FEDERAL COURT OF AUSTRALIA Consolidated Media Holdings Limited v Commissioner of Taxation [2011] FCA 367 Citation: Consolidated Media Holdings Limited v Commissioner of Taxation [2011] FCA 367 Parties: CONSOLIDATED MEDIA HOLDINGS LIMITED v COMMISSIONER OF TAXATION File number(s): NSD 623 of 2009 NSD 822 of 2009 Judge: EMMETT J Date of judgment: 14 April 2011 Catchwords: TAXATION – income tax – company share buy-backs – off-market purchase – entry of transaction into books and records of company – whether consideration constituted dividend within the meaning of s 159GZZZP of the Income Tax Assessment Act 1936 (Cth) – whether purchase price was debited against amounts standing to the credit of the company's share capital account – meaning of 'share capital account' – extent to which reserve accounts may have negative or debit balances Legislation: Australian Securities and Investments Act 2001 (Cth) s 226 Corporations Act 2001 (Cth) ss 9, 257A, 257B, 257D, 257E, 257H, 286, 292, 295, 296, 297 Income Tax Assessment Act 1936 (Cth) ss 6D, 44, 46, 46A, 159GZZZK, 159GZZZP, 159GZZZQ, 160APA, 177 Income Tax Assessment Act 1997 (Cth) Taxation Administration Act 1953 (Cth) Sch 1 (ss 286-75, 298-10) Date of hearing: 7 and 8 March 2011 Place: Sydney Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 73 Counsel for the Applicant: T. F. Bathurst QC, A. J. Payne SC, C. A. Burnett Solicitors for the Applicant: Mallesons Stephen Jaques Counsel for the Respondent: B. J. Sullivan SC, T. M. Thawley, M. Hirschhorn Solicitors for the Respondent: Australian Government Solicitor IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 623 of 2009 BETWEEN: CONSOLIDATED MEDIA HOLDINGS LIMITED Applicant AND: COMMISSIONER OF TAXATION Respondent JUDGE: EMMETT J DATE OF ORDER: 14 APRIL 2011 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The proceeding be dismissed. 2. The applicant pay the respondent's costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court's website. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 822 of 2009 BETWEEN: CONSOLIDATED MEDIA HOLDINGS LIMITED Applicant AND: COMMISSIONER OF TAXATION Respondent JUDGE: EMMETT J DATE OF ORDER: 14 APRIL 2011 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The proceeding be dismissed. 2. The applicant pay the respondent's costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court's website. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 623 of 2009 NSD 822 of 2009 BETWEEN: CONSOLIDATED MEDIA HOLDINGS LIMITED Applicant AND: COMMISSIONER OF TAXATION Respondent JUDGE: EMMETT J DATE: 14 APRIL 2011 PLACE: SYDNEY REASONS FOR JUDGMENT INTRODUCTION 1 In 2002, Crown Melbourne Limited (Crown) paid consideration of $1,000,000,000 to the applicant, Consolidated Media Holdings Limited (the Taxpayer), for the buy-back of shares in Crown held by the Taxpayer. The buy-back was effected in accordance with Chapter 2J of the Corporations Act 2001 (Cth) (the Corporations Act). These two proceedings are concerned with whether, for the purposes of the Income Tax Assessment Act 1936 (Cth) (the 1936 Act), the consideration constituted a dividend, so as to attract a rebate of tax, or gave rise to a capital gain, which would not attract a rebate. The Taxpayer contends that it was a dividend. The respondent, the Commissioner of Taxation (the Commissioner), contends that it resulted in a capital gain. 2 Both proceedings were brought under Part IVC of the Taxation Administration Act 1953 (Cth) (the Administration Act). Proceeding NSD 623 of 2009 relates to the income year ended 30 June 2002, and proceeding NSD 822 of 2009 relates to the year of income ended 30 June 2005. If the Taxpayer's appeal in the first proceeding succeeds, its appeal in the second appeal must succeed. On the other hand, if its appeal in the first proceeding fails, its appeal in the second proceeding must also fail. Accordingly, it is necessary to deal only with the first proceeding. THE RELEVANT STATUTORY PROVISIONS 3 It is necessary to say something about the relevant provisions of the Corporations Act as well as the relevant provisions of the 1936 Act. The Corporations Act 4 Chapter 2J of the Corporations Act deals with transactions affecting share capital. Part 2J.1 of Chapter 2J states the rules to be followed by a company for reductions in share capital and for share buy-backs. Division 1 of Part 2J.1, which consists of ss 256B to 256E, deals with reductions in share capital not otherwise authorised by law. Division 2, which consists of ss 257A to 258F, deals with share buy-backs. 5 Under s 257A, a company may buy back its own shares if: the buy-back does not materially prejudice the company's ability to pay its creditors, and the company follows the procedures laid down in Division 2. 6 Under ss 257B and 257D, in a case of a selective buy-back, the terms of the agreement must, before it is entered into, be approved at a general meeting by special resolution with no votes cast in favour by any person whose shares are proposed to be bought back, or by the unanimous resolution of ordinary shareholders. The company must include with the notice of the meeting a statement setting out all information known to the company that is material to the decision as to how to vote on the resolution. Under s 257E, the company must also lodge with the Australian Securities and Investments Commission (the Commission) a copy of a document setting out the terms of the offer to buy back shares. Under s 257H, once a company has entered into an agreement to buy back shares, all rights attaching to the shares are suspended. A company must not dispose of shares that it buys back and, by the operation of s 257H(3), immediately after the registration of the transfer to the company of the shares bought back, the shares are cancelled. 7 Chapter 2M of the Corporations Act also has some relevance to the questions raised in the proceeding. Chapter 2M is concerned with financial reports and audits. Part 2M.2 of Chapter 2M, which consists of ss 286 to 291, deals with financial records, and Part 2M.3, which includes ss 292 to 301, deals with financial reporting. Under s 286, a company must keep written financial records that correctly record and explain its transactions and financial position and performance, and would enable true and fair financial statements to be prepared and audited. Under s 9 of the Corporations Act, the term financial records includes: invoices, receipts, cheques, vouchers etc; documents of prime entry; and working papers and other documents needed to explain the methods by which financial statements are made up, and to explain adjustments to be made in preparing financial statements. 