Case: Chief Commissioner of State Revenue v Dick Smith Electronics Holdings Pty Ltd [2005] HCA 3 ; (2005) 221 CLR 496 
Outcome: cited
I have earlier referred to the Commissioner's submissions under the heading 'Issues arising on the appeal', but as I have sought to emphasise, only in outline, given the extent that the Commissioner's case in the course of presentation of submissions was reframed purportedly in reply. An emphasis of the Commissioner's case was that the s 160ZD(1) notion of 'the consideration in respect of a disposal of an asset' , by reason of the inclusion of those words 'in respect of' , draws 'the widest possible connection between the terms of the disposal and the receipt of money or property'. Attention was drawn by the Commissioner in that regard to State Government Insurance Office (Qld) v Crittenden [1966] HCA 56 ; (1966) 117 CLR 412 at 416, where Taylor J referred to the expression 'in respect of' appearing in legislation, though being 'difficult of definition' , as having nevertheless and by virtue of longstanding judicial precedent 'the widest possible meaning of any expression intended to convey some connexion or relation between the two subject matters to which the words refer' . The legislative context there addressed in Crittenden was that of personal injury insurance. More recently in Moneywood Pty Limited v Salamon Nominees Pty Limited [2001] HCA 2 ; (2001) 202 CLR 351 at 380, Gummow J adopted that earlier dictum in Crittenden , the context in Moneywood also being other than that of revenue law. Moreover at 398 in Moneywood , Kirby J observed that '[t] he width of the words "in respect of" has been the subject of many juridical observations. There is no reason in the present context to cut down that width.' The Commissioner's submissions thereafter focused with emphasis upon dicta of the majority judgment of Gummow, Kirby and Hayne JJ in Chief Commissioner of State Revenue v Dick Smith Electronics Holdings Pty Ltd [2005] HCA 3 ; (2005) 221 CLR 496, which involved a consideration of the meaning of 'dutiable value' in relation to ' dutiable property that is subject to a dutiable transaction' appearing in the stamp duty legislation of the State of New South Wales. Though the context in Dick Smith Electronics was that of revenue law, the issue there arose in a stamp duty and not an income tax context, involving the extent of stamp duty exigible upon agreements for the sale or transfer of shares the subject of issued capital in a company. The present circumstances relate of course to income tax assessable upon the monetary value of shares the subject of an agreement for sale or transfer of property, being of course shares in Westpac. 58 The circumstances in Dick Smith Electronics were that an agreement for the acquisition of the entire issued capital of a private company stipulated for a substantial purchase price for the shares less a so-called 'dividend amount' equal to the target company's retained earnings up to a certain maximum sum, and for the vendors (being the existing shareholders) to cause the target company to declare dividends equal to those retained earnings in favour of those existing shareholders. The takeover agreement further stipulated that on completion thereof, the purchaser would both pay the purchase price to the vendor shareholders and provide the finance, by way of additional consideration on the takeover, to enable the target company to discharge the debts owing to the existing vendor shareholders arising out of the dividends thus declared but remaining unpaid. Thus immediately prior to completion of the takeover agreement, the target company declared but did not distribute in cash those substantial dividends, and thereby created a debt equal to the amount thereof due by the target company to the existing shareholders, that is of course, the vendors of the shares in the target company. At the time of completion of the takeover agreement, the purchaser paid to the vendors accordingly the purchase price for their shares, less the amount of the dividend declared and distributed in their favour, but nevertheless simultaneously lent to the target company the residue of the purchase price, which equalled the dividend required to be so declared. Thereafter the company, being thus funded for the intended purpose, satisfied in cash the dividend declared in favour of the vendor shareholders. The takeover agreement was assessed to stamp duty what was identified as the consideration for the shares. 