Article: "Taxation in Australia"

1. : This article provides an analysis of the success rate for tax cases in the Federal Court, the Full Federal
Court and the High Court in 2015 compared with the previous four years. It shows that the ATO was an extremely
successful litigant in 2015 and has significantly improved performance over the past five years. The trend line
demonstrates the benefits of the ATO's case selection process (including determining the cases it settles) and its
case management This article also provides a summary of some of the important tax judgments from the Federal
Court the Full Federal Court and the High Court from January 2015 to the end of December 2015. A summary of a
small number of key cases, particularly those affecting the financial services industry, is also included.
FEATURE
by Joanne Dunne, CTA, Partner, and Hilary Taylor, Nick Batten and
Nathan Krapivensky, Lawyers, MinterEllison, Melbourne
Introduction
This article provides a summary of tax
judgments from the Federal Court, the
Full Court of the Federal Court and the
High Court from January 2015 to the end
of December 2015.
The following are excluded from this
article:
E cases which are purely of a procedural
nature, for example, interlocutory
applications for discovery, or relating to
the service or the filing of evidence or
applications for leave to appeal;
E collections or debt-related cases that
are simple in nature, for example, cases
where the taxpayer or another person
applies to set aside a statutory demand
or to set aside an order to wind up a
company;
a state tax cases;
a Administrative Appeals Tribunal cases;
and
E decisions on High Court special leave
applications.
The article also provides a summary of a
small number of key cases, particularly
those affecting the financial services
industry, but also some general cases
of importance. Where known at the
date of this article, potential appeals
or ATO decision impact statements
are noted. This article also provides a
statistical analysis of the win/loss ratio
for the taxpayer and ATO in relation to all
cases (apart from those noted above as
excluded).
Statistical analysis
Table 1 takes into account all tax cases
(other than those noted above as
excluded). Table 2 shows the trend line for
the ATO. These statistics demonstrate the
greatest success rate for the ATO in the last
five years, and the continuing improvement
in the ATO's case management and case
selection processes since 2011.
It is also notable that there were more
cases litigated before the Federal Court
in particular in 2015. However, this seems
an anomaly as it is notable that, in 2015,
particular taxpayers litigated several issues
before the courts on separate occasions,
and there were also a wide range of
taxpayers taking claims which appeared
(with respect to those taxpayers) to have
little chance of success, but which the
taxpayers clearly believed in. The number
of cases before the Federal Court in
particular, but also the Full Federal Court,
were affected by those two issues.
Table 2 shows this win percentage as a
trend over the past five years, indicating
overall success in favour of the ATO.
2015 Federal Court tax cases
Case: Financial Synergy Holdings Pty Ltd v
FCT [20151 FCA 53
Judge: Pagone J
Outcome: Commissioner
Summary: As part of a group restructure,
on 29 June 2007, a number of units in
the Orford Family Trust (established prior
to 20 September 1985) were transferred
to Financial Synergy Holdings Pty Ltd in
exchange for Financial Synergy Holdings
Pty Ltd issuing shares in itself.
The taxpayer elected a roll-over under
Div 122 of the Income Tax Assessment Act
1997 (Cth) (ITAA97), which disregarded the
Table 1: Overall win/loss
Court Total ATO Taxpayer
cases win win
High
Court 3 2
Full
Federal
Court 17 14
Federal
Court 31 23 8
Total 51 39 9.5
c)/0
success
overall 76.5% 23.5%
Table 2: Historical win percentage
Year Total ATO Taxpayer
cases win% win%
2011 31 50% 50%
2012 30 60% 40%
2013 74.5% 25.5%
2014 36 73% 27%
2015 51 76.5% 23.5%
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3. FEATURE
disposal of the units and the units retained
pre-CGT status (this was not in dispute).
Subsequently, a consolidated group was
formed on 1 July 2007 with Financial
Synergy Holdings Pty Ltd as the head
entity of the consolidated tax group and
a number of subsidiary entities.
In performing its tax consolidation
calculations, the taxpayer was required to
determine the allocable cost amount of the
units it had rolled over in setting the tax
base of underlying assets. The taxpayer
adopted a market value at the date of
actual transfer in 2007 of $30m.
At issue was the meaning of the
words "as at the time of acquisition" in
s 110-25(2)(b) ITAA97 and whether the cost
base of the units was to be determined
in 2007 (ie approximately $30m) or
pre-20 September 1985 (ie approximately
$1.5m), being the date when they were
deemed to have been acquired under
the roll-over provisions in Div 122 —
particularly pursuant to s 122-70(3) ITAA97.
The taxpayer also argued that, by virtue
of s 705-65(1) ITAA97, in forming a
consolidated group, it was deemed to have
acquired the assets "at the joining time",
and that Div 122 merely dealt with pre-COT
assets, not cost base.
Judgment: The court held that (among
other references) the use of the words
"acquired" in s 122-70(3) and "at the time
of acquisition" in s 110-25(2)(b) reflects an
intention that they operate together.
The court also held it was a false
dichotomy to suggest that Div 122 dealt
only with CGT status, and not the date of
acquisition of assets because parliament
could not have intended that the taxpayer
be entitled to preserve the pre-COT nature
of the units but also a reset cost base
under s 705-125 ITAA97.
