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HARTS AUSTRALIA PTY LTD & ANOR v FC of T

Judges:
Drummond J

Court:
Federal Court

MEDIA NEUTRAL CITATION: [2000] FCA 1131

Judgment date: 11 August 2000

Drummond J

The main question for decision is whether an agreement between a taxpayer company and an associated company under which the latter transferred to the former tax- deductible losses incurred by it, is effective for the purposes of s 80G the Income Tax Assessment Act 1936 (Cth) (``ITAA'') when the agreement does not transfer the right to deduct losses of a specified amount, but rather so much of the associated company's losses as is required to reduce the taxpayer company's taxable income to ``nil''. This main question and another are to be determined in both cases on agreed facts pursuant to an order I made under O 29 r 2 the Federal Court Rules.

2. The main question arises in relation to Harts Consulting Pty Ltd in respect of its 1992 year of income and in relation to Harts Australia Ltd in relation to its 1993 and 1996 years of income. The three agreements here in question identify certain financial year losses in respect of which Bomilsco Pty Ltd, an associate of the two Harts companies, has a right to a deduction, as the subject of each agreement. The loss transfer agreement between Bomilsco and Harts Australia dated 26 October 1993 is typical of all three agreements of present relevance. It provides:

``BOMILSCO PTY LTD AND HARTS AUSTRALIA LIMITED

1993 FINANCIAL YEAR

It has been irrevocably agreed between the Companies that the right to a deduction for some of the losses incurred by Bomilsco Pty Ltd will be transferred to Harts Australia Limited.

In accordance with s. 80G of the ITAA:-

  • a) The losses were incurred in the 1990 year.
  • b) Bomilsco Pty Ltd and Harts Australia Limited were both resident companies for the whole year and all intervening years.
  • c) Harts Australia Limited has a Taxable Income in 1993.
  • d) Common ownership is satisfied at all times during the year and all intervening years.
  • e) The amount to be transferred is so much of the losses required which make Harts Australia Limited taxable income NIL.

(Signed)(Signed) Public OfficerPublic Officer Bomilsco Pty LtdHarts Australia Limited 26/10/9326/10/93''

3. This form of agreement does not identify the dollar amount of the losses that are to be the subject of the transferred right to the deduction. It is a ``formula document'' described in par 5 of Taxation Ruling 98/12 which the Commissioner there, and now in this Court, says does not satisfy s 80G(6)(c) the ITAA.

4. Section 80G the ITAA, so far as is material, provides:

``SECTION 80G TRANSFER OF LOSS WITHIN COMPANY GROUP

80G(1A) [No operation from 1997/98 year onwards] The right to a deduction for an amount of a loss cannot be transferred under this section in the 1997-98 year of income or a later year of income.

...

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80G(1) [`Group Company'] For the purposes of this section, a company shall be taken to be a group company in relation to another company in relation to a year of income if-

  • (a) one of the companies was a subsidiary of the other company; or
  • (b) each of the companies was a subsidiary of the same company,

during the whole of the year of income...

...

80G(6) [Year loss deemed to be incurred] Subject to this section, where:

  • (a) a resident company other than a prescribed dual resident (in this section referred to as the `loss company' ) is deemed to have incurred a loss for the purposes of section 79E or 80 in the year of income that commenced on 1 July 1984 or in a subsequent year of income (in this section referred to as the `loss year' );
  • (b) a resident company other than a prescribed dual resident (in this section referred to as the `income company' ) has, or would but for the operation of this section have, a taxable income in the year of income that commenced on 1 July 1984 or in a subsequent year of income (in this section referred to as the `income year' );
  • (ba) the loss company is not a dual resident investment company in relation to the loss year nor in relation to the income year;
  • (c) the loss company and the income company agree that the right to an allowable deduction under subsection 79E(3), 79F(6), 80(2), 80AAA(7) or 80AA(4), as the case requires, in respect of so much of the whole or part of the loss as has not been allowed as a deduction should be transferred to the income company in the income year;
  • (d) in a case where the loss year is the same year of income as the income year:
    • (i) the loss company is a group company in relation to the income company in relation to the loss year; and
    • (ii) if the loss company had incurred the loss in the year of income immediately preceding the loss year and had derived sufficient assessable income (including film income) in the loss year, the loss or that part of the loss, as the case may be, would, but for this section, be allowable as a deduction from the assessable income of the loss company in the loss year (ignoring any exempt income derived by the loss company in the loss year or in that preceding year); and
  • (e) in a case where the income year is a year of income subsequent to the loss year:
    • (i) the loss company is a group company in relation to the income company in relation to the loss year and the income year and in relation to any year of income commencing after the end of the loss year and ending before the commencement of the income year; and
    • (ii) if the loss company had derived sufficient assessable income (including film income) in the income year, the loss or that part of the loss, as the case may be, would, but for this section, be allowable as a deduction from the assessable income of the loss company in the income year (ignoring any exempt income derived by the loss company in the income year),

