• The impact of this case on ATO policy is discussed in Decision Impact Statement: Handbury Holdings Pty Ltd v Federal Commissioner of Taxation (VID 1021 of 2008).

HANDBURY HOLDINGS PTY LTD v FC of T

Judges:
Finn J
Sundberg J
Perram J

Court:
Full Federal Court, Melbourne

MEDIA NEUTRAL CITATION: [2009] FCAFC 141

Judgment date: 9 October 2009

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Finn, Sundberg and Perram JJ

Introduction

1. For the financial year ended 30 June 2005 the respondent Commissioner assessed the taxpayer's income to two capital gains of $16,934,891 and $50,226,752. The taxpayer objected to the assessment on the grounds that the first capital gain did not arise and that the second was overstated by $9,205,469. The Commissioner disallowed the taxpayer's objection. An application to set aside that decision was rejected by a judge of this Court:
Handbury Holdings Pty Ltd v Commissioner of Taxation 2008 ATC ¶20-071; [2008] FCA 1787. From that dismissal the taxpayer now appeals.

Background

2. The taxpayer is the head company of a consolidated group. The consolidation provisions contained in Part 3-90 of the Income Tax Assessment Act 1997 (Cth) ("the Act") constitute a regime which permits groups of wholly owned subsidiaries to be treated for tax purposes as if they were part of the head company of the group. Whilst that legal fiction is in place, no economic event occurring within the consolidated group has any tax consequences because such events are attributed to the head company. That fiction requires adjustment when a subsidiary ceases to be wholly owned and leaves the group, an event conveniently described as deconsolidation. In particular, on deconsolidation it is necessary to put a value (or "cost") on the assets owned by the subsidiary and also upon the head company's shareholdings in the subsidiary. This is so because other tax laws - such as those concerned with depreciation and the taxing of capital gains - require for their effective operation the existence of such a point of reference.

3. Upon the deconsolidation of a subsidiary Part 3.90 provides the machinery to set the costs of those assets and shareholdings. The amount thus fixed is called the "tax cost setting amount". The Act requires the tax cost setting amount for a head company's interest in its

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former subsidiary to be calculated in accordance with Division 711.

4. Division 711 commences with s 711-1 which is headed "What this division is about". It provides:

"If an entity ceases to be a subsidiary member of a consolidated group, the tax cost setting amount for the group's membership interests in the entity reflects the group's cost for the entity's net assets."

(our emphasis)

5. The question in this case is at what moment the "entity's net assets" are to be assessed. The entity in this case was Murdoch Magazines Pty Ltd ("Magazines") which, until 30 July 2004, was a wholly owned subsidiary of the taxpayer. On that day, however, Magazines became deconsolidated when two of its creditors who were external to the group swapped the debts owed to them by it for the issue of shares in it. The deconsolidation therefore occurred not only as a result of, but at the same time as, that debt for equity swap. Although it was an issue at first instance, it is no longer in dispute either that the release of the debts was the consideration for the allotment by Magazines of the shares, or that those two events occurred simultaneously. It is, in fact, that simultaneity which gives rise to the present problem. If Magazine's net assets are assessed at the moment of deconsolidation they will not include the liabilities to the two external creditors; if they are assessed just before that time, however, they will.

Relevant facts

6. On 29 July 2004 Magazines was indebted to two external creditors for amounts totalling $26,140,360. As a result of the debt for equity swap which occurred on 30 July 2004 its liabilities either exceeded its assets by $16,934,891 (i.e. it had negative net worth) or its assets exceeded its liabilities by $9,205,469, depending upon whether the external debts of $26,140,360 were taken into account or not. The Commissioner took the view that they should be taken into account and, therefore, set the tax cost setting amount for the taxpayer's interests in Magazines at zero - for Magazines having net negative worth of - $16,934,891, its shares were worthless. If the external debts were not taken into account then the tax cost setting amount would have been $9,205,469. This matters because shortly after the debt for equity swap giving raise to deconsolidation the taxpayer disposed of all of its shares in Magazines to another party, Pacific Publications Pty Ltd. The Commissioner assessed that disposal of shares as involving a capital gain of $50,226,752 over a cost base of zero. Had the external debts of $26,140,360 been excluded from an assessment of the value of the net assets of Magazines on deconsolidation then the cost base would have been increased by $9,205,469 (reflecting a tax cost setting amount of that sum rather than zero), and the amount of the capital gain would have become reduced by the same sum. It is for that reason that the taxpayer contends that that part of its assessment should be reduced by $9,205,469.

