CATCHWORDS
INCOME TAX - dividend - whether payment of purported dividend to taxpayer which held shares as mortgagee was truly a "dividend" for purposes of sub-s 44 (1) and 46 (2) of Income Tax Assessment Act 1936 - payment also part of larger commercial arrangement - effect of contract by company to declare and pay dividend to mortgagee-shareholder - whether payment deprived of character of dividend.
Income Tax Assessment Act 1936, ss 44 (1), 46 (2).
BILL ACCEPTANCE CORPORATION LIMITED v COMMISSIONER OF TAXATION
No NG 358 OF 1995
Lindgren J
Sydney
13 May 1996
IN THE FEDERAL COURT OF AUSTRALIA)
NEW SOUTH WALES DISTRICT REGISTRY) No NG 358 of 1995
GENERAL DIVISION )
BETWEEN:
BILL ACCEPTANCE CORPORATION LIMITED
Applicant
AND:
COMMISSIONER OF TAXATION
Respondent
CORAM: Lindgren J
PLACE: Sydney
DATE: 13 May 1996
MINUTE OF ORDERS
THE COURT ORDERS:
1. THAT the appeal be allowed.
2. THAT the respondent pay the applicant's costs.
3. THAT the proceeding be stood over to Monday 20 May 1996 at 9.30 am before Lindgren J for the making of any further orders.
4. THAT by 5.00 pm on Thursday 16 May 1996 the parties supply to the Associate to Lindgren J agreed short minutes of any further orders to be made on 20 May 1996 and if agreement has not by then been reached, short minutes of the orders for which they will respectively contend.
NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA)
NEW SOUTH WALES DISTRICT REGISTRY) No NG 358 of 1995
GENERAL DIVISION )
BETWEEN:
BILL ACCEPTANCE CORPORATION LIMITED
Applicant
AND:
COMMISSIONER OF TAXATION
Respondent
CORAM: Lindgren J
PLACE: Sydney
DATE: 13 May 1996
REASONS FOR JUDGMENT
INTRODUCTION
The applicant ("BAC") appeals pursuant to s 14ZZ of the Taxation Administration Act 1953 against a decision of the respondent ("the Commissioner"). The decision was notified on 24 March 1995 and relates to income tax payable by BAC for the year ended 30 September 1990 (in lieu of 30 June 1990).
BAC appeals against the Commissioner's rejection of BAC's claimed entitlement to a rebate under sub-s 46 (2) of the Income Tax Assessment Act (1936) ("the Act") in respect of what it contends was a "dividend" of $24,808,553 received by BAC on 4 July 1990 from Ausintel Investments Australia Pty Ltd ("AIA"). I will sometimes refer to that payment made by AIA to BAC on that date as a "dividend" without prejudice to the question for decision whether it was truly in the nature of a dividend.
FACTS
The facts were within narrow compass and there was no substantial dispute about them.
1. On 28 September 1984 BAC entered into a "Facility Agreement" with EJ Ang International Pty Ltd ("EJAI"). By the Facility Agreement, BAC agreed to provide financial accommodation to EJAI. The financial accommodation was to be a "Cash Advance Facility" and a "Support Guarantee/Multi-currency Facility" placed at EJAI's disposal by BAC under the terms of the Facility Agreement. Shortly, the Support Guarantee was a guarantee to be provided by BAC to Westpac Banking Corporation ("Westpac") guaranteeing the obligations of EJAI to Westpac.
2. Also on 28 September 1984, EJAI entered into a Mortgage of Shares with BAC. It mortgaged to BAC all shares held by EJAI from time to time in AIA (called in the Mortgage of Shares "the Subject Shares") as security for all monies then or thereafter owing or to become owing or payable by EJAI to Westpac. Clause 1 of the Mortgage of Shares began as follows:
"The Mortgagor [EJAI] as beneficial owner and expressed so to assign and transfer HEREBY ASSIGNS AND TRANSFERS unto the Mortgagee [BAC] the Subject Shares and all benefits and advantages to be had recovered or obtained under or by virtue of the Subject Shares and all the estate right title and interest whatsoever of the Mortgagor in and to the Subject Shares ..."
