In a recent decision, the Court considered the issue of whether parties were dealing with each other at arm’s length for the purposes of the scrip-for-scrip rollover provisions. The transaction had been designed to take advantage of the scrip-for-scrip roll-over provisions even though the parties were in an arm’s length relationship. The question was whether the intention of both parties in structuring the transaction to obtain the benefit of the relief was sufficient to constitute “collusion” by the parties to mean that they did not deal with each other at arm’s length.
Under the scrip-for-scrip roll-over provisions there is an additional condition that must be satisfied if the original interest holder and an acquiring entity did not deal with each other at arm’s length and neither the original entity nor the replacement entity had at least 300 members just before the arrangement started or the original interest holder, the original entity and an acquiring entity were all members of the same linked group just before that time. It was accepted by the taxpayer and the Commissioner that this additional condition could not be satisfied if the parties did not deal at arm’s length.
Therefore it was essential to the taxpayer’s case that the original interest holder and the acquiring entity were found to be dealing with each other at arm’s length.
The Commissioner accepted that the relationship between the original interest holder and the acquiring entity was an arm’s length one. However the Commissioner argued that the parties, although otherwise dealing with each other at arm’s length, had “colluded” to obtain the scrip-for-scrip rollover relief.
In other taxation contexts, in relation to whether parties are dealing with each other at arm’s length, there is case law to suggest that parties which are otherwise are at arm’s length, are not dealing with each other at arm’s length, if there is collusion between the parties. However the issue has not arisen in the context of the scrip-for-scrip roll-over relief.
The Court found there was no actual collusion between the parties. The Court also found that this was not a case of one party to the bargain being disinterested in the outcome so as to lead to a conclusion that the parties were not dealing at arm’s length.
The Court held that the fact a transaction is devised in a certain way to obtain a revenue advantage does mean that the transaction is a non-arm’s length one. In the Court’s view the parties dealt with each other at arm’s length within the meaning of the scrip-forscrip roll-over relief provisions.
The Commissioner also sought to argue Part IVA applied to allow him to cancel the tax benefit available from the scrip-for-scrip rollover provisions.
In this case the issue was what might reasonably be expected to have occurred in the absence of the scheme. This involved the Court engaging in a prediction as to events which would have taken place in the absence of the scheme.
However the Court held that there was no amount that would have been included, or might reasonably be expected to have been included, in the assessable income of the taxpayer (being an amount that was not otherwise part of that assessable income by reason of the roll-over relief) if the scheme identified by the Commissioner had not been entered into or carried out. Part IVA therefore did not apply.