FEDERAL COURT OF AUSTRALIA

Channel Pastoral Holdings Pty Ltd v Commissioner of Taxation

[2015] FCAFC 57

THE COURT ORDERS THAT:

1.    Reserved question 1 is answered “yes”.

2.    Reserved question 2 is answered “yes”.

3.    Reserved question 3 is answered “no”.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

THE COURT ORDERS THAT:

1.    Reserved question 1 is answered “yes”.

2.    Reserved question 2 is answered “yes”.

3.    Reserved question 3 is answered “no”.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

ALLSOP CJ:

1    I have read the reasons to be published of Edmonds and Gordon JJ, Pagone J and Davies J. The three bodies of reasons reflect a difference of opinion (between Edmonds and Gordon JJ, on the one hand, and Pagone J and Davies J, on the other) as to questions 1 and 2 in the special case, and the reasons for the answer to question 3 (though there is agreement as to the answer to question 3). For the reasons that follow, I agree with the answers to the three questions proposed by Edmonds and Gordon JJ.

2    The surrounding circumstances and statutory provisions are fully described in the reasons of the other members of the bench. I will use abbreviations used in the other judgments.

3    The issues that arise, and the differences of view, concern the meaning and effect of Pt IVA of the 1936 Act concerning “Schemes to Reduce Income Tax” and of Pt 3-90 of the 1997 Act concerning “Consolidated Groups”, and of the inter-relationship between the two Parts.

4    Of central importance to the resolution of the controversy is the approach required by McHugh, Gummow, Kirby and Hayne JJ in Project Blue Sky Inc v Australian Broadcasting Authority [1998] HCA 28; 194 CLR 355 at 381-382 [69]-[71]:

69    The primary object of statutory construction is to construe the relevant provision so that it is consistent with the language and purpose of all the provisions of the statute. The meaning of the provision must be determined "by reference to the language of the instrument viewed as a whole". In Commissioner for Railways (NSW) v Agalianos, Dixon CJ pointed out that "the context, the general purpose and policy of a provision and its consistency and fairness are surer guides to its meaning than the logic with which it is constructed". Thus, the process of construction must always begin by examining the context of the provision that is being construed.

70    A legislative instrument must be construed on the prima facie basis that its provisions are intended to give effect to harmonious goals. Where conflict appears to arise from the language of particular provisions, the conflict must be alleviated, so far as possible, by adjusting the meaning of the competing provisions to achieve that result which will best give effect to the purpose and language of those provisions while maintaining the unity of all the statutory provisions. Reconciling conflicting provisions will often require the court "to determine which is the leading provision and which the subordinate provision, and which must give way to the other". 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.

71    Furthermore, a court construing a statutory provision must strive to give meaning to every word of the provision. In The Commonwealth v Baume Griffith CJ cited R v Berchet to support the proposition that it was "a known rule in the interpretation of Statutes that such a sense is to be made upon the whole as that no clause, sentence, or word shall prove superfluous, void, or insignificant, if by any other construction they may all be made useful and pertinent".

(Footnotes omitted)

5    These passages are important in two relevant respects: the importance of determining the relevant hierarchy (whether express or implied) in reconciling the operation of the provisions in question; and the importance of context, purpose and policy of a provision and its consistency and fairness as guides to its meaning.

6    Revenue statutes of the detail of the 1936 Act and the 1997 Act may not admit of the flexibility of interpretation that may attend statutes expressed in more general terms: Delaware & Hudson Co v Commissioner of Internal Revenue 65 F 2d 292 at 292-293 (1933 2nd CCA per Learned Hand J). As the same judge said in Helvering v Gregory 69 F 2d 809 at 810 (1934 2nd CCA) “as the articulation of a statute increases, the room for interpretation must contract.” In closely structured and finely worded legislation, the importance of the text may be paramount: Joffe v The Queen; Stromer v The Queen [2012] NSWCCA 277; 82 NSWLR 510 at 518 [36]. Nevertheless, even in such statutes, context and purpose may be important: Quikfund (Australia) Pty Ltd v Airmark Consolidators Pty Ltd [2014] FCAFC 70; 222 FCR 13 at 30 [75]; Snedden v Minister for Justice [2014] FCAFC 156; 315 ALR 352 at [99]. Purpose and policy in such statutes are unlikely to be broad social policies embedded in the Act and extrapolated to the case at hand; rather, they will likely be the particular purpose and policy of a section, division or part found in their words and in the context in which the particular provisions appear.

7    In this legislation, Parliament has made clear in s 177B(1) of the 1936 Act the relevant hierarchy of importance of the provisions of Pt IVA and Pt 3-90: the former is to prevail, in that “nothing in the provisions of this Act other than this Part…shall be taken to limit the operation of this Part”: s 177B(1). The 1997 Act is part of “this Act” when that phrase is used in the 1936 Act: s 6(1) of the 1936 Act. Thus, Pt 3-90 is subordinate to Pt IVA. That relationship of subordination, however, is only relevant to the extent that the meaning and effect of the subordinate provisions might otherwise “limit the operation” of Pt IVA.

8    To the extent that all of the judgments of Edmonds and Gordon JJ, Pagone J and Davies J permit a determination under s 177F(1) in respect of CCC as a taxpayer, I respectfully agree. Section 701-1 and the rules therein cannot limit the operation of Pt IVA: s 177B(1). Further, s 701-1 does not remove or destroy the existence of an entity in the group, but makes it a part of the head company. To the extent that the decision of the majority of the Full Court in Federal Commissioner of Taxation v Macquarie Bank Ltd [2013] FCAFC 13; 210 FCR 164 may be taken to decide to the contrary of the availability of a determination under s 177F(1) concerning an entity that is part of a group contemplated by Pt 3-90 in circumstances such as the present, in my respectful view, it is wrong and should not be followed.

9    The tax benefit that is referable to an amount not being included in assessable income (s 177F(1)(a)); or a deduction or part of a deduction being allowable (s 177F(1)(b)); or a capital loss or part of a capital loss being incurred (s 177F(1)(c)), is of, to, or by the taxpayer. Section 701-1 does not deny the existence of CCC, rather it states it to be part of the head company of the group for the relevant purposes in s 701-1.

10    The determination under s 177F(1) is conditioned upon a tax benefit being obtained, but for the section, in connection with a scheme. The place of the determination in the ascertainment of substantive liability to tax illuminates the centrality of the postulates upon which the cancellation of the tax benefit from the entry into the scheme is founded. Not only do the postulates frame the debate or controversy for resolution if there be a dispute, but also they form the foundation of the liability to tax.

11    How then can a determination as to CCC’s tax benefit be “given effect” for the purposes of s 177F(1)? The essence of the view of Edmonds and Gordon JJ is that one cannot give effect to a determination under s 177F as to a tax benefit obtained by one taxpayer by assessing another taxpayer in circumstances where the position of that other taxpayer was contrary to the postulates founding the determination. Put simply in terms of the facts here, the tax benefit was obtained by CCC by its joining the group; had CCC not joined the group it, CCC, would have had assessable income and assessable net capital gain; in these circumstances, CPH cannot be assessed by reference to those tax consequences because to do so accepts that CCC did join the group. In other words, one cannot “give effect” to a determination by assessing someone whose only relationship with the taxpayer in the determination is denied by a postulate in connection with the scheme not being entered into and founding the determination.

12    There is, with respect, great force in this approach. It gives coherence and harmony to the postulated facts and the structure of the scheme and, without otherwise restricting the extent of the power given to the Commissioner to give effect to the determination, it requires her or him to conform to the determination to which effect is being given. This approach does not give a narrow role or effect to the phrase “give effect” in s 177F(1); but it does recognise the necessary limitation from the whole phrase “to give effect to that determination”. The determination is one in which amounts, deductions or losses should or should not be taken into account or recognised on the basis of a relationship with postulated facts in connection with a scheme. The determination is the product, as objective facts, of a relationship between the taxpayer, the postulated facts and the scheme. To give effect to the determination is to do that which is appropriate and adapted to bring about liability to tax on that factual hypothesis.

13    The questions that then arise are whether the terms of Pt 3-90 require or permit CPH to be assessed because it is now the head company of a group to which Pt 3-90 applies and whether to do so can be seen to give effect to the determination about CCC as taxpayer (as a “part” of the head company) by assessing the head company which is responsible for CCC as its “part”: see s 701-1(1).

14    In considering these questions, it is to be recalled that s 177B(1) prevents (relevantly) Pt 3-90 from limiting the operation of Pt IVA. To contemplate CPH being assessed for liability to tax in respect of the determination concerning the disallowance of the tax benefit of CCC would not limit the operation of Pt IVA. It would involve the giving effect to a determination concerning the liability to tax of CCC (as “part” of the head company) by permitting assessment of the head company of the group. The inconsistency of the object of the assessment (CPH) and the postulate can be recognised, but the result, and that inconsistency, can be reconciled by the posited intended work of s 701-1 of making the head company liable for the tax of its parts.

15    This conclusion cannot, however, require the converse: that CCC not be an available object for assessment in giving effect to the determination. To the extent that the issue of an assessment to CCC would be a natural and appropriate consequence of an otherwise authorised determination to CCC under s 177F(1), any conclusion that s 701-1(1), (2) and (3) prevented same would be to limit the operation of Pt IVA.

16    One is therefore left with the position, on this hypothesis, of Pt IVA and Pt 3-90 authorising the assessment to two taxpayers CCC and CPH where the assessment to one (CCC) would be giving effect to the terms of the determination and the factual postulates in connection therewith, and the assessment to the other (CPH) would not be giving effect to the terms of the determination and the factual postulates in connection therewith, but Pt 3-90 could be seen to permit the assessment to CPH as the now responsible head company for the liability of CCC (as its “part”) to tax. Once, however, one recognises that the objectives of Pt 3-90 are as set out in s 700-10 (to prevent double taxation of the same economic gain, to prevent a double tax benefit from an economic loss, and to provide a systematic solution to prevent such double taxation and double tax benefit), and once one accepts that Pt 3-90 cannot prevent an assessment to CCC to give effect to the determination concerning it, one is drawn to the conclusion that the context, general purpose and policy of Pt 3-90 and its consistency and fairness are a sure guide that an assessment to CPH, absent a prohibition on the assessment to CCC, does not fall within the intended reach of the words of s 701-1, in circumstances where (as here) such assessment would not otherwise give effect to the terms of the determination to CCC.

17    Nor can the Commissioner make a determination under s 177F(1) on the postulated facts of the scheme that CPH obtained a tax benefit referable to the net capital gain that CCC would have made had the scheme not been entered. The postulated facts would have seen CPH as foreign or irrelevant to any dealing with the land. That it later became the head company of the group cannot transform the relevant step in working out the tax liability of CCC or CPH as one which gave it a tax benefit of the relevant kind from the entry into the scheme. If the scheme had not been entered into, and CCC had not joined the group, CPH would have had no relevant income or gain, nor lost any relevant deduction, on the postulated facts.

18    Thus, I would answer question one, “yes” and question two, “yes”.

19    Question three raises the same issue as question one insofar as it is directed to the authority to make the determination to CCC. Nothing further needs to be said as to this.

20    Question three also raises the question whether by reason of Div 701 of Pt 3-90 the Commissioner was not authorised to issue the alternative assessments to CCC. This is to be answered “no” for the reasons given by Edmonds and Gordon JJ or Pagone J and Davies J. Given the approach of Edmonds and Gordon JJ, it may not be necessary to resort to the hierarchy found in s 177B(1). Nevertheless, as I have said, to the extent that the issue of an assessment to CCC would be a natural and appropriate consequence of an otherwise authorised determination to CCC under s 177F(1), any conclusion that s 701-1(2) and (3) prevented same would be to limit the operation of Pt IVA, a circumstance not permitted by s 177B(1).

21    Question three should be answered, “no”.

Associate:

Dated:        7 May 2015

REASONS FOR JUDGMENT

EDMONDS AND GORDON JJ:

22    This is a special case, stated pursuant to Pt 38 of the Federal Court Rules 2011, reserving three questions for consideration by the Court, upon an agreed statement of facts.

23    The reserved questions concern the intersection and interaction of the provisions of Pt IVA of the Income Tax Assessment Act 1936 (Cth) (“the 1936 Act”) dealing with Schemes to Reduce Income Tax, and Pt 3-90 of the Income Tax Assessment Act 1997 (Cth) (“the 1997 Act”) dealing with Consolidated Groups.

24    The first and second of the reserved questions raise issues considered and determined by this Court in Federal Commissioner of Taxation v Macquarie Bank Ltd (2013) 210 FCR 164 (“Macquarie (Full Court)”). The respondent (“Commissioner”) challenges the correctness of that decision. The third reserved question raises an argument not considered in Macquarie (Full Court); it was not raised either before the primary judge in Macquarie Bank Ltd v Federal Commissioner of Taxation 2011 ATC 20-281 (“Macquarie (First Instance)”) or before this Court on appeal.

25    The agreed facts are set out below.

Agreed facts

The Primary Facts

26    Channel Cattle Co Pty Ltd (“CCC”) was incorporated in 1981.

27    Mr Peter Sherwin and Mrs Florence Sherwin (together “the Sherwins”) acquired all of the shares in CCC prior to 20 September 1985 and these shares were thus pre-Capital Gains Tax assets.

28    Prior to 31 December 2007, CCC was the owner of two cattle stations known respectively as “Alroy Downs” and “Dalmore Downs” which it acquired in 2004. The stations comprised land in the Northern Territory, associated plant and equipment, trading stock (cattle and horses) and the stations’ stock brand (“the agricultural assets”).

29    Channel Pastoral Holdings Pty Ltd (“CPH”) was incorporated on 6 July 2006. From the date of incorporation, Mr Sherwin and Mrs Sherwin each held one of the only two issued shares in CPH.

30    On 28 December 2007, Florence Sherwin transferred her share in CPH to Peter Sherwin, causing Peter Sherwin to become sole owner of CPH.

31    Until 31 December 2007, CPH was a dormant company. On that date, the Sherwins agreed to transfer their shares in CCC to CPH for consideration totalling $61,232,074. Thereafter CPH became the sole owner of CCC. The “value” of the trading stock held by CCC as at 31 December 2007, for the purposes of Subdiv 70-C of the 1997 Act, was $6,522,502.