8 Under s 292, a company such as the Taxpayer is required to prepare a financial report and directors' report for each financial year. Under s 295, the financial report for a financial year consists of the financial statements for the year, the notes to those financial statements and the directors' declaration about the statements and notes. The financial statements for a year are a profit and loss statement for the year, a balance sheet as at the end of the year and a statement of cash flows for the year. The notes to the financial statements are disclosures required by the regulations made under the Corporations Act (the Regulations), notes required by relevant accounting standards, and any other information necessary to give a true and fair view. 9 Under s 296, the financial reports of a company for a financial year must comply with the accounting standards made for the purposes of the Corporations Act by the Australian Accounting Standards Board (the AASB Standards), together with any further requirements in the Regulations. The Australian Accounting Standards Board (the Board) is a Commonwealth statutory authority established by s 226 of the Australian Securities and Investments Act 2001 (Cth). Under s 297 of the Corporations Act, the financial statements and notes for a financial year must give a true and fair view of the financial position and performance of a company. That requirement does not affect the obligation under s 296 for a financial report to comply with the AASB Standards. The 1936 Act 10 Division 16K of Part III of the 1936 Act deals with the effect of buy-backs of shares. Under 159GZZZK, when a company buys a share in itself from a shareholder in the company, the purchase is a buy-back. If the buy-back is not made in the ordinary course of trading on a stock exchange, the buy-back is an off-market purchase. It is common ground that the buy-back of shares by Crown from the Taxpayer was an off-market purchase. 11 The critical provision of the 1936 Act for present purposes is s 159GZZZP, which applies where a buy-back of a share is an off-market purchase. In such a case, the difference between the purchase price, on the one hand, and the part of the purchase price that is debited against amounts standing to the credit of the company's share capital account, on the other hand, is to be taken to be a dividend paid by the company, to the seller as a shareholder in the company, out of profits derived by the company, on the day the buy-back occurs. 12 Under s 6D of the 1936 Act, a share capital account is: an account which the company keeps of its share capital; or 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. If a company has more than one account covered by that provision, the accounts are taken for the purposes of the 1936 Act to be a single account. 13 Section 159GZZZQ determines the part, if any, of the buy-back consideration in an off-market purchase that is to be treated as sale proceeds for capital gains tax purposes. Subject to the operation of the section, the seller is taken to have received the purchase price as consideration for the sale of the shares. Section 159GZZZQ(3) provides that, subject to s 159GZZZQ(8), the amount of the consideration that the seller is taken to have received is to be reduced by any reduction amount. 14 Section 159GZZZQ(4) sets out the steps that are to be taken in working out whether there is a reduction amount. First, one works out whether the whole or part of the purchase price in respect of the buy-back is taken to be a dividend by s 159GZZZP. Secondly, for any amount that is taken to be a dividend, one works out whether the whole or part of it is included in the seller's assessable income or is an eligible non-capital amount. Any such amount is the reduction amount in respect of the buy-back. If the whole of the purchase price is taken to be a dividend, as the Taxpayer contends in the present case, and was included in assessable income under s 44 of the 1936 Act, it would be excluded from the consideration. 15 However, s 159GZZZQ(8) provides that if: the amount of consideration that the seller is taken to have received is reduced by a reduction amount; the deemed dividend, so far as it does not exceed the reduction amount, consists to any extent of a rebatable amount; and as a result of the operation of s 159GZZZQ the seller would incur a capital loss in respect of the buy-back; then the reduction in the amount of the consideration under s 159GZZZQ(3) is, instead, a reduction equal to the reduction amount, less so much of the rebatable amount as does not exceed the loss amount. If the seller is entitled to a rebate of tax under s 46 or s 46A in the seller's assessment for a year of income in respect of the dividend, the dividend consists of a rebatable amount worked out by dividing the amount of the rebate by the general company tax rate within the meaning of s 160APA. THE BUY-BACK 16 Throughout the year ended 30 June 2002, the Taxpayer owned all of the 2,938,587,410 issued shares in the capital of Crown. During that year, Crown decided to buy back 840,336,000 of the issued shares in order to return to the Taxpayer capital that was in excess of the needs of Crown. The buy-back proposal was initiated by Mr Geoffrey Kleemann, who oversaw the carrying out of the buy-back. Mr Kleemann was the chief financial officer of the corporate group consisting of the Taxpayer and its subsidiaries. His responsibilities included the management of the Taxpayer's financial assets, including investments in its subsidiaries, such as Crown. That management included ensuring that assets of the Taxpayer and its subsidiaries were being utilised most effectively across the group. 