 2001
Taxation Administration Act 1953 s 14ZAF, 14ZAGFederal Commissioner of Taxation v Slater Holdings Ltd (1984) 156 CLR 447; (1984) 56 ALR 306
Tennant v Smith [1892] AC 150
Eisner v Macomber (1920) 252 US 189
Federal Commissioner of Taxation v Blakely (1951) 82 CLR 388
Macfarlane v Federal Commissioner of Taxation (1986) 86 ATC 4477
Re Spanish Prospecting Co Ltd [1911] 1 Ch 92
QBE Insurance Group Ltd v Australian Securities Commission (1992) 8 ASCR 631; (1992) 10 ACLC 1490; (1992) 28 ALD 334
Sun Alliance Investments Pty Ltd v Commissioner of Taxation [2004] FCAFC 11
Webb v Federal Commissioner of Taxation (1922) 30 CLR 450
Marra Developments Ltd v B W Rofe Pty Ltd [1977] 2 NSWLR 616
Ronpibon Tin NL and Tong Kah Compound NL v Federal Commissioner of Taxation (1949) 78 CLR 47
Federal Commissioner of Taxation v Energy Resources of Australia Ltd (1994) 94 ATC 4923
Grimwade v Federal Commissioner of Taxation (1949) 78 CLR 199
Davis Investments Pty Ltd v Commissioner for Stamp Duties (NSW) (1958) 100 CLR 392REASONS FOR DECISION
8 June 2005 Senior Member P McDermott Introduction
1. The applicant seeks a review of that part of a decision of the Commissioner of Taxation (“the Commissioner”) which disallowed the applicant’s objection to an amended assessment made by the Commissioner in respect of the taxpayer’s income tax liability for the year ended 30 June 2000.
Hewlett-Packard Company “spin-off”
2. The Hewlett-Packard Company was originally incorporated in 1947 in the State of California. As from May 1968 the company was incorporated in the State of Delaware.
3. The contested part of the assessment in this case relates to the distribution to the applicant of shares in Agilent Technologies Inc (“Agilent”). The Hewlett-Packard Company made this distribution to the applicant following the “spin-off” by the company of its Agilent subsidiary by the distribution of stock.
4. In March 1999, the board of directors of the Hewlett-Packard Company decided to strategically realign the Hewlett-Packard Company to create two distinct companies, one focused on the Hewlett-Packard Company’s computing and imaging business, the other on Agilent, containing the Hewlett-Packard Company’s test and measurement businesses, semiconductor products, chemical analysis and other healthcare solutions businesses.
5. On 2 March, 1999 the board of directors of the Hewlett-Packard Company announced the realignment in the form of a spin-off transaction. In connection with the spin-off, the Hewlett-Packard Company transferred the assets and liabilities of its “Measurement Organization” which includes its test and measurement, semiconductor products, chemical analysis and healthcare solutions businesses to Agilent on 1 November 1999, the separation date.
6. Immediately after the separation date, Agilent began operating as a separate subsidiary of the Hewlett-Packard Company. Agilent launched an initial public offering of approximately 15.9% of its common stock on 18 November 1999. After the completion of the initial public offering, the Hewlett-Packard Company owned approximately 84.1% of the shares of Agilent.
7. On 7 April 2000 the board of directors of the Hewlett-Packard Company had approved the distribution of 380,000,000 shares of Agilent common stock to holders of Hewlett-Packard Company common stock which would be made to shareholders on 2 June 2000. A shareholder in the Hewlett-Packard Company would receive 0.3814 Agilent shares for each Hewlett-Packard Company share that was held on 2 May 2000 (HP T1, folios 1-2).
8. On 2 May 2000 the applicant held 3,483 shares in the Hewlett-Packard Company and on this basis was entitled to receive 1327 shares in Agilent. As is common in such corporate reorganisations, no fractional shares in Agilent were issued and a cash adjustment was made of any such fractional entitlement.
9. On 11 May 2000, the Hewlett-Packard Company issued an Information Statement advising that the distribution, consisting of 380,000,000 shares and representing 84% of the Agilent Common Stock, would be by way of dividend to be distributed on 2 June 2000 (HP T1, folio 1).