the amount of the loss or of that part of the loss, as the case may be, shall, for the purposes of the application of the provisions of this Act other than this section in relation to the income company in relation to the income year, be deemed to be a loss incurred by the income company for the purposes of section 79E, 79F, 80, 80AAA or 80AA, as the case requires, in:

  • (f) a case to which paragraph (d) applies - the year of income immediately preceding the loss year; or
  • (g) a case to which paragraph (e) applies - the loss year.

...

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80G(6A) [Form and time of agreement] An agreement under paragraph (6)(c) must be:

  • (a) in writing and signed by the public officer of each of the loss company and the income company; and
  • (b) made before the date of lodgment of the return of income of the income company for the income year or within such further time as the Commissioner allows.

...

80G(7) [Loss exceeds net income] An agreement under paragraph (6)(c) relating to the transfer to the income company of a right to an allowable deduction under subsection 79E(3), 80(2) or 80AA(4) from the assessable income of the income company of the income year in respect of a loss or a part of a loss has no effect to the extent that the sum of the amount specified in the agreement and any amount specified in an agreement previously made under paragraph (6)(c) and any amounts specified in notices given under paragraph (6)(c)... by any company in relation to allowable deductions under subsection 79E(3), 79F(6), 80(2), 80AAA(7) or 80AA(4) from that assessable income exceeds:

  • (a) in a case where the income company has not in the income year derived exempt income - the amount by which the assessable income of the income company of that year exceeds the allowable deductions (other than deductions allowable by virtue of this section) from that assessable income; or
  • (b) in a case where the income company has in the income year derived exempt income - the amount by which the sum of the assessable income of the income company of that year and the net exempt income of the income company of that year exceeds the allowable deductions (other than deductions allowable by virtue of this section) from that assessable income.

...

80G(8) [Film income] An agreement under paragraph (6)(c) relating to the transfer to the income company of a right to an allowable deduction under subsection 79F(6) or 80AAA(7) from the assessable income of the income company of the income year in respect of a loss or part of a loss has no effect to the extent that the sum of the amount specified in the agreement and any amount specified in an agreement previously made under paragraph (6)(c)... by any company in relation to allowable deductions under that subsection from that assessable income exceeds the sum of the net assessable film income within the meaning of section 79F or 80AAA, as the case requires, of the income company of that year and the net exempt film income within the meaning of that section of the income company of that year.

...

80G(13) [Further agreement to transfer] Where the loss company makes an agreement in accordance with paragraph (6)(c) in relation to a part of a loss incurred by the loss company, that company must not make a further agreement in accordance with that paragraph in relation to that loss that purports to transfer to a company the right to an allowable deduction in respect of an amount that exceeds the amount obtained by deducting from the amount of that loss the amount of that part of that loss or the sum of the amounts of those parts of that loss specified in the first-mentioned agreement.

...

80G(15) [Amendment of assessments] Where:

  • (a) the right to an allowable deduction in respect of a loss or a part of a loss incurred by the loss company is transferred to the income company pursuant to subsection (6); and
  • (b) that loss or a part of that loss was not deemed to have been incurred by the loss company,

nothing in section 170 prevents the amendment of an assessment of the income of the income company to disallow the whole or a part of the deduction referred to in paragraph (a).

