CHANNEL PASTORAL HOLDINGS PTY LTD v FC of T

Judges: Allsop CJ

Edmonds J
Gordon J
Pagone J
Davies J

Court:
Full Federal Court, Sydney

MEDIA NEUTRAL CITATION: [2015] FCAFC 57

Judgment date: 7 May 2015

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Edmonds and Gordon JJ

22. This is a special case, stated pursuant to Pt 38 of the Federal Court Rules 2011 , reserving three questions for consideration by the Court, upon an agreed statement of facts.

23. The reserved questions concern the intersection and interaction of the provisions of Pt IVA of the Income Tax Assessment Act 1936 (Cth) ( " the 1936 Act " ) dealing with Schemes to Reduce Income Tax, and Pt 3-90 of the Income Tax Assessment Act 1997 (Cth) ( " the 1997 Act " ) dealing with Consolidated Groups.

24. The first and second of the reserved questions raise issues considered and determined by this Court in
Federal Commissioner of Taxation v Macquarie Bank Ltd (2013) 210 FCR 164 ( " Macquarie (Full Court) " ). The respondent ( " Commissioner " ) challenges the correctness of that decision. The third reserved question raises an argument not

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considered in Macquarie (Full Court) ; it was not raised either before the primary judge in
Macquarie Bank Ltd v Federal Commissioner of Taxation 2011 ATC 20-281 ( " Macquarie (First Instance) " ) or before this Court on appeal.

25. The agreed facts are set out below.

AGREED FACTS

The Primary Facts

26. Channel Cattle Co Pty Ltd ( " CCC " ) was incorporated in 1981.

27. Mr Peter Sherwin and Mrs Florence Sherwin (together " the Sherwins " ) acquired all of the shares in CCC prior to 20 September 1985 and these shares were thus pre-Capital Gains Tax assets.

28. Prior to 31 December 2007, CCC was the owner of two cattle stations known respectively as " Alroy Downs " and " Dalmore Downs " which it acquired in 2004. The stations comprised land in the Northern Territory, associated plant and equipment, trading stock (cattle and horses) and the stations ' stock brand ( " the agricultural assets " ).

29. Channel Pastoral Holdings Pty Ltd ( " CPH " ) was incorporated on 6 July 2006. From the date of incorporation, Mr Sherwin and Mrs Sherwin each held one of the only two issued shares in CPH.

30. On 28 December 2007, Florence Sherwin transferred her share in CPH to Peter Sherwin, causing Peter Sherwin to become sole owner of CPH.

31. Until 31 December 2007, CPH was a dormant company. On that date, the Sherwins agreed to transfer their shares in CCC to CPH for consideration totalling $ 61,232,074. Thereafter CPH became the sole owner of CCC. The " value " of the trading stock held by CCC as at 31 December 2007, for the purposes of Subdiv 70-C of the 1997 Act, was $ 6,522,502.

32. CPH elected to form a consolidated group with effect from 1 January 2008, with CPH as head entity and CCC as a subsidiary entity ( " the CPH consolidated group " ).

33. In February 2008, CCC entered into a contract to sell the agricultural assets to an unrelated third party purchaser, Baldy Bay Pty Ltd (as trustee of the Long Yard Trust). The sale price of the agricultural assets was $ 70,000,000.

34. The sale of the agricultural assets by CCC was completed on 29 February 2008.

Further Matters

35. The parties further agreed on the following matters.

36. Divisions 701 to 721 of Pt 3-90 of the 1997 Act create a regime under which corporate groups can elect to be taxed as a consolidated group of entities (a " consolidated group " ) rather than as a number of separate entities. The core rules for the operation of the 1936 and 1997 Acts for consolidated groups are set out in Div 701.

37. Pursuant to s 705-35(l)(c) of the 1997 Act, upon CCC joining the CPH consolidated group, the tax cost of each of CCC ' s reset cost base assets was reset to its " tax cost setting amount " with effect from 1 January 2008. As a result, the cost base of the land for the purposes of Pt 3-1 of the 1997 Act increased, as well as the cost of the plant and equipment and CCC ' s trading stock (horses and cattle).

38. The sale of the agricultural assets subsequent to formation of the CPH consolidated group resulted in, but for the application of Pt IVA of the 1936 Act, the following outcomes for CPH, as head entity of the CPH consolidated group (amongst other things):

• (a) a capital loss on the sale of the land;
• (b) derivation of $ 25,405,000 in assessable income from the sale of the trading stock; and
• (c) a deduction of $ 23,026,930 being allowed for the amount by which the tax cost setting amount of the trading stock exceeded the value of the trading stock as at 30 June 2008, by which time the trading stock had been sold.

39. The sale did not give rise to any tax consequences for CCC as a subsidiary member of the CPH consolidated group.

40. If the Sherwins had sold their shares in CCC to Baldy Bay Pty Ltd for $ 70,000,000, rather than transferring these shares to CPH, there would have been no tax liability for the Sherwins.

41.

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If CCC had sold the agricultural assets to Baldy Bay Pty Ltd for $ 70,000,000 without the anterior steps whereby CPH acquired CCC for $ 61,232,074 and thereafter formed a consolidated group with CCC as a subsidiary member, the tax outcome would have been different.

42. The Commissioner contends, and the applicants deny, that if the steps described in [ 30 ] to [ 34 ] above had not been entered into and carried out, it might reasonably be expected that:

• (a) CCC would not have joined the CPH consolidated group with effect from 1 January 2008;
• (b) CCC would have sold the agricultural assets in February 2008; and
• (c) accordingly, amongst other things:
  • (i) CPH would not have made a capital loss on the sale of the land;
  • (ii) CCC would have made an assessable net capital gain in the sum of $ 33,795,402 on the sale of the land;
  • (iii) CPH would not have been entitled to a deduction for the trading stock;
  • (iv) CCC would have derived $ 25,405,000 in assessable income from the sale of the trading stock; and
  • (v) CCC would have been entitled to an additional deduction of $ 6,393,252 in respect of movement in the value of the trading stock over the income year ended 30 June 2008.