10. The Master Separation Agreement that was placed in evidence (Exhibit M) contained the recital that both the Hewlett-Packard Company and Agilent intended that the distribution of shares in Agilent to shareholders in the Hewlett-Packard Company “will qualify as a tax-free organization under Sections 368(1) (D) and 355 of the Internal Revenue Code of 1986, as amended (“The Code”) and that this Agreement if intended to be, and is hereby adopted as, a plan of reorganization under Section 368 of the Code”.
11. Whether or not “the plan of reorganisation” is tax-free for US federal income tax purposes is not determinative of whether the distribution of Agilent shares to the applicant is taxable under Australian law.
12. There was admitted before the Tribunal the quarterly accounts of the Hewlett-Packard Company (Exhibit B) that were filed with the Securities and Exchange Commission on 12 September 2000. In these accounts it is stated that the distribution of Agilent shares resulted in a US$4.2 billion reduction in retained earnings and in the elimination of the net assets of the discontinued operation.
Distribution of Agilent shares to applicant
13. On 2 June 2000 the Hewlett-Packard Company issued the applicant with 1327 shares in Agilent. The company then posted a share certificate to the applicant (HP T2, folio 9). At that time those shares had a market value of US$77.0068. The Commissioner assessed the value of that distribution of shares as $168,961.68. Initially the further amended facts and contentions of the Commissioner calculated this distribution by reference to the exchange rate of US$0.68048. The applicant made no challenge to such basis of calculation by the Commissioner.
14. The applicant made disclosure of the receipt of those shares in his return to the Commissioner for that year. The applicant, however, considered that the shares were non-taxable.
15. The applicant in his notice of objection relied upon the fact that in other identical cases there were private rulings that were favourable to the taxpayer. The applicant in particular quoted from one private ruling which contained an affirmative answer to the question: “Were the Agilent Technologies Inc. shares acquired by way of a tax-free spin off?” [T1, folio 6]. However, private rulings only apply to the person who is seeking a ruling cf. Taxation Administration Act 1953, s 14ZAF, s 142ZAG.
16. The Commissioner, in issuing a Private Ruling to the applicant, relied on this memo from Hewlett-Packard Australia:
“Taxation Ruling
HP Australia had previously obtained advice from PricewaterhouseCoopers in relation to the Australian taxation treatment of the shares in Agilent Technologies (“Agilent”) that the Australian tax residents received on the spin-off of Agilent Technologies.
The Australian Taxation Office has confirmed PwC’s advice in writing (in the form of an ATO opinion).
For Australian taxation purposes, the receipt of the Agilent shares by Australian tax resident shareholders is a taxable dividend. In practical terms, the difference between you receiving the Agilent shares and a usual dividend from Hewlett Packard is that you received the dividend in the form of shares in Agilent Technologies rather than in the form of cash.
As stated in HP’s quarterly accounts (refer to note 2) filed on 12 September 2000 with the Securities Exchange Commission, the distribution of the Agilent shares was against Hewlett Packard’s retained profits. This is the principal reason as to why the receipt of the Agilent shares was regarded by the ATO as a taxable dividend.”
In the circumstances it was understandable why the Commissioner regarded the distribution as being assessable.
Was the distribution of Agilent shares a dividend within the meaning of s 6 of the Income Tax Assessment Act 1936?
17. At the hearing the Commissioner contended that the distribution of Agilent shares was a dividend within the meaning of s 6 of the Income Tax Assessment Act 1936 (“the Act”).
18. The Commissioner also contended that the dividend was paid, or is taken to be paid, out of profits under s 44 (1) (a) of the Act: see Respondents Further Amended Facts and Contentions, filed 21 February 2005; contention 2.
19. The applicant contended that the distribution of Agilent shares resulted in a dilution of the value of the applicant’s shares in the Hewlett-Packard Company. The applicant contended that there was a reduction in value of Hewlett-Packard Company shares after the distribution of Agilent shares.
20. A distribution is a “dividend” for the purposes of the Act if it is “made by a company to any of its own shareholders, whether in money or other property”: see the definition of “dividend” in section 6 of the Act. I consider that shares in Agilent are certainly “property” for the purposes of the Act as is any other in specie distribution of property. In Federal Commissioner of Taxation v Slater Holdings Ltd (1984) 156 CLR 447; (1984) 56 ALR 306 at Gibbs CJ recognised that the statutory definition of dividend had been modified. In his dissenting judgment in Federal Commissioner of Taxation v Uther (1965) 112 CLR 630 at 636, Kitto J made some observations on how legislative amendments have expanded the definition of dividend.
