Decision impact statement

Commissioner of Taxation v Futuris Corporation Limited

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Court Citation(s):
[2012] FCAFC 32
(2012) 205 FCR 274
2012 ATC 20-306
(2012) 87 ATR 828

Venue: Federal Court of Australia
Venue Reference No: SAD 139 of 2010
Judge Name: Kenny, Stone and Logan JJ
Judgment date: 19 March 2012
Appeals on foot:
No

Impacted Advice

Relevant Rulings/Determinations:

• No relevant rulings or determinations were considered by the Court.

Impacted Practice Statements:

• PS LA 2005/24

Précis

Outlines the ATO's response to this decision concerning the application of the general anti-avoidance provisions to increase the net capital gain returned as a result of a public float.

Brief summary of facts

This case concerns the amount of the net capital gain assessable to the taxpayer from the public float of the Futuris group's Building Products Division (BPD).

Futuris Corporation Limited (the taxpayer) undertook a complex series of steps prior to the public float of the BPD. As a result of those steps the value shifting provisions of Division 19A of the former Part IIIA of the Income Tax Assessment Act 1936 operated in such a way that there was an increase of $82.95m in the cost base of the shares in the float vehicle. This in turn resulted in the taxpayer returning a net capital gain of $9.7m. The Commissioner applied Part IVA of the Income Tax Assessment Act 1936, identifying a primary scheme and an alterative scheme, and increased the taxpayer's assessable net capital gain by $82.95m.

At first instance the taxpayer put on expert evidence from a chartered accountant who specialises in corporate finance. The expert concluded that in the absence of the scheme identified by the Commissioner it was reasonable to expect that a different company in the group would have been the float vehicle and consequently a different entity in the group would have made the capital gain (referred to as Counterfactual 1). Evidence before the Court showed that the assessable net capital gain to this subsidiary would have been approximately $95.7m.

Federal Court decision

Besanko J, at first instance, accepted this evidence. His Honour found that in the absence of the scheme identified by the Commissioner the taxpayer would, as a matter of reasonable expectation, have carried out the sale of the BPD in accordance with Counterfactual 1. That led to the conclusion that the taxpayer did not obtain a tax benefit within the meaning of section 177C(1)(a) of the Income Tax Assessment Act 1936.

However, his Honour also noted that if a tax benefit had been obtained in connection with the scheme identified by the Commissioner, then he would have concluded that the taxpayer had entered into the scheme for the dominant purpose of obtaining a tax benefit.

Additionally, his Honour decided a number of points of law raised by the taxpayer favourably to the Commissioner. Of particular interest are the following points.

•

The application of a specific anti-avoidance provision does not impliedly limit the operation of Part IVA.

•

The scheme identified by the Commissioner does not have to include the transaction that gives rise to the tax benefit. It is sufficient if the tax benefit arose in 'connection' with the scheme.

•

The Commissioner is not required to identify a counterfactual.

•

The taxpayer must show that "it would have undertaken or might reasonably be expected to undertake a particular activity in lieu of the scheme and that that activity would or might reasonably be expected to have resulted" in assessable income no more in amount than was returned by the taxpayer.

•

If, on the evidence, it is not possible to make a reliable prediction about the counterfactual, then the taxpayer must fail.

•

The question posed by section 177C (1) (a) is whether, because of the scheme, a particular amount has not been included as assessable income. It is not relevant to that question to consider whether the taxpayer's assessable income included some other amount, such as a dividend. Capital gains and dividends are different amounts.

Issues decided by the Full Federal Court

The Court noted that the definition of 'tax benefit' in section 177C(1)(a) requires that there be a prediction as to what 'might reasonably be expected to have been included in the assessable income of the taxpayer' in the absence of the scheme. That prediction necessarily involves an opinion as to events and transactions that have not taken place. It must be not just a possibility but 'sufficiently reliable for it to be regarded as reasonable': Peabody.

