The ATO on Mon 6.5.2013 released a Decision Impact Statement on the High Court decision in FCT v Consolidated Media Holdings Ltd [2012] HCA 55; (2012) 84 ATR 1. In that case, the High Court unanimously allowed the Commissioner’s appeal thereby confirming that the taxpayer made a capital gain of some $400m in an off-market share buy-back in relation to shares it held in another company. The ATO said the decision was consistent with its long standing practice and policy in relation to share buy-backs.
[LTN 68, 11/4/13]
Extracts from [2012] HCA 55
Catchwords from [2012] HCA 55: Taxation – Income tax – Share buy-back – Off-market purchase – Company’s financial record of transaction – Whether dividend or capital gain – Whether purchase price “debited against amounts standing to the credit of … the company’s share capital account” – Meaning of “share capital account” – Relevance of legislative history.
The Dispute: Taxpayer executed the share buy back agreement with Crown Ltd before 30 June 2002 and settled afterwards, expecting the proceeds to be a dividend (with a dividend rebate), but the Commissioner took the view that the proceeds were capital for the sale of the shares and assessed the taxpayer on a capital gain in the 2002 year.
The Court held that it was a capital gain on the basis that the account out of which the sale proceeds were paid, was part of Crown’s ‘share capital account’ (for the reasons expressed in para 46 below).
46. Crown’s Share Buy-Back Reserve Account in which, as corrected, the only entry as at 30 June 2002 was a id=”mce_marker” billion debit was a record of the transaction by which Crown had on 28 June 2002 entered into an executory contract to reduce its share capital by that amount. As illustrated by the derivation of the figure for “Contributed Equity” later shown in Crown’s audited financial statements, the financial position of Crown in relation to its share capital as at 30 June 2002 could only be understood by subtracting the id=”mce_marker” billion debit balance in its Share Buy-Back Reserve Account from the credit balance of just over $2.4 billion in its Shareholders Equity Account. On either basis, the Share Buy-Back Reserve Account answered the description of an account which Crown kept of its share capital within s 6D(1)(a). The Share Buy-Back Reserve Account was therefore a share capital account.