• The impact of this case on ATO policy is discussed in Decision Impact Statement: Commissioner of Taxation v McNeil (Published 10 January 2011).

FC of T v McNEIL

Judges: Gummow ACJ
Hayne J

Callinan J
Heydon J
Crennan J

Court:
High Court of Australia

MEDIA NEUTRAL CITATION: [2007] HCA 5

Judgment date: 22 February 2007

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Callinan J

53. The issues, the facts and the relevant statutory provisions are set out in the joint judgment. Because my opinion is a dissenting one, and I agree in substance with the reasoning of the majority in the Full Court of the Federal Court, it is not necessary for me to state in elaborate detail why I would decide the appeal differently from the majority in this Court.

54. The key to unlock the problem here is to be found in the observation of French J, that the money received by the respondent: ^[47] Commissioner of Taxation v McNeil 2005 ATC 4658 ; (2005) 144 FCR 514 at 529 [ 44 ] per French J.

" … was not an entitlement derived from profits earned by the company. It arose out of the decision by the company to reduce its issued capital through a buy back process. "

And that, inevitably was what happened when the transactions for which the documents provided were carried into full effect: the capital, including the value of the respondent ' s rights as a shareholder in respect of it, became less than it would otherwise have been, because St George Bank Limited ( " SGL " ) had expended some of that capital in buying some of its own shares and reducing thereby the number of shares on issue.

55. In my view the character of a payment for the purposes of the statutory definition of income, that is, " income according to ordinary concepts " , is not always to be, indeed cannot always be, determined simply and solely by reference to its quality in the hands of a recipient. I do not take
GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation ^[48] (1990) 170 CLR 124 at 136 per Brennan, Dawson, Toohey, Gaudron and McHugh JJ. and the other cases referred to in the reasons for decision there, to be denying reference to the full circumstances leading to the receipt in the hands of the taxpayer. It will usually only be by reference to a transaction as a whole that the quality of a receipt, otherwise perhaps even unintelligible, will begin to be able to be ascertained. In GP International this

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Court was dealing with an argument that a receipt was disbursable by the taxpayer and should not for that reason be treated as income, and was not enjoining courts in the future from examining the whole of a transaction to identify the quality of a receipt.

56. The fact that the capital of the company suffered a reduction is far from irrelevant. But even if it were, and it were possible, as realistically I do not think it is, to look only to what the respondent had in her hands, the result is the same. She was left with a sum of money, and, it may readily be accepted, the same notional pieces of property, her shares, intact, representing a contingent entitlement to the capital of SGL reduced by reason of the expenditure of some of it to buy back its shares. The money that the respondent received was not " severed " from the shareholding in SGL. It was the result of a reorganisation of the capital of the company which effectively gave shareholders access to a component of it that they would not otherwise have had. It was not a dividend, nor was it analogous to one.

57. The appellant, in his determination (the subject of the appeal) said this:

" Although the [ sell back ] Rights were granted for the benefit of shareholders for nil consideration, they had a value because possession of a Right entitled the holder to sell SGL shares back to SGL for a price which exceeded the market value of the SGL shares. "

This statement wrongly assumes that the quoted price of the shares on the stock exchange from time to time was necessarily the correct and exclusive value of the shares. The fact that the sell back rights, available to shareholders, had an additional value shows that this is not so. In this case SGL ' s directors knew better than those in the usual marketplace, the stock exchange. Perhaps that value, coming to attach as it did specifically to shareholders ' sell back rights, may have been a consequence wholly, or in part, of a perception, or the actuality, of the " tax-effectiveness " of the scheme, as three judges in the Courts below and I hold in effect it to be, but there is nothing unusual about that.

58. Of course, the likely incidence of tax may affect value. If an example be required,
Tait v Federal Commissioner of Taxation ^[49] (1967) 116 CLR 620. in which special provisions relating to the incidence of income tax upon graziers was held in this Court to affect the value of a deceased ' s estate for the purpose of federal estate duty, provides it. That the value of a species of property may be so affected does not change its character.

59. The quoted price on the stock exchange of the shares in SGL was not the full measure of the value of the shares to shareholders on the relevant date as the directors of SGL knew, and took steps to establish by setting in motion the arrangements that they did. I agree with these passages in the judgment of Dowsett J ^[50] Commissioner of Taxation v McNeil 2005 ATC 4658 ; (2005) 144 FCR 514 at 559 [ 178 ] , 562-563 [ 186 ] - [ 187 ] . :

" The Commissioner ' s case assumes that in the latter case, the relevant shareholding would remain unchanged, that the proceeds of sale were produced by the Taxpayer ' s investment without any diminution in its value. This assumption is made superficially more attractive by the fact that sale of the Sell Back Rights led to the Taxpayer receiving money from a third party, not from SGL. However it is obvious that the only reason for purchasing Rights would be in order to exercise them by selling shares to SGL. That was an attractive opportunity because SGL was offering an amount which was well above the prevailing market price. A purchaser of Sell Back Rights would pay a price which reflected, to some extent at least, the gain to be made by selling shares to SGL, which gain was to be derived from the assets of SGL. By creating Sell Back Rights, SGL ensured that shareholders who chose not to sell their own shares would nonetheless participate indirectly in the distribution of SGL assets which was an essential element of the Scheme. The special sense in which I use the expression ' distribution of SGL assets ' is obvious.

