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CONSOLIDATED MEDIA HOLDINGS LTD v FC of T

Judges:
Stone J
Greenwood J
Logan J

Court:
Federal Court, Sydney

MEDIA NEUTRAL CITATION: [2012] FCAFC 36

Judgment date: 20 March 2012

Stone, Greenhood and Logan JJ

1. This appeal is a further sequel to an off-market share buy-back, effected in accordance with Ch 2J of the Corporations Act 2001 (Cth), by Crown Melbourne Limited (Crown) in 2002.

2. The relevant facts, as opposed to the application of the Income Tax Assessment Act 1936 (Cth) (1936 Act) and the Income Tax Assessment Act 1997 (Cth) (1997 Act), properly construed, to those facts, are not in dispute. That is so even though at trial the parties led expert evidence as to the accounting treatment of the buy-back transaction in the appellant's accounts and there was a difference of opinion as between experts as to the appropriate manner of accounting. Though he summarised that evidence, the primary judge did not find it necessary to resolve that difference of opinion in order to resolve the case. Neither party submitted that it was necessary so to do in order to resolve the appeal. The following summary is taken from the reasons for judgment of the learned primary judge.

3. For all of the year ended 30 June 2002, the appellant, then named Publishing and Broadcasting Limited but now named Consolidated Media Holdings Limited (CMH), held 2,938,587,410 shares in Crown. This holding represented all of Crown's issued shares. At a meeting of Crown's directors held on 13 June 2002, a proposal that Crown buy back 840,336,000 of those shares for a consideration of $1 billion was considered by the board. That consideration was to be satisfied either by the assignment to CMH of intra-group debts as agreed between Crown and CMH or, failing agreement, by payment in cash. Crown's board of directors resolved to undertake the share proposed buy-back. As a result and also on 13 June 2002, Crown made a written offer to CMH to buy back 840,336,000 shares in Crown for a consideration of $1 billion and on terms more particularly set out in a draft share buy-back agreement attached to the offer.

4. On 28 June 2002, Crown and CMH entered into a share buy-back agreement (Buy-Back Agreement) for the purchase of that number of shares in Crown for that consideration. The Buy-Back Agreement provided for completion on 1 August 2002 or such other date as might be agreed between the parties. In the result, the completion date was 6 August 2002. The Buy-Back Agreement further provided for the $1 billion consideration for the 840,336,000 shares to be satisfied in the manner proposed. The buy-back was made off-market.

5. Prior to 28 June 2002, the following accounts had been established in Crown's general ledger:

" Shareholders Equity Account , number 310200;

Inter-company Loan (Payable) Account , number 215120; and

Inter-company Receivables Account , number 112529.

On 28 June 2002, Share Buy-Back Reserve Account , number 310250, was established in Crown's general ledger."

6. On 28 June 2002, a debit of $1 billion was made to the Share Buy-Back Reserve Account and a credit of $1 billion was made to the Inter-company Receivables Account. However, the credit entry made to the Inter-company Receivables Account was subsequently reversed by correcting journal entries processed on 25 July 2002, with effect from 30 June 2002. The correcting entries involved a debit to the Inter-company Receivables Account, number 112529, and a credit to the Inter-company Loan (Payable) Account, number 21510.

7. No entry was made in the Shareholders Equity Account, number 310200, in relation to the buy-back. There have been no entries made in the Share Buy-Back Reserve Account, number 310250, since the initial debit entry made on 28 June 2002, and that account still exists in Crown's general ledger with a debit balance of $1 billion.

8. On 6 August 2002:

  • • a transfer by the appellant to Crown of 840,336,000 shares in Crown for a consideration of $1 billion was executed under the common seals of each of Crown and the appellant;
  • • a deed of assignment of a debt of $1 billion owed by Publishing and Broadcasting (Finance) Limited (the Debtor) to Crown was executed by Crown, the appellant and the Debtor, in satisfaction of the purchase price payable under the Buy-Back Agreement; and
  • • Crown cancelled 840,336,000 of the shares held by the appellant.

9. The position of the respondent Commissioner of Taxation (Commissioner) is that, for the purposes of Pt 3-1 of the 1997 Act, a net capital gain of $402,461,564 was included in CMH's assessable income for the year ended 30 June 2002. The 840,336,000 Crown shares were said by the Commissioner to have a cost base of $597,538,436 which, when deducted from the consideration of $1 billion, resulted in a net capital gain of $402,461,564. He assessed accordingly in respect of the 2002 income year. He made a related assessment in respect of the 2005 income year.

10. It was common ground before us, as it was below, that the outcome in respect of the 2002 income year (proceeding number NSD 623 of 2009 below) would dictate that in respect of the 2005 income year (proceeding number NSD 822 of 2009 below), ie were the appeal to succeed in respect of the 2002 income year, it must likewise succeed in respect of the 2005 income year and vice versa. CMH filed but one notice of appeal. By that notice it appealed against the orders made in proceeding number NSD 623 of 2009 and those made in proceeding number NSD 822 of 2009. No issue was raised as to the adequacy under the then prevailing rules of the adoption of this course. The parties proceeded on the assumption that the notice was sufficient to challenge the orders made in each proceeding rather than it being necessary for separate appeal notices to be filed. So do we.

11. CMH contends that there was no resultant capital gain from the above transactions. Rather, its position was that s 159GZZZP of the 1936 Act applied and applied such that the whole of the $1 billion consideration for the purchase of the shares under the Buy-Back Agreement was taken to be a dividend included in CMH's assessable income by virtue of s 44 of the 1936 Act but which in turn attracted a rebate of tax pursuant to s 46 of that Act. Its further submission was that, to the extent that s 159GZZZP was applicable, s 159GZZZQ then had the effect of reducing to that extent the consideration which would otherwise fall for taxation by reason either of the capital gains tax provisions or, depending on its circumstances (eg whether it was a share trader), the ordinary income provisions of the 1997 Act.

