Contribution not made in exchange for shares constituted share capital (2024)

The Federal Court has granted the declaratory relief sought by a taxpayer in respect of whether an amount of $4,388,252,224 paid to it by its sole shareholder and expressed to be for nil consideration and not in exchange for further shares was properly characterised as an amount of share capital.

Facts

The taxpayer was a company registered on 14 September 2010 as part of the privatisation of certain components of the Queensland Rail group. In the course of the public flotation and ASX listing of Queensland’s coal and freight network and the sell-down of the State’s interest in that business via a share offer, the taxpayer received $4,388,252,224 from the State of Queensland (referred to herein as either the “State Contribution” or the “Receivable”).

The facts of the matter were complex. Relevantly, on 15 November 2010 the Queensland State Treasurer issued a Direction stating that “the consideration provided for transfer of the Receivable from the State of Queensland to [the taxpayer] is nil” and that the transfer of the Receivable was to be designated a “contribution by the State of Queensland and to be adjusted against the contributed equity of [the taxpayer]”. At the time of the Direction, “the contributed equity of [the taxpayer]” was comprised of 100 fully paid shares held by 2 Ministers of Queensland, the allotment of which had been recorded in the taxpayer’s Authorised Capital account.

The minutes of a meeting of directors of the taxpayer on 17 November 2010 stated that the company was “to recognise the transfer of the Receivable from the State of Queensland to the Company as a contribution of equity … in accordance with AASB Interpretation 1038” and directed how “the impact of the transfer of the Receivable” was to be reflected in the company’s accounting records. The taxpayer gave effect to the directors’ resolution by creating a separate “Capital Distribution” account within its accounting system in the 2011 financial year and an amount of $4,388,252,224 was posted to that account to reflect the State Contribution made on 19 November 2010. On 22 November the public offering was completed and the taxpayer’s shares were listed on the ASX.

The taxpayer sought declarations under s 39B(1A)(c) of the Judiciary Act 1903 and s 21 of the Federal Court of Australia Act 1976 to the effect that both its Authorised Capital account and Capital Distribution account were “share capital accounts” for the purpose of s 975-300(1) of the Income Tax Assessment Act 1997, and that they were taken to be a single share capital account in accordance with s 975-300(2). The Commissioner accepted that the Authorised Capital account was a share capital account but not the Capital Distribution account. The principal issue in dispute was whether the amount of $4,388,252,224 credited to the Capital Distribution account was an amount of share capital.

The taxpayer’s primary case (relying on various case authorities) was that the State Contribution was property contributed by the State in its capacity as shareholder, and not by way of loan or gift, with the result that it was necessarily share capital. Alternatively, it was submitted that the State Contribution was sufficiently connected to, or capable of being regarded as consideration for, the earlier issue of the 100 fully paid shares in the taxpayer so as to qualify the State Contribution as share capital.

The Commissioner contended that share capital was that which was subscribed in exchange for shares: the State Contribution was not made in exchange for shares and was not therefore share capital. The taxpayer had drawn a distinction between the transactions that involved the allotment of shares in the company, recorded in the Authorised Capital account, and the State Contribution, which was recorded in the Capital Distribution account. It was contended that the character of the State Contribution was to be determined primarily from the plain language of the 15 November 2010 Direction, which provided that the consideration for transfer of the Receivable was nil. The State Contribution did not relate to the taxpayer’s share capital but rather formed part of the assets in excess of the taxpayer’s share capital that affected the value of the company and, by extension, its shareholders’ equity. According to the Commissioner, the State Contribution should be characterised as a gift.

Decision

Justice Thawley granted the declaratory relief sought, finding that the State Contribution was an amount of share capital within the meaning of s 975-300(1). While the term “share capital” almost invariably referred to the capital contributed to a company in exchange for shares, that was not an exhaustive definition. The contribution was made by the State, as sole shareholder, intending it to form part of the company’s share capital. The contribution was treated the taxpayer as forming part of share capital, without the requirement to issue further shares in exchange. The State Contribution was appropriately characterised as share capital.

Contrary to the taxpayer’s submissions, Thawley J considered there to be no statement of principle that a company’s share capital included any money or property contributed to a company by a member in that capacity not made by way of loan or gift. The case authorities put forward did not support such a broad statement of principle. Rather, the judgments accepted (in obiter dictum) that a shareholder of a company may make a non-loan capital contribution to a company without issuing shares. However, while the cases relied on did not endorse the taxpayer’s statement of principle, they did not deny that a contribution from a shareholder not made in exchange for shares could in certain circ*mstances constitute share capital.

Although the 15 November 2010 Direction expressly stated that the consideration for the State Contribution was “nil”, it needed to be read in the context of the whole document and in the context of the known background leading to that Direction. Assessed objectively in such context, Thawley J said the State Contribution was intended to be an equity contribution by the sole shareholders of the fully paid ordinary shares on issue, namely by the 2 Minister shareholders for the State. The contribution was not intended as a gift. The “designation” made by the Direction was intended to reflect that the State was making a capital contribution as 100% shareholder, being a contribution that should be reflected in the accounts of the taxpayer as adjusting the ordinary shares on issue, those ordinary shares comprising the whole of what was then “the contributed equity”. The equity contribution was intended to be share capital and was properly characterised as share capital.

Finally, Thawley J considered the Commissioner’s reliance on the different manner in which the taxpayer accounted for the State Contribution and allotment of shares to be misplaced. A distinction was drawn between the transactions, but it was a distinction that was to be expected. An entity could have more than one account of its share capital. The State Contribution was not posted to the “Authorised Capital” account because no shares were being issued in exchange for the contribution. There was nothing unusual about recording the transaction in a different account in these rather peculiar circ*mstances.

Source: Aurizon Holdings Ltd v FC of T 2022 ATC ¶20-824; [2022] FCA 368, 8 April 2022.