Decision impact statement

Keycorp Ltd v Commissioner of Taxation

Venue: Federal Court of Australia
Venue Reference No: NSD121 of 2006
Judge Name: Allsop J
Judgment date: 7 February 2007
Appeals on foot:
No.

Impacted Advice

Relevant Rulings/Determinations:

• ATO ID 2005/285

Subject References:
Company losses
Continuity of ownership test
Group company loss transfers
Same business test
Tax loss
Part of a loss

Précis

Outlines the Tax Office's response to this case which concerned whether the taxpayer was entitled to transfer a loss incurred in a particular part of an income year being that period after a disqualifying event of a change of ownership occurred.

Brief summary of facts

1. In September 1982 Keycorp Ltd (KYC) was incorporated;

2. On 21 August 2000 Keycorp Solutions Ltd ("KSL") was incorporated (wholly owned by KYC) as a special purpose entity to acquire a particular business from Telstra Corporation Ltd ("Telstra") but remained a dormant company until 14 December 2000;

3. On 25 October 2000 Telstra through its wholly owned subsidiary Telstra cb.fs Ltd agreed to subscribe for 38,700,000 shares in the capital of KYC. The shares were not issued to Telstra until 14 December 2000 and represented approximately 51% of the total capital of KYC at the time of issue.

4. On 14 December 2000 Telstra transferred the business to KSL. The only activity prior to this date was to enter into contracts for the acquisition of the business. On the basis that KSL did not trade from the time of incorporation until 14 December 2000, being the time of the transfer of the business from Telstra, the business of KSL commenced on that date.

5. During the income year 2001 KYC reverted to a 30 June year end resulting in a transitional income year from 1 January 2000 to 30 June 2001. KYC incurred a tax loss of $39,068,802 in the 18 month period from 1 January 2000 to 30 June 2001. After utilising losses in that income year there were tax losses available to be carried forward of $27,470,209;

6. In the 2002 year KSL derived a taxable income of $27,748,457.

7. An attempt to transfer tax losses incurred by KYC for the period 1 January 2000 to 30 June 2001 was ineffective as KYC failed the continuity of ownership test in s165-12 due to the sale of its shares to Telstra on 14 December 2000.

8. To overcome this difficulty, on 21 July 2005 KYC and KSL sought a private ruling from the Commissioner on whether the part of the tax loss incurred by KYC in the period 14 December 2000 to 30 June 2001 could be transferred to KSL The loss transfer agreement that would be entered into was to transfer $27,748,457 in tax losses from KYC to KSL to reduce the taxable income of KSL to nil.

9. Subsequent to the ruling request KSL changed its name to Telstra Payment Solutions Ltd

Issues decided by the court or tribunal

1. Does Subdivision 170-A of the ITAA 1997 allow the transfer of "part of a tax loss incurred in part of an income year" between companies in the same wholly-owned group? A key question in respect of this issue is whether the expression "part of the tax loss" in s 170-10 of the ITAA 1997 refers only to the amount of the tax loss to be transferred or extends to losses incurred in a particular part of an income year.

His Honour held that,

'Ultimately, I think the matter is capable of being rendered to one issue: Is Division 170 and, in particular, s 170-10 directed in any circumstances to the transfer of a tax loss that is referable to part of an income year and as such able to be described as "part of a tax loss for an income year"? The view that I have come to is that the answer to this question is, "no". '

His Honour acknowledged that this leads to a lack of conformity between the regime for deduction under Division 165 and that for transfer under Division 170 but went on to say that

"I do not see that as an oddity or inconvenience. It is merely what Parliament has chosen. It would be odder and possibly more inconvenient if the taxpayer were left freely able to choose the time unit of its tax affairs to transfer its losses, in circumstances where the Parliament has set down a detailed regime for dealing with working out taxable income and tax loss where, for one reason, there are two or more temporal units of the basal income year."

Tax Office view of Decision

This decision accords with the longstanding treatment of this issue by the Commissioner.

Administrative Treatment

Implications on current Public Rulings & Determinations

None

Implications on Law Administration Practice Statements

None

Implications on Law Administration Practice Statements

None

Court citation:
[2007] FCA 41
2007 ATC 4176
65 ATR 758
(2007) 158 FCR 153

Legislative References:
Income Tax Assessment Act 1997
36-10
36-17
165-10
165-12
165-13
165-20
170-10
170-10(2)
170-15(1)
170-30(2)
170-40(2)
170-50(2)

Case References:
Braverus Maritime Inc v Port Kembla Coal Terminal Ltd
(2005) 148 FCR 68

Brennan v R
(1936) 55 CLR 253

CIC Insurance Ltd v Bankstown Football Club Ltd
(1997) 187 CLR 384

Commissioner of Taxation of the Commonwealth of Australia v Murry
(1998) 193 CLR 605

Commissioner of Taxation of the Commonwealth of Australia v Linter Textiles Australia Limited
(2005) 220 CLR 592
2005 ATC 4255
59 ATR 177

Commissioner of Taxation v Asiamet (No 1) Resources Pty Ltd
(2004) 137 FCR 146
2004 ATC 4303
55 ATR 239

Federal Commissioner of Taxation v Comber
(1986) 10 FCR 88
86 ATC 4171
17 ATR 413

Federal Commissioner of Taxation v McMahon
(1997) 79 FCR 127
97 ATC 4986
37 ATR 167

Federal Commissioner of Taxation v Reynolds Australia Alumnia Ltd
(1987) 77 ALR 543
87 ATC 5018
19 ATR 598

Federal Commissioner of Taxation v Top of the Cross Pty Ltd
(1981) 37 ALR 623
81 ATC 4563
12 ATR 413

Harts Australia Ltd v Commissioner of Taxation
(2001) 109 FCR 405
2001 ATC 4394
47 ATR 371

Harts Australia Pty Ltd v Commissioner of Taxation
2000 ATC 4566
45 ATR 51

Plessey Australia Pty Ltd v Federal Commissioner of Taxation
(1989) 89 ALR 395
89 ATC 5163
20 ATR 1538