12. It is never more necessary than in a case such as this to begin with the text of the statute. Of particular relevance are the following provisions (as in force at the material time) of the 1936 Act: s 159GZZZP, s 159GZZZQ and s 6D:

" 159GZZZP Part of off market purchase price is a dividend

  • (1) For the purposes of this Act, but subject to subsection (1A), where a buy back of a share or non share equity interest by a company is an off market purchase, the difference between:
    • (a) the purchase price; and
    • (b) the part (if any) of the purchase price in respect of the buy back of the share or non share equity interest which is debited against amounts standing to the credit of:
      • (i) the company's share capital account if it is a share that is bought back; or
      • (ii) the company's share capital account or non share capital account if it is a non share equity interest that is bought back;
      is taken to be a dividend paid by the company:
    • (c) to the seller as a shareholder in the company; and
    • (d) out of profits derived by the company; and
    • (e) on the day the buy back occurs.
  • (1A) If the dividend is included to any extent in the seller's assessable income of any year of income, it is not taken into account to that extent under section 118-20 of the Income Tax Assessment Act 1997.
  • (2) The remainder of the purchase price is taken not to be a dividend for the purposes of this Act.

159GZZZQ Consideration in respect of off market purchase

  • (1) Subject to this section, if a buy back of a share is an off market purchase, then:
    • (a) in determining, for the purposes of this Act:
      • (i) whether an amount is included in the assessable income of the seller under a provision of this Act other than Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (about CGT); or
      • (ii) whether an amount is allowable as a deduction to the seller; or
    • (b) whether the seller makes a capital gain or capital loss;
    in respect of the buy back, the seller is taken to have received or to be entitled to receive, as consideration in respect of the sale of the share, an amount equal to the purchase price in respect of the buy back.

    Deemed consideration increased to market value

  • (2) If apart from this section:
    • (a) the purchase price in respect of the buy back;

      is less than:

    • (b) the amount that would have been the market value of the share at the time of the buy back if the buy back did not occur and was never proposed to occur;
    then, subject to subsection (3), in making the determinations mentioned in paragraphs (1)(a) and (b), the amount of consideration that the seller is taken to have received or to be entitled to receive in respect of the sale of the share is equal to the market value mentioned in paragraph (b) of this subsection.

    Deemed consideration reduced where dividend assessable etc.

  • (3) Subject to subsection (8), if there is a reduction amount in respect of the buy back (see subsection (4)), then, in making the determinations mentioned in paragraphs (1)(a) and (b), the amount of consideration that the seller is taken to have received or to be entitled to receive in respect of the sale of the share, after any application of subsection (2), is reduced by the reduction amount.

    Reduction amount

  • (4) The following steps are to be taken in working out whether there is a reduction amount in respect of the buy back:
    • (a) first, work out whether the whole or part of the purchase price in respect of the buy back is taken to be a dividend by section 159GZZZP;
    • (b) second, for any amount satisfying paragraph (a), work out whether the whole or part of it is either:
      • (i) included in the seller's assessable income of any year of income (disregarding section 128D); or
      • (ii) an eligible non capital amount (see subsection (5)).
    The amount worked out is the reduction amount in respect of the buy back.

    Eligible non capital amount

  • (5) An amount is an eligible non capital amount if it is neither:
    • (a) debited against a share capital account or a reserve to the extent that it consists of profits from the revaluation of assets of the company that have not been disposed of by the company; nor
    • (b) attributable, either directly or indirectly, to amounts that were transferred from such an account or reserve of the company.

    Debit for deemed dividend

  • (7) For the purposes of subsection (5), an amount of the purchase price that is taken to be a dividend by section 159GZZZP is taken to have been debited against the account or reserves against which the purchase price was debited, and to the same extent.

    Rebatable amount excluded from reduction where loss

  • (8) If:
    • (a) the amount of consideration that the seller is taken by subsection (1) or (2) to have received or to be entitled to receive in respect of the sale of the share is, apart from this subsection, reduced by a reduction amount under subsection (3); and
    • (b) the dividend mentioned in paragraph (4)(a), so far as it does not exceed the reduction amount, consists to any extent of a rebatable amount (see subsection (9)); and
    • (c) disregarding this subsection, as a result of the operation of this section:
      • (i) for the purposes of Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (about CGT), the seller incurs a capital loss or an increased capital loss (which loss or increase is the loss amount ) in respect of the buy back; or
      • (ii) a loss, or an increased loss, (which loss or increase is also the loss amount ) in respect of the buy back is allowable as a deduction to the seller under a provision of a Part of this Act other than Part 3-1 or 3-3 of the Income Tax Assessment Act 1997; or
      • (iii) the amount of a deduction allowable from the seller's assessable income of any year of income in respect of the issue or acquisition of the share exceeds, or exceeds by a greater amount, (the excess or increased excess is also the loss amount ) the amount included in the seller's assessable income of any year of income in respect of the buy back of the share;
      then the reduction in the amount of the consideration under subsection (3) is instead a reduction equal to:
    • (d) the reduction amount;

      less:

    • (e) so much of the rebatable amount as does not exceed the loss amount.

