6. Will Part IVA apply to CWAP where CWAP disposes of all or most of its Optus shares by choosing the Buy-Back Alternative?
The Commissioner's opinion in relation to each question is as follows:
- 1. Yes. Section 159GZZZP will apply to deem part of the Buy-Back Consideration payable to CWAP to be a dividend. The dividend will be unfranked.
- 2. Yes. The dividend component of the Buy-Back Consideration received by CWAP will be determined under section 159GZZZP by deducting from the Buy-Back Consideration the amount debited by Optus to its share capital account.
- 3. Yes. For the purposes of determining whether in respect of the disposal of an Optus share:
- (i) an amount is included in the assessable income of CWAP; or
- (ii) an amount is allowable as a deduction to CWAP; or
- (iii) whether CWAP makes a capital gain or capital loss,
the amount of consideration which is taken to have been received by CWAP in respect of the disposal of the Optus share will be determined under section 159GZZZQ to be equal to the Buy-Back Consideration less the amount that is taken to be a dividend by section 159GZZZP.
- 4. No. The Commissioner will not make a determination under subsection 45B(3) to apply section 45C in relation to the whole or part of the distribution of share capital to CWAP.
- 5. Yes. CWAP will be liable to dividend withholding tax payable in accordance with section 128B in respect of the dividend component of the Buy-Back Consideration. The rate of tax payable is 15% of the dividend.
- 6. No. Part IVA will not apply to any of the schemes in relation to CWAP if CWAP disposes of all or most of its Optus shares by choosing the Buy-Back Alternative and dividend withholding tax is paid.
29. On 30 August 2001, the appellant accepted the buy-back alternative in respect of 1,639,849,948 Optus shares, for a total consideration of $6,216,762,899.29.
30. On 6 September 2001, Optus bought back 1,642,101,319 shares (including the 1,639,849,948 shares held by the appellant) for $6,225,502,631.68 (the first buy-back). The bought back shares were cancelled. The bought back shares represented 43% of the Optus shares that were on issue at that date.
31. On or about 6 September 2001, a total amount of $587,346,464 (including $586,983,026 withheld from the appellant) was paid by Optus to the Commissioner as dividend withholding tax.
32. On 28 September 2001, Optus bought back a further 999,985 shares (not held by the appellant) (the second buy-back). Those bought back shares were also cancelled.
33. Optus accounted for the consideration paid on the first buy-back and second buy-back by: (a) debiting the account labelled the "share capital" account by the percentage of shares bought back of the total number of Optus shares then on issue (namely, 43%); and (b) debiting the balance of the consideration to a new account labelled a "buy-back reserve" account. Those accounting transactions were consistent with the accounting treatment which had been agreed in the Implementation Agreement to facilitate the acquisition of Optus by SingTel.
34. The accounting adopted by Optus was also consistent with the basis upon which the appellant had obtained a private binding ruling(s) from the Commissioner on the subject of the buy-back of the appellant's shares.
2017 ATC 19687
It was also consistent with what had been represented to the Commissioner by both Optus and the appellant in their various applications for the rulings.
35. In accordance with the ruling requests, the ruling(s) and the terms of the Implementation Agreement, the total consideration paid by Optus for the buy-back of $6,225,502,631.68 was debited in part to the share capital account and in part to the share buy-back reserve account. $2,306,705,228.26 was debited to the share capital account. The balance of the consideration of $3,918,797,343.42 was debited to the share buy-back reserve account. There is no dispute between the parties that the manner in which Optus accounted for the share buy-back was acceptable under the relevant Australian Accounting Standards. Two experts gave evidence (by reference to the relevant Accounting Standards, Corporations Law requirements, Statements of Accounting Concepts, and Urgent Issues Group Consensus Views applicable to the buy-back transaction) that the accounting adopted by Optus in its general ledger was an acceptable method of recording the buy-back transaction.
36. On 30 September 2001, in respect of the first buy-back, Optus recorded the transaction in its accounts by making the following journal entries:
- (a) Debit to the Share Capital account of $2,306,705,228.16;
- (b) Debit to the Share Buy-Back Reserve account of $3,918,797,343.42;
- (c) Credit to the Debt due to Optus shareholders account of $6,225,502,631.68.
37. Also on 30 September 2001, in respect of the second buy-back, Optus recorded the transaction in its accounts by making the following journal entries:
- (a) Debit to the Share Capital account of $1,398,591.34;
- (b) Debit to the Share Buy-Back Reserve account of $2,486,249.76;
- (c) Credit to the Debt due to Optus shareholders account of $3,884,841.10.
38. On 30 October 2001, Optus issued SingTel with 1,643,098,304 shares for an amount of $6,229,387,472.78.
39. The accounting by Optus of the share buy-back transaction reflected the distinction between its capital and the equity of its shareholders. The statement of financial position subsequently published by Optus for the financial year ended 31 March 2002 recorded the amount of $9,248.5 million as "contributed equity". It also showed negative reserves of $3,931.8 million. The former was to be read in conjunction with note 18 and the latter was to be read in conjunction with note 19.
40. Before setting out the notes, it is appropriate to set out an extract of the Balance Sheet (described as Statement of Financial Position (as at 31 March 2002)):
Statement of Financial Position
2017 ATC 19688
Notes 18 and 19 relevantly stated:
2017 ATC 19689
The financial statements recorded the buy-back transaction from the point of view of Optus as a matter affecting the equity of the shareholders. The amount shown as "contributed equity" increased from $5,305.5 million to $9,248.5 million by reason of the share buy-back as explained in note 18, namely the acquisition of 1,643,098,304 shares (a decrease in contributed equity, but only as to part of the consideration being $2,308.1 million of the total cost of $6,239.9 million) and the issue to SingTel of the same number of shares at the price of $3.7912 per share (an increase in contributed equity). The buy-back transaction also affected the total reserves shown in note 19. It is not necessary to set out note 20. It merely elaborates on that component of equity referable to accumulated losses.
43. At this stage, it is appropriate to make some further observations concerning the accounts and the notes:
- (a) First, it is apparent from the Statement of Financial Position that "Equity" was divided into three components being:
- (i) Contributed equity;
- (ii) Reserves; and
- (iii) Retained profits (accumulated losses).
- (b) Secondly, the phrase "contributed equity" was a reference to share capital as note 18 explains. More significantly, "Reserves" were not treated as share capital.
- (c) Thirdly, it is apparent that movement in reserves or retained profits (accumulated losses) could affect the overall equity, but not "contributed equity" as such.
- (d) Fourthly, notes 18 and 19 demonstrate that the buy-back reserve was not a charge as such on "contributed equity". The only part of the buy-back consideration that was charged to "contributed equity" was $2,308 million. This is made plain in note 18 under the heading "Share buy back".
- (e) Fifthly, the accounts were signed off by the directors, with a clear audit report from PWC. There is no issue that the accounts reflected relevant standards and legislative requirements and that the recorded transactions reflected their commercial and economic reality, ie the debit to the buy-back reserve was not treated as affecting "contributed equity" and was not seen as a reduction of capital.
44. For the years ending 31 March 2002 to 2012, the share buy-back reserve account had a negative balance of $3,931,788,979.18. The movements in the share buy-back reserve account can be summarised as follows (we note that the credit entry of approximately $10.5 million in the year ending 31 March 2002 was apparently a costs adjustment):
|2001|| || || ||0|
|2003 - 2011|| || || ||3,931,788,979.18|
|2012|| || || ||3,931,788,979.18|
|2014|| || || ||0|
2017 ATC 19690
As we have said, on 5 December 2012, the High Court handed down its decision in Consolidated Media.
46. On 30 January 2013, the Commissioner issued to Optus a private ruling on the subject of a proposed capital reduction.
47. On 6 March 2013, Optus undertook a capital reduction in accordance with Part 2J.1 of the Corporations Act 2001 (Cth). As an integral part of this reduction of capital, the debit entry on the share buy-back reserve account was wiped out with a corresponding reduction of capital made. We would note that this is all consistent with the position accepted by all participants and reflecting the commercial and economic reality that the amount debited to the buy-back reserve account in September 2001 through to March 2013 was not treated as a reduction of capital as such, even though it may have reduced Optus' equity position (a different concept as we will later explain). Optus recorded the 2013 capital reduction in its accounts by making the following journal entries:
|Dr Share capital - Fully paid ordinary shares||$3,931,788,979.18|
|Cr Share Buy Back Reserve||$3,931,788.979.19|
48. On 9 May 2013, the appellant lodged an application with the Commissioner pursuant to s 18-70 of Schedule 1 to the TAA for a refund of incorrectly withheld tax in the amount of $452,452,013. On 26 May 2014, the Commissioner advised the appellant of his decision not to refund the withholding tax sought in the appellant's application. On 22 July 2014, the appellant lodged pursuant to the provisions of Part IVC of the TAA an objection in relation to the decision not to refund the withholding tax. On 24 October 2014, the Commissioner issued his notice of decision on objection in respect of the refund application, in which he indicated that the appellant's objection had been disallowed in full. The Commissioner's decision was then the subject of appeal before the primary judge.
