Section 45B
177 The Commissioner's position was that the planning and implementation of Methuselah's selective capital reduction, as described above, was a "scheme" (as defined in s 995-1(1) of the ITAA 1997) within the meaning of s 45B(10) of the ITAA 1936.
178 The Commissioner contended that s 45B of the ITAA 1936 applied by operation of s 45B(2) because:
(a) under this "scheme", Mr Ierna and the WHFT were provided with a capital benefit within the meaning of s 45B(5) of the ITAA 1936; and
(b) having regard to the "relevant circumstances" (as defined in s 45B(8)) of this "scheme", it would be concluded that Mr Ierna and, as the controller of the trustee of the WHFT, Mr Hicks entered into or carried out the "scheme" for a purpose of enabling each of them to obtain a tax benefit.
179 The Commissioner submitted that Mr Ierna and the WHFT were each provided with a "capital benefit" (within the meaning of s45B(5)) of $26,000,000 by Methuselah in connection with the share capital reduction.
180 To give context, the terms of s 45B should now be set out:
Schemes to provide certain benefits
Purpose of section
(1) The purpose of this section is to ensure that relevant amounts are treated as dividends for taxation purposes if:
(a) components of a demerger allocation as between capital and profit do not reflect the circumstances of a demerger; or
(b) certain payments, allocations and distributions are made in substitution for dividends.
Application of section
(2) This section applies if:
(a) there is a scheme under which a person is provided with a demerger benefit or a capital benefit by a company; and
(b) under the scheme, a taxpayer (the relevant taxpayer), who may or may not be the person provided with the demerger benefit or the capital benefit, obtains a tax benefit; and
(c) having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling a taxpayer (the relevant taxpayer) to obtain a tax benefit.
Commissioner to determine that section 45BA or 45C applies
(3) The Commissioner may make, in writing, a determination that:
(a) section 45BA applies in relation to the whole, or a part, of the demerger benefit; or
(b) section 45C applies in relation to the whole, or a part, of the capital benefit.
A determination does not form part of an assessment.
Note: If section 45BA applies in relation to the whole, or a part, of a demerger benefit, this benefit may be a capital benefit.
Meaning of provided with a demerger benefit
(4) A person is provided with a demerger benefit if in relation to a demerger:
(a) a company provides the person with ownership interests in that or another company; or
(b) something is done in relation to an ownership interest owned by the person that has the effect of increasing the value of an ownership interest (which may or may not be the same ownership interest) owned by the person.
Meaning of provided with a capital benefit
(5) A reference to a person being provided with a capital benefit is a reference to any of the following:
(a) the provision of ownership interests in a company to the person;
(b) the distribution to the person of share capital or share premium;
(c) something that is done in relation to an ownership interest that has the effect of increasing the value of an ownership interest (which may or may not be the same interest) that is held by the person.
(6) However, a person is not provided with a capital benefit to the extent that the provision of interests, the distribution or the thing done referred to in subsection (5) involves the person receiving a demerger dividend.
(7) For the purposes of this section, a non-share distribution to an equity holder is taken to be the distribution to the equity holder of share capital to the extent to which it is a non-share capital return.
Meaning of relevant circumstances of scheme
(8) The relevant circumstances of a scheme include the following:
(a) the extent to which the demerger benefit or capital benefit is attributable to capital or the extent to which the demerger benefit or capital benefit is attributable to profits (realised and unrealised) of the company or of an associate (within the meaning in section 318) of the company;
(b) the pattern of distributions of dividends, bonus shares and returns of capital or share premium by the company or by an associate (within the meaning in section 318) of the company;
(c) whether the relevant taxpayer has capital losses that, apart from the scheme, would be unutilised (within the meaning of the Income Tax Assessment Act 1997) at the end of the relevant year of income;
(d) whether some or all of the ownership interests in the company or in an associate (within the meaning in section 318) of the company held by the relevant taxpayer were acquired, or are taken to have been acquired, by the relevant taxpayer before 20 September 1985;
(e) whether the relevant taxpayer is a non-resident;
(f) whether the cost base (for the purposes of the Income Tax Assessment Act 1997) of the relevant ownership interest is not substantially less than the value of the applicable demerger benefit or capital benefit;
(h) if the scheme involves the distribution of share capital or share premium - whether the interest held by the relevant taxpayer after the distribution is the same as the interest would have been if an equivalent dividend had been paid instead of the distribution of share capital or share premium;
(i) if the scheme involves the provision of ownership interests and the later disposal of those interests, or an increase in the value of ownership interests and the later disposal of those interests:
(i) the period for which the ownership interests are held by the holder of the interests; and
(ii) when the arrangement for the disposal of the ownership interests was entered into;
(j) for a demerger only:
(i) whether the profits of the demerging entity and demerged entity are attributable to transactions between the entity and an associate (within the meaning in section 318) of the entity; and
(ii) whether the assets of the demerging entity and demerged entity were acquired under transactions between the entity and an associate (within the meaning in section 318) of the entity;
(k) any of the matters referred to in subsection 177D(2).
