Decision impact statement

Commissioner of Taxation and Fabig & Dickinson

Venue: Administrative Appeals Tribunal
Venue Reference No: NSD 247 of 2013
NSD 248 of 2013
Special leave refused, S181 of 2013
Judge Name: Edmonds, Griffiths and Davies JJ
Judgment date: 28 August 2013
Appeals on foot: No
Decision Outcome: Favourable

Impacted Advice

Relevant Rulings/Determinations:

Précis

Outlines the ATO's response to these cases which concerned whether partial scrip-for-scrip rollover relief was available to the taxpayers in relation to their exchange of shares in one company for those in another, where the consideration received by them was disproportionate to their shareholding.

Brief summary of facts

Ms Fabig and Mr Dickinson, along with all other shareholders in iMega Pty Ltd ( iMega ), entered into a Share Purchase Agreement to dispose of 90% of the shares they held for cash as well as shares in Photon Group Ltd ( Photon ).

Photon, the purchaser, did not pay the shareholders the same consideration for each of their shares. This was, the Tribunal below found, a direct result of a Shareholders' Agreement. Mr Dickinson held 50% of the shares in iMega but was relevantly entitled to 80% of any consideration on their sale under that agreement. Ms Fabig held 32.3% of the shares in iMega, but was entitled to 15.5% of the consideration.

A Deed of Variation was also entered into by the shareholders to dispose of the remaining 10% of the shares in iMega. The consideration was also cash and shares in a manner consistent with the Shareholders' Agreement.

The Tribunal held that the taxpayers were entitled to partial scrip-for-scrip rollover as each arrangement was one in which participation was available on substantially the same terms for all the iMega shareholders, as required by paragraph 124-780(2)(c).

Justice Davies summarised the Tribunal's reasoning as follows:

'... even though the arrangement [defined by s 995-1] is broadly defined by the terms of the Share Purchase Agreement and the Deed of Variation, and cannot be contradicted by the terms of rejected offers, the general circumstances that led to the finalisation of those terms can be and are in this instance part of the arrangement. Critically, here the indifference of Photon as to the break-up between the Shareholders of the consideration is such a circumstance which is a relevant part of the arrangement.'

And that:

'Photon was willing to buy out the Shareholders in iMega on the same terms for all and that offer could have been accepted on those terms. They do not have to accept on the same terms in order to conclude that participation was available on the same terms: ...'

The Commissioner appealed from the Administrative Appeals Tribunal's decisions.

Issues Decided by the Court

The issues were whether the Tribunal erred in the identification of the arrangement and whether the arrangement was one in which participation was available on substantially the same terms for all the shareholders (see paragraph 124-780(2)(c)).

Justice Davies held (at [25]) that: 'The "arrangement" in this case was the contractual relationship entered into' and that: 'If, and in so far as, the Tribunal took the circumstance of Photon's indifference about the allocation of the purchase price as amongst the shareholders into account in defining the "arrangement" it fell into legal error. Photon's indifference did not form part of the relevant "arrangement" because of the terms on which the parties did contract.'

Her Honour went on to say that:

'This case does not turn on the proper identification of the "arrangement" ... but upon the fact ... that the disparity in consideration amongst the shareholders arose as the direct result of their private Shareholders' Agreement. In that context, Photon's indifference to the allocation of the consideration bore upon the question that the Tribunal had to decide although for the reasons that follow, I have concluded that the Tribunal was wrong to conclude that Photon's indifference meant that ... the condition in s 124-780(2)(c) was satisfied.'

Her Honour concluded (at [27]) that:

The Tribunal reasoned that the condition in s 124-780(2)(c) was satisfied because Photon was willing to buy the shares on the same terms for all shareholders and was indifferent to the break-up of consideration amongst the shareholders. The Tribunal thereby concluded at Fabig [38] and Dickinson at [37] that Photon's offer could have been accepted by the shareholders on the same terms. However, that conclusion was reached without regard to the legal obligations on the shareholders under the Shareholders' Agreement. Photon may have been indifferent about the allocation of consideration when it made the offers but the Shareholders' Agreement meant that it was not open to the shareholders to accept Photon's offer on the same terms. They were contractually obliged to sell their shares for different consideration and in consequence, participation in the share sales was not available to them on substantially the same terms. The Tribunal was wrong to conclude otherwise.

Justices Edmonds (with additional reasons) and Griffiths agreed with Davies J.

ATO view of decision

The decision does not impact upon the Commissioner's practices. In applying paragraph 124-780(2)(c), we will evaluate whether participation was available on substantially the same terms by reference to the arrangement in question and also, consistent with Justice Davies' judgment (at [25]), other matters beyond the arrangement itself. This will include, in appropriate cases, any Shareholders' Agreement.

Administrative Treatment

Implications for impacted ATO precedential documents (Public Rulings & Determinations etc)

Not applicable.

Implications for impacted Law Administration Practice Statements

Not applicable.

Your comments

We invite you to advise us if you feel this decision has consequences we have not identified, or if a precedential decision such as a Public Ruling or an ATO ID requires reconsideration or amendment. Please forward your comments to the contact officer by the due date.

Court citation:
[2013] FCAFC 99
2013 ATC 20-413
(2013) 95 ATR 660
(2013) 215 FCR 122

Legislative References:
Income Tax Assessment Act 1997
Subdivision 124-M
995-1

Case References:
S v Crimes Compensation Tribunal
[1998] 1 VR 83

Australand Investments Ltd v Commissioner of State Revenue
(2009) 2009 ATC 20-137
(2009) 77 ATR 683

Commissioner of State Revenue v Australand Investments Ltd
(2012) 2012 ATC 20-332
[2012] VSCA 152