49. In large measure, the above primary facts are not controversial as between the parties, but it has been necessary to set them out in order to appreciate our later observations. We would also note the following concerning evidence adduced before the primary judge.
50. As we have indicated, two experts gave evidence about the nature of the buy-back reserve account, but they disagreed about the substance of the share buy-back transaction and the nature of the buy-back reserve. A joint report was prepared by Mr Warren McGregor (the Commissioner's witness) and Mr Wayne Lonergan (the appellant's witness) in which they identified those matters on which they agreed and those on which they differed. They were each also called to give oral evidence and gave that evidence concurrently. Mr McGregor was a director of the financial reporting firm of Stevenson McGregor and a senior consultant with PWC. He was also an adjunct professor at the Department of Accounting and Finance at Monash University and had been involved in the independent setting of accounting standards domestically and internationally. Mr Lonergan was a founding director of Lonergan Edwards and Associates which was a specialist corporate valuation firm based in Sydney. He was previously a corporate finance partner at the firm of Coopers and Lybrand (which subsequently amalgamated with the firm PWC). He had been a member of a number of bodies including the Companies and Securities Advisory Committee and the Australian Accounting Standards Board.
51. The difference between the experts in how they saw the nature of the share buy-back reserve lay in the difference between them about how they saw the substance of the share buy-back transaction. Mr McGregor's opinion was that the substance of the share buy-back transaction involved "a return of capital and a return on capital" to the shareholders (including the appellant). The amount received by the shareholders from Optus was seen by Mr McGregor to have a component representing the return of the capital which had been
2017 ATC 19691
contributed to the company together with a component representing something in the nature of a reward or profit on that contribution (a return on capital). The former was seen to come from the share capital account and the latter from the buy-back reserve account. Contrastingly, Mr Lonergan took issue with Mr McGregor's understanding of the substance of the transaction as involving a return on, and a return of, investment. Mr Lonergan saw the substance of the buy-back transaction "as a share capital transaction in the context of a change of control transaction" whereby the shareholders were made an offer to purchase their shares in Optus for a specified bid price. An important basis of Mr Lonergan's opinion was that the offer to acquire shares was "linked" with the change of control and in particular with the mechanism by which "SingTel had to undertake to subscribe for share capital ([namely,] the same number of shares and the amount subscribed equating to the buy-back price excluding transaction costs) to fund the payment". Each of the experts was cross-examined. The primary judge considered that neither view of the substance of the transaction, or of the nature of the buy-back reserve, was shown to be without difficulty or wholly without merit. His Honour considered that the substance of the buy-back share transaction, and the mechanism by which it was accounted for (including the buy-back share reserve), could with some justification be seen as involving either a share capital transaction whereby the capital in Optus of the existing shareholders was substituted with that from SingTel, or as involving a takeover in which the existing shareholders were paid an amount through the buy-back which gave them both a return of their equity and some return on the equity.
52. The experts relied upon relevant accounting standards, although none of the standards dealt conclusively with the circumstances concerning the Optus share buy-back. The only authoritative pronouncement at the relevant time specifically referring to the accounting for, and reporting of, share buy-backs was the Urgent Issues Group Abstract 22 (UIG 22) dealing with "accounting for the buy-back of no par value shares" issued by the Australian Accounting Research Foundation on behalf of the Australian Society of Certified Practising Accountants and the Institute of Chartered Accountants in Australia. Guidance had previously been issued on accounting for share buy-backs in the context of shares with a par value, but a need was felt to clarify whether the requirements of that guidance applied in accounting for a buy-back of no par value shares. The issue considered in UIG 22 was how the buy-back of no par value shares was to be recognised in the general purpose financial report of a company. UIG 22 expressed consensus that shares included in the equity of an entity which were bought back required that the equity of the entity be reduced directly by the cost of acquisition of the shares bought back. The cost of acquisition was said to comprise the purchase consideration plus the costs incidental to the acquisition, and "a description of the nature and terms of the share buy-back and any other information material to an understanding of the transaction [had to] be disclosed in the financial year in which the buy-back occurs".
53. The discussion in UIG 22 which followed the statement of consensus by the Urgent Issues Group referred to the Statement of Accounting Concepts entitled "Definition and Recognition of the Elements of Financial Statements" (SAC 4). Paragraph 8 of UIG 22 referred to the definition in SAC 4 of distributions to owners as "future economic benefits distributed by the entity to all or part of its ownership group, either as a return on investment or as a return of investment". Mr Lonergan emphasised the sentence in UIG 22 following this reference to SAC 4 which noted that in "the case of a share buy-back, the parties (shareholders/owners) are receiving consideration for their shares" because they are equity participants in the entity. Mr Lonergan went on to note that the discussion in UIG 22 referring to the definition in SAC 4 of a distribution to owners as "being either a return on investment or a return of investment" did "not specifically state that a buy-back has to be split between these components". Paragraph 11 in UIG 22, however, noted the fact that the
2017 ATC 19692
details of buy-back arrangements may vary from time-to-time and that the consensus in UIG 22 did not prescribe which equity accounts were to be adjusted for the cost of the acquisition of the shares bought back.
54. Mr McGregor also referred to paragraph 11 of UIG 22 noting that it allowed for the "accounting for the buy-back to reflect the substance of the buy-back transaction". This was consistent with the requirements of Australian Accounting Standard AASB 1001 that accounting policies must be selected and applied in a manner which ensured that the resulting financial information satisfied the concepts of relevance and reliability. We will return to UIG 22 later.
55. Ultimately the experts agreed that the Optus buy-back transaction affected the equity in Optus but disagreed about whether the amount in the share buy-back reserve was part of the return of the investment or a return on the investment. Mr McGregor identified this difference in the joint report stating:
The difference of opinion relates to the nature of the buy-back amount, ie the "distribution to shareholders" and, as a corollary, the nature of the "buy-back reserve". As noted [...] above, the authoritative accounting literature characterises "distributions" as either returns of investment or returns on investment. Mr McGregor believes the buy-back amount comprised in part a return of investment and in part a return on investment. Optus' accounting for the transaction was consistent with that perspective. The buy-back amount was apportioned between a reduction in paid up capital, reflecting the proportion of the total number of shareholders participating in the buy-back, and the share buy-back reserve. [Emphasis added by Mr McGregor]
56. His Honour concluded that the competing expert opinions assisted the relevant factual inquiry that he was addressing, but did not resolve it (see at ). We will discuss his Honour's conclusions later, but in essence they are not inconsistent with the views expressed by Mr McGregor, which in our view his Honour was entitled to rely upon. In any event, his Honour's principal conclusion is supportable independently of the expert evidence. We would also note for completeness that there is no ground of appeal which challenges the reasonableness of relying upon Mr McGregor's opinion evidence if and to the extent that his Honour may have done so (see at  and  ("... to obtain a return of their capital and on their capital.")).
57. Section 159GZZZP of the ITAA (as it stood as at the date of the first buy-back) provided:
159GZZZP Part of off-market purchase price is a dividend
(1) For the purposes of this Act, but subject to subsection (1A), where a buy-back of a share by a company is an off-market purchase, the difference between:
- (a) the purchase price; and
- (b) the part (if any) of the purchase price in respect of the buy-back of the share which is debited against amounts standing to the credit of the share capital account of the company;
is taken to be a dividend paid by the company:
- (c) to the seller as a shareholder in the company; and
- (d) out of profits derived by the company; and
- (e) on the day the buy-back occurs.
(1A) If the dividend is included to any extent in the seller's assessable income of any year of income, it is not taken into account to that extent under section 118-20 of the Income Tax Assessment Act 1997.
(2) The remainder of the purchase price is taken not to be a dividend for the purposes of this Act.