Parliament intended for the cost base rules
in the consolidation provisions to operate
to set a cost base referable to market value
at a time prior to 20 September 1985, and
the cost base was $1,560,649.
Note: The taxpayer successfully
appealed to the Full Federal Court. The
Commissioner has sought special leave to
appeal to the High Court.
Case: FCT v Warner [2015] FCA 659
Judge: Perry J
Outcome: Commissioner
Summary: In this case, the Commissioner
served notices under both s 264 of the
Income Tax Assessment Act 1936 (Cth)
(ITAA36) and s 353-10 of the Taxation
Administration Act /953 (Cth) (TAA) on
the liquidators of a group of companies
which were part of a consolidated group
for income tax purposes and a GST group
for GST purposes. The liquidators took
the position that s 486 of the Corporations
Act 2001 (Cth) (Corporations Act) required
a creditor of a company in liquidation
to obtain a court order before it could
inspect the company's records held by its
liquidator, and that s 264 was inconsistent
with s 486. As a result, the liquidators did
not propose to produce the documents
required under the s 264 document notice
absent a court order.
The Commissioner sought a declaration
from the court that the liquidators had to
comply with the s 264 and s 353-10 notices
and raised a series of questions of law.
The liquidators were not represented and
an amicus curiae was appointed to raise
arguments countering the Commissioner's
position.
,.;:..4..gmer- t: The court held that ss 264 and
353-10 authorised the Commissioner to
require production of documents from any
person, irrespective of whether or not the
recipient of the notice is the liquidator of
a company, taxpayer or putative taxpayer
in liquidation. Section 486 does not affect
the liquidators' obligation to comply with a
s 264 notice or a s 353-10 notice.
Case: Davies v OCT [2015] FCA 773
Judge: Perram J
Outcome: Taxpayer
Summary: This case considered the
interpretation of the employee share
scheme provisions in Div 83A ITAA97.
The taxpayer was an incoming executive
director of Whitehaven.
In April 2009, Whitehaven agreed to grant
a company controlled by the taxpayer the
right to acquire shares and be granted
options, subject to shareholder approval
at an AGM (which occurred in November
2009). The shares and options were
allotted in four stages between December
2009 and October 2011.
Under s 83A-15 of the Tax (Transitional
Provisions) Act 1997 (Cth) (ITTPA), if a
beneficial interest in a right was acquired
before 1 July 2009, and after 1 July 2009
that right becomes a right to acquire a
beneficial interest in a share, Div 13A
I1AA36 would apply as if the right had
always been a right to acquire a beneficial
interest in the share. At issue was
whether, for the purposes of the ITTPA,
the taxpayer's company acquired the
rights in April 2009 (and pre-July 2009 so
that Div 13A applied) or at the date of the
shareholder approval in November 2009.
If the shares and options were to be valued
for tax purposes as at the date on which
the taxpayer's company acquired the right
to have the shares and options issued, any
discount to the market value of the shares
and options was to be calculated and
brought to tax in the hands of the taxpayer
(as an associate of his company) under the
then s 139D(2) ITAA36, at that earlier date
when the shares were trading at a low price,
rather than as at the vesting dates when the
share price had increased substantially.
Judgment: The court held that, when the
taxpayer entered the agreement for the
right to acquire shares and options, the
taxpayer obtained contingent rights to
acquire a beneficial interest in a share.
Once the shareholder approval was
granted, the right that the taxpayer had
acquired under the agreement became a
right to acquire a beneficial interest in a
share. The requirements of the ITTPA were
satisfied, and the taxpayer was taxed
taking into account the lower price.
Note: An ATO decision impact statement
has been issued withdrawing TD 2014/21.
Case: Thomas v FCT [2015] FCA 968
Judge: Greenwood J
Outcome: Commissioner/taxpayer (on
penalties)
Summary: The taxpayers were a trustee
and the two beneficiaries of the family trust
(an individual and a company).
In the 2006 to 2009 income years, the
trustee had passed resolutions sharing
franking credits and foreign tax offsets
between the individual beneficiary at over
90% and the company beneficiary at less
than 10%. Another resolution shared all of
the other net income (eg dividends) between
the individual beneficiary at less than 1%
and the company beneficiary at more than
99%. The purpose of this was to maximise
the refundable tax offsets available only to
the individual beneficiary and to ensure that
s 99A ITAA36 did not apply.
The trustee had sought directions in
the Queensland Supreme Court on the
interpretation of the trust deed and the
allocation of franking credits. In Thomas
Nominees Pty Ltd v Thomas,' the Supreme
Court ruled that the deed allowed the
TAXATInN IN Al ISTRAIJA I MAY 2016

4. FEATURE
allocation of franking credits separately
from the net income of the trust. One of
the issues before the Federal Court was
whether the Commissioner was bound by
the directions of the Supreme Court.
In 2011, the Commissioner issued amended
assessments to the taxpayers and imposed
shortfall penalties. The Commissioner
contended the franking credits formed part
of the income of the trust and therefore
could not be distributed separately from
the dividends to which they attached.
Likewise, the allocation of other credits
such as foreign tax credits was similarly
at issue. The taxpayer objected to both
the assessments and the application of
penalties.
