The Federal Court has held that for the purposes of determining the “allocable cost amount” (or cost base) of an asset that came to be owned by a consolidated group on consolidation – in circumstances where the asset was originally a pre-CGT asset that had been subject to a roll-over that preserved its pre-CGT status – the time for determining its market value cost base for these purposes was its time of “deemed” acquisition under the roll-over (ie pre-CGT), and not its date of “actual” acquisition at “joining time”. Moreover, for the taxpayer in this case, this meant that the “allocable cost amount” of the trust units in question was id=”mce_marker”.5m (being the “pre-CGT market value” of the units), and not $33m (being their market value at “joining time”).
In arriving at this conclusion, the Federal Court first noted that the issue centred on the interpretation of s 110-25(2)(b) – which provides that the cost base of an asset includes “the market value of any other property [the taxpayer] gave or [was] required to give, in respect of acquiring it (worked out as at the time of the acquisition)”. It then found that the phrase “worked out as at the time of the acquisition” should be interpreted in the circumstances to mean at the time of “deemed” acquisition in Div 122 on the grounds that it gave effect to the policy behind Div 122 in respect of pre-CGT assets – namely, to ensure “both that any capital gain arising from the CGT event would be disregarded and that any pre-CGT status of the asset would be preserved in the hands of the company acquiring the asset”.
At the same time, the Court dismissed a range of arguments by the taxpayer, including that the “time of acquisition” rules in Div 109 did not accord with such an interpretation, that it was “a false dichotomy in this case to draw a distinction between the date of acquisition of assets and their CGT status” and that s 110-25(12) deemed the taxpayer to have “acquired” the units at the “joining time”.
(Financial Synergy Holdings Pty Ltd v FCT [2015] FCA 53, Federal Court, Pagone J, 9 February 2015.)
[LTN 27, 12/2/15]
FJM summary of decision
In this case a Holding Company formed a consolidated group that included a Unit Trust. The Holding Company made it’s election to consolidate on 1 July 2007, just two days after it acquired all the units in the Unit Trust (when the market value of the Unit Trust was about $30m). The Holding Company acquired these units by issuing 30 million id=”mce_marker” shares to the vendor Family Trust (in line with the value of the Unit Trust). This acquisition was by way of a ‘same asset’ CGT rollover under subdivision 122-A of the 1997 Act and, as a result of s122-70(3), the units, which were pre-CGT in the hands of the vendor Family Trust, were deemed to be acquired by the Holding Company before 20 September 1985 also.
The issue arose because consolidation provisions require the Holding Company to ‘push down’ it’s ‘allocable cost amount’ (‘ACA’) onto the Group Member’s assets (that is the Unit Trust’s assets). The first step in calculation this ACA is to calculate the relevant cost base that the Holding Company has in the units (membership interests) of the Unit Trust. All parties agreed that the relevant ‘cost base’ quantification provision was s110-25(2)(b) of the 1997 Act, which sets the cost base of the Units as equal to the market value of the property the Holding Company gave in relation to the acquisition of the Units (that is the ‘market value’ of the shares it issued for the units). Under this provision, the market value of these shares has to be determined “at the time of acquisition” of the Units, and thus the issue arose as to whether this “time of acquisition” was the actual time the Holding Company acquired the units (viz: 29 June 2007) or the deemed time of acquisition: “before 20 June 1985” (viz: 19 September 1985 or some earlier date).
Justice Pagone held that the Holding Company’s cost base for the Units was the value of those Units on 19 September 1985 (ie. at a time proximate to date mentioned in the deemed date of the Holding Company’s acquisition). His Honour said that this was because this “construction … accords with the intention expressed by the words used by the legislature” [para 12].
But with respect to His Honour, this conclusion appears fatally flawed for this reason. Under the relevant cost base provision (s110-25(2)(b)) it is the market value of the ‘shares’ given for the units (and not the units themselves) which sets the cost base for the units which the company acquired. Section 110-25(2)(b) calls for the market value of those shares to be determined “at the date of acquisition” of the units. But here lies the problem. The shares that have to be valued did not exist at 19 September 1985. Indeed they did not exist until they were issued as part of the ‘rollover’ transaction. And this problem will arise every time s122-70(3) applies. This is because this section is part of subdivision 122-A, which calls for a company to issue shares as consideration for the asset it acquires. Never will such shares be in existence until the actual rollover transaction occurs. Therefore, when construing s122-70(3), its only purpose must be to preserve any pre-CGT status in the hands of the acquiring company. It cannot be to also set some unspecified date prior to 20 September 1985 as the acquisition date for determining the cost base of the assets it acquires under the rollover.