Commonwealth Bank of Australia v Deputy Commissioner of Taxation

[2009] FCAFC 126
(2009) 77 ATR 74
(2009) 180 FCR 161

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(Judgment by: Emmett J)

Commonwealth Bank of Australia
vDeputy Commissioner of Taxation

Court:

Judges: Finn J

Emmett JPerram J

Legislative References:
Bank Integration Act 1991 - The Act
Banking Legislation Amendment Act 1989 - The Act
Income Tax Assessment Act 1997 - The Act; s 995-1(1); Pt 3-90
Partnership Act 1892 (NSW) - s 1
Commonwealth Banks Act 1959 - The Act; Pt V
Income Tax Assessment Act 1936 - s 166A

Case References:
-

Hearing date: 6 August 2009
Judgment date: 16 September 2009

Sydney

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Judgment by:
Emmett J

[49] This appeal concerns the effect of the Bank Integration Act 1991 (Cth) (Integration Act). I have read the reasons of Finn and Perram JJ in draft form and I agree with their Honours' conclusions for the reasons stated by them. However, I wish to add some observations of my own.

[50] The Integration Act was enacted to facilitate the absorption of each of eight savings banks into its related trading bank. Clearly enough, the Integration Act was enacted to overcome the complexities that would be involved in melding each of the two related banks into a single legal entity. The banks in question are described in Sch 1 to the Integration Act. Two of the banks described are the appellant, Commonwealth Bank of Australia (the Trading Bank), and its former related savings bank, Commonwealth Savings Bank of Australia (the Savings Bank).

[51] The trading banks are described in the Integration Act, as receiving banks and their related savings banks are described as transferring banks. Part 2 of the Integration Act, which consists of ss 7 to 11, deals with the steps leading to a bank reorganisation. Under s 7, where a receiving bank and its related transferring bank agree to seek the statutory vesting of the business of the transferring bank in the receiving bank, the receiving bank may give notice of that agreement to the Reserve Bank and to the Treasurer. Provision is made for the Reserve Bank to certify to the Treasurer that the interests of the depositors of both the receiving bank and its transferring bank would be adequately protected if the vesting proceeds. Section 9 then authorises the Treasurer to fix a day on which the business of the transferring bank is to vest in the receiving bank. That day is to be called the succession day for the two banks. Section 5 defines business as including, in relation to a bank, the assets and liabilities of that bank. That definition appears to contemplate that the business might include something other than assets and liabilities, although it is difficult to conceive what.

[52] Part 3 of the Integration Act contains the pivotal provisions for bank reorganisations. Under s 12, on the succession day for two related banks, the receiving bank becomes the successor in law of the transferring bank. Specifically, for present purposes, the Trading Bank became the successor in law of the Savings Bank on 1 January 1993, pursuant to Pt 3 of the Integration Act. By the operation of s 13, all assets of the Savings Bank, wherever located, vested in, or became otherwise available for use of, the Trading Bank and all liabilities of the Savings Bank, wherever located, became liabilities of the Trading Bank.

[53] Part 3 of the Integration Act contains other provisions designed to facilitate the succession of each receiving bank to the undertaking of its relevant transferring bank. Thus:

•

Each instrument subsisting immediately before the succession day to which the transferring bank was a party, that was given to, by or in favour of the transferring bank, that refers to the transferring bank or under which money is, or may become payable, or other property is, or may become liable to be transferred, to or by the transferring bank, is to continue to have effect as if the reference in the instrument to the transferring bank were a reference to the receiving bank.

•

Places of business of the transferring bank became places of business for the receiving bank.

•

Where proceedings to which the transferring bank was a party were pending or existing in any court or tribunal, the receiving bank was substituted for the transferring bank as a party to the proceeding and has the same rights in the proceeding as the transferring bank had.

[54] Part 4 of the Integration Act, which consists of ss 21 and 22, deals with taxation matters. Part 5 deals with miscellaneous matters. Part 6 makes consequential amendments to the Commonwealth Banks Act 1959 (Cth), under which the Savings Bank exists. Part V of that Act, which continues the Savings Bank in existence, was repealed with effect from 1 January 1993, thereby dissolving or extinguishing the Savings Bank at the moment when the Trading Bank became its successor in law.

[55] This appeal is concerned with the effect of Pt 4 of the Integration Act. Section 21(1) provides that tax was not to be payable under any law of the Commonwealth or of a State or Territory in respect of the operation or effect of the Integration Act or anything done for a purpose connected with, or arising out of, its operation or effect. However, under s 21(3), tax referred to in s 21(1) does not include any tax assessed under the Income Tax Assessment Act 1936 (Cth) (the 1936 Act) or the Income Tax Assessment Act 1997 (Cth) (the 1997 Act).

