: 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.

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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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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

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.

TAXATION IN AUSTRALIA I VOL 50(10) 611

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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

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• 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: FCT v 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 I VOL 50(10) 613

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

Aid TAYATIMI IN Al ISTRAI Al MAY 2016

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

TAXATION IN AUSTRALIA I VOL 50(10) 615

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