Douglas v FC of T
Members:DK Grigg SM
Tribunal:
Administrative Appeals Tribunal, Brisbane
MEDIA NEUTRAL CITATION:
[2022] AATA 2056
DK Grigg (Senior Member)
BACKGROUND
1. This matter concerns an amended income tax assessment issued to the Applicant, Mr Douglas, by the Australian Tax Office ("ATO") for the financial year ended 30 June 2019.
2. Mr Douglas is a retiree and the owner of some fully paid ordinary shares in BHP Group Limited.[1]
3. Following BHP's sale of some of its onshore US oil and gas assets, BHP announced it intended to:[2]
- a) undertake an off-market share buy-back of BHP ordinary shares, and
- b) return the net proceeds from the asset sales to ordinary shareholders of BHP by way of a Special Dividend.
4. BHP issued a news release on 17 December 2018 stating:[3]
BHP has successfully completed its off-market tender buy-back…of BHP Group Limited…shares.
…
…the Board of BHP has determined to pay a special dividend… The Special Dividend represents the residual US$5.2 billion of net proceed from the sale of its onshore US assets not returned via the Off-Market Buy-Back
…
We are pleased to have completed the Off-Market Buy-Back which, together with the Special Dividend, will deliver on our commitment to return the net proceeds from the sale of our Onshore US assets to our shareholders
…
For shareholders who have successfully tendered their shares, A$27.26 per share of the Buy-Back Price is treated for Australian tax purposes as a fully franked dividend. For Australian capital gains tax purposes, the capital proceeds are $4.92 per share, being the $0.38 per share capital component plus A$4.54 per share…"
(emphasis added)
5. On 16 January 2019 the Commissioner of Taxation issued a public Class Ruling in relation to the BHP off-market share buy-back setting out "the Commissioner's opinion on the way in which the relevant provisions identified below apply to the defined class of entities, who take part in the scheme to which this Ruling relates". CR 2019/5 applied to the 2019 financial year. CR 2019/5 does not strictly apply to Mr Douglas because he did not dispose of his shares or participate in the Buy-Back,[4]
6. CR 2019/5 provides:[5]
3. The class of entities to which this Ruling applies is the ordinary shareholders of BHP Group Limited (BHP) who:
disposed of their ordinary shares in BHP under the off-market share buy-back (the 'Buy-Back')…
13. The BHP Group proposed the Buy-Back and Special Dividend following the sale of its Onshore US oil and gas assests. Under the BHP Group's Capital Allocation Framework, the proceeds represented surplus funds to dividend and capital investment requirements having regard to current and foreseeable caoital investment requirements and dividend payments. …
17. …eligible shareholders were entitled to offer to sell some or all of their ordinary shares to BHP…
29. Participating Shareholders are taken to have been paid a dividend of $27.26 (the Dividend Component) on 17 December 2018 for each share bought back under section 159GZZZP.
30. The Dividend Component is a frankable distribution pursuant to section 202-40, and is capable of being franked in accordance with section 202-5. …
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32. The Dividend Component of $27.26 per share and, subject to the shareholder being a 'qualified person', the amount of the franking credit on the Dividend Component is included in the assessable income of Australian resident individual58. The Buy-Back Price received by Participating Shareholders comprises two components:
- a Dividend Component, and
- a Capital Component.
59. The amount of each of these components is determined in accordance with sections 159GZZZP and 159GZZZQ, and has regard to how BHP accounted for the Buy-Back.
60. Section 159GZZZP provides that where the buy-back of a share is an off-market purchase, the difference between the purchase price and the part (if any) of the purchase price which is debited against amounts standing to the credit of the company's share capital account is taken to be a dividend paid by the company to the seller on the day the buy-back occurred. The Buy-Back occurred on 17 December 2018.
61. The Buy-Back Price was $27.64 per share, of which $0.38 (the Capital Component) was debited against the amounts standing to the credit of BHP's share capital account. As a result, the Dividend Component is taken to be $27.26 per share.
62. The Dividend Component of $27.26 per share is frankable, but only to the extent that the Buy-Back Price does not exceed the market value of a BHP share at the time of the Buy-Back if the buy-back did not occur and was never proposed to occur (paragraph 202-45(c)).
63. TD 2004/22 sets out the Commissioner's view as to how to determine what would have been the market value of a BHP share at the time of the Buy-Back if the buy-back did not occur and was never proposed to occur. In respect of the Buy-Back, the Buy-Back Price per share did not exceed the market value determined in accordance with TD 2004/22. As a result, the entire Dividend Component is frankable.