17 At a meeting of the directors of Crown held on 13 June 2002, the directors considered the proposal that Crown buy back 840,336,000 of its ordinary shares held by the Taxpayer, for a consideration of $1,000,000,000. The consideration was to be satisfied by the assignment to the Taxpayer of intra-group debts as agreed between Crown and the Taxpayer, or failing agreement, by cash payment. The directors resolved, relevantly, that: they were satisfied as to the solvency of Crown following the proposed buy-back; they were satisfied that the proposed buy-back would not materially prejudice Crown's ability to pay its creditors; Crown take all steps required to introduce and implement the proposed buy-back in accordance with the Corporations Act; an agreement and a transfer of shares to effect the buy-back be approved and executed; and the secretary of Crown be instructed to make all necessary entries in the register of members of Crown. 18 On 13 June 2002, Crown made a written offer to the Taxpayer to buy back 840,336,000 ordinary shares for $1,000,000,000 on the terms of the draft share buy-back agreement attached to the offer. Crown also gave to the Taxpayer the form of statutory notice required by s 257D(2) of the Corporations Act, proposing that a resolution be passed approving the terms of the share buy-back agreement. The statutory notice set out the details required by the Corporations Act to be provided to shareholders. On the same day, Crown gave notice in form 280 to the Commission of the proposal, describing it as a "selective buy-back". 19 On 28 June 2002, the Taxpayer and Crown entered into a share buy-back agreement (the Buy-Back Agreement), which provided for the sale by the Taxpayer to Crown of 840,336,000 shares in Crown for the purchase price of $1,000,000,000. The Buy-Back Agreement provided for completion on 1 August 2002, or such other date as might be agreed in writing by the parties, when the purchase price was to be paid and the Taxpayer was to deliver to Crown a duly executed transfer of the subject shares and the relevant share certificates. The purchase price, as I have said, was to be satisfied by the assignment by Crown to the Taxpayer of such debts or other sums due or payable to Crown by any of its associates as the parties might agree or, failing agreement, by payment in cash. On the same day, a written resolution, that the Buy-Back Agreement be approved and that Crown be authorised to enter into the Share Buy-Back Agreement, was signed under s 249B of the Corporations Act by the Taxpayer, as the sole member of Crown. 20 Prior to 28 June 2002, the following accounts had been established in Crown's general ledger: Shareholders Equity Account, number 310200; Inter-company Loan (Payable) Account, number 215120; and Inter-company Receivables Account, number 112529. On 28 June 2002, Share Buy-Back Reserve Account, number 310250, was established in Crown's general ledger. 21 On 28 June 2002, a debit of $1,000,000,000 was made to the Share Buy-Back Reserve Account and a credit of $1,000,000,000 was made to the Inter-company Receivables Account. However, the credit entry made to the Inter-company Receivables Account was subsequently reversed by correcting journal entries processed on 25 July 2002, with effect from 30 June 2002. The correcting entries involved a debit to the Inter-company Receivables Account, number 112529, and a credit to the Inter-company Loan (Payable) Account, number 215120. 22 No entry was made in the Shareholders Equity Account, number 310200, in relation to the buy-back. There have been no entries made in the Share Buy-Back Reserve Account, number 310250, since the initial debit entry made on 28 June 2002, and that account still exists in Crown's general ledger with a debit balance of $1,000,000,000. 23 The Buy-Back Agreement was completed on 6 August 2002. On that day: a transfer by the Taxpayer to Crown of 840,336,000 shares in Crown for a consideration of $1,000,000,000 was executed under the common seals of each of Crown and the Taxpayer; a deed of assignment of a debt of $1,000,000,000 owed by Publishing and Broadcasting (Finance) Limited (the Debtor) to Crown was executed by Crown, the Taxpayer and the Debtor, in satisfaction of the purchase price payable under the Buy-Back Agreement; and Crown cancelled 840,336,000 of the shares held by the Taxpayer. On 16 August 2002, Crown gave notice to the Commission in form 284 of the cancellation of 840,336,000 of its shares for a consideration of $1,000,000,000. 24 Crown's Financial Report for the year ended 30 June 2002, which was audited by Ernst and Young, was lodged with the Commission on 27 September 2002. The Statement of Financial Position within the Financial Report showed a reduction in the item for "Contributed Equity" during the year of $1,000,000,000, from $2,411,823,000 to $1,411,823,000. The item for "Reserves" remained unchanged. The item for "Retained Profits/(Losses)" showed the reduction of a loss amount. The item for "Total Shareholders' Equity", which was made up from those 3 items, was shown as having been reduced from $2,371,518,000 to $1,507,531,000. 25 Note 16 against the item "Contributed Equity" disclosed a reduction in the number of shares from 2,938,587,410 to 2,098,251,410. Note 16 recorded the following: On 28 June 2002, 840,336,000 ordinary shares (28.6 per cent of total shares on issue) were bought back by Crown Limited. The shares were repurchased from [the Taxpayer] for a total consideration of $1,000,000,000. 26 The Commissioner asserts that, as at 28 June 2002, the cost base, for the purposes of Part 3-1 of the Income Tax Assessment Act 1997 (Cth) (the 1997 Act), of the 840,336,000 shares bought back from the Taxpayer by Crown was $597,538,436. Since the consideration received by the Taxpayer for the sale of those shares was $1,000,000,000, the Taxpayer made a capital gain on the disposal of the shares of $402,461,564. THE ACCOUNTING EVIDENCE 27 The parties adduced evidence concerning accounting practice in Australia as at 30 June 2002, in relation to the accounting treatment of the buy-back in the books of Crown. It is desirable to say something about that evidence. 28 Professor David Boymal was instructed by the Taxpayer to prepare a report. Professor Boymal is a consultant and Adjunct Professor of Accounting at RMIT University. He has 48 years of experience in accounting and audit standards setting. He retired as Senior Partner and National Director – Accounting and Audits Standards of Ernst and Young in 2003, and retired in 2008 as full time chairman and chief executive officer of the Board. Professor Boymal has also been a member of the Urgent Issues Group (the UIG), a committee of the Board. The UIG was originally established by Australian professional accounting bodies to provide interpretations of the Board's standards where diverse accounting treatment was occurring in practice. When accounting standard setting arrangements in Australia were re-structured in 2000, the UIG was re-established as a committee of the Board and the consensus views of the UIG were thereafter published in the form of abstracts. The Board has a reserve power of veto over interpretations published by the UIG. Abstracts published by the UIG deal only with the contents of financial reports and do not address the recording of transactions in the books and records of a company. 