Meaning of obtaining a tax benefit
(9) A relevant taxpayer obtains a tax benefit if an amount of tax payable, or any other amount payable under this Act, by the relevant taxpayer would, apart from this section, be less than the amount that would have been payable, or would be payable at a later time than it would have been payable, if the demerger benefit had been an assessable dividend or the capital benefit had been an assessable dividend.
(10) In this section:
"scheme" has the meaning given by subsection 995-1(1) of the Income Tax Assessment Act 1997.
[emphasis in original]
181 The Commissioner submitted that the capital benefit received by Mr Ierna and the WHFT was attributable to profits (unrealised or realised) of the CBT. It was put that Fewstone, the trustee of the CBT, was an "associate" of Methuselah within the meaning of s 318 of the ITAA 1936, for the purposes of having regard to the "relevant circumstance" as set out in s45B(8)(a).
182 Such is the breadth of the definition of "associate" in s 318 of the ITAA 1936, it may be accepted that, on the evidence, Fewstone as trustee of the CBT was an "associate" of Methuselah: see, in combination, s 318(2)(c), s 318(3)(a) and also s 318(6)(a) of ITAA 1936 and, as to "sufficiently influenced", BHP Billiton Ltd v Commissioner of Taxation (2020) 270 CLR 60.
183 Section 318 of the ITAA 1936 specifies how entities, be they individual or corporate, become "associates" of a "primary entity". The point was made for the applicants that a trust has no separate legal personality. This is fundamental. A "trust" may be described as obligations, enforceable in a court of equity, assumed by a person having legal personality in respect of property or income (or both). The absence of legal personality of a trust is so even though, for the purposes of income taxation, the net income of a trust estate is treated as if a trust did have legal personality separate from the person who was subject to the relevant trust obligation. From this, it was said to follow that, although a trustee, individual or corporate, of a trust may, under s 318, be such an "associate", the same would not be true for a trust itself. On that construction, a unit holder in the CBT might be an "associate" of a "primary entity", which may include a trustee of a trust, but not of a trust. A corollary of this submission was therefore that the Commissioner's s 45B determination had been based on a false legal premise. The return of share capital was not "attributable" to any profits of CBT. Fewstone had no profits realised or unrealised of its own. The return of share capital effected by the 2016 restructure could not, so the submission went, be attributable to its profits. The applicants therefore submitted that, for these reasons alone, the assessments, insofar as they depend on such a determination, have been shown to be excessive, because s 45B had no application. Although that determination does not form part of the assessment concerned (s 45B(3)), the unfranked dividend deeming effected by s 45C as a consequence of a determination could not rise higher than a determination which could be made under s 45B. If s 45B had no application, there could be no deeming consequential upon a determination.
184 The Commissioner's riposte was that, in construing s 318, a rule of necessity operated such that the role of "associate" was attached to the trustee of the trust in its capacity as such. This was said to arise by implication such that, materially, the "profit" of a trust was to be regarded as the profit of its trustee.
185 A difficulty with any such implication is that the text of s 318 draws a distinction between a trustee of a trust and the trust: see s 318(2)(c). Moreover, and further to develop a point earlier made as to the taxation of trusts, the ITAA 1936, by s 96, expressly provides that, "Except as provided in this Act, a trustee shall not be liable as trustee to pay income tax upon the income of the trust estate." The presence of that expressly stated general position, and the exception to it, suggests that it is unlikely that an exception was intended to arise by implication. As it happens, there are other reasons, flowing from the circumstances of this case, why s 45B had no application. So, the case can be decided by assuming that the Commissioner's construction is correct. I do, however, record my preference, for the reasons just given, for the construction promoted by the applicants.
