Assets acquired 'pre-CGT' (pre-1985) are exempt from capital gains tax. Section 122-70 provides that if these assets are transferred to another company (the 'head company') in a tax consolidation, they will retain their pre-CGT character. There remains an accounting question subject to this case which can be framed as follows:
At what price are the pre-CGT assets transferred to the head company? Is it zero, is it the market value on the day of transfer (as is the case with all other assets) or is it some other value?
The Case
Post-CGT assets are deemed to be transferred at their market value, and this market value is a key factor in determining the assets' cost base in the new company.
The Commissioner of Taxation contended that the cost base of pre-CGT assets should be zero, otherwise the system will allow taxpayers holding tax free assets to obtain modest tax benefits from other sections in the tax act which (presumably) in the Commisioner's opinion should only be available for assets which will eventually be taxed upon their sale (depreciation in division 40 might be one example of a benefit).
A single judge of the Federal Court agreed with the Commissioner and ruled that Pre-CGT assets are taken to be sold to the head company of a consolidated group at the market value of those assets at 24 September 1985. This value is generally a lot closer to zero than it is to the market value on the day of transfer.
That decision was appealed by the taxpayer to the Full Court, consisting of three judges to hear the appeal.
The Decision
Middleton and Davies JJ:
"The primary judge held that the “time of acquisition” of the units for the purposes of working out the first element of the cost base of the units in accordance with s 110-25(2) was deemed by s 122-70(3) to be “before” 20 September 1985. His Honour also held that s 122-70(3) should be construed as referring to a date “immediately” before 20 September 1985, that is, 19 September 1985.
For the reasons that follow, we have respectfully reached the different conclusion that the “time of acquisition” of the units for the purposes of working out the first element of the cost base of the units in accordance with s 110-25(2) was 29 June 2007." 1
For the reasons that follow, we have respectfully reached the different conclusion that the “time of acquisition” of the units for the purposes of working out the first element of the cost base of the units in accordance with s 110-25(2) was 29 June 2007." 1
"The Commissioner submitted that it would be an anomalous result for the taxpayer to have a market value cost base for the pre-CGT assets in determining allocable cost amount. It was submitted that it was antithetical to the concept of a roll-over for the cost base of a pre-CGT asset to be “freshened up” on a roll-over to the amount in fact paid or given by a taxpayer because to achieve this “freshening up”, the disposition or the CGT event is not ignored but for cost base purposes is fully embraced and that the tax consequences of the event are not thereby delayed but assumed immediately. It was submitted that it was improbable that this was what Parliament intended. It was submitted that the consequences for the purposes of the consolidation provisions in Pt 3-90 would be that taxpayers would obtain the double benefit of a market value step-up in the cost base of the membership interests of an entity joining a consolidated group (so as to permit higher depreciation deductions for its underlying assets, amongst other things) as well as an exemption from capital gains tax on the ultimate disposal of those membership interests. It was submitted that there was no extrinsic material that supported the proposition that these outcomes were intended by Parliament.
The answer to these submissions is that the need to determine cost base for the purposes of the consolidation provisions arises in a separate and different context. The cost base is used to work out the allocable cost amount that is used in resetting the cost base for the assets of a joining entity. The object of the process is “to recognise the *head company’s cost of becoming the holder of the joining entity’s assets as an amount reflecting the group’s cost of acquiring the entity”: s 705-10(2). The taxpayer’s construction gives effect to and is consistent with that object." 2
Logan JJ:
"The controversy present in this case may perhaps be the result of an omission of express provision for the harmonious operation of two ameliorating Divisions within the 1997 Act; the provisions of Div 705 (tax cost setting amount for assets where entities become subsidiary members of consolidated groups) within the consolidated group provisions of Pt 3-90 on the one hand and, on the other, the capital gains tax (CGT) rollover relief provisions within Div 122 of Pt 3-3 within the CGT regime found in ch 3. Such is the intricacy of these two ameliorating Divisions that they were always fraught with the prospect that a statutory construction controversy might be generated by an omission of specific provision for a particular occurrence. The presence of ameliorating provisions is conducive to a particular ordering of business and personal affairs in order to have the advantage of them. Apart from challenging the limits of human comprehension, one of the difficulties of the contemporary preference for intricacy in the 1997 Act is the difficulty of predicting in advance and making related provision in advance for all of the ways in which this ordering of affairs might occur.
Flowing from the absence of this express provision, there is a certain attraction in the construction favoured by the learned primary judge, responsive to a submission by the Commissioner that it negated what would otherwise be a form of “double-dipping” by the appellant, i.e. the obtaining of a “market-value step up” under Subdiv 705-A while at the same time retaining pre-CGT status for the relevant asset.
In my view, characterisations of relevant provisions offered by the taxpayer in its submissions correctly reflect how they are to be construed and operate to negate the attraction just mentioned. The taxpayer submitted that, read in the context of the object of the Division in which each was located, s 110-25 was to be characterised as a quantitative valuation provision, whereas s 122-70(3) was to be characterised as a qualitative provision, each respectively linking, without conflict, to separate groups of provisions in the 1997 Act. I agree." 3
In my view, characterisations of relevant provisions offered by the taxpayer in its submissions correctly reflect how they are to be construed and operate to negate the attraction just mentioned. The taxpayer submitted that, read in the context of the object of the Division in which each was located, s 110-25 was to be characterised as a quantitative valuation provision, whereas s 122-70(3) was to be characterised as a qualitative provision, each respectively linking, without conflict, to separate groups of provisions in the 1997 Act. I agree." 3
Notes
The case is here: http://www.austlii.edu.au/au/cases/cth/FCAFC/2016/31.html
1. (p3 & 4)
2. (p37 & 38)
3. (p42 - 44)
2. (p37 & 38)
3. (p42 - 44)
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