Decision impact statement

ABB Australia Pty Ltd & Anor v Commissioner of Taxation

Court Citation(s):
[2007] FCA 1063
2007 ATC 4765
66 ATR 460

Venue: Federal Court of Australia
Venue Reference No: NSD 1171 of 2004
Judge Name: Lindgren J
Judgment date: 20 July 2007
Appeal on foot:
No

Impacted Advice

Relevant Rulings/Determinations:

• TR 98/1 considered briefly (at para 152)

Subject References:
Taxation
withholding tax
section 128B(1) of Division 11A of Pt III of the Income Tax Assessment Act 1936
whether income consisting of a dividend derived upon declaration
assignment of right to receive dividend
accruals
business and accounting practice
payment of dividends
'dividend'
'paid'
'derived'
declaration
timing of derivation

Précis

Outlines the Tax Office's response to this case about a non-resident company's liability to withholding tax on a dividend declared by its Australian resident subsidiary company and paid to an unrelated Australian resident company pursuant to assignments of the right to receive the dividend.

Brief summary of facts

ABB Asea Brown Boveri Ltd ("ABB Zurich"), a non-resident company incorporated in Switzerland, was the sole shareholder in ABB Australia Pty Ltd ("ABB Australia"), a resident company incorporated in New South Wales. ABB Zurich was the holding company of some 1,000 companies in the ABB corporate group around the world. ABB Australia declared a final dividend of $49,000,000 payable on a later date to the registered shareholders as at the declaration. After the declaration but before payment of the dividend, ABB Zurich, for valuable consideration of $48,816,995, assigned its right to receive the dividend to Barclays de Zoete Wedd Ltd ("BZW"), a non-resident company incorporated in the United Kingdom. Then BZW, for valuable consideration of $48,826,480, assigned its right to receive the dividend to Barclays Australia Limited ("BAL"), a resident company incorporated in New South Wales. BAL paid the consideration payable to BZW, BZW paid the consideration payable to ABB Zurich, BAL gave notice to ABB Zurich of the assignment from BZW to itself (BAL), and BAL requested ABB Zurich to instruct ABB Australia to pay the amount of the dividend into BAL's bank account in Sydney. ABB Zurich directed ABB Australia to pay the amount of the dividend into BAL's bank account in Sydney. ABB Australia paid the amount of the dividend into that bank account. The Commissioner issued notices to ABB Zurich and ABB Australia demanding payment of withholding tax in respect of the dividend. ABB Zurich and ABB Australia sought declarations pursuant to s 39B of the Judiciary Act 1903 that ABB Zurich was not liable to withholding tax on the dividend of $49 million, and that ABB Australia was not required to make a deduction from that sum in respect of withholding tax.

Issues decided by the court or tribunal

1. The dividend income was derived by ABB Zurich when the members of ABB Australia declared the dividend on 30 May 1996.

ABB Zurich was carrying on a business consisting of managing its investments in, and the affairs of, some 1,000 subsidiaries around the world. ABB Zurich controlled ABB Australia, and the decision to declare the dividend and defer payment of it. For accounting purposes ABB Zurich recognised dividends on an accruals basis at the time of declaration, and the evidence indicated that that practice accorded with Australian accounting standards applicable to the ordinary business practices of reporting companies in Australia at the time. Business, commercial and accounting practice was relevant to the question of when income consisting of a dividend 'came home' and was derived by a company in the circumstances of ABB Zurich. In the circumstances of this case and under the specific provisions of Division 11A [s 128B(1)], ABB Zurich derived the dividend when it was declared.

2. Alternatively, the dividend income was derived by ABB Zurich on 21 June 1996, as it was paid to ABB Zurich on that date because the payment by ABB Australia to BAL was the agreed mode of discharge of ABB Australia's monetary obligation to ABB Zurich, was an amount with which ABB Zurich was to be credited with in its dealings with BZW and BAL, and was the payment of a dividend necessarily paid to a shareholder.