[56] Section 22 of the Integration Act deals with the application of the 1936 Act and the 1997 Act. Where a succession day is fixed for a receiving bank and its related transferring bank, s 22 applies to the business of the transferring bank that becomes the transferred business of the receiving bank on that day.

[57] The scheme of s 22 is unusual. Section 22(2) begins by a statement of the intention of the Parliament. It is not expressed, in terms, to be an operative provision. Rather, it is expressed to be a statement by the Parliament of the way in which the subsequent operative or dispositive provisions of s 22 are to be construed. Section 22(3), (4) and (5) is clearly an operative provision. Both parties accept that s 22 should also be treated as not merely a statement of intention. Section 22(6), (7), (8), (9) and (10) is also concerned with the construction of the operative provisions.

[58] Section 22(3), (4) and (5) addresses three specific taxation matters that might arise following the fixing of a succession day in relation to a receiving bank and its related transferring bank. Section 22(3) deals with the continuity of a partnership in which a transferring bank was a partner. Section 22(4) deals with assessable income of the transferring bank, allowable deductions and capital losses of a transferring bank and all other consequences for the transferring bank. Section 22(5) deals with any franking surplus or franking deficit of the relevant transferring bank.

[59] The critical question for present purposes is the effect of s 22(3), in the light of the intention of the Parliament stated in s 22(2). Section 22(2) expresses two intentions of the Parliament. First, s 22(2)(a) says that, following the succession day, the receiving bank is for all purposes of the 1936 Act and the 1997 Act to be placed in the same position, in relation to the business that becomes the business of that receiving bank under the Integration Act, as its related transferring bank would have been, apart from the operation or effect of the Integration Act.

[60] Secondly, s 22(2)(b) says that the operation or effect of the Integration Act in relation to that business should be revenue neutral. That is stated to mean that no assessable income, deduction, capital gain or capital loss is to be derived or incurred, or should accrue, by or to the receiving bank or the transferring bank in relation to that business, merely because of the operation or effect of the Integration Act. Thus, s 22(2)(b) is concerned with the derivation, incurring or accrual of:

•

assessable income

•

deductions

•

capital gains

•

capital losses

merely because of the operation or effect of the Integration Act or of anything done for a purpose connected with or arising out of that operation or effect.

[61] Section 22(4) relevantly provides that, where a succession day is fixed:

•

all assessable income derived or taken to be derived by the transferring bank,

•

all allowable deductions and capital losses incurred or taken to be incurred by the transferring bank, and

•

all other consequences for the transferring bank,

are taken to be have been derived or incurred by or to have occurred in relation to the receiving bank and not the transferring bank.

[62] Thus, while s 22(2)(b) and (4) address similar matters, they are concerned with different aspects of the integration. Section 22(2)(b) is concerned with derivation, incurring or accrual by or to either the transferring bank or the receiving bank because of the operation or effect of the Integration Act. On the other hand, s 22(4) is concerned to ensure that the derivations, incurrings and occurrences in relation to the transferring bank are to be taken to be in relation to the receiving bank.

[63] On that analysis, the presently critical provision, s 22(3), is not affected by s 22(2)(b). The relevant intention is that expressed in s 22(2)(a), namely, that the receiving bank should stand in the shoes of the transferring bank in relation to the business that becomes its business under the Integration Act. Under s 22(3), nothing in the Integration Act is to affect the continuity of any partnership in which a transferring bank was a partner immediately before the succession day.

[64] The relevance of the operation and effect of s 22(3) is the Trading Bank's claim to be entitled to reset the value on the basis of which former partnership property may be depreciated. Section 59AA(1) of the 1936 Act, as then in force, relevantly provides that, if, for any reason, a change has occurred in the ownership of, or in the interests of persons in, property in respect of which depreciation has been allowed and one or more of the persons who owned the property before the change has or have an interest in the property after the change, the provisions of the 1936 Act relating to depreciation apply as if the persons who owned the property before the change (the Transferor) had, on the day on which the change occurred, disposed of the whole of the property to the person by whom the property is owned after the change (the Transferee). Section 59AA(2) provides that the provisions of the 1936 Act relating to depreciation apply as if the consideration for the disposal was equal to the market value of the property immediately before the time when the change occurred. However, there is an exception for rollover relief to which reference will be made below.