7. Because the Commissioner assessed Magazines as having a deficiency of assets over liabilities of $16,934,891, he also assessed the taxpayer's wealth as having been increased by the "transfer" from it to Magazines of that negative value. That transfer occurred on deconsolidation, when Magazines was disaggregated from the taxpayer and developed a separate existence for tax purposes.

8. Such an increase in a head company's wealth is exigible to tax as a capital gain and, when it occurs, is known as CGT Event L5. Where the deconsolidating entity does not have net negative worth, CGT Event L5 does not occur, for the head company's wealth, in such a situation, is not increased by the deconsolidation. In this case, had the debts of Magazines to the external creditors not been included in assessing its net value, then CGT Event L5 would not have occurred. This is because, on that view of things, the net worth of Magazines was $16,934,891 and deconsolidation therefore reduced, rather than augmented, the taxpayer's wealth.

9. The taxpayer therefore submits that it should not have been assessed for the capital gain of $16,934,891 on the deconsolidation of Magazines because CGT Event L5 did not occur. For the same reason it argues that its assessment for capital gains tax on the disposal of its shares in Magazines has proceeded on an erroneous assumption that their tax cost setting

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ATC 10183

amount on deconsolidation was zero (because the net worth of Magazines was - $16,934,891 if the two debts totalling $26,140,360 to the external creditors were included) when it should have been set at $9,205,469 (if those two debts were not included). It will be noted that the alleged excessive assessments are, in total, the same amount as the debts which were swapped for equity.

The proceedings below

10. At first instance the taxpayer submitted that the Act drew a clear distinction between the time of deconsolidation - called by the Act "the leaving time" - and the time immediately before that time - called by the Act "the time just before the leaving time". The liabilities which were to be taken into account were those set out in s 711-20(1) which, in terms, spoke of "the liabilities that the leaving entity takes with it when it ceases to be a *subsidiary member" (the Act is punctuated by asterices which, serving no useful purpose, are omitted for the remainder of these reasons). That statement required not only assessment of liabilities at the moment of deconsolidation but also that those liabilities be taken away by the departing entity (cf. "takes with it), a concept irreconcilable with the circumstances obtaining in a debt for equity swap. It was true that the requirement of asportation was not present in every provision dealing with liabilities in Division 711, but the words in s 711-20 were part of the central taxing provisions and were to be given precedence over other provisions. This flowed from the words just quoted which were located in part of s 711-20(1) entitled "Step 4". The reference to Step 4 gave s 711-20(1) its paramount role because CGT Event L5 was defined in s 104-520 to occur, relevantly, when "the amount remaining after applying step 4 of the table in section 711-20 is negative". Step 4 and s 711-20(1) were, therefore, integrally connected with the very provisions which defined and gave form to CGT Event L5.

11. The Commissioner, on the other hand, submitted that the full text of step 4 needed to be considered. That text was:

"Subtract from the result of step 3 the step 4 amount worked out under section 711-45, which is about:

• (a) the liabilities that the leaving entity takes with it when it ceases to be a subsidiary member; and
• (b) membership interests in the leaving entity that are not held by members of the old group."