Procedural History

43. The parties also agreed that the following procedural steps have taken place.

44. CCC has not lodged a tax return for the period beginning 1 January 2008 and concluding 30 June 2008, when it was a subsidiary member of the CPH consolidated group. However, on 31 March 2009, CCC lodged a tax return for the period beginning 1 July 2007 and concluding 31 December 2007.

45. On 31 March 2009, pursuant to s 166A of the 1936 Act, the Commissioner was deemed to have made and served an assessment to CCC in respect of its taxable income prior to it joining the CPH consolidated group.

46. The restructuring of CCC and CPH as described in [ 30 ] to [ 32 ] above did not constitute fraud or evasion for the purposes of s 170 of the 1936 Act.

47. On 5 June 2009, CPH lodged a tax return for the income year ended 30 June 2008.

48. On 5 June 2009, pursuant to s 166A of the 1936 Act, the Commissioner was deemed to have made and served an assessment to CPH of its taxable income for the income year ended 30 June 2008.

49. On 31 May 2013, the Commissioner made a determination pursuant to para (1)(a) of s 177F of the 1936 Act that CCC obtained a tax benefit for the year of income ended 30 June 2008, referable to the capital gain alleged at [ 42(c)(ii) ] above.

50. On 31 May 2013, the Commissioner made two determinations pursuant to paras (l)(b) and (1)(c) respectively of s 177F of the 1936 Act that CPH obtained tax benefits for the year of income ended 30 June 2008, referable to:

• (a) the deduction for trading stock referred to at [ 42(c)(iii) ] above;
• (b) the capital loss referred to at [ 42(c)(i) ] above.

51. On 31 May 2013, the Commissioner took action to give effect to the determinations referred to at [ 49 ] and [ 50 ] above by the issue of an amended assessment to CPH as head company of the CPH consolidated group for the income year ended 30 June 2008.

52. On 17 July 2013, CPH objected to the amended assessment dated 31 May 2013.

53. On 18 November 2013, the Commissioner disallowed CPH ' s objection. In considering and disallowing the objection, the Commissioner also made a determination pursuant to para (l)(a) of s 177F of the 1936 Act that CPH had obtained a tax benefit referable to the net capital gain alleged at [ 42(c)(ii) ] above.

54. On 25 November 2013, CPH appealed that objection decision to this Court.

55. On 13 March 2014, the Commissioner made alternative determinations pursuant to para (l)(a) of s 177F of the 1936 Act that CCC obtained tax benefits, referable to the capital gain made from the sale of the land alleged at [ 42(c)(ii) ] above and the non-inclusion of

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assessable income from the sale of the trading stock alleged at [ 42(c)(iv) ] above, for the period 1 January 2008 to 30 June 2008 (the " alternative determinations " ).

56. On 14 March 2014, the Commissioner took action to give effect to the alternative determinations by issuing (in the alternative to the amended assessment referred to at [ 51 ] above) an assessment pursuant to s 168 or, alternatively, s 169 of the 1936 Act, to CCC for the period 1 January 2008 to 30 June 2008, when it was a subsidiary member of the CPH consolidated group ( " the alternative assessment " ).

57. On 17 March 2014, CCC objected to the alternative assessment dated 14 March 2014.

58. On 28 March 2014, the Commissioner disallowed CCC ' s objection.

59. On 2 April 2014, CCC appealed that objection decision to this Court.

60. Copies of the s l77F determinations and the associated assessments, referred to above, were attached as Annexure " A " to the special case and are reproduced in [ 79 ] , [ 85 ] and [ 104 ] below.

61. The applicants and the Commissioner have executed a settlement deed, whereby the adjudication of the following legal questions will fully dispose of the proceedings inter partes .

THE RESERVED QUESTIONS

62. The three questions reserved for consideration by the Court are set out in [ 63 ] below.

63. Whether, by reason of Div 701 of Pt 3 - 90 of the 1997 Act, the Commissioner was not:

• (1) authorised to make the determination to CCC referred to at [ 49 ] above and to give effect to that determination by issuing the amended assessment to CPH referred to at [ 51 ] above;
• (2) authorised to make the determination to CPH referred to at [ 53 ] above in connection with the consideration of CPH ' s objection to the amended assessment referred to at [ 51 ] above;
• (3) authorised to make the alternative determinations to CCC referred to at [ 55 ] above and to give effect to those determinations by issuing the alternative assessment to CCC referred to at [ 56 ] above.

STATUTORY CONTEXT

Part IVA of the 1936 Act: Schemes to Reduce Income Tax

64. In the relevant year of income, the provisions of Pt IVA relevantly provided:

177A Interpretation

• (1) In this Part, unless the contrary intention appears:
• …

  scheme means:

  • (a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and
  • (b) any scheme, plan, proposal, action, course of action or course of conduct.

    taxpayer includes a taxpayer in the capacity of a trustee.

• (2) The definition of taxpayer in subsection (1) shall not be taken to affect in any way the interpretation of that expression where it is used in this Act other than this Part.
• (3) The reference in the definition of scheme in subsection (1) to a scheme, plan, proposal, action, course of action or course of conduct shall be read as including a reference to a unilateral scheme, plan, proposal, action, course of action or course of conduct, as the case may be.
• (4) A reference in this Part to the carrying out of a scheme by a person shall be read as including a reference to the carrying out of a scheme by a person together with another person or other persons.
• (5) A reference in this Part to a scheme or a part of a scheme being entered into or carried out by a person for a particular purpose shall be read as including a reference to the scheme or the part of the scheme being entered into or carried out

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  by the person for 2 or more purposes of which that particular purpose is the dominant purpose.

