Commissioner of Taxation v Consolidated Media Holdings Ltd
Document type: Decision Impact Statement
Venue: High Court (S228 of 2012)
Judgment date: 5 December 2012
Date published: 6 May 2013

Summary of decision:
Outlines the ATO response to this case which concerned the treatment of consideration for an off-market share buy back.

Overview of facts:
Consolidated Media Holdings Ltd ("CMH", then known as PBL) owned all of the ordinary shares in Crown Limited ("Crown"). | On 13 June 2002, the Directors of Crown resolved to implement, pursuant to Division 2 of Part 2J.1 of the Corporations Act 2001 , a proposed share buy-back of approximately 840 million ordinary shares from CMH. The consideration for the buy-back of shares was $1 billion. | By a Share Buy-Back Agreement dated 28 June 2002, Crown agreed to purchase, and CMH agreed to sell to Crown, the ordinary Crown shares. | On that day, Crown recorded a debit of $1 billion in a new account labelled "Share Buy-Back Reserve Account" created in its general ledger. Crown also maintained a "Shareholders Equity Account" which maintained a credit balance and in which no entry was recorded in relation to the share buy-back. | The financial statements of Crown for the year ended 20 June 2002 disclosed that Contributed Equity had been reduced by $1 billion, from $2.4 billion to $1.4 billion, during the year. Crown's audited financial statements for the year ended 30 June 2002 further showed that the company had Retained Profits (Losses) of ($27,352,000). | The taxation consequences of a share buy-back are dealt with in Division 16K of the ITAA 36. In this instance, the buy-back was off-market share buy-back, a fact not disputed by the parties. | In an off-market share buy-back, the difference between the purchase price and any part of the purchase price that is debited against amounts standing to the credit of the company's share capital account is treated, for income taxation purposes, as a dividend paid by the company: s.159GZZZP ITAA36. | Issues decided by the court/Tribunal | The issue in the appeal was whether the $1 billion was debited against amounts standing to the credit of Crown's share capital account, within the meaning of s.159GZZZP (1) ITAA 36. | CMH contended that the Share Buy-Back Reserve was not such an account as no entry was made in Crown's Shareholder's Equity general ledger account. No amount having been debited to Crown's share capital, CMH contended that the amount it received was a dividend (unfranked, though rebateable, under former s.46 ITAA 36). | The Commissioner was of the view that the entire consideration received by CMH was capital, having been debited entirely against an amount standing to the credit of Crown's share capital account. It mattered not that the particular account was labelled Share Buy Back Reserve and held in a separate account to Crown's Shareholder's Equity Account. On this analysis, none of the amount received by CMH was a dividend. | Emmett, J in the Federal Court [2011] FCA 367 agreed with the Commissioner that the Share Buy-Back Reserve formed part of the share capital account of Crown under s.6D ITAA 36. | His Honour noted also that the capital contributed by Crown's shareholders was reduced by $1 billion as a result of the share buy-back. Crown had cancelled the shares bought-back, as required under the Corporations Act 2001, and returned capital to the taxpayer. The cancelled shares were part of the share capital of Crown and some record must be made of this reduction of capital. Despite neither the Shareholder's Equity Account nor the Share Buy-Back Reserve being called a share capital account, Emmett, J found that both accounts were share capital accounts within the meaning of s.6D. The Share Buy-Back Reserve recorded this capital reduction. | The Full Federal Court [2012] FCAFC 36 found for the taxpayer on appeal. The Full Court found that s.6D only applied to an account to which the paid-up capital of the company was originally credited. Therefore a debiting of the Share Buy-Back Reserve could not affect the Shareholder's Equity Account for s.159GZZZP purposes. This was to protect companies from the unintended consequences of the capital 'tainting' rules. | With Special leave, the Commissioner appealed to the High Court. | The High Court, in a unanimous decision, allowed the Commissioner's appeal. The court considered it was sufficient for an account to be a share capital account, under s.6D, for that account to be an account that was either a record of a transaction into which the company had entered in relation to its share capital, or a record of the financial position of the company in relation to its share capital. | The $1 billion debit entry made in the Share Buy-Back Reserve Account was a record of the transaction made by Crown on 28 June 2002 to reduce its share capital. The share capital of Crown could only be understood by reference to both the Shareholders Equity Account and its Share Buy-Back Reserve Account. | The court found that both accounts taken together constituted Crown's share capital. Accordingly, the debit of $1 billion in the Share Buy-Back Reserve account was a debit against the amount standing to the credit of the combined share capital account. | Consequently, none of the amount received by CMH was therefore a dividend. In these circumstances, CMH actually realised a capital gain on the disposal of its Crown shares.

