Capricorn Diamonds Ltd v Commissioner of Taxation

1 In January 1996 CRA Ltd, now known as Rio Tinto Ltd (Rio Tinto), the applicant's parent company, and RTZ plc, now known as Rio Tinto plc, an English corporation, combined as a dual‑listed company structure. In effect that involved a merger of the two companies. However they remain listed on their respective stock exchanges and retain their separate identities, but operate as if they together own their combined assets. The board of each company is identical. The shareholders of Rio Tinto, being shareholders in an Australian company, remain entitled to receive franked dividends. In the lead up to and promotion of the dual listing, shareholders were informed that Rio Tinto expected to continue to pay twice‑yearly fully franked dividends to its Australian shareholders. After the dual listing it was discovered that Rio Tinto did not have sufficient franking credits to do this. One of the methods considered in order to supplement its franking credit balance was for Rio Tinto and two of its subsidiary companies to "borrow" shares in companies having surplus credits, and take franked dividends upon the shares while Rio Tinto and the subsidiaries were shareholders. The applicant is one of the subsidiaries. 2 In May 1997 the applicant became registered as the holder of shares in Campbell Investment (Australia) Pty Ltd (CIA). Fully franked dividends declared in respect of the shares were paid to the applicant while it was a shareholder. The applicant used the franking credits to enable Rio Tinto to pay fully franked dividends to its shareholders. An assignment fee was payable to CIA's parent, Campbell Investment Company, in connection with the transaction. 3 In his assessments the respondent treated the dividends paid by CIA as fully assessable and non‑rebateable income of the applicant, denied the availability of the franking credits, denied the deductibility of the assignment fee, assessed income tax and franking deficits tax and imposed substantial penalties. The applicant's objections to the assessments were disallowed, and the applicant appealed against the objection decisions by filing applications in accordance with Order 52B of the Federal Court Rules. 4 The details of the assignment transaction are substantially the same as those considered in Rio Tinto Ltd v Commissioner of Taxation [2004] FCA 335. The only difference of note is that in the Rio Tinto transaction a management fee was paid by Rio Tinto to an associated company, while no such fee was paid by the applicant.