Judgment: The Federal Court held that:
▪ the franking credits could not be dealt
with by the trustee separately from the
franked distributions to which they were
attached, as s 207-55 ITAA97 required
the franking credits and the dividends
to be connected. The approach
of the taxpayers represented an
"impermissible un-linking inconsistent
with the legislation";
• franking credits could not be "streamed"
independently from the net income of
the trust in contrast to fully franked
dividends which were "dividends" and
represented a category of distributable
trust income;
• the court considered that in most
cases, there is a difference between the
distributable income of the trust and
the s 95(1) ITAA36 net income of the
trust estate. In contrast to the finding
of the Queensland Supreme Court, the
distributable income of the trust was
its "net income" as calculated under
s 95(1), not trust income;
E TA 92/13 was not relevant as it failed
to correctly state the position under
Div 207 ITAA36;
• the Commissioner was not prevented
from making submissions on all
questions of fact and law in issue
in the present proceedings, even
though there were directions made
by the Queensland Supreme Court.
The directions from the Queensland
Supreme Court were made in the
context of proceedings which were not
contested and where the Commissioner
was not a party. The Commissioner
had to form a view based on the tax
law. Further, there was no authority for
the view that the principle of estoppel
applies to the construction of a trust
deed; and
• the court set aside the shortfall
penalties on the basis that they were
excessive in the circumstances given
that the taxpayer had a reasonably
arguable position relying on the
Queensland Supreme Court decision
and TR 92/13 (now withdrawn),
which allowed imputation credits to
be attached non-proportionally to
amounts of net income distributed
to beneficiaries.
Case: Bell Group Ltd (in liq) v DCT [2015]
FCA 1056
Judge: Wigney J
Outcome: Taxpayer
Summary: In 1991, a liquidator was
appointed to the taxpayer and a number
of related entities. In 2008, the taxpayer
commenced proceedings in the Supreme
Court of Western Australia against a
number of banks (including NAB). The
taxpayer was successful, but the banks
obtained special leave to appeal to the
High Court. Prior to the appeal, however,
the parties entered into a deed of
settlement which provided that the banks
pay a settlement sum to the liquidator to
be held for the benefit of the taxpayer and
related entities.
In 2015, the Commissioner issued
garnishee notices under s 260-5 of Sch 1
TAA to NAB in respect of tax liabilities
arising from the payment of the settlement
sum. At this stage, the funds held by NAB
pursuant to the deed of settlement had not
yet been distributed.
The taxpayer sought to have the garnishee
notices declared invalid on the basis
that they were an attachment against the
property of the taxpayer and therefore void
by reason of s 468(4) of the Corporations
Act. This issue had been considered by
the High Court in Bruton Holdings Pty Ltd
(in liq) v FCT.2
The Commissioner asserted that the
subject of the notice referred to a
post-liquidation tax liability and that his
right to seek a remedy in respect of this
liability was preserved by s 254(1)(h)
ITAA36, which was to be given priority over
s 468(4). The Commissioner asserted that
Bruton Holdings only applied in relation to
pre-liquidation tax liabilities.
Judgment: The court held that Bruton
Holdings equally applied to post-liquidation
tax liabilities.
The court held that s 260-45 of Sch 1 TAA
(in respect of pre-liquidation tax-related
liabilities) and s 254(1)(h) require the
liquidator to set aside amounts to meet
expected tax debts, but leave questions of
payment and priority to the Corporations
Act. The court found that s 254(1)(h) did
not confer a remedy for the Commissioner
as against property of the taxpayer once
winding-up had commenced.
The court held that it was important to note
that s 254(1)(h) used the word "attachable"
and whether the liability was "attachable"
was determined on the same basis as was
considered in Bruton Holdings.
Note: An ATO decision impact statement
has been issued, which suggests that it
still holds the same view regarding Bruton
Holdings and will be looking for a more
appropriate test case to test the issue at
a future date.
Case: Tech Mahindra Ltd v FCT [2015]
FCA 1082
Judge: Perry J
Outcome: Commissioner
Summary: This case considered art 7
and art 12 of the Australia-India double
tax agreement (DTA) (the relevant DTA
considered was the agreement pre-2011
amendments).
The most important articles considered
were:
art 12(4), which provided that amounts
constituting royalties are to be dealt with
under art 7 or art 14 where the services
in respect of which royalties are paid are
effectively connected to a permanent
establishment in the source state; and
art 7(7), which provided that where
profits included items of income dealt
with under other articles, then those
other articles were not affected by art 7.
The taxpayer was a company resident in
India and registered in Australia. It had
offices in Sydney and Melbourne through
which it provided software products
and IT services (including software
development) to customers in Australia.
It was not disputed that those offices
constituted permanent establishments
under the Australia-India DTA. The services
were provided to the customers partly
by employees located in Australia and
partly by employees located in India. The
taxpayer did not dispute that income was
taxable in Australia to the extent it was
attributable to services carried out by
Australian employees.
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5. FEATURE
The issue in this case was whether
income derived from services the taxpayer
provided to Australian customers which
were performed by employees located in
India was taxable in Australia.
