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Tax Telegraph, March 2013

CasesCommissioner loses on Macquarie Part IVA appeal

Commissioner of Taxation v Macquarie Bank Limited [2013] FCAFC 13

The Full Federal Court has dismissed the Commissioner’s appeal against the Federal Court’s decision in Macquarie Bank Limited v Commissioner of Taxation [2011] FCA 1076 and has held that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) did not apply to a scheme which included Macquarie Bank Limited (MBL) gaining a step up in the cost base of an asset under the tax cost setting process within the tax consolidation regime, which resulted in a capital gain that was around $277m less than it otherwise would have been, but for the scheme.

As part of the scheme, MBL purchased Mongoose Acquisition Limited Liability Company (MALLC), a US resident company which owned 100% of Mongoose. Mongoose held a minority interest in an Australian Listed Company, Minara Resources Limited (Minara).  MBL acquired MALLC for the purpose of acquiring an indirect interest in Minara and then selling the shares in Minara.

Prior to acquiring MALLC, MBL loaned MALLC the Australian dollar equivalent of $316m to fund a dividend that MALLC had declared to its then current shareholders. Following the acquisition of MALLC, MBL appointed a number of its senior executives to MALLC’s board of directors which resulted in MALLC becoming an Australian resident for tax purposes. This change in residency led to MALLC and Mongoose (as a wholly owned subsidiary of MALLC) becoming members of MBL’s tax consolidated group. Therefore, the $316m liability owed by MALLC to MBL effectively resulted in a ‘step up’ in the tax cost of the Minara shares and a significantly smaller capital gain on their sale. At first instance, the Federal Court upheld the taxpayer’s appeal against the Commissioner’s decision to issue two separate Part IVA assessments to MBL and Mongoose.

The issues for determination by the Full Federal Court were:

  1. Whether and how the Commissioner may make determinations and issue amended assessments under Part IVA in respect of income derived by a subsidiary member of a consolidated group, and
  2. If so, whether a tax benefit was obtained by a relevant ‘taxpayer’ in connection with the scheme relied upon by the Commissioner and whether that scheme was entered into with the requisite sole or dominant purpose of obtaining the tax benefit .

In relation to the first issue, the Full Court considered that there was no reason to show why Part IVA should not apply to the consolidation regime under Pt 3-90 of the Income Tax Assessment Act 1997 (ITAA 1997) but rather the contrary – section 701-85 of the ITAA 1997 expressly states that the operation of the consolidation regime is subject to any provisions of the ITAA 1997 and ITAA 1936 if that provision expressly or impliedly requires it. Despite having reached this conclusion, the Full Court found that in the current case, the consolidation regime precludes the direct assessment of subsidiaries under Part IVA, as the subsidiary member of a consolidated group is deemed to not have a separate existence for these purposes.

In relation to the second issue, the Full Court found that MBL, the relevant ‘taxpayer’ for the purposes of Part IVA, had not received a tax benefit under the scheme as sought to be defined by the Commissioner, as the Commissioner’s counterfactual effectively required that two different taxpayers be involved in the tax benefit analysis – which is not permissible on the face of the legislation. Although not strictly necessary, the Full Court considered whether the scheme satisfied section 177D of the ITAA 1936 and found that no party to the scheme had a dominant purpose of enabling another party to obtain a tax benefit in connection with the scheme.

Full Federal Court confirms termination payment was not a ‘genuine redundancy payment

Weeks v Commissioner of Taxation [2013] FCAFC 2

The Full Federal Court has dismissed the taxpayer’s appeal against the Federal Court’s decision in Weeks v Commissioner of Taxation [2012] FCA 342 and held that a termination payment received by the taxpayer was not a ‘genuine redundancy payment’ under section 83-175(1) of the Income Tax Assessment Act 1997 (ITAA 1997). The taxpayer was formerly a senior ATO officer, and while the taxpayer was on leave, another senior officer was appointed and the taxpayer’s business line was restructured. After a voluntary ‘redundancy’ was accepted by the taxpayer, the Commissioner ruled that a ‘genuine redundancy payment’ had not been made. In deciding that there had been no “genuine redundancy payment”, the Full Court found that there had been no “genuine redundancy” because although the services of the taxpayer were no longer required by the employer, the position itself remained and had not been reorganised out of existence.

GST: Companies denied input tax credits – not ‘carrying on an enterprise’

Bayconnection Property Developments Pty Ltd and Ors and Commissioner of Taxation [2013] AATA 40
The Administrative Appeals Tribunal (AAT) has decided that five company taxpayers (all owned and controlled by members of the same family) were not entitled to input tax credits claimed over tax periods ranging from February 2005 to January 2009. The claims related to acquisitions purported to have been made in relation to the establishment, construction and operation of a proposed vocational training institution and related trade businesses.

The AAT found that while other companies in the family owned group appeared to have undertaken activities with respect to the establishment of the proposed development project, none of the five taxpayers had commenced any activities by the time they became registered for GST, nor during the period they remained registered, and on that basis none of them was ‘carrying on an enterprise’ within the meaning of section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 including doing anything in the course of commencement of an enterprise.

The AAT found that the role of four of the taxpayers was limited to being placed into the proposed operating structure as the respective vehicles responsible for a particular trade business once the institution was up and running. The fifth taxpayer’s claim to have been providing administration services to other entities, unrelated to the project, was not accepted by the AAT in the absence of evidence. The AAT concluded that any acquisitions that might have been made by the taxpayers were not ‘creditable acquisitions’ because the requirement that the taxpayers were carrying on an enterprise was not satisfied. The AAT affirmed the GST assessments issued by the Commissioner, along with 75% penalties (uplifted by 20%) for the taxpayers’ intentional disregard of the tax law.

Federal Court confirms 4-year amendment period for ‘beneficiary of a trust estate’

Yazbek v Commissioner of Taxation [2013] FCA 39

The Federal Court has dismissed the taxpayer’s appeal against the decision of the Administrative Appeals Tribunal (AAT) in Yazbek and Commissioner of Taxation [2012] AATA 477. The AAT had held that the taxpayer was a ‘beneficiary of a trust estate’ during the 2005 income year, allowing the Commissioner under item 4 of section 170(1) of the Income Tax Assessment Act 1936 (ITAA 1936) to extend the amendment period from two to four years. This was despite the fact that the taxpayer had not received any trust distributions for that income year and was only a potential object of a discretionary trust.

In dismissing the taxpayer’s appeal, the Court held that it saw no error in the decision or reasoning of the AAT and found that the ordinary meaning of ‘beneficiary’ applied in this case, being “a person for whose benefit a trust is to be administered and who is entitled to enforce the trustee’s obligation to administer the trust according to its terms”. The Court also had regard to the statutory context of the term ‘beneficiary’ and found that where the Act intends to refer to a beneficiary who is ‘presently entitled’, those words are used (such as in Division 6 of the ITAA 1936) rather than ‘beneficiary of a trust estate’.

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