FEDERAL COURT OF AUSTRALIA

Capricorn Diamonds Ltd v Commissioner of Taxation [2004] FCA 336

CAPRICORN DIAMONDS LIMITED v THE COMMISSIONER OF TAXATION FOR THE COMMONWEALTH OF AUSTRALIA

V 551, V555 and V 556 OF 2003

SUNDBERG J

29 MARCH 2004

MELBOURNE

THE COURT ORDERS THAT:

1.             Within twenty eight days of the date of this order the Respondent file and serve a Statement of Facts, Issues and Contentions in compliance with Order 52B rule 5 of the Federal Court Rules.

2.             The document filed on 15 September 2003 entitled “Respondent’s Statement of Facts Issues and Contentions” be removed from the Court file.

3.             The document filed on 24 October 2003 entitled “Respondent’s Amended Statement of Facts Issues and Contentions” be removed from the Court file.

4.             Any request for further and better particulars of the Respondent’s Statement of Facts, Issues and Contentions filed and served pursuant to paragraph 1 be served by the Applicant within 28 days of receipt of that Statement.

5.             The Respondent file and serve any such particulars within twenty eight days of receipt of the Applicant’s request.

6.             The Applicant file and serve its Statement of Facts, Issues and Contentions within twenty eight days of receipt of the Respondent’s particulars of its Statement of Facts, Issues and Contentions.

7.             The Respondent pay the Applicant’s costs of the Respondent’s motion notice of which was filed on 26 November 2003.

8.             The Respondent’s motion notice of which was filed on 4 December 2003 be dismissed.

9.             The Respondent pay the Applicant’s costs of the Respondent’s motion.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT

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.

5                     The reasons for the orders made herein are those appearing in Rio Tinto Ltd v Commissioner of Taxation [2004] FCA 335.

Associate:

Dated:                                      29 March 2004