    Meaning of rebatable amount

  • (9) For the purposes of subsection (8), if the seller is entitled to a rebate of tax under section 46 or 46A in the seller's assessment for a year of income in respect of the dividend, the dividend consists of a rebatable amount worked out using the formula:

    amount of rebate

    ----------------------------------------------

    general company tax rate

    within the meaning of section 160APA

6D Meaning of share capital account

  • (1) A share capital account is:
    • (a) an account which the company keeps of its share capital; or
    • (b) any other account (whether or not called a share capital account), created on or after 1 July 1998, where the first amount credited to the account was an amount of share capital.
  • (2) If a company has more than one account covered by subsection (1), the accounts are taken, for the purposes of this Act, to be a single account.

    Note: Because the accounts are taken to be a single account (the combined share capital account ) tainting any of the accounts has the effect of tainting the combined share capital account.

  • (3) However, an account that is tainted for the purposes of Division 7B of Part IIIAA is not a share capital account for the purposes of this Act other than for the purposes of:
    • (a) the definition of paid-up share capital in subsection 6(1); and
    • (b) subsection 44(1B); and
    • (c) section 46H; and
    • (d) subsection 159GZZZQ(5); and
    • (e) Division 7B of Part IIIAA; and
    • (f) subsection 160ZA(7A)."

Axiomatically, these provisions must be construed not just by reference to the ordinary grammatical meaning of the text adopted by Parliament but also in context and, insofar as it is possible to discern, having regard to their subject matter, scope and purpose.

13. The primary judge offered the following summary (reasons for judgment, paragraphs 11, 13, 14 and 15), with which we respectfully agree, of the operation of s 159GZZZP and s 159GZZZQ of the 1936 Act:

  • "11 … s 159GZZZP … applies where a buy-back of a share is an off-market purchase. In such a case, the difference between the purchase price, on the one hand, and the part of the purchase price that is debited against amounts standing to the credit of the company's share capital account, on the other hand, is to be taken to be a dividend paid by the company, to the seller as a shareholder in the company, out of profits derived by the company, on the day the buy-back occurs.
  • …
  • 13 Section 159GZZZQ determines the part, if any, of the buy-back consideration in an off-market purchase that is to be treated as sale proceeds for capital gains tax purposes. Subject to the operation of the section, the seller is taken to have received the purchase price as consideration for the sale of the shares. Section 159GZZZQ(3) provides that, subject to s 159GZZZQ(8), the amount of the consideration that the seller is taken to have received is to be reduced by any reduction amount .
  • 14 Section 159GZZZQ(4) sets out the steps that are to be taken in working out whether there is a reduction amount. First, one works out whether the whole or part of the purchase price in respect of the buy-back is taken to be a dividend by s 159GZZZP. Secondly, for any amount that is taken to be a dividend, one works out whether the whole or part of it is included in the seller's assessable income or is an eligible non-capital amount. Any such amount is the reduction amount in respect of the buy-back. If the whole of the purchase price is taken to be a dividend, as the Taxpayer contends in the present case, and was included in assessable income under s 44 of the 1936 Act, it would be excluded from the consideration.
  • 15 However, s 159GZZZQ(8) provides that if:
    • • the amount of consideration that the seller is taken to have received is reduced by a reduction amount;
    • • the deemed dividend, so far as it does not exceed the reduction amount, consists to any extent of a rebatable amount; and
    • • as a result of the operation of s 159GZZZQ the seller would incur a capital loss in respect of the buy-back;
    then the reduction in the amount of the consideration under s 159GZZZQ(3) is, instead, a reduction equal to the reduction amount, less so much of the rebatable amount as does not exceed the loss amount. If the seller is entitled to a rebate of tax under s 46 or s 46A in the seller's assessment for a year of income in respect of the dividend, the dividend consists of a rebatable amount worked out by dividing the amount of the rebate by the general company tax rate within the meaning of s 160APA."

[Emphasis in original]

14. His Honour opined that the definition of share capital account in s 6D of the 1936 Act was "not a felicitous one". We respectfully agree. What was critical for his Honour was that the cancelled shares were part of the share capital of Crown. He stated (reasons for judgment, para 70):

"Some record must be made by Crown of the fact that part of its share capital was returned to [CMH]. … As a consequence of the share buy-back, the capital contributed by crown's shareholders was reduced by $1,000,000. That debit was recorded in the Share Buy-Back Reserve Account, number 310250. I consider that that was part of the account kept by Crown of its share capital, namely, that part was returned as a consequence of the share buy-back."

15. Though neither was termed a share capital account , the primary judge considered that the Shareholders Equity Account, number 310200 and the Share Buy-Back Reserve Account, number 310250 collectively comprised the account kept by Crown of its share capital. That being so, his Honour concluded that the Share Buy-Back Reserve Account, number 310250 was part of the account kept by Crown of its share capital within the meaning of s 6D of the 1936 Act. It followed from this conclusion, so his Honour considered, that the share purchase price of $1 billion had been debited against amounts standing to the credit of Crown's share capital account within the meaning of s 159GZZZP of the 1936 Act. That being so, the primary judge concluded that the buy-back transaction had resulted in a capital gain rather than a dividend. Accordingly, he dismissed each of CMH's appeals against adverse objection decisions.

16. While CMH's has consistently contended that the effect of s 159GZZZP and s 159GZZZQ of the 1936 Act was that the buy-back transaction did not result in an assessable capital gain but rather a deemed dividend which consequentially attracted a rebate, it was frankly conceded by its counsel, who did not appear below, that the detailed and sophisticated submission made to us on behalf of CMH as to why these sections, even having regard to s 6D, did not have this result was not made to the primary judge. This undoubtedly explains why his Honour's reasons for reaching his conclusion do not address the issues raised by that submission and are, instead, compressed.