[65] Section 59(1) of the 1936 Act provides that, where any property of a taxpayer, in respect of which depreciation has been allowed, is disposed of, the depreciated value of the property at that time, less the amount of any consideration receivable in respect of the disposal, is an allowable deduction. Under s 59(2), if that consideration exceeds the depreciated value, the excess, to the extent of the sum of the amounts allowed in assessments for income tax, is to be included in the assessable income of the taxpayer. The applicant, the Trading Bank, says that ss 59AA and 59 constitute one of the vices to which s 22(3) of the Integration Act is directed.

[66] The issue between the Trading Bank and the respondent, the Deputy Commissioner of Taxation (the Commissioner), concerns the operation of Pt 3-90 of the 1997 Act in the light of s 22 of the Integration Act. Part 3-90 allows certain groups of entities, as defined, 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 a separate income tax identity. The head company inherits the income tax history of a subsidiary member when the subsidiary member becomes a subsidiary member of the group. That is supported by rules that, inter alia, set the cost, for income tax purposes, of assets that subsidiary members bring into the group.

[67] Section 700-5(1) provides that the single entity rule determines how the income tax liability of a consolidated group is to be ascertained. The basic principle is contained in the core rules in Div 701. Section 700-5(2) provides that, 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. Under s 700-5(3), an eligible wholly owned group becomes a consolidated group after notice of a choice to consolidate is given to the Commissioner.

[68] Section 701-1(1) provides that, if an entity is a subsidiary member of a consolidated group for any period, it and any other subsidiary members of the group are taken, for the purposes covered by s 701-1(2) and (3), to be parts of the head company of the group rather than separate entities, during that period. The purposes covered by s 701-1(2) and (3) are:

•

Working out the amount of the liability of the head company and the entity that is a subsidiary member for income tax.

•

Working out the loss, if any, of a particular sort of the head company or the subsidiary member entity.

[69] Section 703-30(1) provides that an entity, which, under s 960-100(1)(d), includes a partnership, is a wholly owned subsidiary of another entity if all the membership interests in the first entity (the Subsidiary Entity) are beneficially owned by the second entity (the Holding Entity).

[70] The Trading Bank contends that continuity, when referred to in s 22(3) of the Integration Act, is concerned with continuity for tax purposes. It says that there would be no reason to preserve continuity for any purpose other than for tax purposes: the operation of s 22(2)(a), in protecting the interest of the Savings Bank, is complementary of s 22(3), which protects the interests of third parties, including the Trading Bank.

[71] However, both s 22(2)(a) and (2)(b) are relevantly qualified by reference to the business that becomes the business of the receiving bank under the Integration Act. It is only in relation to that business that the receiving bank is to be placed in the same position as the transferring bank would have been, apart from the operation and effect of the Integration Act. Further, it is only in relation to that business that the operation or effect of the Integration Act is to be revenue neutral, in the sense referred to in s 22(2)(b). There is no intention stated in s 22(2) designed to protect a receiving bank in relation to assets or liabilities that do not become assets or liabilities of the receiving bank under the Integration Act.

[72] The present dispute concerns the operation of Pt 3-90 of the 1997 Act in relation to partnerships between the Savings Bank and the Trading Bank that were in force on 1 January 1993 (the Bank Partnerships). That depends upon one entity, being the Partnerships, being treated as part of the Trading Bank in accordance with s 701-1(1) of the 1997 Act. The effect of s 22(3) was that, for the purposes of the 1936 Act and the 1997 Act, nothing in the Integration Act affected the continuity of a partnership in which a transferring bank was a partner. That is to say, so long as there were legal entities capable of being partners in a partnership, the partnership was taken not to be dissolved by reason of the operation of Pt III of the Integration Act.

[73] However, that says nothing about the deemed continuation in existence of a legal entity that was extinguished and ceased to exist by the operation and effect of the Integration Act. That was the effect of Pt 6 in relation to the Savings Bank. The word "continuity" is concerned with the principle that a partnership comes to an end on the dissolution or death of a partner. It is not concerned with the deemed continuation in existence of an entity that is extinguished by the effect and operation of the Integration Act.

[74] As from 1 January 1993, there was no longer any partnership between the Savings Bank and the Trading Bank because the Bank Partnerships were dissolved on that day when the Savings Bank ceased to exist. The Trading Bank succeeded to the assets and liabilities of the Savings Bank in relation to the Bank Partnerships. However, the language of s 22(3) is not apt or appropriate to treat the single entity, the Trading Bank, as being in a partnership with itself by reason of having succeeded to the assets and liabilities of the Savings Bank under the Bank Partnerships.

[75] That is the conclusion reached by the primary judge. Her Honour was correct in that conclusion. The appeal should be dismissed.