59 It may be seen that the present circumstances differ from those in Dick Smith Electronics . Whereas as indicated above, the purchaser there was obliged to in effect fund the target company so that it could pay the dividend to the vendors, the amount whereof would reduce the stipulated purchase price, and the vendor was not required to complete other than upon the footing of performance of that obligation, and so that the vendor would receive the dividend as well as the sale price for the shares stipulated in the agreement for sale which became the subject of transfer. The majority concluded that the vendor was entitled to receive, and the purchaser obliged to procure, that the vendors did receive on completion, as part of the total sale consideration required to be furnished by the purchaser, payment by the target company of the outstanding dividends already due to the vendors though in their capacity as shareholders of the target company. The majority held that the dutiable consideration comprised the several promises on the part of the purchaser recorded in the takeover agreement, in consequence whereof the vendors received an agreed monetary amount, whereof part was by way of dividend from the target company pursuant to the takeover agreement. 60 After referring to the well known dictum of Dixon J (as he then was) in Archibald Howie Pty Ltd v Commissioner of Stamp Duties (NSW) [1948] HCA 28 ; (1948) 77 CLR 143 at 152 as to the notion of the term consideration, being: '... the word "consideration" should receive the wider meaning or operation that belongs to it in conveyancing rather than the more precise meaning of the law of simple contracts... the consideration is rather the money or value passing which moves the conveyance or transfer. ' and also to what was said by Lord Wilberforce in another stamp duty context in Shop and Store Developments Ltd v Commissioner of Inland Revenue [1967] 1 AC 472 at 503 as to the term 'consideration', being: 'In the first place, the phrase "consideration for the transfer or conveyance" seems to me to refer clearly and naturally to that which passed to the transferor company "for" the transferred properties....' the reasons of the majority judgment in Dick Smith Electronics , under the heading 'The error of the Supreme Court' , continued at 519-520 as follows: 'The result of this analysis is that the primary judge and the majority of the Court of Appeal erred in the approach that they respectively took to the application of the Act to the uncontested facts. Approached correctly, the case may be summed up as follows. The promises which the parties made and recorded in the Agreement can be sufficiently described as being: (1) the Vendors' promise to transfer the Shares to the Purchaser; (2) the Vendors' promise to procure the Company to declare as large a dividend as it could (up to a maximum of $27 million); (3) the Purchaser's promise to pay the Vendors $114,139,649 minus the Dividend Amount; and (4) the Purchaser's promise to "fund" the Company's payment of the dividend. The consideration for each of those promises is to be found in the promises made by the opposite party. However, what for the purposes of s 21(1) of the [Duties] Act moved the transfers by the Vendors was performance of all of the various stipulations in the Agreement, not merely the promises which the Purchaser made. To put the same point in other words: why identify the consideration "for" the transfers as only what the Purchaser gives up? The Vendors transferred the Shares in return for receiving some $114 million, of which part was received from the Company because the parties had agreed that this should be so.' 61 The Commissioner contended that 'the same analysis applies here', though of course Dick Smith Electronics involved the issue as to the stamp duty exigible on the 'dutiable value' of the totality of the shares in a private company incorporated in New South Wales the subject of sale by two equal offshore incorporated shareholders, whereas the present context involves the different revenue issue as to whether capital gains tax is exigible in relation to the capital gain controversially postulated by the Commissioner in respect of the disposal of a significant but apparently far from being a controlling parcel of shares in a public company (of course Westpac). The valuable consideration which was said by the Commissioner to have 'moved' the disposal here of the subject parcel of Westpac shares from Lend Lease to County Natwest, as I have already foreshadowed, was 'the money' (ie the two monetary instalments of purchase price payable at different times and totalling $353,297,356), and additionally the value of the so-called 'contractual rights' to share in future dividends to be paid by Westpac in respect of that subject parcel, which the Commissioner characterised as '[a]dditional non-cash consideration' and asserted to have a value of $144,236,243 ( ante ). Those future dividends equalled what might be declared by Westpac during the period of time between entry into the FPA on 7 June 1996 and its completion. Thus it was the