29 Professor Robert Walker was instructed by the Commissioner to prepare a report. Professor Walker has been Professor of Accounting at the University of Sydney since 2004. Prior to that appointment, he had been Professor of Accounting at the University of New South Wales since 1978. He was a foundation member of the Accounting Standards Review Board in 1984-5. 30 Professor Boymal and Professor Walker produced a joint report concerning matters that were agreed between them. I shall first say something about the joint report. In their joint report, Professor Walker and Professor Boymal expressly reserved other matters with respect to which there was continuing disagreement. Their respective positions are also summarised below. The Joint Report 31 Share capital accounts and reserve accounts are elements of shareholders' equity. That implies that reserve accounts represent repositories of accumulated and undistributed profits. In the Australian context, reserves can be established in limited circumstances to reflect changes in shareholders' equity that did not arise from recorded profits. Such reserves include share premium reserves and asset revaluation reserves. 32 The most common usage of reserve accounts by companies is to record amounts of undistributed profits. The establishment of a reserve out of accumulated profits may be taken as a signal to shareholders that directors do not consider it advisable to distribute profits, or previously accumulated profits, in their entirety. In practice, however, decisions about dividend distributions would be made by directors on the basis of the financial circumstances of the company. 33 Since the 1960s, the term reserve has been used in literature in the United States, the United Kingdom and Australia to refer solely to elements of shareholders' equity. Those elements could include such items as: share premium reserve; general reserve; asset replacement reserve; dividend equalisation reserve; and asset revaluation reserve. Each of those elements, apart from share premium reserve, is separate and distinct from the recorded value of contributed capital. 34 The use of reserve accounts to record elements of shareholders' equity other than contributed capital was reflected in schedules to various iterations of company legislation in force in Australia prior to the Corporations Act. Each of those schedules required separate disclosure of contributed share capital, reserves and retained profits. A similar requirement appeared in Schedule 5 to the Corporations Act. However, that was superseded by AASB Standard 1040 ('Statement of Financial Position'), which applied to financial years ending on or after 30 June 2001. AASB Standard 1040 prescribed that specific classes of recognised items must be disclosed separately on the face of the statement of financial position, including, under the heading equity, the following: (i) contributed equity; (ii) reserves; (iii) retained profits or accumulated losses; and (iv) outside equity interest. Reference to "outside equity interest" related to the preparation of consolidated statements, not to the accounts of an individual company. 35 AASB Standard 1040 also required the following disclosure: (a) for retained profits or accumulated losses: (i) the amount at the beginning of the reporting period; (ii) the nature and amount of each increase or decrease during the reporting period; and (iii) the amount as at the reporting date; and (b) for each reserve within equity: (i) a description of the nature and purpose of the reserve; (ii) the amount at the beginning of the reporting period; (iii) the nature and amount of each increase or decrease during the reporting period; and (iv) the amount as at the reporting date. 36 AASB Standard 1041 ('Revaluation of Non-Current Assets') states that the asset revaluation reserve, or similarly entitled accounts, should not have a negative or debit balance. AASB Standard 1041 provides that, if an asset revaluation reserve had previously been established to record an upward asset revaluation, but the value of the relevant assets had subsequently declined, then a downward asset revaluation could be charged against the asset revaluation reserve to extinguish the prior write-up, but no more. The balance of the write-down had to be recorded as an expense. Hence the asset revaluation reserve account could not have a negative balance. 37 AASB Standard 1012 ('Foreign Currency Translation') states, in relation to the treatment of investments in self-sustaining foreign operations, that exchange differences may bear little or no relation to gains or losses which may ultimately occur in relation to transactions within the economic entity or with external parties. Hence, it is inappropriate to view an exchange difference as a measure of gain or loss. Accordingly, exchange differences are taken directly to the foreign currency translation reserve, a separate reserve in the equity section of the statement of financial position. Such a reserve may have a debit or credit balance. With the exception of AASB Standard 1012, there were no Australian accounting standards current in 2002 that expressly permitted the establishment of a reserve account with a debit, or negative, balance, and, with the exception of AASB Standard 1041, there were no standards that expressly disallowed this. Professor Boymal 38 Professor Boymal reported that, during the relevant period, there were no accounting principles or standards in Australia in relation to the recording of transactions in the books and records of a company. He said that the term accounting principles is not used as having a meaning different from the term accounting standards. He said that the only requirement relating to recording of transactions in the books and records of a company was the requirement of s 286 of the Corporations Act. 39 Professor Boymal also reported that, in the relevant period, there was no requirement, under any accounting principles or standards, that the recording and the reporting of transactions of a company be identical. AASB Standards and abstracts published by the UIG deal with financial reporting, and make no references to recording in the books and records of a company. Professor Boymal gave examples of commonly occurring situations in practice where the information in the financial report is not identical to the information in the records of a company, such as its ledgers. 