There followed a right in EJAI to a retransfer of the Subject Shares upon payment. Clause 3 provided that the monies secured by the Mortgage of Shares should, at the option of BAC, become due and payable upon default. Clause 7 was a covenant by EJAI for "further assurance" in respect of the Subject Shares. Clause 11 provided that BAC should have an absolute discretion to apply any payment or credit in reduction of any part or parts of the moneys secured by the Mortgage of Shares as BAC might elect, and that in default of election, payments and other receipts should be appropriated firstly to interest on arrears, secondly to other interest payable under the Mortgage of Shares, and thirdly to "the moneys secured" by the Mortgage of Shares. Finally, cl 15 provided that until the power of sale given by the Mortgage of Shares should have arisen, any dividends and/or income from the Subject Shares which might be actually received by BAC were to be paid by it to EJAI, subject to this proviso:
" ... THAT after the said power of sale has arisen, the dividends and/or income of the Subject Shares shall be received by the mortgagee and shall be applied by it as if it were part of the proceeds of sale under the said power ..."
3. On or about 25 October 1984 BAC entered into a "Guarantee" with Westpac. By the Guarantee, BAC guaranteed the due and punctual payment by EJAI to Westpac under or pursuant to a multicurrency credit facility to be provided by Westpac to EJAI pursuant to the facility letter about to be referred to.
4. By a facility letter dated 26 October 1984 ("the facility letter"), Westpac offered to EJAI an offshore loan facility with a multi-currency option. Westpac lent to EJAI pursuant to this facility letter.
5. On 12 July 1986 parties including BAC and AIA entered into a "Deed of Postponement". Its purpose was to postpone the rights of shareholders in and creditors of AIA (referred to in the Deed of Postponement as "AI") in favour of BAC. In order to understand the operative provision noted below, it is necessary to know how certain expressions appearing in that provision were defined. "AI/EJAI Loan" refers to a loan of $14,200,000 owing by AIA to EJAI together with interest accrued or yet to accrue. "EJAI/AI Shares" refers to the entire shareholding of EJAI in AIA. "EJAI/BAC Debt" refers to the foreign currency indebtedness of EJAI to BAC together with all interest accrued and yet to accrue thereon pursuant to the Facility Agreement.
By cl 3 of the Deed of Postponement, the shareholders whose
names, addresses and shareholdings in AIA were set out in the first schedule to
the Deed, covenanted that
they would not accept or permit the declaration or payment of any dividend on
their shares so long as any part of, inter alia, the EJAI/BAC Debt was
outstanding. By cl 4 of the Deed, the
Lenders named in the second schedule to the Deed to whom AIA owed the amounts
set out opposite their names in that schedule undertook not to accept or demand
repayment of the loans or any interest thereon nor consent to any variation of
the terms of the loans, other than as might be necessary to carry the Deed into
effect, so long as any part of, inter alia, the EJAI/BAC debt was
outstanding.
Clause 5 provided relevantly as follows:
"5 At the direction of the Shareholders and Lenders AI [as noted above, a reference to AIA] covenants that:
(a) it will apply all moneys from time to time available to it for the repayment of loans or the payment of dividends as follows:
(i) firstly, in repayment of the AI/EJAI Loan and, after that has been fully repaid, in payment of dividends on the EJAI/AI Shares until as a result of the on-payment from EJAI to BAC of such repayments and dividends the EJAI/BAC Debt has been wholly repaid; ..."
It will be noted that AIA's covenant was to pay what were described as "dividends on the EJAI/AI Shares" out of moneys from time to time available to it for that purpose.
6. On or about 12 July 1986 BAC entered into a "Deed of Release" with, inter alia, EJAI. By the Deed of Release, BAC agreed to release, inter alia, EJAI from its obligations under the accommodation facility which BAC had granted to it pursuant to the Facility Agreement and to discharge the Deed of Mortgage once a certain sale had been completed and "the distribution of all surplus funds by [AIA] in accordance with the Deed of Postponement" had occurred.
7. On 17 July 1986 BAC became registered as the holder of shares in AIA pursuant to the Mortgage of Shares.
8. On 8 January 1987 the articles of association of AIA were altered by special resolution, by, relevantly, the inclusion of a new article 67A. Sub-clauses (1) and (3) of the new article 67A were as follows:
"(1)Notwithstanding anything in these Articles contained, for so long as any part of the EJAI/BAC Debt ... is outstanding no dividend will be paid otherwise than on the shares (whether registered in the name of BAC or any other party) which are the subject of charges in favour of BAC securing the EJAI/BAC Debt.
