Decision impact statement

Commissioner of Taxation v AXA Asia Pacific Holdings Ltd

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Court Citation(s):
[2010] FCAFC 134
2010 ATC 20-224
189 FCR 204
81 ATR 180

Venue: Federal Court of Australia
Venue Reference No: VID 917 of 2009
Judge Name: Dowsett, Edmonds and Gordon JJ
Judgment date: 18 November 2010
Appeals on foot:No.
Decision Outcome: Adverse

Impacted Advice

Relevant Rulings/Determinations:

• TR 2005/19

Impacted Practice Statements:

• PS LA 2005/24

Précis

Outlines the ATO view of this case which concerned the availability of partial scrip-for scrip rollover relief under Subdivision 124M of the Income Tax Assessment Act 1997 in respect of a capital gain from the disposal of a shareholding in a wholly-owned subsidiary.

Brief summary of facts

Under a complex structured arrangement AXA Asia Pacific Holdings Ltd ('AXA') agreed to exchange shares it held in AXA Australia Health Insurance Pty Ltd ('AXA Health") for cash of $57m and $513m convertible vendor shares in a 99% Macquarie owned entity. As part of the arrangement put and call options could be exercised by AXA after an agreed period of six months. The options enabled AXA to either put the shares for cash or to convert the shares and obtain the Macquarie entity which would hold the proceeds from the on-sale of the AXA Health shares to a 'consortium' company MB Health Holdings Pty Ltd ('MB Health'). The members of MB Health were Macquarie ('MBL') and British United Provident Insurance Ltd ('BUPA'). By the time the Underwriting Agreement was entered into MBL and BUPA had agreed that MB Health would acquire the shares in AXA Health from the Macquarie entity.

Before Jessup J in the Federal Court the Commissioner argued that the taxpayer and the entity which acquired the shares in AXA Health did not deal with each other "at arm's length" within the meaning of section 124-780(4) of the 1997 Act with the result that the taxpayer was not entitled to the relief. His Honour held that the parties dealt "at arms length" and therefore roll-over relief was available.

Alternatively, the Commissioner submitted that if the requirements for roll-over under Subdivision 124-M were met, Part IVA applied to include the whole of the capital gain in the assessable income of the taxpayer in the 2003 income year. His Honour held that Part IVA did not apply because the taxpayer didn't obtain a tax benefit within the meaning of section 177C(I)(a).

The Commissioner appealed to the Full Federal Court on both the arm's length and Part IVA grounds.

Issues decided by the court

The Full Federal Court held that the parties (AXA and MBL) dealt with each other at "arm's length" pursuant to s124-780(4) and that Part IVA did not apply to deny AXA the partial roll-over relief.

A majority of the Court (Edmonds & Gordon JJ) dismissed the Commissioner's appeal in respect of the interpretation of Subdivision 124-M. The majority held that the trial judge was correct to conclude that the relevant parties dealt with each other "at arm's length". The dissenting judge, Dowsett J, concluded that the parties were not dealing "at arm's length" and the appeal should be allowed on the scrip for scrip roll-over issue. In concluding that the parties were not dealing at arm's length His Honour stated that Macquarie had, in effect, undertaken to assist AXA to dispose of AXA Health in a way which would minimise AXA's capital gains tax exposure.

The Court was unanimous in dismissing the Commissioner's appeal in respect of the application of Part IVA. In their joint reasons for judgment Gordon and Edmonds JJ (Dowsett J agreed) held that the Commissioner's appeal grounds concerning the tax benefit should be rejected.

In considering the Part IVA issues their Honours (Edmonds and Gordon JJ with Dowsett J substantially agreeing) stated the following relevant legal principles:

1.

'The starting point in any consideration of s 177C must be the whole of Pt IVA. No one provision can be viewed in isolation: Commissioner of Taxation v Hart [2004] HCA 26; (2004) 217 CLR 216 at [37] per Gummow and Hayne JJ'.(para 124)

2.