40 Professor Boymal expressed the opinion that the journal entry recorded by Crown on 28 June 2002 was an acceptable and appropriate method of recording the buy-back transaction, since it correctly recorded and explained the transaction and adequately enabled true and fair financial statements to be prepared as at 30 June 2002. He said that, as the $1,000,000,000 debit balance in the Share Buy-Back Reserve Account indicates a reduction of $1,000,000,000 in the equity of Crown and, since a $1,000,000,000 credit balance in an inter-company account of the Taxpayer indicates an amount owing and not yet settled of $1,000,000,000, the journal entry readily enables financial statements to be prepared at 30 June in accordance with the AASB Standards and other requirements. He said that some further disclosures and further explanations would also be required in the financial statements that would not be expected to be reflected in the ledger accounts themselves. 41 Professor Boymal also said that, in the relevant period, there was no meaning under any accounting principles or standards, in relation to the recording of transactions in the books and records of Crown, of the terms share capital and share capital account. He said that the AASB Standards applied to financial reporting and not to the recording of transactions in the books and records of a company. He expressed the opinion that, in ordinary usage, the term share capital account would be taken to mean a ledger account in a company's books and records with the caption "Share Capital". 42 Professor Boymal expressed the opinion that the Share Buy-Back Reserve Account did not constitute a share capital account for the purposes of any relevant accounting principles or standards. He said that, for financial reporting purposes, a reserve account, including the Share Buy-back Reserve Account, distinguishes that element of equity from other elements of equity, including contributed equity. 43 Professor Boymal also expressed the opinion that the debit entry to the Share Buy-Back Reserve Account did not constitute a debit to amounts standing to the credit of Crown's capital account for the purpose of any relevant accounting principles or standards in relation to the recording of transactions in the books and records of Crown. He considered that, for financial reporting purposes, a negative, or debit, amount in the Share Buy-Back Reserve Account constituted a reduction in the total shareholders' equity of Crown, without attributing that reduction to any specific positive or credit component of equity. He gave three reasons. First, the buy-back was not complete as at 30 June 2002, since the shares had not yet been transferred from the Taxpayer to Crown and had not yet been cancelled. Secondly, even if the buy-back had been completed and the shares had been cancelled, there was no mandatory requirement to attribute the buy-back and cancellation to any specific equity item or items. Thirdly, the balance sheet section of the consolidation worksheets, showing shareholders' equity, continued to show the Share Buy-Back Reserve Account as a negative, or debit, item in total shareholders' equity and not as a deduction from any particular component. 44 However, Professor Boymal said that the treatment of the buy-back in Crown's ledger did not appear to be consistent with the treatment in the 2002 financial report of Crown. He considered that there were two alternative choices available to Crown. The first was to present the transaction as complete as at 30 June 2002 and to explain in the notes to the financial report that it was presented in that manner because the transaction was completed and the shares cancelled subsequent to the balance date but before the directors approved the financial report on 27 September 2002. The second alternative was to present the transaction as incomplete at 30 June 2002 and to explain in the notes to the financial report that it had been completed prior to the directors' approval and to describe how the completion would affect subsequent financial statements. Professor Boymal expressed the opinion that either of those alternatives was acceptable in order to present a true and fair view. He said that Crown appeared to have chosen the first alternative, possibly because it required less complex explanations. Nevertheless, Professor Boymal considered that there remained some inconsistency between the intention of Crown, as reflected in its books and records, and the intention of Crown, as reflected in the financial report as at 30 June 2002. Professor Walker 45 Professor Walker expressed the opinion that the currently accepted meaning in Australia of a reserve account is: an account that may be used to record elements of shareholders' equity over and above contributed capital. He said, further, that such accounts arise when directors of a company have resolved to allocate some part of undistributed profits to such an account, generally to signal that those profits are not to be distributed as dividends or that the funds are being retained for some other purpose. In addition, an asset revaluation reserve may be established when non-current assets are re-valued. He said that, on their accepted meaning, reserve accounts necessarily have a credit balance. The only exception is where a debit balance may arise in a foreign currency translation reserve account, established in accordance with AASB Standard 1012. In 2002, AASB Standard 1012 was the only AASB Standard that expressly contemplated the establishment of a reserve account that could have a negative or debit balance. The 'reserves' in such an account are repositories of adjustments arising from the preparation of consolidated statements for a holding company and its subsidiaries. Professor Walker said that, with the potential exception of a foreign currency translation reserve account, a reserve account is never established with a debit or negative balance. If losses or downward asset revaluations are recorded, reserve accounts may be written down to zero, but no further. 