58. It is not necessary to set out s 159GZZZJ to 159GZZZN and 159GZZZQ. It is also not in doubt that the first buy-back and the second buy-back each involved an off-market purchase(s).
2017 ATC 19693
Section 6 (at the relevant time) set out definitions of, inter alia, "dividend" and "share capital account" in the following terms:
- (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
but does not include:
- (d) moneys paid or credited by a company to a shareholder or any other property distributed by a company to shareholders (not being moneys or other property to which this paragraph, by reason of subsection (4), does not apply or moneys paid or credited, or property distributed for the redemption or cancelling of a redeemable preference share), where the amount of the moneys paid or credited, or the amount of the value of the property, is debited against an amount standing to the credit of the share capital account of the company; or
- (e) moneys paid or credited, or property distributed, by a company for the redemption or cancellation of a redeemable preference share if:
- (i) the company gives the holder of a share a notice when it redeems or cancels the share; and
- (ii) the notice specifies the amount paid-up on the share immediately before the cancellation or redemption; and
- (iii) the amount is debited to the company's share capital account;
except to the extent that the amount of those moneys or the value of that property, as the case may be, is greater than the amount specified in the notice as the amount paid-up on the share; or
- (f) a reversionary bonus on a policy of life-assurance.
share capital account has the meaning given by section 6D.
60. Section 6D (as it stood as at the date of the first buy-back) provided as follows:
6D Meaning of share capital account
(1) A share capital account is:
- (a) an account which the company keeps of its share capital; or
- (b) any other account (whether or not called a share capital account), created on or after 1 July 1998, where the first amount credited to the account was an amount of share capital.
(2) If the company has more than one account covered by subsection (1), the accounts are taken, for the purposes of this Act, to be a single account.
Note: Because the accounts are taken to be a single account (the combined share capital account) tainting any of the accounts has the effect of tainting the combined share capital account.
(3) However, an account that is tainted for the purposes of Division 7B of Part IIAA is not a share capital account for the purposes of this Act other than for the purposes of:
- (a) the definition of paid-up share capital in subsection 6(1); and
- (b) subsection 44(1B); and
- (c) section 46H; and
- (d) subsection 159GZZZQ(5); and
- (e) Division 7B of Part IIIAA; and
- (f) subsection 160ZA(7A).
61. A principal objective of s 6D in the context of s 159GZZZP is to ensure that a shareholder is not taken to receive a taxable dividend to the extent that what the shareholder receives in an off-market buy-back of shares is a return of the capital which had been contributed to the company for the issue of the shares. That objective is achieved by excluding from the taxable returns to shareholders the amount which had been standing as a credit in the company's account of its share capital. In that context, it is not necessary for the contributing shareholders to be the same as the shareholders receiving the payment.
2017 ATC 19694
In relation to the liability to withholding tax on any dividend and the payment thereof, ss 128B and 128C of the ITAA (as they stood at the relevant time) apply, although it is not necessary to set out these provisions. Relatedly, see also s 12-210 of Schedule 1 to the TAA dealing with the withholding and s 18-70 thereof (as it stood at the date of the refund claim) dealing with the refund of withheld amounts. It is not necessary to set out s 18-70 in full. Under s 18-70(1), an entity may apply in writing to the Commissioner for the refund of an amount if, inter alia, "the amount was so withheld, or paid to the Commissioner, in error". Under s 18-70(2), the Commissioner must refund the amount if, inter alia, "the Commissioner is satisfied that it would be fair and reasonable to refund the amount, having regard to" various matters. For present purposes, we do not need to trouble ourselves with s 18-70(2). The present appeal has concerned the threshold question of whether "the amount was so withheld, or paid to the Commissioner, in error". As is or will be apparent, we do not consider that there has been any "error". But if there had been, the operation of s 18-70(2) would then need to be remitted to the Commissioner for further consideration.
63. Finally, on the hearing of the appeal various submissions were made concerning the then provisions of the Corporations Act dealing with share capital reductions and share buy-backs under the then Part 2J.1 (ss 256A to 258F). We do not need to set these out, but we will refer to some of these provisions later. Likewise, reference was made to Part 2M.2 and in particular s 286 dealing with an obligation to keep financial records. We will return to these issues later.
PRIMARY JUDGE'S REASONS
64. His Honour accepted (at ) that the application of s 159GZZZP(1), coupled with the definition in s 6D, depended upon a factual inquiry to determine which part, if any, of the purchase price for the appellant's shares bought back was debited against amounts standing to the credit of the share capital account of Optus at the relevant time. That factual inquiry depended upon whether the buy-back reserve was an account which Optus kept at the relevant time of its share capital within the meaning of s 6D(1)(a).
65. First, his Honour emphasised the circumstances of the case before him. As his Honour described it (at ), the Optus buy-back was part of a takeover offer whereby the bidder was funding the disposal of shares where shareholders had elected for their shares to be bought back by Optus as an option available to them. Optus was to be put in funds by SingTel to enable Optus to fund the buy-back. As his Honour perceived it, the issue for Optus was how to account for the difference between the amount it would receive to fund the payment to its shareholders and the amount it had in its share capital account that was referable to capital contributed by those shareholders. The approach taken was to create a buyback reserve to account for that difference. His Honour said that the character of the buy-back reserve account at the time of the debit reflected a transaction which was part of or facilitated a funding mechanism for the Optus shareholders to obtain a return of their capital and a return on their capital. As his Honour saw it, the shareholders were selling their shares in Optus to enable SingTel to acquire them at the amount offered. He considered that the role played by the buyback reserve account was to facilitate the payment of the consideration to the shareholders to the extent that the consideration exceeded the amount standing in the accounts of Optus as capital contributed by shareholders.
66. His Honour went on to discuss the relevance of the option given by cl 5.1 of the Implementation Agreement. We will return to this later.
67. Secondly, his Honour at various points in his reasons distinguished the nature and type of account dealt with in Consolidated Media from the circumstances of the present case.
68. As his Honour explained, correctly in our view, Consolidated Media was dealing with a different context.
2017 ATC 19695
Like the present case, in a general sense Consolidated Media was concerned with whether an account labelled a "share buyback reserve account" was an account which a company had kept of its share capital within the definition of s 6D for the purposes of s 159GZZZP. But the context was quite different. Publishing and Broadcasting Limited (PBL), the relevant taxpayer, received consideration for the sale of its shares to Crown Limited (Crown) in an off-market buy-back in the year ending 30 June 2002. PBL owned all of the nearly 3 billion issued and paid up ordinary shares in Crown for the whole of the year ending 30 June 2002. On 28 June 2002, PBL and Crown agreed for Crown to buy back 840,336,000 of its issued shares in order for Crown to return the capital to PBL which was in excess of Crown's needs. The agreement between Crown and PBL provided for PBL to sell 840,336,000 shares to Crown by 1 August 2002 for a purchase price of $1 billion. Crown had created accounts in its general ledger before 28 June 2002, including those labelled a "shareholders' equity account" and an "inter-company loan (payable) account". On 28 June 2002, Crown created a new account in its general ledger labelled a "share buy-back reserve account". On that date, a debit of $1 billion was made to the share buy-back reserve account and a credit of $1 billion was made to an account labelled "inter-company receivables account", although the latter was subsequently reversed by correcting journal entries processed on 25 July 2002, with effect from 30 June 2002, which resulted in a credit being recorded in the inter-company loan (payable) account. No entry was made in the shareholders' equity account in relation to the buy-back, although Crown's financial report for the year ending 30 June 2002 showed a reduction of $1 billion in the item for "contributed equity" during the year. Note 16 to the accounts against the item "contributed equity" disclosed a reduction in the number of shares from 2,938,587,410 to 2,098,251,410 shares. The trial judge in Consolidated Media found that the debit recorded in the share buy-back reserve account was to an account kept by Crown of its share capital for the purposes of ss 6D and 159GZZZP. The High Court upheld the view that both the shareholders' equity account and the share buyback reserve account were share capital accounts that were to be taken as a single share capital account against which the purchase price was debited.
70. It was in that context that the High Court made its observations at  to  to which we will return later.
71. The primary judge in the present case distinguished Consolidated Media. His Honour said (at ) that the fact that the buy-back reserve account in that case was held to be a share capital account did not carry with it the conclusion that all accounts with the label "buy-back reserve" account are share capital accounts within the meaning of s 6D and for the purposes of s 159GZZZP. Clearly that is correct.