On 30 May 1996 ABB Zurich became entitled to a present indebtedness payable in the future, and retained legal title to that debt notwithstanding the assignments. Payment on 21 June 1996 by ABB Australia to the bank account of BAL discharged ABB Australia's indebtedness to ABB Zurich and the contractual obligations that ABB Zurich had undertaken under the deeds of assignment, guarantee and indemnity and offshore custody deed. The payment to BAL was also payment to ABB Zurich. ABB Australia had a monetary obligation to ABB Zurich and the companies agreed that that monetary obligation should be discharged by ABB Australia paying the amount to BAL.

3. ABB Zurich was liable to pay withholding tax upon an amount of A$49,000,000 being income derived by it that consisted of a dividend paid by ABB Australia under s 128B(1) and (4) and s 128C(1) of the Income Tax Assessment Act 1936 ("ITAA 1936").

4. ABB Australia was obliged (but failed) to make a deduction of A$7,350,000 before the amount of A$49,000,000 was paid by ABB Australia as required by s 221YL(1) of the ITAA 1936.

5. ABB Australia was liable to pay to the respondent the amount of A$7,350,000 (and an amount of additional tax) under s 221YQ(1) of the ITAA 1936.

Tax Office view of Decision

The Tax Office considers that the correct decision was reached by the Federal Court. In relation to the obiter dicta comments concerning the Commissioner's further alternative submission that ABB Zurich could not avoid the derivation of income consisting of a dividend when it was paid on 21 June 1996 by an equitable assignment of the right to receive the dividend, the Tax Office will consider the issue after the decision of the High Court of Australia in Bluebottle UK Ltd & ors v DCT & anor S302/2007, which was heard on 29 August 2007.

Lindgren J stated that the decision was confined to the factual circumstances of the case and to the specific provisions of Division 11A [at paragraphs 150 and 153].

Lindgren J observed at [97] that unlike s 44(1), s 128B(1) does not expressly require that the dividend be paid to the shareholder: whereas s 44(1) includes in the assessable income of a taxpayer 'dividends paid to him by the company', s 128B does not identify the payee. Lindgren J also stated at [150] that: "Generally speaking dividend income is derived when it is received", and noted at [7] that: "it is an express condition of the operation of s 44(1) that the dividend be paid to the shareholder".

Under section 44(1) the assessable income of a shareholder in a company includes "dividends that are paid to the shareholder by the company out of profits ...". Under s 6(1) " paid in relation to dividends includes credited or distributed". Under s 128B(1) and (4) a non-resident is liable to withholding tax in respect of income that "is derived" and "consists of a dividend paid by a company that is a resident".

The decision establishes that for the purposes of liability to dividend withholding tax under s 128B of Division 11A, companies that carry on a business managing investments in, and the affairs of, subsidiary companies derive dividend income upon declaration. The Commissioner is of the view that for the purposes of liability to dividend withholding tax under s 128B of Division 11A, the principles of the decision would also apply to any entity that carries on a business of managing investments in other companies such that it derives dividend income on an accruals basis upon declaration, whether or not the companies in which shares are held are wholly owned or controlled subsidiaries of the entity.

The Commissioner may consider any wider implications of dividend assignments for the interpretation or application of s 44(1) after the decision of the High Court of Australia in Bluebottle.

The decision concerns a final dividend declared by a private company giving rise to an immediate debt owed by the company to shareholders, which was declared in accordance with the legislation and case law as it stood prior to the enactment of the Company Law Review Act 1998. The decision does not deal with dividends determined pursuant to the replaceable rules in ss 254U and 254V of the Corporations Act. Under those rules a company can fix the amount, time and method of payment of a dividend, and a debt only arises when the time for payment arrives. The decision to pay the dividend may be revoked any time before then. The Tax Office may consider this issue further in relation to the decision of the High Court of Australia in Bluebottle.

Administrative Treatment

None

Implications on current Public Rulings & Determinations

None

Implications on Law Administration Practice Statements

None

Legislative References:
Judiciary Act 1903 (Cth)
39B

Conveyancing Act 1919 (NSW)
12