…

In examining the Scheme, one must keep in mind the legal context in which it was designed and implemented. Shareholders had contractual and statutory rights as against SGL and inter se. In buying back one of its shares, SGL was buying the relevant shareholder ' s right to participate in dividends and in any surplus of assets over liabilities in a winding up. In this case, it seems that those rights were worth more than the paid up value of the share. The

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market price reflected the market ' s assessment of that value, but SGL offered an even greater amount. One must proceed upon the basis that SGL ' s offer reflected the Board ' s assessment of the true value of the shares. It is unlikely that the Board decided to buy the shares at a price above the amount which it considered to be their true value. Presumably, the board considered that the market was under-valuing the shares. For this reason, the offer was attractive to some, perhaps many, shareholders to whom market price was more important than the possible return from a notional winding up.

What, then, was the purpose of the arrangement concerning the shareholders who did not accept the offer? It is conceivable that it was designed as a convenient mechanism for ensuring that the 5 % target was achieved. However it is significant that those who designed the Scheme considered that there would be a worthwhile market for the Sell Back Rights, probably because the offer was well above the market price. Clearly, SGL considered that shareholders who chose not to sell should, nonetheless, be able to participate in the benefit of the Scheme. Given that such benefit cannot be characterised as a gift, one must ask why that view should have prevailed. The only likely answer is that as the Scheme involved the disbursement of company assets, there was at least a possibility that the outcome would be disadvantageous to such shareholders, either because the value of their shares on an asset-backing basis might be reduced (perhaps because the Board erred in assessing the value of the shares) or because the Scheme might have an adverse effect on the market price of the shares. "

60. I am unable to accept that the sell back rights which the respondent enjoyed, and which were turned to account on her behalf, did not represent any portion of her rights as a shareholder under the constitution of SGL; or that anything turns upon the execution of the scheme for what was, clearly, a reduction of capital, by the performance of covenants in deeds poll. Indisputable rights that the respondent had as a shareholder included her right with other shareholders to insist upon the application of the capital of SGL diligently and honestly in pursuance of its objects, and, in the event that there was an excess of it which SGL ' s directors thought might prudently be returned to shareholders, that it be returned to them in the same proportions as their shareholdings bore to all of the shareholdings in the company.

61. It was not the deeds poll that breathed life into the scheme under which the respondent received the value of her sell back rights. The deeds poll recorded the scheme, and ensured that the respondent would receive her due under it, but the scheme itself had more to it than them. The availability of excess capital, SGL ' s directors ' decision to return it to the shareholders, the selection and adoption of the means of doing so, the retention by shareholders, such as the respondent, of their shares intact, the actual reduction of capital that ensued, and the receipt of the value of the sell back rights by the shareholders, were the major elements of the scheme and constituted in totality its " life " .

62. I would also regard the cases, as to which there is unanimity only in that they are not determinative, to the extent that they are illuminating, as tending to support the respondent ' s position rather than the appellant ' s. By reason of the careful analysis by Dowsett J of them, it is unnecessary for me to do more than say that I agree with it.

Capital Gain

63. I am also in agreement with Dowsett J in the Full Court of the Federal Court that the " event " upon which the appellant relied, the issue of the sell back rights, did not of itself result in the receipt by the respondent of money, or indeed an entitlement to receive money. What is taxable in a given case is the capital gain calculated by reference to the amount of the capital proceeds " because of the ' Capital Gains Event ' " . And " capital proceeds " includes money, " other consideration … received " or money that a taxpayer is " entitled to receive " " because of the … event " ^[51] cf Commissioner of Taxation v McNeil 2005 ATC 4658 ; (2005) 144 FCR 514 at 570 [ 218 ] - [ 220 ] . . " Consideration " is a term which involves an element of exchange ^[52] Commissioner of Taxation v Scully 2000 ATC 4111 ; (2000) 201 CLR 148 at 166 [ 25 ] per Gaudron ACJ, McHugh, Gummow and Callinan JJ. , something which is missing here in relation to the sell back rights ^[53] cf Commissioner of Taxation v McNeil 2005 ATC 4658 ; (2005) 144 FCR 514 at 570-571 [ 220 ] . .

64. I would dismiss the appeal with costs.

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