177B Operation of Part

• (1) Subject to subsection (2), nothing in the provisions of this Act other than this Part … shall be taken to limit the operation of this Part.
• …

177C Tax benefits

• (1) Subject to this section, a reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to:
  • (a) an amount not being included in the assessable income of the taxpayer of a year of income where that amount would have been included, or might reasonably be expected to have been included, in the assessable income of the taxpayer of that year of income if the scheme had not been entered into or carried out; or
  • (b) a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out; or
  • …

    and, for the purposes of this Part, the amount of the tax benefit shall be taken to be:

  • …
  • (c) in a case to which paragraph (a) applies - the amount referred to in that paragraph; and
  • (d) in a case to which paragraph (b) applies - the amount of the whole of the deduction or of the part of the deduction, as the case may be, referred to in that paragraph; and
  • …

177D Schemes to which Part applies

This Part applies to any scheme that has been or is entered into after 27 May 1981, and to any scheme that has been or is carried out or commenced to be carried out after that date (other than a scheme that was entered into on or before that date), whether the scheme has been or is entered into or carried out in Australia or outside Australia or partly in Australia and partly outside Australia, where:

• (a) a taxpayer (in this section referred to as the relevant taxpayer ) has obtained, or would but for section 177F obtain, a tax benefit in connection with the scheme; and
• (b) having regd to:
  • (i) the manner in which the scheme was entered into or carried out;
  • (ii) the form and substance of the scheme;
  • (iii) the time at which the scheme was entered into and the length of the period during which the scheme was carried out;
  • (iv) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme;
  • (v) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme;
  • (vi) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;
  • (vii) any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out; and
  • (viii) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi);

    it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme

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    or of enabling the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer or is the other taxpayer or one of the other taxpayers).

• …

177F Cancellation of tax benefits etc.

• (1) Where a tax benefit has been obtained, or would but for this section be obtained, by a taxpayer in connection with a scheme to which this Part applies, the Commissioner may:
  • (a) in the case of a tax benefit that is referable to an amount not being included in the assessable income of the taxpayer of a year of income - determine that the whole or a part of that amount shall be included in the assessable income of the taxpayer of that year of income; or
  • (b) in the case of a tax benefit that is referable to a deduction or a part of a deduction being allowable to the taxpayer in relation to a year of income - determine that the whole or a part of the deduction or of the part of the deduction, as the case may be, shall not be allowable to the taxpayer in relation to that year of income; or
  • …

    and, where the Commissioner makes such a determination, he shall take such action as he considers necessary to give effect to that determination.

• (2) Where the Commissioner determines under paragraph (1)(a) that an amount is to be included in the assessable income of a taxpayer of a year of income, that amount shall be deemed to be included in that assessable income by virtue of such provision of this Act as the Commissioner determines.
• …

Part 3 - 90 of the 1997 Act: Consolidated Groups

65. Section 700-1 of the 1997 Act sets out what Pt 3-90 is about. It provides:

This Part allows certain groups of entities to be treated as single entities for income tax purposes.

Following a choice to consolidate, subsidiary members are treated as part of the head company of the group rather than as separate income tax identities. The head company inherits their income tax history when they become subsidiary members of the group. On ceasing to be subsidiary members, they take with them an income tax history that recognises that they are different from when they became subsidiary members.

This is supported by rules that:

• (a) set the cost for income tax purposes of assets that subsidiary members bring into the group; and
• (b) determine the income tax history that is taken into account when entities become, or cease to be, subsidiary members of the group; and
• (c) deal with the transfer of tax attributes such as losses and franking credits to the head company when entities become subsidiary members of the group.

66. Section 700-5 provides an overview of Pt 3-90 as follows:

• (1) The single entity rule determines how the income tax liability of a consolidated group will be ascertained. The basic principle is contained in the Core Rules in Division 701.
• (2) Essentially, a consolidated group consists of an Australian resident head company and all of its Australian resident wholly-owned subsidiaries (which may be companies, trusts or partnerships). Special rules apply to foreign-owned groups with no single Australian resident head company.
• (3) An eligible wholly owned group becomes a consolidated group after notice of a choice to consolidate is given to the Commissioner.
• (4) This Part also contains rules which set the cost for income tax purposes of assets of entities when they become subsidiary members of a consolidated group and of membership interests in those entities when

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  they cease to be subsidiary members of the group.
• (5) Certain tax attributes (such as losses and franking credits) of entities that become subsidiary members of a consolidated group are transferred under this Part to the head company of the group. These tax attributes remain with the group after an entity ceases to be a subsidiary member.

67. Section 700-10 provides that the objects of Pt 3-90 are:

• (a) to prevent double taxation of the same economic gain realised by a consolidated group; and
• (b) to prevent a double tax benefit being obtained from an economic loss realised by a consolidated group; and
• (c) to provide a systematic solution to the prevention of such double taxation and double tax benefits that will:
  • (i) reduce the cost of complying with this Act; and
  • (ii) improve business efficiency by removing complexities and promoting simplicity in the taxation of wholly-owned groups.

68. Division 701 sets out the core rules of Pt 3-90. It relevantly provides:

Common rule

701 - 1 Single entity rule

• (1) If an entity is a * subsidiary member of a * consolidated group for any period, it and any other subsidiary member of the group are taken for the purposes covered by subsections (2) and (3) to be parts of the * head company of the group, rather than separate entities, during that period.

Head company core purposes

• (2) The purposes covered by this subsection (the head company core purposes ) are:
  • (a) working out the amount of the * head company ' s liability (if any) for income tax calculated by reference to any income year in which any of the period occurs or any later income year; and
  • (b) working out the amount of the head company ' s loss (if any) of a particular * sort for any such income year.

  Note: The single entity rule would affect the head company ' s income tax liability calculated by reference to income years after the entity ceased to be a member of the group if, for example, assets that the entity held when it became a subsidiary member remained with the head company after the entity ceased to be a subsidiary member.

Entity core purposes

• (3) The purposes covered by this subsection (the entity core purposes ) are:
  • (a) working out the amount of the entity ' s liability (if any) for income tax calculated by reference to any income year in which any of the period occurs or any later income year; and
  • (b) working out the amount of the entity ' s loss (if any) of a particular * sort for any such income year.

  Note: An assessment of the entity ' s liability calculated by reference to income tax for a period when it was not a subsidiary member of the group may be made, and that tax recovered from it, even while it is a subsidiary member.

• (4) …

Head company rules

701 - 5 Entry history rule

For the head company core purposes in relation to the period after the entity becomes a * subsidiary member of the group, everything that happened in relation to it before it became a subsidiary member is taken to have happened in relation to the * head company.