46 Professor Walker said that the term reserve has changed over time. More than 50 years ago, the term was often used to refer to liabilities, adjustments to the book value of assets or a component of accumulated profits. The first two are now referred to as provisions, a term that may be used to describe estimates of liabilities. Provision accounts are also used to adjust originally-recorded values of certain assets, and must be read in conjunction with asset accounts so as to reflect the balance sheet valuation of an asset. Thus, it is common to see accounts styled provision for depreciation, in respect of non-current assets, and provision for bad and doubtful debts, in respect of receivables. The balances of those accounts are set off against the book value of non-current assets or receivables. The third usage of reserve, referring to a component of accumulated profits, has been retained. 47 Professor Walker also said that the term reserve could be applied to an account established in limited circumstances to reflect changes in shareholders' equity that did not arise from recorded profits. One example is that of a share premium reserve. When company legislation required shares to have a par value, and shares were issued for a price above the par value, the premium over the par value was credited to a share premium reserve. A second example is where an upward revaluation is made of non-current assets. The increases in recorded values of the assets would be accompanied by increases in recorded shareholders' funds, usually with a credit to an asset revaluation reserve. 48 Professor Walker expressed the opinion that the use by Crown of the Share Buy-Back Reserve Account, number 310250, was not consistent with accepted usage of the concept of reserve in accounting practice in Australia. He considered that the treatment was wrong for the following reasons: the Share Buy-Back Reserve Account was not created by the allocation of undistributed profits; the Share Buy-Back Reserve Account had a debit balance and never had a credit balance or any credit entry, in circumstances where the common and accepted accounting practice has been for reserve accounts to be retained only if they have credit balances; and reserve accounts are not used to record downward movements in contributed share capital. 49 Professor Walker expressed the opinion that, since the Share Buy-back Reserve Account, number 310250, was used to record a downward adjustment to share capital, it could not properly be described as a reserve account. Rather, it could only be regarded as an account created as an offset against the amounts previously recognised as share capital. He considered that the Share Buy-Back Reserve Account, number 310250, and the Shareholders Equity Account, number 310200, should be read in conjunction with each other and that the Share Buy-Back Reserve Account, number 310250, had no significance, except when so read. Professor Walker concluded that, in substance, Share Buy-Back Reserve Account, number 310250, was itself a share capital account. 50 Professor Walker considered that, if the Share Buy-Back Reserve Account was truly a reserve account, one would expect that its existence would have been separately disclosed in order to comply with AASB Standard 1040, which prescribed, as I have said, that certain classes of recognised items be disclosed separately on the face of the statement of financial position. Professor Walker considered that, since Crown's auditor signed a report indicating compliance with the requirements of the AASB Standards, the auditor had concluded that a share buy-back reserve account was not a reserve account for the purposes of AASB Standard 1040. Professor Walker concluded that an amount was debited to a share capital account of Crown in respect of the share buy-back. 51 Professor Walker also expressed the view that it was inappropriate to record the extinguishment of share capital by means of a share buy-back, by debiting an account other than a share capital account. Professor Walker considered that the Shareholders Equity Account, number 310200, was misnamed, and that it recorded contributed share capital. He was of the opinion that the appropriate entry to have made prior to 30 June 2002 was a debit to the Shareholders Equity Account, number 310200. A corresponding credit entry of $1,000,000,000 should have been made to an account of the Taxpayer. Crown's Auditor 52 Evidence was also adduced from Crown's auditor. Mr Brian Long became auditor of Crown in 1999 and he audited Crown's 2002 financial report. Mr Long was not personally aware at the time of the audit of Crown's 2002 financial report that the buy-back was accounted for by debiting the Share Buy-Back Reserve Account, number 310250. He said that he did not require that detail of information as part of his audit, and that whether the equity is reduced through a share buy-back reserve account or a share capital account is not a matter that is relevant to the presentation of a buy-back in a company's financial report. Mr Long said that a share buy-back is not a difficult transaction to audit and to characterise in financial reports, because the concept is clear and unambiguous: a share buy-back always involves a reduction in equity and either a commensurate reduction in an asset or a commensurate increase in a liability. 