80G(16) [Retention of right to deduction] If, as a result of the amendment of an assessment or for any other reason, a deduction is not allowable from the

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assessable income of the income company in respect of the whole of an amount specified in an agreement under paragraph (6)(c) or specified in a notice given under paragraph (6)(c)... this section applies as if only that part of the amount specified in that agreement or that notice in respect of which a deduction is allowable to the company were so specified.''

5. The applicant submits that the provisions of s 80G that set out the requirements for an agreement that will be effective to transfer the right to deduct certain losses are contained in s 80G(6)(c) and (6A) and that these provisions do not require the specification of a fixed dollar amount of the loss to be transferred. It is further submitted that those sub-sections of s 80G upon which the Commissioner relies in arguing the contrary are merely subsidiary to these operative provisions. So understood, they cannot control the meaning of sub-section (6)(c) and (6A). The respondent contends that the applicant's approach to statutory construction is erroneous, that it fails to take into account the necessity of seeking the meaning of the particular provisions from their wording read in their relevant statutory context. The respondent submits that when s 80G(6)(c) and (6A) are read in the context of the whole section, it is clear that only an agreement specifying a particular dollar amount of losses to be transferred can meet the requirements of sub- section (6)(c). Argument ranged more widely than this. It included an examination of the nature of an assessment under the ITAA and debate as to whether or not an agreement in the form now in question is compatible with what is involved in such an assessment.

6. It is clear that the object of s 80G is to allow company A to transfer to company B either the whole or part of a loss incurred by the former which is allowable as a deduction from its income, to the intent that the loss will be deductible by the latter from its own assessable income, but only to the extent that that loss has not, in fact, already been allowed as a deduction against company A's income in any particular year and only provided the two companies are in common ownership.

7. However, by force of s 80G(6) and (12) respectively, it is only if the conditions which s 80G requires to be met are complied with that such a transfer will be effective to deem the amount of company A's loss to be a loss incurred by company B and to deem it to be no longer a loss incurred for the purposes of ss 79E(3), 79F(6), 80(2), 80AAA(7) or 80AA(4) by company A.

8. One of these conditions is that there must be a transfer agreement of a particular kind between the two companies. Section 80G(6)(c) requires that there be an agreement between the two companies that company A's unexercised right to an allowable deduction for losses which it is entitled, by s 79E(3), 79F(6), 80(2), 80AAA(7) or 80AA(4), to deduct from its own assessable income is to be transferred, in respect of the whole or part of those losses, to company B.

9. The content of the right that can be the subject of a transfer agreement within s 80G(6)(c) can be ascertained from the five sub- sections under which company A's entitlement to a deduction in respect of certain losses arises and from the use to which the ITAA permits those losses to be put by way of deduction. The general provision, s 80, will serve as an example. It is company A's right to an allowable deduction under s 80(2) that can be made the subject of a transfer agreement. Section 80(2) gives company A the right to a deduction from its assessable income for a particular year of ``so much of the losses incurred by [it] in any of the 7 years next preceding the year of income as has not been allowed as a deduction from [its] income of any of those years''. Section 80(1) defines the kind of losses that come within s 80(2):

``For the purposes of this section, a loss shall be deemed to be incurred in any year when the allowable deductions... from the assessable income of that year exceed the sum of that income and the net exempt income of that year, and the amount of the loss shall be deemed to be the amount of such excess.''

10. Such a loss must necessarily be a dollar amount and, by force of s 80(2), the sum of each of those dollar amounts of the losses in the seven years preceding company A's particular year of income is an allowable deduction from that company's assessable income for that year. The right to an allowable deduction under s 80(2) is thus the right to deduct a particular dollar amount from the company's assessable income in a particular year.