'Section 177C (read with the other provisions in Pt IVA) identifies that it is an "objective fact" whether a taxpayer obtained a tax benefit in relation to a scheme to which Pt IVA applies: Commissioner of Taxation v Peabody [1994] HCA 43; (1994) 181 CLR 359 at 382; Hart [2004] HCA 26; 217 CLR 216 at [37]; Federal Commissioner of Taxation v Lenzo [2008] FCAFC 50; (2008) 167 FCR 255 at [119] citing Commissioner of Taxation v Mochkin [2003] FCAFC 15; (2003) 127 FCR 185 at [26].'(para 126)

3.

'In the case of an amount being included in the assessable income of a taxpayer, s 177C(1)(a) provides that it is an objective inquiry as to what would have been included or might reasonably be expected to have been included in the assessable income had the "scheme" not been entered into or carried out: Epov v Federal Commissioner of Taxation [2007] FCA 34; (2007) 65 ATR 399 at [62] and Peabody [1994] HCA 43; 181 CLR 359 at 385-6.'(para 127)

4.

'The legislation requires a comparison between the relevant scheme and an alternative postulate, or counterfactual: Hart [2004] HCA 26; 217 CLR 216 at [66]'.(para 128)

5.

'The alternative postulate requires a "prediction as to events which would have taken place if the relevant scheme had not been entered into or carried out and that prediction must be sufficiently reliable for it to be regarded as reasonable" (emphasis added). "A reasonable expectation requires more than a possibility": Lenzo [2008] FCAFC 50; 167 FCR 255 at [122] citing Peabody [1994] HCA 43; 181 CLR 359 at 385.'(para 129)

6.

'The question posed by s 177C (1) is answered on the assumption that the scheme had not been entered into or carried out: Lenzo [2008] FCAFC 50; 167 FCR 255 at [121]' (para 129).

7.

'... the question involves the objective enquiry of predicting the particular activity or the events that would have, or might reasonably be expected to have, taken place in the absence of the scheme: Lenzo [2008] FCAFC 50; 167 FCR 255 at [128]; Peabody [1994] HCA 43; 181 CLR 359 at 385 and Commissioner of Taxation v Trail Bros Steel & Plastics Pty Ltd ( 2010) 186 FCR 410 at [28].' (para 131)

8.

' The particular activity or the events that would have, or might reasonably be expected to have, taken place in the absence of the scheme and which are identified as a result of the objective enquiry are not confined or defined by the scheme. As the High Court has said, "scheme" is a word of wide import: Peabody [1994] HCA 43; 181 CLR 359 at 383; Hart [2004] HCA 26; 217 CLR 216 at [87]' (para 131).

9.

'The express words of s 177C require a prediction about what would happen or might reasonably be expected to happen. It is necessarily a hypothetical analysis. But it is a hypothetical analysis directed at ascertaining what particular activity would have been (or might reasonably have been) undertaken if the scheme was not entered into. The "integers" comprising the scheme that are relevant to that objective enquiry are not limited and "may not always permit the precise identification of ... all the integers of a particular 'scheme'": Hart [2004] HCA 26; 217 CLR 216 at [43] and Trail Bros (2010) 186 FCR 410 at [30]' (para 132).

10.

'It is contrary to the express words of s 177C (including s 177C (2)), its context and its purpose to exclude particular integers from a prediction about what would happen or might reasonably be expected to happen. Put another way, absent particular integers, the enquiry would not be an objective enquiry as required by s 177C but a prediction of what would happen or might happen having regard to only a sub-set of the integers available to a taxpayer: see Trail Bros (2010) 186 FCR 410 at [31]' (para 133).

11.

