Commissioner seeks special leave to appeal in tax consolidation litigation

The Commissioner of Taxation has lodged an application seeking special leave to appeal to the High Court of Australia against the Full Federal Court decision in Financial Synergy Holdings Pty Ltd v Commissioner of Taxation [2016] FCAFC 31. In this case, the Full Court agreed with the taxpayer that the time of acquisition of units in a unit trust that was subject to a capital gains tax (CGT) rollover was the date of the relevant contract for acquisition which occurred in 2007, and not a date that was apparently "just" before 20 September 1985. The importance of determining the time of acquisition is that the market value of the shares (given as consideration for acquiring the units) at the time of acquisition is the CGT cost base of the units under sub-section 110-25(2) of the Income Tax Assessment Act 1997 (ITAA 1997). This CGT cost base was relevant to the tax consolidation tax cost setting process (at Step 1) when the unit trust became a member of the tax consolidated group.

The Commissioner’s reasoning for a date immediately before 20 September 1985 being treated as the time of acquisition, was that the effect of the CGT rollover (under sub-section 122- 70(3) of the ITAA 1997) was to deem the units to have been acquired before 20 September 1985, not only for the purposes of preserving the pre-CGT status of the units, but also for the purposes of setting their cost for the purposes of sub-section 110-25(2). The Full Court rejected this reasoning, saying that there were a number of contextual reasons against extending the effect of sub-section 122-70(3) to govern the time of acquisition for the purpose of working out the cost base of the units under sub-section 110-25(2), including that (and citing Commissioner of Taxation v Comber (1986) 10 FCR 88 at 96 as authority) the function of the deeming provision in sub-section 122-70(3) did not need to extend beyond that purpose in the context of Division 122 of the ITAA 1997. 

Improved access to corporate losses

On 6 April 2016, the Commonwealth Treasury released draft legislation as part of the Government’s National Innovation and Science Agenda, that is designed to improve access by companies to tax and capital losses by supplementing the existing ‘same business test' with a new, more flexible ‘similar business test’.

The current same business test discourages loss companies that have new equity investors which would cause the failure of the “continuity of ownership test”, to innovate and adapt their current business activities. The purpose of the proposed similar business test measure is to encourage innovation by allowing loss-making corporates (and listed widely held trusts) to seek out new opportunities to return to profitability.

The new similar business test will be satisfied if, in general terms, the business that the company carries on in the year a loss is to be recouped is a similar business to the business it carried on immediately before the change of ownership or control that caused it to fail the continuity of ownership test.

These amendments will broadly apply to losses made by companies for income years beginning on or after 1 July 2015.

Submissions were sought on the proposed law by 22 April 2016. It was the intention of Government to have these measures introduced into Parliament in the Winter session.

Senate Report into Corporate Tax Avoidance - Part 2 - Gaming the system

The Senate Standing Committee on Economics issued its second report on its inquiry into corporate tax avoidance - Part 2: Gaming the system - on 22 April 2016.

In this report, the committee only made one recommendation and that was that the inquiry be extended until 30 September 2016 to explore the implications arising from the “Panama Papers”. The Green's senators made a further recommendation that the government implements a comprehensive response to corporate tax avoidance, starting with the establishment of a public register of beneficial ownership and a public register of tax settlements.

Key points noted:

  • The committee reiterates its position that greater transparency in tax affairs is important both for addressing profit shifting by multinationals and maintaining public confidence in the integrity of the tax system. While the committee notes that a government consultation process is underway to develop a voluntary tax transparency code, it is sceptical that a voluntary code will provide the necessary incentives for multinationals with questionable tax practices to disclose their affairs, and considers that a mandatory tax reporting code should be implemented as soon as practicable.
  • The parallel legislative inquiry which examined the government's multinational tax avoidance bill last year recommended that a postimplementation review of the laws be undertaken within three years. The committee noted that this recommendation should be incorporated into a broader review of Australia's progress in implementing the Base Erosion and Profit Shifting (BEPS) recommendations.
  • Recommendation 3 (mandatory tax transparency code), recommendation 4 (reinstating the tax transparency laws as originally enacted), recommendations 5, 7 and 11 (Public register of settlements, annual report to Parliament and ATO resourcing) and recommendation 13 (Grandfathered proprietary companies) from the Senate Committee’s interim report were reinforced.
  • It is evident to the committee that recent legislative changes may not be sufficient to address the multinational profit shifting problem. There are two main areas - transfer pricing and interest deductions - where the committee considered that the present system architecture is not adequate and further reform may be warranted.

Areas for further action:

  • The committee considers it is in the broader public interest for significant global entities to be required to file general purpose financial accounts. It urges the government to amend the accounting standards and make significant global entities file general purpose accounts for their Australian activities.
  • The evidence presented over the course of this inquiry indicated to the committee that transfer pricing provisions do not serve Australia well. The committee appreciates that there are no easy solutions to reforming internationally accepted principles as they relate to transfer pricing. That said, the committee considers that the current transfer pricing principles need to be fully explored, and, where necessary, redrafted to ensure that transfer pricing cannot be manipulated to the detriment of Australian tax revenue.
  • Throughout the course of the inquiry, more and more evidence emerged to suggest to the committee that tax avoidance is widespread among both individuals and corporations. In light of the most recent release of the “Panama Papers”, the committee has resolved that it should explore the wider implications of this new information on tax avoidance and assess initiatives by the Australian Taxation Office to combat tax avoidance and aggressive minimisation by individuals as well as corporations.