Issues decided:
The issue in the appeal was whether the $1 billion was debited against amounts standing to the credit of Crown's share capital account, within the meaning of s.159GZZZP (1) ITAA 36. CMH contended that the Share Buy-Back Reserve was not such an account as no entry was made in Crown's Shareholder's Equity general ledger account. No amount having been debited to Crown's share capital, CMH contended that the amount it received was a dividend (unfranked, though rebateable, under former s.46 ITAA 36). The Commissioner was of the view that the entire consideration received by CMH was capital, having been debited entirely against an amount standing to the credit of Crown's share capital account. It mattered not that the particular account was labelled Share Buy Back Reserve and held in a separate account to Crown's Shareholder's Equity Account. On this analysis, none of the amount received by CMH was a dividend. Emmett, J in the Federal Court [2011] FCA 367 agreed with the Commissioner that the Share Buy-Back Reserve formed part of the share capital account of Crown under s.6D ITAA 36. His Honour noted also that the capital contributed by Crown's shareholders was reduced by $1 billion as a result of the share buy-back. Crown had cancelled the shares bought-back, as required under the Corporations Act 2001, and returned capital to the taxpayer. The cancelled shares were part of the share capital of Crown and some record must be made of this reduction of capital. Despite neither the Shareholder's Equity Account nor the Share Buy-Back Reserve being called a share capital account, Emmett, J found that both accounts were share capital accounts within the meaning of s.6D. The Share Buy-Back Reserve recorded this capital reduction. The Full Federal Court [2012] FCAFC 36 found for the taxpayer on appeal. The Full Court found that s.6D only applied to an account to which the paid-up capital of the company was originally credited. Therefore a debiting of the Share Buy-Back Reserve could not affect the Shareholder's Equity Account for s.159GZZZP purposes. This was to protect companies from the unintended consequences of the capital 'tainting' rules. With Special leave, the Commissioner appealed to the High Court. The High Court, in a unanimous decision, allowed the Commissioner's appeal. The court considered it was sufficient for an account to be a share capital account, under s.6D, for that account to be an account that was either a record of a transaction into which the company had entered in relation to its share capital, or a record of the financial position of the company in relation to its share capital. The $1 billion debit entry made in the Share Buy-Back Reserve Account was a record of the transaction made by Crown on 28 June 2002 to reduce its share capital. The share capital of Crown could only be understood by reference to both the Shareholders Equity Account and its Share Buy-Back Reserve Account. The court found that both accounts taken together constituted Crown's share capital. Accordingly, the debit of $1 billion in the Share Buy-Back Reserve account was a debit against the amount standing to the credit of the combined share capital account. Consequently, none of the amount received by CMH was therefore a dividend. In these circumstances, CMH actually realised a capital gain on the disposal of its Crown shares.

ATO view of decision:
This decision is consistent with the longstanding practice and policy of the ATO in relation to share buy-backs. | Note: On 21 October 2011 the Government released an Exposure Draft Bill concerning the Taxation of Share Buy Backs. The Exposure Draft seeks to amend the taxation law pertaining to share buy-backs. As presently drafted, the existing buy-back provisions considered by the High Court of Australia in this case are not relevantly altered. In particular, the capital component for a share remains that part of a purchase price debited against amounts standing to the credit of the company's share capital account.

Administrative treatment:
None | Implications for ATO precedential documents (Public Rulings & Determinations etc) | None | Implications for Law Administration Practice Statements | None

Legislative references: Income Tax Assessment Act 1936 6D 159GZZZP
Subject references: Income Tax Off-market share buy-back Share Capital Account