Commissioner's explanation that '[i]t is sufficient for the Commissioner's point that [Lend Lease's] contractual rights as a whole are assignable, subject to consent', in order for its Part IIIA case to qualify within the s 160ZD(1)(c) expression 'property other than money as a result or in respect of the disposal' . It was further said by the Commissioner that Lend Lease's contractual rights were capable in their nature of assumption by third parties and also of assignability, albeit that consent was required, and that prior to the FPA, Lease Lease 'did not have the contractual rights under it', but by entering into the FPA, it 'obtained or received those rights'. Lend Lease rejoined to the effect that the Commissioner's characterisation of Lend Lease's contractual rights as a whole was different to that characterisation elsewhere given by the Commissioner as rights 'to retain beneficial ownership', in either case '... until the Completion Date'. 62 In support of the Commissioner's case in any event, the Commissioner submitted that the majority of the High Court found in Dick Smith Electronics that what was received by the vendors by virtue of the takeover agreement there involved included the substantial dividend to be paid to the vendors prior to completion, and that the vendors had bargained with the purchaser to achieve that result (pursuant of course to the takeover agreement), the 'dividends' in that context having been declared and satisfied out of the fund comprising historically retained earnings of the target company. However as I have sought to point out, the circumstances relevantly involved in Dick Smith Electronics do not provide the extent of the analogy the commissioner sought to invoke. It was further emphasised by the Commissioner in any event that '[t]he amount of consideration which moved the sale was the receipt of the sum including the dividends and it did not matter that part was paid from the target company rather than the purchaser', and further therefore that '[t]he consideration for the transfers was not only what the purchaser gave up, but also what was agreed would be received by the vendors from the target' company. I have of course already made observations concerning what seem to me to have been features in Dick Smith Electronics distinguishable from the present case. 63 It was pointed out further by the Commissioner that '... even the minority judges in Dick Smith Electronics (Gleeson CJ and Callinan J) were prepared to accept that the promise to fund the dividend, as opposed to the performance of that promise, was a 'non-monetary consideration for the agreement to transfer on sale'. In that regard however Gleeson CJ and Callinan J observed (at 510) that while they were '... prepared to accept that the obligation accepted by [Dick Smith Electronics]', being the obligation of the purchaser to lend to that target company 'an amount sufficient to put it in funds to pay the dividend ', they decided nevertheless that '[w]e cannot accept that it is monetary consideration for the transfer on sale'. Be that as it may, the findings made by the High Court majority in Dick Smith Electronics were described by the Commissioner to be consistent with the approach taken in Colonial Mutual Life Assurance Society Ltd v Federal Commissioner of Taxation [1953] HCA 68 ; (1953) 89 CLR 428, where it was held that the payment of amounts equal to 90 per cent of all rents, as and when received by lessees of a city mixed development, constituted in reality outgoings of a capital nature, being part of the capital costs for the acquisition of an asset comprising that development, and were therefore not deductible. In other words the terminology adopted by contracting parties in their contract does not necessarily determine the character of a transaction the subject of that contract at least for revenue purposes, irrespective of the nature and extent of the divergence of views between the majority and minority of the High Court in Dick Smith Electronics . So much may be readily accepted but the issue remains as to whether the Commissioner thereby gains the assistance it seeks from Dick Smith Electronics . 64 It was said by the majority in Dick Smith Electronics in any event at 519 that '[i] t was only in return for that total sum (paid by the various steps and in the various forms required by the Agreement) that the Vendors were willing to transfer to the Purchaser the bundle of rights which their shareholding in the Company represented', and further that '... the amount of monetary consideration for the transactions of sale and transfer of the Shares... was to come as a dividend from the Company...'