186 Of the application provision, s 45B(2), the phrase "it would be concluded" imports an objective test. Correctly, this was common ground between the parties.
187 But was the asserted capital benefit "attributable" in terms of s 45B(8)(a) to the profits of Methuselah or an "associate"?
188 It was also common ground between the parties that, as found in s 45B(8)(a), "attributable" imports a causal connection between the capital benefit and profits of the kind specified. As a matter of ordinary English flowing from the text and the context in which "attributable" appears this must be so. The word "attributable" carries meanings such as caused by, or owing to, or produced by a particular source: see Oxford English Dictionary, Online Edition. The element of "particular source" in the meaning of "attributable" was an important feature of the applicants' submissions.
189 As yet, s 45B of the ITAA 1936 has not been the subject of judicial consideration. However, in respect of its construction and albeit for different reasons, each party sought to gain comfort by analogy from certain observations made in Commissioner of Taxation v Sun Alliance Investments Pty Ltd (in liq) (2005) 225 CLR 488 (Sun Alliance Investments).
190 The applicants cited the following passage from Sun Alliance Investments, at [79] to [81], concerning the now former s 160ZK(5) of the ITAA 1936, both in support of the causative quality of "attributable", but also to contrast the language of that provision with that of s 45B(8)(a):
79. However, unlike s 44 of the 1936 Act, s 160ZK(5) speaks, not of "dividends paid … out of profits derived" by a company, but of a distribution that "could reasonably be taken to be attributable to profits that were derived by the company" before the taxpayer's acquisition of shares in it. The inquiry contemplated by that provision is therefore not directed exclusively towards the identification of the source of funds from which a dividend is paid.
80. It is the concept of causation, rather than source, with which s 160ZK(5) is concerned. In determining whether the plaintiff's loss of employment was "attributable to" the provisions of the Local Government Act 1972 (UK), Donaldson J in Walsh v Rother District Council said:
"[T]hese are plain English words involving some causal connection between the loss of employment and that to which the loss is said to be attributable. However, this connection need not be that of a sole, dominant, direct or proximate cause and effect. A contributory causal connection is quite sufficient."
Nothing, either in the text of s 160ZK(5) or in its objects as expressed in the Explanatory Memorandum on the Bill for the Amending Act, indicates that a narrower meaning should be presently ascribed to that phrase.
81. As explained above, the phrase "could reasonably be taken to be" indicates that in order for s 160ZK(5) to be enlivened the relevant pre-acquisition profits need not actually be a contributory cause to a subsequent distribution: it would suffice that those profits may reasonably be capable of being seen as such.
[Footnote references omitted; emphasis added]
191 The applicants drew attention to the emphasised observation in the passage quoted, so as to contrast the text of s 160ZK(5) on which it was based with the text of s 45B(5). They submitted that the language of s 45B(8)(a) was narrower such that, "the existence of profits in the company or an associate must actually be a contributory cause of the decision to return capital" (emphasis by applicants). This submission should be accepted. There is nothing in the text of s 45B(8)(a) which has the quality of "could reasonably be taken to be", which informed the observation in [81] of Sun Alliance Insurance that profits need not actually be a contributory cause of a subsequent distribution.
192 The Commissioner's embrace of Sun Alliance Insurance was for the explanation found earlier in the judgment, at [61], of the ordinary meaning of "profits", "a gain made by a business and disclosed by a comparison between the state of that business at one point in time and its state at another". There is nothing in the text of s 45B(8)(a) which would suggest that "profits" is being used in any different sense in that provision. Indeed, given the alternative postulates of "capital" and "profits" as used with respect to a company (or an associate of a company), context confirms that "profits" is being used in accordance with its ordinary meaning.
193 Understanding the purpose of these alternative postulates and, for that matter, s 45B generally is, in my view, assisted by reference to a wider context.