11. Section 80G(6)(c) requires agreement that there is to be a transfer of this right to an

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allowable deduction under s 80(2) ``in respect of so much of the whole or part of'' the loss the subject of the right to that deduction. What can be transferred under s 80G is company A's right to deduct that dollar amount, to the extent of the whole of it or a part only of it. An agreement to transfer the loss company's right to a deduction under s 80(2) in respect of the whole of its loss deductible under that section must necessarily refer to a loss of a particular dollar amount that is then, ie, at the date of the agreement, identifiable, even if that dollar amount is not itself recorded in the agreement. An agreement to transfer the loss company's right to a deduction under s 80(2) in respect of part only of that loss must identify the part of the then identifiable dollar amount of the entire loss that is the subject of the agreement; prima facie, that could be done by recording in the agreement either the dollar amount of that part or the fraction of the then identifiable dollar amount of the whole of the loss that is the subject of the transfer agreement.

12. Section 80G operates to give the income company the right to make a reduction in its assessable, and thus its taxable, income which it would not have, but for the transfer agreement. That right is not, however, freestanding. It can be exercised only within the process of assessment of the income company's taxable income, whether that assessment is made by the company itself under s 166A, by the Commissioner by amendment of that deemed assessment under s 170(1) or by the Commissioner under s 170(7) at the conclusion of any litigation over his amended assessment. That assessment is the process of ascertaining an immutable figure,
Henderson v FC of T 70 ATC 4016 at 4018-4019; (1968-1970) 119 CLR 612 at 647-648, does not alter the fact that the ITAA makes provision for differing assessments of that figure each of which, after actual or deemed service of notice of the particular assessment, will impose a legally binding obligation on the taxpayer company to pay the tax so assessed.

13. In s 6(1) the ITAA, the term ``assessment'' is defined to mean the ascertainment of the amount of taxable income and of the tax payable on that taxable income; the term ``taxable income'' is defined in ss 6(1) and 48 to mean the amount remaining after deducting all allowable deductions from the assessable income derived by the taxpayer during the year of income. It is well-established that this process of assessment, for the purposes of ITAA, involves, firstly, a process of calculation by which the provisions of the Act relating to liability to tax are given concrete application in a particular case, with the consequence that the taxpayer's taxable income and the tax payable thereon are determined in specified amounts and, secondly, service (whether actual or deemed) of a notice on the taxpayer setting out the results of that process of calculation. See
Batagol v FC of T (1963) 12 ATD 202 at 204; (1963) 109 CLR 243 at 251-252. This remains an accurate statement of what constitutes an assessment under the self- assessment provisions, including s 166A, of the current ITAA:
Industrial Equity Ltd & Anor v DFC of T & Ors 90 ATC 5008 at 5013; (1990) 170 CLR 649 at 658.

14. The object of s 80G is to permit the transfer of a right to deduct a loss from one company's assessable income to an associated company so that it can deduct that same loss from its own assessable income. And since this right to deduct a transferred loss is a right exercisable only within this process of ascertaining the figure that expresses the income company's taxable income, it must I think be the right to deduct a figure that is identifiable as a specific dollar amount, at the latest, at the time the transfer agreement is made.

15. For these reasons I cannot accept that sub-section (6)(c) can be satisfied by an agreement for the transfer by the loss company of its right to a deduction in respect of the whole or a part of a loss available to it, the precise dollar amount of which is not fixed and identifiable at the date of the agreement, but which may thereafter change at each point in time at which the process of assessment of the income company's taxable income for a particular year may have to be undertaken and which will only finally be identifiable when the last stage of that process is complete.

16. A transfer agreement in the form adopted by Bomilsco and the two Harts companies is not one which meets the requirements of s 80G(6)(c) the ITAA because it operates in terms to permit the transfer from Bomilsco to the relevant Harts company of an amount that is intended to change, to the extent necessary to reduce the Harts company's taxable income to nil, each time an assessment of that taxable

ATC 4572

income may be made in accordance with the ITAA.

17. This is not to say, at least so far, that the dollar amount of the loss the subject of the transfer agreement must be recorded in the agreement if it is to satisfy s 80G(6)(c). But the amount of the loss must be fixed and identifiable at the date of the agreement. That much follows from a consideration of the wording of s 80G(6)(c) and of the fact that the right of deduction the subject of an agreement within that sub-clause can only be exercised in the process of assessment of the transferee company's taxable income. But in order to identify the proper construction of s 80G(6)(c), it is not enough to have regard only to the words of the sub-section: the relevant context in which that sub-section is found must also be taken into account.