'... the onus is on the taxpayer ...to establish that he or she did not obtain a tax benefit in connection with the scheme; that is the taxpayer needs to show that the amount would not have been included, or might not reasonably be expected to have been included, in its assessable income if the scheme had not been entered into or carried out: s 14ZZK (and s 14ZZO) of the Taxation Administration Act 1953 (Cth); McAndrew v Federal Commissioner of Taxation [1956] HCA 62; (1956) 98 CLR 263 at 268-9; Gauci v Commissioner of Taxation [1975] HCA 54; (1975) 135 CLR 81 at 89; McCormack v Commissioner of Taxation [1979] HCA 18; (1979) 143 CLR 284 at 303, 306 and 323; Commissioner of Taxation v Dalco [1990] HCA 3; (1990) 168 CLR 614 at 620, 623-625 and Lenzo [2008] FCAFC 50; 167 (para 134).

Applying those principles to the evidence their Honours decided that the trial judge was correct to conclude that there was no tax benefit obtained by AXA in connection with the scheme. That is, having accepted the evidence of the Macquarie representative that had the scheme not been carried out in the way it was, Macquarie would not have obtained their fees and this was sufficient to discharge AXA's onus of demonstrating that the Commissioner's alternative postulate of a direct sale of AXA Health to MB Health was not sufficiently reliable for it to be regarded as reasonable.

Their Honours stated that ultimately the Court will decide what would have been done, or might reasonably be expected to have been done, in lieu of the scheme having regard to all of the evidence that is led. Based on the evidence before the trial judge, the Full Court concluded that it might reasonably be expected that had the scheme not been entered into a direct sale of AXA Health assets to Medical Benefits Fund of Australia Ltd ('MBF') rather than a sale of shares would have occurred.

The Commissioner was not granted special leave to appeal from the decision of the Full Federal Court to the High Court of Australia. The Court stated that the arm's length issue was essentially a factual issue and in relation to Part IVA the Court considered that there were insufficient prospects of success.

Tax Office view of Decision

The Commissioner is of the view that this case raised important issues concerning the interpretation of paragraph 177(C)(1)(a) where a taxpayer carries out a commercial transaction (eg the disposal of an asset) which is structured in a particular way (the scheme) so that an amount is not included in its assessable income (the tax benefit).

Why the Commissioner sought special leave to appeal to the High Court

The Commissioner's application for special leave to appeal to the High Court was essentially based on the notion that, in an income benefit case where there is a scheme from which a profit from a commercial endeavour has been achieved in a way that does not give rise to an assessable amount, you have the constituent elements of the phrase "the obtaining by a taxpayer of a tax benefit in connection with a scheme".

The way forward

It is well settled that the application of Part IVA will be sensitive to the particular facts of each case.

Notwithstanding how the parties put their respective cases, the Full Court has confirmed that it is the Court that will decide what would have been done or might reasonably be expected to have been done in lieu of the scheme having regard to all the evidence that is led.

As stated above, in this case the Full Court itself identified that on the evidence before the trial judge it might reasonably be expected that, had the scheme not been entered into or carried out, a direct sale of AXA Health's business assets to MBF would have occurred. The activity would then have produced a gain, but not a gain for the taxpayer assessed by the Commissioner.

The ability of the Court to form a view as to whether a tax benefit has been obtained by a particular taxpayer on a basis other than that put by the parties is consistent with the High Court's approach in Peabody regarding the Court's ability to determine the existence of a scheme independent of the scheme identified by the Commissioner.

The Full Federal Court's decision demonstrates the criticality or primacy of the evidence in the application of Part IVA. On the basis of the evidence accepted by the trial judge, the Court held that AXA did not obtain a tax benefit.

A clear implication of the Court's decision is the need for the Commissioner to test any evidence supporting assertions or statements by taxpayers about what would or might reasonably be expected to have happened absent the scheme. Depending on the particular facts of a case, it may be necessary to undertake a more forensic exercise in analysing all possible counterfactuals subject to the proviso that they are not speculative or have no direct relevance to the impugned scheme.