Note 1: Other provisions of this Part may affect the tax history that is inherited (e.g. asset cost base history is affected by section 701-10 and tax loss history is affected by Division 707).

Note 2: Section 73BAC of the Income Tax Assessment Act 1936 overrides this rule for the purposes of the research and development incremental expenditure provisions.

Note 3: …

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701-10 Cost to head company of assets of joining entity

• (1) This section has effect for the head company core purposes when the entity becomes a * subsidiary member of the group.

Assets to which section applies

• (2) This section applies in relation to each asset that would be an asset of the entity at the time it becomes a * subsidiary member of the group, assuming that subsection 701 - 1(1) (the single entity rule) did not apply.

  Note: See subsection 705 - 35(3) for the treatment of a goodwill asset resulting from the head company ' s ownership and control of the joining entity.

Object

• (3) The object of this section (and Division 705 which relates to it) is to recognise the cost to the * head company of such assets as an amount reflecting the group ' s cost of acquiring the entity.

Setting tax cost of assets

• (4) Each asset ' s * tax cost is set at the time the entity becomes a * subsidiary member of the group at the asset ' s * tax cost setting amount.
• …

Entity rules

701-30 Where entity not subsidiary member for whole of income year

Object

• (1) The object of this section is to provide for 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.

When section has effect

• (2) This section has effect for the entity core purposes if:
  • (a) the entity is a * subsidiary member of the group for some but not all of an income year; and
  • (b) there are one or more periods in the income year (each of which is a non-membership period ) during which the entity is not a subsidiary member of any * consolidated group.

Tax position of each non-membership period to be worked out

• (3) For every non-membership period, work out the entity ' s taxable income (if any) for the period, the income tax (if any) payable on that taxable income and the entity ' s loss (if any) (a non-membership period loss ) of each * sort for the period. Work them out:
  • (a) as if the start and end of the period were the start and end of the income year; and
  • (b) ignoring the operation of this section in relation to each other non-membership period (if any); and
  • (c) so that each relevant item is either:
    • (i) allocated to only one of the non-membership periods or to a period that is all or part of the rest of the income year; or
    • (ii) apportioned among such periods (for example, by Subdivision 716-A (see note to this subsection)).

    Note: Other provisions of this Part are to be applied in working out the taxable income or loss, for example:

    • • section 701-40 (Exit history rule); and
    • • Subdivision 716-A (about assessable income and deductions spread over several membership or non-membership periods); and
    • • section 716-850 (about grossing up threshold amounts for periods of less than 365 days).

    Subdivision 716 also affects the tax position of the head company of a group of which the entity has been a subsidiary member for some but not all of the income year.

  • …

Income tax for the financial year

• (4) The entity ' s income tax (if any) for the * financial year concerned is the total of every amount of income tax worked out for the entity under

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  subsection (3).

Taxable income for the income year

• (5) The entity ' s taxable income for the income year is the total of every amount of taxable income worked out for the entity under subsection (3).
• (6) The entity ' s income tax worked out under subsection (4) is taken to be payable on the entity ' s taxable income for the income year worked out under subsection (5), even if the amount of the tax differs from the amount that would be worked out by reference to that taxable income apart from subsection (5).
• …

Exceptions

…

701 - 85 Other exceptions etc. to the rules

The operation of each provision of this Division is subject to any provisions of this Act that so requires, either expressly or impliedly.

Note: An example of such a provision is Division 707 (about the transfer of certain losses to the head company of a consolidated group). That Division modifies the effect that the inheritance of history rule in section 701-5 would otherwise have.

69. Division 703 of Pt 3-90 sets out the rules for what is a consolidated group, the entities that are members of a consolidated group as well as rules relating to how to constitute a consolidated group.

70. Section 703-5 provides:

• (1) A consolidated group comes into existence:
  • (a) on the day specified in a choice by a company under section 703 - 50 as the day on and after which a * consolidatable group is taken to be consolidated; or
  • (b) as described in section 703-55 (about creating a consolidated group from a * MEC group).

• (2) The consolidated group continues to exist until the * head company of the group:
  • (a) ceases to be a head company; or
  • (b) becomes a member of a * MEC group.

  The consolidated group ceases to exist when one of those events happens to the head company.

• (3) At any time while it is in existence, the consolidated group consists of the * head company and all of the * subsidiary members (if any) of the group at the time.

71. Section 703-10 provides:

• (1) A consolidatable group consists of:
  • (a) a single * head company; and
  • (b) all the * subsidiary members of the group.
• (2) To avoid doubt, a consolidatable group cannot consist of a * head company alone.

72. Section 703-15 relevantly provides:

• (1) An entity is a member of a * consolidated group or * consolidatable group while the entity is:
  • (a) the * head company of the group; or
  • (b) a * subsidiary member of the group.

73. Section 703-50 relevantly provides:

• (1) A company may make a choice in writing that a * consolidatable group is taken to be consolidated on and after a day that is specified in the choice and is after 30 June 2002, if the company was the * head company of the group on the day specified.

• (2) The choice cannot be revoked, and the specification of the day cannot be amended, after the choice is made under subsection (1).

74. Division 705 of Pt 3-90 sets out the rules for setting the tax cost of an entity ' s assets where it becomes a subsidiary member of a consolidated group. Subdivision 705-A deals with the basic case of a single entity joining an existing consolidated group. Section 705-5 is a guide to subdiv 705 - A and provides:

When an entity becomes a subsidiary member of an existing consolidated group, the tax cost setting amount for its assets reflects the cost to the group of acquiring the entity.

75. Section 705-10 deals with the application and object of subdiv 705-A in the following terms:

Application

• (1) This Subdivision has effect, subject to section 705 - 15, for the head company core purposes set out in subsection 701 - 1(2) if an entity (the joining entity ) becomes a * subsidiary member of a * consolidated group (the joined group ) at a particular time (the joining time ).