32    CPH elected to form a consolidated group with effect from 1 January 2008, with CPH as head entity and CCC as a subsidiary entity (“the CPH consolidated group”).

33    In February 2008, CCC entered into a contract to sell the agricultural assets to an unrelated third party purchaser, Baldy Bay Pty Ltd (as trustee of the Long Yard Trust). The sale price of the agricultural assets was $70,000,000.

34    The sale of the agricultural assets by CCC was completed on 29 February 2008.

Further Matters

35    The parties further agreed on the following matters.

36    Divisions 701 to 721 of Pt 3-90 of the 1997 Act create a regime under which corporate groups can elect to be taxed as a consolidated group of entities (a “consolidated group”) rather than as a number of separate entities. The core rules for the operation of the 1936 and 1997 Acts for consolidated groups are set out in Div 701.

37    Pursuant to s 705-35(l)(c) of the 1997 Act, upon CCC joining the CPH consolidated group, the tax cost of each of CCC’s reset cost base assets was reset to its “tax cost setting amount” with effect from 1 January 2008. As a result, the cost base of the land for the purposes of Pt 3-1 of the 1997 Act increased, as well as the cost of the plant and equipment and CCC’s trading stock (horses and cattle).

38    The sale of the agricultural assets subsequent to formation of the CPH consolidated group resulted in, but for the application of Pt IVA of the 1936 Act, the following outcomes for CPH, as head entity of the CPH consolidated group (amongst other things):

(a)    a capital loss on the sale of the land;

(b)    derivation of $25,405,000 in assessable income from the sale of the trading stock; and

(c)    a deduction of $23,026,930 being allowed for the amount by which the tax cost setting amount of the trading stock exceeded the value of the trading stock as at 30 June 2008, by which time the trading stock had been sold.

39    The sale did not give rise to any tax consequences for CCC as a subsidiary member of the CPH consolidated group.

40    If the Sherwins had sold their shares in CCC to Baldy Bay Pty Ltd for $70,000,000, rather than transferring these shares to CPH, there would have been no tax liability for the Sherwins.

41    If CCC had sold the agricultural assets to Baldy Bay Pty Ltd for $70,000,000 without the anterior steps whereby CPH acquired CCC for $61,232,074 and thereafter formed a consolidated group with CCC as a subsidiary member, the tax outcome would have been different.

42    The Commissioner contends, and the applicants deny, that if the steps described in [30] to [34] above had not been entered into and carried out, it might reasonably be expected that:

(a)    CCC would not have joined the CPH consolidated group with effect from 1 January 2008;

(b)    CCC would have sold the agricultural assets in February 2008; and

(c)    accordingly, amongst other things:

(i)    CPH would not have made a capital loss on the sale of the land;

(ii)    CCC would have made an assessable net capital gain in the sum of $33,795,402 on the sale of the land;

(iii)    CPH would not have been entitled to a deduction for the trading stock;

(iv)    CCC would have derived $25,405,000 in assessable income from the sale of the trading stock; and

(v)    CCC would have been entitled to an additional deduction of $6,393,252 in respect of movement in the value of the trading stock over the income year ended 30 June 2008.

Procedural History

43    The parties also agreed that the following procedural steps have taken place.

44    CCC has not lodged a tax return for the period beginning 1 January 2008 and concluding 30 June 2008, when it was a subsidiary member of the CPH consolidated group. However, on 31 March 2009, CCC lodged a tax return for the period beginning 1 July 2007 and concluding 31 December 2007.

45    On 31 March 2009, pursuant to s 166A of the 1936 Act, the Commissioner was deemed to have made and served an assessment to CCC in respect of its taxable income prior to it joining the CPH consolidated group.

46    The restructuring of CCC and CPH as described in [30] to [32] above did not constitute fraud or evasion for the purposes of s 170 of the 1936 Act.

47    On 5 June 2009, CPH lodged a tax return for the income year ended 30 June 2008.

48    On 5 June 2009, pursuant to s 166A of the 1936 Act, the Commissioner was deemed to have made and served an assessment to CPH of its taxable income for the income year ended 30 June 2008.

49    On 31 May 2013, the Commissioner made a determination pursuant to para (1)(a) of s 177F of the 1936 Act that CCC obtained a tax benefit for the year of income ended 30 June 2008, referable to the capital gain alleged at [42(c)(ii)] above.

50    On 31 May 2013, the Commissioner made two determinations pursuant to paras (l)(b) and (1)(c) respectively of s 177F of the 1936 Act that CPH obtained tax benefits for the year of income ended 30 June 2008, referable to:

(a)    the deduction for trading stock referred to at [42(c)(iii)] above;

(b)    the capital loss referred to at [42(c)(i)] above.

51    On 31 May 2013, the Commissioner took action to give effect to the determinations referred to at [49] and [50] above by the issue of an amended assessment to CPH as head company of the CPH consolidated group for the income year ended 30 June 2008.

52    On 17 July 2013, CPH objected to the amended assessment dated 31 May 2013.

53    On 18 November 2013, the Commissioner disallowed CPH’s objection. In considering and disallowing the objection, the Commissioner also made a determination pursuant to para (l)(a) of s 177F of the 1936 Act that CPH had obtained a tax benefit referable to the net capital gain alleged at [42(c)(ii)] above.

54    On 25 November 2013, CPH appealed that objection decision to this Court.

55    On 13 March 2014, the Commissioner made alternative determinations pursuant to para (l)(a) of s 177F of the 1936 Act that CCC obtained tax benefits, referable to the capital gain made from the sale of the land alleged at [42(c)(ii)] above and the non-inclusion of assessable income from the sale of the trading stock alleged at [42(c)(iv)] above, for the period 1 January 2008 to 30 June 2008 (the “alternative determinations”).

56    On 14 March 2014, the Commissioner took action to give effect to the alternative determinations by issuing (in the alternative to the amended assessment referred to at [51] above) an assessment pursuant to s 168 or, alternatively, s 169 of the 1936 Act, to CCC for the period 1 January 2008 to 30 June 2008, when it was a subsidiary member of the CPH consolidated group (“the alternative assessment”).

57    On 17 March 2014, CCC objected to the alternative assessment dated 14 March 2014.

58    On 28 March 2014, the Commissioner disallowed CCC’s objection.

59    On 2 April 2014, CCC appealed that objection decision to this Court.

60    Copies of the s l77F determinations and the associated assessments, referred to above, were attached as Annexure “A” to the special case and are reproduced in [79], [85] and [104] below.

61    The applicants and the Commissioner have executed a settlement deed, whereby the adjudication of the following legal questions will fully dispose of the proceedings inter partes.

The Reserved Questions

62    The three questions reserved for consideration by the Court are set out in [63] below.

63    Whether, by reason of Div 701 of Pt 3-90 of the 1997 Act, the Commissioner was not:

(1)    authorised to make the determination to CCC referred to at [49] above and to give effect to that determination by issuing the amended assessment to CPH referred to at [51] above;

(2)    authorised to make the determination to CPH referred to at [53] above in connection with the consideration of CPH’s objection to the amended assessment referred to at [51] above;

(3)    authorised to make the alternative determinations to CCC referred to at [55] above and to give effect to those determinations by issuing the alternative assessment to CCC referred to at [56] above.

Statutory Context

Part IVA of the 1936 Act: Schemes to Reduce Income Tax

64    In the relevant year of income, the provisions of Pt IVA relevantly provided:

177A    Interpretation

    (1)    In this Part, unless the contrary intention appears:

…

scheme means:

(a)    any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and

(b)    any scheme, plan, proposal, action, course of action or course of conduct.

taxpayer includes a taxpayer in the capacity of a trustee.

(2)    The definition of taxpayer in subsection (1) shall not be taken to affect in any way the interpretation of that expression where it is used in this Act other than this Part.

(3)    The reference in the definition of scheme in subsection (1) to a scheme, plan, proposal, action, course of action or course of conduct shall be read as including a reference to a unilateral scheme, plan, proposal, action, course of action or course of conduct, as the case may be.

(4)    A reference in this Part to the carrying out of a scheme by a person shall be read as including a reference to the carrying out of a scheme by a person together with another person or other persons.

(5)    A reference in this Part to a scheme or a part of a scheme being entered into or carried out by a person for a particular purpose shall be read as including a reference to the scheme or the part of the scheme being entered into or carried out by the person for 2 or more purposes of which that particular purpose is the dominant purpose.

177B    Operation of Part

(1)    Subject to subsection (2), nothing in the provisions of this Act other than this Part … shall be taken to limit the operation of this Part.

…

177C     Tax benefits

(1)    Subject to this section, a reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to:

(a)    an amount not being included in the assessable income of the taxpayer of a year of income where that amount would have been included, or might reasonably be expected to have been included, in the assessable income of the taxpayer of that year of income if the scheme had not been entered into or carried out; or

(b)    a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out; or

…

and, for the purposes of this Part, the amount of the tax benefit shall be taken to be:

…

(c)    in a case to which paragraph (a) applies—the amount referred to in that paragraph; and

(d)    in a case to which paragraph (b) applies—the amount of the whole of the deduction or of the part of the deduction, as the case may be, referred to in that paragraph; and

…

177D    Schemes to which Part applies

    This Part applies to any scheme that has been or is entered into after 27 May 1981, and to any scheme that has been or is carried out or commenced to be carried out after that date (other than a scheme that was entered into on or before that date), whether the scheme has been or is entered into or carried out in Australia or outside Australia or partly in Australia and partly outside Australia, where:

(a)    a taxpayer (in this section referred to as the relevant taxpayer) has obtained, or would but for section 177F obtain, a tax benefit in connection with the scheme; and

(b)    having regard to:

(i)    the manner in which the scheme was entered into or carried out;

(ii)    the form and substance of the scheme;

(iii)    the time at which the scheme was entered into and the length of the period during which the scheme was carried out;

(iv)    the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme;

(v)    any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme;

(vi)    any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;

(vii)    any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out; and

(viii)    the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi);

it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme or of enabling the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer or is the other taxpayer or one of the other taxpayers).

…

177F Cancellation of tax benefits etc.

(1)    Where a tax benefit has been obtained, or would but for this section be obtained, by a taxpayer in connection with a scheme to which this Part applies, the Commissioner may:

(a)    in the case of a tax benefit that is referable to an amount not being included in the assessable income of the taxpayer of a year of income – determine that the whole or a part of that amount shall be included in the assessable income of the taxpayer of that year of income; or

(b)    in the case of a tax benefit that is referable to a deduction or a part of a deduction being allowable to the taxpayer in relation to a year of income—determine that the whole or a part of the deduction or of the part of the deduction, as the case may be, shall not be allowable to the taxpayer in relation to that year of income; or    

…

and, where the Commissioner makes such a determination, he shall take such action as he considers necessary to give effect to that determination.

(2)    Where the Commissioner determines under paragraph (1)(a) that an amount is to be included in the assessable income of a taxpayer of a year of income, that amount shall be deemed to be included in that assessable income by virtue of such provision of this Act as the Commissioner determines.

    …

Part 3-90 of the 1997 Act: Consolidated Groups

65    Section 700-1 of the 1997 Act sets out what Pt 3-90 is about. It provides:

This Part allows certain groups of entities to be treated as single entities for income tax purposes.

Following a choice to consolidate, subsidiary members are treated as part of the head company of the group rather than as separate income tax identities. The head company inherits their income tax history when they become subsidiary members of the group. On ceasing to be subsidiary members, they take with them an income tax history that recognises that they are different from when they became subsidiary members.

This is supported by rules that:

(a)    set the cost for income tax purposes of assets that subsidiary members bring into the group; and

(b)    determine the income tax history that is taken into account when entities become, or cease to be, subsidiary members of the group; and

(c)    deal with the transfer of tax attributes such as losses and franking credits to the head company when entities become subsidiary members of the group.

66    Section 700-5 provides an overview of Pt 3-90 as follows:

(1)    The single entity rule determines how the income tax liability of a consolidated group will be ascertained. The basic principle is contained in the Core Rules in Division 701.

(2)    Essentially, a consolidated group consists of an Australian resident head company and all of its Australian resident wholly-owned subsidiaries (which may be companies, trusts or partnerships). Special rules apply to foreign-owned groups with no single Australian resident head company.

(3)    An eligible wholly owned group becomes a consolidated group after notice of a choice to consolidate is given to the Commissioner.

(4)    This Part also contains rules which set the cost for income tax purposes of assets of entities when they become subsidiary members of a consolidated group and of membership interests in those entities when they cease to be subsidiary members of the group.

(5)    Certain tax attributes (such as losses and franking credits) of entities that become subsidiary members of a consolidated group are transferred under this Part to the head company of the group. These tax attributes remain with the group after an entity ceases to be a subsidiary member.

67    Section 700-10 provides that the objects of Pt 3-90 are:

(a)    to prevent double taxation of the same economic gain realised by a consolidated group; and

(b)    to prevent a double tax benefit being obtained from an economic loss realised by a consolidated group; and

(c)    to provide a systematic solution to the prevention of such double taxation and double tax benefits that will:

    (i)    reduce the cost of complying with this Act; and

(ii)    improve business efficiency by removing complexities and promoting simplicity in the taxation of wholly-owned groups.

68    Division 701 sets out the core rules of Pt 3-90. It relevantly provides:

Common rule

701-1     Single entity rule

(1)    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.

Head company core purposes

    (2)    The purposes covered by this subsection (the head company core purposes) are:

(a)    working out the amount of the *head company’s liability (if any) for income tax calculated by reference to any income year in which any of the period occurs or any later income year; and

(b)    working out the amount of the head company’s loss (if any) of a particular *sort for any such income year.

Note:    The single entity rule would affect the head company’s income tax liability calculated by reference to income years after the entity ceased to be a member of the group if, for example, assets that the entity held when it became a subsidiary member remained with the head company after the entity ceased to be a subsidiary member.

Entity core purposes

    (3)    The purposes covered by this subsection (the entity core purposes) are:

(a)    working out the amount of the entity’s liability (if any) for income tax calculated by reference to any income year in which any of the period occurs or any later income year; and

(b)    working out the amount of the entity’s loss (if any) of a particular *sort for any such income year.