72. His Honour then went on to contrast the type of buy-back addressed in Consolidated Media with the facts of the present case. Consolidated Media involved a buy-back of shares by Crown from its sole shareholder for the purpose of returning to that shareholder capital that was in excess of the needs of Crown. It was a return by a company to its shareholder of capital that was in the company before the buy-back and which, upon its return, reduced the share capital in the company. Contrastingly, so his Honour held, in the present case the buy-back of the appellant's shares was different in substance and form from the transaction in Consolidated Media. His Honour said that the buy-back in the case of Optus did not return capital to its shareholders in excess of the needs of Optus but could, in an economic sense, be seen as a substitution of the capital which had previously been contributed by its previous shareholder with that funded by its subsequent shareholder. The buy-back of the appellant's shares in Optus occurred in the context of the appellant, as the majority shareholder in Optus, disposing of its shareholding in Optus as part of a takeover by the SingTel group. The agreement which emerged for the acquisition by SingTel of the appellant's shares in Optus included a proposal for all of the then existing Optus shareholders to be able to elect to have their Optus shares bought back in an offmarket buy-back. The proposal contemplated that Optus might be called upon to pay for the shares bought back and required that Optus be put
2017 ATC 19696
in funds by SingTel to pay for the shares to be bought back. As his Honour perceived it, Optus, unlike the company in Consolidated Media, was neither reducing nor seeking to reduce its capital by the proposed buy-back, but was seeking to facilitate the substitution of its shareholders. There are some aspects of his Honour's characterisation (and purportedly relevant distinguishing features) that are problematic, but we do not need to dwell on this for the moment.
73. His Honour later said (see at ) that the Optus accounts did not reveal a situation, unlike Consolidated Media, of a financial position in relation to share capital that could only be understood by subtracting the total consideration for the buy-back as a reduction of the credit balance in Optus' share capital account. We agree with that statement at least. We will return to Consolidated Media later.
74. Thirdly, his Honour pointed out that neither the appellant nor Optus had at the time of the relevant transactions treated the buy-back reserve account as a "share capital account" within the meaning of s 6D for the purposes of s 159GZZZP. The application for a private ruling from the Commissioner and that ruling in June 2001 in fact treated the buy-back reserve account as not a "share capital account".
75. Fourthly, his Honour also pointed out that the provisions of the Implementation Agreement made a distinction, when dealing with the accounting for the consideration of the buy-back, by:
- (a) debiting the account labelled the "share capital" account by the percentage of shares bought back of the total number of Optus shares then on issue; and
- (b) debiting the balance of the consideration to a new account labelled a "buy-back reserve" account.
76. This was also consistent with how Optus accounted for the consideration in its own books by inter alia the two debit entries. It was also not in dispute that the manner in which Optus accounted for the share buy-back was acceptable under the applicable Australian Accounting Standards (see at ).
77. Generally, his Honour emphasised the significance of the accounting treatment of the consideration for the buy-back (see at ). Only part was treated as a debit against the share capital account. The other part was debited not against the share capital account but rather the buy-back reserve account.
78. Fifthly, his Honour distinguished between the concept of equity and the concept of capital contributed to a company (see at ). His Honour was correct to do so. Indeed, the appellant's failure to do so highlights one of the major misconceptions in its argument before us. His Honour held that the accounting by Optus of the share buy-back transaction reflected the distinction between its capital and its equity. So, the relevant balance of the consideration for the buy-back was not a return of capital which had been contributed to Optus, but was reflected in the accounts as "a matter of equity" and was to constitute a negative reserve (at  and ). His Honour said (at ) that the buy-back reserve account had an impact upon the equity of shareholders, but it did not record the financial position of Optus "in relation to its share capital". We agree.
79. As his Honour put it (at ), the buy-back reserve account was not a record of a transaction reducing the share capital of the company. The buy-back reserve account was needed to account for the payment of part of the consideration paid for the shares bought back from money lent to Optus by SingTel for that purpose. His Honour said that the key requirement of the appropriate approach to account for the buy-back was that the equity of Optus was reduced by the cost of acquisition of the shares bought back. Optus had only two accounts which could have been used to reflect the reduction in shareholders' equity, namely, the share capital account and the retained profits account. The buy-back reserve account was created as a new equity account to carry the negative reserve occasioned by payment of the difference between the total consideration and the amount standing in the credit of the share capital account referable to the
2017 ATC 19697
capital contributed by shareholders whose shares were bought back. Accordingly, the buy-back transaction had an impact upon the equity in Optus because of the amount of the consideration to be paid in the buy-back. But importantly, the buy-back reserve account did not record a transaction reducing (or increasing) the contributed capital of the shareholders to Optus at the time of the debits. Again, in our view this analysis is correct.
80. Sixthly, his Honour said (at ) that every share buy-back involves a reduction of capital to the extent that shares bought back are cancelled (see s 257H(3) of the Corporations Act), but the consideration payable for the shares bought back and cancelled need not be from funds previously contributed to the company for the acquisition of those shares. In the present case, his Honour said that the consideration debited to the share buy-back reserve account came from borrowings pursuant to an agreement for the funding of a takeover in which the buyback was a component. The SingTel bidder subsequently acquired shares and the purchase price for the subsequent acquisition was credited to the account labelled "share capital". On 30 October 2001, Optus issued 1,643,098,304 shares to SingTel for an amount of $6,229,387,472.78 and on 31 October 2001, a credit of that amount was made to account 310100 being the account labelled "share capital". A corresponding debit of that amount was made to account numbered 295400 being the account labelled "subordinated debt".
81. Seventhly, his Honour said (at ) that the buy-back in the present case was governed by, and took place under, Division 2 of Part 2J.1 of the Corporations Act. A reduction of share capital by Optus buying back its shares was authorised by s 258E(1)(b) "if the shares [were] paid for out of share capital", but there was no restriction on the source of funds that Optus could use to effect its buy-back. Section 257A(b) permitted Optus to buy back its own shares provided that it followed the procedures laid down in Division 2 of Part 2J.1 of the Corporations Act. The buy-back of Optus' shares fell within the provisions governing the selective buy-back of shares and required, amongst other things, the lodging with the Australian Securities and Investments Commission of the offer documents: see s 257E. The accounting entries in Schedule B to the Implementation Agreement expressly provided for a pro rata reduction in the share capital account to the number of shares bought back. His Honour held that it was that reduction of share capital which was authorised by s 258E as a reduction in share capital, namely, the proportion of the consideration to be debited against the share capital account.
82. Eighthly, his Honour rejected the argument that as Optus had no positive equity reserves and no retained profits, the financial position of Optus in relation to its share capital could only be understood by subtracting the debit balance in its buy-back reserve account from the credit balance in the share capital account. His Honour said (at ) that the fact that an outgoing has an impact upon equity does not stamp the outgoing as a reduction in capital. And Optus was able to make the buy-back regardless of whether it had available profits, an asset revaluation reserve or any positive equity account. We would interpolate here that it was able to do so through borrowed funds.
83. Ninthly, his Honour (at ) rejected the argument that the subscription for further share capital by SingTel on 30 October 2001 in an amount equivalent to the total buy-back consideration changed the characterisation. His Honour accepted that SingTel contributed capital to Optus within several months after the buy-back, but held that the subsequent contribution of capital to Optus told against the view that the funding recorded in the buy-back reserve account had previously been contributed as capital. The later subscription of shares by SingTel was a subsequent transaction and was recorded by a credit to the share capital account and a debit to the subordinated debt account. As his Honour analysed the matter, the journal entries thus confirmed the source of the previous payment to the appellant as being from the money borrowed by Optus for the payment and not from amounts which had been contributed as capital. Again, in our view this analysis is correct.
2017 ATC 19698
Tenthly, his Honour noted that on 30 January 2013, the Commissioner issued a further private ruling in the context of a proposed reduction of capital which proceeded on the basis that the buy-back reserve account was a share capital account (see at  and ). It may be noted that this ruling was after the decision in Consolidated Media, which had been handed down on 5 December 2012. His Honour said that he did not need to consider the correctness of the 2013 private ruling. But in any event he held that the history of the transactions on the buy-back reserve account between September 2001 and March 2013, when the debit balance of the account was in substance set off against the credit balance of the share capital account, was consistent with the treatment of the buy-back reserve account as a negative reserve, rather than as a share capital account.