Object

• (2) The object of this Subdivision 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. That amount consists of the cost of the group ' s * membership interests in the joining entity, increased by the joining entity ' s liabilities and adjusted to take account of the joining entity ' s retained profits, distributions of profits, deductions and losses.
• (3) The reason for recognising the * head company ' s cost in this way is to align the costs of assets with the costs of * membership interests, and to allow for the preservation of this alignment until the entity ceases to be a * subsidiary member, in order to:
  • (a) prevent double taxation of gains and duplication of losses; and
  • (b) remove the need to adjust costs of membership interests in response to transactions that shift value between them, as the required adjustments occur automatically.

Note: Under Division 711, the alignment is preserved by recognising the head company ' s cost of membership interests in the entity if it ceases to be a subsidiary member of the group as the cost of its assets reduced by its liabilities.

THE INTERSECTION AND INTERACTION OF PART IVA OF THE 1936 ACT AND PART 3-90 OF THE 1997 ACT

76. The determinations and assessments issued in this case are predicated on the Commissioner ' s view that either:

• (1) A tax benefit was obtained by CCC, being the non-inclusion of an amount of a capital gain on the sale of the land. The Commissioner has sought to give effect to this by making a s 177F determination in respect of CCC (see [ 49 ] above) and issuing an amended assessment to CPH as head entity (see [ 51 ] above). Notwithstanding that, on the postulate upon which the s 177F determination was made to CCC, CPH was not the head company of a consolidated group which included CCC as a subsidiary member. The Commissioner ' s position relies on the single entity rule in s 701-1 of Pt 3 90 at the time the assessment was issued. Whether the Commissioner is authorised to do this engages the issues raised by reserved question 1.
• (2) Alternatively, the same tax benefit was obtained by CPH as head entity of the CPH consolidated group. The Commissioner has sought to give effect to this by making a s 177F determination in respect of CPH, which he also relies upon to defend his decision to disallow the objection to the amended assessment he had earlier issued to

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  CPH (see [ 53 ] above). Notwithstanding that, on the postulate upon which the s 177F determination was made to CPH, CPH was not the head company of a consolidated group which included CCC as a subsidiary member. The Commissioner ' s position also relies on the single entity rule in s 701-1 of Pt 3 90 at the time the assessment was issued. Whether the Commissioner is authorised to do this engages the issues raised by reserved question 2.
• (3) Alternatively, a tax benefit was obtained by CCC, being the non inclusion of an amount of a capital gain on the sale of the land and the non inclusion of assessable income from the sale of the trading stock. The Commissioner sought to give effect to this by both making a s 177F determination in respect of, and issuing an assessment to, CCC (see [ 55 ] and [ 56 ] above). Whether the Commissioner is authorised to do this engages the issues raised by reserved question 3.

77. The Commissioner ' s primary case relies upon the assessment he has issued to CCC (see [ 76(3) ] above). His alternative case relies upon the amended assessment to CPH (see [ 76(1) ] and [ 76(2) ] above), and upon the dissenting judgment of Emmett J in Macquarie.

Reserved Question 1

78. As indicated in [ 51 ] above, the Commissioner sought, inter alia , to give effect to the determination referred to at [ 49 ] above by the issue of an amended assessment to CPH as head company of the CPH consolidated group for the income year ended 30 June 2008.

79. The determination at [ 49 ] above reads:

Determination made pursuant to section 177F of Part IVA of the Income Tax Assessment Act 1936

I, Michael Cranston, Deputy Commissioner of Taxation, Small and Medium Enterprises, in the exercise of the powers and functions delegated to me by the Commissioner of Taxation determine under paragraph 177F(1)(a) of the Income Tax Assessment Act 1936 (the Act) that the amount of $ 33,795,402 being a tax benefit that is referable to an amount that has not been included in the assessable income of Channel Cattle Co Pty Ltd, TFN … … … (the taxpayer) for the year of income ended 30 June 2008, shall be included in the assessable income of the taxpayer for that year of income.

I further determine under subsection 177F(2) of the Acct that the amount shall be deemed to be included in the assessable income of the taxpayer by virtue of subsection 102-5(1) of the Income Tax Assessment Act 1997.

Dated the 31 ^st day of May 2013.

Michael Cranston (Signed)

(Signed) p.p [ Julie Elms ]

Michael Cranston

Deputy Commissioner of Taxation, Small and Medium Enterprises

80. In the normal course, where a subsidiary member of a consolidated group enters into a scheme to which s 177D applies, the Commissioner is authorised to make a determination under s 177F(1), but the authorised determination will be (in a para (a) case) one to include an amount in the assessable income of the head company, to which for tax assessment purposes the activities of the subsidiary member are, by s 701-1, attributed and subsumed. Effect is then given to that determination by the issue of an assessment including the amount in the assessable income of the head company.

81. Assuming it is permissible, in certain circumstances, to give effect to a s 177F determination to include an amount in the assessable income of one taxpayer by the issue of an assessment including the amount in the assessable income of a different taxpayer, and that one of those circumstances includes the issue of an assessment including an amount in the assessable income of a head company of a consolidated group to give effect to a determination to include that amount in the assessable income of a subsidiary member of that group, the present case is not one of them. In our view, any assessment to give effect to an anterior s 177F determination to include an amount in the assessable income of a taxpayer must be consistent, in all material respects, with the postulate upon which that determination is predicated, whether the assessment is issued to

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the taxpayer referred to in the determination or a different taxpayer. The CPH amended assessment is inconsistent with the postulate upon which the CCC determination is predicated - that CCC sold the agricultural assets as a stand-alone entity, i.e., otherwise than as a subsidiary member of the CPH consolidated group - and it follows, in our view, that the CPH amended assessment cannot, and does not, give effect to the CCC determination as required by s 177F.

82. 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) 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.

83. Reserved question 1 must be answered " yes " . The Commissioner was not authorised to give effect to the determination in [ 49 ] above by issuing the amended assessment to CPH referred to at [ 51 ] above.

Reserved Question 2

84. As indicated in [ 53 ] above, the Commissioner, in disallowing CPH ' s objection to the amended assessment referred to in [ 51 ] above, sought to defend that disallowance by making a determination pursuant to para (1)(a) of s 177F of the 1936 Act that CPH had obtained a tax benefit referable to the net capital gain alleged at [ 42(c)(ii) ] above.