. It was further said by the majority at 519 '[t] hat which passed to the Vendors "for" the transfers of the Shares was "consideration" which was "monetary" rather than "non-monetary" within the meaning of s 21(1) of the [Stamp Duties] Act' , since '[t] he transaction was to be assessed to duty on the footing that it was performed... both sides addressed their arguments by reference to the implementation of the transaction [and] [t] he Commissioner correctly took the stance that the intended result of the transaction, seen as a whole, was the receipt by the Vendors of [that total sum]'. 65 It was contended by the Commissioner that in the present case, '[t]he relevant connection between the right to receive a portion of future dividends and the disposal of the Westpac shares was demonstrated by the FPA itself', the Commissioner thereby drawing attention to clauses 3.1, 3.2, 3.3, 5.1 and 5.2 of the FPA, which have been already reproduced in these reasons, and also to clause 7.1(b), which the Commissioner described as having 'provided for an automatic reduction in the Purchase Price of the shares in the circumstances specified in clause 7.9,' whereby Westpac might declare a so-called 'excessive dividend', as quantified by the Commissioner, '... in excess of 70c per share for any fiscal year'. Purportedly upon the basis of the entitlements thus postulated by the Commissioner to be conferred by the FPA, the Commissioner submitted that Lend Lease 'was entitled to dividend rights as a shareholder in Westpac until the Completion Date, subject to the limits imposed by the transaction documents', being limits described by the Commissioner as 'significant' and referable to what the Commissioner described as 'limited dividends', 'no rights to capital in the shares', 'sterilised voting', and 'restriction on dealing in the shares without consent'. There are I think at least conceptual difficulties with that analysis on the Commissioner's part, aside from the express terms of the FPA in any event. Be that as it may, the Commissioner categorised those rights to ongoing entitlement to dividends as 'property' within ss 160ZD(1) and 160K(3) of the Tax Act. 71 It was next submitted by the Commissioner that '[i]t is not necessary that the value in the consideration for the shares should flow directly from County Natwest as purchaser for reasons discussed... in Dick Smith [Electronics]', and I was referred to what the majority in Dick Smith Electronics was said by the Commissioner to have held, being that '... the dividends received by the vendor from the target company moved the transaction and constituted part of the consideration for the transaction'. However a similar observation is not sufficiently apposite to the present circumstances. The subject dividends on the Westpac shares were to be and were in fact declared and paid by Westpac in the ordinary periodic course in relation to the entirety of its share capital listed for quotation on the Australian Stock Exchange, whereof only a relatively minor proportion were the subject of sale (ie from Lend Lease to County Natwest), and not for comparison as occurred in Dick Smith Electronics , by way of a single or isolated dividend distribution of accumulated retained earnings of the controlled subsidiary made in the context of and in order to facilitate the takeover, albeit also at arm's length, of the entirety of the issued capital of the offshore target company InterTAN Australia Ltd by way of takeover by Dick Smith Electronics Holdings Pty Ltd. The Commissioner contended nevertheless that s 160ZD(1) did not support 'a restrictive interpretation' which 'only picks up consideration which is received in a tangible or physical way', asserting in that regard that '[t]he words that govern the relationship between the consideration and the disposal are of the widest import', and were 'not to be read down by a reference to any notion of tangibility', whatever might be effectively conveyed, if at all, by that non-statutory notion of 'tangibility' so used by the Commissioner. 72 The Commissioner drew attention in any event to the way in which Lend Lease characterised the rights conferred in its favour by the FPA, and submitted that '[t]he dividends were commercially regarded as part of the consideration for the disposal of the shares', since '[t]he value of the dividend flow was clearly something which was in the mind of the Lend Lease Corporation Board in making its decision to authorise the transaction to proceed'. The Commissioner next referred, inter alia , to reports of 28 March 1996 made to the Lend Lease Board meeting held on 29 March 1996 (see [2]-[3] above), which summarised 'the effects of the proposal' submitted to the Lend Lease board by County Natwest in the context of the current market value of the Westpac shares, together with the realisable market value of the Lend Lease holding of Westpac shares if sold 'today' after allowing for 'market