Case: Norman v Federal Commissioner of Taxation [1963] HCA 21 ; (1963) 109 CLR 9
Outcome: distinguished
The third, and further alternative way in which the Commissioner put his case, is that under the statutory r&eacute;gime, ABB Zurich could not, without assigning the underlying shares, effect an assignment of the debt that would avoid derivation by it of the "dividend". This third submission depends largely, though not entirely, on Norman v Federal Commissioner of Taxation [1963] HCA 21 ; (1963) 109 CLR 9 ( Norman ). 36 I will elaborate on the parties' submissions below. 37 In their outline of opening, the applicants set out the following facts which, although elaborated upon by the Commissioner as noted below, were not in issue between the parties: Parties [ABB Australia] (formerly called Asea Brown Boveri Pty Limited) ... is a company: (a) incorporated pursuant to the laws of New South Wales; (b) the issued capital of which during the period from (at least) 1 May 1996 to 30 June 1996 comprised 53,072,944 ordinary shares of A$1.50 each and 42,827,055 ordinary shares of A$1.00 each, all of which were registered in the name of the Second Applicant (as beneficial owner) except for 1 ordinary share of $1.00 which was registered in the name of Patelhold Patentverwertungs und Elektro Holding AG on bare trust for the Second Applicant (as beneficial owner); (b) which is, and was at all material times, a resident of Australia for the purposes of [the 1936 Act]. [ABB Zurich] is a company: (a) incorporated pursuant to the laws of Switzerland; (b) which is, and was at all material times, a non-resident of Australia for the purposes of the 1936 Act. [BZW] is a company: (a) incorporated pursuant to the laws of England and Wales; (b) which was at all material times a non-resident of Australia for the purposes of the 1936 Act. [BAL] is a company: (a) incorporated pursuant to the laws of New South Wales; (b) which was at all material times a resident of Australia for the purposes of the 1936 Act. Declaration of the Dividend On 22 May 1996, the directors of ABB Australia resolved that the declaration and payment of a final dividend of A$49,000,000 for the year ended 31 December 1995 payable on 21 June 1996 to the registered shareholders of the company as at 30 May 1996 be recommended to the shareholders at an annual general meeting. On 30 May 1996, in accordance with Article 82 of the Articles of Association of ABB Australia, the members of the company resolved at an annual general meeting that a final dividend of A$49,000,000 be paid to members holding shares in the company as at 30 May 1996 and that the dividend be payable on 21 June 1996 (the " Dividend "). Assignment of the right to the Dividend On 3 June 1996 in Zurich, Switzerland: (a) ABB Zurich made an offer in writing to BZW (the " First Offer ") to assign to BZW absolutely all of ABB Zurich's right to receive the Dividend on the terms set out in the First Offer; and (b) the First Offer was accepted by Mr Althans, as attorney for BZW, orally in accordance with its terms. The First Offer, which was expressed to be governed by English law, included terms to the following effect: (a) the consideration payable by BZW to ABB Zurich for the assignment was a sum payable in Australian dollars calculated in accordance with the formula set out in Appendix 1 to the First Offer (the " Price "), which was ultimately determined to be A$48,816,995; (b) the Price was payable to ABB Zurich by wire transfer no later than 5 June 1996; (c) following acceptance of the offer, ABB Zurich would give a direction to ABB Australia to pay the Dividend to such bank account as shall be designated by BZW or a "Permitted Assign"; (d) ABB Zurich agreed that BZW may without the consent of ABB Zurich, assign to a Permitted Assign the benefit of all or any of ABB Zurich's obligations under the First Offer and/or any benefit arising under or out of the First Offer. BZW did not give notice to ABB Australia of the assignment of ABB Zurich's right to receive the Dividend. On 4 June 1996, in Zurich, Switzerland: (a) BZW made an offer in writing to BAL (the " Second Offer ") to assign to BAL all of BZW's right to receive the Dividend and the benefits of the First Offer; (b) the Second Offer was accepted by Mr B Gill, as attorney for BAL, orally in accordance with its terms. The Second Offer, which is also expressed to be governed by English law, provided that the consideration payable by BAL to BZW for the assignment was the amount of A$48,826,480. On 5 June 1996: (a) BAL paid the consideration for the assignment under the Second Offer (being the amount