85. Finally, his Honour rejected the appellant's argument that its position was consistent with the legislative purpose of s 159GZZZP as being (at ) only "to prevent profits from being used to pay for share buy-backs and distributed to shareholders as a return of capital rather than as a taxable dividend by treating amounts other than share capital returned to shareholders as a dividend". As his Honour said:
The text and policy of s 159GZZZP(1) does not require an inquiry into whether the payment is from the company's distributable profit but, rather, whether it is from what the company had received as contributions of capital from its shareholders.
GROUNDS OF APPEAL
86. Before discussing the grounds of appeal, it is appropriate to make the following general observations.
87. First, the issue before us is whether the buy-back reserve account was a "share capital account" within the meaning of s 6D(1)(a) as it then stood. The meaning of "share capital account" was recently illuminated and expounded in Consolidated Media at  to . The present appeal involves no more than the application of that meaning (as so expounded) to the transactions and accounts before us.
88. Secondly, Consolidated Media stated that whether an account falls within that meaning does not necessarily turn on how the account is described. Moreover, it does not necessarily turn on any amount having been credited to the account (at ). So much is accepted by the parties before us. But this is not to say that these matters are irrelevant to the commercial context or significance of the relevant transactions or the characterisation of the account(s) that recorded or reflected them, which context and significance need to be considered in order to answer the ultimate question of the characterisation of the particular account in question.
89. Thirdly, Consolidated Media stated at :
In a context in which the relevant record-keeping obligation of a company under Pt 2M.2 of Ch 2M of the Corporations Law was to keep written financial records that correctly recorded and explained its transactions and financial position and performance and that would enable true and fair financial statements to be prepared and audited, it was sufficient for an account to answer the description in s 6D(1)(a) of "an account which the company keeps of its share capital" (emphasis added) that the account, whether debited or credited with one or more amounts, be either a record of a transaction into which the company had entered in relation to its share capital, or a record of the financial position of the company in relation to its share capital.
90. As explained, a "share capital account" could be an account, whether debited or credited with one or more amounts, that was "a record of a transaction into which the company had entered in relation to its share capital". Alternatively or as well, it could be an account, whether debited or credited with one or more amounts, that was "a record of the financial position of the company in relation to its share capital".
91. Fourthly, the appellant in some respects in its submissions has sought to parse the language of these descriptions. Moreover, it has understandably sought to bring the buy-back reserve account under either or both descriptions. But care needs to be taken not to
2017 ATC 19699
decontextualise these descriptions from the factual circumstances that the High Court was addressing, particularly as those descriptions are not the express statutory language. Further, although each description uses the phrase "in relation to", which words in other contexts can be of extensive ambit, in the present context they resonate more with "concerning". We, of course, have applied these descriptions but recognise the need for such contextualisation.
92. Fifthly, we would note at this point that there are substantial differences between Consolidated Media and the present case including the following. In Consolidated Media, it was apparent that the entirety of the debit to the buy-back reserve was intended to reflect a reduction of capital, commercially, economically and legally. That is not the present case. Unlike Consolidated Media, in the present context there was a separate debit on the share capital account for that purpose. In the present case the debit on the buy-back reserve account was not intended to and did not reflect such a reduction. In Consolidated Media, the debit on the buy-back reserve was to be seen and treated as a charge to "Contributed Equity" (see at  and ). But as we have set out earlier, in the present case, the debit on the buy-back reserve account was not seen as such a charge. It was seen as a charge on total equity. It was only in 2013 that the debit was in substance charged to "contributed equity" or the share capital account effectively by the setting off. Such distinguishing features in and of themselves are sufficient to distinguish Consolidated Media.
93. Generally, whatever criticisms may be made of aspects of the primary judge's characterisation of the transactions or the accounts which recorded them or part of his analysis of Consolidated Media, those criticisms do not undermine the essential distinctions set out in the preceding paragraph.
94. Sixthly, before proceeding further it is necessary to be clear about what is meant by "capital" or "shareholders' capital". In the present context, we are concerned with share capital rather than other commercial contexts such as working capital. As explained by Gower and Davies' Principles of Modern Company Law (9th edition by Paul Davies and Sarah Worthington) at [11-1], in the present context, "capital" connotes the value of the assets contributed to the company by those who subscribe for its shares; we are not, of course, here dealing with the market value of shares. We have emphasised the "value" of what is contributed, as it is this concept rather than the assets themselves (say subscription money) that is being referred to; it may also be appropriate to describe this in terms of the "amount of the share(s)" so contributed (see for example,
Archibald Howie Pty Ltd v Commissioner of Stamp Duties (NSW) (1948) 77 CLR 143 at 153 per Dixon J). The assets will change their form, indeed may be disposed of or lost. But this is not a reduction of capital as such. Likewise, the company may create or acquire new or enhanced assets through, for example, trading profitably, borrowing money from a third party or asset revaluation. But this is not share capital as such in that form. Moreover, a share capital account is not as such an asset account.
95. The concept of "capital" as used in the present context is also to be distinguished from "equity". The concept of "equity" usually describes a surplus of assets over liabilities. It is not the same as capital. So, in the present case, for Optus in the year ending 31 March 2002, total equity equalled net assets. Total equity itself can be divided into components. So, for Optus for the year in question, it was divided into "contributed equity", "reserves" and "retained profits (accumulated losses)". But the only component of total equity referable to "capital" or "shareholders' capital" was "contributed equity". And, as we have indicated earlier, the debit on the buy-back reserve account was not in form or in substance a charge on contributed equity. It was never seen as such commercially or economically by any of the (highly sophisticated) relevant participants (the complete opposite to the scenario in Consolidated Media).
96. Seventhly, it is appropriate to make several other points concerning reductions of capital. Subject to satisfying legislative requirements and a company's constitution, such a reduction can occur out of any assets of a company or any source and may involve a distribution in specie (see for example, cl 28.1 of Optus' constitution at the relevant time and generally Archibald Howie Pty Ltd v
2017 ATC 19700
Commissioner of Stamp Duties (NSW) at 152 per Dixon J). But a reduction of capital does not arise simply from or by negative equity or a wasting or deficiency in assets. The amount or value of capital contributed does not itself change as such, although the money originally provided may have been transformed, consumed or lost. Moreover, that amount or value can also be seen as a standard to measure the right to any return of capital which a company may make either as a going concern or in a winding up (as Dixon J explains), whatever may have happened to the money originally contributed.
97. Further on this aspect, it may be accepted that a buy-back of shares and their cancellation may constitute a reduction of capital. But the question is what the monetary quantification of that reduction is taken to be. It is erroneous to assert that it must be the total consideration paid for the buy-back. After all, part of the consideration may be referable to or reflective of realisable profits or other reserves/accounts other than share capital.
98. Further and relatedly, it is appropriate to make some brief observations concerning Chapter 2J of the Corporations Act. Division 2 of Part 2J.1 (ss 257A to 257J) deals with share buy-backs. It was not in dispute before us that the buy-back in the present case was a selective off-market buy-back and that an exemption was given by ASIC under s 257D(4) to the otherwise requirement for shareholder approval under either option set out in s 257D(1). Accordingly, ss 257A and 257B were satisfied. Moreover, cancellation of the shares bought back took place in accordance with s 257H(3). To what extent did the Corporations Act treat this as being a reduction of capital? The answer to that question is provided by s 258E, which at the time relevantly provided the following:
Other share cancellations
- (1) Any reduction in share capital involved in:
- (a) the redemption of redeemable preference shares out of the proceeds of a new issue of shares made for the purpose of the redemption (see section 254K); or
- (b) a company's buying-back of its own shares under sections 257A to 257J if the shares are paid for out of share capital
is authorised by this section.
- (2) A company may cancel shares returned to it under section 651C, 724(2), 737 or 738 and any reduction in the company's share capital that is involved is authorised by this subsection.
- (3) Any reduction in a company's share capital because of an order under section 1325A is authorised by this subsection.
99. It can be appreciated from s 258E(1)(b) that in the buy-back context, it was only taken to be a reduction of share capital (and accordingly authorised) "if the shares are paid for out of share capital". In other words, if the shares are paid for out of something else (ie retained profits or some other reserve), it may not be a reduction of capital at all (and accordingly requires no authorisation). Section 258E does not state or necessarily imply that on a buy-back there is necessarily a reduction of capital and that the buy-back consideration must all be "paid for out of share capital". But if some of it is paid for out of share capital, and there is a reduction to that extent, then that reduction is taken to be authorised (s 256B does not then operate). What is meant by "paid for out of share capital"? We take that to refer to a debiting or charging of share capital of the type identified in Optus' accounts. The concept "paid for" is not literally referring to payment as such, as a share capital account is not an asset account.
