Decision impact statement
Commissioner of Taxation v News Australia Holdings Pty Ltd
Court Citation(s):
[2010] FCAFC 78
2010 ATC 20-191
(2010) 79 ATR 461
Venue: Federal Court of Australia
Venue Reference No: NSD 1209 of 2009
Judge Name: Stone, Jessup & Jagot JJ
Judgment date: 30 June 2010
Appeals on foot:
No
Impacted Advice
Relevant Rulings/Determinations:- None
Subject References:
Corporate restructure
capital loss
Part IVA
subjective purpose of taxpayer
proper consideration of form & substance
Decision Outcome:
Unfavourable
Précis
The global corporate restructure implemented by News Corporation in order to move its ultimate holding company from Australia to the US resulted in a capital loss of $1.5 billion. The migration would have caused a large CGT liability if done directly; however, the requirement of management was that it should create no tax and no tax risk.
Brief summary of facts
This case concerns a corporate restructure, a purpose of which was to change the intra-group holding of shares in a US subsidiary from the Australian taxpayer company to a new US head company. During this restructure, a series of steps was implemented which included the US subsidiary buying back the shares held by the Australian taxpayer company (resulting in a capital loss by operation of Division 16K of the ITAA 1936) in exchange for a debt note. On the same day, the US subsidiary then re-issued shares to the new US head company in exchange for the debt note which the US head company received on the same day from the Australian taxpayer company as a reduction of capital distribution by the Australian taxpayer company in which the US head company was the shareholder.
In connection with the restructure, the News group applied for, and received, favourable rulings from the US Internal Revenue Service ('IRS') relating to the US tax consequences of certain aspects of the arrangements. News group also applied for and received a ruling from the ATO that, as there was no longer an anticipated capital gain due to a turn in market prices, Part IVA could not apply to include a capital gain in the applicant's income as a result of the disposal of its interest in the US subsidiary by way of a buyback of shares. The taxpayer did not request a ruling in relation to a possible capital loss benefit.
The Commissioner made a Part IVA determination to disallow the tax benefit (the $1.5 billion CGT loss) that was generated by a "scheme" identified by the Commissioner within a much broader arrangement, being the migration of News Corporation from Australia to the US. The Commissioner's alternate postulate was that the taxpayer, in the absence of the scheme, might reasonably have been expected to make a direct transfer of shares which would not have generated a loss.
The AAT concluded that the manner in which the scheme was entered into or carried out did not point to an objective purpose of obtaining a tax benefit as the transactions undertaken to give effect to the corporate restructure, although complex, had the non-tax purpose of effecting the restructure for the ultimate commercial benefit of News Group and its shareholders.
The AAT considered that as it was intended to move very substantial assets from an Australian corporation to a related US corporation it was not surprising that the process was both complex and complicated and that mechanisms other than transfers were considered for parts of the process. The particular steps undertaken were sensible and rational against the "no tax, no tax risk" requirement of management, without which the restructure would not have occurred.
Issues decided by the court
The appeal raised three errors of law that we said had been made by the AAT in deciding to set aside the objection decision.
Firstly, the Court rejected the argument that the AAT had erred in having regard to subjective purposes of the taxpayer and others by accepting evidence that the taxpayer would not have undertaken the transaction if there was a risk of tax being payable in Australia. The Court stated that, to the extent the AAT did take this "no tax, no tax risk" position into account, it did so on the basis of objectively ascertainable evidence.
Secondly, the Court rejected the argument that the buy back structure had been suggested in the context of the payment of a dividend being ruled out for UK tax reasons, but was not related to the choice between a buy back and a direct transfer of shares for which UK tax was not a relevant consideration. The Court considered that there was some evidence to show that the decision to proceed with the buy back option was prompted by UK tax considerations, and that was sufficient for there to be no error of law.
Thirdly, the Court rejected the argument that the AAT had failed to properly compare the form and substance of the scheme and had misunderstood our submission that the whole set of complex circular transactions resulted in the taxpayer being in precisely the same economic position after the buy back. The Court concluded that this argument had been addressed by the AAT and simply rejected, which disclosed no error of law.
Tax Office view of Decision
This was a very complex series of international transactions with rulings from different regulators. This made for a factually difficult case for the application of Part IVA because the transaction was based upon tax advice in at least three jurisdictions which became embedded in the transaction as it evolved. The earlier UK tax advice on the evidence led to the development of a structure upon which rulings were obtained from the US Inland Revenue Service. One of those rulings was a significant factor in the decision of the AAT.
There were a number of factual findings by the AAT which we disagreed with, but, as an appeal only lies on an error of law, we, and the Full Federal Court, were confined to the facts as found by the AAT.
The Court stated emphatically that the test as to purpose in Part IVA was an objective one and that the Tribunal had identified the correct principles, including that the section leaves no room for consideration of a person's subjective purposes or motivations. Whilst we had considered that the AAT had erred in having regard to the taxpayer's "no tax no tax risk" position we accept the Court's view that the AAT had in fact confined itself to objectively ascertainable evidence.
The Court also agreed with the Tribunal's conclusion that our counterfactual "was likely to have led to a capricious and uncertain outcome" and the avoidance of such an outcome was more likely to have been the dominant purpose. Although we consider the taxpayer could have chosen a time when the possibility of a capricious outcome would have been ameliorated, we accept that it was open to the Court to find that our counterfactual was subject to the problems identified by the Tribunal.
The Court decided that there was some evidence to support the findings by the AAT that the buy-back element of the scheme had been decided upon for UK tax reasons. The Court considered that the taxpayer's decision was "prompted by" rather than "decided upon" for UK tax considerations, but that the Tribunal's language should not be parsed in an effort to find legal error. We agree that it is not possible to sustain an argument that there was an error of law on the basis of no evidence in these circumstances.
We also accept that it was open to the Court to find that the AAT had addressed, but rejected, the Commissioner's submissions in relation to the form and substance of the scheme and that of itself was not an error of law.
We do not consider that the decision, properly understood, raises any uncertainty (or at least, any uncertainty capable of ready particularisation) about the application of Part IVA.
Administrative Treatment
Public Rulings & Determinations to be reviewed and considered
None
Implications on Law Administration Practice Statements
None
Legislative References:
Income Tax Assessment Act 1936
177D
Case References:
Commissioner of Taxation v Hart
[2004] HCA 26
217 CLR 216
55 ATR 712
2004 ATC 4599
Commissioner of Taxation v Zoffanies Pty Ltd
[2003] FCAFC 236
54 ATR 280
2003 ATC 4942
Dranichnikov v Minister for Immigration and Multicultural Affairs
[2003] HCA 26
197 ALR 389
Lafu v Minister for Immigration and Citizenship
[2009] FCAFC 140
Macquarie Finance Ltd v Commissioner of Taxation
[2005] FCAFC 205
2005 ATC 4829
61 ATR 1