12. The words relied upon by the taxpayer were, said the Commissioner, merely descriptive of what was to be found in s 711-45. That descriptive nature was obvious from the words "which is about". The language of s 711-45 spoke of liabilities "of the leaving entity at the leaving time". There was in that language no reference to the asportation of liabilities; whilst it was true that the expression appeared to refer to the leaving time it was obvious from the objects of Division 711 - set out in s 711-5(3) - that the entire division was bent towards "recognising the head company's cost for those interests, just before the leaving time". That was a good reason for construing "at the leaving time" as meaning "just before the leaving time". Further, it was obvious that Division 711 often used the expression "at the leaving time" in situations where the entity in question had not yet left the group (for example, s 711-25(4)(a)). Finally, the Commissioner said that it was plain that the taxpayer was simply adopting a device which avoided the clear intention of the legislation.

13. The primary judge reasoned that "the leaving time" and "the time just before the leaving time" were essentially the same time, at least in Division 711. Thus the words "at the leaving time" could mean "just before the leaving time". Her Honour found step 4 of s 711-20 to be merely descriptive of what was taking place under s 711-45 which, on the view her Honour took on the leaving time question, meant that liabilities existing just before the deconsolidation were to be taken into account. Her Honour therefore concluded that the debts owed by Magazines to the external creditors should be taken into account in assessing its net value, upheld the Commissioner's position and, in the event, dismissed the taxpayer's application with costs.

Consideration

14. Division 711 is to be interpreted as an integrated element of Part 3-90. Part 3-90 governs the treatment of consolidated groups. It

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begins substantively with Division 701 which is entitled "Core rules". The first core rule is contained in s 701-1 which is entitled "Single entity rule". It provides:

"If an entity is a subsidiary member of a consolidated group for any period, it and any other subsidiary member of the group are taken for the purposes covered by subsections (2) and (3) to be parts of the head company of the group, rather than separate entities, during that period."

15. Subsections (2) and (3) refer, in effect, to the purposes of working out the tax liability of either the head company or of its subsidiaries. A number of rules are then established to regulate the operation of this tax fiction. These include rules governing the position of the head company ("Head company rules") and the position of subsidiaries ("Entity rules"). The Head company rules include a rule for fixing the value or "cost" of a head company's shareholding in a subsidiary upon the subsidiary's deconsolidation. It is contained in s 701-15(3) which provides:

"For each membership interest that the head company of the group holds in an entity that ceases to be a subsidiary member, the interest's tax cost is set just before the entity ceases to be a subsidiary member at the interest's tax cost setting amount."

16. The focus on assessment "just before" deconsolidation is not idiosyncratic. Where the Act has to fix the tax cost of membership interests in deconsolidating subsidiaries, it requires assessment just before deconsolidation: cf. s 701-50(3). Where, however, the Act fixes the tax cost of assets held by subsidiaries (as opposed to membership interests in them) it appears to do so at the leaving time: cf. ss 701-10(4), 701-20, 701-25, 701-35(4), 701-40 and 701-45(4). Why Parliament thought that the tax cost of membership interests in a deconsolidating subsidiary should be assessed just before the leaving time, but that the tax cost of the assets should be set at the leaving time, is a matter of conjecture. It may reflect a need for capital gain tax purposes to have a cost base set immediately prior to the disposal of an interest so that a capital gain may be determined.

17. The nature of the tax cost setting amount is then explained in s 701-55. Where questions of capital gains tax in relation to an asset affected by a deconsolidation arise, s 701-55(5) deems the cost base of the asset to be the tax cost setting amount; where issues of depreciation arise in relation to such an asset, s 701-55(2) deems the asset to have been acquired at the tax cost setting amount. Equivalent arrangements are made in the case of trading stock and also for other matters. The tax cost setting amount, so viewed, is not to be seen as an obscure part of the consolidation provisions but, rather, as the central means by which those provisions interact with the balance of the Act and other laws.

18. The ways in which the issue of tax costs setting might arise on deconsolidation are broadly summarised in s 701-60 which is in these terms:

"The asset's tax cost setting amount is worked out using this table.