18. In
CIC Insurance Limited v Bankstown Football Club Limited (1997) 9 ANZ Insurance Cases ¶61-348; (1997) 187 CLR 384, it was said at 408 that ``the modern approach to statutory interpretation insists that the context be considered in the first instance, not merely at some later stage when ambiguity might be thought to arise''. In
TCN Channel Nine Pty Ltd v Australian Mutual Provident Society (1982) 42 ALR 496, the Full Court had to consider s 91D the Broadcasting and Television Act 1942 (Cth). Sub-section (1) authorised a person to apply to the Tribunal for a certificate under the section authorising him ``to hold interests in a'' licensee company. Other sub-sections of s 91D empowered the Tribunal, on receipt of such an application, to issue a certificate to the applicant authorising him to hold, ``as specified in the certificate'', shareholding interests in the company amounting to a particular amount and those sub-sections also placed restrictions on the Tribunal's power to issue such a certificate by reference to the extent of control of the company that the size of the shareholding in respect of which the applicant sought the Tribunal's certificate would confer on the applicant. The Full Court said, at 503:

``If s 91D(1) is read alone, its language is sufficiently wide to encompass interests which are held or are proposed to be held at the time the application is made to the Tribunal. The language of that sub-section would also include interests which are not held or even proposed to be held at the time of the application and which may never in fact be held by the applicant...

However, when s 91D(1) is read in the light of the remainder of the section, it is plain to us that Parliament did not intend so wide a construction to be given to the section. It permits the issue of a certificate authorising the applicant to hold `either or both of the following' (ie, shareholding interests amounting to a specified amount or loan interests amounting to a specified amount) `as specified in the certificate'... In our view, the word `specified' is used in the sense of stating in detail or with particularity. To specify the shareholding or lone interests in the certificate requires more than a mere statement that the holder of the certificate is authorised to hold shareholding or loan interests in the company concern. It must give details of the particular interests the holding of which is authorised.''

19. The TCN case illustrates the importance of context in construing a statutory provision.

20. Even if s 80G(6)(c), read in isolation from the rest of the section, was sufficiently wide to encompass a loss transfer agreement that did not specify any particular amount of loss by reference to which it was to operate but adopted a formula of the kind here in question, the context in which s 80G(6)(c) is found (ie, the whole of s 80G) shows, in my opinion, that an agreement will only satisfy s 80G(6)(c) if it specifies the quantum of the losses in respect of which the right to a deduction has been transferred.

21. Section 80(G)(6A) does not throw any light on the question of present concern. It prescribes only certain formal requirements: to be effective, an agreement must be in writing and it must be signed by the public officer of each of the loss and the income companies and the last date when such an agreement can be made is the day before the date of lodgment of the return of income of the income company for the year in question (unless the Commissioner allows further time).

22. But ss 80G(7), (13) and (16) have general application to all loss transfer agreements within s 80G(6)(c), irrespective of the particular provision of the ITAA under which a deduction is allowable to the loss company. Each sub- section is drawn on the assumption that an agreement within s 80G(6)(c) will specify the

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dollar amount of the loss the subject of the transfer of the loss company's right to a deduction: each provision operates upon an arithmetical difference between the amount so specified and another dollar figure. I regard this as a strong indication that s 80G(6)(c) is to be read as referring only to an agreement for the transfer of the right to deduct a loss the quantum of which is stated in the agreement as a dollar figure. Where these sub-sections refer to an amount being specified in the agreement, they are therefore to be read as using the word ``specified'' in the sense of ``stated in detail or with particularity'': see TCN at 503.