17. As put to us, the origins of s 159GZZZP of the 1936 Act, in the form applicable to the 2002 income year, lie in amendments made to that Act as a sequel to the abolition in Australian Corporations Law in 1998 of the concept of a "par value" of a share. That such abolition occurred in 1998 is certain.

18. By virtue of the Company Law Review Act 1998 (Cth) (Company Law Review Act), Sch 5, a new division, Div 11 of Pt 11.2 of Ch 11, was inserted into the then Corporations Law for which the Corporations Act 1989 (Cth) provided. It was provided by s 2(5) of the Company Law Review Act that the amendments to the Corporations Law made by Sch 5 of that Act commenced immediately after the Taxation Laws Amendment (Company Law Review) Act 1998 (Cth) (Taxation Laws Amendment (Company Law Review) Act 1998). The Taxation Laws Amendment (Company Law Review) Act 1998 commenced on 1 July 1998 (see Commonwealth Gazette 1998, No. S317). By s 3 of, and Sch 5 to, that Act, a number of amendments were made to the 1936 Act. Materially, new definitions of paid-up share capital and share capital account were inserted into s 6(1) of the 1936 Act:

" paid-up share capital of a company means the amount standing to the credit of the company's share capital account reduced by:

  • (a) the amount (if any) that represents amounts unpaid on shares; and
  • (b) the tainting amount (if any).

share capital account , for the purposes of this Act other than the definition of paid-up share capital, subsection 44(1B), section 46H, subsection 159GZZZQ(5), Division 7B of Part IIIAA and subsection 160ZA(7A), does not include an account that is tainted for the purposes of Division 7B of Part IIIAA."

Another amendment which was made to the definitions found in s 6(1) of the 1936 Act was to omit from paragraph (d) of the definition of dividend the reference to "a share premium account of the company" and to substitute for that a reference to "the share capital account of the company". At the same time, the definition of share premium account was omitted from s 6(1) of the 1936 Act. That definition had previously provided that a share premium account was, materially, "an account, whether called a share premium account or not, to which the company has, in respect of premiums received by the company on shares issued by it, credited amounts …" (emphasis in italics). The emphasised words in that omitted definition assumed significance in the submission CMH made to us.

19. The Taxation Laws Amendment (Company Law Review) Act 1998 also made amendments to s 159GZZZP of the 1936 Act including, materially, to s 159GZZZP(1)(b), which was amended so as to omit its reference to "a share premium account" and to substitute instead a reference to "the share capital account".

20. The express sequencing of commencement dates for the amendments made to the Corporations Law by the Company Law Review Act and those made to the 1936 Act by the Taxation Laws Amendment (Company Law Review) Act 1998, together with the nature of the amendments made to those Acts, makes it plain that the amendments to the 1936 Act were intended to specify what were the revenue law consequences of the abolition of the concept of a par value for a share, of any related need for a share premium account and of the other changes made to the Corporations Law by the Company Law Review Act.

21. One such consequence, highlighted by the reference in the then newly inserted definition of share capital account to Div 7B of Pt IIIAA of the 1936 Act (since repealed), was the insertion into the 1936 Act of what became known as the "tainting rules". The design of these tainting rules was accurately described by CMH in its submissions as being to prevent companies from disguising a profit distribution as a tax preferred capital distribution from its share capital account by transferring profits to that account and then distributing from it. To this end, a distribution debited against an amount standing to the credit of a tainted account was deemed to have been paid by the company out of profits (s 44(1B) of the 1936 Act), thereby making s 44(1)(a) of the 1936 Act applicable such that the amount of the distribution formed part of a shareholder's assessable income.

22. As the 1936 Act stood after these amendments, while this kind of distribution was assessable as a dividend, not only could it not be franked, but also it did not attract an inter-corporate dividend rebate (the former s 46G and s 46H of the 1936 Act refer). This was so even though, under the tainting rules (s 160ARDQ in particular), there was an automatic debit to the company's franking account.

23. The position thus created by the amendments made to the 1936 Act by the Taxation Laws Amendment (Company Law Review) Act 1998 was that, while, in the circumstances described, shareholders were taken to receive an assessable dividend, a reduction in franking credits was imposed on the company concerned without that company being able to confer those credits on those shareholders.

24. One of the provisions which formed part of the newly inserted Div 11 of Pt 11.2 of Ch 11 of the Corporations Law was s 1446, which provided:

" 1446 Share capital-transfer of money in share premium account and capital redemption reserve into the share capital account

Immediately after commencement, any amount standing to the credit of the company's share premium account and capital redemption reserve becomes part of the company's share capital."

The company law effect of this provision was to merge, per force of statute, any credit amount in the former share premium account of a company with the share capital of that company. The revenue law effect of this statutory merger could create a "tainting" of that company's share capital account in circumstances where the company's former share premium account was already "tainted". In such a circumstance and even though the company had not sought to make any distribution to a shareholder from its share capital account, a debit would be made to that company's franking account. Another way in which, even in the absence of such a distribution to shareholders, such a debit to the company's franking account would have occurred under the 1936 Act as it then stood was via the delayed crediting to a company's share capital account of amounts originally credited to a capital redemption reserve (in respect of redeemable preference shares issued by a company).

25. Section 6D was not part of the initial corporate law review related amendments to the 1936 Act. Rather, s 6D was inserted into the 1936 Act by the Taxation Laws Amendment (No 7) Act 1999 (Cth) (Taxation Laws Amendment (No 7) Act 1999).

