Can the Commissioner rule that a consolidated group was formed as part of a tax avoidance scheme, then assess a subsidiary of the consolidated group as if the consolidated group was never created?
The Full Federal Court has ruled: Yes, the Commissioner can. The key question was, who can the Commissioner assess, if anyone?
Can the Commissioner amend the assessment of the head entity to include a taxable capital gain (of the subsidiary) that would have existed if the consolidated group had never formed? No: The Federal Court ruled that the Commissioner can not assess the head entity of a consolidated group he is determining should never have been formed in the first place! In their words this is an inconsistent conclusion.
Can the Commissioner issue an assessment to the subsidiary subject to this transaction, then attribute the taxable gain to the subsidiary's head entity in the consolidated group? No: The Federal Court dismissed this approach for the same reasons above.
Can the Commissioner issue an assessment to the subsidiary subject to this transaction, as if the consolidated group never formed? The Federal Court said: Yes. This is the preferred approach.
Highlights from the majority judgement
Background:
Head Entity: CPH
Subsidiary: CCC
The CGT event happened to CCC. CPH was a dormant company until shares in CCC were transferred onto its books.
The logic behind assessing a subsidiary as if consolidation never occurred:
"In the present case, the application of Pt IVA proceeds on the basis that CCC is not a subsidiary member of the CPH consolidated group for part of the 2008 income year. The fact that CCC is not a member of the CPH consolidated group for part of the 2008 income year is the basis for the alternative determination. The Commissioner then is required to, and did, give effect to that determination by issuing the alternative assessment to CCC: s 177F(1)(a). The ability to issue an assessment to a subsidiary member of a consolidated group that was not a member for part of the income year is expressly provided for by s 701-30. That section does not ignore the single entity rule in Pt 3-90. It recognises, as was the fact, that there will be instances where a subsidiary member is not part of the consolidated group for the whole income year. Section 701-30 provides a method of working out how the entity core rules apply to the entity for periods in the income year when the entity is not part of the group. The method involves treating each period separately with no netting off between them. That is what occurred here. There is no basis for reliance on the default exception to the core rules in s 701-85." (p 109)
On the application of Part IVA to tax consolidated groups
"Thirdly, the tax benefit upon which a taxpayer is assessed in reliance on a determination made under s 177F(1)(a) is predicated on a postulate, which is a hypothesis as to what the taxpayer would have, or might reasonably be expected to have, done if he had not done what he did do. If that postulate is that the taxpayer would have, or might reasonably be expected to have, sold an asset as a stand-alone entity without having become a subsidiary member of a consolidated group, it does not seem to us that there is any reason to prevent the Commissioner from making a determination in those terms, and using an assessment to give effect to it." (p 103)
On the intersection between s 177F (Part IVA) and pt 3-90 (Division 700 - tax consolidated groups)
"We accept that, at the time of issue of the assessment, CCC is part of CPH under the single entity rule in s 701-1, and that an assessment to CPH to give effect to the anterior determination to CCC can be said, in the context of the single entity rule viewed in isolation, to be consistent with that determination. But we cannot agree with that analysis when the single entity rule has to be viewed through the prism of its intersection with Pt IVA and the hierarchy afforded those latter provisions by s 177B(1). Arguably, this is best exemplified in our answer to reserved question 3 below (see [89] to [109]), and, in particular, our acceptance that s 177B(1) does not allow the single entity rule in s 701-1 to stand in the way of the Commissioner making a determination to include in the assessable income of CCC the amount that would have been included on the postulate upon which the determination to CCC was predicated, and issuing an assessment to CCC to give effect to that determination. Such an outcome leads to “harmonious goals”, to use the term that fell from the plurality in Project Blue Sky Inc v Australian Broadcasting Authority [1998] HCA 28; (1998) 194 CLR 355 (“Project Blue Sky”) at [70], in contrast to the conflicting outcome achieved by the issue of an assessment to CPH, said to give effect to an anterior determination to CCC only because CCC was a subsidiary member of the CPH consolidated group at the time of the issue of the assessment. Moreover, having regard to the objects of Pt 3-90, in particular that expressed in s 700-10(a) (see [67] above) – to prevent double taxation of the same economic gain realised by a consolidated group – it cannot be the case that the Commissioner is authorised to assess both CPH and CCC. In our view, the more harmonious outcome is the process underlying the issues raised by reserved question 3." (p 82) *Emphasis added
Technicalities of the Formalities
The five judges were split in their reasoning, with 3/5 affirming the position outlined above. However, more accurately, all judges ruled in favor of the Commissioner for differing reasons. I have quoted from the majority judgement of Edmonds and Gordon JJ, with whom Allsop CJ agreed with the conclusions of.
[2015] FCAFC 57
http://www.austlii.edu.au/au/cases/cth/FCAFC/2015/57.html
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Tax Professional