Commissioner successful in dispute over cost base of pre-CGT asset
Financial Synergy Holdings Pty Ltd v Commissioner of Taxation  FCA 53, involved a dispute over the capital gains tax (CGT) cost base of units in a trust where they were swapped in consideration for the issuance of shares in a company as part of an arrangement whereby roll-over under Subdivision 122-A of the Income Tax Assessment Act 1997 (ITAA 1997) was obtained. The question was whether the CGT cost base of the units acquired was to be determined as the market at the date of contract of the shares issued as consideration for acquiring the units, or the market value of those shares determined before 20 September 1985.
In this respect, it is relevant to note that the units acquired by the taxpayer were accepted as being originally acquired by the transferor before 20 September 1985 (pre-CGT), and that under subsection 122-70(3) of the ITAA 1997, the effect of the transferor obtaining ‘Subdivision 122-A roll- over’ in respect of transfer of the units to the acquiring company (Financial Synergy Holdings Pty Ltd ) was that the acquiring company was taken to have acquired the rolled over asset (i.e. the units) before 20 September 1985.
Whilst it is generally accepted that the purpose of sub-section 122-70(3) is simply to preserve the CGT (i.e.CGT exempt) status of the rolled over asset in the hands of the transferee (i.e. because generally CGT does not apply to the disposal of a pre-CGT asset), the Commissioner and the taxpayer had different views as to whether sub- section 122-70(3) ‘governed’ the ‘time of acquisition’ of the units for the purposes of applying the CGT cost base rules in sub-section 110-25(2)(b) of the ITAA 1997. Under that provision, the first element of the CGT cost base of an asset is the market value of the property given in respect of the acquisition, with such market value being determined at the time of acquisition. The relevance of determining CGT cost base of the units in this case, was that the unit trust became a
‘subsidiary member’ of a tax consolidated group after acquisition, (with the taxpayer being the head company of the group), and it was thus necessary to determine the CGT cost base of the units for the purposes of step 1 of the 'allocable cost amount' in the tax consolidation regime cost setting rules.
The Commissioner’s position was that the ‘time of acquisition’ for the purposes of sub-section 110- 25(2)(b) was immediately before 20 September 1985 since, according to the Commissioner, sub- section 122-70(3) specified the time of acquisition. In response, the taxpayer submitted that sub- section 122-70(3) was simply a specific provision for preserving pre-CGT status of the units, and that under the general acquisition principles in the CGT regime, the units were acquired at the date of the contract for acquisition, which in this case occurred in 2007 when the taxpayer contracted to acquire the units. The taxpayer also had an alternative argument which ultimately was dismissed by the Court.
In finding for the Commissioner, Justice Pagone said that it was a “false dichotomy in this case to draw a distinction between the date of acquisition of assets and their CGT status”. According to his Honour, “it was clear from the effect of sub-section 122-70(3) that the relevant feature of the CGT status conferred upon assets by reliance upon the provision was that they were deemed to have been acquired before 20 September 1985”.
As a result, his Honour concluded that the market value was required to be determined immediately before 20 September 1985 and not at the date of contract in 2007.
Despite its apparent lack of current application, the case continues to provoke considerable interest across the broader tax community. Some of the comments made by the Court would suggest that an appeal on the matter would be likely.