CONTRACTS — Construction — Interpretation — Where sale contract entered into in respect of shares in a company — Where buyer and selling shareholders were uncertain as to rate of withholding tax applicable to company in respect of its capitalisation of interest — Where sale contract provided for a portion of purchase price to be placed in escrow which was to be released if Australian Taxation Office (ATO) ‘determined’ that additional withholding tax was payable by company — Where ATO accepted company’s position conveyed in a voluntary disclosure that additional withholding tax was payable — Where buyer seeks release of escrow funds to pay additional withholding tax — Whether contractual condition for release of escrow funds was satisfied
CONTRACTS — Implied terms — Terms implied in law — Duty to cooperate — Whether duty to cooperate was implied into sale contract — Whether buyer breached implied duty to cooperate by causing company to make voluntary disclosure to ATO of failure to withhold additional amount — Whether any breach of an implied duty to cooperate caused loss to the defendants
Quick Take
1Under reg 40(1)(b) of the Taxation Administration Regulations 2017 (Cth), the amount of dividend withholding tax to be withheld turns on the address of the payee (not its tax residence or actual entitlement to treaty benefits), and the rate is calculated by reference to the rate 'provided for' in the relevant double tax agreement rather than the rate to which the payee is actually entitled — a question on which no prior judicial decision existed.
2Where a contractual escrow mechanism allocates risk in a way that gives the parties competing commercial interests in the timing and manner of resolution of a contingent liability, the implied duty to cooperate is attenuated: a party is entitled to take its own legitimate contractual interests into account before cooperating, and is not required to subordinate those interests to mitigate the other party's contractual risk.
3A contractual condition requiring an amount to be 'determined by the Australian Taxation Office' is satisfied by an ATO decision accepting a voluntary disclosure and confirming the taxpayer's liability, and is not confined to the formal issuance of a penalty notice under s 298-10 of Schedule 1 to the Taxation Administration Act 1953 (Cth).
