Tax Facts

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  • Debit of $3.9 billion was not a debit against share capital

    In brief:    A foreign taxpayer has been unsuccessful in its argument that a debit of over $3.9 billion to a negative ‘share buy-back reserve’ account, as part of an off-market share buy-back in a listed company in which the taxpayer owned a majority of shares, constituted an amount debited ‘against amounts standing to the credit of the share capital account’. The consequence was that the amount so debited was taken to be a dividend paid to the taxpayer as a shareholder out of profits derived by the company – the foreign taxpayer was consequently not entitled to a refund of approximately $452.5 million withheld as dividend withholding tax.

    More:    The circumstances of this case arose from the takeover of Optus by the SingTel group. The tax at stake was substantial and an appeal to the Full Federal Court has already been lodged. But the principles involved apply to a company of any size and illustrate one of the significant disconnects between tax law and company law, exacerbated by legislative liberalisation of the maintenance of capital doctrine in company law. The essence of the disconnect is that there are no prescriptive rules in the Corporations Act about how a share buy-back need be funded and it is possible for the aggregate consideration payable by a company for a buy-back to exceed the company's issued capital and realised profit funds – however, for tax purposes, the general rule is that the buy-back consideration will be taken to be a dividend payable out of profits except to the extent debited against amounts standing to the credit of the company's share capital account. In the Cable & Wireless case, a substantial part of the buy-back consideration was funded by borrowings from the SingTel group as part of the takeover arrangements.

    The taxpayer relied on the High Court decision in FC of T v Consolidated Media Holdings Ltd [2012] HCA 55, where the opposite conclusion had been reached. However, that decision was distinguished because there the buy-back involved a reduction of capital. In the Cable & Wireless case, the ‘share buy-back reserve’ was a funding mechanism for funding of the takeover by loan advances from the bidder. (Cable & Wireless Australia & Pacific Holding BV (in liquidation) v FC of T [2016] FCA 78)

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    10 Mar 2016

    Topic: Income Tax

  • Another catastrophic error with super contribution caps

    In brief:    An innocent error by a taxpayer, despite engaging and acting on the advice of both a tax agent and financial planner, has resulted in an unexpected tax bill of over $83,000 for excess non-concessional contributions tax. The taxpayer made a non-concessional contribution of $450,000 in the 2011 year of income – the maximum for 3 years at the time under the ‘bring forward’ rule. However, that rule had already inadvertently been triggered in the 2010 year of income and a substantial part of the subsequent contribution of $450,000 constituted an excess contribution. And, in the circumstances, the Administrative Appeals Tribunal held that there were no special circumstances for the purposes of s292-465(3) that would enable part of the contributions to be allocated to a different year of income.

    More:    It is ironic that rules intended to be beneficial for taxpayers can have such catastrophic affects when things go wrong. Although the extreme harshness of the regime with excess contributions has been substantially alleviated from the 2014 year of income onwards. As well as the need to carefully check past contributions, this case is also a good reminder of the importance of communication and coordination if the affairs of a client involve 2 or more advisers. A failure to seek/advise relevant information from and to other client advisers is a dangerous practice that can fairly easily amount to a prima facie case of negligence in appropriate circumstances. (Brady v FC of T [2016] AATA 97)

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    10 Mar 2016

    Topic: SMSFs/Income Tax