26. CMH submitted that s 6D was inserted so as to avoid outcomes such as those described in the preceding paragraph which, it submitted, were unintended having regard to the end to which the tainting rules were directed. It further submitted that s 6D(1)(a) refers to a company's "ordinary" share capital account, ie, the account to which the paid up capital of the company had originally been credited and that s 6D(1)(b) was intended to cover any other account to which - what was now - share capital had first been credited (such as a share premium account or a capital redemption reserve). The intent, so it submitted, of s 6D(2) was to ensure that a merger of those latter accounts with the ordinary share capital account would not "taint" the "ordinary" share capital account, by deeming the latter accounts to have always been part of the share capital account. Thus, any merger would be a transfer within a single account and would not cause the share capital account to become "tainted". CMH further submitted that, in turn, s 6D(3) maintained the position that whilst a tainted account was not treated as a share capital account for the purposes of the s 6(1) definition of "dividend", it was treated as a share capital account for the purposes of s 44(1B), which ensured that distributions to shareholders from tainted share capital accounts would be assessable under s 44(1).

27. CMH also submitted that s 159GZZZP operated so as to characterise the purchase price for an off-market buy-back of shares wholly or in part as an assessable dividend on the one hand or assessable capital or revenue proceeds on the other by reference to the nature of the company account, irrespective of its title, to which that purchase payment was debited.

28. For his part, the Commissioner accepted that the amendments made by the Taxation Laws Amendment (Company Law Review) Act 1998 were a consequence of the change made in 1998 to the Corporations Law so as to abolish the concept of par value for a share. His submission was that this change to the Corporations Law had not abolished the concept of paid-up capital for a company and that, even after its consequential amendment, s 159GZZZP(1) remained concerned with how a share buy-back was funded.

29. The Commissioner conceded that the amendment made in 1998 to s 159GZZZP(1)(b) "gave rise to the question as to the extent to which the buy-back consideration was 'debited against amounts standing to the credit of … the company's share capital account'". Nonetheless, he submitted that, even though s 6D was introduced in the context of a particular issue, this did not demonstrate that the Parliament had, in so doing, not paid due regard to how that provision would operate in the context of the 1936 Act as a whole. He further submitted that, had there been any intention that the content of s 6D have some more limited operation, the definition could have been located in a particular part of the 1936 Act in which such a limited definitional application was intended to have effect.

30. The Commissioner submitted that, in light of s 6D, "debited against amounts standing to the credit of … the company's share capital account" was not to be read narrowly, having regard to a recognition in s 6D that "share capital" might be recorded in more than one account. That being so, he submitted that there was, in terms of s 159GZZZP(1)(b) of the 1936 Act, such a debiting because either:

  • (a) Share Buy-Back Reserve Account, number 310250 was part of Crown's share capital account; or alternatively,
  • (b) The amount of $1 billion was in any event debited against the amounts standing to the credit of Crown's share capital account.

His further submission was that the Share Buy-Back Reserve Account together with Shareholders Equity Account, number 310200 collectively comprised "the company's share capital account" for the purposes of s 159GZZZP(1) because, as the primary judge had concluded, the Share Buy-Back Reserve Account was part of the account that Crown kept of its share capital. He further submitted that, even if there were separate and distinct share capital accounts, s 6D(2) operated to deem those two accounts to be the one account. On these bases the Commissioner submitted that the appeals should be dismissed.

31. In
Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue 2009 ATC 20-134; (2009) 239 CLR 27 at [47], Hayne, Heydon, Crennan and Kiefel JJ stated:

"This Court has stated on many occasions that the task of statutory construction must begin with a consideration of the text itself. Historical considerations and extrinsic materials cannot be relied on to displace the clear meaning of the text. The language which has actually been employed in the text of legislation is the surest guide to legislative intention. The meaning of the text may require consideration of the context, which includes the general purpose and policy of a provision, in particular the mischief it is seeking to remedy."

[Footnote references omitted]

Later in their joint judgment (at [51]), their Honours quoted with evident approval observations made by Gleeson CJ in
Carr v Western Australia (2007) 232 CLR 138 at [6] when he said:

"[I]t may be said that the underlying purpose of an Income Tax Assessment Act is to raise revenue for government. No one would seriously suggest that s 15AA of the Acts Interpretation Act has the result that all federal income tax legislation is to be construed so as to advance that purpose. Interpretation of income tax legislation commonly raises questions as to how far the legislation goes in pursuit of the purpose of raising revenue. In some cases, there may be found in the text, or in relevant extrinsic materials, an indication of a more specific purpose which helps to answer the question. In other cases, there may be no available indication of a more specific purpose. Ultimately, it is the text, construed according to such principles of interpretation as provide rational assistance in the circumstances of the particular case, that is controlling."

These passages set out the principles that must guide us in construing the provisions of the 1936 Act relevant to the determination of this appeal. If, in the application of these principles, there remain what might be considered, either by the Commissioner, a taxpayer or others, unintended consequences, the responsibility for those consequences and for any remedying of them lies with the Parliament:
Commissioner of Taxation v Multiflex Ltd 2011 ATC 20-292; (2011) 197 FCR 580 at [1].

32. We have already made reference to the context in which the Taxation Laws Amendment (Company Law Review) Act 1998 came to be enacted. Viewed against that contextual background, the object of s 159GZZZP, as amended by the Taxation Laws Amendment (Company Law Review) Act 1998, seems to have been no more or less than to create a regime for the assessment of the consideration paid for an off-market share buy-back, which would resemble that which prevailed prior to the abolition of the concept of par value and a share premium account, but take account of those changes to company law.

