Slutzkin v Federal Commissioner of Taxation
Encyclopedia
Slutzkin v Federal Commissioner Of Taxation (1977) 140 CLR
314 was a High Court of Australia
case concerning the tax position of company owners who sold to a dividend stripping operation. The Australian Taxation Office
(ATO) claimed the proceeds should be treated as dividends, but the Court held they were a capital sum like an ordinary investment asset sale.
In the taxonomy of tax schemes the overall operation was a classic exploitation of income versus capital dichotomy. But there was no need for contrivance or collusion, the different tax treatment to each party simply made the transaction an advantage to both.
The principal interest in the case today is its part in judicial interpretation of the section 260 anti-avoidance provisions of the Income Tax Assessment Act 1936
, and indirectly in overall dividend stripping operations of the time (insofar as action against the vendors' position failed).
for his trading companies. The shares of Francis Richards were held by Slutzkin and his associates as trustees for his children.
The holding company structure allowed group profits to be retained and used as working capital. But from 1 July 1967 the law on undistributed profits tax changed and Francis Richards as constituted could no longer serve that purpose. Consequently, Slutzkin formed a new holding company to continue it.
In late 1968 Slutzkin wished to dispose of Francis Richards, to save ongoing accounting fees and operating costs. His solicitor and advisor Rodney Rosenblum (also one of the trustee shareholders of Francis Richards) had started dividend stripping
with a company called Cadiz and offered to have Cadiz buy Francis Richards for the value of its accumulated profits.
The advantage to Slutzkin of selling instead of liquidating the company was that selling would be a capital transaction, and therefore tax-free, whereas in liquidation the final dividend distribution would be taxed as income. Cadiz required the company to have only cash assets, and no liabilities, so bank term deposits were called in and remaining liabilities paid out.
On 12 November 1968 Francis Richards had a balance sheet total of $105,124.70, and was sold to Cadiz for $104,393.30. That sale was the extent of the involvement of Slutzkin and the other trustee (Slutzkin's accountant Gordon Hapgood), but Rosenblum's role continued in Cadiz. He had taken legal advice on the propriety of acting on both sides of the transaction and in any case the tax treatment, and court case were not affected by his multiple positions.
Cadiz then proceeded with its dividend strip, causing Francis Richards to pay dividends totalling $103,744.70. Cadiz then on-sold the company for $6,831.96, a price possible because as a private company which had paid out an excess distribution (under section 106 of the ITAA) it was worth more than its asset value. The net profit to Cadiz was $6,183.36 before expenses.
The Australian Taxation Office
(ATO) claimed that selling Francis Richards, rather than liquidating or declaring a dividend, constituted a tax avoidance
scheme, and that the proceeds should be treated as income in the hands of the trustee shareholders. The ATO added corresponding amounts to their assessments for the year ending 30 June 1969.
Slutzkin and the others appealed to the Supreme Court of New South Wales
. This matter was only undertaken by the vendors, the buyer Cadiz was not a party to the action. Justice Rath agreed with the ATO and dismissed the appeal, whereupon Slutzkin appealed to the High Court.
and justices Stephen
and Aickin
overturned Justice Rath's decision and found unanimously for Slutzkin. The justices were adamant that the proceeds to Slutzkin and the vendors were a capital sum, representing the sale of an investment. Slutzkin had arranged the company's affairs in a form that would make it desirable for the purchaser Cadiz, but what Cadiz was going to do later was not something they could know or have an interest in.
The judges held section 260 could not apply because firstly a capital sale was a transaction which had no income tax consequences, and secondly because section 260 is an "annihilating" provision. It could void a contract, but that was all, it did not reconstruct a transaction or impose tax in a new form. Only if the voided contracts left some set of facts taxable by other parts of the act would it result in new taxation. Barwick cited the 1976 New Zealand
case Europa Oil (N.Z.) Ltd v Commissioner of Inland Revenue (N.Z.) (No. 2) on that point.
The tax landscape has changed considerably since these times. The anti-avoidance provisions of Part IVA are much broader and specifically apply against dividend stripping of the kind Cadiz used. Capital gains tax
would apply to Slutzkin's proceeds too.
Commonwealth Law Reports
The Commonwealth Law Reports are the authorised reports of decisions of the High Court of Australia. The CLR are published by the Lawbook Company, a division of Thomson Reuters...
314 was a High Court of Australia
High Court of Australia
The High Court of Australia is the supreme court in the Australian court hierarchy and the final court of appeal in Australia. It has both original and appellate jurisdiction, has the power of judicial review over laws passed by the Parliament of Australia and the parliaments of the States, and...
case concerning the tax position of company owners who sold to a dividend stripping operation. The Australian Taxation Office
Australian Taxation Office
The Australian Taxation Office is an Australian Government statutory agency and the principal revenue collection body for the Australian Government. The ATO has responsibility for administering the Australian federal taxation system and superannuation legislation...
(ATO) claimed the proceeds should be treated as dividends, but the Court held they were a capital sum like an ordinary investment asset sale.
In the taxonomy of tax schemes the overall operation was a classic exploitation of income versus capital dichotomy. But there was no need for contrivance or collusion, the different tax treatment to each party simply made the transaction an advantage to both.
The principal interest in the case today is its part in judicial interpretation of the section 260 anti-avoidance provisions of the Income Tax Assessment Act 1936
Income Tax Assessment Act 1936
Income Tax Assessment Act 1936 is an act of the Parliament of Australia. It's one of the main statutes under which income tax is calculated. The act is gradually being rewritten into the Income Tax Assessment Act 1997, and new matters are generally now added to the 1997 act.The reason for...
, and indirectly in overall dividend stripping operations of the time (insofar as action against the vendors' position failed).