21. Apart from this definition in section 6, it is clear that, on general concepts, a dividend is not taxable only if it is paid in the form of money. As Lord Halsbury stated in Tennant v Smith [1892] AC 150 at 156, a distribution of “money’s worth” may be taxable if paid out of profits: see also Eisner v Macomber 252 US 189. However, the 1936 Act removed any qualification that a “dividend” be paid from profits: see Federal Commissioner of Taxation v Uther (1965) 112 CLR 630 at 636.
22. I accept the submission of the Commissioner that the distribution of Agilent shares is a dividend for the purposes of section 6 of the Act.
Liability under s 44(1)(a) of the Act is dependent upon a distribution being made out of profits
23. Dividends are assessable as income of a shareholder in a company provided that they come within the terms of section 44 (1) (a) of the Act. That provision is expressed to apply whether the company is a resident or non-resident. Accordingly a distribution from a non-resident company (such as the Hewlett-Packard Company) may be assessable under section 44(1)(a) provided that the conditions stipulated in that provision are satisfied.
24. Where a shareholder is a resident, which is the case here, a dividend which is paid to the shareholder is assessable provided that it is paid out of profits derived by it from any source: see section 44 (1)(a). This provision originated as section 16AA of the Income Tax Assessment Act 1922-1934 (as inserted by the IncomeTax Assessment Act 1934). The words “out of profits” were retained in section 44(1) of the Act: See Federal Commissioner of Taxation v Blakely (1951) 82 CLR 388 at 406 per Fullagar J. Section 44 (1) of the Act also maintained the distinction in section 16AA of the Income Tax Assessment Act (1922-1934) between taxing a resident with “dividends paid to him by the company out of profits derived by it from any source” and a dividend paid to an absentee “to the extent to which they are paid out of profits derived by it from sources in Australia”. I will comment upon the significance of the words “to the extent to which” later in these reasons.
25. Section 44(1)(a) of the Act continues the change introduced by the IncomeTax Assessment Act 1934 of making shareholders assessable to tax provided that they receive a distribution which is derived from profits of the company: See Federal Commissioner of Taxation v Slater Holdings Ltd (1984) 156 CLR 447 at 457 per Gibbs CJ. In my opinion this case depends entirely on whether the distribution of Agilent is paid out of profits of the Hewlett-Packard Company. Unless the payment is made out of “profits” there is no basis for an assessment being made under section 44: see Federal Commissioner of Taxation v Blakely (1951) 82 CLR 388 at 397 per Latham CJ.
Meaning of “profits”
26. The Act does not contain a definition of what are the “profits” of a company.
27. The meaning of the term “profits” must be found from the decisions of the courts. I accept the submission of the Commissioner that there can be no justification for attributing any narrow view to the meaning of profits: see Macfarlane v Federal Commissioner of Taxation (1986) 86 ATC 4477 at 4482-4483.
28. The courts continue to emphasise that the profit of a business should be calculated by reference to changes in the value of assets of a business during the relevant financial period. This was established in the seminal decision of Re Spanish Prospecting Co Ltd [1911] 1 Ch 92 where Fletcher Moulton LJ, at 98, considered the meaning of the word “profits”. His Lordship considered that the word “profits” has a well-defined legal meaning and considered that term implies a comparison between the state of a business at two specific dates usually separated by an interval of one year.
29. Accordingly, the fundamental meaning of the term “profits” is the amount of gain made by a business in a year. This can only be ascertained by a comparison of the assets of the business at the two dates.
30. I am bound by decisions such as QBE Insurance Group Ltd v Australian Securities Commission (1992) 8 ASCR 631; (1992) 10 ACLC 1490; (1992) 28 ALD 334, where the court considered that the statement of principle that profit should be calculated by reference to changes in the value of assets of a business during the relevant financial period, as mentioned by Fletcher Moulton LJ in Re Spanish Prospecting Co Ltd [1911] 1 Ch 92, is as relevant today as it was in 1911 when it was expounded.
Was the distribution of the Agilent shares derived from the profits of the Hewlett-Packard Company?