Tax cost setting amount

Tax cost setting amount

Item	If the asset's tax cost is set by:	The asset's tax cost setting amount
1	section 701-10 (Cost to head company of assets of joining entity)	the amount worked out in accordance with Division 705
2	section 701-15 (Cost to head company of membership interests in entity that leaves group)	the amount worked out in accordance with section 711-15 or 711-55
ATC 10185 3	section 701-20 (Cost to head company of assets consisting of certain liabilities owed by entity that leaves group) or section 701-45 (Cost of assets consisting of liabilities owed to entity by members of the group)	the market value of the asset
4	section 701-50 (Cost of certain membership interests of which entity becomes holder on leaving group)	the amount worked out in accordance with section 711-55"

19. It is this table which tells one that the rule in s 701-15(3) is implemented by calculating the amount in accordance with, relevantly, s 711-15.

20. That section is contained in Division 711. As was noted at the beginning of these reasons, that division opens with s 711-1 which provides that the division seeks to set "the tax cost setting amount for the group's membership interests in the entity" so that they reflect "the group's cost for the entity net assets". The expression "interests in the entity" is consistent with the requirement of s 701-15(3) that the assessment occur "just before" deconsolidation. This is so because where the deconsolidation occurs because the head company disposes of interests in a subsidiary, it will no longer have those interests "in" the subsidiary at deconsolidation. In such a situation, which is admittedly not the present one, seeking to set the tax cost just before the leaving time is more coherent.

21. There are other statutory indications pointing in the same direction. Section 711-10(a) provides:

"If this Division applies, the amount of the following is worked out under the Division:

• (a) the tax cost setting amount for the purposes of item 2 in the table in s 701-60 for each membership interest in the leaving entity that members of the old group held; and

  …"

(emphasis added)

22. This section requires an assessment in respect of the interest "held" by the old group in the subsidiary. The only time at which that is certainly true is just before the leaving time. The same may be seen in s 711-15(1) which provides, in part:

"The tax cost setting amount for each membership interest in the leaving entity that members of the old group held, where paragraph 711-10(b) does not apply, is worked out by:

• (a) first, working out the old group's allocable cost amount for the leaving entity in accordance with section 711-20;

  …"

(emphasis added)

23. This provision is to be particularly noted because it not only points at assessment just before deconsolidation but also reveals the nature of s 711-20 as part of a process directed to that end. The calculation of the old group's "allocable cost amount" by s 711-20 is thus to be seen as part of a process of determining a tax cost just before the leaving time.

24. Section 711-20(1), upon which the taxpayer's argument depends, contains a table which is in the following form (with certain parts given emphasis):

• "(1) Work out the old group's allocable cost amount for the leaving entity in this way:
  Working out the old group's allocable amount for the leaving entity

  Working out the old group's allocable amount for the leaving entity

  ATC 10186 Step	What the step requires	Purpose of the step
  1	Start with the step 1 amount worked out under section 711-25, which is about the terminating values of assets that the leaving entity takes with it when it ceases to be a subsidiary member	To ensure that the allocable cost amount includes the cost of the assets.
  2	Add to the result of step 1 the step 2 amount worked out under section 711-35, which is about the value of deductions inherited by the leaving entity that are not reflected in the terminating value of the assets that the leaving entity takes with it.	To ensure that the value of the deductions is reflected in the allocable cost amount
  3	Add to the result of step 2 the step 3 amount worked out under section 711-40, which is about liabilities owed by members of the old group to the leaving entity at the leaving time.	To ensure that the liabilities, which are not recognised while the leaving entity is taken to be part of the head company by subsection 701-1(1), are reflected in the allocable cost amount.
  4	Subtract from the result of Step 3 the Step 4 amount worked out under section 711-45, which is about: (a) the liabilities that the leaving entity takes with it when it ceases to be a subsidiary member; and (b) membership interests in the leaving entity that are not held by members of the old group.	To ensure that the allocable cost amount is reduced to reflect the liabilities and the market value of the membership interests
  5	If the amount remaining after step 4 is positive, it is the old group's allocable cost amount for the leaving entity. Otherwise the old group's allocable cost amount is nil.
  Note: If the amount remaining after step 4 is negative, the head company is taken to have made a capital gain equal to the amount: see CGT event L5."

