The head of a tax consolidated group has successfully argued that schemes to fund the acquisition, by a member of the group, of shares in an unrelated company, were not entered into or carried out for the dominant purpose of the taxpayer obtaining a tax benefit.

The facts were these.

  • The taxpayer is the head company of a tax consolidated group (Australian Taxpayer Head Co) , which includes Mylan Australia Pty Ltd (Australian Group Co).
  • The ultimate holding company is Mylan Inc, which was incorporated in the US (US Ultimate Hold Co).
  • In October 2007, the Mylan Group acquired a global generics pharmaceutical business (Merck Generics) for USD 7 billion.
  • The acquisition was financed by a Senior Credit Agreement (Credit Agreement) with a syndicate of lenders (the Credit Agreement also refinanced US Ultimate Hold Co’s existing indebtedness).
  • One of the operating companies, in Merck Generics, was Alphapharm, which was a subsidiary of a Netherlands company (Netherlands Generics Hold Co).
  • Alphapharm’s shares were acquired by Australian Group Co (the Australian Taxpayer Head Co and Australian Group Co were specifically incorporated for this purpose).
  • The acquisition of those shares (valued at over $1 billion) was financed with a mix of interest-bearing debt and equity at a 3:1 ratio.
  • The debt component was funded by an intragroup loan (using promissory notes) from a Luxembourg member of the Mylan Group.

However, the ATO applied Pt IVA of the ITAA 1936 to disallow the Australian Taxpayer Head Co’s deductions, for interest expenses, under the promissory notes, and consequential carry forward losses.

The Federal Court heard an appeal, by the Australian Taxpayer Head Co, which was ultimately in the its favour.

  • The Court’s preferred counterfactual was that, if the scheme hadn’t been entered into, Australian Group Co would have borrowed the required funds, on a 7-year term, under the Credit Agreement, at a floating rate consistent with the rates specified in the Credit Agreement.
  • This produced a tax benefit – the difference between the actual deductions for interest, and the deductions for interest, that would have been allowed, on the Court’s preferred counterfactual (not as yet calculated).
  • But fortunately for the Australian Taxpayer Head Co, the Court concluded that, having regard to the 8 factors listed in s 177D(b), the scheme had not been entered into or carried out for the dominant purpose of enabling the taxpayer to obtain a tax benefit.
  • Those 8 factors nearly all pointed to purposes other than obtaining a tax benefit or were neutral.
  • For example, there were commercial rationales for financing subsidiaries, by inter-company loans.
    • It was not surprising that US Ultimate Hold Co, as the parent company of a group, with global treasury functions, would not be concerned to closely analyse the debt carrying capacity, of a holding company subsidiary (such as Australian Group Co).
    • The decision to fix the interest rate, did not suggest any purpose, of maximising tax deductions for interest expenses.
    • Also, the fact that the 75% debt to asset ratio, was not reflected, at every layer of the corporate chain, down to Australian Group Co, was not a point that supported a conclusion, that US Ultimate Hold Co had the requisite dominant purpose.

(Mylan Australia Holding Pty Ltd v FCT (No 2) [2024] FCA 253, Federal Court, Button J, 20 March 2024.)



[LTN 54, 22.3.24]

FJM 22.3.24