100. We emphasise the difference at this point because of the conceptual confusion in some of the appellant's submissions. The appellant submitted that because there was no other positive equity account, then the amount debited to the buy-back reserve account must have been paid out of the share capital account and accordingly there had been a reduction of capital also constituted by that debit entry. This is wrong at a number of levels. In reality, the amount debited to the reserve was paid
2017 ATC 19701
for by the borrowings from SingTel. Further, it was not "paid for out of share capital" in the sense of being charged thereto, which is the only relevant context given that the share capital account is not an asset account.
101. Finally, we should make some observations concerning UIG 22 issued in June 1999 after the concept of par value had been abolished. The consensus (see at ) was that where shares included in the equity of an entity were bought back, the equity of an entity was required to be directly reduced by the cost of acquisition (total consideration in the present case) of the shares bought back. This is reinforced at . But, importantly for present purposes, what is emphasised at  is that:
This Consensus does not prescribe which equity accounts are to be adjusted for the cost of the acquisition of the shares bought back. It allows the accounting for the buy-back to reflect the substance of the buy-back transaction.
102. This reinforces the point that we have made earlier that although the buy-back consideration had to be a charge to equity, it did not all have to be a charge to share capital. Optus' accounts reflect the substance of what occurred. Part of the consideration for the buy-back was a charge to contributed equity (share capital). The balance was a charge to the buy-back reserve.
103. Having made these general observations on some matters of principle, it is now convenient to address the grounds of appeal under the following subject headings as the appellant has done in its submissions. We have notionally allocated the numbered grounds of appeal to these subject areas, but that exercise is to some extent artificial. Moreover, there is considerable overlap in the grounds of appeal. Accordingly, rather than separately enumerate and proceed in the order of each ground of appeal, it is more convenient to deal with the appellant's criticisms by reference to subject areas.
(a) Mischaracterisation of the reserve (grounds 3 and 4)
104. It is said that the primary judge (at ,  and ) mischaracterised the buy-back reserve by in effect holding that it was in substance a funding mechanism for the buy-back and that it facilitated the payment of the buy-back consideration.
105. Rather, so the appellant contends, the reserve was newly created and the entries made to record the buy-back were debits. It is said that contrary to the primary judge's reasons at  and , there were no amounts "standing in credit in that account" or "standing in the account to pay part of the consideration to shareholders". It is said that contrary to his Honour's reasons at , there were no "funds in the share buy-back reserve account" and that it played no substantive role as a funding mechanism.
106. We reject these criticisms of his Honour's characterisation.
107. First, his Honour appreciated that there was no amount "standing in credit" to the buy-back reserve. His Honour appreciated that it had a negative balance at all relevant times (see at , , ,  and ). We do not consider that any looseness of language used by his Honour in  should be taken as any indication that his Honour misconceived the true characterisation of the reserve.
108. Secondly, his Honour appreciated that the buy-back reserve was an equity account as distinct from an asset account (see at , ,  and ).
109. Thirdly, when his Honour used the language of "funding mechanism" and said that the "role played by the buy-back reserve account was to facilitate the payment of the consideration..." (at ), his observations should not be decontextualised. His Honour was aware that the assets used to fund the buy-back were moneys borrowed from SingTel (or a related entity). The reserve created and the debit
2017 ATC 19702
entry were part of the necessary book-keeping or accounting transactions required. In that sense it could properly be said, in a general sense, to be a part of the funding mechanism and in that sense to facilitate what was ultimately occurring.
110. It is also said that the primary judge (at ) mischaracterised the transaction by finding that the appellant sold its shares to enable SingTel to acquire them. It is said that the shares bought back were cancelled and therefore not acquired by SingTel. But we reject this characterisation of his Honour's reasons. His Honour understood that there was no direct sale; see for example at  and  which indicate that his Honour clearly appreciated that the shares were bought back by Optus and cancelled.
111. Finally on this aspect, even if (contrary to our assessment) his Honour mischaracterised some aspects of the buy-back reserve, that does not avail the appellant. Even on a correct commercial characterisation of that reserve, the appellant still fails. The reserve was not a "share capital account" for the purposes of s 6D(1)(a) and s 159GZZZP for the reasons that we have elaborated on.
(b) Meaning of "share capital account" (grounds 1, 2, 5 to 15)
112. The appellant contends that an "account" is a record of debits and credits relating to a designated topic. For present purposes, we accept that description. We also accept that a record will answer the statutory description of a share capital account if it is either: (a) a record of a transaction into which the company had entered in relation to its share capital; or (b) a record of the financial position of the company in relation to its share capital. Moreover, we accept that the mere labelling of a reserve may not necessarily answer the statutory description of whether one has a share capital account. Relatedly, we accept that an account will not be precluded from being a share capital account merely because it is not labelled a share capital account or is not an account to which the paid up capital of the company was originally credited.
113. The appellant contends that there is no principle that a share buy-back must involve a return to shareholders of only an amount of share capital which bears the same proportion to the total share capital of the company as the number of shares bought back bears to the total number of shares on issue. It is said that with the abolition of the concepts of par value and nominal share capital, and the possibility of selective share buy-backs, shareholders whose shares are bought back may receive an amount, debited to amounts standing to the credit of share capital, which is disproportionate to the number of shares held in the company. We do not dispute any of these contentions in the generality with which they have been expressed, but they do not take the matter far in the present case for the reasons that we have explained and will explain further.
114. Before proceeding further, it is appropriate that we state our principal views in summary, which generally accord with the primary judge's analysis.
115. First, the buy-back reserve was an account of equity, not a share capital account.
116. Secondly, the "contributed equity" or share capital account did not require for its understanding any reference to the buy-back reserve (or the debiting thereof) to be made.
117. Thirdly, the only return of capital as such was the proportionate return of capital being the proportion of shares bought back multiplied by the share capital account balance of Optus. This was the amount debited to the share capital account, but not the amount debited to the buy-back reserve. If anything, that latter additional amount was a return on capital rather than a return of capital.
118. Fourthly, the rulings sought and obtained from the Commissioner, the Implementation Agreement, and the financial accounts and statements of Optus for the year ending 31 March 2002 and thereafter, which we assume (and the experts so agreed) complied with s 286(1) of the Corporations Act, all reflect the commercial, economic and legal reality that the debit to the buy-back reserve
2017 ATC 19703
was not and was not seen to be a reduction or a return of capital. Indeed, the reduction of capital that occurred in 2013 reflected and assumed that prior reality.
119. Fifthly, even though the buy-back reserve obviously concerned shares, this did not make the reserve a share capital account. The concept of "capital" is a reference to the value or amount that shareholders had originally contributed.
120. Sixthly, Consolidated Media is distinguishable. The buy-back reserve in that case was both a record of a transaction reducing share capital and a record of Crown's financial position in relation to its share capital. Contrastingly, in the present case the debit entry to the buy-back reserve did not record a transaction reducing share capital. Moreover, the reserve and the debit entry recorded Optus' financial position in relation to part of its equity, but not share capital or as described in the accounts, "contributed equity". The 31 March 2002 Optus' accounts reflected that reality.
121. The relevant parts of Optus' accounts are set out earlier at  and , including note 18 concerning "Contributed Equity" and note 19 concerning "Reserves". Note 18 recorded a reduction in contributed equity by $2,308.1 million and the latter note recorded a debit to reserves of $3,931.8 million. Note 18 also explained:
During the financial year, the company bought back 1,643,098,304 shares ... This represented 51.7% of the company's issued capital. The average cost per share, after including costs incidental to the acquisition of $10.5 million, was $3.797638. Of total costs of $6,239.9 million, $2,308.1 million was charged to share capital and $3,931.8 million was charged to the buy back reserve.
122. The accounts distinguished between equity and share capital. Contrastingly, in Consolidated Media at , Crown's financial statements "showed a reduction in 'Contributed Equity' of $1 billion from an opening figure of just over $2.4 billion ... to a closing figure of just over $1.4 billion". Crown's position could not be understood without subtracting the $1 billion total consideration from Crown's contributed equity of $2.4 billion. That is not the present case.
