ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT

SUMMARY OF JUDGMENTS

This summary is intended to outline the principal issues and outcomes in the judgments which are published today.  It does not form part of the Reasons for Judgment.

1                     The two judgments which are published today concern the amounts of income tax payable by three companies which are Australian-based members of the Consolidated Press Group.  The period for which their income tax liabilities are in dispute covers the four income years from 1 July 1988 to 30 June 1992. 

2                     The twelve appeals in this case were brought by the Commissioner of Taxation.  He had issued assessments in various years to the three Australian companies.  They objected to the assessments.  The Commissioner disallowed their objections and the companies then appealed to this Court.  Justice Hill set aside the Commissioner’s decisions disallowing the objections to the assessments and remitted the matters to the Commissioner to be dealt with in accordance with his Honour’s reasons.

3                     Of the twelve appeals which the Commissioner has brought in this Court against his Honour’s decisions he has succeeded in two concerning the application of the tax avoidance provisions of Part IVA of the Income Tax Assessment Act to one of the Australian companies, CPH Property Pty Ltd, formerly Australian Consolidated Press Pty Ltd.  The ten remaining appeals by the Commissioner concern an alleged dividend stripping scheme involving Consolidated Press Holdings Ltd and Murray Leisure Group Pty Ltd and a debt defeasance transaction connected with the issue of bonds by one of the Group’s overseas members.  They have been dismissed.  Eight cross-appeals by Consolidated Press Holdings and Murray Leisure Group relating to one aspect of their assessments have also been dismissed.  The issue on which they cross-appealed, unsuccessfully, involved the application of so called thin capitalisation rules to one of their associate companies in the Bahamas.

4                     The two appeals on which the Commissioner succeeded concern the financing of a failed takeover bid in 1989 by the Consolidated Press Group for a United Kingdom company, BAT Industries Plc.  The Court has held that the financing arrangements were structured in such a way as to constitute a tax avoidance scheme for the purposes of Part IVA of the Act.  The beneficiary of the scheme was Australian Consolidated Press, now known as CPH Property Pty Ltd.  Our disagreement with his Honour’s view was confined to the interpretation of one section of the Act (s 79D).  Since that section has now been amended the same issue will not arise again. 

5                     An alleged dividend stripping scheme was the subject of the next two appeals brought by the Commissioner.  Dividend stripping schemes are a form of tax avoidance scheme for which the Act makes particular provision in s 177E.  There is no precise legal definition of such schemes.  Generally speaking they involve a company which has accumulated profits.  The shares in the company are purchased by a third party, the stripper.  The stripper, who acquires a controlling interest, declares a dividend on the shares so converting the accumulated profits into dividends.  This causes the value of the shares to drop so they can be sold at a lesser price.  The selling shareholders get capital in their hands and the stripper usually gets a rebate on dividends and a tax “loss” on the difference between what it paid for the shares and what it sold them for. 

6                     The two appeals in question involved an alleged dividend stripping scheme connected with the replacement of the Consolidated Press Group’s UK holding companies by similarly named companies incorporated in the Bahamas in 1990.  Justice Hill decided that the transactions associated with the liquidation of the UK companies were brought about as part of a reorganisation of the Group which had to do with proposed changes to UK and Australian tax laws.  The purpose of the transactions and the associated reorganisation was to avoid exposing members of the Consolidated Press Group to double taxation in the United Kingdom and in Australia. They were not brought about for the purpose of enabling Consolidated Press Holdings and Murray Leisure Group to receive capital instead of taxable dividend distributions even though they had that result.  Hill J therefore concluded that there was no scheme “by way of or in the nature of a dividend stripping”.

7                     There is, however, another limb to s 177E which catches “a scheme having substantially the effect of a scheme by way of …dividend stripping”.  Hill J thought that some of the arrangements came within this limb.  In the end, this did not matter because he found that the Commissioner had been wrong in deciding that there had been a distribution of profits of the relevant UK company.  So he decided in favour of Consolidated Press Holdings and Murray Leisure Group.

8                     On the appeal, the Court has decided that, because the arrangements were not entered into for the purpose of avoiding Australian tax, they could not be regarded as dividend stripping and did not come within either limb of s 177E.  In other words, the arrangements did not even have the effect of a scheme by way of dividend stripping.  In this respect, the Court has disagreed with Justice Hill’s reasons.  But the Court has reached the same result and so the Commissioner’s appeals on the dividend stripping issue have been dismissed.

9                     Then there were eight appeals brought by the Commissioner in respect of income said to have been earned by an overseas member of the Consolidated Press Group.  This income was connected with the raising of funds by issue of bonds in Swiss francs in 1984 and 1985 and the assumption of liabilities under the bonds by a third party in 1989.  This assumption of liability arrangement was called a debt defeasance agreement.  The Commissioner argued that the Consolidated Press company which had effectively disposed of its liability under the bonds had made a gain from that transaction which amounted to income.  He contended that the income should be attributed to the two Australian members of the Consolidated Press Group, Consolidated Press Holdings  and Murray Leisure Group.  We agreed with his Honour’s conclusion that the alleged gain was not income of the kind which could be attributed to those companies under the Act.  These eight appeals by the Commissioner were dismissed.

10                  The same companies cross-appealed against his Honour’s decision in respect of the same assessments but on another issue.  They were liable to pay tax on income earned by one of the Consolidated Press Group based in the Bahamas.  They wanted to offset, against the income earned by that company, interest payments which it made to other companies in respect of borrowings.  His Honour held, however, that for certain purposes the Bahamas company had to be treated as if it were an Australian company largely funded by an overseas corporation.  This meant that so called thin capitalisation rules under the Act applied and the interest payments were not deductible against that company’s income except to a very limited extent. So that company’s income had to be brought to account as taxable income of the Australian companies without the claimed deduction for interest. We agreed with his Honour’s reasoning and dismissed the eight cross-appeals.