194 That wider context is supplied by the Act which inserted s 45B in its original form into the ITAA 1936, the Taxation Laws Amendment (Company Law Review) Act 1998 (Cth) (Taxation Laws CLR Act), and by other amendments made by that Act. Materially, at the same time as the original s 45B was inserted, extensive amendments were made by s 3 and Schedule 3 of the Taxation Laws CLR Act to the definition of "dividend" in s 6(1) of the ITAA 1936. As so amended, and as later applicable to the present case, the definition of "dividend" became:
dividend includes:
(a) any distribution made by a company to any of its shareholders, whether in money or other property; and
(b) any amount credited by a company to any of its shareholders as shareholders;
but does not include:
(d) moneys paid or credited by a company to a shareholder or any other property distributed by a company to shareholders (not being moneys or other property to which this paragraph, by reason of subsection (4), does not apply or moneys paid or credited, or property distributed for the redemption or cancellation of a redeemable preference share), where the amount of the moneys paid or credited, or the amount of the value of the property, is debited against an amount standing to the credit of the share capital account of the company; or
(e) moneys paid or credited, or property distributed, by a company for the redemption or cancellation of a redeemable preference share if:
(i) the company gives the holder of the share a notice when it redeems or cancels the share; and
(ii) the notice specifies the amount paid-up on the share immediately before the cancellation or redemption; and
(iii) the amount is debited to the company's share capital account;
except to the extent that the amount of those moneys or the value of that property, as the case may be, is greater than the amount specified in the notice as the amount paid-up on the share; or
(f) a reversionary bonus on a life assurance policy.
Note: Subsection (4) sets out when paragraph (d) of this definition does not apply.
195 One of the amendments made to the definition of "dividend" by the Taxation Laws CLR Act (s 3 and schedule 3, item 5) was to "Omit "a share premium account of the company;", substitute "the share capital account of the company; or"." This omission of the reference in income tax law to "share premium account" in the definition of "dividend" was no coincidence. It is reactive to changes to company law made by the Company Law Review Act 1998 (Cth). This is confirmed by regard to the second amendment reading speech in respect of what became the Taxation Laws CLR Act, as delivered by the Parliamentary Secretary to the Prime Minister:
The changes made in the Taxation Laws Amendment (Company Law Review) Bill 1998 make various consequential amendments to the taxation laws as a result of changes to the Corporations Law made by the Company Law Review Bill 1997, which will abolish the concept of par value for shares and the associated concepts of share premiums as well as make it easier for companies to return capital to shareholders. The amendments will ensure that the provisions in the tax law that are currently dependent on the concept of par value can continue to operate appropriately in the future and introduce an anti-avoidance measure to prevent companies entering into capital streaming and dividend substitution arrangements.
See Commonwealth, Parliamentary Debates, House of Representatives, 27 May 1998, 4038 (The Hon. Chris Miles).
196 A detailed account of the history of the changes to corporations law which led to the abolition of the concept of a "par value" for a share in a company was offered by the High Court in Commissioner of Taxation v Consolidated Media Holdings Ltd (2012) 250 CLR 503, at [24] to [29]. The High Court observed in that case, at [31], that amendments to income tax legislation had "tracked" the amendments to corporations legislation. Section 45B offers an example of such "tracking".
197 Obviously enough, s 45B, as enacted, was an anti-avoidance measure of the kind referred to in this second amendment reading speech. Although later amended (so as to include demerger benefits) into the form quoted above, that form retains, in my view, an evident purpose of preventing companies "entering into capital streaming and dividend substitution arrangements". Put another way, and as did the applicants in their submissions (inspired by a description offered by the Commissioner in PSLA 2005/21), the purpose is to ensure companies do not "distribute what are effectively profits to shareholders as preferentially-taxed capital rather than dividend".
198 Presently materially, and flowing from the definition of "dividend" in s 6(1) of the ITAA 1936, it may be said that a "dividend" is "any distribution made by a company to any of its shareholders, whether in money or other property … but does not include [such monies and the like] debited against an amount standing to the credit of the share capital account of the company".
199 Drawing these threads about the construction and purpose of s 45B together, a question to be answered is whether, objectively, the capital benefit received by Mr Ierna and the WHFT was "attributable to" (in the sense of actually caused by or sourced in) Methuselah's share capital account? That company's only account was its genuine share capital account of $75 million.
200 Or was it, as the Commissioner contended, sourced in an increase in value of the CBT units (from $1 to $2,587,626 each), which was realised, in part, by the cancellation of the Methuselah shares effected by the selective capital reduction?
201 There is just no doubt that the value of the units in the CBT had increased over time from the original $30 capital contributed by unit holders upon the settlement of the CBT in 1985. Neither side challenged the reliability of the valuation, as at 20 May 2016, undertaken by Hanrick Curran. Indeed, each party's case was predicated upon its accuracy. I accept the accuracy of that valuation.
