The ATO on Mon 21.1.2013, issued a Decision Impact Statement on the High Court’s decision in Mills v FCT [2012] HCA 51.
In that decision, the High Court unanimously allowed the taxpayer’s appeal and set aside the Commissioner’s determination that no franking credit was to arise in respect of distributions made on certain securities issued by the Commonwealth Bank. The Court effectively held that the “imputation benefit” scheme provisions in s 177EA of the ITAA 1936 did not apply to cancel franking credits that arose to the taxpayer from distributions paid on Commonwealth Bank “PERLS V Securities”.
The ATO said that in this case, “the High Court found that the Bank had a demonstrated need to raise Tier 1 capital; that this was its main purpose; and that all means available to do so would have involved the Bank franking distributions to the same extent. The High Court held, therefore, that the franking purpose was no more than incidental in the sense that it furthered, or followed as a natural consequence of, the commercial requirement for Tier 1 capital and that the other identified relevant circumstances were not sufficiently probative of purpose to alter this conclusion.” The ATO said if the same facts and circumstances subsist in other cases of Tier 1 capital-raising, “it is clear that s 177EA will not apply”.
The ATO noted the High Court’s comments in relation to when a franking purpose will be incidental. The ATO said the decision suggests that in cases where a substantial, albeit not dominant, purpose of franking is evident, there will be a need to carefully scrutinise the extent to which the franking purpose can be said to do no more than further, or follow from, some other purpose. The ATO also noted the High Court’s confirmation that the circumstances listed in s 177EA(17) are not exhaustive of the matters that may be probative of the ultimate question as to purpose. In relation to other forms of capital raising, the ATO said whether s 177EA applies will depend on the facts and circumstances of each case.
Although noting that Taxation Ruling TR 2009/3 deals with a somewhat different arrangement to the one considered in the case, the ATO said aspects of that Ruling will need to be considered and possibly amended to take into account the reasoning of the High Court.
[LTN 13, 21/1/13]