The tax administration regime is Australia is far from simple. Challenging a decision of the ATO can take many forms. Taxpayers seeking relief from a ruling by the Commissioner usually have to rely on an appeal to the Federal Court or the AAT. But where there are third parties with interests in the resolution of the taxpayer's dispute (such as a company's shareholders), does the taxpayer have to seek a private ruling before applying for a declaration? Similarly, where a shareholder contributes capital, but no shares are exchanged in return, can this be called a share capital contribution?
These were the issues facing the Court in Aurizon Holdings Limited v Commissioner of Taxation [2022] FCA 368.
Does the taxpayer need to seek a private ruling first?
Taxpayers who are unsure as to how the law will apply to them can ask the Commissioner of Taxation for a private ruling – i.e., how the ATO would apply the law in the circumstances.
Private rulings have a number of benefits:
- They are binding on the Commissioner, meaning the ATO must honour the ruling and protect the taxpayer from any penalties if the taxpayer follows the ruling.
- They are private and so allow negotiation with the ATO while maintaining confidentiality.A word of warning though – the ATO may release an anonymised version of the ruling, so taxpayers should be careful if their affairs may not be easily anonymise-able.
- If the taxpayer is not satisfied with the outcome, it may be possible to appeal the decision to the AAT or Federal Court.Practically, this has the impact of bringing to the issue to a head.
If there are third parties (such as shareholders) with interests in the outcome, the applicant may seek a class ruling. This is similar to a private ruling, except it also binds the Commissioner with respect to the relevant third parties.
Declaration also available
But private or class rulings are not the only option available to taxpayers. They can also apply directly to the Court for a declaration. For example:
- In La Mancha Group International B.V. v Commissioner of Taxation [2020] FCA 1799 the Court declared that the rights of a dissolving company to appeal assessments issued by the Commissioner would be transferred to its successor as part of a merger.
- In Auctus Resources Pty Ltd v Commissioner of Taxation [2020] FCA 1096, the ATO paid the applicant $2.2 million as part of a research and development tax offset. It then argued the amount was an administrative overpayment and sought to have it returned. The applicant successfully obtained a declaration that it was not an overpayment.
- In Commissioner of Taxation v Cassaniti [2018] FCAFC 212, the Commissioner disallowed any credits against Mrs Cassaniti’s tax liabilities. She sought a declaration from the Court that she was entitled to them – which was successful (affirmed on appeal).
Of course, the Court is not obliged to grant such relief, and may refuse to do so, if, for example, it is persuaded that seeking a private ruling, followed by Part IVC proceedings (if the applicant is not satisfied) is a more appropriate option.
What is share capital?
Share capital is usually an amount contributed to a company in exchange for shares. The ATO will look to whether there is a ‘share capital account’. That is, an account which holds share capital, or an account created after 1 July 1998 where the first amount credited was share capital.
Characterising an account as one of share capital is rarely controversial, and commonly occurs during an initial public offering (IPO).
What happened in Aurizon?
Aurizon is a freight rail company formerly owned by the Queensland Government (then known as QR National). In 2010, the State decided to sell its interest and facilitate an IPO. At that time, Aurizon was indebted to the State in the sum of approximately $4.3 billion. Through a series of steps prior to the IPO, that debt was to be forgiven in exchange for shares. But that did not occur.
Instead, the Government ordered that the debt owed by Aurizon be forgiven in exchange for nil consideration (ie., no shares – the State Contribution), and that the amount be credited to equity. This contribution was ultimately reflected in Aurizon’s Share Offer Document.
Was declaratory relief available to Aurizon where it had not sought a private ruling?
The Commissioner argued that Aurizon should first seek a private ruling, then bring proceedings under Part IVC if it was not satisfied with the outcome.
While the Court recognised the merits of the private ruling regime, it noted a number of limitations in the present case:
- It would have been difficult to identify the relevant facts upon which the ruling would be made.
- Any appeal from such a ruling would have been limited to the facts as put in the ruling application. The nature of the facts and evidence in this case meant if there had been a Part IVC appeal, the facts would have ‘been shown to be wrong in some respect’ meaning the process would need to start again.
- Third parties – in particular, Aurizon’s shareholders – had an interest in the matter being resolved in a way which binds the Commissioner, and this "is not achieved through a private binding ruling".
Interestingly, no mention was made as to the availability of a class ruling, which would have had the effect of binding the Commissioner with respect to Aurizon’s shareholders.
In any event, the Court was satisfied that it should not exercise its discretion in denying relief to Aurizon and ordered that the parties to confer as to the form of what such a declaration would take.
State Contribution was share capital
After considering the relevant case law at some length, the Court concluded that while share capital contributions are almost always made in exchange for shares, this is not an exhaustive definition. Rather, the focus must be upon "precisely what occurred" and the context in which it occurred.
To that end, the Court placed emphasis on a number of key factors:
- The State provided that the consideration from Aurizon was "nil". This made clear the contribution was not a loan.
- Accounting standards required that contributions by owners to state-owned entities be recognised directly in equity. That the State "designated" the contribution be adjusted against the contributed equity of Aurizon supported the inference of a share capital contribution.
- It was originally intended that the State Contribution would be made in exchange for shares. The subsequent change to the transaction steps was done to ensure that the correct number of shares existed at the time the Offer Document was issued, rather than a change to the underlying nature of the contribution.
- "Neither the evidence nor common sense disclose[d] any good or proper reason for intending that the State Contribution be something other than share capital".
Accordingly, the State Contribution was share capital.