Note:    An assessment of the entity’s liability calculated by reference to income tax for a period when it was not a subsidiary member of the group may be made, and that tax recovered from it, even while it is a subsidiary member.

(4)    …

Head company rules

701-5 Entry history rule

For the head company core purposes in relation to the period after the entity becomes a *subsidiary member of the group, everything that happened in relation to it before it became a subsidiary member is taken to have happened in relation to the *head company.

Note 1:    Other provisions of this Part may affect the tax history that is inherited (e.g. asset cost base history is affected by section 701-10 and tax loss history is affected by Division 707).

Note 2:    Section 73BAC of the Income Tax Assessment Act 1936 overrides this rule for the purposes of the research and development incremental expenditure provisions.

Note 3:    …

701-10 Cost to head company of assets of joining entity

(1)    This section has effect for the head company core purposes when the entity becomes a *subsidiary member of the group.

Assets to which section applies

(2)    This section applies in relation to each asset that would be an asset of the entity at the time it becomes a *subsidiary member of the group, assuming that subsection 701-1(1) (the single entity rule) did not apply.

Note:    See subsection 705-35(3) for the treatment of a goodwill asset resulting from the head company’s ownership and control of the joining entity.

Object

(3)    The object of this section (and Division 705 which relates to it) is to recognise the cost to the *head company of such assets as an amount reflecting the group’s cost of acquiring the entity.

Setting tax cost of assets

(4)    Each asset’s *tax cost is set at the time the entity becomes a *subsidiary member of the group at the asset’s *tax cost setting amount.

…

Entity rules

701-30 Where entity not subsidiary member for whole of income year

Object

(1)    The object of this section is to provide for a method of working out how the entity core rules apply to the entity for periods in the income year when the entity is not part of the group. The method involves treating each period separately with no netting off between them.

When section has effect

(2)    This section has effect for the entity core purposes if:

(a)    the entity is a *subsidiary member of the group for some but not all of an income year; and

(b)    there are one or more periods in the income year (each of which is a non-membership period) during which the entity is not a subsidiary member of any *consolidated group.

Tax position of each non-membership period to be worked out

(3)    For every non-membership period, work out the entity’s taxable income (if any) for the period, the income tax (if any) payable on that taxable income and the entity’s loss (if any) (a non-membership period loss) of each *sort for the period. Work them out:

(a)    as if the start and end of the period were the start and end of the income year; and

(b)    ignoring the operation of this section in relation to each other non-membership period (if any); and

(c)    so that each relevant item is either:

(i)    allocated to only one of the non-membership periods or to a period that is all or part of the rest of the income year; or

(ii)    apportioned among such periods (for example, by Subdivision 716-A (see note to this subsection)).

Note:    Other provisions of this Part are to be applied in working out the taxable income or loss, for example:

•    section 701-40 (Exit history rule); and

•    Subdivision 716-A (about assessable income and deductions spread over several membership or non-membership periods); and

•    section 716-850 (about grossing up threshold amounts for periods of less than 365 days).

    Subdivision 716 also affects the tax position of the head company of a group of which the entity has been a subsidiary member for some but not all of the income year.

…

Income tax for the financial year

(4)    The entity’s income tax (if any) for the *financial year concerned is the total of every amount of income tax worked out for the entity under subsection (3).

Taxable income for the income year

(5)    The entity’s taxable income for the income year is the total of every amount of taxable income worked out for the entity under subsection (3).

(6)    The entity’s income tax worked out under subsection (4) is taken to be payable on the entity’s taxable income for the income year worked out under subsection (5), even if the amount of the tax differs from the amount that would be worked out by reference to that taxable income apart from subsection (5).

…

Exceptions

…

701-85    Other exceptions etc. to the rules

The operation of each provision of this Division is subject to any provisions of this Act that so requires, either expressly or impliedly.

Note:    An example of such a provision is Division 707 (about the transfer of certain losses to the head company of a consolidated group). That Division modifies the effect that the inheritance of history rule in section 701-5 would otherwise have.

69    Division 703 of Pt 3-90 sets out the rules for what is a consolidated group, the entities that are members of a consolidated group as well as rules relating to how to constitute a consolidated group.

70    Section 703-5 provides:

(1)    A consolidated group comes into existence:

(a)    on the day specified in a choice by a company under section 703-50 as the day on and after which a *consolidatable group is taken to be consolidated; or

(b)    as described in section 703-55 (about creating a consolidated group from a *MEC group).

Note:    The day specified in a choice under section 703-50 as the day on and after which a consolidatable group is taken to be consolidated may be a day before the choice is made.

(2)    The consolidated group continues to exist until the *head company of the group:

(a)    ceases to be a head company; or

(b)    becomes a member of a *MEC group.

The consolidated group ceases to exist when one of those events happens to the head company.

Note:    The group does not cease to exist in some cases where a shelf company is interposed between the head company and its former members: see subsection 124-380(5) and section 703-70.

(3)    At any time while it is in existence, the consolidated group consists of the *head company and all of the *subsidiary members (if any) of the group at the time.

Note:    A consolidated group continues to exist despite one or more entities ceasing to be subsidiary members of the group or becoming subsidiaries of the group, as long as the events described in subsection (2) do not happen to the head company. Thus a consolidated group may come to consist of a head company alone at various times.

71    Section 703-10 provides:

(1)    A consolidatable group consists of:

(a)    a single *head company; and

(b)    all the *subsidiary members of the group.

(2)    To avoid doubt, a consolidatable group cannot consist of a *head company alone.

72    Section 703-15 relevantly provides:

(1)    An entity is a member of a *consolidated group or *consolidatable group while the entity is:

(a)    the *head company of the group; or

(b)    a *subsidiary member of the group.

73    Section 703-50 relevantly provides:

(1)    A company may make a choice in writing that a *consolidatable group is taken to be consolidated on and after a day that is specified in the choice and is after 30 June 2002, if the company was the *head company of the group on the day specified.

Note 1:    The head company of the group must give the Commissioner a notice in the approved form containing information about the group (see sections 703‑58 and 703‑60).

Note 2:    A group that is consolidated for income tax purposes may also consolidate for the purposes of the Minerals Resource Rent Tax Act 2012 (see section 215-10 of that Act).

Note 3:    A group that is consolidated for income tax purposes may also consolidate for the purposes of the Petroleum Resource Rent Tax Assessment Act 1987 (see section 58N of that Act).

(2)    The choice cannot be revoked, and the specification of the day cannot be amended, after the choice is made under subsection (1).

74    Division 705 of Pt 3-90 sets out the rules for setting the tax cost of an entity’s assets where it becomes a subsidiary member of a consolidated group. Subdivision 705-A deals with the basic case of a single entity joining an existing consolidated group. Section 705-5 is a guide to subdiv 705-A and provides:

When an entity becomes a subsidiary member of an existing consolidated group, the tax cost setting amount for its assets reflects the cost to the group of acquiring the entity.

75    Section 705-10 deals with the application and object of subdiv 705-A in the following terms:

Application

(1)    This Subdivision has effect, subject to section 705-15, for the head company core purposes set out in subsection 701-1(2) if an entity (the joining entity) becomes a *subsidiary member of a *consolidated group (the joined group) at a particular time (the joining time).

Object

(2)    The object of this Subdivision is to recognise the *head company’s cost of becoming the holder of the joining entity’s assets as an amount reflecting the group’s cost of acquiring the entity. That amount consists of the cost of the group’s *membership interests in the joining entity, increased by the joining entity’s liabilities and adjusted to take account of the joining entity’s retained profits, distributions of profits, deductions and losses.

(3)    The reason for recognising the *head company’s cost in this way is to align the costs of assets with the costs of *membership interests, and to allow for the preservation of this alignment until the entity ceases to be a *subsidiary member, in order to:

(a)    prevent double taxation of gains and duplication of losses; and

(b)    remove the need to adjust costs of membership interests in response to transactions that shift value between them, as the required adjustments occur automatically.

Note:    Under Division 711, the alignment is preserved by recognising the head company’s cost of membership interests in the entity if it ceases to be a subsidiary member of the group as the cost of its assets reduced by its liabilities.

The Intersection and Interaction of Part IVA of the 1936 Act and Part 3-90 of the 1997 Act

76    The determinations and assessments issued in this case are predicated on the Commissioner’s view that either:

(1)    A tax benefit was obtained by CCC, being the non-inclusion of an amount of a capital gain on the sale of the land. The Commissioner has sought to give effect to this by making a s 177F determination in respect of CCC (see [49] above) and issuing an amended assessment to CPH as head entity (see [51] above). Notwithstanding that, on the postulate upon which the s 177F determination was made to CCC, CPH was not the head company of a consolidated group which included CCC as a subsidiary member. The Commissioner’s position relies on the single entity rule in s 701-1 of Pt 3-90 at the time the assessment was issued. Whether the Commissioner is authorised to do this engages the issues raised by reserved question 1.

(2)    Alternatively, the same tax benefit was obtained by CPH as head entity of the CPH consolidated group. The Commissioner has sought to give effect to this by making a s 177F determination in respect of CPH, which he also relies upon to defend his decision to disallow the objection to the amended assessment he had earlier issued to CPH (see [53] above). Notwithstanding that, on the postulate upon which the s 177F determination was made to CPH, CPH was not the head company of a consolidated group which included CCC as a subsidiary member. The Commissioner’s position also relies on the single entity rule in s 701-1 of Pt 3-90 at the time the assessment was issued. Whether the Commissioner is authorised to do this engages the issues raised by reserved question 2.

(3)    Alternatively, a tax benefit was obtained by CCC, being the non-inclusion of an amount of a capital gain on the sale of the land and the non-inclusion of assessable income from the sale of the trading stock. The Commissioner sought to give effect to this by both making a s 177F determination in respect of, and issuing an assessment to, CCC (see [55] and [56] above). Whether the Commissioner is authorised to do this engages the issues raised by reserved question 3.

77    The Commissioner’s primary case relies upon the assessment he has issued to CCC (see [76(3)] above). His alternative case relies upon the amended assessment to CPH (see [76(1)] and [76(2)] above), and upon the dissenting judgment of Emmett J in Macquarie.

Reserved Question 1

78    As indicated in [51] above, the Commissioner sought, inter alia, to give effect to the determination referred to at [49] above by the issue of an amended assessment to CPH as head company of the CPH consolidated group for the income year ended 30 June 2008.

79    The determination at [49] above reads:

Determination made pursuant to section 177F of Part IVA of the Income Tax Assessment Act 1936

I, Michael Cranston, Deputy Commissioner of Taxation, Small and Medium Enterprises, in the exercise of the powers and functions delegated to me by the Commissioner of Taxation determine under paragraph 177F(1)(a) of the Income Tax Assessment Act 1936 (the Act) that the amount of $33,795,402 being a tax benefit that is referable to an amount that has not been included in the assessable income of Channel Cattle Co Pty Ltd, TFN ……… (the taxpayer) for the year of income ended 30 June 2008, shall be included in the assessable income of the taxpayer for that year of income.

I further determine under subsection 177F(2) of the Acct that the amount shall be deemed to be included in the assessable income of the taxpayer by virtue of subsection 102-5(1) of the Income Tax Assessment Act 1997.

Dated the 31st day of May 2013.

Michael Cranston (Signed)    (Signed) p.p [Julie Elms]

Michael Cranston

Deputy Commissioner of Taxation, Small and Medium Enterprises

80    In the normal course, where a subsidiary member of a consolidated group enters into a scheme to which s 177D applies, the Commissioner is authorised to make a determination under s 177F(1), but the authorised determination will be (in a para (a) case) one to include an amount in the assessable income of the head company, to which for tax assessment purposes the activities of the subsidiary member are, by s 701-1, attributed and subsumed. Effect is then given to that determination by the issue of an assessment including the amount in the assessable income of the head company.

81    Assuming it is permissible, in certain circumstances, to give effect to a s 177F determination to include an amount in the assessable income of one taxpayer by the issue of an assessment including the amount in the assessable income of a different taxpayer, and that one of those circumstances includes the issue of an assessment including an amount in the assessable income of a head company of a consolidated group to give effect to a determination to include that amount in the assessable income of a subsidiary member of that group, the present case is not one of them. In our view, any assessment to give effect to an anterior s 177F determination to include an amount in the assessable income of a taxpayer must be consistent, in all material respects, with the postulate upon which that determination is predicated, whether the assessment is issued to the taxpayer referred to in the determination or a different taxpayer. The CPH amended assessment is inconsistent with the postulate upon which the CCC determination is predicated – that CCC sold the agricultural assets as a stand-alone entity, i.e., otherwise than as a subsidiary member of the CPH consolidated group – and it follows, in our view, that the CPH amended assessment cannot, and does not, give effect to the CCC determination as required by s 177F.

82    We accept that, at the time of issue of the assessment, CCC is part of CPH under the single entity rule in s 701-1, and that an assessment to CPH to give effect to the anterior determination to CCC can be said, in the context of the single entity rule viewed in isolation, to be consistent with that determination. But we cannot agree with that analysis when the single entity rule has to be viewed through the prism of its intersection with Pt IVA and the hierarchy afforded those latter provisions by s 177B(1). Arguably, this is best exemplified in our answer to reserved question 3 below (see [89] to [109]), and, in particular, our acceptance that s 177B(1) does not allow the single entity rule in s 701-1 to stand in the way of the Commissioner making a determination to include in the assessable income of CCC the amount that would have been included on the postulate upon which the determination to CCC was predicated, and issuing an assessment to CCC to give effect to that determination. Such an outcome leads to “harmonious goals”, to use the term that fell from the plurality in Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 (“Project Blue Sky”) at [70], in contrast to the conflicting outcome achieved by the issue of an assessment to CPH, said to give effect to an anterior determination to CCC only because CCC was a subsidiary member of the CPH consolidated group at the time of the issue of the assessment. Moreover, having regard to the objects of Pt 3-90, in particular that expressed in s 700-10(a) (see [67] above) – to prevent double taxation of the same economic gain realised by a consolidated group – it cannot be the case that the Commissioner is authorised to assess both CPH and CCC. In our view, the more harmonious outcome is the process underlying the issues raised by reserved question 3.