It is for the taxpayer to establish that there is no tax benefit in connection with the scheme (see [62]). The Commissioner is under no obligation to adduce evidence about transactions to which he is a stranger: it is the taxpayer who must establish why an assessment is excessive ([55] and [62]). The '... taxpayer may seek to prove in its own way, that the assessment is excessive' ([62]). Ultimately, it is for the Court to make the '... objective determination of the alternative postulate' ([62] quoting from the decision in FC of T Trail Bros Steel & Plastic Ltd (2010) 186 FCR 410). In some cases the Court may need to decide if there is sufficient evidence to allow such a determination to be made. That is, whether the taxpayer has met its evidential onus. In this context the weight to be given to the taxpayer's expert witness '... must be assessed in the context of other evidence adduced by Futuris' ([68]).

The Court found that direct evidence of contemporaneous consideration of the alternative postulate is not the only way to establish the reliability of a prediction ([80]). The expert's evidence was relevant and persuasive and there was no error in the primary judge accepting his evidence ([81]).

The Court found that the primary judge was correct in concluding that there was no tax benefit in connection with the primary scheme or the alternative scheme within section 177C(1)(a).

The Court found it unnecessary to consider dominant tax purpose under section 177D(b) in view of its decision that the primary judge was correct that there was no tax benefit.

The Full Court's decision did not directly overturn any of the primary judge's rulings on the other points of law raised by the taxpayer.

ATO view of Decision

The appeal focused on whether there was sufficient relevant and persuasive evidence to allow the primary judge to make his finding in respect of section 177C.

The Full Court's decision turned largely on the question as to whether the taxpayer has met its onus to establish that there was no tax benefit in connection with the scheme. The Full Court concluded that the judge at first instance was correct in concluding that the onus had been met. That is, the case turned on the weight to be given to the evidence, and as such does not appear to have significant implications for other cases.

The Full Court's decision is one of a number of recent Federal Court decisions on the principles to be applied in determining whether a tax benefit is obtained in connection with a scheme. See the ATO's decision impact statement for Commissioner of Taxation v RCI Pty Ltd.

The decision did not overturn any of the findings at first instance on points of law raised by the taxpayer.

The Government has announced that it will introduce amending legislation, with effect from 1 March 2012, dealing with the operation of the 'tax benefit' provisions of Part IVA.

Administrative Treatment

Implications on current Public Rulings & Determinations

None

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 High Court in this case, in relation to the tax benefit test in subsection 177C(1). Refer to paragraphs 99, 105, 116 and 162 of PS LA 2005/24.

However, section 177CB was inserted by the Taxation Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Act 2013, Schedule 1. In the ATO's view, section 177CB so significantly alters the conceptual framework of the tax benefit test in subsection 177C(1) that earlier case law involving the tax benefit concept can no longer be wholly regarded as representing the law after 16 November 2012, and should be treated with extreme caution. Refer to paragraph 83 of PSLA 2005/24.

Amendment history

Legislative References:
Income Tax Assessment Act 1936
Part IIIA Division 19A
Part IVA
177B(1)
177C(1)
177C(1)(a)
177D(a)
177D(b)
177F
160ZZO

Taxation Administration Act 1953
14ZZO

Case References:
Commissioner of Taxation v Consolidated Press Holdings Ltd (No 1)
(1999) 91 FCR 524
99 ATC 4945
(1999) 42 ATR 575

Commissioner of Taxation v Hart
(2004) 217 CLR 216
2004 ATC 4599
(2004) 55 ATR 712

Commissioner of Taxation v Trail Bros Steel & Plastic Ltd
(2009) 75 ATR 916
2009 ATC 20-141
[2009] FCA 1210

Federal Commissioner of Taxation v Lenzo
(2008) 167 FCR 255
[2008] FCAFC 50
2008 ATC 20-014

Federal Commissioner of Taxation v Peabody
(1994) 181 CLR 359
94 ATC 4663
28 ATR 344

Federal Commissioner of Taxation v Spotless Services Limited
(1996) 186 CLR 404
(1996) 34 ATR 183
96 ATC 5201
(1996) 141 ALR 92

Federal Commissioner of Taxation v Trail Bros Steel & Plastics Pty Ltd
(2010) 186 FCR 410
2010 ATC 20-198
(2010) 79 ATR 780

Futuris Corporation Limited (ACN 004 336 636) v Commissioner of Taxation
(2009) 75 ATR 365
[2009] FCA 600
2009 ATC 20-115

Futuris Corporation Limited ACN 004 336 636 v Commissioner of Taxation
[2010] FCA 935
2010 ATC 20-206
(2010) 80 ATR 330