Commonwealth Bank of Australia v Deputy Commissioner of Taxation
[2009] FCA 226
•13 March 2009
FEDERAL COURT OF AUSTRALIA
Commonwealth Bank of Australia v Deputy Commissioner of Taxation [2009] FCA 226
TAXATION – Bank Integration Act 1999 (Cth) – Application of s 22(3) – Partnership between transferring and receiving bank – Whether partnership continues after integration – Meaning of “continuity of any partnership”
Bank Integration Act 1991 (Cth)
Commonwealth Banks Act 1959 (Cth)
Income Tax Assessment Act 1936 (Cth)Commissioner of Taxation v Comber 10 FCR 88
East Finchley Pty Ltd v Federal Commissioner of Taxation (1989) 90 ALR 457
Herbert Adams Proprietary Limited v Federal Commissioner of Taxation (1932) 47 CLR 222SJ Mackie Pty Ltd v Dalziell Medical Practice Pty Ltd [1989] 2 Qd R 87
COMMONWEALTH BANK OF AUSTRALIA v DEPUTY COMMISSIONER OF TAXATION
NSD 532 of 2008
STONE J
13 MARCH 2009
SYDNEY
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
NSD 532 of 2008
BETWEEN: COMMONWEALTH BANK OF AUSTRALIA
ApplicantAND: DEPUTY COMMISSIONER OF TAXATION
Respondent
JUDGE:
STONE J
DATE OF ORDER:
13 MARCH 2009
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.The application be dismissed with costs.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using eSearch on the Court’s website.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
NSD 532 of 2008
BETWEEN: COMMONWEALTH BANK OF AUSTRALIA
ApplicantAND: DEPUTY COMMISSIONER OF TAXATION
Respondent
JUDGE:
STONE J
DATE:
13 MARCH 2009
PLACE:
SYDNEY
REASONS FOR JUDGMENT
In this proceeding the Commonwealth Bank of Australia (Commonwealth Bank) appeals from a decision of the Deputy Commissioner of Taxation disallowing, in part, objections made by the Bank to the Commissioner's Notice of Assessment for the year ending 30 June 2003. The parties have filed an agreed statement of facts upon which they both rely. As there is no dispute as to the facts only a brief summary of the relevant facts is necessary.
Factual summary
The applicant was established in 1953 under the name of the Commonwealth Trading Bank of Australia. Its name was changed to the Commonwealth Bank of Australia in 1984. The Commonwealth Savings Bank of Australia (Savings Bank) was established in 1927 and remained a subsidiary of the Commonwealth Bank until 1 January 1993 (the succession day). On the succession day, by virtue of the Bank Integration Act 1991 (Cth), the Savings Bank was integrated with the Commonwealth Bank. As a result of that integration the Commonwealth Bank became the successor in law of the Savings Bank, all assets of the Savings Bank were vested in it, all liabilities of the Savings Bank became its liabilities and the Savings Bank ceased to exist. On the same day the provisions of the Commonwealth Banks Act 1959 (Cth) that created and governed the Savings Bank were repealed by s 31 of the Bank Integration Act.
At the time of the integration four partnerships existed between the Commonwealth Bank and the Savings Bank, who were the only members of those partnerships. The partnerships are described in more detail below; see [7]. It is a basic principle of partnership law that any change in membership destroys the existing partnership; SJ Mackie Pty Ltd v Dalziell Medical Practice Pty Ltd [1989] 2 Qd R 87. Accordingly, under the general law, those partnerships came to an end on integration as a consequence of the transfer of the Savings Bank’s assets and liabilities and it ceasing to exist. The applicant contends, however, that the effect of s 22(3) of the Bank Integration Act is that for taxation purposes the partnership has continued since the succession day. In 1993 s 22(3) provided:
Where a succession day is fixed for a receiving bank and the relevant transferring bank, then, for the purposes of the Income Tax Assessment Act 1936 nothing in this Act affects the continuity of any partnership in which a transferring bank was a partner immediately before the succession day.
The Commonwealth Bank acted on its understanding of s 22(3) in treating the relevant partnerships as having continued in existence since 1 January 1993. It submitted income-tax returns for the partnerships in which deductions for asset depreciation were claimed as though the partnerships continued in existence and as though the assets continued to be held as partnership assets. This approach continued until 1 July 2002 when a consolidated group, of which the Commonwealth Bank is the head company, was formed pursuant to the provisions of Part 3-90 of the Income Tax Assessment Act 1997 (Cth).
The consolidation provisions of Part 3-90 of the 1997 Act provide that where a partnership first becomes part of a consolidated group the value (or “tax cost”) of the partnership assets may be reset to market value. The effect may be that the market value of the partnership assets at the date of consolidation is greater than their written-down value, immediately before consolidation. Where this is so, the scope for depreciation deductions after consolidation will be greater than before consolidation.
