Decision impact statement
Financial Synergy Holdings Pty Ltd v Federal Commissioner of Taxation
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Court citation:
Federal Court
[2016] FCAFC 31
2016 ATC 20-557
High Court
[2016] HCA Trans 232
Venue: Federal Court of Australia
Venue Reference No: VID 88 of 2015; M46 of 2016
Judge Name: Middleton, Logan and Davies JJ
Judgment date: 10 March 2016
Appeals on foot: No
Decision Outcome: Unfavourable to the Commissioner
Impacted Advice
Relevant Rulings/Determinations:
 The ATO has reviewed the impact of this decision including any precedential documents and Law Administration Practice Statements |
Précis
Outlines the ATO's response to this case which concerns whether the deeming rule in subsection 122-70(3) of the Income Tax Assessment Act 1997 (ITAA 1997) operates only to preserve the pre-CGT status of an asset subject to a Subdivision 122-A roll-over or also determines the time the asset is acquired for the purpose of calculating its cost base under paragraph 110-25(2)(b) of the ITAA 1997.
Brief summary of facts
A trustee of a family trust acquired units in the Financial Synergy Unit Trust (the unit trust) before 20 September 1985 (pre-CGT units). The market value of the units in the unit trust as at 1 July 1985 was $1,560,649.
On 29 June 2007 the trustee disposed of all of its pre-CGT units to Financial Synergy Holdings Pty Ltd (the taxpayer) in consideration of the issue of 30 million shares at $1 each by the taxpayer. The trustee chose to obtain CGT roll-over relief under Subdivision 122-A of the ITAA 1997 in respect of this disposal.
The taxpayer formed a consolidated group with effect from 1 July 2007, comprising itself, the unit trust and number of other entities. The cost base of the units in the unit trust determined under paragraph 110-25(2)(b) of the ITAA 1997 became the amount in item 1 in the table in subsection 705-65 of the ITAA 1997 for step 1 in working out the allocable cost amount for the unit trust as an entity joining a consolidated group. The taxpayer lodged tax returns for the 2008 to 2013 income years on the basis that the cost base of the pre-CGT units acquired on 29 June 2007 was $30 million.
In Financial Synergy Holdings Pty Ltd v Commissioner of Taxation [2015] FCA 53 the primary judge held that the time of acquisition for the purpose of calculating the cost base of the pre-CGT units under paragraph 110-25(2)(b) of the ITAA 1997 was deemed by subsection 122-70(3) of the ITAA 1997 to be before 20 September 1985 rather than the actual date of acquisition of 29 June 2007.
Issues decided by the court
The main issue before the Full Federal Court was whether the cost base of the units was the market value of the taxpayer's shares issued in consideration for the pre-CGT units as at 29 June 2007 or at a date before 20 September 1985 by virtue of subsection 122-70(3) of the ITAA 1997.
Middleton and Davies JJ (with Logan J agreeing) concluded that the time of acquisition of the units in the unit trust was 29 June 2007 because:
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- the reference to an acquisition time of an asset being "before 20 September 1985" in subsection 122-70(3) of the ITAA 1997 is used in contradistinction to an asset being acquired on or after 20 September 1985 which is provided with a cost base under subsection 122-70(2). The legislative scheme is to exempt pre-CGT assets from the operation of the CGT provisions. The purpose served by subsection 122-70(3) is to preserve the pre-CGT status of an asset which has been rolled-over. The function of the deeming provision does not need to extend beyond that purpose in the context of Division 122: Commissioner of Taxation v Comber (1986) 10 FCR 88 at 96 [34] ;
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- the definition of 'acquire' in section 995-1 of the ITAA 1997 does not extend the ambit of the deeming provision. The time deemed by subsection 122-70(3) does not govern the time of acquisition for the purposes of applying the meaning of 'acquire' under section 995-1 and subsection 110-25(2). Subdivision 109-B is not an operative part of the ITAA 1997 and does not of its own force govern the time of acquisition for the purposes of subsection 110-25(2) [35]; and
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- the legislature specifically introduced section 716-855 of the ITAA 1997 to contain a special rule for consolidated groups in relation to Subdivision 126-B roll-overs and it was telling against the Commissioner's construction that there was no such cognate provision in respect of a Division 122 roll-over [36].
ATO view of decision
The Full Federal Court has clarified the scope of the deeming rule in subsection 122-70(3) of the ITAA 1997. This deeming rule only applies for the purpose of exempting pre-CGT assets from the operation of the CGT provisions. The deeming rule does not determine the acquisition time for the purpose of calculating the cost base of a pre-CGT asset under paragraph 110-25(2)(b) of the ITAA 1997.
Implications for advice or guidance
ATO ID 2014/14 was withdrawn on 13 January 2017. This ATO ID contained a view that subsection 122-70(3) of the ITAA 1997 determines the acquisition time of a pre-CGT asset for the purpose of calculating its cost base under paragraph 110-25(2)(b) of the ITAA 1997. That view was found to be incorrect by the Full Federal Court in this case.
Implications for impacted Law Administration Practice Statements
Nil
Amendment history
| Date of Amendment | Part | Comment |
|---|---|---|
| 17 January 2017 | Implications for impacted advice or guidance | Updated to advise the withdrawal of ATO ID 2014/14. |
Legislative References:
Income Tax Assessment Act 1997
Div 109
Div 110
Subdiv 109-B
Subdiv 110-A
Subdiv 122-A
Subdiv 126-B
102-20
104-5
104-10
109-5
109-50
109-55
110-25(2)
122-15
122-20
122-40
122-70
701-1
701-10
705-10
705-60
705-65
716-855
950-100
950-150
995-1(1)
Case References:
Commissioner of Taxation v Comber
(1986) 10 FCR 88
(1986) 17 ATR 413
86 ATC 4171
Cooper Brookes (Wollongong) Pty Ltd v Commissioner of Taxation
(1981) 147 CLR 297
(1981) 11 ATR 949
81 ATC 4292
Other References:
ATO ID 2014/14