The DTA at the time included art 7(1)(b)
which provided (on the facts of the case)
that Australia could tax sales of goods
or merchandise of the same or a similar
kind to those sold through the permanent
establishment, as well as income from
other business activities of the same or a
similar kind as those carried on through the
permanent establishment.
The Commissioner's assessment
proceeded on the basis that art 7(1)(b) was
applicable, and art 12 did not apply, as
art 12(4) provided that art 7 applied, and
art 7(1)(b) applied to provide Australia the
right to tax wherever the activities took
place.
In the alternative, the Commissioner
contended the payments from Australian
customers were "royalties": (1) meeting the
applicable definition under art 12 (ie the
"rendering of any services (including those
of technical or other personnel) which
make available technical knowledge,
experience, skill, knowhow or processes
or consist of the development and transfer
of a technical plan or design"); (2) those
royalties arose in Australia; and (3) Australia
could impose tax. Under that alternative
argument, the Commissioner maintained
that art 12(4) only prioritised art 7 over
art 12 to the extent that there was an
attribution to a permanent establishment,
and not otherwise.
The taxpayer objected, and appealed
the Commissioner's disallowance of that
objection to the Federal Court.
Judgment: The court dismissed the
taxpayer's proceedings, although the
Commissioner's assessments were
reduced. The court held:
IG art 7 did not apply, and the income
from the services supplied by Indian
employees was not "business profits"
taxable in Australia;
• however, art 12 did apply to some of
the payments, as some of the services
comprised "royalties" as defined. Those
royalties were deemed to have an
Australian source by virtue of art 23 of
the Australia-India DTA, and Australia
could impose tax to that extent (subject
to art 12). Those payments were
taxable in Australia in accordance with
s 6-5(3)(a) ITAA97;
• the services provided by the Indian
employees of the taxpayer were
"royalties" as those services in part
consisted of the "development and
transfer of a technical plan or design".
The court held for completeness that
the services did not "make available"
technical knowledge — technical
knowledge was not supplied, services
using that knowledge was;
• art 7(7) prioritised art 12, and art 12(4)
did not apply as there was no
effective connection to a permanent
establishment in Australia. The
contractual arrangements between
customers and the Australian permanent
establishment in respect of the services
was not sufficient for an "effective
connection", rather the test is one of
whether profits are attributable to the
work of the permanent establishment;
and
• the taxpayer was contending that, while
there was an "effective connection" for
the purposes of art 12(4) requiring art 7
to have priority, there was no effective
connection or attribution to a permanent
establishment for the purposes of art 7,
and tax did not arise. The court held
there was no discernible purpose for
that outcome and it was not correct.
Note: The taxpayer has appealed to the
Full Federal Court.
Case: Chevron Australia Holdings Pty Ltd v
FCT (No. 4) [2015] FCA 1092
Judge: Robertson J
Outcome: Commissioner
Summary: This was the first major case in
Australia to consider transfer pricing issues
in relation to cross-border related party
financing.
The dispute concerned the transfer pricing
implications of a Credit Facility Agreement
dated 6 June 2003 between Chevron
Australia Holdings Pty Ltd (CAHPL) and
Chevron Funding Corporation Inc (CFC),
a Delaware-based wholly owned subsidiary
of CAHPL. The facility was for the AUD
equivalent of US$2.5b. The USD funds had
been raised by CFC from the commercial
paper market at approximately 2%
interest and on-lent to CAHPL in AUD at
approximately 9% interest.
The Commissioner denied a proportion of
the deductions claimed by CAHPL for the
interest paid to CFC. The Commissioner
issued amended assessments for the
2004 to 2008 tax years with penalties.
The assessments relied on determinations
made by the Commissioner pursuant
to Div 13 ITAA36. In addition, the
Commissioner made determinations under
Div 815-A ITAA97 for the 2005 to 2007
tax years. Division 815-8 ITAA97 was not
considered as a part of this case.
The central issue was whether interest
charged by CFC to CAHPL exceeded the
arm's length amount, but other issues
arose including the constitutional validity
of Div 815-A, and whether art 9 of the
Australia-United States DTA operated as
an independent basis for assessment.
Judgment: The Federal Court held in
favour of the Commissioner, on the basis
that the taxpayer had not discharged its
onus of proof that the assessments were
excessive. The case turned on the evidence
that was before the court.
Critical holdings included:
N the facility between CAHPL and CFC did
not contain any security or covenants
which would be expected in arm's
length agreements. If such provisions
were included, the arm's length interest
rate would have been lower;
▪ credit rating agency evidence
presented by both the taxpayer and
the Commissioner was not held to be
relevant because the court held that
independent lenders do not rely on
published credit ratings, and instead
complete their own credit analysis;
• although it was permissible to take the
implicit support of a parent entity into
account, it had very little impact on
pricing by a lender (this was particularly
important as the Commissioner had
maintained that implicit support would
have led to a higher credit rating for the
borrower, and a reduced interest rate);
a an arm's length loan may have been
made in AUD for commercial reasons,
despite carrying a higher interest
rate than a loan in USD. This was in•
response to submissions from the
Commissioner which focused on the
"property" for the purposes of the
transfer pricing provisions, and argued
that the "property" was USD;
L "consideration" in Div 13 was not
limited to the interest rate, and included
valuable promises of the borrower (such
as restrictive covenants and security);
a Div 13 does not treat a taxpayer
which is a subsidiary of an entity as a
stand-alone entity (ie without taking into
account its status as a subsidiary);
612 TAXATION IN AUSTRALIA) MAY 2016

6. FEATURE
• art 9 of the Australia—United States
DTA did not operate to provide an
independent taxing power;
lie Div 815-A was constitutionally valid; and
• the transfer pricing rules can be applied
irrespective of whether the amount
of debt is below the safe harbour
thresholds under the thin capitalisation
rules.