Background
Alan Slutzkin owned a group of businesses and in April 1964 formed a company, Francis Richard Holdings Pty Ltd, which he used as a holding companyHolding company
A holding company is a company or firm that owns other companies' outstanding stock. It usually refers to a company which does not produce goods or services itself; rather, its purpose is to own shares of other companies. Holding companies allow the reduction of risk for the owners and can allow...
for his trading companies. The shares of Francis Richards were held by Slutzkin and his associates as trustees for his children.
The holding company structure allowed group profits to be retained and used as working capital. But from 1 July 1967 the law on undistributed profits tax changed and Francis Richards as constituted could no longer serve that purpose. Consequently, Slutzkin formed a new holding company to continue it.
In late 1968 Slutzkin wished to dispose of Francis Richards, to save ongoing accounting fees and operating costs. His solicitor and advisor Rodney Rosenblum (also one of the trustee shareholders of Francis Richards) had started dividend stripping
Dividend stripping
Dividend stripping is the purchase of shares just before a dividend is paid, and the sale of those shares after that payment, i.e. when they go ex-dividend....
with a company called Cadiz and offered to have Cadiz buy Francis Richards for the value of its accumulated profits.
The advantage to Slutzkin of selling instead of liquidating the company was that selling would be a capital transaction, and therefore tax-free, whereas in liquidation the final dividend distribution would be taxed as income. Cadiz required the company to have only cash assets, and no liabilities, so bank term deposits were called in and remaining liabilities paid out.
On 12 November 1968 Francis Richards had a balance sheet total of $105,124.70, and was sold to Cadiz for $104,393.30. That sale was the extent of the involvement of Slutzkin and the other trustee (Slutzkin's accountant Gordon Hapgood), but Rosenblum's role continued in Cadiz. He had taken legal advice on the propriety of acting on both sides of the transaction and in any case the tax treatment, and court case were not affected by his multiple positions.
Cadiz then proceeded with its dividend strip, causing Francis Richards to pay dividends totalling $103,744.70. Cadiz then on-sold the company for $6,831.96, a price possible because as a private company which had paid out an excess distribution (under section 106 of the ITAA) it was worth more than its asset value. The net profit to Cadiz was $6,183.36 before expenses.
The Australian Taxation Office
Australian Taxation Office
The Australian Taxation Office is an Australian Government statutory agency and the principal revenue collection body for the Australian Government. The ATO has responsibility for administering the Australian federal taxation system and superannuation legislation...
(ATO) claimed that selling Francis Richards, rather than liquidating or declaring a dividend, constituted a tax avoidance
Tax avoidance
Tax avoidance is the legal utilization of the tax regime to one's own advantage, to reduce the amount of tax that is payable by means that are within the law. The term tax mitigation is a synonym for tax avoidance. Its original use was by tax advisors as an alternative to the pejorative term tax...
scheme, and that the proceeds should be treated as income in the hands of the trustee shareholders. The ATO added corresponding amounts to their assessments for the year ending 30 June 1969.
Slutzkin and the others appealed to the Supreme Court of New South Wales
Supreme Court of New South Wales
The Supreme Court of New South Wales is the highest state court of the Australian State of New South Wales...
. This matter was only undertaken by the vendors, the buyer Cadiz was not a party to the action. Justice Rath agreed with the ATO and dismissed the appeal, whereupon Slutzkin appealed to the High Court.
Decision
In the High Court, Chief Justice Garfield BarwickGarfield Barwick
Sir Garfield Edward John Barwick, was the Attorney-General of Australia , Minister for External Affairs and the seventh and longest serving Chief Justice of Australia...
and justices Stephen
Ninian Stephen
Sir Ninian Martin Stephen, is a retired politician and judge, who served as the 20th Governor-General of Australia and as a Justice in the High Court of Australia.-Early life:...
and Aickin
Keith Aickin
Sir Keith Arthur Aickin KBE QC , Australian judge, was a Justice of the High Court of Australia.Aickin was born in Melbourne in 1916, and was educated at Melbourne Grammar School. He also studied at the University of Melbourne, where he graduated with a Bachelor of Laws and later a Master of Laws...
overturned Justice Rath's decision and found unanimously for Slutzkin. The justices were adamant that the proceeds to Slutzkin and the vendors were a capital sum, representing the sale of an investment. Slutzkin had arranged the company's affairs in a form that would make it desirable for the purchaser Cadiz, but what Cadiz was going to do later was not something they could know or have an interest in.
The judges held section 260 could not apply because firstly a capital sale was a transaction which had no income tax consequences, and secondly because section 260 is an "annihilating" provision. It could void a contract, but that was all, it did not reconstruct a transaction or impose tax in a new form. Only if the voided contracts left some set of facts taxable by other parts of the act would it result in new taxation. Barwick cited the 1976 New Zealand
New Zealand
New Zealand is an island country in the south-western Pacific Ocean comprising two main landmasses and numerous smaller islands. The country is situated some east of Australia across the Tasman Sea, and roughly south of the Pacific island nations of New Caledonia, Fiji, and Tonga...
case Europa Oil (N.Z.) Ltd v Commissioner of Inland Revenue (N.Z.) (No. 2) on that point.
Result
These kind of transactions came to be called a Slutzkin Scheme (eg. in ), though that term may have had limited currency. It doesn't appear Slutzkin was the first, or the last, nor even the biggest example of such transactions.The tax landscape has changed considerably since these times. The anti-avoidance provisions of Part IVA are much broader and specifically apply against dividend stripping of the kind Cadiz used. Capital gains tax
Capital gains tax in Australia
Capital gains tax in the context of the Australian taxation system applies to the capital gain made on disposal of any asset, except for specific exemptions. The most significant exemption is the family home...
would apply to Slutzkin's proceeds too.