Tax Brief 3 March 2005 Stamp Duty Tail Wags CGT Dog? Whilst the High Court decision in Chief Commissioner of State Revenue v Dick Smith Electronics Holdings Pty Ltd ( Dick Smith ) involves NSW stamp duty, it is interesting to also consider whether it has any implications for the interpretation of the capital gains tax provisions of the Income Tax Assessment Act, 1997. The Facts In Dick Smith, the vendors wished to sell and the purchaser wished to buy ordinary and redeemable preference shares in InterTAN Australia Ltd ( the Company ). A sale agreement was entered into which provided: 4.4 (a) The parties agree that prior to Completion, the Vendors shall ensure that the Company shall declare a dividend on its ordinary shares equal, in total, to the Dividend Amount. The record date for the dividend shall be one day prior to the Completion Date and the dividend shall be payable on Completion. It was also provided that: 7.7 On Completion, immediately after payment of the Purchase Price, the Purchaser shall fund the Company so that the Company is able to discharge the debts created by the declaration of the dividend referred to in clause 4.4. Immediately following such funding, the parties shall procure that the Company pay that dividend, less any amount which the Company is required to withhold on account of the dividend not being fully franked. The Purchase Price was defined as: means $114,139,649.00 minus the Dividend Amount. In turn, the Dividend Amount was defined as: means all retained earnings (up to a maximum of $27,000,000) which the Company is able to pay on the Shares at Completion, or such other amount as the parties agree. The Company declared a dividend of $25,584,097 in relation to its ordinary shares. The purchaser then paid the ordinary and preference shareholders
$88,555,552, being $114,139,649 less the dividend declared. Immediately after that payment, the purchaser lent $25,584,097 to the Company which the Company then paid to its ordinary shareholders in satisfaction of the liability created by the declaration of the dividend. Stamp duty was assessed on the basis that the consideration was $114,139,649 whereas the purchaser argued that it was $88,555,552 (the difference being the $25,584,097 paid as a dividend). The purchaser succeeded before Gzell J of the NSW Supreme Court, Dick Smith Electronics Holdings Pty Ltd v Chief Commissioner of State Revenue 2002 ATR 490 and also, by majority, (Meagher JA and Sheller JA; Davies AJA dissenting) before the NSW Court of Appeal, Chief Commissioner of State Revenue v Dick Smith Electronic Holdings Pty Ltd (2003) 58 NSWLR 567. In the High Court, by a 3 to 2 majority (Gummow, Kirby and Hayne JJ; Gleeson CJ and Callinan J dissenting) the Commissioner s assessment was restored. Minority View The minority in the High Court, Gleeson CJ and Callinan J, essentially accepted that the agreement had the effect that it purported to have, i.e. after the payment of the dividend, the purchase price of the shares became $89 million. In effect, it was accepted that the vendors sold their shares ex dividend. They noted that the requirement to fund the Company to enable it to discharge the debt created by the declaration of the dividend could have been satisfied in a variety of ways other than by the purchaser providing a loan to the Company, e.g. by subscribing capital, providing security for a loan provided to the Company by a third party, etc. They also noted that clearly the Company was solvent so that when the purchaser loaned monies to fund the dividend, the purchaser clearly obtained an asset and the price paid for the shares reflected the Company s liability to repay the loan to the purchaser. The minority stated (para. 14): There is no justification for ignoring (the) facts, which were all provided for, as the natural consequence of what was provided for, in the agreement. Section 21 of the Duties Act, 1997 (NSW), inter alia, provides: (1) The dutiable value of dutiable property that is subject to a dutiable transaction is the greater of: (a) the consideration (if any) for the dutiable transaction (being the amount of a monetary consideration or the value of a non-monetary consideration), and (b) the unencumbered value of the dutiable property. 2 Stamp Duty Tail Wags CGT Dog?