33. The Taxation Laws Amendment (No 7) Act 1999 did more than just insert s 6D into the 1936 Act. It also consequentially omitted the then existing definition of share capital account in s 6(1), as inserted by the Taxation Laws Amendment (Company Law Review) Act 1998. It likewise made amendments to the then s 160ARDM within the "tainting rules" in the 1936 Act and made elaborate provision in the form of transitional provisions in respect of merging tainted share premium accounts: see Sch 1, Pt 2, item 9, Taxation Laws Amendment (No 7) Act 1999. Those transitional provisions specifically address and negate any franking debit which would otherwise arise as a consequence of tainting upon merger of accounts. By s 2(2) of the Taxation Laws Amendment (No 7) Act 1999 the amendments made by Schedule 1 were taken to have commenced immediately after the commencement of s 1 of the Taxation Laws Amendment (Company Law Review) Act 1998. Read as a whole, the amendments made by Sch 1 to the Taxation Laws Amendment (No 7) Act 1999 and the timing of the commencement of those amendments strongly suggest that the purpose of this amending legislation, including the insertion of s 6D, was, materially, to ameliorate, not exacerbate or perpetuate, problems which had emerged in the adaptation of the 1936 Act as it had stood prior to the Taxation Laws Amendment (Company Law Review) Act 1998, to an era when, as a result under changes to the Corporations Act resulting in the abolition of the concept of a par value for a share, a company would no longer have a share premium account. There is nothing about the 1999 amendments which suggests that Parliament intended to change the object of s 159GZZZP as amended in 1998. The Taxation Laws Amendment (No 7) Act 1999 made no express amendment of s 159GZZZP.

34. This understanding of the object of the amended s 159GZZZP and of the purpose of the Taxation Laws Amendment (No 7) Act 1999, postulated by reference to text, context and evident purpose, is reinforced by recourse to the explanatory memoranda which were circulated by the then Treasurer in respect of the bills which respectively became the Taxation Laws Amendment (Company Law Review) Act 1998 and the Taxation Laws Amendment (No 7) Act 1999. Such recourse is permitted by s 15AB(1) of the Acts Interpretation Act 1901 (Cth) but it is never, of course, a substitute for a careful consideration of the language which has actually been employed by Parliament:
Saeed v Minister for Immigration and Citizenship (2010) 241 CLR 252 at [31] - [32]; Re Bolton;
Ex parte Beane (1987) 162 CLR 514 at 518. That is why we have first examined the text, context and evident related purpose and object of the provisions.

35. As to the bill which as enacted became the Taxation Laws Amendment (Company Law Review) Act 1998, it is stated in respect of the proposed amendments which included those which would amend the then existing s 159GZZZP:

  • "1.106 The amendments will also ensure that existing provisions within the tax laws that are dependent on the concept of par value operate consistently with the policy underlying their operation under the current Corporations Law."

36. It is stated in the explanatory memorandum in respect of the bill which, as enacted, became the Taxation Laws Amendment (No 7) Act 1999 that, the bill "amends the Income Tax Assessment Act 1936 and associated tax laws to ensure that the share capital tainting provisions are not triggered in inappropriate circumstances" and further, in hindsight ironically, that the proposed amending legislation is "not complex". As to the "Background" to the bill, it is stated, materially:

  • "1.5 The Act, which received Royal Assent on 1 July 1998, made various consequential amendments to the tax laws as a result of changes being made to the Corporations Law by the Company Law Review Act 1998 (Review Act) which abolished the concept of par value for shares and the associated terms of share premium as well as made it easier for companies to return capital to shareholders.
  • 1.6 The tainting rule within the Act prevents companies disguising a profit distribution as a tax-preferred capital distribution from the share capital account by first transferring profits into that account and then distributing from it. A similar rule applied to share premium accounts before their abolition on 1 July 1998: in cases where the share premium account contained amounts other than share premiums ('tainted share premium accounts') the share premium account was also treated as a profit account.
  • 1.7 Since the tainting rule's inception two unintended outcomes have emerged. First, the merger of tainted share premiums with share capital on 1 July 1998 has the effect of tainting the new share capital account for tax purposes, thereby preventing the distribution of profits in the guise of share capital. This has the inappropriate flow-on effect of producing an automatic franking debit upon merger and it removes the ability of companies to defer distribution of tainted amounts already transferred to share premium accounts.
  • 1.8 Second, under the rules formerly applicable to share premium accounts before 1 July 1998, a share premium account did not become tainted when share premiums were credited to another account and then transferred to the share premium account, provided they could be identified in the books of the company at all times as such a premium. The law in its present form does not expressly provide for this exception.
  • 1.9 The Act also provides an exception to the tainting rule where an amount is transferred to a share capital account under a debt for equity swap. The exception reflects the fact that no undue tax advantage can arise by companies transferring amounts which only represent a liability, as distinct from a profit, to the share capital account, and then making a distribution from that account.
  • 1.10 To achieve this, the tainting rule adopts the existing definition of debt for equity swap in section 63E of the ITAA 1936. However, for technical reasons some debt for equity swaps fail to qualify as the definition is currently expressed."

[Emphasis in italics]

"The Act" referred to in this excerpt from the explanatory memorandum is Taxation Laws Amendment (Company Law Review) Act 1998.