83    Reserved question 1 must be answered “yes”. The Commissioner was not authorised to give effect to the determination in [49] above by issuing the amended assessment to CPH referred to at [51] above.

Reserved Question 2

84    As indicated in [53] above, the Commissioner, in disallowing CPH’s objection to the amended assessment referred to in [51] above, sought to defend that disallowance by making a determination pursuant to para (1)(a) of s 177F of the 1936 Act that CPH had obtained a tax benefit referable to the net capital gain alleged at [42(c)(ii)] above.

85    The determination reads:

Determination made pursuant to section 177F of Part IVA of the Income Tax Assessment Act 1936

I, Michael Cranston, Deputy Commissioner of Taxation, Private Groups and High Wealth Individuals, in the exercise of the powers and functions delegated to me by the Commissioner of Taxation determine under paragraph 177F(1)(a) of the Income Tax Assessment Act 1936 (the Act) that the amount of $33,795,402 being a tax benefit that is referable to an amount that has not been included in the assessable income of Channel Pastoral Holdings Pty Ltd TFN ……… (the taxpayer) for the year of income ended 30 June 2008, shall be included in the assessable income of the taxpayer for that year of income.

I further determine under subsection 177F(2) of the Act that the amount shall be deemed to be included in the assessable income of the taxpayer by virtue of subsection 102-5(1) of the Income Tax Assessment Act 1997.

Dated the 18th day of November 2013

(Signed)    (Signed) p.p [Patricia Redknap]

Michael Cranston

Deputy Commissioner of Taxation, Private Groups and High Wealth Individuals

86    Having regard to the agreed facts, in particular those at [28] to [34] above, there is no factual basis for such a determination. On the postulate or counterfactual, upon which the tax benefit the subject of the CPH determination is predicated, namely, that CCC would have, or might reasonably be expected to have, sold the CCC agricultural assets otherwise than as a subsidiary member of the CPH consolidated group, CPH could never, and did not, obtain such a tax benefit from such a sale. What the primary judge said in Macquarie (First Instance) at [45] is equally apposite to this determination in the present case.

87    Here, the Commissioner seeks to defend an anterior assessment to CPH as head company of a consolidated group, which included CCC as a subsidiary member at the time the assessment was issued, by the making of a subsequent determination to CPH when, on the postulate upon which the s 177F determination was made to CPH, CPH was not the head company of a consolidated group which included CCC as a subsidiary member. For the reasons outlined in [61] above, in our view, the Commissioner is not authorised to do this.

88    Reserved question 2 must be answered “yes”. The Commissioner was not authorised to make the determination in respect of CPH referred to at [53] above in defending the disallowance of CPH’s objection to the amended assessment referred to at [51] above.

Reserved Question 3

Introduction

89    Having regard to the agreed facts at [55] and [56] above, this question can be expanded on its framework in [63(3)] above to read: Whether, by reason of Div 701 of Pt 3-90 of the 1997 Act, the Commissioner was not authorised to make the alternative determinations on 13 March 2014 to CCC pursuant to paragraph (1)(a) of s 177F of the 1936 Act that CCC obtained tax benefits referable to the non-inclusion of the capital gain of $33,795,402 from the sale of the land and the non-inclusion of assessable income of $25,405,000 from the sale of the trading stock, for the period from 1 January 2008 to 30 June 2008 and to give effect to those determinations by issuing the alternative assessment pursuant to ss 168 or 169 of the 1936 Act to CCC for the period from 1 January 2008 to 30 June 2008, when it was a subsidiary member of the CPH consolidated group.

90    The underlying issue raised by this question is whether the Commissioner is denied the authority to issue an assessment to CCC, in reliance on anterior determinations made to CCC pursuant to s 177F(1)(a) of the 1936 Act, at times when CCC was, in fact, a subsidiary member of a consolidated group, when the determinations and assessment were predicated for the purposes of Pt IVA of the 1936 Act on the basis that CCC was not a subsidiary member of a consolidated group, but a stand-alone taxpayer liable to assessment.

91    In our view, that issue and the question giving rise to it should be answered “no” – the Commissioner is not denied the authority to issue an assessment to CCC in reliance on anterior determinations made to it pursuant to s 177(1)(a) – for the reasons which follow.

Part IVA: Some Observations on Certain Aspects

92    First, the operation of Pt IVA is not limited by any other provision of the 1936 or 1997 Acts. Section 177B provides that “nothing in the provisions of this Act other than this Part [IVA] … shall be taken to limit the operation of this Part [IVA]”: see [64] above. In the 1936 Act, the “Act” includes the 1997 Act: see s 6(1) and Macquarie at [106]. In the 1997 Act, “this Act” also includes the 1936 Act: s 995-1(1).

93    Second, Pt IVA is a set of interrelated provisions. Those provisions do not and cannot operate in isolation. Part IVA falls for consideration only where the Commissioner has made a determination under s 177F(1): Federal Commissioner of Taxation v Hart (2004) 217 CLR 216 (“Hart”) at [37]. As Gummow and Hayne JJ went on to say in that paragraph:

A determination can be made only where a tax benefit has been obtained (or, but for s 177F(1), would be obtained) by a taxpayer in connection with a scheme to which Pt IVA applies. It follows, of course, that the concepts of “tax benefit”, “scheme” and “scheme to which this Part applies” all have their part to play in deciding whether the power given to the Commissioner by s 177F(1) can be exercised. But it is important to consider what the Act says about those concepts having regard to two considerations. First, the various defined terms must be given operation in the interrelated way which s 177F(1) requires. Each of the defined terms takes its place in a single provision permitting the making of a determination. …

94    The “interrelated way” in which the various defined terms operate includes s 177C. Section 177C(1) addresses “tax benefit”: see [64] above. That section (read with the other provisions in Pt IVA) identifies that whether a taxpayer obtained a tax benefit in relation to a scheme to which Pt IVA applies is an objective fact: Federal Commissioner of Taxation v Trail Bros Steel & Plastics Pty Ltd (2010) 186 FCR 410 (“Trail Bros”) at [23] and the cases cited. Identification of a tax benefit is itself a multifaceted task. It is a multifaceted task in two distinct, but necessarily interrelated, ways. It is multifaceted within Pt IVA because of the interrelated provisions of that Part. For example, the interrelated way in which ss 177C and 177D(b) operate requires a comparison between the scheme and the alternative postulate: Trail Bros at [25]; Hart at [66] and Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404 (“Spotless”) at 423-424.

95    But the identification of the tax benefit (and the alternative postulate) has another equally important and necessary facet – the interaction between Pt IVA and another section, Division or Part of the Acts. That second concept requires further explanation. As was said in Trail Bros at [26] and [28]:

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” … The question posed by s 177C(1) is answered on the assumption that the scheme had not been entered into or carried out: [Federal Commissioner of Taxation v Lenzo (2008) 167 FCR 255 at [121]].

…

When assessing the alternative postulate or predicting the events that would or might take place, that question is answered on the assumption that the scheme has not been entered into or carried out: Lenzo 167 FCR 255 at [121]. Put another way, s 177C does require the entirety of the scheme to be ignored: Lenzo 167 FCR 255 at [136]. But that is not the entire question posed by s 177C. The rest of the question involves the objective enquiry of predicting the events that would have, or might reasonably be expected to have, taken place in the absence of the scheme.

(Emphasis omitted.)

96    Identification of that alternative postulate is significant. The alternative postulate, and tax benefit, follows from Pt IVA interacting, intersecting and operating with another section, Division or Part of the Acts. Some matters should be noted at the outset. First, as a matter of statutory construction, the two sets of provisions (Pt IVA on the one hand, and the taxing provision(s) relied upon as the basis for, or underpinning of, the tax benefit on the other hand) should so far as possible be construed so as to operate according to their terms: Project Blue Sky at [78]. The fact that a taxing provision or provisions are inserted into the Acts after the introduction of Pt IVA does not detract from that proposition. On the contrary, as Gaudron J held in Saraswati v R (1991) 172 CLR 1 at 17:

It is a basic rule of construction that, in the absence of express words, an earlier statutory provision is not repealed, altered or derogated from by a later provision unless an intention to that effect is necessarily to be implied. There must be very strong grounds to support that implication, for there is a general presumption that the legislature intended that both provisions should operate and that, to the extent that they would otherwise overlap, one should be read as subject to the other.

97    Next, the result (the alternative postulate and identified tax benefit) is based on an assumed set of facts, not the true facts. As a result, the basis on which a taxpayer is assessed under Pt IVA is necessarily not what the taxpayer actually did. It is assessed on the basis of what it would have done, or might reasonably be expected to have done, not what it did do. Indeed, in many cases where Pt IVA has been applied to strike down a scheme to which that Part applies, the basis on which the taxpayer is ultimately assessed is directly contrary to the position it in fact found itself in before the Part was applied. For example, in Spotless, the taxpayer submitted that in the absence of the scheme (investment of funds on short term deposit in a bank account with the European Pacific Banking Co Ltd (“EPBCL”) in the Cook Islands), there would have been no investment in EPBCL and para (a) of s 177C(1) would have had no subject matter upon which to operate: at 424. The Court rejected that submission and, in relation to the expression “an amount not being included” in s 177C(1)(a), stated:

In our view, the amount to which par (a) refers as not being included in the assessable income of the taxpayer is identified more generally than the taxpayers would have it. The paragraph speaks of the amount produced from a particular source or activity. In the present case, this was the investment of $40 million and its employment to generate a return to the taxpayers. It is sufficient that at least the amount in question might reasonably have been included in the assessable income had the scheme not been entered into or carried out.

Section 177D presents the question whether, having regard to the eight categories of matter identified in par (b), posited as objective facts, in the present case a reasonable person would conclude that the taxpayers entered into the scheme for the dominant purpose of enabling each to obtain a “tax benefit” in the necessary sense. A particular application of the definition provision of “tax benefit” in s 177C(1) thus involves consideration of the particular materials answering the various categories in par (b) of s 177D.

The taxpayers were determined to place the $40 million in short-term investment for the balance of the then current financial year. The reasonable expectation is that, in the absence of any other acceptable alternative proposal for “off-shore” investment at interest, the taxpayers would have invested the funds, for the balance of the financial year, in Australia. The amount derived from that investment then would have been included in the assessable income of the taxpayers. The interest rate in the Cook Islands was 4.5 per cent below applicable bank rates in Australia. It reasonably could be concluded that the amount the taxpayers would have received on the Australian investment would have been not less than the amount of interest in fact received from the investment with EPBCL. Accordingly, there is no error adverse to the taxpayers in identifying the amount of the “tax benefit” as an amount equal to the interest less the Cook Islands withholding tax.

(Emphasis added).

Put another way, the s 177C(1)(a) amount (the tax benefit) was the amount that would have been produced from a particular source or activity – the investment of $40 million in Australia to generate a return to taxpayers – when, in fact, the taxpayer invested the funds offshore in the Cook Islands: Spotless at 424.

98    In Hart, the s 177C(1)(b) amount (the tax benefit) was the difference between all the interest in fact charged to that part of the loan used for an investment property and the interest that would have been charged to that part of the loan had it been a loan requiring periodical payments sufficient to pay both principal and interest over the term of the loan: at [32]. Substantively, the alternative postulate on which the tax benefit was calculated was an assumed loan with distinctly different terms for the payment of principal and interest.

99    In Trail Bros, the Court rejected the contention that in identifying the tax benefit in s 177C(1)(b), there was a requirement that the alternative postulate be capable of being classified as the same kind of deduction made in the absence of Pt IVA. As the Court said at [48]:

[The] comparison does not assume, let alone require, that if the scheme had not been effected, the taxpayer would have ordered its affairs in a way that engaged the same provisions of the Act (or engaged the same provisions in the same way) as were said to be applicable to the events and transactions comprising the scheme. Imposing the notion that to determine the amount of the tax benefit, a comparison must be made between deductions of the same kind or class assumes, wrongly, that tax benefits follow only in cases where, but for the scheme, a taxpayer would have sought to engage the same provisions of the Act in ordering its affairs. There is no warrant for making that assumption.

The respective positions to be compared were payment by an employer to a “Welfare Fund” and payment by an employer to a superannuation fund: at [49]. Again, the alternative postulate on which the tax benefit was calculated was a payment to an assumed entity of a particular character.

100    Only after identification of the tax benefit, and the making of a determination in respect of that taxpayer, is the Commissioner required pursuant to s 177F to “take such action as he considers necessary to give effect to that determination”.

Part 3-90: Some Observations on Certain Aspects

101    First, none of the objects of Pt 3-90, as specified in s 700-10 (see [67] above), will be violated or otherwise frustrated by answering question 3, “no”.

102    Secondly, the single entity rule in s 701-1(1) (see [68] above) has to be read and construed as being limited to the purposes covered by ss 701-1(2) and (3), because that is what s 701-1(1) says; for the purposes of working out the head company’s and any subsidiary company’s liability to income tax while they are members of the same consolidated group during any period or periods in the relevant year of income. The single entity rule prevents the Commissioner, consistently with para (a) of s 700-10 (the first Pt 3-90 object), from taxing the same economic gain to both the head company and the subsidiary member that actually makes the gain while it is a member of the head company’s consolidated group.

103    Thirdly, the tax benefit upon which a taxpayer is assessed in reliance on a determination made under s 177F(1)(a) is predicated on a postulate, which is a hypothesis as to what the taxpayer would have, or might reasonably be expected to have, done if he had not done what he did do. If that postulate is that the taxpayer would have, or might reasonably be expected to have, sold an asset as a stand-alone entity without having become a subsidiary member of a consolidated group, it does not seem to us that there is any reason to prevent the Commissioner from making a determination in those terms, and using an assessment to give effect to it.

Consideration and Analysis

104    On 13 March 2014, the Commissioner made the alternative determinations pursuant to paragraph (l)(a) of s 177F of 1936 Act. The determinations read:

Determination made pursuant to section 177F of Part IVA of the Income Tax Assessment Act 1936

I, Michael Cranston, Deputy Commissioner of Taxation, Private Groups and High Wealth Individuals, in the exercise of the powers and functions delegated to me by the Commissioner of Taxation determine under paragraph 177F(1)(a) of the Income Tax Assessment Act 1936 (the Act) that the amount of $33,795,402 being a tax benefit that is referable to an amount that has not been included in the assessable income of Channel Cattle Co Pty Ltd TFN ……… (the taxpayer) for the period 1 January 2008 to 30 June 2008, shall be included in the assessable income of the taxpayer for that period.