It was accepted by both parties that in para. (a) or means and. The Commissioner sought to uphold the assessment on the basis that s.21(1)(a) applied and did not seek to apply s.24 which is directed against arrangements reducing dutiable value. Indeed, the Commissioner disclaimed any suggestion that the transaction involved an attempt to evade or avoid duty. The minority found (para.26) that full consideration for the dividend was provided in exactly the same way as the shareholders in Archibald Howie Pty Ltd v Commissioner of Stamp Duties (NSW) (1948) 77 CLR 143 provided consideration for the distribution in specie, i.e. the consideration was the amount subscribed as share capital. They found that the declaration and payment of the dividend by the Company to the vendors was not a dutiable transaction (para 30) nor was the loan made by the purchaser to enable the payment of the dividend (para 31). The consideration for the loan was, as is usual, the promise to repay together with any interest. According to the minority (para. 32): Both in form and in substance, the purchase price of the shares was $114,139,649 minus the amount of the dividend. How could it have been otherwise? The agreement contemplated that, prior to completion, the Vendors would use their rights as shareholders to cause the Company to declare a dividend out of all the retained profits of the Company up to a maximum of $27 million. The vendors received two sums of money. They received the purchase price payable for the shares and the dividend paid in respect of the Company s ordinary shares. The dividend arose from the vendors exercising their power as shareholders (para. 35): It is true that it was part of the agreement between the Vendor and the respondent that, before transferring the shares in the Company to the respondent, a dividend would be declared. That does not make the declaration and payment of the dividend part of the dutiable transaction. The right of the Vendor to declare the dividend was not conferred on them by the agreement. It was conferred on them by the Articles of Association of the Company. Whilst the minority were prepared to accept that the obligation to ensure that the dividend was funded was part of the consideration for the shares, they could not accept that this was monetary consideration. It was non-monetary consideration that, having regard to the circumstances, was unlikely to be of substantial value. Accordingly, the minority found that, in addition to the purchase price of $88,555,552, there was non-monetary consideration that needed to be valued. 3 Stamp Duty Tail Wags CGT Dog?
Majority View The majority (Gummow, Kirby and Hayne JJ) examined the relevant legislation and noted that (paras 63 & 64): Chapter 2 of the Act (ss.8-104) is headed Transactions concerning dutiable property. Sub-paragraph (i) of s.8(1)(b) states that one of the transactions on which Ch 2 charges duty is an agreement for the sale or transfer of dutiable property. The term dutiable property is defined in s.11 so as to include shares in a New South Wales company such as the Company. The duty charged upon a dutiable transaction being an agreement for the sale or transfer of shares was duty charged as if each such dutiable transaction were a transfer of dutiable property (s.9(1)). The consequence was that the relevant dutiable transaction in this case was the Agreement; the Purchaser was to be taken as the transferee of the Shares by a transfer occurring on 10 April 2001, the date of entry into the Agreement (s.9(2) [Davis Investments Pty Ltd v Commissioner of Stamp Duties (NSW) (1958) 100 CLR 392 at 406]). The duty charged by Ch 2 was payable by the Purchaser as the transferee (s.13). Accordingly, the majority emphasised that it was the sale agreement that was the dutiable transaction and liability for duty arose when that agreement was executed. In contrast, the transfer of shares was (per s.18(2)) only subject to nominal duty so as to avoid the payment of double duty. They also emphasised that the sale would not have gone ahead if the dividend was not paid. The majority also analysed s.21(1)(a) [quoted above] and highlighted that, so far as is relevant here, it is the consideration for the dutiable transaction that is subject to duty. They held that the consideration for the dutiable transaction, being the sale agreement, looks to what was received by the Vendors so as to move the transfers to the Purchaser as stipulated in the Agreement (para. 72). The majority found (paras 73-74): What was to be received by the Vendors, and was received by them, was $114,139,649. The Vendors had bargained for an obligation on the part of the Purchaser to bring about that result. It was only in return for that total sum (paid by the various steps and in the various forms required by the Agreement) that the Vendors were willing to transfer to the purchaser the bundle of rights which their shareholding in the Company represented. In the opinion of the majority, it is not what the purchaser parted with or to whom, that has to be ascertained, rather what was received by the vendor. In this vein, the majority asked (para. 79): 4 Stamp Duty Tail Wags CGT Dog?