23. Section 80G(7) deals with the case where the income company is unable to take advantage, as a deduction, of the whole of the loss transferred because it does not have sufficient net assessable income to absorb the whole of that loss. The sub-section declares that, in that event, the loss transfer agreement has no effect to the extent that ``the amount specified in the agreement'' exceeds that part of the transferred losses which the income company is in a position to deduct. That is, the loss transfer agreement has no effect to the extent of the arithmetical difference between the amount of the loss specified in the agreement and the lesser part of that figure that the income company is able to deduct: notwithstanding s 80G(6) and (12), that difference is to remain a loss incurred by the loss company deductible by it from its assessable income. This sub-section assumes that the agreement will specify a dollar amount. Effect cannot be given to it unless that is the position.

24. Section 80G(13) provides that ``where the loss company makes an agreement in accordance with paragraph 6(c)'' in relation to a part only of a loss deductible by it under any of s 79E(3), 79F(6), 80(2), 80AAA(7) or 80AA(4), the loss company must not make a further agreement in accordance with sub- paragraph (6)(c) in relation to that entire loss, if the further agreement purports to transfer the loss company's right to an allowable deduction in respect of an amount that exceeds the difference between the entirety of the loss and ``the amount of that part of that loss... specified in the first mentioned agreement''. Like sub- section (7), this sub-section, in imposing a qualified prohibition against making further agreements under sub-section (6)(c), operates by reference to the arithmetical difference between the amount of that part of the entire loss available to the loss company as a deduction, which part is specified in the first transfer agreement, and the amount of the entirety of that available loss. It too assumes that the first-mentioned agreement will specify a dollar amount as the particular loss the subject of the right of deduction that is transferred. It cannot be given effect otherwise either.

25. Section 80G(15) deals with the situation where the loss company was never truly entitled to deduct the loss transferred: it declares that the deeming effect given to the transfer by s 80G(6) does not prevent amendment of the assessment of the income company to deny it a deduction for that transferred loss. Section 80G(16) deals with, among other things, the impact of an amendment of the income company's assessment on an agreement to transfer losses to it, where the loss company was truly entitled to deduct the losses. If as a result of the amendment of the income company's assessment ``or for any other reason'', a deduction is not allowable from the assessable income of that company ``in respect of the whole of an amount specified in an agreement under par (6)(c)'', s 80G(6) and (12) are not to operate according to their terms, but are each to have a partial operation only. If the income company's amended assessment leaves it able to absorb only a part of the transferred losses, the unusable excess of that loss is to remain available as a deduction to the loss company, despite s 80G(6) and (12). This is achieved by declaring that s 80G is to apply ``as if only that part of the amount specified in that agreement [under par (6)(c)]... in respect of which a deduction is allowable to the [income] company were so specified''. Like sub-sections (7) and (13), s 80G(16) operates by reference to the arithmetical difference between the amount of the loss specified in the transfer agreement and the amount of the lesser part of that loss that the income company is in fact able to absorb into its assessable income. It too assumes that a transfer agreement within sub- section (6)(c) will specify the dollar amount of the losses the subject of the agreement. This sub-section cannot be given its intended effect if that is not done.

26. The deeming provisions of s 80G(6) and (12) by themselves provide further support for reading s 80G(6)(c) as requiring a loss transfer

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agreement to state the dollar amount of the loss. Under sub-section (6), once the conditions of that provision, including the making of an agreement sufficient for the purposes of cl (c) are satisfied, the whole of the amount of the loss to which the loss company previously had a right to a deduction, or that part of that loss in respect of which the transfer of the loss company's right to a deduction is made, is henceforth deemed to be a loss incurred by the income company. Pursuant to sub-section (12), it is also deemed not to have been incurred by the loss company. This deemed state of affairs cannot thereafter be altered by an act of the parties though the operation of the agreement may be altered by the statute, if any of s 80G(7), (15) or (16) have application in the particular case. The Commissioner is also given discretionary power by s 80G(6A) to permit the parties to make, out of time, a further loss transfer agreement applicable to losses not the subject of the first agreement to ensure that the income company will have sufficient losses available to it to absorb as much as possible of its assessable income. But that does not permit any alteration to the deemed state of affairs with respect to the loss the subject of the first agreement that is produced by s 80G(6) and (12) upon the making of that agreement.