In some cases, a counterfactual consistent with the substance of the activity which gave rise to a tax benefit will be reasonably clear on the facts (see Spotless and British American Tobacco Australia Services v FCT(2010) ATC 20-222)

The Court's conclusion on the evidence in this case that a different taxpayer, AXA Health, would have obtained a tax benefit raises implications for future cases. At least in income benefit cases, the Commissioner may need to consider raising multiple assessments. This will depend on the particular facts of a case.

The Commissioner will take all decisions of the High Court and Federal Court into account in applying Part IVA to the particular facts of cases and will give due regard to the decision in AXA in determining on the evidence whether a relevant taxpayer obtains a tax benefit under s 177C.

Administrative Treatment

Implications for ATO precedential documents (Public Rulings & Determinations etc)

None

Implications for 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 Full Federal Court in this case; in particular, the Commissioner may need to consider raising multiple assessments on different taxpayers under different alternative postulates. Refer to paragraph 162 of PS LA 2005/24. See also paragraph 99.

In relation to other comments made by the Full Federal Court in this case, note that 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 IVA

Income Tax Assessment Act 1997
Subdivision 124-M

Case References:
ACI Operations Pty Ltd v Berri Ltd
(2005) 15 VR 312
[2005] VSC 201

Australian Trade Commission v WA Meat Exports Pty Ltd
(1987) 75 ALR 287

Baxter v Commissioner of Taxation
(2002) 196 ALR 519
[2002] FCA 1256
2002 ATC 4917
51 ATR 209

Collis v Federal Commissioner of Taxation
(1996) 33 ATR 438
96 ATC 4831

Commissioner of Taxation v Dalco
[1990] HCA 3
(1990) 168 CLR 614
90 ATC 4088
20 ATR 1370

Commissioner of Taxation v Hart
[2004] HCA 26
2004 ATC 4599
55 ATR 712

Commissioner of Taxation v Mochkin
[2003] FCAFC 15
(2003) 127 FCR 185
2003 ATC 4272
52 ATR 198

Commissioner of Taxation v Peabody
[1994] HCA 43
94 ATC 4663
28 ATR 344

Commissioner of Taxation v Spotless Services Ltd
[1996] HCA 34
96 ATC 5201
34 ATR 183

Commissioner of Taxation v Trail Bros Steel & Plastics
(2010) 186 FCR 410
2010 ATC 20-198

Epov v Federal Commissioner of Taxation
[2007] FCA 34
65 ATR 399
2007 ATC 4092

Federal Commissioner of Taxation v Ashwick (Qld) No 127 Pty Ltd
[2011] FCAFC 49
2011 ATC 20-255
192 FCR 325

Federal Commissioner of Taxation v Lenzo
[2008] FCAFC 50
(2008) 167 FCR 255
2008 ATC 20-014
71 ATR 511

Gauci v Commissioner of Taxation
[1975] HCA 54
5 ATR 672
75 ATC 4257

Granby v Federal Commissioner of Taxation
[1995] FCA 1217
(1995) 129 ALR 503
30 ATR 400
95 ATC 4240

McAndrew v Federal Commissioner of Taxation
[1956] HCA 62
2007 ATC 4092
65 ATR 399

McCormack v Commissioner of Taxation
[1979] HCA 18
79 ATC 4111
9 ATR 610

McCutcheon v Federal Commissioner of Taxation; Re Hains (deceased)
[2008] FCA 318
2008 ATC 20-009
69 ATR 607

Barnsdall v Federal Commissioner of Taxation
(1988) 81 ALR 173
88 ATC 4565
19 ATR 1352

Re RAL and Federal Commissioner of Taxation
[2002] AATA 653
(2002) 50 ATR 1076
2002 ATC 109
50 ATR 1076

Spencer v The Commonwealth
(1907) 5 CLR 418
[1907] HCA 82

Trustee for the Estate of the late AW Furse No 5 Will Trust v Federal Commissioner of Taxation
(1991) 21 ATR 1123
91 ATC 4007