85. The determination reads:

Determination made pursuant to section 177F of Part IVA of the Income Tax Assessment Act 1936

I, Michael Cranston, Deputy Commissioner of Taxation, Private Groups and High Wealth Individuals, in the exercise of the powers and functions delegated to me by the Commissioner of Taxation determine under paragraph 177F(1)(a) of the Income Tax Assessment Act 1936 (the Act) that the amount of $ 33,795,402 being a tax benefit that is referable to an amount that has not been included in the assessable income of Channel Pastoral Holdings Pty Ltd TFN … … … (the taxpayer) for the year of income ended 30 June 2008, shall be included in the assessable income of the taxpayer for that year of income.

I further determine under subsection 177F(2) of the Act that the amount shall be deemed to be included in the assessable income of the taxpayer by virtue of subsection 102 - 5(1) of the Income Tax Assessment Act 1997 .

Dated the 18 ^th day of November 2013

(Signed)

(Signed) p.p [ Patricia Redknap ]

Michael Cranston

Deputy Commissioner of Taxation, Private Groups and High Wealth Individuals

86.

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Having regard to the agreed facts, in particular those at [ 28 ] to [ 34 ] above, there is no factual basis for such a determination. On the postulate or counterfactual, upon which the tax benefit the subject of the CPH determination is predicated, namely, that CCC would have, or might reasonably be expected to have, sold the CCC agricultural assets otherwise than as a subsidiary member of the CPH consolidated group, CPH could never, and did not, obtain such a tax benefit from such a sale. What the primary judge said in Macquarie (First Instance) at [ 45 ] is equally apposite to this determination in the present case.

87. Here, the Commissioner seeks to defend an anterior assessment to CPH as head company of a consolidated group, which included CCC as a subsidiary member at the time the assessment was issued, by the making of a subsequent determination to CPH when, on the postulate upon which the s 177F determination was made to CPH, CPH was not the head company of a consolidated group which included CCC as a subsidiary member. For the reasons outlined in [ 61 ] above, in our view, the Commissioner is not authorised to do this.

88. Reserved question 2 must be answered " yes " . The Commissioner was not authorised to make the determination in respect of CPH referred to at [ 53 ] above in defending the disallowance of CPH ' s objection to the amended assessment referred to at [ 51 ] above.

Reserved Question 3

Introduction

89. Having regard to the agreed facts at [ 55 ] and [ 56 ] above, this question can be expanded on its framework in [ 63(3) ] above to read: Whether, by reason of Div 701 of Pt 3 - 90 of the 1997 Act, the Commissioner was not authorised to make the alternative determinations on 13 March 2014 to CCC pursuant to paragraph (1)(a) of s 177F of the 1936 Act that CCC obtained tax benefits referable to the non-inclusion of the capital gain of $ 33,795,402 from the sale of the land and the non-inclusion of assessable income of $ 25,405,000 from the sale of the trading stock, for the period from 1 January 2008 to 30 June 2008 and to give effect to those determinations by issuing the alternative assessment pursuant to ss 168 or 169 of the 1936 Act to CCC for the period from 1 January 2008 to 30 June 2008, when it was a subsidiary member of the CPH consolidated group.

90. The underlying issue raised by this question is whether the Commissioner is denied the authority to issue an assessment to CCC, in reliance on anterior determinations made to CCC pursuant to s 177F(1)(a) of the 1936 Act, at times when CCC was, in fact, a subsidiary member of a consolidated group, when the determinations and assessment were predicated for the purposes of Pt IVA of the 1936 Act on the basis that CCC was not a subsidiary member of a consolidated group, but a stand-alone taxpayer liable to assessment.

91. In our view, that issue and the question giving rise to it should be answered " no " - the Commissioner is not denied the authority to issue an assessment to CCC in reliance on anterior determinations made to it pursuant to s 177(1)(a) - for the reasons which follow.

Part IVA: Some Observations on Certain Aspects

92. First, the operation of Pt IVA is not limited by any other provision of the 1936 or 1997 Acts. Section 177B provides that " nothing in the provisions of this Act other than this Part [ IVA ] … shall be taken to limit the operation of this Part [ IVA ] " : see [ 64 ] above. In the 1936 Act, the " Act " includes the 1997 Act: see s 6(1) and Macquarie at [ 106 ] . In the 1997 Act, " this Act " also includes the 1936 Act: s 995-1(1).

93. Second, Pt IVA is a set of interrelated provisions. Those provisions do not and cannot operate in isolation. Part IVA falls for consideration only where the Commissioner has made a determination under s 177F(1):
Federal Commissioner of Taxation v Hart (2004) 217 CLR 216 ( " Hart " ) at [ 37 ] . As Gummow and Hayne JJ went on to say in that paragraph:

A determination can be made only where a tax benefit has been obtained (or, but for s 177F(1), would be obtained) by a taxpayer in connection with a scheme to which Pt IVA applies. It follows, of course, that the concepts of " tax benefit " , " scheme " and " scheme to which this Part applies " all have their part to play in deciding whether the power given to the Commissioner by s

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177F(1) can be exercised. But it is important to consider what the Act says about those concepts having regard to two considerations. First, the various defined terms must be given operation in the interrelated way which s 177F(1) requires. Each of the defined terms takes its place in a single provision permitting the making of a determination. …

94. The " interrelated way " in which the various defined terms operate includes s 177C. Section 177C(1) addresses " tax benefit " : see [ 64 ] above. That section (read with the other provisions in Pt IVA) identifies that whether a taxpayer obtained a tax benefit in relation to a scheme to which Pt IVA applies is an objective fact:
Federal Commissioner of Taxation v Trail Bros Steel & Plastics Pty Ltd (2010) 186 FCR 410 ( " Trail Bros " ) at [ 23 ] and the cases cited. Identification of a tax benefit is itself a multifaceted task. It is a multifaceted task in two distinct, but necessarily interrelated, ways. It is multifaceted within Pt IVA because of the interrelated provisions of that Part. For example, the interrelated way in which ss 177C and 177D(b) operate requires a comparison between the scheme and the alternative postulate: Trail Bros at [ 25 ] ; Hart at [ 66 ] and
Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404 ( " Spotless " ) at 423 - 424.