37. More particularly, in relation to the proposed amendment of the 1936 Act which came to be made by the Taxation Laws Amendment (No 7) Act 1999 so as to insert s 6D, it is stated in the explanatory memorandum:

" Delayed crediting of share capital

  • 1.23 Under the current tainting rule, the delayed crediting of share capital to the share capital account results in tainting the account. This may occur in circumstances where share capital received on the issue of shares is not credited by the company to its share capital account, but to another account. For example, some accounting standards may require share capital received by a company on the issue of redeemable preference shares to be credited to a liability account.
  • 1.24 In this way the current tainting rule is inconsistent with the rules that were formerly applicable to share premium accounts whereby a share premium account did not become tainted when share premiums were credited to another account and then transferred to the share premium account, provided they could be identified in the books of the company at all times as such a premium.
  • 1.25 To ensure that the delayed crediting of share capital to the share capital account does not inappropriately taint the account the amendments insert a new definition of 'share capital account'. [Items 1 and 2 of Schedule 1; new section 6D]
  • 1.26 The amendments provide that a share capital account is to include, in addition to the ordinary account which a company keeps of its share capital, an account (whether called a share capital account) where the first amount credited to the account was an amount of share capital. [Item 2 of Schedule 1; new subsection 6D(1)]
  • 1.27 Where the company has more than one share capital account, the accounts are taken for the purposes of the tax laws to be a single account. (As a result the tainting of any of the share capital accounts will result in the tainting of all of the share capital accounts.) This means that where a company establishes a special account for share capital before transferring the share capital to the main account, the special account will be treated as always having been part of the share capital account. Any subsequent transfer of amounts between accounts will therefore amount to a transfer between sub-accounts of the share capital account, and will not taint share capital. [Item 2 of Schedule 1; new subsection 6D(2)]
  • 1.28 Furthermore, the transfer to a company's share capital account of an amount of share capital which has been credited to an existing non-share capital account, for example, an account of amounts owed creditors, will not result in the share capital account becoming tainted if the amount could be identified in the books of the company as an amount of share capital at all times before it was credited to the share capital account. [Item 3 of Schedule 1; new paragraph 160ARDM(2)(a)]
  • 1.29 The amendments also provide that an account that is tainted under the tainting rule is not a share capital account for the purposes of the Act other than for the purposes of:
    • • the definition of paid-up share capital in subsection 6(1);
    • • subsection 44(1B);
    • • section 46H;
    • • subsection 159GZZZQ(5);
    • • Division 7B of Part IIIAA; and
    • • subsection 160ZA(7A).

[Item 2 of Schedule 1; new subsection 6D(3)] "

[Emphasis in italics added]

This explanatory memorandum makes no reference to s 159GZZZP at all.

38. In the course of oral argument, the following anomaly was submitted by counsel for GMH to flow from the construction of s 6D propounded by the Commissioner and adopted by the primary judge. Suppose after a year of income, an amount were to be transferred from a profit account to a reserve account of a company. On the construction of s 6D adopted below, that reserve account and an equity account would together constitute the "share capital account" of a company the transfer of year end profits from the profit account to the reserve account would "taint" the entire share capital account with the result that a distribution paid out of share capital which might have been paid up years beforehand would become a tainted distribution for the purposes of s 160ARDM of the 1936 Act.

39. The Commissioner submitted that no such anomaly could occur because s 160ARDM and the share tainting rules ceased to have effect on and from 1 July 2002. That they then ceased to have effect is true but we are concerned with the 1936 Act as it applied in the 2002 income year when they did have effect. This submission by the Commissioner is no answer to the identified anomaly.

40. The construction of s 6D of the 1936 Act promoted by CMH in its submissions would obviate the anomaly. That promoted by the Commissioner would not. In particular, reading that section in the wider context described above, it does not strain the language of s 6D(1)(a) to read that paragraph as a reference to the company account, however described, to which the paid up capital of the company was originally credited. In turn, s 6D(1)(b) would then apply to any other post 30 June 1998 account (and there might be more than one) to which the first amount credited was an amount of share capital.

41. It is immaterial to the resolution of this case that, on the evidence in this case, it is not possible to conclude what was paid up on the particular Crown shares bought back from CMH and cancelled. A share buy-back, off-market or otherwise, will always result in a reduction of a company's capital. The transactions effected under the Buy-Back Agreement resulted in an amount being applied to reduce Crown's capital. In
Inland Revenue Commissioners v Universal Grinding Wheel Co Ltd [1955] AC 807 at 819 (
IRC v Universal Grinding Wheel), Viscount Simonds (on behalf of an Appeal Committee of the House of Lords which comprised His Lordship and Lords Porter, Morton of Henryton, Reid and Cohen), referring to what had been decided in
Ex parte Westburn Sugar Refineries Ltd [1951] AC 625, stated:

"[In] a reduction of capital it is competent for a company to pay off share capital by transferring to the shareholders assets of which the value may exceed the amount by which the share capital is reduced, and that the court should sanction the reduction provided that it is satisfied as to the safeguarding of the creditors, the shareholders and the public. From this it clearly emerges that there need be no precise correspondence between the amount by which the shareholders' capital is reduced and the value of that which is transferred to them, even though the latter exceeds the former. It need, therefore, cause no surprise if the "sum applied in reducing capital" exceeds the amount by which the capital is nominally reduced."


IRC v Universal Grinding Wheel was later applied by the High Court in
Comptroller of Stamps (Victoria) Ashwick (Vic) No 4 Pty Ltd 87 ATC 5064; (1987) 163 CLR 640 at 651 in the particular context of a redemption of redeemable preference shares so as to hold that such a redemption results in a reduction of paid up share capital.

42. In a company law sense, it was correct for the primary judge to conclude (reasons for judgment, para 70) that the consequence of the share buy-back resulted in a return of capital to CMH and a related reduction in Crown's share capital. Yet whether or not s 159GZZZP applied was not to be answered by the reaching of such a conclusion.