31. Recently, the Federal Court of Australia has emphasised that the determination of whether or not a profit has been derived is a question of fact: see Sun Alliance Investments Pty Ltd v Commissioner of Taxation [2004] FCAFC 11. In this case this depends upon the existence of evidence that the company has paid a dividend out of profits.
32. The magnitude of the distribution of Agilent shares was certainly recognised by the Commissioner. The Commissioner put forward the facts that there was a distribution by the Hewlett-Packard Company of 380,000,000 Agilent shares and that each Agilent share was, at the time of distribution, worth US$77.0068 per share: see Respondent’s Further Amended Facts and Contentions, filed 21 February 2005; Facts 4 & 6.
33. On this basis I find that the Hewlett-Packard Company made a total dividend distribution of Agilent shares of US$29,262,584,000.
34. The Commissioner also put forward the fact that the Hewlett-Packard Company’s quarterly accounts, filed with the Securities and Exchange Commission on 12 September 2000, stated that the distribution of Agilent shares resulted in a US$4.2 billion reduction in retained earnings and in the elimination of the net assets of the discontinued operation: see Respondent’s Further Amended Facts and Contentions, filed 21 February 2005; Fact 8.
35. This statement that the distribution of Agilent shares had resulted in the elimination of the net assets of the discontinued operation can be better appreciated by an examination of the quarterly accounts of the Hewlett-Packard Company that were filed with the Securities and Exchange Commission on 12 September 2000 (Exhibit B, s 37 documents, folio 37). Those quarterly accounts disclose that the Hewlett-Packard Company retained certain assets and liabilities of Agilent which were subsequently liquidated. This resulted in cash flows from discontinued operations of approximately $1.0 billion and an increase in additional paid-in-capital of approximately $1.4 billion. It should also be borne in mind that on 1 November 1999, the separation date, the Hewlett-Packard Company had transferred the assets and liabilities of its “Measurement Organization” to Agilent.
36. On this basis I find that the distribution of Agilent shares resulted was not wholly derived from profits or retained earnings of the Hewlett-Packard Company. I make this finding on the basis that the retained earnings were of an amount of about US $4.2 billion. The use of the expression “retained earnings” in the Hewlett-Packard Company’s quarterly accounts is, in my opinion, appropriate to refer to profits.
37. In Federal Commissioner of Taxation v Slater Holdings Ltd (1984) 156 CLR 447 at 460, Gibbs CJ emphasised: “Although profit in its ordinary sense often means the excess of returns over the outlay of capital, Farwell J said in Bond v Barrow Haematite Steel Co [1902] 1 Ch. 353, at pp 365-366, that the question whether there are profits available for distribution is to be answered according to the circumstances of each particular case, the nature of the company and the evidence of competent witnesses”.
38. In examining the circumstances of this particular case I make the observation that this is not the usual situation where a company in its ongoing business is making a distribution to shareholders. Rather it is a case where a parent company has created a new subsidiary company to carry out an enterprise that the parent company has engaged in and issued shares in that subsidiary to existing shareholders. In that context the company has also transferred certain assets and liabilities to the new subsidiary company. There is evidence before the Tribunal, in the form of an Information Statement, that the Hewlett-Packard Company transferred the assets and liabilities of its “Measurement Organisation” to Agilent (HP T1, folio 7).
39. The matter before me is one which does not appear to have been considered before. Some commentators have remarked upon the fact that “there has been little exploration by the courts of the status of dividends according to the judicial concepts of income”: see G S Cooper, R E Krever, and R J Vann, Income Taxation: Commentary and Materials (4th ed., 1999), p.193.
40. This matter involves a corporate reconstruction: see Webb v Federal Commissioner of Taxation (1922) 30 CLR 450 at 463 per Knox CJ, Gavan Duffy J and Starke J; at p. 471 per Issacs J. Corporate restructures are now dealt with under “demerger dividend” provisions (subsections 44(2)-(6)) which apply where there has been the restructuring of a company by carving up the company into two or more corporate entities. Under the “demerger dividend” provisions, a demerger dividend is deemed not to be paid out of profits (see subsection 44(3)) and is not assessable income (see subsection 44(4)). In one recent demerger case a dividend that included a portion paid from retained earnings was not assessable as a dividend under subsection 44(1)(a): see CR 2002/81. However, the demerger provisions are not applicable in this case as they only apply to demergers that occur after 1 July 2002.