I further determine under subsection 177F(2) of the Act that the amount shall be deemed to be included in the assessable income of the taxpayer by virtue of subsection 102-5(1) of the Income Tax Assessment Act 1997.

Dated the 13 day of March 2014

                            (Signed) p.p [Julie Elms]

Michael Cranston

Deputy Commissioner of Taxation, Private Groups and High Wealth Individuals

Determination made pursuant to section 177F of Part IVA of the Income Tax Assessment Act 1936

I, Michael Cranston, Deputy Commissioner of Taxation, Private Groups and High Wealth Individuals, in the exercise of the powers and functions delegated to me by the Commissioner of Taxation determine under paragraph 177F(1)(a) of the Income Tax Assessment Act 1936 (the Act) that the amount of $25,405,000 being a tax benefit that is referable to an amount that has not been included in the assessable income of Channel Cattle Co Pty Ltd TFN ……… (the taxpayer) for the period 1 January 2008 to 30 June 2008, shall be included in the assessable income of the taxpayer for that period.

I further determine under subsection 177F(2) of the Act that the amount shall be deemed to be included in the assessable income of the taxpayer by virtue of section 6-5 of the Income Tax Assessment Act 1997.

Dated the 13 day of March 2014

                            (Signed) p.p [Julie Elms]

Michael Cranston

Deputy Commissioner of Taxation, Private Groups and High Wealth Individuals

105    The next day, 14 March 2014, the Commissioner took action to give effect to the alternative determinations by issuing the alternative assessment to CCC for the period 1 January 2008 to 30 June 2008. The alternative assessment is said to have been made pursuant to s 168, or alternatively s 169, of the 1936 Act, but in our view, it is unnecessary to source the Commissioner’s authority in these provisions for the reasons referred to in [108] and [109] below, namely, the provisions of s 701-30 of the 1997 Act.

106    While the alternative determinations do not say as much, they are both predicated on the postulate that CCC would have, or might reasonably be expected to have, sold the land and trading stock as a stand-alone entity if CPH had not done what it did do, namely, acquire all the shares in CCC and choose to form a consolidated group including itself as head company and CCC as a subsidiary member, prior to any such sale of the land and trading stock by CCC. That postulate is entirely hypothetical, and the assessment to give effect to the determinations is not affected, limited or prohibited in any way by the provisions of Pt 3-90, in particular, the single entity rule in s 701-1, the operation of which is predicated on facts inconsistent with the postulate.

107    The same conclusion is reached if one approaches the issue through the prism of Pt 3-90, rather than through the unlimited operation of s 177B of Pt IVA. Part 3-90 actually contemplates that, as a matter of fact, there may be periods in the income year when an entity is not part of the group: see s 701-30 in [68] above. It further provides for how the entity’s taxable income (if any) is to be worked out for what is called the “non-membership period”: see s 701-30(3).

108    In the present case, neither CCC nor CPH were members of a consolidated group in the period 1 July 2007 to 31 December 2007. For that period, their respective taxable incomes were to be worked out in accordance with s 701-30(3). The alternative determinations are predicated on the postulate that they were not members of a consolidated group during the remaining period of that year and that their respective taxable incomes for the remaining period of that year were to be worked out in accordance with s 701-30(3). It may not have been necessary for the postulate underlying the alternative determination to embrace the whole of the remaining period of the year ended 30 June 2008; it may have been sufficient to confine it to the period 1 January 2008 to 29 February 2008, the latter date being the date on which the sale of the agricultural assets by CCC was completed (see [34] above). But, in our view, nothing turns on this.

109    During the course of argument, the Commissioner contended that the answer to this question required the operation of the single entity rule in Pt 3-90 to give way to the paramountcy of Pt IVA (s 177B(1)), in reliance on the default exception to the core rules in s 701-85 (see [68] above), so that CCC may be assessed despite the statutory single entity rule. For the reasons set out from [92] above, that approach has not been adopted. In the present case, the application of Pt IVA proceeds on the basis that CCC is not a subsidiary member of the CPH consolidated group for part of the 2008 income year. The fact that CCC is not a member of the CPH consolidated group for part of the 2008 income year is the basis for the alternative determination. The Commissioner then is required to, and did, give effect to that determination by issuing the alternative assessment to CCC: s 177F(1)(a). The ability to issue an assessment to a subsidiary member of a consolidated group that was not a member for part of the income year is expressly provided for by s 701-30. That section does not ignore the single entity rule in Pt 3-90. It recognises, as was the fact, that there will be instances where a subsidiary member is not part of the consolidated group for the whole income year. Section 701-30 provides a method of working out how the entity core rules apply to the entity for periods in the income year when the entity is not part of the group. The method involves treating each period separately with no netting off between them. That is what occurred here. There is no basis for reliance on the default exception to the core rules in s 701-85.

Associate:    

Dated:    7 May 2015

REASONS FOR JUDGMENT

PAGONE J:

110    I have had the benefit of reading the joint reasons for judgment of Edmonds and Gordon JJ but respectfully differ from their conclusions in some respects.

111    The three questions posed for the Court concern an important matter of general tax administration, namely the application of the general anti-avoidance provision in Part IVA of the Income Tax Assessment Act 1936 (Cth) (“the 1936 Act”) to companies governed by the consolidation regime in Part 3-90 of the Income Tax Assessment Act 1997 (Cth) (“the 1997 Act”) where the statutory consequence arising from a company joining a consolidated group is an essential element in what the Commissioner contends to be a tax benefit for the application of Part IVA. The Commissioner has made alternative determinations and has raised alternative assessments to apply the anti-avoidance rule in Part IVA which the taxpayers contend cannot be made consistently with the consolidation provisions because of the single entity rule in Div 701 of the 1997 Act.

112    The Commissioner has sought to tax, pursuant to Part IVA, an amount of $33,795,402 arising from a sale by Channel Cattle Co Pty Ltd (“CCC”) of pastoral leases, associated trading stock and depreciating assets under a contract entered into in February 2008 by CCC with an unrelated third party purchaser, namely, Baldy Bay Pty Ltd. For present purposes it may be accepted that the sale would have resulted in a taxable capital gain to CCC but for the formation of a consolidated group with Channel Pastoral Holdings Pty Ltd (“CPH”) as head entity, and CCC as a subsidiary entity, with effect from 1 January 2008. Until then CPH had been a dormant company and CCC had been the owner of two cattle stations known respectively as “Alroy Downs” and “Dalmore Downs” which it had acquired in 2004. The stations comprised land in the Northern Territory, associated plant and equipment, trading stock (cattle and horses) and the stations’ stock brand. CCC had been incorporated in 1981 and all of its shares were owned by Mr and Mrs Sherwin until 31 December 2007 when they agreed to transfer their shares in CCC to CPH for consideration totalling $61,232,074. Mr and Mrs Sherwin had acquired those shares before 20 September 1985 and their transfer to CPH was not taxable as a capital gain to Mr and Mrs Sherwin. CPH was incorporated on 6 July 2006 with each of Mr and Mrs Sherwin holding one of the only two issued shares until 28 December 2007 when Mrs Sherwin transferred her share in CPH to her husband resulting in Mr Sherwin becoming the sole owner of CPH. A consequence of these transactions was to enable CCC and CPH to become a consolidated group under Part 3-90 of the 1997 Act.

113    CPH elected to form a consolidated group with effect from 1 January 2008 with itself as the head entity. The consequences of CCC joining the CPH consolidated group included, significantly, that the tax cost of each of CCC’s reset cost base assets was reset to its “tax cost setting amount” with effect from 1 January 2008 pursuant to s 705-35(1)(c) of the 1997 Act. The result of that was to increase, for the purposes of Part 3-1 (which deals with capital gains and losses) of the 1997 Act, the cost base of the land, plant and equipment and trading stock owned by CCC when joining the CPH consolidated group. CPH accounted for the transaction as head entity of the group by claiming a capital loss on the sale of the land, returning the derivation of $25,405,000 in assessable income from the sale of the trading stock, and claiming a deduction of $23,260,930 by way of allowance for the amount by which the tax cost setting amount of the trading stock exceeded the value of the trading stock as at 30 June 2008 (by which time the trading stock had been sold).

114    The Commissioner contends, however, that a tax benefit has been obtained by a taxpayer in connection with a scheme within the meaning of the provisions of Part IVA of the 1936 Act. For present purposes it is to be accepted that the sale by CCC as a subsidiary in the CPH consolidated group, in the absence of the application of Part IVA, would produce the tax consequences of resetting the tax cost setting amount of each of CCC’s reset cost base assets described above. It may also be assumed for the purposes of this proceeding that CCC would have been assessed for its sale of its assets had it sold them other than as a subsidiary member of the consolidated group which was created two months before the sale. That may be assumed because the parties have narrowed their dispute in this proceeding and do not require the Court to determine the correctness of the conflicting contentions about whether CCC would have made a taxable capital gain had CCC not joined the CPH consolidated group. The three questions posed for the Court, in this context, therefore, are all concerned with determining whether, and if so how, the Commissioner can apply Part IVA where a tax benefit is said to have been obtained in connection with a scheme which involves the creation of a consolidated group with the consequence that the entity that would otherwise have been taxable comes within the terms and operation of the single entity rule in the consolidation provisions in Part 3-90. The critical point in issue in each of the questions is whether Div 701 of Part 3-90 of the 1997 Act prevents the operation of Part IVA where an element in the scheme which is said to produce a tax benefit is the consequences which arise under the 1997 Act by the consolidation. The “Act” for the purposes of the 1997 Act includes the 1936 Act (see the definition of “this Act” in s 995-1(1) of the 1997 Act) and vice versa (see the definition of “this Act” in s 6(1) of the 1936 Act).

115    The Commissioner has sought to navigate the inter-relationship between the consolidation provisions and the general anti-avoidance provision by making alternative determinations and alternative assessments to negate the fiscal effect of the consolidation upon the sale by CCC to Baldy Bay Pty Ltd. Each of the three questions posed for the Court to answer seeks to explore whether, in light of Div 701 in Part 3-90 of the 1997 Act, the Commissioner was able to make the alternative determinations and then to give effect to them in the various ways described in the three questions. In each case CCC and CPH contend that Div 701 of the 1997 Act prevents the Commissioner from relying upon Part IVA of the 1936 Act.

116    Each question has two parts: the first is concerned with the power under s 177(1)(a) to make a determination and the second with the power under s 177F(1) to give effect to the determination which was made (assuming it to be effective). The first two questions depend upon a reconsideration by this Court of the decision, and reasoning, of the majority in Federal Commissioner of Taxation v Macquarie Bank Ltd (2013) 210 FCR 164 which had been decided at first instance in Macquarie Bank Ltd v Federal Commissioner of Taxation [2011] FCA 1076 (“Macquarie Bank”). The Commissioner challenges the correctness of that decision and contends that it is plainly wrong and ought not to be followed. The third question raises an argument that was not considered in Macquarie Bank and, to that extent, does not necessarily call for a reversal of the decision but nonetheless requires some consideration of the reasoning in Macquarie Bank if only to consider whether it has application to the new argument. Each question, and the reasoning in Macquarie Bank, requires a construction and understanding of what Div 701 does and its impact, if any, upon Part IVA. It may be desirable, therefore, to consider those provisions generally before turning specifically to the reasoning in Macquarie Bank.

117    The first question asks whether Div 701 prevents the Commissioner from applying Part IVA by making a determination to CCC and then to give effect to that determination by issuing an amended assessment to CPH. Section 177F(1) confers upon the Commissioner power first to make a determination of the kind described in the section and then to give effect to such a determination. The scenario contemplated by the first question supposes that CCC is the taxpayer which has, or would but for the application of the section have, obtained a tax benefit. The relevant tax benefit contemplated by the scenario is the non-inclusion of an amount in the assessable income of CCC in connection with a scheme through which, relevantly, CCC was a member of a consolidated group at the point of sale of its assets such as to invoke reliance upon the operation of Part 3-90 including Div 701.

118    The taxpayers in this proceeding contend that Div 701 prevents the Commissioner from making a determination under s 177F(1)(a) to include a tax benefit in the assessable income of CCC. It is, therefore, necessary to consider the terms of Div 701. Section 701-1(1) provides:

701-1    Single entity rule

(1)    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.

An effect of s 701-1(1) is that CCC must be taken to be part of CPH rather than as a separate entity. That effect, however, is specifically limited to the purposes covered by subsections (2) and (3) which provide:

Head company core purposes

(2)    The purposes covered by this subsection (the head company core purposes) are:

(a)    working out the amount of the head company's liability (if any) for income tax calculated by reference to any income year in which any of the period occurs or any later income year; and

(b)    working out the amount of the head company's loss (if any) of a particular sort for any such income year.

Note:    The single entity rule would affect the head company's income tax liability calculated by reference to income years after the entity ceased to be a member of the group if, for example, assets that the entity held when it became a subsidiary member remained with the head company after the entity ceased to be a subsidiary member.

Entity core purposes

(3)    The purposes covered by this subsection (the entity core purposes) are:

(a)    working out the amount of the entity's liability (if any) for income tax calculated by reference to any income year in which any of the period occurs or any later income year; and

(b)    working out the amount of the entity's loss (if any) of a particular sort for any such income year.

Note: An assessment of the entity's liability calculated by reference to income tax for a period when it was not a subsidiary member of the group may be made, and that tax recovered from it, even while it is a subsidiary member.

Each of these subsections refers to a “sort” of loss which is provided for by s 701-1(4) to include a tax loss and a net capital loss.