53 Mr Long formed the opinion that Crown's 2002 financial report was in accordance with the Corporations Act and that it gave a true and fair view of Crown's financial position as at 30 June 2002, and of its performance for the year ended 30 June 2002, and that it complied with the relevant AASB Standards and other mandatory reporting requirements. Having subsequently been informed of the debit to the Share Buy-Back Reserve Account, number 310250, Mr Long remains of the opinion that Crown's 2002 financial report gave a true and fair view of the financial position of Crown as at 30 June 2002. He considers that it was open to Crown to disclose details of the Share Buy-Back Reserve Account, number 310250, but that it would not have been more appropriate to do so. THE PROCEDURAL BACKGROUND 54 The due date for lodgement of the Taxpayer's income tax return for the year ended 30 June 2002 was 2 December 2002. However, the Taxpayer lodged its income tax return on 26 June 2003. As a consequence, the Taxpayer incurred an administrative penalty of $2,750 for failing to lodge its income tax return on time. By notice issued on 24 April 2003 (the April 03 Notice), the Commissioner informed the Taxpayer of the imposition of an administrative penalty in that sum. The April 03 Notice stated that the due date for lodgement of the income tax return had been 2 December 2002 and that the due date for payment of the penalty was 21 May 2003. The penalty of $2,750 was paid by the Taxpayer on 28 August 2003. 55 However, in the meantime, on 16 July 2003, the Commissioner issued the Taxpayer with a further document, which is entitled "NOTICE OF ASSESSMENT" (the July 03 Notice). A copy of the July 03 Notice is set out in the Schedule to these Reasons. The July 03 Notice stated separate amounts for 'Taxable Income', 'Gross Tax', 'Other Credits' and 'Balance of this Assessment'. The amount of Gross Tax was 30 per cent of the Taxable Income, that being the company tax rate at the time. The amount of Other Credits was equal to the amount of Gross Tax. Balance of this Assessment was shown as '0.00'. 56 Underneath those four items was the following statement: This amount is/was due on 02 DEC 02 The July 03 Notice then went on to state: Other amounts payable includes- Income Tax – … … $2750.00 DR At the foot of the July 03 Notice was the following: Amount Due $2750.00 Date Due and Payable See Above 57 Clearly enough, the July 03 Notice involved administrative blunders. There is no evidence that tax in the sum of $2,750 was payable by the Taxpayer in respect of the year ended 30 June 2002. A clear inference can be drawn that the sum of $2,750 referred to in the July 03 Notice is the amount that was payable by way of administrative penalty for late lodgement of the Taxpayer's income tax return. In so far as the July 03 Notice describes the sum of $2,750 as being due and payable on 2 December 2002, it is clearly erroneous. Further, it is also erroneous in suggesting that that sum was income tax payable by the Taxpayer. 58 On 29 October 2008, the Commissioner sent to the Taxpayer a second document entitled "NOTICE OF ASSESSMENT", expressed to be for the year ended 30 June 2002 (the October 08 Notice). The October 08 Notice stated an amount of Taxable Income of $132,577,362.00, Gross Tax of $39,773,208.60 and Other Credits of $39,773,178.60. The October 08 Notice stated that the "Balance of this Assessment" was "30.00DR", and that that amount "is/was due on 02 DEC 02". 59 The October 08 Notice was accompanied by a document described as "INCOME TAX ADJUSTMENT SHEET" (the Adjustment Sheet). The Adjustment Sheet stated that, as a result of an examination of the Taxpayer's income tax affairs, the following adjustments had been made: Taxable Income as returned/assessed $1,132,577,262.00 Dividends Received (Deducted) $1,000,000,000.00 Net Capital Gain (Added) $402,461,564.00 Losses Transferred In (Deducted) $402,461,464.00 Adjusted/Amended Taxable Income $132,577,362.00 Total rebates/credits as returned/assessed $339,773,178.60 Other Rebates $300,000,000.00 Adjusted/Amended Rebates/Credits $39,773,178.60 60 The Adjustment Sheet stated that the receipt by the Taxpayer of $1,000,000,000 under the Share Buy-back Agreement was not a deemed dividend but capital proceeds of a CGT event, because the proceeds were paid out of share capital. The Adjustment Sheet also stated that there was a net capital gain made from the CGT event relating to the Share Buy-Back Agreement. Finally, the Adjustment Sheet stated that the Taxpayer was not entitled to a s 46 inter-corporate rebate because the receipt of $1,000,000,000 under the Share Buy-Back Agreement was not a dividend but capital proceeds of a CGT event. 61 On 19 December 2008, the Taxpayer objected against the assessment referred to in the October 08 Notice, but without admitting its validity. On 30 April 2009, the Commissioner disallowed the objection. By application filed on 26 June 2009, the Taxpayer appealed against the objection decision of 30 April 2009. That is the proceeding now before the Court. THE ISSUES 62 The Taxpayer contends that the October 08 Notice was notice of an amended assessment and, therefore, an impermissible assessment, having been made more than 4 years after the assessment referred to in the July 03 Notice. The Commissioner, on the other hand, contends that, because the July 03 Notice showed an assessment of nil, the assessment referred to in the October 08 Notice was an original assessment and not an amended assessment. 63 In its appeal statement filed on 5 August 2009, the Taxpayer contended that the October 08 Notice gives notice of an amended assessment which, by reason of the assessment referred to in the July 03 Notice, is invalid as being precluded by s 170 of the 1936 Act and not authorised by any other provision of the 1936 Act. The Taxpayer also contended that the entire proceeds received for the sale of shares in Crown under the buy-back is to be taken, by the operation of s 159GZZZP of the 1936 Act, to be a dividend paid by Crown to the Taxpayer, which was included in the Taxpayer's assessable income for the year ended 30 June 2002, by virtue of s 44 of the 1936 Act. THE JULY 03 NOTICE AS A NOTICE OF ASSESSMENT 64 The July 03 Notice did not specify any amount of tax payable in respect of the taxable income stated in that document. Rather, it indicated that there was no tax payable on the taxable income. Curiously, however, the July 03 Notice then stated that other amounts payable included the sum of $2,750, which was described, erroneously, as "income tax". In so far as the July 03 Notice stated that the sum of $2,750 was due and payable on 2 December 2002, it was also erroneous. 