43. Further, having regard to the wider context and purpose of the 1998 changes to the Corporations Act and the purpose or object of the successive, related amendments which were made to the 1936 Act in 1998 and 1999, the use of the singular in s 6D(1)(a) is no coincidence. That account is merely whichever one in which a company ordinarily keeps its share capital on contribution. In turn, s 6D(1)(b) picks up other accounts created after 30 June 1998 to which the first amount credited was an amount of share capital such as the proceeds of transfers from a share premium account or a capital reserve account the proceeds of which, in light of the 1998 company law changes, were regarded as part of a company's share capital. Section 6D(2) of the 1936 Act treats each of those accounts as a single account thereby facilitating transfers between them. So construed and as CMH submitted, s 6D avoids unintended adverse "tainting" consequences. There is no warrant to construe s 6D any more widely than this. The broad construction of the section for which the Commissioner contended is neither supported by construing its text in context and having regard to its evident purpose nor by reference to relevant secondary materials.

44. As to s 159GZZZP, it is to be remembered that the provision falls to be construed not by reference to the facts of any one case but by reference to text, purpose and context. The purchase price in an off-market buy-back of shares may or may not exceed the amount paid up on those shares. The meaning of s 159GZZZP does not vary accordingly. Yet further, it is to be recalled that s 159GZZZP(1) is a deeming provision ("is taken to be"). When s 159GZZZP(1) is engaged, the differential amount (the difference between the purchase price and the s 159GZZZP(1)(b) amount) is, inter alios, deemed to be a dividend paid "out of profits derived by a company": s 159GZZZP(1)(d). It would be antithetical to that feature of the provision to construe s 159GZZZP as engaged only to the extent to which an off-market buy-back was in fact paid out of company profits yet that was the submission made on behalf of the Commissioner - "The amendments [in 1998 to s 159GZZZP] specified the tax consequences to the shareholder according to which funds the company chose to use to fund the share buy-back (capital or profits)". Yet further and as already highlighted, it is an inherent feature of any share buy-back that the consideration for it will be applied in a reduction of the company's share capital. We reject the Commissioner's submission.

45. On the true construction of s 6D and applying it to the facts the trial judge should have reached the following conclusions:

  • (a) the Shareholders Equity Account was, in terms of s 6D(1)(a) of the 1936 Act, an account in which Crown kept its share capital; and
  • (b) the Share Buy-Back Reserve Account was neither such an account nor was it an account to which s 6D(1)(b) of the 1936 Act applied.

46. In any event, even if the Share Buy-Back Reserve Account did fall within s 6D(1)(b) and, by virtue of s 6D(2), was taken with the Shareholders Equity Account to be a single account, for s 159GZZZP not to apply so as to deem a dividend to have been paid by Crown the consideration for the shares bought back must be debited against amounts standing to the credit of the share capital account. Section 6D(2) creates but one statutory fiction, not two. It deems multiple accounts to be a single account. It does not deem the act of debiting against one account to have occurred against an amount standing to the credit of another account. One does not extend by implication a statutory fiction when so to do would, as here, be subversive of the object of the 1998 amendment to s 159GZZZP and not in any way further the evident object of the 1999 amendment which introduced s 6D:
Commissioner of Taxation v Comber 86 ATC 4171; (1986) 10 FCR 88 at 96, per Lockhart J, applying Re Levy;
Ex parte Walton (1881) 17 Ch D 746 at 756 per James LJ. Here, there was a debit entry in Crown's Share Buy-Back Reserve Account. There was also a credit balance in Crown's Shareholders Equity Account. That debit was never, in terms of s 159GZZZP(1)(b) of the 1936 Act, applied against that credit balance. It follows it ought to have been concluded that no part of the purchase price in respect of this off-market buy-back was debited against amounts standing to the credit of Crown's share capital account and that the purchase price is, by virtue of s 159GZZZP, taken to be a dividend paid by Crown to CMH out of profits derived by Crown.

47. A consequence of these conclusions is that the resultant deemed dividend payment to CMH attracts an inter-corporate dividend rebate under s 46 of the 1936 Act. That is nothing more than a consequence of CMH being a public company and of the inapplicability of anti-avoidance measures such as ss 46G, 46H and 46K. That consequence on the facts of the present case is no reason to adopt a construction of either s 6D or s 159GZZZP(1) so as to deny CMH any deemed dividend at all.

48. For these reasons, the appeal must be allowed, with costs and the orders made below both in proceeding number NSD 623 of 2009 and in proceeding number NSD 822 of 2009 set aside. In lieu thereof, it should be ordered that the appeals against the objection decisions be allowed, the objection decisions set aside and the matters remitted to the Commissioner for taking, pursuant to s 14ZZQ of the Taxation Administration Act 1953 (Cth) such action, including amending any assessment concerned, as is necessary to give effect to these orders. As to the costs below, our view is that there should be no order as to costs in respect of the taxation appeal stage of the proceedings. As we noted at the outset of these reasons, the way in which CMH's case was developed before us differed markedly from the way its case was developed before the learned primary judge. His Honour was pressed with forensic accounting evidence as if a preference for one body of evidence or another would be determinative rather than a detailed examination of the text, scope and purpose of the legislation. We were not so pressed and it was the latter, statutory construction submission which proved decisive, not any acceptance by us that the primary judge had in some way erred in failing to prefer the accounting evidence which CMH had led. So radical was the difference in the way in which CMH's case was presented as between original and appellate jurisdiction and so decisive has that difference proved that we are persuaded that there should, in respect of the proceedings in the original jurisdiction, be a departure from the ordinary rule as to costs following the event and, instead, there be no order as to costs.


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