(2)........................................
(3)The Directors shall pay such
interim dividends in accordance with the foregoing provisions of this Article
as may be required by BAC ... by notice to the
Company and are lawfully payable by the Company."
9. The parties informed me that it was agreed that, in round figures, as at 30 June 1990, BAC had paid to Westpac under the Guarantee $38,241,051 and had recovered $15,688,878, leaving a balance of principal in respect of which EJAI was liable to indemnify BAC of $22,562,269; that by that date EJAI had become liable to BAC for "contractual interest" of $21,247,230; and that, accordingly, as at 30 June 1990 the total amount of EJAI's liability to BAC amounted to $43,809,499.
10. On 3 July 1990 the directors of AIA passed a resolution which was relevantly as follows:
" ... that a dividend of $24,808,553 ... be declared.
The dividend is to be paid on 4 July, 1990 to Bill Acceptance Corporation Limited in accordance with Article 67A of the Articles of Association of the company."
11. On 4 July 1990 AIA paid to BAC that the amount of $24,808,553.00. The related remittance advice from AIA to BAC referred to the payment as a "dividend". (There was evidence as to that part of the dividend which was derived from AIA's revenue profits and that part which was derived from its capital profits, as well as evidence as to that part of the dividend which was "franked" and that part which was "unfranked", but it was common ground that I need not concern myself with these matters.)
12. Subsequently (the date does not matter), within its records BAC appropriated the total amount of $24,808,553.00 which it had received from AIA as follows: two amounts of $18,434,149.34 and $2,812,850.60 (totalling $21,246,999.94) were appropriated to the interest payable by EJAI to BAC and the remaining $3,561,553.06 was appropriated to principal payable by EJAI to BAC.
The evidence also showed that until EJAI defaulted, EJAI paid amounts to BAC which, after BAC deducted and retained a "guarantee fee", BAC remitted to Westpac, representing interest payable by EJAI to Westpac.
The evidence also showed that in its income tax returns BAC returned interest income on a cash basis rather than on an accruals basis.
LEGISLATION AND OUTLINE OF PARTIES' SUBMISSIONS
At this point it is appropriate to note the relevant provisions within ss 44 and 46 of the Act:
"44(1) The assessable income of a shareholder in a company ... shall, ... -
(a) if he is a resident - include dividends paid
to him by the company out of
profits derived by it from any source; and
(b) .....................................
46(2) Subject to this section, a shareholder, being a company that is a resident, is entitled to a rebate in its assessment in respect of income of the year of income of the amount obtained by applying the average rate of tax payable by the shareholder:
(a) ......................................
(b) if the shareholder is not a private company in relation to the year of income, to the part of any dividends (..................................) that is included in its taxable income."
It was not in dispute that BAC was a resident company other than a private company in relation to the relevant year of income.
The word "dividend" is "defined" in sub-s 6 (1) of the Act relevantly as follows:
"6(1) In this Act, unless the contrary intention appears:
.........................................
‘dividend’ includes:
(a) any distribution made by a company to any of its shareholders, whether in money or other property;
(b) any amount credited by a company to any of its shareholders as shareholders; and
(c) the paid-up value of shares issued by a company to any of its shareholders to the extent to which the paid-up value represents a capitalization of profits;
but does not include: [there follow, in paras (d), (e) and (f), certain exclusions not presently relevant]."
BAC submits that the character of the payment of $24,808,553.00 on 4 July 1990 as a dividend is not denied by the fact that it formed part of a larger transaction in which the payment played another role. BAC referred to In re Sir Robert Peel's Settled Estates [1910] 1 Ch 389 at 398 at 400-401; Commissioners of Inland Revenue v Forrest (1924) 8 TC 704; Commissioners of Inland Revenue v Oakley (1925) 9 TC 582; Investment and Merchant Finance Corporation Ltd v Commissioner of Taxation (1971) 125 CLR 249 at 254, 255, 264-265, 272-273; Rowdell v Rowdell (1963) 111 CLR 106 at 118, 137; and Federal Commissioner of Taxation v Patcorp Investments Ltd (1976) 140 CLR 247 at 295, 312.