65 An administrative penalty that arises under s 286-75 of Division 286 of Schedule 1 of the Administration Act is not tax or income tax. Further, an administrative penalty is not the subject of an assessment within the meaning of the 1936 Act. Under s 298-10 of Schedule 1 of the Administration Act, the Commissioner is required to give written notice to an entity of its liability to pay a penalty. However, the Commissioner does not make an assessment. Notwithstanding that the July 03 Notice described the sum of $2,750 as "income tax", the document was not a notice of the ascertainment of an amount of taxable income and the tax payable on that taxable income. The July 03 Notice made clear that there was no tax payable in respect of the taxable income of the Taxpayer. It was patently clear that gross tax of 30 per cent of the taxable income was debited and that an equivalent amount, clearly the s 46 rebate, had been credited so as to give rise to an assessment that no tax was payable. It is common ground that an assessment that no tax is payable is not an original assessment. 66 I do not consider that the July 03 Notice was conclusive evidence of the due making of an assessment of tax payable of $2,750. True it is that notice of the administrative penalty had been given by the document of 24 April 2003, which stated that the due date for payment of the administrative penalty was 21 May 2003. I do not consider that the erroneous assertion in the July 03 Notice that the amount of the administrative penalty, wrongly described as income tax, was due on 2 December 2002, the date when tax would have been payable if any were payable, renders the July 03 Notice a notice of a valid assessment to income tax of $2,750. Once it had paid the administrative penalty described in the documents of 24 April 2003, it would have been open to the Taxpayer to point to manifest errors in the July 03 Notice, if the Commissioner then sought to recover a further sum of $2,750, in reliance upon s 177 of the 1936 Act. I do not consider that the July 03 Notice precluded the Commissioner from making an assessment such as was referred to in the October 08 Notice. CONSIDERATION FOR THE BUY-BACK AS A DIVIDEND 67 The critical question for present purposes is whether the purchase price of $1,000,000,000 paid by Crown to the Taxpayer was debited against amounts standing to the credit of Crown's share capital account. That is to say, the question is whether any part of that sum was debited against amounts standing to the credit of an account that Crown keeps of its share capital. The taxpayer contends that the Share Buy-Back Reserve Account, number 310250, is the only account of Crown's in which the sum of $1,000,000,000 was debited and that that account was not a share capital account of Crown. 68 The definition of share capital account in s 6D of the 1936 Act is not a felicitous use of language. It may be significant that the definition does not refer to an account in which a particular record is kept or in which an entry is made. Rather, it speaks of a company keeping an account of its share capital. There is no definition of the term account in the relevant legislation. The word must therefore be given its ordinary English meaning, as appropriate to the context in which the word is used. 69 The Taxpayer contends that s 6D refers to the account in a company's books and records in which capital contributed by its shareholders is recorded, by being credited to the account. That would normally be an account in a company's ledger, designated share capital account, or some similar name. The Taxpayer points to Crown's Shareholders Equity Account, number 310200, as being an example of such a name. The Taxpayer says that the term share capital account, as defined in s 6D, does not include every account the contents of which reflect the interest of shareholders in the company or could potentially be used to increase or decrease the balance of the share capital account. The Taxpayer says further that it would not encompass every account within the shareholders' equity part of the general ledger. Thus, the Taxpayer says, the only account of Crown that would be its share capital account within the meaning of s 6D is Crown's Shareholders Equity Account, number 310200. No entry was made in that account by reason of the share buy-back or to record any effect or consequence of the share buy-back. 70 The consequence of the share buy-back was that the shares bought by Crown from the Taxpayer were cancelled and capital was returned to the Taxpayer. The cancelled shares were part of the share capital of Crown. Some record must be made by Crown of the fact that part of its share capital was returned to the Taxpayer. The sum of $1,000,000,000 was capital returned to the Taxpayer that was in excess of the needs of Crown. As a consequence of the share buy-back, the capital contributed by Crown's shareholders was reduced by $1,000,000,000. That debit was recorded in the Share Buy-Back Reserve Account, number 310250. I consider that that was part of the account kept by Crown of its share capital, namely, that part that was returned as a consequence of the buy-back. 71 Thus, the Shareholders Equity Account, number 310200, and the Share Buy-Back Reserve Account, number 310250, together constitute the account kept by Crown of its share capital. Neither is called share capital account. Nevertheless, it was necessary for Crown to keep a record of its share capital. In the events that happened, Crown recorded the receipt of its share capital in the Shareholders Equity Account, number 310200. It recorded the return of part of that share capital in Share Buy-back Reserve Account, number 310250. 72 Accordingly, the Share Buy-Back Reserve Account, number 310250, was part of the account kept by Crown of its share capital within the meaning of s 6D. It follows that the consideration for the buy-back was debited to Crown's share capital account within the meaning of s 159GZZZP. I consider that the purchase price of $1,000,000,000 paid by Crown to the Taxpayer as consideration for the buy-back was debited against amounts standing to the credit of Crown's share capital account within the meaning of s 159GZZZP of the 1936 Act. Accordingly, the transaction resulted in a capital gain rather than a dividend. CONCLUSION 73 The Taxpayer's appeal in respect of the assessment referred to in the October 08 Notice must be dismissed. It follows that the Taxpayer's appeal in respect of the notice of assessment for the year ended 30 June 2005 must also be dismissed. The Taxpayer should pay the Commissioner's costs of both proceedings. I certify that the preceding seventy-three (73) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett. Associate: Dated: 14 April 2011 SCHEDULE – THE JULY 03 NOTICE