Friday, May 8, 2015

Devuba Pty Ltd vs Federal Commissioner of Taxation

This was a win for the taxpayer on small business CGT concessions in the Administrative Appeals Tribunal.  They ruled that ordinary shares are to be looked at before slightly more 'novelty' shares are considered, for the purpose of ownership tests outlined in the small business CGT concession division - 152.

When a company sells shares in a small business, if the owners of the company who sold the shares wish to claim small business capital gains concessions, the company must be 90% owned (directly or indirectly) by individuals who own at least 20% of the small business being sold (directly or indirectly).  It is a complex concept when viewed abstractly, but when the time comes to sell your own business, the dots are a lot easier to connect with entities you are familiar with (ie: your own companies and trusts).

The problem in this case was that the taxpayer's wife held a dividend access share (DAS) in the Devuba, allowing her access to dividends, only when the directors want to give her one.  The share carried with it no inherent rights or voting power.  The ATO concluded that because the DAS could be paid a dividend, even on occasions that ordinary shares were not paid anything, that the DAS could effectively over-ride an ordinary share. 

This is of importance because s 152-70 provides:

"An entity holds a direct small business participation percentage at the relevant time in an entity equal to the percentage of any distribution of capital that the company may make."

The ATO concluded that the husband "may" receive $0 because his wife owns a share that could over-ride him.  This is a interesting conclusion that could lead to the eventual conclusion that no one is entitled to anything in a company with two different types of shares that can be paid out on different occasions.  The end result in this case is that the taxpayer would not satisfy the requirements of s 152-70, because they failed to hold 90% of the company that sold the shares of the small business in question.  In fact, following the ATO logic they own 0%.

The Tribunal didn't side with the ATO on this occasion.  They ruled that ordinary shares should be used in these cases to test taxpayers according to s 152-70, with disregard to any novelty shares that may form part of the companies share capital (see the reasoning below).  After the test was applied at the level of ordinary shares, the taxpayer was demonstrated to be 90% owned by owners of the small business being sold and hence could claim the concessions.  Highlights from the judgement are below.

"In the view of the Respondent, the directors of the Applicant had discretion to pay a dividend on the DAS and could use their powers to pay a dividend on the DAS to the exclusion of all and any of the other classes of shares. Accordingly, the holders of the ordinary shares might obtain a zero distribution. As a result, for the purposes of the test contained in item 1 of the s 152-70, the "percentage of any dividend that the company (namely the Applicant) may pay" on the ordinary shares is nil. The consequence of such a finding would be that the SBPPs held by Mr Van der Vegt and the Trust in the Applicant would be zero and the Applicant would not be entitled to any relief under div 152.

The issue comes down to this - what is the effect of the words "the percentage of any dividend the company may pay" as those words are used in the Table in s 152-70(1) of the Act when read in the context of the DAS."  (p 51-52)

"When one looks at the terms of s 152 - 10 (2) it is readily apparent that the CGT stakeholder test that is the subject of that subsection needs to be satisfied "just before the CGT event". Similarly, in s 152 - 70 the direct SBPP is to be worked out "at the relevant time" which again is just before the CGT event. It would seem to follow from this that the rights of shareholders in the Applicant and for that matter in Primacy are to be assessed at the same time namely just before the CGT event.

At that time being the moment just before 19 May 2010 logic would suggest that the only shares that carried any rights to dividends that may be paid in the Applicant were the ordinary shares. Those ordinary shares and no other shares at that time carried all the rights not only in respect of dividends but also in respect of voting and in respect of rights to distribution of surpluses on a winding up.

The consequence is that it cannot be said that at the relevant time (i.e. just before 19 May 2010), the DAS holder may be paid a dividend."  (p 61-63)
"The decision of the High Court in Casuarina would seem to suggest that it is more a case of testing a hypothetical dividend which may be paid by the company based on the facts as they exist just before 19 May 2010.
Consequently, the Tribunal concludes that in this case the relevant time to which the relevant provision takes us is just before 19 May 2010. It is at that time that the hypothetical needs to be posed - namely if a dividend were to be declared at that time the dividend would not and could not have been paid in favour of anyone other than the ordinary shareholders. At that time, Mr Van der Vegt had a direct SBPP in the Applicant of 50% and that is not diminished by the existence of discretionary entitlements in the DAS holder. The fact that at some hypothetical future time, a dividend could have been resolved and paid in favour of the DAS holder is, based on the reasoning of the High Court in Casuarina, not to the point and is largely irrelevant to the question at hand."  (p 76-77)


*Note:  This decision has been appealed*
*Was upheld in the initial appeal... (2016)


 [2015] AATA 255

http://www.austlii.edu.au/au/cases/cth/AATA/2015/255.html

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