Record of a transaction in relation to Optus' share capital (grounds 5, 6 and 15)
123. The appellant asserted that once it is accepted, as it is said the primary judge did, that: (a) every share buy-back involves a reduction of capital to the extent that the shares bought back are cancelled (at ); (b) the Implementation Agreement required that part of the consideration for the buy-back be debited to the share capital account and part to the buy-back reserve (at ); and (c) the shares bought back were all cancelled (at ), it follows, so the appellant said, that the debit to the buy-back reserve was a record of a transaction in relation to the company's share capital. It is said that the primary judge erred in concluding otherwise. But with respect, this argument involves a non sequitur. Moreover, as the Commissioner correctly contended, if such a submission was accepted this would lead to the "remarkable" conclusion that all debits to an equity account in a buy-back would necessarily be debits to amounts standing to the credit of a share capital account. The proposition would be even more bizarre if the debits were to an accumulated profits/retained earnings account; counterintuitively, s 159GZZZP would not then operate to treat the amount as a dividend.
124. It is said that the primary judge's reasons for distinguishing Consolidated Media, and concluding that the buy-back reserve was not a record of a transaction reducing Optus' share capital "are difficult to discern" and are "clearly affected by the factual errors identified" earlier. But as we have said already, a fair reading of the primary judge's reasons does not disclose factual errors. Further, we do not consider his Honour's reasons for distinguishing Consolidated Media to be opaque or in any way difficult to discern. But in any event this is no answer to the principal distinguishing features that we have identified for ourselves in these reasons.
2017 ATC 19704
It is said that his Honour's observation that the transaction in Consolidated Media involved a return of capital to the shareholder that was in excess of the needs of the company, and that the substance of the buy-back in the present case involved a company that was "neither reducing nor seeking to reduce its capital by the proposed buy-back, but was seeking to facilitate the substitution of its shareholders" (at ), even if correct, was irrelevant to the application of s 159GZZZP. Generally, it is said that there are three flaws in the primary judge's reasoning.
126. First, it is said that there is nothing in Consolidated Media to suggest that the reasoning was limited to cases involving a return of capital to a shareholder "that was in excess of the needs" of the company. There might be a variety of reasons why share capital would be used to buy back shares. It is said that distinguishing the reason for the implementation of the buy-back is not a basis for distinguishing Consolidated Media. It is said that the reasoning in Consolidated Media makes no reference to this factual aspect of the case being an important, or even relevant, consideration. It is said that the question in the present case is whether analysis of the substance of the arrangement discloses that, in this case, the debit to the buy-back reserve represented share capital used to effect the buy-back.
127. Secondly and relatedly, it is said that whether a company has capital surplus to its needs is irrelevant to a determination as to the character of an amount to be returned to shareholders; cf
Re Westburgh Sugar Refineries Ltd  AC 625 at 636 where, so the appellant contended, such a consideration was considered by Lord Radcliffe to be irrelevant to whether the Court should approve a return of capital. Similarly, it is said that the issue is irrelevant to whether a company can buy back its own shares under relevant provisions of the Corporations Act.
128. As to these two points, we accept that his Honour did distinguish the different buy-backs as between Consolidated Media on the one hand, and the present case on the other hand. But his Honour was simply making the obvious point that in Consolidated Media, all of the consideration for the buy-back was treated as a reduction of capital, whereas in the present case that was not reflected in the commercial arrangements or financial and accounting records concerning the amount debited to the buy-back reserve. His Honour's observations relating to capital being in excess of a company's needs was simply part of the context to explain why in Consolidated Media all of the consideration for the buy-back was treated as a reduction of capital. His Honour was not saying that the legal question of whether one had a "share capital account" within the meaning of s 6D rose or fell on the question of whether capital was in excess of a company's needs. His Honour properly focussed on the nature and character of the buy-back reserve, the need for the debit entry and the broader context, including the creation, recording and accounting of and for the subordinated debt. Finally and accordingly on this aspect, we consider Re Westburgh Sugar Refineries Ltd to be of little, if any, assistance on the issues with which we need to deal. The issue identified by Lord Reid at 631 has little to do with the issue that we are addressing, it being accepted in that case that on any view there was a reduction of capital, albeit that the assets transferred were valued at more than the share capital; nevertheless the reduction was sanctioned. It is not in dispute that a reduction of capital can be effected in many and varying ways subject to complying with a company's constitution and legislative requirements.
129. Thirdly, it is said that the fact that as a result of the buy-back arrangement Optus neither reduced nor increased its share capital supports, rather than detracts from, the conclusion that the whole of the purchase price for the buy-back was applied to reduce share capital. It is said that the only way in which the share capital of the company could remain unchanged at the end of the arrangement was if the whole of the purchase price for the buy-back was debited against share capital. It is said that this is because under the Implementation Agreement, the placement was for an amount equal to the buy-back purchase price. Indeed, it is said that the buy-back reserve was set up to account for the buy-back only as no other entries were made to this account until it was set-off against the share capital account in 2013.
2017 ATC 19705
In our view this contention misunderstands his Honour's reasoning at . His Honour did not say that as a result of the entire transaction, including the later subscription for shares, Optus' share capital account remained unchanged. In fact it was altered. The later subscription was in its entirety recorded as an accretion to share capital, whereas the buy-back was recorded only partly as a depletion of that account. In saying that the borrowing was not intended to affect the share capital position, his Honour was simply making the point that the borrowing to fund the buy-back was not a transaction that affected Optus' capital position. And that is for the reason that a borrowing is reflected on the balance sheet as giving rise both to an asset (cash) and a liability (the borrowing). It does not of itself affect any account of share capital as such. No substantial criticism can be made of his Honour's observations at . The primary judge was also correct to observe that the buy-back affected both share capital and equity other than share capital (see at  and ).
130. Generally, we disagree with the appellant's contention that the primary judge's findings about the substance of the arrangement lead inexorably to the conclusion that the amount debited to the buy-back reserve was, in fact, a debit to Optus' share capital account. We also do not agree that the primary judge erred by directing attention to the supposed intention of those implementing the arrangement as indicated by labels used by the parties for the accounting entries in Schedule B to the Implementation Agreement. This was part of the relevant background. We of course accept that the understanding of the parties and the labels used by them to reflect those understandings or planning objectives are not determinative.
Record of financial position of Optus in relation to its share capital (grounds 7 to 14)
131. The second of the tests identified in Consolidated Media directs attention to whether the debit to the buy-back reserve was a record of the financial position of Optus in relation to its share capital. In Consolidated Media, it was concluded that the information recorded in Crown's financial reports relating to the derivation of the figure for contributed equity illustrated that the financial position in relation to its share capital could only be understood by taking into account the debit balance in the share buy-back register. The appellant contends that the same conclusion is demonstrated in relation to Optus by reason of the following matters:
- (a) First, the manner of reporting of the buy-back in the financial reports of Optus.
- (b) Secondly, the absence of any equity funds, other than share capital, which were available to fund the buy-back.
- (c) Thirdly, the clear relationship between amounts debited to the buy-back reserve, and the amount of the replacement share capital subscribed by SingTel, confirming that the latter was a subscription of share capital to replace the former.
- (d) Fourthly, the set-off of the debit balance in the buy-back reserve against the account labelled "Share Capital" in March 2013.
132. As to the first matter, it is said that the financial reports recorded the amount of $9,248.5 million as "Contributed Equity" and the amount of $3,931.8 million as negative buy-back reserve, with no buy-back reserve in the previous financial year. It is said that note 18 to the accounts, which related to "Contributed Equity", revealed that after removing the effect of shares issued under employee share plans, there was: (a) an apparent net increase of $3,921.3 million in share capital as a result of the arrangement; and (b) a corresponding decrease to the buy-back reserve, being a total debit of $3,931.8 million ($3,921.3 million plus $10.5 million in costs incidental to the buy-back). It is said that importantly, both the net increase in share capital and corresponding decrease to the buy-back reserve were described as matters relating to Optus' "Contributed Equity".
2017 ATC 19706
We reject the appellant's reading and characterisation.
134. The appellant has sought to make the point that note 18 records a net increase in share capital and note 19 records a "corresponding" decrease in the buy-back reserve (after transaction costs are excluded) and that the inference is that they must both relate to contributed equity, as the amounts equate. But the net increase in share capital is as a result of SingTel subscribing shares subsequent to the buy-back. That later subscription does not govern the character of the earlier buy-back. Indeed the later subscription was one that may or may not have occurred. As the primary judge correctly found, at the same time as SingTel agreed to ensure Optus had funds to acquire the appellant's shares, SingTel reserved the right not to call for the issue of replacement shares but instead pay interest on the subordinated debt if it reached 100%.