Note: The taxpayer has appealed to the
Full Federal Court.
Case: Orica Ltd v FCT Rom} FCA 1399
Judge: Pagone J
Outcome: Commissioner
Summary: The taxpayer was the head
entity of the Orica Australia consolidated
group. This case considered the application
of Pt IVA ITAA36, whether the taxpayer had
a reasonably arguable position, and the
application of penalties under s 284-145
of Sch 1 TAA. The issues related to the
2004 to 2006 income years (ie prior to the
amendments to Pt IVA in 2012).
The background revolved around the
booking of US tax losses by the Orica
group in its consolidated balance sheet.
The US tax losses could only be booked if it
was virtually certain those losses would be
used in future against income. Because the
US operations were loss-making, those US
tax losses were not anticipated to be able
to be recognised through ordinary trading.
The lack of recognition of the US tax losses
in the balance sheet had an impact on the
reporting of the group's profits, reducing
assets and increasing the group's income
tax expense. If the losses could be booked,
there would be an increase in Orica's
reported consolidated profits, by way of a
reduction in its income tax expenses.
When the group considered that issue,
ideas were considered to generate income
in the US. The arrangement adopted
involved a degree of circular financing
which, in relation to Australia, involved:
2 a member of the Orica tax consolidated
group in Australia (OEH) subscribing
for three tranches of redeemable
preference shares (RPS) in a US
subsidiary which had the US tax losses
(OUSSI). The RPS carried a right
to receive a non-cumulative annual
dividend payable out of distributable
profits. The subscription was funded
by OEH borrowing funds from another
member of the Australian consolidated
group (OFL);
• OUSSI lending the funds to OFL at
interest rates ranging from 4.46% to
5.43% per annum, guaranteeing OUSSI
a flow of interest income in the US
and enabling the US tax losses to be
booked in the consolidated balance
sheet; and
• OFL on-lending the funds it borrowed
from OUSSI to OEH.
From an Australian income tax perspective,
the consolidated group claimed a
deduction (at 30%) for interest incurred on
the loan from OUSSI, remitted withholding
tax to the AID (at 10%) on the interest
payments and was not assessed on the
dividends received on the RPS.
The Commissioner sought to apply Pt IVA
to deny deductions for interest on the loans
from OUSSI on the basis that the dominant
purpose of the scheme was to obtain those
deductions.
The case focused exclusively on the
purpose element in Pt IVA, as the scheme
and tax benefit elements of Pt IVA were
conceded.
The taxpayer argued the scheme was
undertaken in order to re-recognise the US
tax losses and, in turn, increase accounting
profits. This, in turn, was anticipated to
improve investor perceptions of the group's
financial performance, increase Orica's
share price, reduce the risk of a hostile
takeover and reduce the risk of a breach
of financial covenants. The taxpayer
maintained that the dominant purpose of
the scheme was not to obtain tax benefits.
Judgment: The court held that:
• the evidence did not establish a causal
link with the purposes asserted by
the taxpayer and, in any case, "any
consequence from the schemes to the
perceptions of investors or ... financiers
would necessarily have arisen from the
after tax effect on reported profits for
the group arising from the deductions
for the interest paid ...";3
• the shape or form of the transaction
adopted indicated the presence of a
dominant purpose of obtaining a tax
benefit;
• citing FCT v Spotless Services Ltd°
and FCT v Hart,' the existence of a
commercial purpose relating to the
accounting treatment did not vitiate the
fact that obtaining the tax benefit was
the dominant commercial purpose;
II in reality, the accounting effect was an
increase in group profits by the amount
of the tax deductions obtained. The
commercial benefit identified by the
taxpayer represented a monetisation
of a tax benefit, and without the
tax benefit, the schemes would not
have made commercial sense. This
supported the view that the dominant
purpose was to obtain the tax benefits;
• there was insufficient evidence
to support the view OUSSI would
otherwise have entered into a financing
with an external provider, and generated
income from a bank deposit; and
• when assessing the taxpayer's liability
for penalties, the court found that
the taxpayer's position did not meet
the "reasonably arguable" threshold
and that penalties were appropriately
applied. The taxpayer had argued at the
time it entered the scheme, the High
Court's judgment in Hart had not been
issued, but there was no evidence of
how the decision in Hart could have
affected its conclusion.
2015 Full Court of the Federal
tax cases
Case: FCTv AusNet Transmission Group
Pty Ltd [2015] FCAFC 60
Judges: Kenny, Edmonds and
Greenwood JJ
Outcome: Commissioner
Summary: This was an appeal by the
Commissioner from the Federal Court.
This case considered the proper method of
apportioning purchase price to copyright
assets purchased by the taxpayer
without an explicit statement of value.