25. Each of Steps 1-4 reaches down further to nominated provisions. At each of the Steps, after the words "which is about", there are expressions which, at least on their face, appear to be descriptions of the provisions referred to.

26. There are some difficulties in the way in which the table operates. Although this case is concerned with step 4 it is convenient, for reasons which will become apparent, to begin with step 1. That step expressly concerns itself with values that the leaving entity takes with it "when it ceases to be a subsidiary member". That time is defined in s 711-5(1) to be "the leaving time". The words "which is about" ordinarily suggest that what follows is a description of that which precedes. It is necessary then to attend to the provision apparently described, s 711-25(1). It provides:

"For the purposes of step 1 in the table in subsection 711-20(1), the step 1 amount is worked out by adding up the head company's terminating values of all the assets that the head company holds at the leaving time because the leaving entity is taken by subsection 701-1(1) (the single

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entity rule) to be a part of the head company."

(emphasis added)

27. "At the leaving time", however, the fact is that the single entity rule does not deem the entity to be part of the head company for at that moment the subsidiary is no longer a member of the group.

28. This internal inconsistency in s 711-25 occurs in a context in which the provision is described in step 1 of s 711-20 as gauging assets at the time the entity ceases to be a member (scil. the leaving time).

29. There thus arises a dilemma. If the words "at the leaving time" in s 711-25(1) are given their usual meaning the words which immediately follow "because the leaving entity is taken by subsection 701-1(1) (the Single entity rule) to be part of the head company" are incoherent. At the same time, however, the expression "at the leaving time" in s 711-25 will be consistent with the description of s 711-25 in step 1 of s 711-20 for, so viewed, it will be concerned with assets "when it ceases to be a subsidiary member".

30. On the other hand, if s 701-25(1) be rescued from incoherence by reading "at the leaving time" as meaning "just before the leaving time" this comes at the cost of rendering the description of s 711-25(1) in step 1 inaccurate for, so interpreted, it will not operate at "the leaving time". Further, there is little doubt that the words in step 1 "that the leaving entity takes with it" will be left with no operation.

31. The problem of reconciling apparently conflicting parts of the statute is well-worn territory. That process of reconciling such provisions will often require a court, as Lord Herschell explained in
Institute of Patent Agents v Lockwood [1894] AC 347 at 360, "to determine which is the leading provision, and which must give way". The High Court applied that dictum in
Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 at 381-382 [70] and went on to say:

"Only by determining the hierarchy of the provisions will it be possible in many cases to give each provision the meaning which best gives effect to its purpose and language while maintaining the unity of the statutory scheme."

32. It is necessary, therefore, to identify which of step 1 and s 711-25 prevails over the other. That endeavour is to be approached with a recognition that neither construction is free from inconsistency. For two reasons, we favour the conclusion that it is s 711-25 and its difficulties which should prevail over step 1 and its inconsistencies: first, the scheme of Division 711 is about, as we have already indicated, putting a value on the interests held by the head company in a subsidiary at deconsolidation. That is only a meaningful endeavour just before the leaving time. Secondly, the words in the table include "which is about" which are words of description and not of prescription.

33. That conclusion carries with it the consequence that "at the leaving time" in that section should be construed as meaning "just before the leaving time". No doubt this is a strange reading of the word "at" but it is made necessary by the internal inconsistency which unquestionably exists:
Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation 81 ATC 4292; (1981) 147 CLR 297 at 305, 311 and 321.

34. Since s 711-25 is paramount over step 1 this means that the words "Step 1 which is about the terminating values of assets that the leaving entity takes with it when it ceases to be a subsidiary member" should be construed to mean "which is about the terminating values of assets of the leaving entity just before it ceases to be a subsidiary member".

