Full Federal Court finds for taxpayer in dispute regarding CGT time of acquisition
In Financial Synergy Holdings Pty Ltd v Commissioner of Taxation  FCAFC 31, the Full Federal Court, allowed the taxpayer’s appeal. In the case, the taxpayer claimed a capital gains tax (CGT) roll-over to preserve the pre capital gains tax (pre-CGT) status of the asset rolled over. The appeal challenged the view of Justice Pagone at first instance, that the effect of obtaining the rollover meant that, the time of acquisition of the rolled-over asset under section 110-25(2) of the Income Tax Assessment Act 1997 (ITAA 1997), was immediately before 20 September 1985 and not the actual date of contract for the acquisition.
Briefly, Financial Synergy Holdings Pty Ltd (FSH) was the head company of a tax consolidated group (TCG) which formed with effect on 1 July 2007. The TCG was comprised of the head company, the Financial Synergy Unit Trust (the Unit Trust) and three other companies. The units in the Unit Trust had been originally acquired pre-CGT and were transferred to FSH on 29 June 2007, with CGT roll-over being chosen under Subdivision 122-A of the ITAA 1997. In consideration for the transfer of the units to FSH, the transferor was issued with 30 million shares (consideration shares) in FSH, each share having a value of $1. After this transaction, a further 25,302 units in the Unit Trust were issued to FSH in part satisfaction of $12,423,741 owed to it. This issue of units occurred on 29 June 2007.
FSH lodged tax returns for the 2008 to 2013 income years as the head company of the TCG on the basis that the time of acquisition of the units, for the purposes of determining the CGT cost base of the units, was the date of contract for the acquisition which was 29 June 2007. The relevance of the time of acquisition was that under section 110-25(2)(b) of the ITAA 1997, the market value of the consideration shares (being property given to acquire the rolled-over units) needed to be determined at the time of acquisition. If the taxpayer’s view was correct, the value of the consideration shares was substantial – ie around $30 million, whereas, the Commissioner contended it was the value in 1985, which was, in relative terms, nominal (around $1.560,649).
The relevance of the CGT cost base to the calculation of FSH’s taxable income for the 2008 to 2013 income years was that FSH needed to take into account the CGT cost base of the units under the tax consolidation cost setting rules in Division 705 of the ITAA 1997, although it is unclear from the decision as to how the amount taken to be the CGT cost base was allocated to particular assets in the tax cost setting process.
The Commissioner’s argument was that the effect of the Subdivision 122-A roll-over of the units was that the units acquired by FSH were deemed to have been acquired before 20 September 1985 (see section 122-70(3) of the ITAA 1997), and that section 122-70(3) had effect for all purposes of the ITAA 1997, with the consequence that the units were to be treated as being acquired ‘before’ 20 September 1985. The effect of the position taken by the Commissioner was that FSH’s CGT cost base in the units acquired from the transferor was not $30 million, but instead, was an amount in the order of $1,560,649, being the value of the Financial Synergy business at 1 July 1985 (being a date proximate to 20 September 1985). Under the tax cost setting rules, the Commissioner’s position was that it was this amount that FSH needed to use in the cost setting process, notwithstanding that this amount had no relevance to either the identity of or the value of the property that FSH gave to acquire the units in 2007.
At first instance, Justice Pagone agreed with the Commissioner that section 122-70(3) was a time of acquisition rule for all purposes of the ITAA 1997. Thus, for the purposes of determining the cost base of the units, the time of acquisition of the units was immediately before 20 September 1985, and based on this construction of the relevant provisions, FSH was required to determine the market value the consideration shares that it gave in 2007, at a date that was immediately before 20 September 1985.
In a unanimous finding in favour of FSH, the Court considered the ‘function’ of section 122-70 of the ITAA 1997 which, because section 122-70(3) applied, deemed the time of acquisition of the units in the Unit Trust to be before 20 September 1985. With respect to section 122-70, the Court said that “the function of s122-70 was to preserve the CGT characteristics of the asset in the hands of the recipient by providing, in the case of an asset acquired on or after 20 September 1985, that the recipient takes the same cost base of the asset as the transferor’s cost base at the time of disposal (s122-70(2)) and, in the case of an asset acquired by the transferor before 20 September 1985, that the company is taken to have acquired [the asset] before that day”.
After considering the function of the provision, the Court said that there were a “number of contextual reasons against extending the effect of the provision to govern the time of the acquisition for the purposes of working out cost base under s110- 25(2)(b)”. Relevantly the Court made the following observations and findings:
- The reference in sub-section 122-70(3) to a time before 20 September 1985 is intended to exclude assets dealt with under subsection122-70(2) ie assets which are not preCGT assets. The purpose therefore served by sub-section 122-70(3) is to preserve the preCGT status of assets rolled over, and “the function of the deeming provision does not need to extend beyond that purpose in the context of Div 122: Commissioner of Taxation v Comber (1986) 10 FCR 88 at 96.”
- The word ‘acquire’ in section 995-1 of the ITAA 1997 does not extend the ambit of the deeming provision and relevantly, whilst Subdivision 109-B, (which is referred to in that definition), “sets out s122-70(3) as an acquisition rule (see s109-5) .... [it] is not an operative part of the 1997 Act: s109-50, s950-150”. Accordingly “the outcome that the pre-CGT assets are taken to have been acquired for the purposes of s110-25 before September 1985 is not mandated by Div 109 or the definition of acquire”.
- Section 716-855 was introduced by the legislature to deal with rollovers under Subdivision 126-B, and in particular to deal with the time of acquisition where sub-section 126-60(3) applies for the purposes of allocable cost amount (ACA) cost setting. Importantly sub-section 126-60(3) is in similar terms to sub-section 122-70(3) in that the function of the provision preserves the pre-CGT status of assets rolled over, by deeming the assets to have been acquired before 20 September 1985.
The effect of section 716-855 is that, for the purposes of determining the CGT cost base and reduced cost base of the asset rolled over and to which sub-section 126-60(3) applies, the ‘rule’ in sub-section 126-60(2) is to be applied, notwithstanding that sub-section 126- 60(3) still applies to preserve pre-CGT status. Under that ‘rule’, the transferor’s cost base and reduced cost base is inherited by the transferee, and the market value of property given to acquire the assets is not relevant. With respect to section 716-855, the Court said that “importantly there is no such cognate provision in respect of a Div 122 roll-over”, and that “the absence of a cognate provision in respect of a Div 122 roll-over is telling against the Commissioner’s construction”.
- The object of the ACA cost setting provisions in the tax consolidation regime is to “recognise the head company’s cost of becoming the holder of the joining entity’s assets as an amount reflecting the group’s cost of acquiring the entity”: sub-section 705-10(2). According to the Court, “the taxpayer’s construction gives effect to and is consistent with that object. Section 716-855 provides an exception only in relation to pre-CGT assets acquired under Subdiv 126-B roll-overs”.
Taxpayer appeals the decision on question of whether amount on buy-back was debited to the share capital account
The taxpayer has appealed to the Full Federal Court against the decision in the Cable & Wireless Australia & Pacific Holdings BV case which was reported March TaxTalk Monthly. This case concerns the application of the share buy-back provisions in the tax law and whether an amount debited to a ‘Share Buy-Back Reserve Account’ was debited to a share capital account and thus not a dividend for tax purposes.