Consistent with its approach to the partnerships since the succession day, the applicant treated the partnerships as being still in existence for income tax purposes on 1 July 2002 and therefore reset the “tax cost” of the underlying assets of the partnerships to the market value of those assets as at 1 July 2002. The effect was to entitle the applicant to a “step-up” in the tax cost of the assets for the purpose of claiming depreciation deductions in the 2003 income year and in future years. Accordingly, the applicant claimed depreciation deductions for the 2003 income year by reference to the market value of the partnership assets upon consolidation. The Commissioner rejected these deductions and issued an amended assessment. The applicant objected to the amended assessment and its objection was disallowed. The applicant now appeals from that objection decision.
The partnerships were entered into between the applicant and the Savings Bank in the period from 1985 to 1990 and were known as:
·The Camooweal Participation;
·the Allco Participation;
·the ANL Charterparty Participation; and
·the TAA (Comm) Leveraged Lease Participation.
The participation interests in the above partnerships were held as follows: for Camooweal and Allco, 99% by the Bank and 1% by the Savings Bank; for ANL Charterparty and TAA (Comm) Leveraged Lease, 1% by the Commonwealth Bank and 99% by the Savings Bank. The agreed statement of facts gives the closing written down value of the assets of each of the partnerships as at 30 June 2002 and their market value as at 1 July 2002. The figures are set out in the following table.
Partnership
Closing written down value at 30 June 2002
Market value at 1 July 2002
Camooweal
$4,142,828
$89,594,356
Allco
$0
$17,109,347
ANL Charterparty
$0
$13,227,513
TAA (Comm) Leveraged Lease
$0
$19,929,453
The disputed assessment
In its income-tax return for the year ending 30 June 2003, lodged on 5 May 2004, the Commonwealth Bank claimed capital allowance (depreciation) deductions only in respect of the Camooweal assets, the amount claimed being $1,118,563. By virtue of s 166A of the Income Tax Assessment Act 1936 (Cth) the respondent is deemed to have served a notice of assessment on the applicant on 5 May 2004. On 3 December 2007, the applicant objected against that assessment claiming that it was entitled to additional capital allowance deductions. It claimed that the tax cost of those assets should have been reset to the market value of those assets as at 1 July 2002. The agreed statement of facts lists the amount of additional deductions in respect of each partnership as:
(a)$16,022,162 in respect of the Camooweal Assets;
(b)$1,710,934 in respect of the Allco Assets;
(c)$826,720 in respect of the ANL Assets; and
(d)$1,992,945 in respect of the TAA Assets.
The respondent disallowed the applicant’s claim to the additional capital allowance deductions. In financial terms, what is at stake in this proceeding is set out clearly in paragraphs 68 and 69 of the agreed statement of facts as follows:
If the Applicant is correct in its contention that the tax cost of the Camooweal Assets should have been reset as at 1 July 2002 to the market value of those assets, the amount by which the capital allowance deductions should be increased is $15,680,379 calculated as follows:
(a)the effective life of the assets is 8 years;
(b)applying the diminishing value method of depreciation, the capital allowance deductions in the year ended 30 June 2003 are 18.75% of the market value of the assets as at 1 July 2002 ($89,594,356), being $16,798,942;
(c)as capital allowance deductions of $1,118,563 have already been allowed, the balance of deductions that should be allowed to the Applicant is $15,680,379.
If the Applicant is correct in its contention that the tax cost of the Allco Assets, ANL Assets and TAA Assets should have been reset as at 1 July 2002 to the market value of those assets, the amounts by which capital allowance deductions should be increased are the amounts set out in [the table in [8] above] respectively, calculated as follows:
(a)the effective life of the Allco Assets and the TAA Assets is 10 years and the effective life of the ANL Assets is 16 years;
(b)applying the prime cost method of depreciation, the capital allowance deductions in the year ended 30 June 2003 are 10% of the market value of the partnership’s respective assets (6.25% in the case of the ANL Assets) as at 1 July 2002.
The issues in this proceeding
In its written submissions the respondent summarised the questions raised in this proceeding as:
(a)whether s 22(3) of the Bank Integration Act has the effect that the relevant partnerships are (even if only for tax purposes) deemed to be continued in existence; and
(b)if so, whether the consolidation provisions in Part 3-90 of the Income Tax Assessment Act 1997 apply to those deemed partnerships and to the assets of those deemed partnerships in the manner for which the applicant contends.
The first issue
The respective positions of the parties in relation to s 22(3) of the Bank Integration Act can be stated briefly. The applicant relies on the proposition that by virtue of s 22(3) the partnerships with the Savings Bank continued to exist despite all of the assets of the four partnerships being vested in the one entity, the Commonwealth Bank. The applicant submits that the partnerships survived the integration of the two banks, continued in existence and were recognised as such by the Commonwealth Bank in successive returns that it submitted between 1993 and 2002. The applicant submits that this position continued until it exercised its option to form a consolidated group for income tax purposes on 1 July 2002. The applicant supports its analysis with reference not only to the words of s 22(3) but also to the intention of Parliament, expressed in s 22(2), that integration should be “revenue neutral”.