41. In deciding this matter I have to bear in mind that the Commissioner put forward the facts that at the time of the distribution by the Hewlett-Packard Company of the 380,000,000 Agilent shares, each Agilent share was, at the time of distribution, worth US$77.0068 per share: see (Respondent’s Further Amended Facts and Contentions), filed 21 February 2005; Facts 4 & 6. On this basis, it is clear that Agilent is a company having a significant market value. The actual value of the assets of Agilent was not placed before the Tribunal as the quarterly accounts were consolidated. However, there is evidence before the Tribunal that on the separation date, the Hewlett-Packard Company had transferred the assets and liabilities of its Measurement Organisation to Agilent. The net value of these transferred assets would be considerable in view of the fact that the company has a significant market value. The Commission has now resiled from the previous value which it placed on those underlying assets and liabilities that made up Agilent: See (Respondent’s Further Amended Facts and Contentions- Contention 13),
42. In these circumstances I find that a significant component of the distribution of Aglient shares was in the nature of a capital receipt on general principles, rather than wholly from profits.
Is it necessary that the amount of profits be formally recorded in the accounts of the company before a dividend is taxable?
43. I do not accept the submission of the applicant, in reliance on Marra Developments Ltd v B W Rofe Pty Ltd [1977] 2 NSWLR 616, that a profit needs to be recognised or recorded before it is available for distribution. This case reflects the long established Anglo-Australian statutory principle that a dividend is payable only from profits. In Macfarlane v Federal Commissioner of Taxation (1986) 86 ATC 4477 Beaumont J remarked, at 4494, “that there is no reason to read down subsection 44(1)(a) so that it can bring to tax only the dividends paid out of those profits which the companies legislation designates as properly available for distribution”.
44. There may be cases where it is legitimate for a court to infer that a dividend is paid out of profits despite the absence of accounting records which disclose the amount of profits. The Commissioner relied upon Macfarlane v Federal Commissioner of Taxation (1986) 86 ATC 4477 where the court made an inference that a dividend was made from surplus assets not required to meet liabilities or issued share capital. In that case there was no evidence that the distribution was not paid from profits. In my opinion Macfarlane v Federal Commissioner of Taxation (1986) 86 ATC 4477 can be distinguished from this case where there is admitted accounting evidence of the source of the dividend.
Are the requirements of s 44 (1)(a) of the Act met only when a distribution is made wholly out of profits?
45. I have earlier made a finding that the distribution of Agilent shares was not wholly derived from profits of the Hewlett-Packard Company. The applicant made the submission that the stock dividend was not taxable because it was not wholly paid out of profits. The Commissioner rejected the contention of the applicant that the requirements of subsection 44(1) (a) are met only when a distribution is made wholly out of profits. The reply of the Commissioner states “the appellant’s contention that the requirements of subsection 44 (1) are met only when a distribution is made wholly out of profits is rejected by the respondent”: see Respondent’s Reply dated 21 March 2005, para. 11.
46. This is an issue of some complexity. In Australian Income Tax Law and Practice (12th ed, 1991), Vol. 2, p.1810.8 [service 80] the learned authors stated: “It is not clear whether a dividend must be paid wholly out of profits”.
47. The Commissioner relied upon the decision of the High Court of Australia in Federal Commissioner of Taxation v Slater Holdings Ltd (1984) 156 CLR 447; (1984) 56 ALR 306. The Commissioner submitted that the distribution to the shareholders in the Slater Holdings Ltd case “was a distribution of a mass of assets including an amount paid in reduction of capital and an amount of profits”: Respondent’s Submissions, para. 16. The Commissioner also submitted that the Slater Holdings Ltd case was authority for the proposition that the term “profits” will “include capital and revenue profits”: Respondent’s Submissions, para. 18 (d).
48. In examining the Slater Holdings case it is important to appreciate that it concerned a taxpayer company which was a member of a company limited by guarantee, and, as Gibbs CJ pointed out, such entities do not usually engage in undertakings intended to return a profit to their members. Gibbs CJ paid particular attention to the articles of the company limited by guarantee. Upon the liquidation of the company limited by guarantee a member was entitled to share in the distribution of assets (art. 53). The entitlement of a person ceasing to be a member was to receive such payments as the directors might think fit to make (art. 8): such payment was entirely at the discretion of the directors.
