Judgment summary
Shell Energy Holdings Australia Limited (SEHAL) sought to set aside a decision of the Commissioner of Taxation dated 23 February 2024 concerning the cost base of shares SEHAL had held in Woodside Petroleum Limited (WPL) for capital gains tax purposes (paragraph 1).
The dispute concerned the market value, as at 20 January 1997, of a 34.27% shareholding in WPL (the WPL Shareholding) that was deemed under former s 160ZZSC(1) of the Income Tax Assessment Act 1936 (Cth) to have been acquired by Shell Australia Ltd (SAL) on that date for a consideration equal to market value (paragraph 4).
The Court held that the statutory deeming provision required the hypothesis of a single simultaneous acquisition of the entire WPL Shareholding by a single entity to be 'made to work', regardless of real-world legal, regulatory or financial impediments (paragraphs 61-71). On the expert evidence, the Court preferred the opinion of SEHAL's expert, Mr Samuel, that a premium of 15% to 20% over the volume weighted average price (VWAP) should be applied to reflect significant influence, over the Commissioner's expert, Mr McGuiness, who proposed a range of plus or minus 2.5% (paragraphs 76-106).
The Court found the appropriate market value of each share in the WPL Shareholding as at 20 January 1997 to be $11.12, being an 18% premium over the closing price of $9.42 (approximately 18.2% over the VWAP of $9.41) (paragraph 105). The Commissioner's objection decision of 23 February 2024 was set aside (paragraph 106, Orders).
Background
SEHAL is a member of the Shell group of companies, at the relevant time headed by Royal Dutch Shell plc (paragraph 1). SEHAL disposed of shares in Woodside Petroleum Limited (WPL) in the years ended 31 December 2014 and 2017 (the 2015 and 2018 income years) (paragraph 1).
As at 20 January 1997, SAL (later SEHAL's predecessor) held 228,456,275 shares in WPL, comprising about 34.27% of WPL's issued shares, following disposals by BHP in 1990 and 1994 and a related disposal of Shell's indirect interest through North West Shelf Development Pty Ltd in 1994 (paragraphs 6-10, 17-20).
On 9 August 1999, SAL made a determination under s 160ZZSA of the 1936 Act that there had not been continuity of majority underlying interests in certain assets, including the WPL shares, since 19 September 1985 (paragraph 37). By operation of former s 160ZZSC(1) and s 149-5 of the Income Tax (Transitional Provisions) Act 1997 (Cth), the WPL shares were deemed to have been acquired by SAL on 20 January 1997 for a consideration equal to their market value at that time (paragraphs 34-36, 47).
SEHAL's tax returns for the 2011, 2015 and 2018 income years used a cost base of $11.38 per share, reflecting an 18% premium to the closing listed price on 20 January 1997 plus indexation (paragraph 39). Following a review and audit, the Commissioner issued amended assessments on 9 June 2021 rejecting the premium and assessing on the basis of the listed price, resulting in an additional $98,895,530.70 in claimed income tax for the 2015 and 2018 years (paragraphs 40-42). SEHAL objected on 9 August 2021, and the Commissioner disallowed the objection on 23 February 2024, prompting this appeal commenced 23 April 2024 (paragraph 43).
Core dispute
The parties agreed that each WPL share held by SAL as at 20 January 1997 was deemed acquired by SAL on that date for a consideration equal to its market value, pursuant to former s 160ZZSC(1) of the 1936 Act (paragraph 45).
The legal question dividing the parties was whether SEHAL could claim a premium over the VWAP of WPL shares on 20 January 1997, reflecting the significant influence conferred by the 34.27% WPL Shareholding, or whether market value should be assessed by reference to a single WPL share traded on the ASX in isolation (paragraph 46).
This depended on whether market value was to be assessed on the basis of a single share traded on the ASX (the Commissioner's position) or each share valued in the context of a deemed simultaneous acquisition by a single entity of the entire 228,456,275-share parcel (SEHAL's position) (paragraph 46).
A related factual dispute concerned the quantum of any premium to be applied to the market price of $9.41, given competing expert evidence on valuation methodology and the relevance of post-1997 comparable transactions.
Court findings
Jackman J held that former s 160ZZSC(1) is a deeming provision creating a statutory fiction, such that the hypothesis of a single purchaser (SAL) acquiring the entire WPL Shareholding on a single day must be 'made to work', irrespective of whether such an acquisition was realistically possible given legal, regulatory or financial constraints (paragraphs 61-70).