of A$48,826,480) to BZW; (b) BZW paid the Price (being the amount of A$48,816,995) to ABB Zurich; (c) BAL gave to ABB Zurich written notice of the assignment under the Second Offer and a written request that ABB Zurich instruct ABB Australia to pay the amount of A$49,000,000 in respect of the Dividend to an identified bank account of BAL at the National Australia Bank in Sydney "for value 21 June 1996". On 6 June 1996, ABB Zurich gave to ABB Australia a written direction which provided relevantly as follows: "You are irrevocably directed to pay the debt of AUD 49,000,000 due and owing by you to ABB Asea Brown Boveri Ltd, Zurich, Switzerland, to Barclays Australia Limited, 22 nd Floor, 255 George Street, GPO Box 4675, Sydney NSW 2001, Australia. The payment must be made for value 21 June 1996 to the following account [there followed particulars of an agreement at the National Australia Bank in Sydney]. Payment of the Dividend On 20 June 1996, ABB Australia, by special resolution passed at a duly convened meeting of its members, amended its Articles of Association by the addition of a new Article 82(3) as follows: "Members may at any time by way of a written notice direct the Company to pay the amount of any dividend declared pursuant to Article 82(1) to a party nominated in that Notice. The company shall on receipt of any such Notice pay the dividend in accordance with the terms of the Notice." On 21 June 1996, ABB Australia paid the amount of $49,000,000 to BAL in accordance with the direction referred to ... above. On or about 30 June 1996, the payment of the Dividend was recorded in the accounts of ABB Australia by the following journal entry: Dr Retained Earnings Dividend Paid $49,000,000 Cr Monies on deposit ABB $49,000,000. Apart from the accounting entry referred to in the previous paragraph, no other originating entry (being a debit or credit entry) was made in the books of ABB Australia in respect of the debt arising on the declaration of the Dividend or its payment. Dispute with the Respondent On 16 December 2003 the Respondent sent a letter to ABB Australia which stated that ABB Australia was obliged pursuant to s.221YL(1) of the 1936 Act to make a deduction from the Dividend when it was paid on 21 June 1996 which was not made, and required ABB Australia to pay to him pursuant to s.221YQ(1) of the 1936 Act an amount of $15,540,581.40 comprising unpaid withholding tax of $7,350,000, unpaid additional tax by way of penalty of $3,082,367.90 and unpaid general interest charge of $5,108,213.50. Also on 16 December 2003, the Respondent sent a letter to ABB Zurich which stated that ABB Zurich was liable to pay withholding tax, pursuant to s.128B and s.128C of the 1936 Act, in respect of the Dividend, and required ABB Zurich to pay to him the amount of $15,540,581.40 comprising unpaid withholding tax of $7,350,000, unpaid additional tax by way of penalty of $3,082,367.90 and unpaid general interest charge of $5,108,213.50. 189 The Commissioner relies, first, on Norman [1963] HCA 21 ; 109 CLR 9 at 16 per Dixon CJ. 190 In Norman , by deed dated 21 December 1956 a taxpayer purported to assign to his wife by way of gift, relevantly, all the interest, dividends and other income arising from two estates in which the taxpayer had a beneficial interest. Subsequently, company shares representing the taxpayer's interest in the estates were transferred to him and he was registered as the shareholder in respect of them. In the year of income ended 30 June 1958, after the shares had been transferred to the taxpayer, dividends were declared on them. The companies posted to the taxpayer cheques for the dividends drawn in his favour. He endorsed them when necessary and had them paid into his wife's bank account a practice of which his wife was aware. The companies had no notice of the deed. 191 The amounts of the dividends were returned as income of the taxpayer's wife, but the Commissioner contended that they should have been returned as income of the taxpayer. 