discount' (given the size of the subject parcel proposed to be acquired), and the implications of capital gains tax, and the value generally of the so-called 'County Deal'. That report suggested the provision of the following 'explanation to our shareholders and the market' to include the facts that 'Lend Lease has secured the major part of the gain from the restructuring of Westpac and now believes it is appropriate to lock in that value', pointing out thereby that '[t]he arrangements with County have allowed Lend Lease to take back its original capital of $625 million plus an abnormal gain of $75 million', and further that '[t]he shareholders will participate in the major part of the increase in value of the Westpac shares through fully franked dividends over the following 5 years prior to the emergence of profits on investments currently being undertaken.' The inference is open to be drawn that the internal Lend Lease evaluations of the realisation proposal were commercially and not taxation driven, though understandably the Lend Lease decision-makers were concerned to receive expert advice as to any unfavourable taxation implications which might be involved. As I have elsewhere indicated, the Commissioner did not ultimately pursue any case based upon or referrable to the tax avoidance provisions of Part IVA of the Tax Act. 83 The Commissioner next drew attention to the circumstance that before entering into the FPA with County Natwest (as so-called 'Purchaser'), Lend Lease 'did not have the contractual rights under it', but '[b]y entering [into] the FPA it obtained or received those rights'. Lend Lease's 'central submission', so described by the Commissioner, and said to have been advanced by Lend Lease for the first time orally in reply, was as follows (transcript p.140): 'When the applicant disposed of the shares the rights that [counsel for the Commissioner] claims, as [additional] consideration, evaporated. They merged in the transfer. They were spent. The applicant didn't have those rights following the transfer. They were consideration for the transfer, they were terms of the contract for the transfer. It's very easy when talking about consideration, to slide between consideration in the contractual sense, being the mutual exchange of promises, and consideration in the conveyancing sense. The High Court pointed that out on a number of occasions, in Archibald Howie, more recently in Dick Smith. We are concerned with consideration which moves the contract and which one is left with, after the transfer. Not with the mutual promises which comprise contractual consideration. The consideration which the applicant was left with, after the transfer, what it got in exchange for what it gave, was the $3.53. It wasn't the additional promises that my friend relies upon.' The Commissioner sought to emphasise in the above context that contractual rights have value, and in their nature are capable of assignment, and repeated its reliance on Dick Smith Electronics essentially to the extent I have earlier summarised; the Commissioner asserted moreover that what County Natwest did was 'agree to compensate [Lend Lease] for the loss of dividends in circumstances such as any delisting of Westpac [from the Australian Stock Exchange]', being a circumstance falling within the scope of the FPA definition of 'Early Exercise Event' ( ante ), and hence within the scope of operation of clause 5.1 of the FPA ( ante ). 84 The Commissioner therefore submitted that Lend Lease 'got something more than cash here', and that '[t]his was not a mere case of future delivery, it was a carefully constructed transaction, designed to secure to [Lend Lease], through its contractual rights, both immediate cash and a flow of income neither of which, if [Lend Lease] be correct, would lead to the payment of tax'. The Commissioner further submitted that the Westpac dividends were not 'really the additional consideration', but '[t]he contractual rights of [Lend Lease] were', and further that '[t]he dividends were an important by-product over which the parties bargained, and agreed a sharing formula and compensation mechanism'. 85 The complexity of the structure of the FPA, and of its operation in the events which subsequently happened, have rendered it necessary or appropriate for me to record in detail the respective submissions of the parties, both of which were assembled thoughtfully as well as comprehensively. As will have been appreciated from what I have discussed and recorded, I am of the opinion that the case of Lend Lease in denial of the viability of the assessment of the Commissioner to capital gains tax pursuant to Part IIIA of the Tax Act, and to s 160ZD(1)(c) in particular, and hence adversely to the Commissioner, should succeed and therefore be upheld in Lend Lease's favour.