Assessability of the Dividend Component and tax offset
Direct distributions
64. For Participating Shareholders who are Australian residents (other than a partnership or a trust) and who directly received the Dividend Component:
the Dividend Component is included in the assessable income of each Participating Shareholder under subsection 44(1), and
subject to the 'qualified person' rule, the amount of the franking credit on the Dividend Component is included in the assessable income of each
Participating Shareholder under subsection 207-20(1).
65. Subject to the 'qualified person' rule, these Participating Shareholders are entitled to a tax offset under subsection 207-20(2) equal to the amount of the franking credit on the Dividend Component.
7. Mr Douglas was a shareholder of BHP during the 2019 financial year. During the 2019 financial year Mr Douglas received a Special Dividend from BHP of $19,719.06 ("
Special Dividend Amount
") and the related franking credit of $8,451 ("
Franking Credit Amount
").[6]
8. On 22 July 2019 Mr Douglas lodged his income tax return for the 2019 financial year ("ITR"). The ITR included franked dividends of $48,625.00 and dividend franking credits of $20,839.00.[7]
9. A month later Mr Douglas lodged an amended ITR for the 2019 financial year ("Amended ITR"). The Amended ITR reduced:[8]
- (a) the franked dividend amount by $19,719.00 to $28,906.00;
- (b) the dividend franking credits by $8,451.00 to $12,388.00; and
- (c) his taxable income to $49,607.00.
10. Mr Douglas explained to the ATO that by mistake he had included a bonus dividend (the Special Dividend Amount) which he considered should have been treated as a return of capital received from BHP and that given his
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BHP holdings pre-date 1985 they are exempt from CGT.[9]11. On 3 September 2019 the ATO amended Mr Douglas ITR to increase the franked dividends by the Special Dividend Amount and the dividend franking credits by the Franking Credit Amount, to reflect the Dividend Payment Statement issued to Mr Douglas by BHP.[10]
12. As a result of the amendments, Mr Douglas's taxable income was increased to $77,776.00.[11]
13. On 19 April 2021 Mr Douglas lodged an objection to the amended income tax assessment ("
Objection
"). Mr Douglas submitted that:[12]
- a) the ATO was treating the Special Dividend Amount and Franking Credit Amount as income instead of as a return of capital; and
- b) his holding in BHP was acquired prior to 1985 and are therefore exempt from capital gains tax.
14. On 7 May 2021 the ATO advised Mr Douglas that they had considered his objection and decided:[13]
- a) the Special Dividend Amount and Franking Credit Amount is assessable income;
- b) Mr Douglas was entitled to a franking tax offset equal to the amount of the Franking Credit Amount; and
- c) no changes would be made to the amended income tax assessment for the 2019 financial year.
15. The ATO explained that:
14. In this instance BHP sold their assets, being the sale of its onshore US assets, therefore the capital gain tax event belongs to BHP . The proceeds of this event were then distributed to the shareholders in the form of a Special Dividend.
15. In your case, you have received a Special Dividend from BHP of $19,719.06. This amount is included in your assessable income by virtue of section 44 of the ITAA 1936.
16. Additionally, the franking credit of $8,451.03 will also be assessable to you. You are also entitled to a franking tax offset equal to the amount of the franking credit.
(emphasis added)
16. On 8 June 2021 Mr Douglas applied to this Tribunal for review of the ATO's decision.[14]
LEGISLATIVE BACKGROUND
Notice of Amended Assessments
17. Pursuant to section 166 of the Income Tax Assessment Act 1936 (Cth) ("ITAA 1936") the Commissioner must make an assessment of the taxable income of a person, the tax payable thereon, and any tax offset refunds, from ITRs and/or from any other information in the Commissioner's possession.
18. Section 167(b) of the ITAA 1936 provides that, where, as here, the Commissioner is not satisfied with the ITR furnished by any person, the Commissioner may make an assessment of the amount upon which income tax ought to be levied, and that amount shall be the taxable income of that person for the purpose of section 166.
19. Section 175A(1) of the ITAA 1936 provides: "A taxpayer who is dissatisfied with an assessment made in relation to the taxpayer may object against it in the manner set out in Part IVC of the Taxation Administration Act 1953."
Burden of Proof
20. Section 14ZZK(b)(i) of the TAA provides that the Applicant has the burden of proving that the assessment is excessive or otherwise incorrect and what the assessment should have been.