95. But the identification of the tax benefit (and the alternative postulate) has another equally important and necessary facet - the interaction between Pt IVA and another section, Division or Part of the Acts. That second concept requires further explanation. As was said in Trail Bros at [ 26 ] and [ 28 ] :

The alternative postulate requires a " prediction as to events which would have taken place if the relevant scheme had not been entered into or carried out and that prediction must be sufficiently reliable for it to be regarded as reasonable " … The question posed by s 177C(1) is answered on the assumption that the scheme had not been entered into or carried out: [
Federal Commissioner of Taxation v Lenzo (2008) 167 FCR 255 at [ 121 ] .

…

When assessing the alternative postulate or predicting the events that would or might take place, that question is answered on the assumption that the scheme has not been entered into or carried out: Lenzo 167 FCR 255 at [ 121 ] . Put another way, s 177C does require the entirety of the scheme to be ignored: Lenzo 167 FCR 255 at [ 136 ] . But that is not the entire question posed by s 177C. The rest of the question involves the objective enquiry of predicting the events that would have, or might reasonably be expected to have, taken place in the absence of the scheme.

(Emphasis omitted.)

96. Identification of that alternative postulate is significant. The alternative postulate, and tax benefit, follows from Pt IVA interacting, intersecting and operating with another section, Division or Part of the Acts. Some matters should be noted at the outset. First, as a matter of statutory construction, the two sets of provisions (Pt IVA on the one hand, and the taxing provision(s) relied upon as the basis for, or underpinning of, the tax benefit on the other hand) should so far as possible be construed so as to operate according to their terms: Project Blue Sky at [ 78 ] . The fact that a taxing provision or provisions are inserted into the Acts after the introduction of Pt IVA does not detract from that proposition. On the contrary, as Gaudron J held in
Saraswati v R (1991) 172 CLR 1 at 17:

It is a basic rule of construction that, in the absence of express words, an earlier statutory provision is not repealed, altered or derogated from by a later provision unless an intention to that effect is necessarily to be implied. There must be very strong grounds to support that implication, for there is a general presumption that the legislature intended that both provisions should operate and that, to the extent that they would otherwise overlap, one should be read as subject to the other.

97. Next, the result (the alternative postulate and identified tax benefit) is based on an assumed set of facts, not the true facts. As a result, the basis on which a taxpayer is assessed under Pt IVA is necessarily not what the taxpayer actually did. It is assessed on the basis

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ATC 17024

of what it would have done, or might reasonably be expected to have done, not what it did do. Indeed, in many cases where Pt IVA has been applied to strike down a scheme to which that Part applies, the basis on which the taxpayer is ultimately assessed is directly contrary to the position it in fact found itself in before the Part was applied. For example, in Spotless , the taxpayer submitted that in the absence of the scheme (investment of funds on short term deposit in a bank account with the European Pacific Banking Co Ltd ( " EPBCL " ) in the Cook Islands), there would have been no investment in EPBCL and para (a) of s 177C(1) would have had no subject matter upon which to operate: at 424. The Court rejected that submission and, in relation to the expression " an amount not being included " in s 177C(1)(a), stated:

In our view, the amount to which par (a) refers as not being included in the assessable income of the taxpayer is identified more generally than the taxpayers would have it. The paragraph speaks of the amount produced from a particular source or activity . In the present case, this was the investment of $ 40 million and its employment to generate a return to the taxpayers. It is sufficient that at least the amount in question might reasonably have been included in the assessable income had the scheme not been entered into or carried out .

Section 177D presents the question whether, having regard to the eight categories of matter identified in par (b), posited as objective facts, in the present case a reasonable person would conclude that the taxpayers entered into the scheme for the dominant purpose of enabling each to obtain a " tax benefit " in the necessary sense. A particular application of the definition provision of " tax benefit " in s 177C(1) thus involves consideration of the particular materials answering the various categories in par (b) of s 177D.

The taxpayers were determined to place the $ 40 million in short-term investment for the balance of the then current financial year. The reasonable expectation is that, in the absence of any other acceptable alternative proposal for " off-shore " investment at interest, the taxpayers would have invested the funds, for the balance of the financial year, in Australia. The amount derived from that investment then would have been included in the assessable income of the taxpayers. The interest rate in the Cook Islands was 4.5 per cent below applicable bank rates in Australia. It reasonably could be concluded that the amount the taxpayers would have received on the Australian investment would have been not less than the amount of interest in fact received from the investment with EPBCL. Accordingly, there is no error adverse to the taxpayers in identifying the amount of the " tax benefit " as an amount equal to the interest less the Cook Islands withholding tax.

(Emphasis added).

Put another way, the s 177C(1)(a) amount (the tax benefit) was the amount that would have been produced from a particular source or activity - the investment of $ 40 million in Australia to generate a return to taxpayers - when, in fact, the taxpayer invested the funds offshore in the Cook Islands: Spotless at 424.

98. In Hart , the s 177C(1)(b) amount (the tax benefit) was the difference between all the interest in fact charged to that part of the loan used for an investment property and the interest that would have been charged to that part of the loan had it been a loan requiring periodical payments sufficient to pay both principal and interest over the term of the loan: at [ 32 ] . Substantively, the alternative postulate on which the tax benefit was calculated was an assumed loan with distinctly different terms for the payment of principal and interest.

99. In Trail Bros , the Court rejected the contention that in identifying the tax benefit in s 177C(1)(b), there was a requirement that the alternative postulate be capable of being classified as the same kind of deduction made in the absence of Pt IVA. As the Court said at [ 48 ] :

[ The ] comparison does not assume, let alone require, that if the scheme had not been effected, the taxpayer would have ordered its affairs in a way that engaged the same provisions of the Act (or engaged the same provisions in the same way) as were said to

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be applicable to the events and transactions comprising the scheme. Imposing the notion that to determine the amount of the tax benefit, a comparison must be made between deductions of the same kind or class assumes, wrongly, that tax benefits follow only in cases where, but for the scheme, a taxpayer would have sought to engage the same provisions of the Act in ordering its affairs. There is no warrant for making that assumption.

