Decision impact statement

Peter Cumins v Commissioner of Taxation

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Court Citation(s):
[2007] FCAFC 21
2007 ATC 4303
66 ATR 57

Venue: Federal Court of Australia
Venue Reference No: WAD 53 of 2006
Judge Name: Ryan, Tamberlin and Middleton JJ
Judgment date: 2 March 2007
Appeals on foot:

Impacted Advice

Relevant Rulings/Determinations:

This document is not a public ruling, but provides a statement of the Commissioner's position in relation to the decision and how the law will be administered as a consequence of the decision. Any proposals for changes in the law are matters for government and it is not appropriate for the Commissioner to comment.


Outlines the ATO's response to this case which concerned the sale of listed shares by the taxpayer as trustee of one trust to himself as trustee of another trust to crystallise a loss and to entirely offset a capital gain made the previous day.

Brief summary of facts

1. On 11 June 1998 the appellant, in his capacity as trustee of a family discretionary trust ('Trust 1'), disposed of shares and made a capital gain of $787,375. On 12 June 1998 the appellant also became the trustee of a separate family discretionary trust ('Trust 2'). Trust 2 had only been settled that day. While not identical the 'objects' of the two trusts were substantially the same. The appellant had the sole control of both trusts.

2. On 12 June 1998 the appellant as trustee of Trust 1 sold 8 million shares to the appellant as trustee of Trust 2. The shares were at all relevant times mortgaged by Trust 1 to secure a bank loan and were registered in the bank's name. The bank was not informed of the sale and the purchase price was not paid. This share sale resulted in the appellant as trustee for Trust 1 making a capital loss of $800,000 which completely offset the capital gain made the previous day.

3. The Commissioner increased the net capital gain included in the trust's assessable income by $800,000. The Commissioner relied upon a number of grounds including a Part IVA determination.

4. The Tribunal found that the appellant had obtained a tax benefit connected to the scheme identified by the respondent and that a reasonable person would conclude that the sole purpose of the appellant in carrying out the scheme was to obtain the tax benefit and affirmed the respondent's Part IVA determination.

5. On appeal from the Tribunal to the Federal Court, Justice Nicholson held that the Tribunal had properly exercised its discretion under Pt IVA as it found that the capital loss was a tax benefit associated with the scheme and had regard to the eight matters in paragraph 177D(b) in concluding that the appellant carried out the scheme to obtain a tax benefit. His Honour held that Part IVA may apply even where a scheme is 'genuine or directed at crystallising a loss'; although he noted that in this case no economic loss was suffered and the beneficial ownership of the shares did not change. His Honour also rejected the appellant's contention that the Tribunal erred by not taking into account two rulings relating to 'wash sales' as they were not relevant and also rejected the contention that the Tribunal had not adequately considered alternative transactions open to the appellant.

6. The appellant appealed to the Full Federal Court.

Issues decided by the court or tribunal

The Full Federal Court delivered a joint judgment dismissing the appeal.

The Court considered that the Tribunal had properly exercised its power under subsection 177F(1). The court held that once the conclusion under section 177D was reached there was no 'super-imposed obligation' to take into account other matters when deciding whether to cancel a tax benefit.

The Court observed that Pt IVA applies to 'genuine' transactions and that, in any event, the genuineness of the transaction is not an issue to be considered under Part IVA. (The transaction was a 'genuine' transaction in the sense that it was not a sham, and the shares had depreciated in value. In making this observation the Court did not mean 'genuine' in the sense of an un-contrived, commercial dealing.) The Court also agreed that the two rulings relating to 'wash sales' were not relevant to the issues at hand.

The Court held that the Tribunal was entitled to conclude that the suggested alternative arrangements could not have been expected to take place as it was not satisfied on the evidence that the Bank would have consented to these alternative arrangements. The Court noted that because the statutory onus lay on the appellant the Tribunal was entitled to reach the conclusion it did.

It also held that the Tribunal had properly considered the issues relating to remission of additional tax imposed under subsection 227(3). The Tribunal's conclusion that it was not reasonably arguable that Part IVA did not apply to the scheme was in accordance with settled principle and open to the Tribunal.

Tax Office view of Decision

The Court's decision confirms that under subsection 177F(1) the Commissioner is empowered or entitled to cancel a tax benefit if the requirements in section 177D are satisfied.

The Court observed at [41] that the term 'may' in subsection 177F(1) is used in the sense of a power of the Commissioner that arises when the requirements in section 177D are satisfied. There is no further "over-arching" or final discretion to be exercised by the Commissioner independently under subsection 177F(1).

Thus, the decision to cancel a tax benefit under subsection 177F(1) does not involve two stages. Once the Commissioner is empowered to cancel a tax benefit because the requirements in section 177D are satisfied, there is no further opinion he has to form. It follows that the power to cancel a tax benefit under subsection 177F(1) may be discretionary in the sense that it is not compulsory for the Commissioner to exercise the power, but it is not discretionary in the sense of being dependent on his forming an opinion, or state of satisfaction which could be subject to judicial review.

The conclusion reached by the Court in this respect is consistent with Hill J's reasoning (with whom Carr and Hely JJ agreed in this respect) in FC of T v Sleight [2004] FCAFC 94 that subsection 177F(1) permits the Commissioner in his discretion to determine that part only of a tax benefit be cancelled.

The Court's reasoning regarding the nature of the Commissioner's power under subsection 177F(1) is considered equally applicable to the power of the Commissioner to negate a GST benefit under section 165-40 in Division 165 of the A New Tax System (Goods and Services Tax) Act 1999.

Administrative Treatment

Implications on current Public Rulings & Determinations

None directly affected by the decision.

Implications on Law Administration Practice Statements

Law Administration Practice Statement PS LA 2005/24 Application of General Anti Avoidance Rules was updated on 16 September 2016 to reflect statements made by the Full Federal Court in relation to the nature of the Commissioner's discretion under subsection 177F(1) - refer to paragraph 47 of PS LA 2005/24.

Amendment history

Date of amendment Part Comment
3 November 2016 Administrative treatment Updated to reflect PS LA 2005/24 has been revised
  Comments section Deleted

Legislative References:
Income Tax Assessment Act 1936
Pt IVA, ss 177C

Income Tax Assessment Act 1997
Pt 3-1

Case References:
George v FCT
(1952) 86 CLR 183

FCT v Dalco
(1990) 168 CLR 614
90 ATC 4088
20 ATR 1370

FCT v Peabody
(1994) 181 CLR 359
94 ATC 4663
28 ATR 344

FCT v Hart
(2004) 217 CLR 216
2004 ATC 4599
55 ATR 712

Walstern v FCT
(2003) 137 FCR 1
2003 ATC 5041
54 ATR 449

Peter Cumins v Commissioner of Taxation history
  Date: Version:
  28 May 2007 Response
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