The taxpayers had claimed deductions
in the financial years from 1998 to 2005
as a result of a purchase of a business.
One taxpayer had claimed deductions on
its own behalf (the first taxpayer) and the
other as head company of a consolidated
group (the head company taxpayer) which
had been subsequently joined by the first
taxpayer.
Under the purchase agreement, the
assets of the business were defined to
include the intellectual property rights of
the business, which included copyright in
technical drawings, plans and other works
which were critical to the operation and
maintenance of the business. The case
proceeded on the footing that the works
were original works in which copyright
subsisted. The taxpayers claimed the
copyright in the works was a "unit of
industrial property" in relation to which
TAXATION IN AUSTRALIA IVOL 50(10) 613

7. FEATURE
an amount equal to the residual value of
the unit (calculated in accordance with
a prescribed formula) was an allowable
deduction under former Div 10B of Pt III
ITAA36, and former Div 373 and Div 40
ITAA97.
The main issue before the Federal Court
was in respect of the first taxpayer
and was the interpretation of s 124R(5)
ITAA36 for the purposes of determining
the amount of the purchase price to be
allocated to the copyright in the works.
In particular, the issue was whether that
purchase price allocation process was
subject to the Commissioner's discretion
or whether it operated objectively requiring
valuation evidence to be considered.
The Commissioner had determined a nil
allocation.
The Federal Court held that the question of
value and allocation was to be determined
objectively according to the applicable
valuation methods (as an arm's length
transaction was being considered in the
case). On the evidence, the Federal Court
preferred the midpoint of the valuations
previously obtained by the taxpayer as
the basis of valuing the copyright. The
matter was remitted to the Commissioner
to revalue in light of the decision. The
Commissioner appealed to the Full Court.
Judgment: The appeal was allowed. The
court held that:
a on the threshold question of whether
the first taxpayer could challenge the
Commissioner's determination pursuant
to s 124R(5) using Pt IVC proceedings
as opposed to as a judicial review
proceeding, the majority of the court
said the first taxpayer could do so;
S on the question of whether s 124R(5)
involved a valuation of the copyright
works, it was held that it did require
a valuation;
• however, the expert evidence before
the Federal Court was held to be
misconceived and should not have been
admitted as evidence. In particular,
factors which suggested that the
copyright works had no value were not
considered appropriately. The court
considered that if the first taxpayer
had not acquired the copyright, it
would have acquired an implied
licence to use the copyright — with the
copyright being of little to nil value as
a consequence;
a as the expert evidence did not show
that the Commissioner's assessment
of the first taxpayer was excessive,
the Commissioner's assessment was
upheld; and
S in relation to the head company
taxpayer, the court held that there were
unresolved questions in relation to the
valuation of the copyright at the relevant
time that the first taxpayer joined the
consolidated group, and remitted
the matter to the Federal Court for
determination.
Case: Channel Pastoral Holdings Pty Ltd v
FCT [2015] FCAFC 57
Judges: Allsop CJ, Edmonds, Gordon,
Pagone and Davies JJ
Outcome: Commissioner
Summary: This was a special case stated
to the Full Federal Court and was funded
by way of test case funding.
This case considered the application of
Pt IVA to a consolidated group. It followed
the decision in FCT v Macquarie Bank Ltd'
which somewhat confused the position on
that issue. The questions considered by
the Full Federal Court were whether and
how the Commissioner can apply Pt IVA in
connection with a scheme that involves the
creation of a consolidated group.
The critical facts were as follows:
a Channel Cattle Co Pty Ltd (CCC) owned
two cattle stations with associated plant
and equipment, trading stock (cattle and
horses) and the stations' stock brand;
a all of the shares in CCC were owned by
Mr and Mrs Sherwin. They had acquired
their CCC shares prior to 20 September
1985 and were pre-CGT assets;
S until 31 December 2007, Channel
Pastoral Holdings Pty Ltd (CPH) was
a dormant company. On that date,
the Sherwins agreed to transfer their
shares in CCC to CPH for consideration
totalling $61.2m. Following that, CPH
became the sole owner of CCC;
the value of the trading stock held by
CCC as at 31 December 2007, for the
purposes of Subdiv 70-C ITAA97, was
$6.5m;
• CPH elected to form a consolidated
group with effect from 1 January 2008,
with CPH as head entity and CCC as a
subsidiary entity; and
• in February 2008, CCC entered into a
contract to sell the agricultural assets to
a third party purchaser. The sale price
of the agricultural assets was $70m. The
sale of the agricultural assets by CCC
was completed on 29 February 2008.
The Sherwins could have sold their
shares in CCC for $70m without tax
consequences.
By entering the above transactions, CPH
as head entity of the consolidated group
obtained a capital loss on the sale of the
land, derived $25.4m from the sale of
trading stock and derived a deduction of
just over $23m as a result of the tax cost
setting amount for the trading stock (as
calculated on formation of the consolidated
group) exceeding the value of the trading
stock at 30 June 2008.