27. The irrevocability of the agreement by act of the parties is the consequence of the fact that the loss transfer mechanism is a creation of statutory enactment, not private agreement. Whether the right given to an income company to make use of losses incurred by an associated company arises in a particular case depends upon whether the statutory requirements are satisfied. Whether the parties have agreed upon the transfer is relevant only to whether s 80G(6)(c) is satisfied: they have no further power to affect, by their mutual arrangements, the continued existence or content or operative effect of the transfer.

28. An agreement within s 80G(6)(c), by force of s 80G(6) and (12), changes the ownership of the loss the subject of the transfer agreement and puts it beyond the power of the parties to undo or alter (though the effect of their agreement may be altered, if s 80G(7), (15) or (16) apply). Nor can the parties cancel such an agreement or transfer the loss in whole or in part back to the loss company, even though it may emerge that cancellation or retransfer would be more advantageous to them. It follows that the parties cannot make an agreement that will satisfy the requirements of s 80G(6)(c) if what they agree to do is transfer the right to deduct certain losses which will have a variable operation, viz, to transfer that right on terms that may ultimately involve no transfer of any of the losses taking place at all or which may involve the transfer of the right to deduct in respect of differing amounts, as different assessments are made under the ITAA of the income company's assessable income. Only an agreement for the transfer of a fixed and identifiable loss will satisfy s 80G(6)(c). The agreements between Bomilsco and Harts Australia and Harts Consulting are drawn so as to have both of these impermissible operations, ie, one or the other, according to which is necessary to ensure that Harts Australia and Harts Consulting will ultimately have nil assessable income for their own years of income to which the three transfer agreements apply.

29. The fact that an agreement has the effect provided for by s 80G(6) and (12) and, once made, cannot be altered by the parties is therefore another pointer to it applying only in respect of a fixed quantum of loss. Further, if it were open to the parties to vary an agreement within s 80G(6)(c) or to make an inherently variable agreement by adopting a self-adjusting formula of the kind here in question, that would make unnecessary s 80G(7) and (16), which operate as statutory modifications to the otherwise inflexible effect given to a loss transfer agreement by s 80G(6) and (12).

30. The applicants point out correctly that the form of transfer agreement here in question has the same operative effect as that brought about by s 80G(16). But that seems to me of no present moment: that their agreements may achieve the same effect as sub-section (16) does not necessarily mean that they are in a form which complies with the requirements of the section and, in particular, the requirements of s (6)(c). Further, while the parties can only make a transfer agreement that operates by reference to a loss actually available as a deduction to the loss company, they can, subject to that, make an agreement sufficient to satisfy s 80G(6)(c) for the transfer to the income company of a loss far in excess of what they may then consider is needed to reduce the income company's taxable income to nil. They can do this, secure in the knowledge that ultimately, if losses are

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transferred that are in excess of those needed to obliterate the income company's taxable income, the excess losses will revert to the control of the loss company by force of s 80G(7) or (16). To make such an agreement may be a sound strategy to deal with the risk that an amended assessment may issue increasing the income company's taxable income beyond that which the parties consider it to be when the income company self-assesses under s 166A and to deal with the further risk that the Commissioner may refuse to exercise his discretion under s 80G(6A)(b) in favour of the parties and refuse to permit them to make a further agreement under sub-section (6)(c) transferring additional losses from the loss to the income company.

31. But that the parties can so lawfully arrange their affairs with respect to the transfer of losses to their advantage, to achieve the same outcome as a ``formula'' type loss transfer agreement (at least where the loss company has sufficient losses available for transfer to make this strategy available to them) provides no ground for reading s 80G(6)(c) as conferring on the parties the right to achieve that outcome even more directly by making a ``formula'' type of loss transfer agreement. Such a strategy involves nothing other than the utilisation of the statutory provisions. Its availability, in some factual situations, does not mean that the statutory provisions should therefore be given a construction different from that which is otherwise appropriate.

