Ruling Compendium

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if the vendor shareholder is entitled under the contract to refuse to complete the transfer if the dividend is not declared by the target company or if the dividend is not paid by the target company;

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if the vendor shareholder is entitled to refuse to complete the transfer if a purchaser or third party does not finance or facilitate payment of the dividend;

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if the vendor shareholder has bargained for any other obligation on the part of the purchaser to bring about the result that the dividend shall be received by the vendor shareholder.

The final ruling should clarify the minimum circumstances that would give rise to a dividend forming part of the capital proceeds, either by way of separate examples or further commentary at the end of Example 1.

In light of these consequences, it is recommended that Treasury be consulted to ensure that the draft Ruling achieves the right policy outcome.

No consultation with Treasury is proposed at this stage.

Policy aspects may be more broadly discussed with the NTLG Losses and CGT Sub-committee.

However, from the facts of the example three, the line should read '...Pink proposes to acquire all of the shares in Elfin for cash, or for cash and shares in Pink'. [emphasis added]

The reliance by the Commissioner in Dick Smith Electronics is inconsistent with the reasoning of the High Court in that case. In particular:

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in Dick Smith Electronics the dutiable transaction in question was the share sale agreement, and not the subsequent transfer or disposal of the shares for stamp duty purposes. For CGT purposes, income tax is

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assessable upon the money or other property received on the disposal of the shares and not on the agreement;

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the majority (Gummow, Kirby and Hayne JJ) in Dick Smith Electronics held that the key element of the consideration which moved the

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transfer of the shares to the purchaser was the performance by the purchaser of several promises contained in the agreement;

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the Federal Court in Lend Lease Custodian Pty Limited v. Deputy Commissioner of Taxation [2006] FCA 1790 dismissed the Commissioner's contention that the same analysis in Dick Smith Electronics applied in an income tax context;

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for stamp duty purposes, the NSW Office of State Revenue has limited the application of Dick Smith Electronics to the facts in that case so that duty would apply to a dividend paid to a vendor as part of the consideration under a share sale agreement only where the purchaser is required to fund the company to enable the company to pay the dividend to the vendor. It is submitted that for income tax purposes, the application of Dick Smith Electronics should be similarly limited to the specific facts of that case, that is where the purchaser is required to fund the dividend payment.

As noted in Appendix 2 of the draft Ruling, the reliance section 116-20 places on the occurrence of a CGT event which, in the case of disposal of shares, is considered to be similar to a 'dutiable transaction'. Furthermore, section 104-10 describes CGT event A1 as the disposal of a CGT asset which happens when the contract for the disposal is entered into or, if there is no contract, when the change of ownership occurs. A disposal of shares, in particular one which provides for the sale proceeds to include a dividend, would ordinarily involve and coincide with the execution of a sale contract. Therefore, were the majority reasoning in Dick Smith Electronics to be confined to an agreement, it would nonetheless be appropriate to have recourse to the decision in determining whether the dividend would be included as 'capital proceeds' for CGT purposes.

The decision of the Federal Court in Lend Lease Custodian Pty Limited v. Deputy Commissioner of Taxation [2006] FCA 1790 primarily centred on whether a right to share in dividends constituted 'property other than money' in the circumstances of that case. It is considered that this decision does not affect the views expressed in the draft Ruling and its links to the Dick Smith Electronics case.

Paragraphs 79 and 80 have been inserted into the final Ruling to further address the contentions raised in this issue.

The Commissioner is required to apply the law and to take a view as to the operation of the law both before and after the issue of the Ruling, which expresses the Commissioner's view as to what the effect of the law has always been.

The Commissioner's general views on the system of public rulings following the introduction of the self-assessment amendments to implement the Government's response to the ROSA report are found in Taxation Ruling TR 2006/10:

63. Generally however, public rulings will have both a past and future application because they represent the Commissioner's opinion as to what the correct interpretation of the law has always been.

64. The fact that the Tax Office has not previously publicly stated an interpretative or administrative policy does not mean a public ruling should not have a past application. Even if uncertainty existed previously in an industry, market or among taxation advisers and taxpayers, a public ruling that issued to clarify this uncertainty is to have both a past and future application (subject to the exceptions mentioned in paragraph 62 and 70 of this Ruling).

On this basis, retrospective application should apply (subject to the settlement exception noted in paragraph 46 of the final Ruling).