The High Court on Wed 5.12.2012, unanimously allowed the Commissioner’s appeal from a decision of the Full Federal Court (in Consolidated Media Holdings Limited v FCT [2012] FCAFC 36) and upheld an assessment that Publishing and Broadcasting Ltd (“PBL”) (later called “Consolidated Media Holdings Ltd”) made a capital gain when shares it held in Crown Ltd (“Crown”) were bought back by Crown in an off-market share buy-back.
The appeal concerned the characterisation for income tax purposes of consideration received by PBL, for shares sold to Crown, in the buy-back in the year of income ended 30 June 2002.
PBL owned all of the ordinary shares in Crown. On 28 June 2002, PBL and Crown entered into an agreement for PBL to sell some of its shares back to Crown for $1bn. Crown recorded a debit of $1bn in a new account labelled “Share Buy-Back Reserve Account”. It also maintained a “Shareholders Equity Account”, which had a credit balance and in which no entry was recorded in relation to the share buy-back. The Full Federal Court held that the off-market share buy-back transaction did not generate a capital gain of some $400m to the taxpayer. It instead found that the consideration for the buy-back was not capital proceeds paid out of share capital account, but was a dividend within the meaning of s 159GZZZP of the ITAA 1936.
The High Court however allowed the Commissioner’s appeal and held that an account that is a record of a transaction into which a company has entered in relation to its share capital, or that is a record of a company’s financial position in relation to its share capital, is a “share capital account” within the meaning of s 6D(1) of the ITAA 1936. It also held that s 6D(2) required all share capital accounts to be treated as a combined “share capital account”.
Accordingly, the $1bn consideration PBL received under the share buy-back agreement was debited against amounts standing to the credit of Crown’s “share capital account” and the High Court said the Commissioner was correct to have assessed PBL as having made a capital gain.
(FCT v Consolidated Media Holdings Ltd [2012] HCA 55, High Court, French CJ, Hayne, Crennan, Bell and Gageler JJ, 5 December 2012.)
[LTN 236, 5/12]