32. One of the questions which the Court must answer is whether the agreement of October 1993 between Bomilsco and Harts Australia is effective for the purposes of s 80G. For the reasons given, I think it is not. But even if I am wrong in thinking that those reasons justify that answer, I would answer this question in the same way for other reasons.

33. It is difficult to see how the agreement between Bomilsco and Harts Australia made in October 1993, ie, after the agreement between Bomilsco and Harts Consulting made in October 1992, does not fall within the prohibition in s 80G(13). Section 80G(13) prohibits the making of certain agreements. It does not merely declare the effect of a transfer agreement made subsequent to an earlier transfer agreement.

34. The agreement for the 1992 financial year between Bomilsco and Harts Consulting is in respect of losses incurred by Bomilsco in, among others, the 1990 year. In terms, this agreement identifies the amount transferred as including so much of Bomilsco's losses in the 1990 year as is required to make Harts Consulting's taxable income nil, even if the whole, or almost the whole or some lesser part of the whole of the 1990 year loss is required to achieve that. It can therefore be described as an agreement ``in relation to a part of a loss'' incurred by Bomilsco within the meaning of that phrase in sub-section (13). The agreement between Bomilsco and Harts Australia for the 1993 year is limited to the transfer of Bomilsco's losses incurred in the same 1990 year. But it purports to transfer so much of Bomilsco's 1990 year losses as is required to make Harts Australia's taxable income in the 1993 year nil even if almost the whole of that 1990 year loss is required to achieve that. The second agreement in terms permits the transfer to Harts Australia of Bomilsco's right to deduct a part of the losses, including almost the whole of those losses, though the right to deduct that same part was earlier transferred to Harts Consulting. Section 80G(13) therefore prohibits the making of the second agreement. It cannot be saved by waiting to see how the two agreements will need to operate on Bomilsco's 1990 year loss and whether Harts Consulting needs to have recourse to any of that 1990 year loss to reduce its own 1992 year income to nil. The agreement between Bomilsco and Harts Australia dated 26 October 1993 appears, for this reason also, to be ineffective to satisfy the requirements of s 80G(6)(c).

35. The questions ordered to be determined separately will be answered as follows:

36. In Q 204 of 1999 Harts Australia Ltd v Commissioner of Taxation

  • 1. Whether the document annexed to Exhibit 2 and marked ``A1'' may constitute an agreement for the purposes of section 80G(6)(c) of the Income Tax Assessment Act (``the Act''), insofar as it does not specify an amount to be transferred.
  • Answer: No
  • 2. Whether, if the answer to question 1 is ``yes'', and assuming that the agreement was otherwise valid, the effect of that agreement was spent by the transfer from Bomilsco Pty Ltd to the Applicant of the sum of $190,295.00, as evidenced by the 1993 tax return for the Applicant.

    ATC 4576

  • Answer: Unnecessary to answer
  • 3. Whether the document annexed to Exhibit 2 and marked ``A2'' may constitute an agreement for the purposes of section 80G(6)(c) of the Act, insofar as it does not specify an amount to be transferred.
  • Answer: No
  • 4. Whether, if the answer to question 3 is ``yes'', and assuming that the agreement was otherwise valid, the effect of that agreement was spent by the transfer from Bomilsco Pty Ltd to the Applicant of the sum of $12,290.00, as evidenced by the 1996 tax return for the Applicant.
  • Answer: Unnecessary to answer

37. In Q 205 of 1999 Harts Consulting Pty Ltd v Commissioner of Taxation

  • 1. Whether the document annexed to Exhibit 1 and marked ``A'' may constitute a notice for the purposes of s 80G(6)(c) of the Income Tax Assessment Act (``the Act'') insofar as it does not specify an amount to be transferred.
  • Answer: No
  • 2. Whether, if the answer to question 1 is ``yes'', and assuming that the notice was otherwise valid, the effect of that notice was spent by the transfer from Bomilsco Pty Ltd to the Applicant of the sum of $661,353.00, as evidenced by the 1992 tax return for the Applicant.
  • Answer: Unnecessary to answer.

38. The costs of and incidental to the determination in both actions of these questions will be reserved.


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