Cable & Wireless Australia & Pacific Holding BV (in liquidatie) v Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Federal Court of Australia (NSD 318 of 2016)
Date published: 24 January 2018

Summary of decision:
This case was concerned with the treatment of an amount debited to a 'buy-back reserve' account as part of an off-market share buy-back by Cable & Wireless Optus Ltd (now known as Singtel Optus Australia Pty Ltd (Optus)). The central issue was whether a debit to the buy-back reserve account in this case was a debit to a 'share capital account' within the meaning of former section 6D of the Income Tax Assessment Act 1936 (ITAA 1936). If it was considered to be a debit to the share capital account for the purposes of section 159GZZZP of the ITAA 1936, then it would be argued that the amount of dividend withholding tax that had been withheld at the time of the transaction was withheld 'in error'.

Overview of facts:
Prior to 6 September 2001, Cable & Wireless Australia & Pacific Holding BV (CWAP), a company incorporated in the Netherlands and not a resident of Australia, was a shareholder in Optus. On 18 May 2001, Singapore Telecommunications Limited (SingTel) through its wholly owned subsidiary made a takeover offer for a majority of the shares in Optus. An accepting shareholder could elect to accept either a purchase of its shares, or a buy-back by Optus. In the context of a buy-back, the Implementation Agreement mandated that Optus had to account for the transaction in a particular way, relevantly, by making debits to the account labelled 'share capital' and an account labelled 'buy-back reserve'. The debit to the share capital account was to be made on a pro-rata basis. | On 6 September 2001, Optus, in an off-market buy-back bought back 1,642,101,319 shares (including 1,639,849,948 shares owned by CWAP), for total consideration of $6,225,502,631.68. The buy-back was accounted for as follows (in accordance with the Implementation Agreement): Dr Contributed equity $2,306,705,228.16 Dr Buy-back reserve $3,918,797,343.42 Cr Debt due to Optus shareholders $6,225,502,631.68 | On 30 October 2001, Optus issued SingTel with shares for an amount of $6,229,387,472.78. | The statement of financial position published by Optus for the financial year ended 31 March 2002 disclosed a decrease in contributed equity consistent with the accounting treatment above. | Dividend withholding tax was paid to the Commissioner on the basis that the amount debited to the buy-back reserve was a dividend pursuant to section 159GZZZP of the ITAA 1936. | On 6 March 2013, Optus undertook a capital reduction in accordance with Part 2J.1 of the Corporations Act 2001 (Cth). As part of this reduction of capital, the debit entry on the buy-back reserve account was 'set off' against the share capital account. | CWAP, relying on the High Court's decision in Commissioner of Taxation v Consolidated Media Holdings Ltd [2012] HCA 55 (Consolidated Media), contended that a component of the purchase price debited to the buy-back reserve was an amount debited against an amount standing to the credit of Optus' share capital account, with the consequence that part of the total withheld amount was withheld and paid to the Commissioner in error. | In Cable & Wireless Australia & Pacific Holding BV (in liquidatie) v Commissioner of Taxation [2016] FCA 78, Pagone J held that the buy-back reserve was not an account of share capital and that the withholding tax amount was not withheld in error. His Honour said that the decision in Consolidated Media does not carry with it the conclusion that all accounts labelled as buy-back reserve accounts are share capital accounts within the meaning of section 6D and section 159GZZZP of the ITAA 1936. The substance and form of the buy-back was different from that considered in Consolidated Media. CWAP then appealed to the Full Federal Court. | The Full Federal Court, comprised of Allsop CJ, Middleton and Beach JJ, unanimously dismissed the taxpayer's appeal. The Court agreed with the conclusion of the primary judge. | Cable and Wireless sought but was refused special leave to appeal the decision of the Full Federal Court to the High Court (S147/2017). | Issues decided by the court | The primary issue before the court was the characterisation of the 'buy back reserve' account given the commercial arrangements between the parties and the accounting treatment adopted by Optus. | The Court viewed the case as an application of the meaning of 'share capital account' as expounded in Consolidated Media. A share capital account could be an account, whether debited or credited with one or more amounts, that was a 'record of a transaction into which the company had entered in relation to its share capital'. Alternatively or as well, it could be an account, whether debited or credited with one or more amounts, that was a 'record of the financial position of the company in relation to its share capital' [at paragraph 90]. The Court observed that care needs to be taken not to decontextualize these descriptions from the factual circumstances the High Court (in Consolidated Media) was addressing [91]. | The Court distinguished the facts in Consolidated Media from the present case. In Consolidated Media, the entire debit to the buy-back reserve was intended to reflect a reduction of capital, commercially, economically and legally. In the present case, there was a separate debit on the share capital account for that purpose. The debit on the buy-back reserve account was not intended to and did not reflect such a reduction. It was a charge on total equity [92]. | In the present case the 'contributed equity' or share capital account did not require for its understanding any reference to the buy-back reserve (or the debiting thereof) to be made [116]. Furthermore, while the share capital amount increased as a result of SingTel subscribing shares subsequent to the buy-back, this later subscription does not govern the character of the earlier buy-back [134]. | The Court observed that capital or shareholders' capital connotes the value of the assets contributed to the company by those who subscribe for its shares; it is this concept rather than the assets themselves (such as subscription money) that is being referred to. A share capital account is not as such an asset account [94]. | The Court distinguished the concept of 'capital' from 'equity'. The latter usually describes a surplus of assets over liabilities. In this case, the debit on the buy-back reserve account was not in form or in substance a charge on contributed equity (or share capital) [95]. The rulings sought and obtained from the Commissioner, the Implementation Agreement and the relevant financial accounts and statements all reflected the commercial, economic, and legal reality that the debit to the buy-back reserve account was not and was not seen to be a reduction or a return of capital. The reduction of capital in 2013 reflected and assumed that prior reality [118]. | In relation to section 258E of the Corporations Act 2001, which authorised the reduction in share capital in the present case, the Court observed that the provision does not state or necessarily imply that on a buy-back there is necessarily a reduction of share capital and that the buy-back consideration must all be 'paid for out of share capital'. It only authorises a reduction if some of it is 'paid for out of share capital'. The phrase 'paid for out of share capital' refers to a debiting or charging of share capital of the type identified in Optus' accounts. The concept 'paid for' is not literally referring to payment as such, as a share capital account is not an asset account. The court emphasised this point in addressing the appellant's argument that the absence of any positive equity account (apart from share capital) meant that the amount debited to the buy-back reserve account must have been paid for out of the share capital account and accordingly there had been a reduction of capital also constituted by that debit entry [99].

