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How a vendor’s liquidity problem resulted in higher stamp duty for the purchaser

By John McKeown

When New South Wales‑based company, Dick Smith Electronics Holdings Pty Ltd acquired shares from US interests for some $88m it did not count on being assessed for transfer duty on some $114m.

The extra duty was about $150,000.

Further bad luck occurred when it won the first two rounds in Court against the Office of State Revenue, but lost a majority of 3/2 in the High Court.  It had to pay its own costs and those of the OSR as well. Cruel!

Facts

The share sale contract provided that, at settlement, a dividend of about $26m declared prior to settlement would be paid by the company to the outgoing shareholders, ie the vendors.

The company was strapped for cash.

The dividend was generated by a loan by one of the vendors of that amount to the company.  As this liability existed at completion, the purchase price and the value of the shares was $88m.

But duty, of course, was payable under the Act on the higher of the value and the consideration. The OSR assessed duty on $114m including the dividend amount.

The High Court had to determine whether this dividend was part of the "consideration", a term not defined by the Act, and relying for its meaning entirely on case law.

Minority

The High Court minority looked at what consideration was moving in respect of the transfer of shares, as distinct from the dividend, and looking at revenue law and financial accounting standards.

For instance, it noted that the CGT cost base of the shares would not include the dividend amount.

It found that payment of the dividend was in consideration of the loan of the equivalent amount made by one of the vendors.

It also observed that the approach of the New South Wales Act, as with the Queensland Act, represents a shift in emphasis from instrument-based to transaction-based taxation.

Majority

However, the majority took a very simplistic view.

It held that looking into the nature of the transaction was to invite speculation about commercial and revenue considerations, which may have influenced the way the agreement was drafted.

It held that one should simply look to the money being paid to the vendors and not attempt to characterise any part of the payment.

The contract, in its usual way, no doubt provided that all stamp duty be met by the buyer.

The company, with hindsight, would now wish that provision had been inserted requiring the vendor to pay any duty assessed on the dividend component, as that provision was inserted for the vendor’s benefit.

This decision [Chief Commissioner v Dick Smith 2005 HCA3 (February 2005)] is an important win for the OSR under the "new" taxing regime.

It reinforces the need for advisors to consider both State and Federal revenue implications at the front end of any transaction.