Nicholas
Kiwi Pty. Ltd. was the former name of an Australian subsidiary of Sara Lee
Corporation (SLC) of Maryland, USA. SLC does business in many other countries,
the nature of it being the making, selling and distribution of pharmaceutical
and health care products. In the early 1990's, Nicholas put its business on the
auction market.
Roche
Holding Ltd., a Swiss corporation (also with many foreign subsidiaries) was the
successful bidder. Roche entered into a “Purchase and Sale Agreement” (PSA)
with SLC and 24 named subsidiaries (sellers) including NKA on May 31, 1991.
A
choice-of-law clause made English law applicable to the agreement. Under the
PSA, Roche was to take over all of NKA’s health care assets. Under instructions
from SLC, a Roche official signed the PSA, without the prior approval of its
Board of Directors. The Board eventually ratified this action, however, on
August 20, 1991.
Nicholas
Products Pty. Ltd. (successor to NKA), a Roche subsidiary whose incorporation
date was June 25 1991, obtained the transferred Australian health care assets
from Roche. In an August 30, 1991 letter, Roche notified SLC that it had
assigned some of its rights and duties under the PSA to several subsidiaries
and affiliates, including NKA.
On
August 30, 1991, SLC and Roche executed an “Amendment Agreement”(A/A) which,
inter alia, increased the price of the assets sold by respondents by
$1,000,000. It also cut back on the number of employees NKA was supposed to
hire under the PSA from 54 to 14. The A/A expressly amended the PSA and also
provided that, all unamended provisions of the PSA, remain “in full force and
effect.”
As
part of the closing on August 30, 1991, Roche as seller and NKA as buyer
executed a “Deed of Assignment” (DOA). It declared that it was pursuant to the
PSA and not by way of modification thereof and that, in case of conflict, the PSA
was to control. Respondent and NKA also executed a "Deed of Assumption of
Liabilities and Contracts" on August 30 described as “pursuant to” the
PSA, as amended. It mainly dealt with NKA’s assumption of various obligations
and liabilities having to do with intangible rights and assigned contracts.
The
Australian tax authorities differed with SLC as to the date of the asset
transfer. If the event took place in the 1992 income year, taxpayer-respondent
would have offsetting losses or deductions that would lower the amount of its
taxable capital gains. The outcome is otherwise if the controlling date was
that of the contract’s execution in May 1991.
The
Tax Commissioner lost before the Full Federal Court of three judges because it
failed to persuade them that the taxable event had taken place in the tax year
ending June 30,1991 -- the 1991 tax year -- rather than in the 1992 tax year.
The Commissioner then obtained review in the High Court of Australia.
The
High Court allows the Commissioner’s appeal. It first rules that the Board’s
ratification of the previous unauthorized signing of the PSA related back to
the date of the PSA, i.e., May 31, 1991. As to the effect of the A/A on the
PSA, the High Court holds that the parties intended to vary the rights and liabilities
of the PSA in certain important respects but not wholly to rescind and replace
it. The Court also concludes that both the PSA and the A/A did not have in mind
to transfer assets or liabilities on May 31, but, as was done, by separate
deeds delivered at the closing on August 30, 1991.
Addressing
the central issue, the High Court then determines the year in which the capital
gains on the assets are taxable under PtIIIA of the Income Tax Assessment Act
of 1936. Both sides argued on the assumption that the relevant change in asset
ownership had taken place on August 30, i.e. in the 1992 tax year.
As
to the timing of the asset disposal for tax purposes, the following two
provisions apply. Section 160U(3) provides that: “Where the asset was acquired
or disposed of under a contract, the time of acquisition or disposal shall be
taken to have been the time of the making of the contract.” The following
provision, Section 160U(4), then declares that: “Where the asset was acquired
or disposed of otherwise than under a contract, the time of acquisition or
disposal shall be taken to have been the time when the change in the ownership
of the asset that constituted or gave rise to the acquisition or disposal
occurred.” [Emphasis supplied.]
Since
the disposal of assets had taken place “under a contract,” Section 160U(3)
controls. The bottom line for the High Court is as follows. “Where there are
two or more contracts which affect the rights and obligations of the parties to
a disposal of assets, the identification of the contract under which the assets
were disposed of, for the purpose of applying s160U of the Act, requires a
judgment as to which of the contracts is properly to be seen as the source of
the obligation to effect the disposal. In the present case, that contract is
the purchase and sale agreement of 31 May 1991.” [N/A]
The
concurring judge agrees with the Tax Commissioner and would also allow the
appeal. “In summary therefore, the disposition [of assets] in this case must be
taken to have occurred on the making of the May [31, 1991] agreement ... by
reason of the language of s160K(5), s160M(1), s160M(1A) and s160M(2), s160U(1)
and s160U(2) and particularly s160U(3) of the Act.”
“On
that date the respondent executed an agreement and entered into a transaction
for the disposal of assets and became entitled (subject to the fulfilment of
conditions precedent) to receive consideration which included a component of
capital gain. The contract, although subsequently varied (albeit not very
significantly in the overall scale of things) was made on 31 May 1991 and the
relevant assets were disposed of under it on that date.” [N/A]
Citation: Commissioner of Taxation v. Sara Lee Household & Body
Care (Australia) Pty. Ltd., H.C.A. 35 (High Ct. of Aus. June 15).
*** About Sarah Ellen Cox: Sarah E. Cox is a Personal Injury attorney in Fort Myers, Florida. Ms. Cox received her Juris Doctor from Whittier School of Law in 2005, and was admitted to the Florida Bar in 2008. News about Sarah E. Cox are at: https://attorneygazette.com/sarah-ellen-cox# Attorney Profile at: https://solomonlawguild.com/sarah-ellen-cox Blog at: http://SarahECoxBlog.blogspot.com