----why identify the consideration for the transfers as only what the Purchaser gives up? The Vendors transferred the Shares in return for receiving some $114 million, of which part was received from the Company because the parties had agreed that this should be so. Analysis It does however seem a strange result that the vendors ended up with two assets, the shares worth $88 million and the debt worth $26 million, yet for stamp duty purposes the consideration for the shares is taken to be the whole $114 million. Further, if before an agreement for the sale of the shares was entered into the Company had either organised its own finance and paid the dividend of $26 million or merely declared the dividend without paying it[1]and then, after acquiring the shares for $88 million, the purchaser of its own volition (i.e. not as a term of the sale) acquired the $26 million owed by the Company, the dutiable amount surely, even on the majority s view, would only have been $88 million. Hence, by having delays between the dividend and the purchase of the shares and the purchase of the loan [and no vendor guarantee of arranging funding for the dividend (which in the circumstances of Dick Smith seemed unnecessary)], the same result could have occurred for less stamp duty. The conclusion of the majority that the use of the word for in s.21(1)(a) leads to an enquiry as to what was received by the vendor, with respect, seems to have diverted attention from enquiring as to what it is received for. As Green[2]submits, in the context under consideration, the word for rather imports the requirement for a relationship between that which is given and that which is received. It seems that the majority have taken all of the amounts received by the vendors pursuant to the Sale Agreement as being consideration for the sale of the shares when $26 million was paid, as the minority noted, pursuant to their existing rights as shareholders. Capital Gains Implications A consideration of the facts and the conclusion reached in Dick Smith raises concern as to whether the dutiable amount would also be found to be the consideration received for capital gains purposes in respect of the disposal of the Company s shares. An observation made by the minority (at para. 34) was that finding the sale consideration to be $114 million would produce some surprising consequences under revenue law and financial accounting. They noted that if, for capital gains purposes, the cost base of the shares acquired by the purchaser was $114 million this would appear anomalous, particularly as the purchaser also has an asset in the form of the debt owed to it by the Company of $26 million. They felt that this curious outcome flows from the fact that the Commissioner s argument does not reflect either the legal form or the commercial substance of the dutiable transaction. 5 Stamp Duty Tail Wags CGT Dog?
The capital proceeds from a CGT event are generally the sum of the money and the market value of any other property received, or entitled to be received, in respect of the event happening [s.116-20(1)]. Similarly, the first element of the cost base of an asset is the total of the money paid and the market value of any other property given, or required to be paid or given, in respect of acquiring it [s.110-25(2)]. Hence, hopefully some comfort can be taken from the very different wording used for CGT purposes. The nature of the enquiry to be made however is very similar, if not identical. In the present context, the enquiry would be: What is to be received as consideration (money or other property) for selling/disposing of the shares? Perhaps because, as found in Dick Smith, the dutiable transaction for stamp duty purposes is the share sale agreement (in Dick Smith, the instrument) and not the later transfer of the shares that flows from that agreement, a distinction can be drawn between what is consideration for stamp duty and what is consideration for CGT. Hopefully, for CGT and income tax purposes the sale agreement (the instrument) in Dick Smith would be broken down into its constituent parts (which, with respect, the majority in Dick Smith seem to have failed to do) and the receipt of the dividend not taken to be consideration for the disposal of the shares. This article written by Graham Taylor appeared in the April 2005 edition Vol 39 (9) of Taxation in Australia, the journal of the Taxation Institute of Australia. [1] See - Green, Peter Stamp Duty 2005 Financial Services Conference, Taxation Institute of Australia. At page 17. [2] Ibid These notes are in summary form designed to alert clients to tax developments of general interest. They are not comprehensive, they are not offered as advice and should not be used to formulate business or other fiscal decisions. Liability limited by a scheme approved under Professional Standards Legislation Greenwoods & Freehills Pty Limited (ABN 60 003 146 852) www.gf.com.au Sydney ANZ Tower, 161 Castlereagh Street, Sydney NSW 2000 Australia Ph +61 2 9225 5955, Fax +61 2 9221 6516 Melbourne 101 Collins Street, Melbourne VIC 3000, Australia Ph +61 3 9288 1881 Fax +61 3 9288 1828 Perth QV.1 Building, 250 St Georges Terrace, Perth WA 6000, Australia Ph +61 8 9211 7770 Fax +61 8 9211 7755 6 Stamp Duty Tail Wags CGT Dog?