192 In the passage (at 16) cited, Dixon CJ stated: So far as the dividend is concerned, I think the structure of s 44 of the Income Tax and Social Services Contribution Assessment Act 1936-1958 makes it impossible that future undeclared dividends should be assigned by the shareholder so as to exclude him from liability to include the dividends when declared in his assessable income. Section 44 and the sections which follow are framed to deal specially with the case of members of companies who are entitled to dividends. The whole question of tax upon the profits of companies is dealt with specially in the Act, including the scheme relating to rebates. It would become impossible if a shareholder could without transferring his shares assign a future undeclared dividend so as to exclude the operation of the provisions. Menzies J (with whom Owen J agreed) made generally similar comments in relation to the policy underlying s 44(1). Menzies J stated (at 23): I am disposed to think that s 44(1) of the Income Tax and Social Services Contribution Assessment Act requires that when the taxpayer received the dividends paid to him by the companies in which he was a shareholder, as he did, that those dividends should form part of his assessable income. Of course, had he been a trustee of the shares the provisions of Div 6 of the Act would have applied. 193 The Commissioner submits that the comments made by Dixon CJ and Menzies J in Norman have greater force in relation to the circumstances of the present case because the dividend was declared prior to the equitable assignments, whereas in Norman the deed of assignment preceded the declaration of the dividend. 194 There are several differences between the facts of Norman and those of the present case. In Norman : &#8226; the equitable assignment was by way of gift whereas ABB Zurich contracted to sell for valuable consideration; &#8226; the equitable assignment was of prospective or hoped for future dividends, whereas in the present case the equitable assignments were of an existing debt arising from a declaration of dividend that had already occurred; &#8226; the terms of the declaration of dividends did not provide for a postponement of payment, whereas the terms of the declaration of the dividend in the present case provided for a deferral of payment from 30 May 1996 to 21 June 1996; &#8226; the companies drew the cheques for dividends already due and payable in favour of the taxpayer and posted them to him, and he endorsed them where required and paid them into his wife's bank account, whereas ABB Australia paid the amount of the dividend to BAL. The statement by Dixon CJ refers in terms only to assignment of "a future undeclared dividend". The statement by Menzies J refers to the fact that the dividends were paid to the shareholder. 195 The facts in Norman which their Honours must be taken to have had in mind were extreme: the companies, having no notice of the earlier purported gift, drew the dividend cheques in favour of a shareholder and posted them to him. In substance, it was he who effected payment to his wife. 197 The applicants submit that s 44 of the Act cannot determine the capacity of a taxpayer to assign income (while Norman [1963] HCA 21 ; 109 CLR 9 concerned s 44, the Commissioner's submission expressly stated that it proceeded on the basis that s 128B and s 44(1) "are to be construed consistently"). 198 The applicants further submit: The "special characteristics" relied on by the Respondent do not subject the rights in respect of debts arising on the declaration of dividends, or in respect of the future property being the expected dividends, to any different consequences in the case of an assignment. The assignee, of course, takes subject to any disabilities on the subject matter of the assignment flowing from the relationship between the assignor and the company, but this does not preclude assignment nor its tax consequences. It is not to the point that the "source" of the dividend is "an effectuation or realisation of the rights obtained by the acquisition of the share;" the same could be said in respect of interest and principal, rents and land or royalty and intellectual property. 199 It is not in dispute that the declaration of the dividend gave rise to a debt. I do not understand that there is any dispute that s 12 of the Conveyancing Act 1919 (NSW) or the equivalent United Kingdom provision, s 136 of the Law of Property Act 1925 (UK), made the debt assignable at law "subject to equities having priority over the assignee". The assignment in the present case was not under the statute, but it is useful to note that if it had been, there would, in my opinion, have been no "equity" in favour of the Commissioner in respect of withholding tax for three reasons. First, I do not think that the liability of a non-resident to pay withholding tax is an "equity" for present purposes. Second, ABB Zurich was not liable to pay withholding tax prior to the assignment, and so the assignment could not take effect "subject to" that supposed equity. Third, the "subject to equities" qualification relates to the position of the assignee (BAL in the present case) not that of the assignor (ABB Zurich in the present case).