21. The High Court decision in
Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 confirms that the onus is on the taxpayer to establish that default assessments issued by the Commissioner are excessive. The High Court explained that where the Commissioner and taxpayer have not agreed on the assessment:[15]
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"… the Commissioner is entitled to rely upon any deficiency in proof of the excessiveness of the amount assessed to uphold the assessment … unless the [taxpayer] shows by evidence that the assessment is incorrect, [the default assessment] will prevail."
What is a dividend?
22. A "dividend" is defined in section 6(1) of the ITAA 1936 relevantly as follows:
"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;
23. For the purpose of the ITAA 1997,"dividend" has the meaning given by subsections 6(1) and (4) and 6BA(5) and section 94L of the ITAA 1936: s 995-1(1), ITAA 1997.
Are dividends/franking credits included as assessable income?
24. Pursuant to section 44(1)(a)(i) of the ITAA 1936, a resident shareholder's assessable income includes dividends that are paid to them by the company from profits derived by that company from any source. Section 44 states:
- (1)
The assessable income of a shareholder
in a company (whether the company is a resident or a non-resident)
includes
:
- (a)
if the shareholder is a resident
:
- (i) dividends (other than non-share dividends) that are paid to the shareholder by the company out of profits derived by it from any source; and
- (ii) all non-share dividends paid to the shareholder by the company; and
- (a)
if the shareholder is a resident
:
25. Pursuant to section 207-5(1) of the ITAA 1997:
- (1) If a corporate tax entity makes a franked distribution to one of its members, then, as a general rule:
- (a) an amount equal to the franking credit on the distribution is included in the member's assessable income; and
- (b) the member is entitled to a tax offset equal to the same amount.
What about "special dividends"?
26. Provided the payment of a special dividend satisfies the definition of "dividend" in section 6(1) of the ITAA 1936, it will be a "dividend" for income tax purposes and be included as part of a resident shareholder's assessable income.
27. The ATO issued an Interpretive Decision in August 2003 in relation to "special dividends" ("
ATO ID 2003/824
"). [16]
28. ATO ID 2003/824 provides:
Issue
Is a Special Dividend, paid out of a combination of current year profits and retained earnings prior to a corporate restructuring, a 'dividend' for income tax purposes?
Decision
Yes. The Special Dividend constitutes a 'dividend' within the meaning of that term as defined in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936).
Facts
A resident company pays a special dividend to its ordinary shareholders prior to a corporate restructuring under which the shareholders are offered a combination of cash and scrip in exchange for their shares in the company.
The special dividend is debited solely against current year profits and prior year retained earnings accounts.
Reasons for Decision
Subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) defines the term 'dividend' for income tax purposes. Under this section, 'dividend' has the meaning given by subsections 6(1) and (4) and 6BA(5) and section 94L of the ITAA 1936
The payment of the Special Dividend is a distribution of money by the company to its shareholders. This satisfies paragraph (a) of the definition of 'dividend' in subsection 6(1) of the ITAA 1936 . As the special
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dividend is sourced entirely from the company's current year and retained earnings, the distribution does not fall within any of the exclusions to the 'dividend' definition. The other provisions referred to in the subsection 995-1(1) of the ITAA 1997 definition are not relevant to the given facts. The Special Dividend is therefore a dividend for income tax purposes.(emphasis added)
ISSUE FOR THE TRIBUNAL
29. It is not in dispute that during the 2019 financial year Mr Douglas:
- a) was an Australian resident for taxation purposes; and
- b) received a Special Dividend of $19,719.06 and a franking credit of $8,451.03 from BHP.
30. The issue for determination by the Tribunal is whether the amended assessment for the financial year ended 2019 is excessive, which involves determining whether the Special Dividend Amount and Franking Credit Amount should have been included as ordinary income assessable under section 6-5 of the Income Tax Assessment Act 1997) ("ITAA 1997").
31. The essential question is whether the Special Dividend was a "dividend…paid…out of profits" within the meaning of section 44(1)(a) of the ITAA 36.
