NORWICH SUPERANNUATION SERVICES PTY LTD v FC of T

Members:
BH Pascoe SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 16 December 1998

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BH Pascoe (Senior Member)

This is an application to review a decision of the respondent to disallow an objection against a private ruling. The ruling issued at the request of the applicant and stated that ``The common ownership test set out in s 80G(6)(d)(i) was not satisfied'' in relation to the 1994-1995 year of income.

2. At the hearing the applicant, Norwich Superannuation Services Pty Ltd (``NSS'') (formerly CSA Consulting Group Pty Ltd) was represented by Mrs J. Batrouney of counsel and the respondent by Mr P. Sest of counsel. There was no dispute as to the facts in this matter and no evidence was tendered other than copies of correspondence between the applicant and respondent relating to the change of accounting period and a copy of the financial statements and income tax return of NSS for the six months to 31 December 1994.

3. NSS was acquired by and became a wholly owned subsidiary of Norwich Union Financial Services Ltd (``NUFS'') on 4 May 1994. To that time, NSS had been lodging income tax returns on the basis of a 30 June year end. In November 1994 the respondent was requested to approve the adoption of a substituted accounting period (``SAP'') ending on 31 December in common with the parent company, NUFS. In February 1995 the respondent confirmed leave to adopt a SAP ending 31 December and stated ``it may change over to the SAP by lodging a return of income for the period 1 July 1994 to 31 December 1994, in lieu of 30 June 1995. A 12 month return for the period 1 July 1993 to 30 June 1994 will also

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need to be prepared.'' NSS duly lodged a return for the six months to 31 December 1994 on 30 August 1995.

4. The return for this six month period disclosed a loss in that period of $532,063. On 19 December 1995, NSS sought the private ruling on the issue of whether NSS could transfer these losses to NUFS pursuant to section 80G of the Income Tax Assessment Act 1936 (``the Act''). The respondent ruled that the common ownership test in that section was not satisfied and set out in the attached explanation that the test had to be satisfied for the whole of the ``loss year'' which had to be a ``year of income'' being a period of 12 months.

5. In so far as they are relevant to this particular question the applicable provisions of the Act are:

``80G(1) For the purposes of this section, a company shall be taken to be a group company in relation to another company in relation to a year of income if-

• (a) one of the companies was a subsidiary of the other company; or
• (b) each of the companies was a subsidiary of the same company,

during the whole of the year of income or, if either or both of those companies was not or were not in existence during part of the year of income, during that part of the year of income during which both companies were in existence.

80G(2) For the purposes of this section, a company (in this subsection referred to as the `subsidiary company') shall be taken to be the subsidiary of another company (in this subsection referred to as the `holding company') during a period (in this subsection referred to as the `relevant period'), being the whole or a part of a year of income, if-

• (a) at all times during the relevant period, all the shares in the subsidiary company were beneficially owned by-
  • (i) the holding company;
  • (ii) a company that is, or 2 or more companies each of which is, a subsidiary of the holding company; or
  • (iii)...
• (b)...

...

80G(6) Subject to this section, where:

• (a) a resident company (in this section referred to as the `loss company' ) is deemed to have incurred a loss for the purposes of section 79E or 80 in the year of income that commenced on 1 July 1984 or in a subsequent year of income (in this section referred to as the `loss year' );
• (b) a resident company (in this section referred to as the `income company' ) has, or would but for the operation of this section have, a taxable income in the year of income that commenced on 1 July 1984 or in a subsequent year of income (in this section referred to as the `income year' );
• (ba) the loss company is not a dual resident investment company in relation to the loss year nor in relation to the income year;
• (c) the loss company and the income company agree that the right to an allowable deduction under subsection 79E(3), 79F(6), 80(2), 80AAA(7) or 80AA(4), as the case requires, in respect of so much of the whole or part of the loss as has not been allowed as a deduction should be transferred to the income company in the income year;
• (d) in a case where the loss year is the same year of income as the income year:
  • (i) the loss company is a group company in relation to the income company in relation to the loss year; and
  • (ii) if the loss company had incurred the loss in the year of income immediately preceding the loss year and had derived sufficient assessable income (including film income) in the loss year, the loss or that part of the loss, as the case may be, would, but for this section, be allowable as a deduction from the assessable income of the loss company in the loss year (ignoring any exempt income derived by the loss company in the loss year or in that preceding year); and
• (e)...

the amount of the loss or of that part of the loss, as the case may be, shall, for the purposes of the application of the provisions

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of this Act other than this section in relation to the income company in relation to the income year, be deemed to be a loss incurred by the income company for the purposes of section 79E, 79F, 80, 80AAA or 80AA, as the case requires, in:

• (f) a case to which paragraph (d) applies - the year of income immediately preceding the loss year; or
• (g)...

6(1) ...

• `year of income' means:
  • (a) in relation to a company (except a company in the capacity of a trustee) - the financial year next preceding the year of tax, or the accounting period, if any, adopted under this Act in lieu of that financial year;
  • (b)...''

``18(1) Any person may, with the leave of the Commissioner, adopt an accounting period being the 12 months ending on some date other than 30 June. His accounting period in each succeeding year shall end on the corresponding date of that year, unless with the leave of the Commissioner some other date is adopted.''