35. Essentially the same analysis can, and should, be applied to Steps 2 and 3. It should be noted that the description of step 3 which appears in the column headed "purpose of the Step" exhibits the clear intention that the analysis occur just before the leaving time. A corollary of that conclusion is that references to "at the leaving time" in ss 711-35 and 711-40 (described by Steps 2 and 3) should also be read as meaning "just before the leaving time".

36. That approach also resolves a conundrum in s 711-5(3) which describes how the object of Division 711 is to be achieved in these terms:

"This is achieved by recognising the head company's cost for those interests, just

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before the leaving time, as an amount equal to the cost of the leaving entity's assets at the leaving time reduced by the amount of its liabilities."

37. This provision appears to require analysis of both "just before the leaving time" and "at the leaving time". The source of the conundrum lies in Part 3-90's approach of assessing membership interests just before the leaving time, but assets of departing subsidiaries at the leaving time. That conundrum can be solved by reading the words "at the leaving time" as meaning "just before the leaving time".

38. We have dealt with Steps 1, 2 and 3 to show that their preferable construction involves analysis just before the leaving time. Debate in this case turns, however, on step 4. Step 4 refers to s 711-45 which is in these terms:

• "(1) For the purposes of step 4 in the table in subsection 711-20(1), the step 4 amount is worked out by adding up the amounts of each thing (an accounting liability ) that, in accordance with accounting standards, or statements of accounting concepts made by the Australian Accounting Standards Board, is a liability of the leaving entity at the leaving time that can or must be identified in the entity's statement of financial position."

(emphasis added)

39. There is a significant difference between this provision and ss 711-25 (Step 1), 711-35 (Step 2) and 711-40 (Step 3). Whilst each of those provisions contains an internal inconsistency which requires "at the leaving time" to be read as "just before the leaving time" this is not so in the case of s 711-45. Viewed in isolation the words "at the leaving time" in that section are capable of being given their ordinary meaning. Be that as it may, it would be strange indeed if Steps 1, 2 and 3 of s 711-30 were to be assessed "just before the leaving time" but step 4 was to be assessed "at the leaving time". Such an approach would require different meanings to be given to "at the leaving time" in s 711-45 to that which we think that phrase bears in ss 711-25, 711-35 and 711-40. It would also be an approach inconsistent with the way we have suggested that s 711-5(3) is to be interpreted.

40. At least as a matter of initial impression, therefore, it would be preferable to read "at the leaving time" in s 711-45 as "just before the leaving time" and to read the words in step 4 as a reference to the liabilities of the leaving entity just before the leaving time.

41. The taxpayer makes two points against such an approach. First, it submits that it gives no weight to the words "that the leaving entity takes with it". The same expression is used in Steps 1 and 2. If, like the other steps, the proper relation between step 4 and its referred section is that the latter is paramount over the former then this argument does not succeed.

42. The taxpayer's second argument, however, directly challenges that analysis of the relationship between step 4 and s 711-45. It contends that it is step 4 which controls s 711-45 and not, as in the case of the other Steps, the other way around. This is said to be so because step 4 should be characterised as part of the taxing provisions and, in contradistinction, s 711-45 as a calculating or machinery provision.

43. The primacy of step 4 arises, so it is said, because of s 104-520. That section is contained elsewhere in the Act in Part 3.1 which deals with general topics relating to capital gains and losses. It is in these terms:

• "(1) CGT event L5 happens if:
  • (a) an entity ceases to be a subsidiary member of a consolidated group or a MEC group; and
  • (b) in working out the group's allocable cost amount for the entity, the amount remaining after applying step 4 of the table in section 711-20 is negative.
• (2) The time of the event is when the entity ceases to be a subsidiary member of the group.
• (3) For the head company core purposes mentioned in subsection 701-1(2), the head company makes a capital gain equal to the amount remaining."