The Commissioner submits that in the light of the contractual arrangements between the relevant parties in this case, what BAC received from AIA was principal and interest which EJAI was liable to pay to it. The Commissioner submits that the decisive question is whether the payment was a "product" of the financial accommodation provided by BAC to EJAI and that it was. The Commissioner accepts that the issue between the parties is to be determined on the basis that BAC in fact returned interest on a cash basis and the question was whether BAC received the sum of $24,808,553.00 in the character of a dividend or not.
The Commissioner referred to Kelly v Federal Commissioner of Taxation (1985) ATC 4283; Heaton (Inspector of Taxes) v Bell [1970] AC 728 (HL) at 753, 757, 760, 763; and Reuter v Federal Commissioner of Taxation (1993) ATC 5030 at 5035, 5036.
REASONS
In my opinion the amount of $24,808,553.00 paid by AIA to BAC on 4 July 1994 was in the nature of a dividend and sub-ss 44 (1) and 46 (2) of the Act applied to it, with the result that BAC was entitled to the rebate provided for in sub-s 46 (2). The reasons which lead me to this conclusion can be shortly stated.
The payment of $24,808,553.00 on 4 July 1990 by AIA to BAC fell within para (a) of the definition of "dividend" quoted earlier and so is a dividend for the purpose of sub-ss 44 (1) and 46 (2) unless an intention appears that in those sub-sections the word "dividend" is not to bear its defined meaning. I can find no such intention. Moreover, in my view the payment fell within the general law notion of a dividend. In this regard it suffices to note the following:
"The expression ‘dividends on shares’ imports a payment by a company to a person who holds shares in the company at the date when the dividend is, or ought in the ordinary course to be, declared." (Taylor v Reid (1929) 42 CLR 371 at 380.)
"Dividends are distributions of profit to shareholders." (Ford and Austin's Principles of Corporations Law (7th ed, 1995) para [18.010], p 652.)
"In ordinary language today among people having some understanding of business a ‘dividend’ refers to a payment-out of a part of the profits for a period in respect of a share in a company. The dividend may be a fixed amount on a preference share or a fluctuating amount on an equity share. ... The distinction in both ordinary understanding and in taxation legislation is between ‘dividends’ on the one hand and ‘interest’ on the other, ... ."(Esso Petroleum Co Ltd v Ministry of Defence [1990] 1 Ch 163 (Harman J) at 165-166.)
The following
considerations also favour the proposition that the payment was a
dividend. The Commissioner did suggest
that it was not open to AIA to pay to its shareholder, BAC, a dividend of
$24,808,553.00 on 4 July 1994. He did
not attack the arrangement made by the Deed of Postponement or the Deed of
Release or any of the other documents in the case as a "sham". Indeed, he tendered and relied on those two
Deeds. By cl 5 (a) (i) of the Deed of
Postponement, AIA undertook to pay out of moneys available to it for the
purpose, "dividends on the AJAI/AI Shares, until as a result of the
on-payment from EJAI to BAC of such ... dividends, the EJAI/BAC Debt
[was] wholly repaid" (emphasis supplied).
Although the Deed of Release refers to "the distribution of all
surplus funds" that reference is followed by the words "in accordance
with the Deed of Postponement".
Article 67A is also consistent with the payment's being a dividend. The directors of AIA purported on 3 July 1990
to declare a "dividend" to be paid to BAC in accordance with Article
67A. BAC was a shareholder and had been
since 17 July 1986. In the remittance
advice, AIA described the payment as a "dividend". The amount declared was not calculated by
reference to the amount of principal ($22,562,269) or the amount of interest
($21,247,230) payable
by EJAI to BAC (cf s 46D (2) (c) (i) of the Act).
While it is true that the declaration and payment of the amount of $24,808,553.00 occurred within and as part of a broader arrangement found in the Facility Agreement, the Mortgage of Shares, the Guarantee, the facility letter, the Deed of Postponement, the Deed of Release and Article 67A, and that that arrangement explains the broader commercial significance of the payment, it does not, in my view, deprive the payment of the character of a dividend.