119    It is convenient to speak of Div 701 as the “single entity rule” applying to the members of a consolidated group, as the heading to s 701-1 indicates, but it is important not to confuse whatever might be understood by such a label or description with what the section actually provides. The effect of Div 701 has been described as creating a statutory fiction but it may be more helpful, and more accurate, to describe its effect as a statutory direction concerned with the calculation of a composite liability. The statutory direction in s 701-1(1) is not that a subsidiary of a consolidated group is to be treated as non-existent, or that it ceases to be a taxpayer or that it does not derive or make assessable income or gains, or does not incur losses or outgoings. The statutory direction, rather, contemplates the continued existence of a subsidiary of a consolidated group but directs that for the limited purposes of determining “liability” or “losses” of the members of the group, the subsidiary is to be treated as part of the head company. The head company, for its part, is no longer to be treated as if it were a separate company because it must, for the mechanical purposes of working out liability and losses, be taken to include all of the parts of the consolidated group. The requirement that the subsidiary is to be taken to be part of a composite whole is an indication of a statutory direction that the parts continue to exist as parts of the composite whole, and that their individual portions of income and gains, or losses and outgoings, will be taken into account in the calculation of the aggregated composite whole. The identification of the purposes for requiring that the subsidiary be taken to be part of the head company, namely for working out the liability and losses of the head company and of the subsidiary, is another indication that each continues to exist and to derive or make assessable income and gains, and to incur or to make deductible losses and outgoings, because it will be those individually derived or incurred by each of the separate parts of the whole which, after derivation or incurrence by them individually, will be taken into account in working out the head company’s liability or loss. Division 701 does not alter the points of derivation or incurrence (or other such relevant fiscal events) which arise by force of the 1997 Act or of the 1936 Act or by general principle. The liability or loss of the head company to be worked out as required by s 701-1 contemplates that there have been fiscal events by the group members. The function of the individual group members in the working out required by Div 701 is for their individual fiscal amounts to be taken into account in the calculation of the one final composite liability or loss of the whole through the head company. The single entity rule is a statutory direction which removes the need, which had previously existed under the former grouping provisions, for separate returns and assessments, but the rule does not create a general statutory fiction that the individual parts of the consolidated group do not continue to have an existence or that their individual existence is not specifically relevant in the working out of the liability ultimately falling upon the head company. On the contrary, it is plain from s 701-1 itself that each continues to have a fiscal function by their individual contributions to the working out of the liability of the head company in its particular capacity as head company of the group.

120    There is, therefore, no reason in Div 701 of the 1997 Act to exclude from the operation of s 177F(1)(a) of the 1936 Act an ability for the Commissioner to determine that an amount be included in the assessable income of CCC if an amount had not been included in its assessable income by CCC having obtained a tax benefit in connection with a scheme to which Part IVA applies. Such an amount, by force of s 701-1, may come to form part of the liability of the head company but may do so by its inclusion first into the assessable income of the subsidiary in the same way that any item of income derived by the subsidiary in the ordinary course of its activities would come to form part of the liability of the head company worked out under Div 701. Section 177F(1)(a) empowers the Commissioner to determine that an amount of a tax benefit obtained by a “taxpayer” be included in the assessable income of a “taxpayer”. “Taxpayer” is defined in s 6(1) of the 1936 Act broadly to mean a person deriving income or deriving profits or gains of a capital nature. The making of a determination to a “taxpayer” within the meaning of s 177F(1) is a necessary procedural step in the application of Part IVA that does not itself create substantive liability: see WR Carpenter at [43]-[50]. The power to make a determination under s 177F(1)(a) is conditioned upon a tax benefit having been obtained, or which but for the section would be obtained, “by a taxpayer in connection with [the] scheme to which” Part IVA applies. The power to cancel a tax benefit by making a determination is conferred by the word “may” but, in this context, it does not confer upon the Commissioner any overriding discretion: Cumins v Federal Commissioner of Taxation [2007] ATC 4303, [41]; Federal Commissioner of Taxation v Sleight (2004) 136 FCR 211, [103]-[104]; WR Carpenter Holdings Pty Ltd v Federal Commissioner of Taxation (2007) 161 FCR 1, [48]-[51]. The Commissioner has a discretion about the quantum of a tax benefit to determine (see Federal Commissioner of Taxation v Sleight (2004) 136 FCR 211, [114]) but the section otherwise proceeds upon objective facts and conclusions: Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359, 382. The liability arising by application of Part IVA, does so, if at all, by the Commissioner “giving effect” to the determination by the exercise of such assessing, or other relevant, power conferred upon him elsewhere.

121    CCC derived the relevant profits or gains from the sale of the agricultural assets to Baldy Bay Pty Ltd in February 2008. It was the subsidiary, not the head company, which entered into the contract which gave rise to the fiscal consequences to which Div 701 applies. The fiscal character and consequences of the sale for the group are given to it by the subsidiary, and it is the subsidiary as an entity (rather than its assessable income or losses) which by s 701-1 is taken to be “part of” the head company of the group. In other words, the provisions assume, as will be the fact, that it is the subsidiary that acts in the ordinary way and that it will attract the operation of the ordinary taxing provisions, but that the subsidiary is to be taken to be part of the group for the purposes of working out liability and losses. The amount determined by the Commissioner to be included in the assessable income of CCC is no more than the substitution of the amount which would otherwise have been included in the assessable income of CCC and which is required to be taken into account when CCC is taken to be part of CPH as the head company in accordance with Div 701. The provisions of Div 701, relevantly, do not deem derivation (or corresponding losses or outgoings) to be taken to be those of the head company. It may be that CCC is not to be considered as a separate entity for the purposes described in s 701-1, but it must, at least, be considered to be a “part of” the head company and, in that capacity, to have its individual fiscal components taken into account in working out the ultimate liability of the group through the head company in its capacity as head company.

122    A determination to CCC by the Commissioner to include an amount of assessable income is consistent with s 701-1 so construed. The consequences for the liability of the group as a whole of the inclusion of an amount in the assessable income of a part of the group is a separate, and subsequent, question. The ability of the Commissioner to determine that an amount be included in the assessable income of the relevant part of a group is no more than the statutory mechanism to do by administrative action what would have occurred, and which ordinarily does occur, had the event by a subsidiary given rise to assessable income which needed subsequently to be taken into account to work out the liability of the head company. In the ordinary case where Part IVA has no application, the inclusion of amounts of assessable income, or the allowance of deductions, occur upon transactions by force of the legislation without the need for administrative action. Part IVA, in contrast, enables the Commissioner to undo the ordinary operation of the taxing provisions: s 177F provides the mechanism for the Commissioner (a) to deem amounts to be included as assessable income (or for amounts to be excluded as deductions, losses or credits where relevant), and (b) to exercise the other powers given by other provisions (including the powers of assessment in ss 166, 168 and 169 of the 1936 Act) to “give effect” to the determination. The determination in this case to CCC, therefore, takes the place (for the purposes of Part IVA) of the ordinary provisions by permitting inclusions or disallowances to CCC (whatever may then be required by Div 701 for the purpose of working out liability).

123    The conclusion that the Commissioner may, as a matter of power, make a determination directed to a subsidiary of a consolidated group is consistent with the conclusions reached at first instance in Macquarie Bank and by the Full Court on appeal. At first instance Edmonds J said at [51]:

There was considerable argument from both sides of the bar table on the issue of the authority of the Commissioner to make this determination. For the applicants it was said that even if Mongoose was a ‘taxpayer’ as defined by s 6(1) of the 1936 Act, it was not capable of obtaining a tax benefit, at least one comprising its non-derivation of assessable income because, for the purpose of determining its liability to income tax, it was deemed not to be a separate entity and events relating to it were deemed to occur in relation to MBL, not Mongoose. Put another way, after Mongoose joined the MBL consolidated group, even if it was a ‘taxpayer’ as defined, it was not liable to be assessed as a ‘taxpayer’, viz, ‘a person deriving income or deriving profits or gains of a capital nature’. For the Commissioner it was said that once it was accepted that Mongoose is a ‘taxpayer’ as defined, s 177F authorised the making of a determination to include an amount in its assessable income in the circumstances contemplated by the section; that it could not be assessed on such income, a matter the Commissioner disputed, was beside the point. While not actually deciding this point because I am of the view, for other and better reasons detailed below, that the Commissioner’s primary and secondary positions cannot be sustained, I incline to the view that the Commissioner’s view on this issue may be correct and that the Mongoose determination is authorised by s 177F. After all, the determination is made on the hypothesis that at the time Mongoose sold the Minara shares it was not a subsidiary member of the MBL consolidated group and on that hypothesis Mongoose was certainly capable of deriving assessable income and, in consequence, capable of obtaining a tax benefit by its non-derivation.

The members of the Full Court also concluded that a subsidiary in a consolidated group remained a taxpayer within the meaning of Part IVA notwithstanding the fact of consolidation and operation of the single entity rule. Middleton and Robertson JJ said at [131]:

Section 177A(1) provides that a “taxpayer” as referred to in Pt IVA “includes a taxpayer in the capacity of trustee”. The core definition of “taxpayer” is found in s 6(1) of the 1936 Act, where the word is defined as “a person deriving income or deriving profits or gains of a capital nature”. As was accurately conceded by the respondents in their submissions, “most if not all active subsidiary members of a consolidated group will in fact receive income or derive gains, and — Part 3-90 apart — will be ‘taxpayers’”. We have no trouble finding that Mongoose is technically a “taxpayer” insofar as the s 177A definition goes. It is at the next stage of the inquiry — when seeking to carry that conclusion forward — that conceptual complications arise.

Emmett J similarly concluded at [39]-[40] that the subsidiary in a consolidated group remained a taxpayer for the purposes of the application of Part IVA. The majority in the Full Court, and Edmonds J at first instance, however, went on to conclude that the assessments in question were not authorised by reason of Div 701. It may be useful, therefore, to consider the reasoning in Macquarie Bank in the context of the second parts of the first two questions posed for the Court, namely whether Div 701 prevents the Commissioner from giving effect to a determination (whether made to a subsidiary or to the head company) by the issue of an assessment to the head company.

124    The second part of the first question posed for the Court’s determination is whether a determination made to CCC can be given effect to by the making of an assessment to CPH. In Macquarie Bank Edmonds J at first instance, and Middleton and Robertson JJ on appeal to the Full Court, considered that an assessment could not be issued to a head company where the tax benefit had been obtained by the subsidiary. Edmonds J reached that conclusion on the basis that the assessment to the head company could not be said to be “giving effect to” the determination because the assessment would not be “factually consistent with the hypothesis upon which the [subsidiary’s] determination [was] predicated”. His Honour said at [61]:

Even if it is possible and permissible in certain limited circumstances to give effect to a determination to include an amount in the assessable income of one taxpayer by the issue of an assessment including the amount in the assessable income of a different taxpayer, and that one of those limited circumstances may include the issue of an assessment including an amount in the assessable income of a head company of a consolidated group to give effect to a determination to include that amount in the assessable income of a subsidiary member of that group, the present case is not one of them. In my view, any assessment to give effect to an anterior determination to include an amount in the assessable income of a taxpayer must be factually consistent with the hypothesis upon which that determination is predicated, whether the assessment is issued to the taxpayer referred to in the determination or a different taxpayer. The MBL amended assessment is not factually consistent with the hypothesis upon which the Mongoose determination is predicated – that Mongoose sold the Minara shares otherwise than as a subsidiary member of the MBL consolidated group – and it follows, in my view, that the MBL amended assessment cannot, and does not, give effect to the Mongoose determination.

In contrast, but to the same effect, the majority on appeal reasoned that the subsidiary, albeit technically a “taxpayer”, could not be “directly assessed” for the purposes of Part IVA because, as their Honours said at [135], the subsidiary of a consolidated group is “deemed not to have a separate existence” for the purposes required for the application of Part IVA. Emmett J, in dissent, reasoned at [33]-[34] that there was “no reason why a determination issued to one taxpayer cannot be given effect to by issuing an assessment or an amended assessment to another taxpayer”, and that the “relationship between the head company of a consolidated group and a subsidiary member of that group, being the relationship created by the single entity rule in s 701-1 of the 1997 Act, [was] a particular example of circumstances where a determination to one taxpayer may be given effect to by the issue of an assessment to another taxpayer”.

125    The Commissioner challenges the decision in Macquarie Bank and contends that the decision of the majority was manifestly or plainly wrong: Telstra Corporation Ltd v Treloar (2000) 102 FCR 595, 602-3; Nguyen v Nguyen (1990) 169 CLR 245, 269. In my view the decision of the majority in Macquarie Bank was manifestly or plainly wrong and should not be followed. The decision, in my respectful opinion, rests upon a mistaken view of the operation of s 701-1. Their Honours construed Part 3-90 to deem a subsidiary of a consolidated group “not to have a separate existence” for purposes beyond those in s 701-1(2) and (3). Their Honours construed Part 3-90 to prevent a subsidiary of a consolidated group from being “directly assessed”, in the sense that the subsidiary could not have assessable income, rather than construing Div 701 as providing the mechanism by which the separate parts of a consolidated group were made liable through the head company in its capacity as head company of a group. Their Honours, with respect, failed to consider s 701-1(1) to require that a subsidiary in a consolidated group continued to exist and was required to be taken into account as a part of the group and not as if it had ceased to exist, or was not part of the group, when working out the liability of the group in accordance with s 701-1. Similarly their Honours failed to consider that s 701-1(1) also required that the head company be taken to include the subsidiaries as part of the head company. The analysis which their Honours ought to have undertaken, as was undertaken at first instance by Edmonds J, was first to have asked whether the provisions of Part IVA, on their terms, authorised the making of a determination to the subsidiary. The answer to that question depended upon whether the subsidiary was, in light of operative terms of “the single entity rule” in Div 701, precluded from having included in the subsidiary’s assessable income the amount determined to be the tax benefit as a taxpayer within the meaning of s 177F(1) in Part IVA of the 1936 Act. The answer to that question depended in part upon the fact that Div 701 directed that working out the liability of the head company required the subsidiaries of the group to be taken to be parts (with operative effects) of the group. Once that question was answered it would then be relevant to ask whether the raising of an assessment to the head company would “give effect to” the determination made to the subsidiary. In answering that question it would also be necessary to consider that Div 701 required that the subsidiary be taken to be part of the consolidated group and not as if it had ceased to exist. Their Honours did not consider whether an assessment to the head company would give effect to a determination made to the subsidiary within the meaning of s 177F(1). The reasons of the majority have two strands; namely, (a) that the assessment to the subsidiary is an impermissible step in light of their Honours construction of Part 3-90 of the 1997 Act (see at [132]) and, (b) that the assessment to the head company could not be sustained because it could not have obtained the tax benefit hypothesized by the Commissioner (see at [158]-[166]). At [160] their Honours had reasoned that there needed to “be a sufficient connection between the taxpayer in question, their [sic] assessable income and the tax benefit that has not been included therein (but would or might reasonably be expected to have been included if the scheme had not been entered into or carried out)”. Neither strand dealt with whether an assessment to the head company could give effect to a determination if validly made to either a subsidiary or the head company. Neither strand allowed for the subsidiary to have a role, as “part of” the consolidated group, in working out the liability of the head company in its capacity, not as a separate company, but as the head company of the consolidated group. The final liability may fall upon the head company by force of Div 701 but it does so only by taking into account the amounts otherwise assessable or allowable of, and through, the parts which make up the consolidated group as an aggregated whole.