135. SingTel's later subscription for shares did affect Optus' contributed equity. The appellant contends that that increase as well as the decrease to reserves were both "described as matters relating to Optus' 'Contributed Equity'". The appellant relies on note 18 which reported the share buy-back under the contributed equity figures and stated that "$2,308.1 million was charged to share capital and $3,931.8 million was charged to the buy back reserve". But contrary to the appellant's position, that statement supports the Commissioner. It confirms that contributed equity was only reduced by the former sum, but not the total of both sums. Further, the fact that part of the description in note 18 referred to the buy-back reserve did not entail that "contributed equity" was affected by or could only be understood by reference to that reserve. The note was simply explaining how the "total costs of $6,239.9 million" had been allocated to make it clear that only $2,308.1 million was being charged to share capital (as the accounting entries set out in note 18 stated).
136. As to the second matter, it is said that notes 18, 19 and 20 to the financial reports made it clear that the only equity funds available to Optus to be utilised to fund the buy-back consideration were the share capital of the company. It is said that the primary judge found that Optus only had two accounts which could have been used to reflect the reduction in shareholder's equity: share capital and retained losses (at ). It is said that there was no suggestion the buy-back could have been debited against the retained losses account. It is said that accounting practices may have permitted Optus to record the buy-back by making debit entries totalling $3,931,788,979 in the buy-back reserve, but the financial position of Optus in relation to its share capital could only be understood by subtracting the debit balance in the buy-back reserve from the credit balance in the share capital account. It is said that the company had no positive equity reserves and no retained profits. It is said that the only available source of equity was share capital. Accordingly, it is said that if, as the primary judge concluded, the buy-back had an impact on the equity of shareholders, and the only positive equity was share capital, a priori the debit to the buy-back reserve was a debit against amounts standing to the credit of an account Optus kept of its share capital.
137. It is said that the primary judge described (at ) the buy-back reserve as being "created as a new equity account to carry the negative reserve occasioned by payment of the difference between the total consideration and the amount standing in the credit of the share capital account referrable [sic] to the capital contributed by shareholders". It is said that there was no legal impediment to that difference being met by Optus returning its share capital to shareholders. It is said to be illogical to suggest that where the only positive equity is share capital, a negative entry of $3,921.3 million in respect of buy-back consideration paid to shareholders is anything other than a return of that share capital to shareholders.
138. It is said that the primary judge concluded that the buy-back reserve impacted equity but did not impact on share capital (at ). It is said that the flaw in the primary judge's analysis is that if the debit to the buy-back reserve did not impact share capital it must have affected some other equity. His Honour's explanation on this point was that Optus used assets sourced from the Implementation Agreement loans as consideration for the buy-back. It is said however that this
2017 ATC 19707
confuses the source of the purchase price with the manner of its recording in the accounts. It is said that the buy-back consideration was paid out of Optus' assets. As a matter of accounting it was necessarily the case that the buy-back element of the arrangement would lead to a reduction in the shareholders' equity section of the balance sheet. Necessarily, the purchase price paid by Optus had to be reflected in a debit to the shareholders' equity part of the balance sheet. It is said that the fact that Optus had no positive equity accounts other than share capital cannot be avoided by referring to the fact that the buy-back was funded through the use of assets.
139. We reject these contentions as well. They manifest an error of the type that we have identified earlier at  and  and confuse or conflate the distinction between capital and equity.
140. The appellant presupposes that there must be a positive equity account. Moreover, the appellant's submission fails adequately to address the fact that even on its own argument, Optus' then share capital account balance of $5,327,193,221 was less than the buy-back consideration of $6,225,502,631.68, which would have been insufficient if 100% of the shares were to be bought back.
141. In our view, the appellant's contentions were rightly rejected by the primary judge. Not every transaction that impacts a company's equity impacts share capital. It is incorrect to say that Optus' financial position in relation to its share capital could not be understood without having regard to the buy-back reserve. Notes 18 and 19 make plain that the buy-back affected the equity accounts as described, namely by reducing share capital proportionately and by debiting the balance to the buy-back reserve.
142. The appellant has submitted that the primary judge identified (at ) the loaned funds from SingTel as the source of the buy-back consideration, and accordingly has contended that this "confuses the source of the purchase price with the manner of its recording in the accounts". But his Honour did not confuse such matters. A clear distinction was and is to be made between the published accounts, which showed the impact on equity, and an identification of the assets used to pay the consideration. In explaining that "Optus used its assets as consideration", his Honour was simply observing that the absence of a positive equity account was not an impediment to the buy-back, for assets were available to enable it to be implemented.
143. As to the third matter, it is said that the reporting of the arrangement in this manner was consistent with the economic substance of the arrangement, which it is said the primary judge correctly described "in an economic sense, ... as a substitution of the capital which had previously been contributed by its previous shareholder with that funded by its subsequent shareholder" (see at ). It is said that the precise alignment of the number of shares bought back with the number issued to SingTel, and of the total amount of the buy-back consideration with the share capital subscribed by SingTel, made clear that the latter was subscribed as a replacement for the former.
144. The appellant criticises the primary judge's dismissal of that linkage (see at ). It is said that this dismissal is unpersuasive in the light of two matters. The first matter is the precise alignment of the number of shares issued to SingTel (and the amount of share capital subscribed by it) with the results of the buy-back. It is said that as a practical matter the subscription could not be completed until after the results of the buy-back were known, and when the number of shareholders who had elected for the buy-back alternative was clear. It is said that the sequence was dictated by the practicalities of the buy-back arrangement. The second matter is that the option of such a subscription being made by SingTel had been expressly provided for in cll 5.1 and 5.2 of the Implementation Agreement.
145. We reject these criticisms as well.
146. The appellant relies on the primary judge's statement (at ) that "in an economic sense" the subscription by SingTel can be seen as a substitution of previous shareholders' capital. But in our opinion this does not advance the issue. The characterisation of the later subscription transaction, which may not have occurred, does not govern the characterisation of the buy-back, let alone the debit to the buy-back reserve. Further, the appellant has relied on
2017 ATC 19708
SingTel's option to subscribe for shares, but has ignored SingTel's option not to subscribe for shares but instead to receive interest on the subordinated debt if it reached 100% of the shares. The primary judge rightly took this into account. Moreover, SingTel's subscription was a subsequent transaction and was recorded by a credit to the share capital account and a debit to the subordinated debt account.
147. As to the fourth matter, it is said that the purported set-off in 2013 of the debit balance of the buy-back reserve against the share capital account, properly understood, provides confirmation that the debit to the buy-back reserve was from the outset a debit against the share capital of Optus. We disagree. We would have thought that the reverse conclusion follows. In our opinion the set-off more than 10 years later supports the reverse conclusion, namely that the reserve was not an account of share capital or debit against share capital. If the appellant was correct that the reserve was a debit against share capital, then there would have been no need for any reduction of share capital in 2013.
148. Further, it is said that his Honour (at ) was incorrect in concluding that s 258E of the Corporations Act authorised only the proportion of the buy-back consideration debited to the share capital account as a reduction in share capital. But we see no error; see our earlier discussion on s 258E.
149. Finally, it is said that the conclusion for which the appellant contends is consistent with the legislative purpose of s 159GZZZP. Reference is made to the explanatory memorandum to the Taxation Laws Amendment Bill (No 3) 1990 (Cth) at pages 20 and 21 which stated that "[i]n broad terms s 159GZZZP will provide that, to the extent that an off-market purchase is funded from a company's distributable profits, the purchase price will be treated as a dividend paid by the company to the shareholder" (see also pages 4, 5, 16 to 18). It is said that the financial reports show there were no undistributed profits (only accumulated losses) and no other equity amounts, other than share capital, that could have been used to support the buy-back. We do not consider that resort to legislative purpose takes the appellant far. No doubt, s 159GZZZP clearly applies where the buy-back consideration comes from distributable profits, but it is also broader. Its text and evident purpose is that it in essence treats as "profit" any part of the consideration for a buy-back if it is not debited to amounts standing to the credit of a share capital account.
150. None of the appellant's grounds of appeal has been made good. Moreover, even if the primary judge mischaracterised some aspects of the commercial arrangements, that would not justify a different conclusion on the principal question in any event.
151. The appeal should be dismissed with costs.
THE COURT ORDERS THAT:
1. The appeal be dismissed with costs.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.