44. The taxpayer submits that this provision creates CGT Event L5 and that in the act of its creation makes step 4 a critical component in the definition of the taxing event. Viewed as a substantive part of the provision which directly imposes a tax there is no reason, therefore, to

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subordinate step 4 to s 711-45 which only tells one how to calculate a particular figure.

45. This argument should be rejected for four reasons. First, it posits a relationship between s 104-520 and Division 711 which sees the latter as giving effect to the former. That, however, is not a correct characterisation of the role of Division 711. As we have endeavoured to show Division 711's dominant purpose is for fixing the tax cost setting amount for membership interests held by a head company. The fixing of that tax cost is a function made necessary for the consolidation provisions to interact with the rest of the Act. That is why s 701-55 equates the tax cost setting amount to other concepts used in the Act such as acquisition costs (for depreciation purposes) and the cost base (for capital gains tax purposes). It is no coincidence that that section is contained in Division 701 which is both entitled, and concerned with, "Core rules". Further, in every case of deconsolidation the tax cost setting amount will need to be determined regardless of whether CGT Event L5 occurs.

46. It is true, of course, that step 4 is referred to in s 104-520. However, when the significance of the tax cost setting amount to the general scheme of the consolidation provisions is appreciated the notion that it is that section which governs the operation of Division 711 becomes less plausible (particularly in all those cases where CGT Event L5 does not occur).

47. Secondly, even if Division 711 were to be construed on the basis that s 104-520 gives primacy to step 4, no different result would obtain. Division 711 provides for the calculation of the tax cost setting amount in every case and contemplates, in step 4 of s 711-20, a particular scheme of calculation. All that s 104-520 does is to test what the outcome of that particular calculation is. Section 104-520 expressly contemplates the calculation in step 4 taking its ordinary course. We would not therefore read s 104-520 as impacting on the meaning or operation of step 4 of s 711-20(1). To the contrary, a more likely construction is that s 104-520 simply "picks up" the operation of s 711-20 as it finds it. That approach is buttressed by the observation that s 711-20(1) has a substantive (and we think predominant) independent purpose outside CGT Event L5 which is the process of setting the tax cost setting amount.

48. Thirdly, if the taxpayer's argument were accepted there would inevitably be greater problems of coherence. We have already explained why Steps 1, 2 and 3 (and their corresponding provisions in ss 711-45, 711-35 and 711-40) must be read as requiring an analysis just before the leaving time. If step 4 is to proceed on the basis that assessment is to occur at the leaving time, then the table in s 711-20 will operate eccentrically bringing assets (Step 1), deductions (Step 2) and intra-group loans (Step 3) to account just before the leaving time but all other liabilities (Step 4) at the leaving time. That problem of coherence could be avoided if Steps 1, 2 and 3 (and their corresponding sections) were read as requiring assessment at the leaving time. But that approach leads to insoluble incoherence in ss 711-25, 711-35 and 711-40 which we see no way of resolving. An easier path - more consistent with s 104-520's more attenuated role - is to read step 4 simply as part, like the other steps, of s 711-20 and to be interpreted in the light of the balance of Division 711.

49. Finally, the taxpayer's argument gives rise to some anomalies. Because the head company in many cases of deconsolidation will have transferred its membership interests in the subsidiary at the leaving time, fixing the time cost at that moment suffers from the defect of fixing the cost of an asset no longer owned by the head company. Allied to that difficulty is the logical incoherence of having the Act prescribe one cost at the leaving time (the tax cost setting amount) and the parties fixing another (namely, the consideration for the disposal). A much more plausible operation is one which sees the tax cost setting amount fixing the value of the membership interests while the Single entity rule is in play and permitting the real world to provide costing information thereafter. Those observations are reflected in the language of Division 711, both in ss 711-1 which makes plain that what is being valued is an interest "in the entity" and s 711-10 and s 711-15(1) which show that the enterprise undertaken by Division 711 is the assessment of the value of interest "held" by the old group.

50.

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For those reasons the taxpayer's objection to the construction we favour should not be accepted. It follows that the appeal should be dismissed with costs.