Court rules in Smout’s favour

Press, 5 June 1982, Page 19

Court rules in Smout’s favour

PAWellington The Court of Appeal in a unanimous decision has ruled that the distribution of $342,426.50 bv a holding company to ' its shareholders is a tax-free distribution in terms of section 4 (5} of the Income Tax Act. The appellant was Graham Robinson Smout. company director of Auckland. The commissioner of Inland Revenue was the respondent. Mr Justice Cooke, presiding. said that the apneal — from a judgment of Mr Justice Speight, in the High Court — raised questions of some moment to taxpayers who received supposedly taxfree dividends paid 'from capital profits. The judgment said if the capital profit was made bv one company and a pavmen't was made from it ‘to a second company, then passed on by the second company to the shareholders, it was not tax-free in the hands of the shareholder. In this case, the first company was a subsidiary of the second and the capital profit was made by the sale of certain assets from the subsidiary to the holding company. Neither party to the appeal suggested ’ that it made any difference in law th?t the sale was an internal one. -The facts were that Colour and Synthetics. Ltd. sold land and shares to its parent company. Chemby Industries. Ltd. making what the commissioner accepted to have bebn a capital profit of $428,033.13. The subsidiary distributed this to .'its shareholders. Ch’emby's proportion was $342,426.50. and in turn Cfremby made a profit distri-

button to its own shareholders the proportion of the objector. Mr Smout. being $26,194.70. The commissioner claimed that the latter sum was taxable in the objector's hands as a dividend. Mr Justice Speight had upheld this claim, rejecting the argument for the objector that the sum was protected from taxation by section 4 (5) tai or (b). Mr Justice Cooke said the contention advanced for the commissioner was that, whereas no tax would have been payable if Mr Smout had been a direct shareholder in the subsidiary, the same profit would be taxed twice when channelled to him through .the holding company. "Even without the latter suggestion, the result of the contention seems so capricious that the court should be slow to attribute it to Parliament." Mr Justice Cooke said. "On the other hand, it is reasonable to infer that the underlying policy of section 4 (5) is that a genuine capital profit, as long as wholly or partly identifiable, should retain its character as capital and. subject to the setting off of capital losses by any company in whose hands it may be. should not be treated as assessable income." Mr Justice Cooke said the court was holding that the previous understanding and practice was right, in that capital profits were meant by the New Zealand act to retain their character for tax purposes. "If we have misunderstood the true intention of. Parliament. Parliament can readily put the matter right." he said. . •