Issues decided:
The primary issue before the court was the characterisation of the 'buy back reserve' account given the commercial arrangements between the parties and the accounting treatment adopted by Optus. The Court viewed the case as an application of the meaning of 'share capital account' as expounded in Consolidated Media. A share capital account could be an account, whether debited or credited with one or more amounts, that was a 'record of a transaction into which the company had entered in relation to its share capital'. Alternatively or as well, it could be an account, whether debited or credited with one or more amounts, that was a 'record of the financial position of the company in relation to its share capital' [at paragraph 90]. The Court observed that care needs to be taken not to decontextualize these descriptions from the factual circumstances the High Court (in Consolidated Media) was addressing [91]. The Court distinguished the facts in Consolidated Media from the present case. In Consolidated Media, the entire debit to the buy-back reserve was intended to reflect a reduction of capital, commercially, economically and legally. In the present case, there was a separate debit on the share capital account for that purpose. The debit on the buy-back reserve account was not intended to and did not reflect such a reduction. It was a charge on total equity [92]. In the present case the 'contributed equity' or share capital account did not require for its understanding any reference to the buy-back reserve (or the debiting thereof) to be made [116]. Furthermore, while the share capital amount increased as a result of SingTel subscribing shares subsequent to the buy-back, this later subscription does not govern the character of the earlier buy-back [134]. The Court observed that capital or shareholders' capital connotes the value of the assets contributed to the company by those who subscribe for its shares; it is this concept rather than the assets themselves (such as subscription money) that is being referred to. A share capital account is not as such an asset account [94]. The Court distinguished the concept of 'capital' from 'equity'. The latter usually describes a surplus of assets over liabilities. In this case, the debit on the buy-back reserve account was not in form or in substance a charge on contributed equity (or share capital) [95]. The rulings sought and obtained from the Commissioner, the Implementation Agreement and the relevant financial accounts and statements all reflected the commercial, economic, and legal reality that the debit to the buy-back reserve account was not and was not seen to be a reduction or a return of capital. The reduction of capital in 2013 reflected and assumed that prior reality [118]. In relation to section 258E of the Corporations Act 2001, which authorised the reduction in share capital in the present case, the Court observed that the provision does not state or necessarily imply that on a buy-back there is necessarily a reduction of share capital and that the buy-back consideration must all be 'paid for out of share capital'. It only authorises a reduction if some of it is 'paid for out of share capital'. The phrase 'paid for out of share capital' refers to a debiting or charging of share capital of the type identified in Optus' accounts. The concept 'paid for' is not literally referring to payment as such, as a share capital account is not an asset account. The court emphasised this point in addressing the appellant's argument that the absence of any positive equity account (apart from share capital) meant that the amount debited to the buy-back reserve account must have been paid for out of the share capital account and accordingly there had been a reduction of capital also constituted by that debit entry [99].

ATO view of decision:
The ATO accepts this decision.

Administrative treatment:
N/A

Legislative references: Income Tax Assessment Act 1936 Former section 6D Section 159GZZZP Taxation Administration Act 1953 Section 18-70 of Schedule 1
Case references: Commissioner of Taxation v Consolidated Media Holdings Ltd [2012] HCA 55 (2012) 84 ATR 1 2012 ATC 20-361 Archibald Howie Pty Ltd v Commissioner of Stamp Duties (NSW) (1948) 77 CLR 143