The Court rejected the Commissioner's submission that paragraphs (a) and (b) of former s 160ZZSC(1) should be read separately and independently, holding that the consideration in paragraph (b) was inextricably tied to the deemed acquisition described in paragraph (a) (paragraphs 58-60).
The Court found that it was neither necessary nor relevant to ask whether the shares could, as a matter of fact and law, have been acquired by SAL on 20 January 1997, rejecting the Commissioner's reliance on impediments such as takeover requirements, the Foreign Acquisitions and Takeovers Act 1975 (Cth) and s 50 of the Trade Practices Act 1974 (Cth) (paragraphs 65-71).
On the expert evidence, the Court strongly preferred Mr Samuel's opinion over Mr McGuiness's, finding Mr Samuel's empirical market-based analysis compelling and Mr McGuiness's range of plus or minus 2.5% commercially implausible and unsupported by financial or empirical analysis (paragraphs 76-99).
The Court held that evidence of comparable transactions post-dating 20 January 1997 was permissible and not an impermissible use of hindsight, and that the absence of contemporaneous cash flow evidence did not mean SEHAL failed to discharge its onus of proof, as neither expert adopted an income approach (paragraphs 75, 96-97).
The Court found that the extent of significant influence conferred by the WPL Shareholding was towards the upper end of the range of significant influence, supporting a premium above the midpoint of Mr Samuel's 15% to 20% range (paragraphs 102-105).
Outcome
The Court found that the market value of each share in the WPL Shareholding as at 20 January 1997, for the purposes of former s 160ZZSC(1), was $11.12, representing an 18% premium over the closing price of $9.42 on that date (paragraphs 105-106).
The Court held that SEHAL had discharged its burden of proving that the amended assessments were excessive within the meaning of s 14ZZO of the Taxation Administration Act 1953 (Cth) (paragraph 106).
The Commissioner's objection decision dated 23 February 2024 was set aside. The Court indicated a preliminary view that the Commissioner should pay SEHAL's costs, but set a timetable for the filing of submissions on costs given the possibility that this view might be contested or a special costs order sought.
Tp method highlighted
Both expert witnesses agreed that a market approach, rather than an income approach, was appropriate to estimate the market value of a significant influence interest in WPL as at 20 January 1997, applying an adjustment to a market price of $9.41 (the VWAP on that date) (paragraph 74, JER at [3.1.6]-[3.1.9]).
Mr Samuel analysed comparable market transactions, including 1,249 transactions from 1997 across all industries and subsets in the energy and oil and gas sectors, using Bloomberg data, later supplemented with FactSet and Capital IQ data sources, applying filters and weightings to exclude outlier or less comparable transactions and to favour pre-2008 transactions (paragraphs 82-89).
Mr Samuel concluded that a premium of 15% to 20% over the VWAP was appropriate, reasoning that the risk associated with a controlling or significant influence interest is lower than for a minority interest, thereby commanding a higher value, and that strategic benefits of significant influence are generally available to more than one market participant (paragraphs 78-79, 90-92).
Mr McGuiness proposed a much narrower adjustment of plus or minus 2.5%, relying heavily on off-market disposals by BHP and Shell in 1990, 1994 and 1997 that occurred at discounts to listed price, and on the absence of evidence of differential cash flows between minority and significant influence interests (paragraphs 93, 98-99). The Court rejected this approach, finding those disposals were not comparable because none involved acquisition of a significant influence or controlling interest by a single purchaser, and that the observed discounts reflected 'blockage discounts' rather than an absence of a significant influence premium (paragraph 99).
The Court accepted Mr Samuel's evidence and found the appropriate premium to be towards the upper end of his 15% to 20% range, yielding a market value of $11.12 per share (paragraphs 100-105).
Major issues / areas of contention
- Whether former s 160ZZSC(1) of the Income Tax Assessment Act 1936 (Cth) required market value to be assessed on the basis of a single share traded in isolation, or in the context of a deemed simultaneous acquisition of the entire shareholding by a single purchaser
- Whether the statutory hypothesis under former s 160ZZSC(1) had to be 'made to work' notwithstanding real-world legal, regulatory and financial impediments to such an acquisition
- Whether a premium should be added to the market price to reflect the significant influence conferred by a 34.27% shareholding
- Whether comparable transactions post-dating the valuation date of 20 January 1997 could properly be considered in estimating market value
- Whether the absence of contemporaneous cash flow evidence meant the applicant failed to discharge its onus of proof
- The correct quantum of any premium, and where within the expert's proposed range that premium should fall
- The distinction between 'blockage discounts' applicable to sales of shares to multiple institutional investors and premiums payable for significant influence shareholdings