In a decision handed down this on Wed 14.11.2012, the High Court unanimously allowed the taxpayer’s appeal against a decision of the Full Federal Court and set aside a determination of the Commissioner 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 taxpayer had appealed against the decision of the Full Federal Court in Mills v FCT [2011] FCAFC 158. The Full Federal Court had (by majority – Edmonds J dissenting) confirmed that the “imputation benefit” scheme provisions in s 177EA of the ITAA 1936 applied to cancel franking credits that arose to the taxpayer from distributions paid on “debt-like” securities (Perpetual Exchangeable Resaleable Listed Securities V (“PERLS V Securities”)) he had subscribed for in the Commonwealth Bank. The Full Federal Court majority arrived at its decision essentially on the basis of finding that in the absence of the franking credit, the distribution rate would be quite unattractive to investors and therefore the “enabling of franking benefits” was something more than an incidental purpose of the scheme. The taxpayer was the “representative” taxpayer of some 33,000 investors who had received franking credits totalling some $24.2m.
The Commonwealth Bank offered the PERLS V Securities for subscription in a prospectus issued in 2009. The securities consisted of a stapled unsecured note issued by the New Zealand branch of the bank and preference shares issued by the bank. It was common ground that the securities were an equity interest under Div 974 of the ITAA 1997. Importantly, the offer was only made to Australian investors and shareholders in the bank. Prior to the issue of the securities, the bank sought the Commissioner’s view on the treatment of any imputation credits paid on distributions. The Commissioner indicated that the imputation credits may be denied. The Commissioner subsequently denied franking credits of $65.70 to the taxpayer under s 177EA(5)(b) and issued Class Ruling CR 2009/78 in which he expressed his view that the conditions in s 177EA(3)(a) to (d) were satisfied.
The High Court held unanimously that the relevant circumstances to be taken into account included that distributions on the securities were to be paid by the New Zealand branch of the Bank without payment of Australian income tax by the Bank on the source of funding, and that without the issue of PERLS V, the Bank would have raised Tier 1 capital by other means at higher cost. The High Court held that although it would be concluded that the Bank had a purpose of enabling PERLS V holders to obtain an imputation benefit, that purpose was incidental to its purpose of raising Tier 1 capital. As the purpose was an incidental purpose, a necessary precondition to the Commissioner’s power to make the determination was not satisfied, the Court said.
(Mills v FCT [2012] HCA 51, High Court, French CJ, Hayne, Kiefel, Bell and Gageler JJ, 14 November 2012.)
[FJM Note: The way the High Court has interpreted the phrase ‘not more than an incidental purpose’, makes it not so different from ‘dominant’ purpose, in other parts of Part IVA of the ITAA36.]
[LTN 221, 14/11]