The Commissioner contended that if the
steps described above had not been
entered into and carried out, it might
reasonably be expected that:
• CCC would not have joined the CPH
consolidated group with effect from
1 January 2008;
• CCC would have sold the agricultural
assets in February 2008 for $70m;
la this meant that, for tax purposes:
• there would be no capital loss on the
sale of the land;
• CCC would have made an
assessable net capital gain of
$33.7m on the sale of the land;
E CPH would not have been entitled to
a deduction for the trading stock and
CCC would have been entitled to a
lower $6.3m deduction; and
E CCC would have derived $25.4m in
assessable income from the sale of
the trading stock.
The Commissioner issued a number of
alternate determinations under Pt IVA and
assessments as follows:
a first, a determination to CCC on the
basis it had obtained a tax benefit, and
to give effect to that determination an
assessment to CPH as head entity;
al second, a determination to CPH as head
entity and an assessment to CPH; and
a third, a determination to CCC, and an
assessment to CCC.
The taxpayers contended that the
determinations and assessments could
not be made consistently with the
consolidation provisions because of the
single entity rule in Div 701 ITAA97.
The special case considered whether the
Commissioner was authorised to issue the
above determinations and assessments.
It arose following the earlier Macquarie
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8. FEATURE
Bank decision where the majority of the
Full Court held (among other matters) that
a subsidiary member of a consolidated
group could not be assessed under Pt IVA
as a result of the single entity rule, and
the head company could not be assessed
where under the counterfactual it was the
subsidiary company and not the head
company which would have obtained the
tax benefit.
(Note: The authors of this article
understand that it was agreed by the
taxpayer that it would not proceed to
challenge the Commissioner's alternative
postulate above by suggesting that, in
the alternative, the Sherwins would have
sold the shares in CCC to the third party
purchaser, without tax consequences
arising to them. The case does not
consider potentially arguable issues
relating to purpose or tax benefit.)
Judgmen.: All five judges agreed that the
third alternative of issuing a determination
and assessment to CCC was authorised,
and that CCC remained a "taxpayer"
despite the single entity rule. In the case
of the majority, this was because CCC
obtained the tax benefit, and CCC was
not a member of the consolidated group
for the entire income year. This meant that
s 701-30 ITAA97 provided a mechanism
for determining how the provisions applied
to an entity in those circumstances. The
majority of the court also determined that
the first and second alternatives were not
valid (this was dissented from by Justices
Pagone and Davies).
Case: Rio Tinto Services Ltd v FCT [2015]
FCAFC 117
Judges: Middleton, Logan and Pagone JJ
Outcome: Commissioner
Summary: This was an appeal from
the Federal Court by the taxpayer (as
head company of a consolidated group)
dismissing its claim to credits for GST it
paid for acquisitions relating to the supply
of residential premises to employees.
The issue was whether the taxpayer was
entitled to credits for the GST paid on the
acquisitions made by the members of the
group in relation to the supply of residential
accommodation to employees, contractors
and ancillary service providers in the
remote Pilbara region. The Commissioner
argued that the credits were denied to
Rio Tinto by operation of s 11-15(2)(a)
of the A New Tax System (Goods and
Services Tax) Act 1999 (Cth) as a supply
of residential accommodation by way of
lease, which was an input taxed supply
and credits were not available. The Federal
Court agreed with the Commissioner and
the taxpayer appealed.
Judgment: The taxpayer's appeal was
dismissed.
The court held that an acquisition which
relates wholly to the making of supplies
that would be input taxed is not to be
apportioned merely because that supply
may also serve some broader commercial
objective or purpose.
In this case, all of the acquisitions relate
wholly to supplies that would be input
taxed, being the supply of premises by
lease. The supply of the premises for lease
was for the broader business purpose
of carrying on the taxpayer's enterprise,
however, this did not alter the fact that the
acquisitions in question all related to the
making of the supply of the premises by
way of lease.
Nc -3: An ATO decision impact statement
has been issued.
Case: FCT v ElecNet (Aust) Pty Ltd
(Trustee) [20151 FCAFC 178
Judges: Jessup, Pagone and Edelman JJ
Outcome: Commissioner
Summary: This was an appeal by the
Commissioner from the Federal Court. This
was a test case funded under the test case
funding program.
The taxpayer applied to the Commissioner
for a private ruling that the Electrical
Industry Severance Scheme (EISS) it was
trustee of was a "unit trust" that was a
"public unit trust" and a "public trading
trust" for the purposes of Div 6C of Pt III
ITAA36. The Commissioner ruled that the
EISS was not a "unit trust", which meant
that it could not be a "public unit trust" or
a "public trading trust" and disallowed the
taxpayer's objection.
The Federal Court upheld the taxpayer's
appeal, holding that the EISS was a "unit
trust", although whether it was a "public
unit trust" could not be determined from
the evidence before the court, and the
judgment reserved its position on one
aspect of the trust deed relating to whether
there were "active workers".
In reaching its conclusion that there
was a "unit trust", the Federal Court
considered the definition of "unit" in
s 102M ITAA36 to give meaning to
the term "unit trust" in Div 6C. The
Commissioner appealed on the basis
that this was an error of law.
Judgment: The Full Federal Court allowed
the Commissioner's appeal.
