On 10 March 2016, Full Federal Court handed done its decision which was to overturn the decision at first instance decision in favour of the Commissioner:  FCA 53.
The facts in this case involved a family trust that had owned units in a unit trust prior to the introduction of capital gains tax on 20 September 1985 (therefore enjoying exemption from CGT on those pre-CGT units). The Unit Trust operated an actuarial business and its units had a value of about $1.5m in 1985 and came to have a value of about $30m by 2007, when the family trust decided to move the actuarial business into a consolidated structure.
It did this by transferring its units in the Unit Trust to a newly incorporated company (the taxpayer-appellant) on 29 June 2007, in return for shares the taxpayer issued the family trust in return. This was under a Subdiv 122-A rollover, which deemed the taxpayer-appellant’s recently acquired units to have been acquired before the capital gains tax introduction date (20 September 1985) having the effect of passing the pre-CGT status of the units through to the acquiring company. This deeming was under s122-70(3) of the ITAA 1997.
The taxpayer-company then made the election to consolidate, which required it to push down its ‘allocable cost amount’ (ACA) on to the assets in the consolidated group (in the way required, in the ‘tax cost setting’ rules, in s705-35 of the ITAA 1997 and related provisions). Calculating its ACA, in turn, depended on determining the taxpayer-company’s cost base in the units in the Unit Trust group that it had just acquired (s705-60, step1). Calculating the cost base of a ‘pre-CGT’ asset is normally not necessary as there is no CGT on the disposal of such an asset (and thus no need to calculate a gain by reference to its ‘cost base’).
However, consolidation made this necessary and the taxpayer-company applied the normal cost base rules (in s110-25(2)(b) of the ITAA 1997), which set its cost base, in those units, as the market value of the property that it gave to acquire those units. The property it gave to acquire those units was the shares it issued to the family trust (in return for those units). The market value of those shares, at the time they were issued to the family trust, was broadly the $30m which the units were worth at that date.
The taxpayer-company used this $30m amount as the cost base value, in all the consolidation calculations, that set the tax values of all the underlying assets. This produced various deductions that the Commissioner took issue with.
The Commissioner opposed the taxpayer’s calculation of the cost base, used in its ACA calculation (and, thus, all the resulting tax values of assets in the consolidated group) on the following basis:
- the cost base setting provision (s110-25(2)(b)) required the value of the property given (the shares issued), for the acquisition of the rollover asset, to be ascertained at “the time of acquisition“.
- the taxpayer-company was deemed to have acquired those units “prior to 20 September 1985” under the rollover provision (s122-70(3)).
- Just before 20 September 1985, the units were worth only $1.5m.
- And, given that s122-70(3) didn’t say when, before 20 September 1985, the taxpayer-company was deemed to have acquired the units, the value of the units may have been even lower at earlier times.
The issue was whether s122-70(3) was intended to apply in a way that affected the determination of the recipient company’s cost base in the rolled over asset.
At first instance, Pagone J held that s122-70(3) was to be taken at face value as setting the acquisition date (despite it not saying when, prior to 20 September 1985, the acquiring company was deemed to have acquired the rolled over asset). And His Honour took it upon him self to fill this statutory void, by taking the section to mean ‘immediately before’ 20 September 1985 – and he chose 19 September 1985 as the date which was ‘immediately before’ 20 September 1985. He thus upheld the ACA being determined by a cost base determined as the $1.5m value of the units.
The Full Federal Court, however, did not agree and held that the time of acquisition of the units was 29 June 2009, for the following reasons:
- The reference to a time “before 20 September 1985” in s122-70(3) is intended to exclude assets that were acquired on or after 20 September 1985; and
- the time deemed by s122-70(3) does not govern the time of acquisition for the purposes of applying the meaning of “acquire” under s995-1 and s110-25(2).
Accordingly, the appeal was allowed and the Commissioner was ordered to pay the taxpayer’s costs of the appeal and of the hearing below.
(Financial Synergy Holdings Pty Ltd v. Commissioner of Taxation:  FCAFC 31, Middleton and Davies JJ (with Logan J agreeing), 10 March 2016.)
[FJM Note: It appears to me that there are two reasons for concluding in this way. First, s122-70(3) does not say when, before 20 September 1985, the taxpayer-company is deemed to acquire the rolled over asset, as it is only intended to mesh with the general CGT grandfathering rules, to exclude the company from CGT on disposing of that asset. Second, the Commissioner’s construction necessarily had the effect of treating the taxpayer-company as having issued its shares 22 years prior to it’s existence (a manifest absurdity). Further, this deemed acquisition rule (in s122-70(3)) is part of a rollover subdivision that always requires a company to issue shares as part of the rollover. At no time, under these rollover provisions, will the shares be issued at a time which was prior to 20 September 1985.
[LTN 53, 18/3/16]