I will refer briefly to some of the cases to which I was referred. Each case, including the present one, must depend on its own facts. Some of the cases relied on by BAC were cases in which it was taken for granted that sub-ss 44 (1) and 46 (2) applied even though it might, perhaps, have been open to the Commissioner to contend, as he has done in the present case, that a particular payment by a company to a shareholder was deprived of the character of a "dividend" by reason of its role in a larger transaction; see, for example, Investment and Merchant Finance Corporation Ltd v Commissioner of Taxation (1971) 125 CLR 249 at 254 (Barwick CJ), 264-265 (Menzies J), 272-273 (Walsh J).
In my opinion the cases
relied on by the Commissioner are distinguishable. In Kelly v Federal Commissioner of
Taxation (1985) ATC 4283, a university student who also played league
football for a club in Western Australia received a cash award
of $20,000 from a television station as a result of winning the League's
Sandover Medal, a medal which was given to the player voted by umpires as the
"best and fairest" player during the season. It was held that the taxpayer was an employee
of the football club for which he played and that the receipt of $20,000 was
incidental to that employment and was assessable under either s 25 or sub-para
26 (e) of the Act. I need not set out
the terms of those familiar provisions.
It suffices to say that the fact that the payment was held to fall
within their broad scope notwithstanding the television station's motive of
cementing its relationship with the League and attracting more viewers, does
not bear upon the question before me.
In Heaton (Inspector of Taxes) v Bell [1970] AC 728 (HL), Bell was employed by John Waddington Ltd ("JW Ltd") which introduced a voluntary car loan scheme for certain employees. Under the scheme it bought cars, insured them, paid the relevant tax and lent them to those employees who applied to join the scheme. There was then subtracted from the weekly wage of those employees an amount which varied according to the type of car on loan. Bell was assessed to income tax on his wages without subtraction of any amount in respect of a car lent to him. It was held that under his contract of employment, Bell's wages, constituting the consideration payable for his services, remained unchanged and that he had been correctly assessed. Again, the case does not, in my respectful view, bear upon the present one.
Finally, in Reuter v Federal Commissioner of Taxation (1993) ATC 5030, the question was again whether a payment formed part of a taxpayer's assessable income under sub-s 25 (1) or sub-para 26 (e). Hill J held that it did and a Full Court agreed. Hill J had said that the character of the payment was not to be found necessarily and solely in the terms describing it in a certain deed of covenant and that the Court was entitled to look at the whole of the circumstances which led to the payment - propositions which were not disputed on the appeal and were, in any event, supported by, inter alia, Federal Coke Company Pty Ltd v Federal Commissioner of Taxation (1977) ATC 4255. The Full Court said in relation to the payment with which it was concerned, that
"The issue to be decided was whether, in fact, the payment was a ‘product’ of the taxpayer's services having regard to all relevant material. (See Hayes v FC of T (1956) 11 ATD 68; (1956) 96 CLR 47 per Fullagar J at ATD pp 73-74; CLR pp 57-58)." (at 5036)
The question in the Reuter case was whether the payment constituted "income". The familiar general proposition that for income tax purposes a substitute for income is also income does not, in my view, detract from the specific terms of Subdivision D (ss 43A-47A) of Division 2 (ss 25-47A) of Part III of the Act with which I am concerned. As BAC submitted, the Act provides a special regime relating to dividends and includes them as assessable income, whether or not they would be income otherwise. In my view the starting point of the inquiry to be made in the present case is not whether the ultimate source of the dividend is to be found in the financial accommodation provided by BAC to EJAI and EJAI's concomitant liability to pay principal and interest to BAC, but in the question whether the payment made was truly a dividend.
CONCLUSION
The appeal should be allowed with costs.
I do not understand there to be any dispute about the consequences, in terms of monetary amounts, which allowance of the appeal will have, but I will stand over the application to a date on which the parties will bring in agreed short minutes of orders, and if agreement is not reached, the forms of short minutes of orders for which they will respectively contend.
I certify that this and the preceding 15 pages are a true copy of the Reasons for Judgment of the Honourable Justice Lindgren.
Associate:
Dated: 13 May 1996
Heard: 29 April 1996
Place: Sydney
Decision: 13 May 1996
Appearances: Mr A Slater QC with Mr P Braham of counsel instructed by Allen Allen & Hemsley appeared for the applicant.
Mr G T Pagone instructed by the Australian Government Solicitor appeared for the respondent.