32. The parties determined and consented to the matter being heard on the papers.[17]
33. The Tribunal has the following material before it:
| Document | Exhibit |
| T Documents | 1 |
| Statement of Facts Issues and Contentions prepared by the Commissioner and dated 5 October 2021 | 2 |
| Mr Douglas' reply to the SFICs dated 7 October 2021 | 3 |
| Secondary SFICs prepared by the Commissioner and dated 7 March 2022 | 4 |
| Submissions of Mr Douglas dated 21 September 2021 | 5 |
| Submissions Mr Douglas dated 7 October 2021 | 6 |
| Submissions of Mr Douglas dated 19 October 2021 | 7 |
| Submissions of Mr Douglas dated 22 November 2021 | 8 |
| Submissions of Mr Douglas dated 25 November 2021 | 9 |
| Letter from Argo to Mr Douglas' wife dated 26 August 2019 | 10 |
| Submissions of Mr Douglas filed 1 December 2021 | 11 |
| Submissions of Mr Douglas dated 8 December 2021 | 12 |
| Submissions of Mr Douglas dated 10 February 2022 | 13 |
| A News Release of BHP dated 17 December 2018 | 14 |
CONTENTIONS
34. The Commissioner contends the reviewable decision should be affirmed.
35. Mr Douglas contends the assessed taxable income is excessive.
Mr Douglas' contentions
36. Mr Douglas contends that the Special Dividend Amount and Franking Credit Amount should not be included as part of his assessable income because:
- a) they were a bonus dividend of Capital from BHP from the sale of their American oil fields; and/or alternatively;
- b) his BHP holdings were purchased prior to 1985 and are therefore exempt from Capital Gains Tax.[18]
Exhibit 1, T Documents, T5, page 26.
37. Mr Douglas submitted:[19]
BHP had informed shareholders they had sold their 20 yr investment in the American Oil Fields and would be buying back their shares involved as their balance sheet did not justify retaining the 8.3 % of capital and after all transactions completed the residual [dictionary states 'after all debts and fees paid] would be returned to the remaining 91.7 % of shareholders
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ATO approval for off market event was necessary and in this the ATO advised CG was $ .38 with share price of $32.1387 so with 100 cents to the pound the CG was .038 x 32.1387 = $1.22 per share whilst the buyback was restricted to commercial shareholders only so apart from CG statement no other item relates to individual shareholdersIn buyback with 14% discount BHP had a CG of $4.54 on 8.3% is $37.9 giving to the remaining 91.7 a CG of 41.3cents subtracting the staffing costs of ATO approval and the buyback of I am assuming at 21.3cent add the extra 20 cents making CG now $1.42 the amount of the residual paid to shareholders and why it was nominated special because it was CG and Dividend as 99.9% of shareholders would be paying tax say 30% at full rate because BHP tops ASX trading daily at up to 300,000 so weekly is up to 1.5 million and the people who bought between May'65 [imputed started but we could nominate to receive bonus shares without imputed tax and retain prior purchase date till May '85 [start CG started] balance ? % as they have not sold shares and not liable for CG tax and their dividend would have declared the $1.42 as a deduction in the cost price of each share plus $.60 imputed in the dividend section for offset of other non imputed income whilst those buying after May '85 would include in supplementary section and deduct .71 cents as 50% CG
ATO claim that all dividend is earnings is incorrect Capital gains are earnings and are recognised by allowing a 50% discount in the annual tax return
I regard this information proves the payment by BHP as return of capital and maybe at 92 yrs I am the unique person able to claim exemption from tax and entitled to a full tax refund as per Sept. assessment.
I do not believe ATO has legislation to act in the manner they have as Capital Gains was approved by Parliament in May '85 and can not relate to assets purchased prior to this date
38. Mr Douglas also submitted:[20]
Many decades ago BHP instead of declaring larger dividends invested capital in American Shale Oilfields and many like me did not support.
When the opportunity to exit with a capital gain they sold and corrected their action by returning the surplus to the shareholders I have provided a BHP letter confirming this action
Possible declarations for 2018/19 Financial yr were
- A Under 12mths Dividend all income
- B purchases From May 68 two options
- 1 Declare cap gain [reduced 50%] with franking Cr.
- 2 Advise ATO reduced Capital cost shares $1.42 and declare frank as income for non frank items
- C purchases prior May '68 exempt as in my case
Were the amounts paid a return of capital in the hands of Mr Douglas?
39. As referred to in the News Release, the Special Dividend was the surplus earnings remaining following the asset sale and buy-back of shares. Any capital gain made on the sale of the assets was that of BHP's, not Mr Douglas. Mr Douglas did not participate in the buy-back.[21]
40. There is no evidence to support Mr Douglas' claim that the Special Dividend Amount was a return of capital.
Was the Special Dividend a "dividend"?
