The ATO has issued a Decision Impact Statement on the Full Federal Court decision in Cable & Wireless Australia & Pacific Holding BV (in liquidatie) v FCT  FCAFC 71, which held that an off-market share buy back receipt was a ‘dividend’ to the overseas recipient and that and the withholding tax paid was correctly paid and was not refundable as ‘paid in error’ (see also a related Tax Month article about this decision after the High Court refused leave to appeal).
In this appeal, the Full Federal Court upheld the decision, at first instance (by Pagone J) in  FCA 78.
And this, in turn, was not a big surprise, in that the parties had assumed that this ‘dividend’ and ‘withholding tax’ approach would be the result. They structured the takeover on this basis and obtained rulings to that effect. There were very big amounts at stake. The taxpayer had 52% of the target: Optus. In accepting the taxer offer, the taxpayer took the ‘buy-back’ option. Optus bought back 1.6b shares for a total of A$6.2b, on which the withholding tax was $452m.
It was only, the High Court’s decision on 5 December 2012 in Commissioner of Taxation v Consolidated Media Holdings Limited  HCA 55; (2012) 250 CLR 503, that prompted the taxpayer to think that the $452m in withholding tax might have been paid in error and was refundable. The Consolidated Media case held that another buy-back payment, also from a ‘buy-back reserve’ was not a dividend.
There is a summary of the facts and issues set out below (taken form the early paragraphs of the Full Federal Court’s reasons).
The jist of what the Full Federal Court said (and the ATO said, in this DIS) was as follows.
- It is the meaning of ‘share capital account’ that is central.
- An amount, that a company pays a share holder, is not a dividend, if it is debited to (paid from) an untainted ‘share capital account’.
- Not all ‘equity’ is ‘share capital’ – for instance, there could also be retained profits and unrealised profits.
- Consolidated Media was different, because the buy-back was paid entirely from share capital.
- The character of a payment, to a shareholder (funded by the purchaser’s loan to the target), is not characterised by a subsequent payment in, of capital, that is off-set against that loan.
Not surprisingly, the Commissioner says he ‘accepts’ the decision and it has no implications for his current approach.
[FJM; LTN 18/1/18; Tax Month January 2018]
Study Questions (answers below*)
- Did the Court find that the buy-back payment, to the taxpayer was a ‘dividend’?
- Did Cable & Wireless Optus Ltd make the buy-back payment to a resident?
- Was it the High Court case in Consolidated Media that prompted the taxpayer to take a different view on the expected ‘dividend’ characterisation?
- Can the relevant ‘share capital account’ include all equity?
- Did the taxpayer hold 52% of Optus prior to the Singtel takeover?
Summary of facts and issues (from FFC’s reasons)
- The issue the subject of the present appeal relates to the correct characterisation for taxation purposes of an amount of $3,918,797,343.42 debited to a buy-back reserve account in the ledger of Cable & Wireless Optus Ltd, now known as Singtel Optus Australia Pty Ltd (Optus). The amount debited to the buy-back reserve account was part of the consideration paid by Optus to buy back approximately 43% of its shares on 6 and 28 September 2001; the buy-back was part of a takeover of Optus, with the acquirer putting Optus in funds to enable the consideration for the buy-back to be paid. Depending upon the correct characterisation of the amount debited to the buy-back reserve account, the appellant may be entitled to a refund from the Commissioner of Taxation of $452,452,013 in dividend withholding tax. Let us explain.
- Prior to 6 September 2001, the appellant, a company incorporated in the Netherlands and not a resident of Australia, had been a shareholder in Optus and had held approximately 52% of shares in Optus. On 18 May 2001, Singapore Telecommunications Limited (SingTel) through its wholly owned subsidiary made a takeover offer for a majority of the shares in Optus. The takeover offer contained a number of transaction alternatives available to an accepting shareholder of Optus, including the appellant. An accepting shareholder could receive consideration by way of cash, bonds or SingTel shares. Further, an accepting shareholder could elect to accept either a purchase of its shares by the bidder or a buy-back by Optus of the accepting shareholder’s shares in Optus.
- The takeover was successful. The appellant elected to accept a buy-back by Optus of most of its shares in Optus. On 30 August 2001, the appellant accepted the buy-back option in respect of 1,639,849,948 shares (it had a total holding of 1,981,382,291 shares) for a consideration of $6,216,762,899.29. In total, Optus agreed to buy back 1,642,101,319 shares from relevant accepting shareholders for a total consideration of $6,225,502,631.68. In the financial statements of Optus, the buy-back was accounted for in the following manner:
Dr Contributed Equity $2,306,705,228.16
Dr Buy-Back Reserve $3,918,797,403.52
Cr Debt due to Optus shareholders $6,225,502,631.68
- The appellant contends that the buy-back reserve account was a “share capital account” within the meaning of s 6D of the Income Tax Assessment Act 1936 (Cth) (ITAA). If that characterisation is correct, then the amount debited to that account referable to the payment to the appellant for the shares bought back by Optus is not taken to be a dividend paid by Optus as provided for by s 159GZZZP of the ITAA. And if that is correct, then the appellant was not obliged to pay dividend withholding tax of $452,452,013. That being the case, the appellant says that it is entitled to a refund of $452,452,013, which has been erroneously withheld as such tax, pursuant to s 18-70 of Schedule 1 to the Taxation Administration Act 1953 (Cth) (TAA). It says that such an amount was withheld from the appellant and paid to the Commissioner in “error”. The appellant’s position is sought to be justified as a consequence of the High Court’s decision on 5 December 2012 in Commissioner of Taxation v Consolidated Media Holdings Limited  HCA 55; (2012) 250 CLR 503.
- Contrastingly, the Commissioner contends that no error has been made, that the buy-back reserve account is not a “share capital account” within the meaning of s 6D of the ITAA, and that Consolidated Media is distinguishable. Principally, it contends that Consolidated Media was concerned with a buy-back reserve account used to effect a reduction of capital, in contrast with the present case where the buy-back reserve account was not used to effect a reduction of capital.
- The primary judge largely accepted the Commissioner’s submissions and accordingly dismissed the appellant’s proceeding, being in the form of an appeal by the appellant against an appealable objection decision under s 14ZZ of the TAA. The appealable objection decision made by the Commissioner under s 14ZY of the TAA was one which disallowed the appellant’s objection against the Commissioner’s decision to refuse a refund under s 18-70 of Schedule 1 to the TAA. The appellant has appealed the primary judge’s determination.