The respective positions to be compared were payment by an employer to a " Welfare Fund " and payment by an employer to a superannuation fund: at [ 49 ] . Again, the alternative postulate on which the tax benefit was calculated was a payment to an assumed entity of a particular character.

100. Only after identification of the tax benefit, and the making of a determination in respect of that taxpayer, is the Commissioner required pursuant to s 177F to " take such action as he considers necessary to give effect to that determination " .

Part 3-90: Some Observations on Certain Aspects

101. First, none of the objects of Pt 3 - 90, as specified in s 700-10 (see [ 67 ] above), will be violated or otherwise frustrated by answering question 3, " no " .

102. Secondly, the single entity rule in s 701-1(1) (see [ 68 ] above) has to be read and construed as being limited to the purposes covered by ss 701-1(2) and (3), because that is what s 701-1(1) says; for the purposes of working out the head company ' s and any subsidiary company ' s liability to income tax while they are members of the same consolidated group during any period or periods in the relevant year of income. The single entity rule prevents the Commissioner, consistently with para (a) of s 700-10 (the first Pt 3-90 object), from taxing the same economic gain to both the head company and the subsidiary member that actually makes the gain while it is a member of the head company ' s consolidated group.

103. 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.

Consideration and Analysis

104. On 13 March 2014, the Commissioner made the alternative determinations pursuant to paragraph (l)(a) of s 177F of 1936 Act. The determinations read:

Determination made pursuant to section 177F of Part IVA of the Income Tax Assessment Act 1936

I, Michael Cranston, Deputy Commissioner of Taxation, Private Groups and High Wealth Individuals, in the exercise of the powers and functions delegated to me by the Commissioner of Taxation determine under paragraph 177F(1)(a) of the Income Tax Assessment Act 1936 (the Act) that the amount of $ 33,795,402 being a tax benefit that is referable to an amount that has not been included in the assessable income of Channel Cattle Co Pty Ltd TFN … … … (the taxpayer) for the period 1 January 2008 to 30 June 2008, shall be included in the assessable income of the taxpayer for that period.

I further determine under subsection 177F(2) of the Act that the amount shall be deemed to be included in the assessable income of the taxpayer by virtue of subsection 102 - 5(1) of the Income Tax Assessment Act 1997 .

Dated the 13 day of March 2014

(Signed) p.p [ Julie Elms ]

Michael Cranston

Deputy Commissioner of Taxation, Private Groups and High Wealth Individuals

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Determination made pursuant to section 177F of Part IVA of the Income Tax Assessment Act 1936

I, Michael Cranston, Deputy Commissioner of Taxation, Private Groups and High Wealth Individuals, in the exercise of the powers and functions delegated to me by the Commissioner of Taxation determine under paragraph 177F(1)(a) of the Income Tax Assessment Act 1936 (the Act) that the amount of $ 25,405,000 being a tax benefit that is referable to an amount that has not been included in the assessable income of Channel Cattle Co Pty Ltd TFN … … … (the taxpayer) for the period 1 January 2008 to 30 June 2008, shall be included in the assessable income of the taxpayer for that period.

I further determine under subsection 177F(2) of the Act that the amount shall be deemed to be included in the assessable income of the taxpayer by virtue of section 6 - 5 of the Income Tax Assessment Act 1997 .

Dated the 13 day of March 2014

(Signed) p.p [ Julie Elms ]

Michael Cranston

Deputy Commissioner of Taxation, Private Groups and High Wealth Individuals

105. The next day, 14 March 2014, the Commissioner took action to give effect to the alternative determinations by issuing the alternative assessment to CCC for the period 1 January 2008 to 30 June 2008. The alternative assessment is said to have been made pursuant to s 168, or alternatively s 169, of the 1936 Act, but in our view, it is unnecessary to source the Commissioner ' s authority in these provisions for the reasons referred to in [ 108 ] and [ 109 ] below, namely, the provisions of s 701-30 of the 1997 Act.

106. While the alternative determinations do not say as much, they are both predicated on the postulate that CCC would have, or might reasonably be expected to have, sold the land and trading stock as a stand-alone entity if CPH had not done what it did do, namely, acquire all the shares in CCC and choose to form a consolidated group including itself as head company and CCC as a subsidiary member, prior to any such sale of the land and trading stock by CCC. That postulate is entirely hypothetical, and the assessment to give effect to the determinations is not affected, limited or prohibited in any way by the provisions of Pt 3-90, in particular, the single entity rule in s 701-1, the operation of which is predicated on facts inconsistent with the postulate.

107. The same conclusion is reached if one approaches the issue through the prism of Pt 3-90, rather than through the unlimited operation of s 177B of Pt IVA. Part 3-90 actually contemplates that, as a matter of fact, there may be periods in the income year when an entity is not part of the group: see s 701-30 in [ 68 ] above. It further provides for how the entity ' s taxable income (if any) is to be worked out for what is called the " non-membership period " : see s 701-30(3).

108. In the present case, neither CCC nor CPH were members of a consolidated group in the period 1 July 2007 to 31 December 2007. For that period, their respective taxable incomes were to be worked out in accordance with s 701-30(3). The alternative determinations are predicated on the postulate that they were not members of a consolidated group during the remaining period of that year and that their respective taxable incomes for the remaining period of that year were to be worked out in accordance with s 701-30(3). It may not have been necessary for the postulate underlying the alternative determination to embrace the whole of the remaining period of the year ended 30 June 2008; it may have been sufficient to confine it to the period 1 January 2008 to 29 February 2008, the latter date being the date on which the sale of the agricultural assets by CCC was completed (see [ 34 ] above). But, in our view, nothing turns on this.

109. During the course of argument, the Commissioner contended that the answer to this question required the operation of the single entity rule in Pt 3-90 to give way to the paramountcy of Pt IVA (s 177B(1)), in reliance on the default exception to the core rules in s 701-85 (see [ 68 ] above), so that CCC may be assessed despite the statutory single entity rule. For the reasons set out from [ 92 ] above, that approach has not been adopted. In the present case, the application of Pt IVA proceeds on the basis that CCC is not a subsidiary member of

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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.