The court held that:
a the EISS was not a unit trust because
the workers did not have units in any
meaningful sense. Whatever their
beneficial interests, they were not
unitised;
E the definition of "unit" in s 102M relied
on in the Federal Court was relevant;
a "unit trust" for the purposes of
Div 6C is to be interpreted broadly,
and includes trusts where there was
an element of discretion, trusts where
beneficiaries had contingent rights, and
a "unit" could include persons entitled
to a beneficial interest in any of the
income or property of the trust estate.
The Federal Court was correct in that
regard;
the submissions of the Commissioner
that a "fixed trust" involves an interest in
particular property, and a "unit trust" was
a fixed trust involving a proportionate
share in trust rights in all trust property
were rejected as proposing a concept
that was too narrow;
a "unit trust" revolves around
considering the deed, and also the core
concepts of whether persons have:
(1) a beneficial interest in the income
or property of the trust estate which
is (2) capable of being functionally
described as involving units;
a three factors led to the conclusion that
the EISS was not a "unit trust" and
all were based on the trust deed and
discretions available to the trustee under
that deed. This case highlights the need
for care to be taken with drafting the
trust deed; and
n the factors in the trust deed had the
effect that the beneficial interest of
the workers could not be described
functionally as being capable of being a
unitised interest under a unit trust. First,
any rights of the workers were subject
to them being an "active worker"
as determined solely by the trustee.
Second, the taxpayer as trustee had
the power to vary the amount standing
to a worker's account under the trust.
Third, if amounts were to be paid out
of the trust as a severance payment
(as defined in the trust deed), those
amounts were calculated by reference
to a prescribed amount (as defined in
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9. FEATURE
the trust deed), not necessarily what
was standing in the worker's account.
It was possible for workers to receive
less than the amount in their relevant
account.
Note: the taxpayer has sought special
leave to appeal to the High Court.
2015 High Court tax cases
Case: AusNet Transmission Group Pty Ltd
v FCT [2015] HCA 25
Judges: French CJ, Kiefel, Bell, Gageler
and Nettle JJ
Outcome: Commissioner
Summary: This was an appeal by the
taxpayer from the Full Federal Court.
The issue was whether payments
which were made by the taxpayer were
deductible under s 8-1 ITAA97. The
payments were required under an order
in council made under s 163AA of the
Electricity Industry Act 1993 (Vic). The
Federal Court held that the payments were
not deductible because they were not
connected to the production of income and
were payments from the taxpayer's profits
and, alternatively, because the payments
were capital in nature, and the Full Court
dismissed the taxpayer's appeal. The
payments arose following the taxpayer's
acquisition of assets and the transmission
licence from Power Net Victoria and were
noted in agreements relating to that asset
acquisition.
Judgment: The appeal was dismissed
(Nettle J dissenting).
The court held that the payments were of
a capital nature as they were part of the
consideration for the acquisition of the
business by the taxpayer. From a practical
and business point of view, the taxpayer
assumed the liabilities in order to acquire
the assets and transmission licence from
Power Net Victoria.
Case: FCT v Australian Building Systems
Pty Ltd (in liq); FCT v Muller and Dunn as
Liquidators of Australian Building Systems
Pty Ltd (in lip) [2015] HCA 48
Judges: French CJ, Kiefel, Gordon,
Gageler and Keane JJ
Outcome: Taxpayer
Summary: This was an appeal by the
Commissioner from the Full Federal Court.
This was a test case funded under the test
case funding program.
The issue in this case was whether a
liquidator is required under s 254 ITAA36
to retain money to meet any future taxation
liability in respect of the income year in
which a CGT event occurred following the
sale of an asset, prior to an assessment
being issued by the Commissioner. The
issue was the meaning in s 254(1)(d) of a
retention obligation arising where tax "is or
will become due".
Judgment: The Commissioner's appeal
was dismissed (Gordon J and Keane J
dissenting).
In absence of an assessment, s 254 had
no application to the liquidators. At most,
there was an obligation to pay income
tax in the future, but this does not trigger
a retention obligation for the liquidators
in s 254(1)(d) as no tax "is due" or "will
become due", in the sense of "owing", and
there is no certainty as to what the tax is
until an assessment is issued.
This holding was consistent with the High
Court's decision in Bluebottle UK Ltd v
DCT.7 Bluebottle considered s 255 ITAA36
where the same wording (tax "is or will
become due") is used in the context of
retention obligations for persons in control
or receipt of money from a non-resident.
The High Court held there was no
permissible rationale for s 254 to be treated
differently from s 255 in this regard, and
applied Bluebottle.
Note: An ATO decision impact statement
has been issued.
Joanne Dunne, CT-I
Partner
MinterEllison. Melbourne
Hilary Taylor
Lottrer
MinterEllison, Melbourne
Nick Batten
Lawyer
MinterEllison, Melbourne
Nathan Krapirensky
Lawyer
MinterEllison. Melbourne
This article is adapted from a paper delivered at The Tax
Institute's Financial Services Taxation Conference held in
Surfers Paradise on 17 to 19 February 2016.
References
1 [2010] OSC 417.
2 [2009] HCA 32.
3 Orica Ltd v FCT [20151 FCA 1399 at 1301.
4 [1996] HCA 34.
5 120041 HCA 26.
6 [2013] FCAFC 13.
7 [2007] HCA 54.
616 TAXATION IN AUSTRALIA MAY 2016