126    What must be asked to answer the second part of the first question posed for the Court is whether, in light of the terms of Div 701, the assessment to CPH gives effect to the determination to CCC. Part IVA provides that the Commissioner may make determinations in relation to a “taxpayer” and is given a broad power “to give effect” to such determinations by s 177F(1). The power is conferred in broad terms to accommodate, no doubt, the many circumstances in which a tax benefit obtained by a taxpayer may require the Commissioner to do something other than raising an assessment against the taxpayer who had obtained the tax benefit. The way s 177F(1) operates is to permit the Commissioner to add amounts to, or remove amounts from, a taxpayer’s taxable income that would in the usual case be added or removed by force of the general provisions. The section assumes that the powers otherwise available to the Commissioner remain available to “give effect” to what is determined. The section assumes, in other words, that the ordinary provisions of assessment are available, in addition to the provisions in s 177F(3), for the Commissioner to give effect to a determination.

127    The general taxing provisions ordinarily operate by their own force without administrative action with an assessment being the trigger by which amounts brought to tax are made payable. Part IVA is an exception to that general scheme by permitting the fiscal obligation to arise by the Commissioner first making a determination under s 177F. It is not the determination, however, that will cause an amount to be payable. It is the power in s 177F to “give effect” to the determination which permits the Commissioner to rely upon other powers to raise an assessment (Commissioner of Taxation v Jackson (1990) 27 FCR 1) and to take any other action permitted to the Commissioner under other provisions. There is no reason to confine the breadth of the power to “give effect” to a determination beyond the requirement that what is done by the Commissioner to give effect to a determination be “appropriate and adapted” to that end. The relationship created by the single entity rule in Div 701 of the 1997 Act is, as Emmett J observed at [34], “a particular example of circumstances where a determination to one taxpayer may be given effect to by the issue of an assessment to another taxpayer”. That is because to include an amount of income in the assessment of a subsidiary of a consolidated group requires that its liability be worked out as a part of that of the group. The requirement in s 701-1 that CCC, as a subsidiary member of the CPH consolidated group, be taken to be part of that group requires that the tax benefit determined by the Commissioner to be included in the assessable income of CCC be assessed to CPH as part of the liability of the head company. Division 701 does not provide, or require, that CCC does not have, or does not have added under Part IVA, assessable income, but, rather, that whatever be the assessable income of CCC, it be taken into account in working out the liability of CPH and CCC as parts of the group. That view accords with the conclusion of Emmett J in Macquarie Bank at [46].

128    A different view from that expressed by Emmett J had been expressed by Edmonds J at first instance in Macquarie Bank. Edmonds J reasoned that an assessment to the head company would not “give effect” to a determination made to the subsidiary. At [54] his Honour said:

Part IVA does not authorise the Commissioner to issue an assessment including an amount in the assessable income of a subsidiary member of a consolidated group. The Commissioner’s s 177F power to take ‘such action as he considers necessary’ is not at large. It is limited to action which gives effect to a determination. A determination under s 177F only informs the calculation of a taxpayer’s assessable income on a particular hypothesis: it does not and cannot authorise the exclusion of a company from a consolidated group in fact so as to constitute it an entity liable to tax, nor authorise the Commissioner to disregard s 701-1 or s 701-30 and assess the subsidiary member in disregard of those provisions.

His Honour went on to explain at [61] (quoted above) that an assessment to the head company in that case could not, and did not, “give effect” to the determination made to the subsidiary member in the consolidated group because the assessment was “not factually consistent with the hypothesis upon which the [subsidiary’s] determination [was] predicated”. The contrary view expressed by Emmett J on appeal at [33], in contrast, was that the power in s 177F was wide enough to permit the Commissioner to give effect to a determination to one taxpayer by the issue of an assessment to another taxpayer: see also McCutcheon v Federal Commissioner of Taxation (2008) 168 FCR 149, [33]-[35]. His Honour reasoned, as mentioned above, that the specific relationship between the head company of the consolidated group and a subsidiary member of that group was a particular example of circumstances where a determination to one taxpayer may be given effect to by the issue of an assessment to another taxpayer. At [33]-[34] his Honour said:

33    There is no reason why a determination issued to one taxpayer cannot be given effect to by issuing an assessment or an amended assessment to another taxpayer. There is no limitation to that effect in the words of s 177F and there is no reason to imply such a limitation. The Commissioner’s power and obligation to take such action as he considers necessary to give effect to a determination are limited only by what the Commissioner could reasonably consider necessary to give effect to a determination. Necessary must be understood as meaning clearly appropriate and adapted for (see Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47 at 56). It may be that, in the usual case, giving effect to a determination will result in the issue of an assessment or an amended assessment to the taxpayer that is the subject of the determination. However, that need not always be so. There is no reason why the issue of an assessment to one taxpayer may be appropriate and adapted for giving effect to a determination issued to a different taxpayer, having regard to the relationship between the two taxpayers (see, for example, McCutcheon v Federal Commissioner of Taxation (2008) 168 FCR 149 at [33]-[35]).

34    The relationship between the head company of a consolidated group and a subsidiary member of that group, being the relationship created by the single entity rule in s 701-1 of the 1997 Act, is a particular example of circumstances where a determination to one taxpayer may be given effect to by the issue of an assessment to another taxpayer. By s 701-1, a subsidiary member of the consolidated group is, for certain purposes, to be taken to be part of the head company of the group, rather than a separate entity. One of those purposes is the working out of the amount of the entity’s liability, if any, for income tax, as provided in s 701(3)(a). That is to say, where a subsidiary member of a consolidated group has an income tax liability, it is to be taken to be the liability of the head company and the issue of an assessment to the head company may well be appropriate and adapted for giving effect to the determination issued to the subsidiary member, as is the case in the present circumstances. So long as action taken by the Commissioner can be reasonably considered to be appropriate and adapted to giving effect to the determination, there is no other restriction to be read into s 177F as to what the Commissioner can do.

I respectfully agree with and adopt the reasoning and analysis of Emmett J. The power conferred upon the Commissioner in s 177F(1) is expressed in broad terms. It is, in particular, a power to give effect to a determination which, in this instance, works upon the hypothesis that a member of a consolidated group has obtained a tax benefit in connection with a scheme. An assessment to the head company, in this instance CPH, is apt to give effect to a determination that one of the subsidiaries in the group has had included in its assessable income an amount which had been excluded from its income by reason of the scheme in connection with which CCC obtained the tax benefit. An assessment to CPH in this case is, to adopt the words used by Emmett J at [33], “appropriate and adapted for giving effect to a determination issued” to CCC (especially where that which produced the tax benefit was so intimately involved with the creation and joining of the consolidated group which were necessarily steps for the tax benefit to be obtained by the group member). The assessment to CPH, in its capacity as the head company of a consolidated group, in my view, is not factually inconsistent with the hypothesis upon which the determination was predicated because the assessment would be to CPH as the group entity which is made liable for the determination which was made to a member of the group. Accordingly, the answer to the first question is “no”; in other words, that the Commissioner is permitted to make a determination to CCC and to give effect to that determination by an assessment to CPH consistently with the provisions in Div 701 of the 1997 Act.

129    The second question asks whether the provisions of Part IVA permit both the determination and the assessment to be made to CPH. In considering that question it is useful to bear in mind that the tax benefit said to have been obtained in this case is one which necessarily depended upon forming, and CCC joining, a consolidated group. In other words, that the tax benefit was obtained by the elements of a scheme which necessarily produced the consequence that CCC would not be liable for tax on the proceeds of its sale to Baldy Bay Pty Ltd, and on which (on the hypothesis of the scheme) CCC would have been liable had Part 3-90 (a) not effected a resetting of the taxed costs of CCC’s assets, (b) not produced the consequence that CCC would become a subsidiary member of a consolidated group of which CPH was the head entity and (c) not provided that the amount of the liability of CPH was to be worked out on the basis that CCC was part of CPH rather than a separate entity. The tax benefit thus identified is the non-inclusion of an amount in the assessable income not of CPH as a separate company but in its assessable income as a part of the CPH consolidated group of which CCC (that is to say, the group member which on the hypothesis in question obtained the tax benefit) is to be taken to be part. On that basis a determination to CPH, followed by an assessment to CPH, is consistent with both the provisions of Part IVA of the 1936 Act and of Div 701 of the 1997 Act.

130    The argument against a valid determination to CPH was that it could not be said that it had obtained a tax benefit in connection with the scheme because it would have been the subsidiary member which would have made the taxable gain but for the scheme. At first instance Edmonds J said in Macquarie Bank at [45]:

The Commissioner’s position with respect to which alternative he primarily relies on seemed to undergo a metamorphosis during the course of the hearing. At the outset, he seemed to place primary reliance on the MBL determination and the MBL amended assessment to give effect to the MBL determination. This is what one might expect where a subsidiary member of a consolidated group enters into a scheme to which s 177D applies: the Commissioner is authorised to make a determination under s 177F(1), but the authorised determination will be (in a para (a) case) one to include an amount in the assessable income of the head company, to which for tax assessment purposes the activities of the subsidiary member are, by s 701-1, attributed. However, it obviously became apparent to the Commissioner during the course of the hearing that, having regard to his identification of the counterfactual, upon which the tax benefit the subject of the MBL determination was predicated, namely, that Mongoose would have, or might reasonably be expected to have, sold the Minara shares otherwise than as a subsidiary member of the MBL consolidated group, MBL could never, and did not, obtain such a tax benefit from such a sale.

It is respectfully correct to conclude that the alternative postulate of the arrangements entered into in question did not in fact, and could not in fact, have resulted in the head company in Macquarie Bank, or CPH in this case, obtaining a tax benefit in its separate capacity. Emmett J on appeal reasoned, however, that it was the effect of s 701-1 which permitted the issuing of a determination to the head company. At [46] his Honour said:

While Mongoose is a taxpayer for the purposes of determining whether it has assessable income, the effect of Pt 3-90 is to put Macquarie in the shoes of Mongoose. Certainly, Pt IVA must be construed and applied according to its terms. The question is whether the terms of Pt IVA apply to the facts and circumstances of the particular case. That question must be decided in the context of the way in which Pt 3-90 is clearly intended to operate. While Mongoose cannot be the subject of direct application of s 177C, the assessable income of Mongoose must be taken to have been assessable income of Macquarie. I consider that a tax benefit was obtained by Mongoose and that, if there were a Pt IVA scheme, then Macquarie, as the head company, would be the correct entity to whom the Commissioner would issue a determination and amended assessment.

In other words, although it is true in point of fact that CPH could never itself (as a separate entity) have obtained the tax benefit but for the scheme, the operation of Div 701 requires the subsidiary to be taken to be part of the head company for the purpose of working out their liability. The effect of Div 701 is, in other words, to put CPH “in the shoes of” the subsidiary for that purpose. On this reasoning the relevant inquiry may more practically be understood by posing the question as being whether that part of the head company which formed part of the consolidated group obtained the tax benefit, rather than whether the head company without the relevant subsidiary had obtained the tax benefit. On that reasoning a determination to CPH can be seen as the formal mechanism contemplated by s 701-1 to include in the liability of the group the tax benefit obtained by a member of the group, namely by CCC. In this way the determination made to the head company (not as a separate company but in its capacity as the head company which is taken to include all of its parts) is the means by which the tax benefit is included in the relevant part of the consolidated group. To characterise such a determination as if it were a determination to include an amount of assessable income to CPH independently of CCC would not give effect to s 701-1. A determination to CPH in its capacity as the head company of the group is consistent with the purposes in s 701-1(2) and (3) of “working out” the liability and losses of the head company as the aggregate of the parts. The assessment to CPH following the determination to CPH would give effect to the determination because in each case CPH, to adopt the words of Emmett J in Macquarie Bank at [46], is relevantly put by Part 3-90 “in the shoes of” the subsidiary. To see either the determination or the assessment to CPH as if CPH was not a group which was taken to include CCC would not give effect to Div 701. Accordingly, I would answer “no” to question 2; that is, that the provisions of Div 701 do not prevent the Commissioner from making the determination to CPH and then raising the assessment to CPH.

131    The third question posed for the Court does not depend upon a consideration of the correctness of the decision in Macquarie Bank but also depends upon a construction of the interrelationship between Part IVA of the 1936 Act and Div 701 of the 1997 Act. It does not, however, concern the determinations and assessments already considered, but the alternative determinations to CCC and an alternative assessment made to CCC on 14 March 2014 in reliance upon ss 168 and 169 of the 1936 Act. The Commissioner is not precluded from raising alternative assessments upon the same income but may not recover upon each: Richardson v Federal Commissioner of Taxation (1932) 48 CLR 192; Lever Bros Pty Ltd v Federal Commissioner of Taxation (1948) 77 CLR 78; Cadbury-Fry-Pascall Pty Ltd v Federal Commissioner of Taxation (1944) 70 CLR 362.

132    CCC joined as a member of the CPH consolidated group with effect from 1 January 2008. It had lodged a separate tax return for that part of the relevant year of income before joining the CPH consolidated group. On 31 March 2009 it had lodged a tax return for the period between 1 July 2007 and 31 December 2007 which, pursuant to s 166A of the 1936 Act, deemed the Commissioner to have made and served an assessment to CCC in respect of its taxable income before joining the CPH consolidated group. CCC did not lodge a separate tax return and was not separately assessed for any period after 1 January 2008.