41. The Special Dividend was distributed by BHP to Mr Douglas in the form of money. The distribution meets the definition of "dividend" in section 6(1)(a) of the ITAA 1936. The exclusions provided for in the definition of "dividend" in section 6(1)(a) of the ITAA 1936 are not applicable here.
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Was the dividend paid out of profits?
42. Section 44 provides (see above) that a dividend receipt will be taxable as assessable income if it has been "paid…out of profits".
43. Courts have regularly had to turn their mind to whether special dividends should be treated as payments paid out of "profits". Each case turns on its own facts. The following High Court decisions are instructive.
44. In
Newton v Federal Commissioner of Taxation (1958) 98 CLR 1, the High Court was concerned whether the assessable income of the appellants included certain sums declared by companies as special dividends, The facts are more complicated in this matter than the present one. However, the comments of Lord Denning are instructive:
[23] …dividends amount to £1,764,136 pounds paid out by the company. If and so far as the commissioner can show that those special dividends reached the hands of the original shareholders, he is entitled to treat it as income derived by them from the shares. Now the commissioner can trace the sum of 1,661,772 pounds in cash actually into the hands of the original shareholders. He is entitled, therefore, to treat it as income derived by them.
45. In
Re: Slater Holdings Limited And: The Commissioner of Taxation for The Commonwealth of Australia (1983) 76 FLR 256 the Full Federal Court considered whether section 44 (1) (a) applied only to revenue profits, as opposed to capital profits. This argument is one made by Mr Douglas here. The taxpayer received money from a company of which they were a member. Part of the money was a from a gift a shareholder had made to the company, the other part came from capital profits made by the company on the sale of a shopping centre. The sum had been paid to the taxpayer because of its retirement from the company. The Commissioner assessed the taxpayer on both parts of the sum received as dividends within section 44(1) of the ITAA 1936. The Court held (by majority) that the taxpayer had severed its connection with the company and what it received was its share of the available assets. This was capital in its hands, and not assessable as a dividend. The matter was appealed to the High Court:
The Commissioner of Taxation of the Commonwealth of Australia v Slater Holdings Limited (1984) 156 CLR 447. On appeal, the High Court overturned the decision confirming that no distinction is made in these circumstances between capital vs revenue profits. Gibbs CJ found:[24]
[16]… the evidence in the present case shows that the components of the payment were identified - the sources of the payment are revealed. So much of the payment as represented one-third of capital profits reserve and one-third of the divisible revenue profits was clearly made out of profits.
46. Provided there has been an overall "gain" and increase in the company's assets it will constitute a "profit".
47. The distribution was sourced entirely from BHP's current year and retained earnings. Irrespective of whether the distribution came from "revenue" or "capital" profits, cases
Slater (1984) 156 CLR 447 makes it clear that the distribution is still considered as income in the hands of the taxpayer.
48. The explanation to the CR 2019/5 specifically provides that the "dividend component is included in the assessable income of each Participating Shareholder under subsection 44(1)".[25]
49. The Special Dividend was paid to shareholders out of profits, therefore Mr Douglas, a resident shareholder, is required to include the Special Dividend as part of his assessable income.
Is Mr Douglas entitled to franking credits?
50. Pursuant to section 207-5(1) of the ITAA 1997:
- (1) If a corporate tax entity makes a franked distribution to one of its members, then, as a general rule:
- (a) an amount equal to the franking credit on the distribution is included in the member's assessable income; and
- (b) the member is entitled to a tax offset equal to the same amount.
51. The BHP Dividend statement clearly indicates that Mr Douglas received a franked distribution. He is entitled to the Franking Credit Amount and to the corresponding tax
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offset equal to the amount of the Franking Credit Amount.CONCLUSION
52. The Special Dividend paid to Mr Douglas answers the description of "distribution" and therefore falls within the definition of "dividend". The payment does not fall within the exclusions to the 'dividend' definition.
53. The Special Dividend should therefore be treated as a "dividend" for income tax purposes and included as part of Mr Douglas' assessable income.
54. Given the lack of evidence to support Mr Douglas' claim, the Tribunal finds that Mr Douglas has not discharged his onus of proof. Mr Douglas has not proven, on the balance of probabilities, that the assessments are excessive.
55. As a result, the reviewable decision in relation to the 2019 financial year should be affirmed.
DECISION
56. The decision under review in relation to the 2019 financial year is affirmed.
Annexure A - Dividend Statement and Direct Credit Advice
Footnotes
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