202 Having regard to that valuation, and to the financial accounts of the CBT in evidence, the Commissioner put that there had been an increase in value of the units in the CBT from $1.00 to $2,587,626. This was calculated based on a comparison between the valuation which put the market value of the units as at 20 May 2016 as $77,628,766 (inclusive of a market value of intangibles of $56,162,024, comprised of director know-how of $17,477,337 and goodwill of $38,684,687, and the market value of inventory of $42,390,378, and net of liabilities) and the CBT 2016 financial accounts, which put the amounts for intangibles and inventory in the CBT's financial accounts at $1,912,990 and $24,963,645, respectively. The difference in the values was said to be a "profit" (in the sense described above) realised, in part, by the cancellation of the Methuselah shares.
203 The Commissioner's submission does not survive an objective examination of the whole of the circumstances, informed by reference to considerations specified in s 45B(8) of the ITAA 1936.
204 Fundamentally, the reason for this flows from Methuselah being a newly formed company. In terms of s 45B(8)(b), it had no "pattern of distributions of dividends, bonus shares and returns of capital or share premium", and neither did any "associate". Even if one looks to pre-existing entities within the City Beach group of companies, there is no "pattern" of dividend payments which, objectively, would support a conclusion that the $52 million was a substitute for a payment from profits. In the 2014 and 2015 income years, the evidence is that no dividends were declared by any of the companies in that group. In each of the 2010 to 2013 income years, dividends were declared by Mastergrove. But the only conclusion open in respect of these is that they were declared to meet the minimum required interest payments on the Division 7A loans, which then totalled $32,888,000.29. A corollary is that they were not paid to fund the repayment of the loans of Hicks Beneficiary or Ierna Beneficiary.
205 Moreover, as a newly formed accompany, Methuselah had no profits, realised or otherwise. But it did have a genuine share capital account. That was its only account. There has never been, and there could not be, any suggestion that any step in the selective capital reduction was a sham. Indeed, the efficacy of that share capital reduction in company and taxation law was wholly dependent upon it not being a sham.
206 When Mr Ierna and Corkdon, as trustee of the WHFT, disposed of their units in the CBT to Methuselah in return for shares in that company, they did so at market value. Undoubtedly, they made a gain on that disposal. But that gain was of no concern under the ITAA 1936, because in so doing each disposed of pre-CGT assets. As it happens, because by then Parliament had inserted Division 615-A into the ITAA 1997, it was possible to obtain a roll-over under that subdivision 615-A of the ITAA 1997 in respect of that disposal of units, and Mr Ierna and Corkdon, as trustee of the WHFT, chose, as was their perfect right, to obtain the relief Parliament intended be available.
207 Prior to the share capital reduction, Methuselah had a share capital account in the amount of $75 million. This was its true value. It reflected contributed capital of that same value.
208 Objectively, the two stages in the selective capital reduction were directed to the ends of ensuring that:
(a) Methuselah, as a newly formed company, had what Messrs Ierna and Hicks, acting on and accepting on advice from Hanrick Curran, regarded as an appropriate balance of debt and equity;
(b) acquiring shares worth $23 million ($75 million, less $52 million);
(c) taking advantage of the available rollover relief under Division 615-A; and
(d) viewing events more broadly, returning capital to Mr Ierna and Corkdon, as trustee of the WHFT, respectively, for extinguishing Division 7A loans.
209 It is clear to the point of demonstration that Methuselah had no profits, only its share capital account. On no objective view could the return of capital from that account to its shareholders be regarded as a substitute for the payment of a "dividend", as defined, to them. The payment to the shareholders was wholly "attributable to" (actually sourced in or caused by) Methuselah's share capital account. The method chosen had nothing to do with dividend substitution but was explicable by a purpose of taking advantage of Division 615-A rollover relief. Indeed, that was the distinguishing feature of what occurred in 2016 compared with what Hanrick Curran had proposed to Messrs Ierna and Hicks in 2014.
210 Related to this, a point made in the applicants' submissions is a sound one. The capital position of Methuselah was exactly the same as the shareholders undertaking that 2014 proposal of selling their CBT units for $75 million to Methuselah for consideration comprising the right to $52 million cash and the balance in fully paid shares.
211 For these reasons, s 45B had no application to the "scheme" as postulated by the Commissioner. There was never any basis for the making of a determination under s 45C.