49. The Slater Holdings case concerned whether a distribution to the taxpayer was assessable. There were three components to the distribution. One-third of the distribution was from the capital profits reserve. One-third of the distribution was clearly made out of profits. The contentious issue was that the remaining one-third of the distribution was from a gift that was made to the company limited by guarantee by another member. The distribution was assessable on the basis that it represented an increase in assets and therefore represented a profit. The ruling in the Slater Holdings case ensured that companies limited by guarantee would not receive more favourable tax treatment than companies that have a share capital.
50. In Federal Commissioner of Taxation v Slater Holdings Ltd (1984) 156 CLR 447; (1984) 56 ALR 306 Gibbs CJ remarked, at 459 (CLR), 313 (ALR), that “what appears to be implicit in the judgment of Taylor J in FC of T v Uther (1965) 112 CLR 630 is the suggestion that to come within subsection 44 (1) (a) the distribution must have been made wholly out of profits; it is not enough that there is a distribution of a mass of assets which contains profits”. In Slater Holdings Mason J, Brennan J, Deane J and Dawson J agreed with the judgment of the Chief Justice. Mason J and Brennan J also stated that they agreed with the “reasons” of the Chief Justice.
51. Neither the submissions of the applicant or the Commissioner referred to these remarks of Gibbs CJ. However, I have earlier mentioned that the Commissioner did otherwise rely on the Slater Holdings case. Consequently there was no argument before the Tribunal as to whether those remarks should be adopted in this case.
52. Whilst it could be argued that these remarks of Gibbs CJ were not part of the ratio of the case, I consider that those carefully considered remarks of Gibbs CJ are the law that I should follow. This is particularly so as Mason J and Brennan J had expressly stated that they agreed with the reasons of Gibbs CJ: cf, Garcia v National Australia Bank Ltd (1998) 194 CLR 395 at 418 per Kirby J. I also mention that there appear to be no criticisms of those remarks. Indeed soon after the Slater Holdings decision was handed down Professor Parsons thought that it was open for an unlimited liability company to make a distribution expressed to be partly from share profits and partly from revenue profits: see R W Parsons, Income Taxation in Australia: Principles of Income, Deductibility and Tax Accounting (1985), [2.263], p. 96.
53. Since the decision in Federal Commissioner of Taxation v Slater Holdings Ltd (1984) 156 CLR 447; (1984) 56 ALR 306 there have, of course, been amendments to the provisions of the Act relating to dividends. There has been no amendment in relevant respects to subsection 44(1)(a). These amendments have not, for the purposes of this assessment affected this statement of principle that was enunciated by Gibbs CJ.
54. I might mention that the New Business Tax System (Debt and Equity) Act 2001 (Act No 163 of 2001) substituted a new subsection 44(1)(a). The relevant provision which I have considered is section 44 as it stood prior to the commencement of the New Business Tax System (Debt and Equity) Act 2001.
55. I also mention in passing that the New Business Tax System (Debt and Equity) Act 2001 excluded a non-share dividend from a dividend which is assessable under subsection 44(1)(a)(i) as non-share dividends are assessable under subsection 44(1)(a)(ii). At that time there was no amendment to subsection 44(1)(a) to remove the requirement that dividends that are paid to residents have to be paid out of profits. However, in one respect the New Business Tax System (Debt and Equity) Act 2001 did alter the statement of principle that was enunciated by Gibbs CJ by not requiring non-share dividends to be paid out of profits: subsection 44(1)(ii). However, this provision has no application to this matter as the distribution is not a non-share dividend as well the provision was not in force at the relevant time. The provision is only cited to illustrate that Parliament has not otherwise altered that statement of principle that was enunciated by Gibbs CJ.
Is it possible to have an apportionment of that part of the dividend that could be derived from profits?
56. In Federal Commissioner of Taxation v Slater Holdings Ltd (1984) 156 CLR 447; (1984) 56 ALR 306 Gibbs CJ did not think that subsection 44(1)(a) of the Act enabled an apportionment of that part of the dividend that could be derived from profits.
57. The Chief Justice added: “This view may be supported by the fact that the section does not refer to “dividends to the extent to which they were paid to him by the company out of profits” since in the light of the construction given to section 51 of the Act, the inclusion of the phrase ’to the extent to which’ would no doubt have allowed a dissection or apportionment to be made of the distribution: cf., Ronpibon Tin NL and Tong Kah Compound NL v Federal Commissioner of Taxation (1949) 78 CLR 47 at 55”.