6. It was submitted for the applicant that NSS was entitled to transfer the losses for the period 1 July 1994 to 31 December 1994 to its then parent company NUFS pursuant to section 80G(6). It was argued that the ``accounting period'' referred to in section 6(1) can be a period greater or less than 12 months and that, in the case of NSS, it was the period 1 July 1994 to 31 December 1994. This was so, it was said, because in the first year of income in which a taxpayer adopts a substituted accounting period, that changeover year must be a period of greater or less than 12 months. Various references in rulings by the respondent IT2360, IT2433 and IT2465, were quoted as supporting this proposition.

7. For the respondent it was submitted that the right to transfer losses under section 80G required the essential criteria of commonality between transferor and transferee for the whole of a year of income. It was said that the provisions of the section cannot apply without a full year of the commonality and the words should be given their normal meaning. Mr Sest argued that the losses would have been transferable if the applicant company had not changed its accounting period but as it did, the period of the relevant losses was six months not a year. It was pointed out that section 80G(1) allows for a shorter period only where either or both companies were not in existence during part of the year of income.

8. Unfortunately, the question of whether a ``year of income'' can be a period of other than 12 months does not appear to have been addressed by the courts at any time. There are some oblique references to accounting periods in lieu of particular years of income in two old Board of Review decisions located by Mrs Batrouney but they are of little assistance.

9. For section 80G to apply a company must have incurred a loss in a year of income (``the loss year'') and in that year the company must have been a ``group company''. To be a group company NSS was required to have been a subsidiary of NUFS during the whole of that year of income. I am satisfied that the reference in section 80G(2) to a part of a year of income applies only to those companies referred to in subsection (1) as not having been in existence during part of a year. I am further satisfied that the reference to a ``year of income'' or part of a year of income must mean a period of a year as is generally understood as a period of 12 months. There appears to be no warrant for interpreting a word as meaning anything other than its normal accepted meaning unless the particular provision or some other provision of the Act clearly allows a different interpretation or a deemed meaning.

10. At an initial reading it would appear possible that the definition of ``year of income'' in section 6(1) could allow some period not being a year by including ``the accounting period, if any, adopted under this Act in lieu of that financial year''. Section 18 is the provision of the Act allowing adoption of a different accounting period. However, that section clearly requires an accounting period being ``the 12 months'' ending on some date other than 30 June. Consequently, there does not appear to be any basis for regarding a year of income as anything other than a normal year ending 30 June or another period of 12 months ending on some other date.

11. What then is the position in the year of change when, in converting from 30 June year end to, as in this case, 31 December and the company is required by the respondent to lodge a return for six months? In that changeover year

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can that six months be regarded as a year of income? I think not. In order to adopt an accounting period under the Act in lieu of the normal financial year, that accounting period is required to be of 12 months duration under section 18. The adoption of substituted accounting periods has been of concern in collection of revenue. Prior to the introduction of company tax instalment provisions, approval to adopt an accounting period ending 31 December was normally granted on the basis of the company agreeing to pay double the income tax based on six months taxable income. However, no such adjustment is now required as the instalment provisions ensure no postponement of tax by such a change. As in this case, in the year of change, a return of income is required for the full financial year ending on the prior balance date 30 June and a further return for the six months to 31 December. However, I am unable to see how this can be interpreted as the six months being a year of income. Under section 163 the respondent may require any person to furnish any return required for the purposes of the Act. Section 168 allows the respondent to make an assessment of the taxable income derived in ``that year or any part of it'' and of the tax payable thereon and, if the period is less than a year, ``the assessment shall be made as if the beginning and end of that period were the beginning and end respectively of the year of income.'' Both these sections allowed the respondent to call for and assess a six months return to ensure that in the year of change, there was neither double taxation on the first six months of the substituted accounting period ending on 31 December 1994 nor omission of tax payable on the second six months. Section 168 does not deem the period of less than a year as a year of income but treats that period for the purpose of an assessment and that purpose only ``as if'' it began and ended in a year of income.

12. In my view the first substituted accounting period adopted with leave of the respondent was the 12 months ended 31 December 1994. Solely for the purpose of collecting the correct amount of tax from NSS did the respondent then exercise his power under sections 163 and 168. In my view the applicant was in error in believing that the first SAP was either the six months ended 31 December 1994 or the year to 31 December 1995. The former period being less than 12 months is not capable of being an accounting period ``adopted under this Act'' and, therefore, not capable of being a ``year of income''. As indicated earlier there is no warrant for reading the word ``year'' to mean other than 12 months. There is no ambiguity and I am unable to see how two constructions of the phrase ``year of income'' can be open as I was urged to by the applicant. The applicant saw it as inequitable that losses incurred by a wholly owned subsidiary and clearly incurred within the period of ownership should not be capable of being transferred to its parent under section 80G. However, this position will arise in all cases where the whole of the shareholding of a company is acquired during a year of income. It is not until the commencement of the next year of income, being a period of 12 months, that the acquired company can become a group company for the purposes of section 80G.

13. While not raised by either party, it is of interest to consider the position of the deductibility of losses in the six month changeover period outside the transfer provisions of section 80G. Sections 79E, 80A and 80E refer to losses incurred for ``the year of income'', controlling interest at all times ``during the year of income'' and carrying on the same business at all times during ``the year of income''. Given my view that a year means a year, it is not clear on what basis a company in the position of NSS obtains a deduction for the losses in the six months to 31 December 1994. However, I can but assume that section 82 or section 168 copes with this problem. As no argument was put to me relating to these other provisions, and their interpretation is not necessarily germane to the specific issue of section 80G, I refrain from commenting further.

14. It follows from the foregoing reasons that the decision under review should be affirmed.