133    The Commissioner made alternative determinations under s 177F(1)(a) on 13 March 2014 that CCC had obtained tax benefits referable to the capital gain made from the sale of the land and the non-inclusion of assessable income from the sale of trading stock during the period 1 January 2008 to 30 June 2008. The following day, on 14 March 2014, the Commissioner took action to give effect to the alternative determinations by issuing an assessment to CCC in reliance upon s 168 and, alternatively, upon s 169 of the 1936 Act. The relevant issue raised by the third question is, therefore, whether Div 701 prevented the Commissioner from making the alternative determinations and alternative assessment. The reasons for concluding above that Div 701 did not prevent determinations to CCC would also apply in answer to whether the Commissioner was prevented from making the alternative determinations to CCC and will not be repeated. The next issue to consider, therefore, is whether Div 701 prevented the Commissioner from making assessments to CCC under ss 168 or 169 to give effect to the determinations to CCC.

134    The powers in ss 168 and 169 are to assess a taxpayer for the liability which arises by operation of other provisions, including Part IVA. The assessing sections provide:

168    Special assessment

(1)    The Commissioner may at any time during any year, or after its expiration, make an assessment of:

(a)    the taxable income derived (or that there is no taxable income) in that year or any part of it by any taxpayer; and

(b)    the tax payable thereon (or that no tax is payable); and

(c)    the total of the taxpayer's tax offset refunds for that year or that part of it (or that the taxpayer can get no such refunds).

(2)    Where the income, in respect of which such an assessment is made, is derived in a period 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.

169    Assessments on all persons liable to tax

Where under this Act any person is liable to pay tax (including a nil liability), the Commissioner may make an assessment of the amount of such tax (or an assessment that no tax is payable).

The Commissioner’s power to raise assessments under ss 168 and 169 was considered in Deputy Commissioner of Taxation v Jones (1999) 86 FCR 282 where the Court said at [21]-[22]:

21    There has been little discussion in the cases as to the application of s 168. No doubt the section can be applied in a variety of circumstances. It may be necessary for the Commissioner to assess under the section in respect of a taxpayer who dies, where the liability to income tax of the deceased person comes to an end with death and a new liability arises thereafter upon the trustees of the estate. It may be necessary to assess a taxpayer who, part way through the year of income ceases to be a resident of Australia and the Commissioner wishes to ensure that tax is collected before departure. It may also be used where a company is dissolved part way through the year of income. These are but examples. They are not intended to be exhaustive.

22    It may be that the right of the Commissioner to assess under s 168 like the right to assess under s 169 is separate and distinct from the right to assess under s 166: cf Lever Bros Pty Ltd v Commissioner of Taxation (Cth) (1948) 77 CLR 78 at 83 per Williams J. It is unnecessary here to decide that. What is important is that s 168 authorises assessments of income tax to be made in respect of part only of a year of income. There is no reason either in principle or language to confine s 168 to a power to assess once only in respect of a particular financial year (that is to say in respect of only one portion of that year), although the section would clearly authorise such a course. The singular where used in the section can be converted to the plural without difficulty. Put in another way, the Commissioner is authorised by s 168 to assess a taxpayer who has become bankrupt in respect of the taxable income of that taxpayer in that part of the financial year which ends with the bankruptcy and separately in respect of that part of the taxable income of that taxpayer which covers the period from the bankruptcy to the end of the year of income.

The power of assessment conferred by these provisions operates to impose a liability created by the general provisions, including Part IVA. Part IVA does not itself provide a separate power to assess someone to tax, but s 177F(1) contemplates that the Commissioner’s powers of assessment may be exercised to give effect to a determination (subject, of course to any limitations or exclusions which the powers invoked may have).

135    The need for the Commissioner to rely upon either s 168 or s 169 arises only if the Commissioner is precluded by Div 701 from making the determinations and assessments as contemplated by the first two questions. Part IVA must be applied according to its terms (Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404, 414; Federal Commissioner of Taxation v Hart (2004) 217 CLR 216, 239 [51]; Mills v Federal Commissioner of Taxation (2002) 250 CLR 191, 200 [58]) and by, s 177B, overrides any provisions to the contrary. Section 177B provides that nothing in the provisions in the Act, apart from an exception not presently relevant, shall be taken to limit its operation. The “Act” referred to in this provision is made by the definition in s 6(1) to include the 1997 Act which includes Part 3-90 and Div 701. Section 701-85 in Part 3-90, in turn, also provides that the provisions of Div 701 are subject to any provision that so requires either expressly or impliedly. Division 701, therefore, does not prevent the Commissioner from making determinations to CCC under s 177F(1), and the power to give effect to such determinations by assessments to CCC under the assessing powers in ss 168 and 169 are within the power of s 177F(1) as a means by which determinations to CCC may be given effect by assessments directly to CCC. The operation of ss 168 and 169, through s 177F, override any contrary provision in Div 701 because of s 177B of the 1936 Act and s 701-85 of the 1997 Act. Accordingly, I would also answer “no” to question 3; that is, that s 701 does not prevent the Commissioner from making alternative determinations and assessments.

Associate:

Dated:    7 May 2015

REASONS FOR JUDGMENT

DAVIES J:

136    I have had the advantage of reading a draft of the joint reasons of Edmonds and Gordon JJ and a draft of the judgment of Pagone J. I agree with the reasons and conclusions of Pagone J that all three questions should be answered “no” and make some additional observations.

137    The decision of the majority in Macquarie (Full Court) does not give effect to the provisions of Div 701 of the 1997 Act in the context of the application of Pt IVA of the 1936 Act. The majority concluded that the subsidiary company in that case (Mongoose) could not be the subject of direct application of either s 177C or s 177F. Their Honours reasoned that whilst Mongoose was a “taxpayer” for the purposes of Pt IVA, a determination under s 177F could not be made to it because, by virtue of Pt 3-90, the subsidiary was not liable to be assessed. Their Honours said at [133]:

However, it is one thing to conclude that, as a subsidiary, Mongoose technically satisfies the broad definition of “taxpayer” for the purpose of Pt IVA. It is a further – and we consider, impermissible – step to say that as a result, Mongoose in and of itself also has distinct assessable income for the purpose of the application of the provisions of Pt IVA (in particular, s 177F). In this regard, we agree with the respondents’ submissions to the effect that although it may technically have been a “taxpayer”, Mongoose was not liable to be directly assessed as such.

Their Honours also reasoned that Mongoose could not be the subject of the direct application of s 177C because, by virtue of Pt 3-90, Mongoose did not have assessable income. At [166], their Honours stated:

… we do not think it permissible simply to assume that Mongoose is the relevant taxpayer for the purpose of [the tax benefit] analysis, as the primary judge did for the purpose of his Pt IVA analysis. By virtue of the operation of Pt 3-90, as a subsidiary, Mongoose does not have “assessable income” in and of itself, and hence cannot be the subject of direct application of s 177C, for the same reasons that we previously concluded that it cannot be the direct subject of a determination under s 177F.

In each instance, their Honours reasoned that the effect of the single entity rule in s 701-1(1) was to prevent the subsidiary from having a role in the assessability of the consolidated group: at [133] that s 701-1(1) prevented the subsidiary from having a tax benefit included in assessable income by s 177F; and at [166] that s 701-1(1) prevented the subsidiary from having assessable income for any purpose of the application of Pt IVA including the determination of the existence of tax benefit within the terms of s 177C.

138    In each case, their Honours’ reasoning failed to treat the subsidiary as “part of” the consolidated group. The reasoning assumed, rather, that the head company in a group is to be treated as if it were a separate company without the subsidiary being identifiable as part of it for any fiscal purpose. Thus at [164] their Honours explained why the alternate postulate relied on by the Commissioner for the purposes of the s 177C analysis meant that that the Commissioner had no power to make the determination to, or to assess, the head company (Macquarie). The scheme and tax benefit relied on by the Commissioner in that case were similar to the present case. The scheme identified by the Commissioner also included the step of consolidation (step (d)) and it was uncontroversial that, in the absence of the scheme, the subsidiary member (Mongoose) would, or might reasonably be expected to, have sold its assets as an independent entity and not as a subsidiary member of a consolidated group. At [164], however, their Honours stated:

Step (d) represents the entry of Mongoose into the MBL consolidated group, as a wholly-owned subsidiary of MALLC. As the primary judge found, if the scheme had not been entered into or carried out, Mongoose would have sold the Minara shares under the Agency Proposal as an independent entity, and not as a subsidiary member of the MBL consolidated group. In those circumstances, the amount of the tax benefit – $318,507,469 – would not have been (and would not have reasonably been expected to be) included in MBL’s assessable income. Rather, under this counterfactual proposed by the Commissioner, the amount of the tax benefit would have been included in Mongoose’s assessable income in the absence of the scheme.

It may readily be accepted that Macquarie would not of itself, and indeed could not of itself, have derived assessable income from the sale by Mongoose of its shares, had the consolidated group not been formed. But s 701-1(1), as applied in the context of Pt IVA required Macquarie to be treated as including Mongoose as its part, not as if Mongoose was not included as its part. Once it is accepted that the effect of s 701-(1) is to require that the head company be taken to include each of its subsidiaries as its parts, it follows that, for the purposes of Pt IVA, the head company would have derived assessable income. Section 701-1(1) then requires the computation of the head company’s liability for income tax to take into account the tax consequences of the actions of the subsidiary companies as “parts” of the head company for the purposes of working out the head company’s tax liability on the group’s taxable income, so that the calculation of the head company’s taxable income would include any assessable income derived as the result of the actions of CCC giving rise to a liability under Pt IVA.

139    Their Honours’ reasoning that the effect of the single entity rule in s 701-1(1) was to prevent Mongoose from being the relevant taxpayer for the purpose of the tax benefit analysis under s 177C also impermissibly used the single entity rule beyond the purposes for which it was introduced. In considering the effect and operation of s 701(1), it is important to bear in mind that the single entity rule only applies for the purpose of working out the amount of the head company’s tax liability or loss (as the case may be) (s 701-1(2)), and the amount of an entity’s income tax liability or loss (as the case may be), where that entity is not a subsidiary member for the whole of an income year (s 701-1(3); s 701-1(30)). This is made clear by the express words of s 701-1(1) which state that subsidiary members 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. The application of the single entity rule in s 701-1(1) does not extend beyond those purposes and cannot apply outside those purposes: Commissioner of Taxation of the Commonwealth of Australia v Comber (1986) 10 FCR 88 at 96 [25]. Section 701-1(1) has no application in the context of the application of s 177C as the existence of a tax benefit does not, of itself, create any liability. The liability under Pt IVA is only created by a determination made under s 177F and an assessment giving effect to that determination. As the subsidiary is taken to be part of the head company for purpose of working out the head company’s income tax liability, a determination under s 177F to the head company and assessment to that head company gives effect to Div 701 (see question 2).

140    Further, the approach taken by the majority in Macquarie (Full Court) to the application of s 177C does not give effect to the operation that section. The operation of s 177C in the application of Pt IVA is to identify what is referred to in ss 177D and 177F as “the obtaining by a taxpayer of a tax benefit in connection with a scheme”. Section 177C directs an inquiry into what would have occurred, or might reasonably be expected to have occurred, had the scheme not been entered into or carried out. That inquiry is to be approached on the basis that the scheme was not entered into or carried out. Where the scheme includes the step of joining the consolidated group, the fact of membership of the consolidated group is to be ignored for the purpose of the s 177C analysis. In Macquarie (Full Court), as in this case, the joining of the group formed part of the scheme. Also in Macquarie (Full Court), as in this case, the alternate postulate relied on by the Commissioner was that the subsidiary member would have sold its assets as an independent and separate company and derived a taxable gain. On that alternate postulate, the operation of Div 701 does not require that s 177C be applied in the identification of a tax benefit by the subsidiary as if the subsidiary did not have an independent existence but was part of the head company. In my respectful opinion, the majority in Macquarie (Full Court) were therefore plainly wrong to hold that by virtue of the operation of Pt 3-90 the subsidiary cannot be the subject of direct application of the s 177C analysis, and plainly wrong to hold that by virtue of the operation of Pt 3-90 a determination could not be made to the subsidiary and given effect to by an assessment to the head company (see question 1). At [165]-[166] their Honours stated:

… Rather, under this counterfactual proposed by the Commissioner, the amount of the tax benefit would have been included in Mongoose’s assessable income in the absence of the scheme.

This inconsistency was the gravamen of the primary judge’s comments at [45] of his reasons for judgment (as previously alluded to). We think that this issue is fatal to the Commissioner’s submission that a tax benefit was obtained in this case, as the way in which the Commissioner has pleaded the scheme and its corresponding counterfactual clashes with both the manner in which Pt 3-90 consolidated groups are to be assessed under Pt IVA (namely, by making determinations in respect of, and issuing assessments directly to, the head company), and the clear wording of s 177C. We do not think that the words of that section offer any scope to substitute a different taxpayer purely for the purpose of that part of the analysis that relates to what would or might have been included in a taxpayer’s assessable income if the scheme had not been entered into or carried out.

With respect, s 701-1(1) does not require that s 177C be applied on the basis that the subsidiary no longer exists. Rather, s 701-1(1) operates on the assumption that each of the members of the consolidated group continue to have a separate and independent existence other than for the determination of the aggregate imposition of liability. Once it is understood that the effect of Div 701 is to require the subsidiary company to be taken to be part of the head company for the purposes of assessment, it is consistent with Div 701 to assess the head company where the determination is made to the subsidiary company.

141    The provisions construed in this way operate harmoniously and permit a determination either to the subsidiary or to the head company. In each case, there could then be an assessment to the head company which, for the purposes of assessment, is deemed to include the subsidiary as part of the head company. It is only necessary for the Commissioner to rely upon ss 168 and 169 (see question 3) if Div 701 and Pt IVA do not operate in the harmonious way that has been discussed. In that event, however, the terms of Pt IVA have paramount force by virtue of s 177B of the 1936 Act and s 701-85 of the 1997 Act.

Associate:

Dated:    7 May 2015