58. In these circumstances it is not possible to have an apportionment to that part of the dividend that could be derived from profits.
59. I mention that the only respect in which section 44 (as in force at the relevant time) would allow the apportionment of dividends is in the case of a non-resident shareholder. This is because the relevant provision refers to dividends paid to the shareholder by the company “to the extent to which they are paid out of profits derived from sources in Australia”: see subsection 44(1)(b)(i). The use of the words “to the extent to which” would enable an apportionment in accordance with the principle in Ronpibon Tin NL and Tong Kah Compound NL v Federal Commissioner of Taxation (1949) 78 CLR 47 at 55. See Federal Commissioner of Taxation v Slater Holdings Ltd (1984) 156 CLR 447 at 449; (1984) 56 ALR 306 at 313 per Gibbs CJ.
Was the distribution of Agilent shares a “transaction” within the meaning of s.21 of the Act?
60. The Commissioner also contended that the distribution of Agilent shares was a “transaction” within the meaning of section 21 of the Act: see Respondent’s Further Amended Facts and Contentions, filed 21 February 2005; contention 4.
61. Section 21 provides that where, upon any transaction, any consideration is paid or given otherwise than in cash, the money value of that consideration shall, for the purposes of the Act, be deemed to have been paid or given: see subsection 21(1). The section has effect subject to section 21A: see subsection 21(2).
62. It has been recognised that section 21 is declaratory of the general law position: see Federal Commissioner of Taxation v Energy Resources of Australia Ltd 94 ATC 4923.
63. Pivotal to liability under section 21 is the need for there to be a “transaction”. In Grimwade v Federal Commissioner of Taxation (1949) 78 CLR 199 the meaning of “transaction” was discussed by Latham CJ and Rich J. Latham CJ thought that to be a transaction there has to be a transaction with some other person. Rich J referred to the dictionary meaning of “transaction” as being an “act”, “doing”, “negotiation” or “dealing”.
64. The Commissioner relied upon remarks of Dixon CJ in Davis Investments Pty Ltd v Commissioner for Stamp Duties (NSW) (1958) 100 CLR 392 at 408 in support of the contention that the distribution of Agilent shares was a “transaction” within the meaning of section 21 of the Act. However, those remarks were not concerned with the construction of the word “transaction” in a revenue statute.
65. This cannot be a situation where the applicant could influence events such as the Hewlett-Packard Company “spin-off”. In the absence of evidence of any dealing I do not consider that there was a transaction within the meaning of section 21.
Section 6BA of the Act
66. There has been some change of the basis on which the Commissioner made the assessment. In the decision disallowing the objection of the applicant the Commissioner withdrew the contention that the shares were issued by the Hewlett-Packard Company in the context of section 6BA of the Act.
67. The Commissioner at the hearing quite rightly submitted that section 6BA had no application to the distribution of property by a company to a shareholder of that company in the form of shares in another company. I accept that submission of the Commissioner.
Section 37 documents
68. The Government has recognised the complexity of taxation laws: see Tax Reform: not a new tax but a new tax system (Commonwealth of Australia, Canberra, August 1998), p.149. In a case such as this where the applicant was not represented there would be merit if the text of the relevant provisions of the Act upon which the Commissioner was to rely were included in the section 37 documents. This is particularly appropriate as the New Business Tax System (Debt and Equity) Act 2001 substituted a new section 44 into the Act.
Conclusion
69. Based on the material before me and for these reasons, I conclude that the objection decision under review will be set aside and the objection allowed.
70. I wish to record my appreciation to the parties in the manner in which the hearing was conducted by the use of submissions. As a result, the hearing of this difficult matter, in which there was a considerable volume of documentation, was not protracted.
Decision
71. The Tribunal sets aside the objection decision under review and the objection of the applicant is allowed. The dividend paid to the applicant is not assessable income.
I certify that the 71 preceding paragraphs are a true copy of the reasons for the decision herein of Senior Member P McDermott
Signed: Camille Banks
Associate
Date/s of Hearing 7 March 2005
Date of Decision 8 June 2005
The Applicant was represented by his father
Counsel for the Respondent Ms M Brennan
Solicitor for the Respondent ATO Legal Practice
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