The Commonwealth Bank submits that it follows from the proper construction of s 22(3) that the partnerships survived integration and therefore, on consolidation pursuant to Part 3-90 of the Income Tax Assessment Act 1997 (Cth), it is to be treated as holding two separate and distinct categories of assets: (a) its original partnership interests in the partnerships; and (b) the partnership interests previously held by the Savings Bank.
The Commonwealth Bank relies on the statement in s 22(3) that “nothing in this Act affects the continuity of any partnership in which a transferring bank was a partner immediately before the succession day”. In this case the Savings Bank was a partner in all four partnerships “immediately before the succession day”. The applicant finds support for its position in the statement of intention in s 22(2) of the Act which in 1993 was as follows:
(2) It is the intention of the Parliament:
(a)that, on and after the succession day for a receiving bank and the relevant transferring bank, the receiving bank should, for all purposes of the Income Tax Assessment Act 1936, be placed in the same position in relation to the business to which this section applies as the transferring bank would have been apart from the operation or effect of this Act and of any complementary legislation and from anything done for a purpose connected with, or arising out of, that operation or effect; and
(b)that the operation or effect of this Act and of any complementary legislation and anything done for a purpose connected with, or arising out of, that operation or effect in relation to the business to which this section applies should, for all purposes of the Income Tax Assessment Act 1936, be revenue neutral, that is to say that no assessable income, deduction, capital gain or capital loss should be derived, or incurred, or should accrue, by or to the transferring bank or the receiving bank in relation to that business merely because of the operation or effect of this Act and of any complementary legislation or of anything done for a purpose connected with, or arising out of, that operation or effect.
In support of its submission that s 22(3) of the Bank Integration Act preserved the existence of the partnerships (at least for taxation purposes) notwithstanding that they cease to exist under the general law, the applicant places some reliance on what it sees as an underlying purpose of that Act, namely, to ensure that integration achieved by the Act was revenue neutral.
The Bank Integration Act is unusual in giving statutory force (see ss 6 and 22(2)) to statements of its intention. As this proceeding demonstrates, however, that does not relieve this Court of the responsibility to construe the words of s 23 in their full statutory context which includes, but is not limited to, s 22. To appreciate the statutory context it is necessary to consider, in some detail, the effect of integration.
Part 3 of the Act, entitled “Bank reorganisations”, is concerned with the elements of integration which occur on succession day. Section 12(1) provides that on the succession day “the receiving bank becomes the successor in law of the transferring bank”. The other provisions in Part 3 are concerned with the details of transferring the business of the transferring bank to the receiving bank. Part 3 is not concerned with the business of the receiving bank.
The effect of this statutory transfer goes well beyond what could be achieved at common law. The transferring bank's liabilities as well as its assets become those of the receiving bank; s 13(1). Translated instruments continue to have effect “as if a reference in the instrument to the transferring bank were a reference to the receiving bank”; s 14(1). The transferring bank’s places of business in Australia or the external Territories become the receiving bank’s places of business; s 15. The Act provides for continuity of employment for the transferring bank’s employees and of proceedings to which the transferring bank was a party (s 19). Section 18 provided for the continuation for six months of the transferring bank’s business name. Section 16 revokes the transferring bank’s authority to carry on the banking business in Australia. In the case of the applicant and the savings bank, the integration was completed by the repeal on the succession day of Part V of the Commonwealth Banks Act 1959 (Cth), which had established the savings bank, with the result that the savings bank ceased to exist. This Act does not make any provision for the transferring bank to continue to exist or to be deemed to continue to exist.
Part 4 of the Act is concerned with the taxation consequences of integration. It is concerned not with the transferring bank per se, but with the business of the transferring bank - now vested in the receiving bank. It is in this context that the expression of intention in s 22(2) must be understood and in which the operative provisions in subsections (3), (4) and (5) must be construed. As previously indicated it is subsection (3) that is presently of interest. Subsections (4) and (5) are concerned with income tax and capital gains tax and are not relevant in this proceeding.
Section 22(3) is concerned with the continuity of partnerships in which the transferring bank was a partner immediately before succession day. The concern is justified because the effect of the Bank Integration Act is to replace partnerships with the transferring bank by new partnerships with the receiving bank. There are two elements to the process. Assume, for example that there is a partnership between the transferring bank and X co. Divesting the transferring bank of its assets and liabilities dissolves the partnership between the transferring bank and X co; vesting the assets and liabilities in the receiving bank creates a new partnership between the receiving bank and X co. Although the Act clearly intends that these two events will occur virtually simultaneously, nonetheless, it could be argued that there is an instant of discontinuity of partnership carrying with it the potential for adverse taxation consequences. Section 22(3) anticipates this problem and provides for it by deeming there to have been no discontinuity. The section does not purport to deal with any issue other than discontinuity. It does not purport to create a new partnership; it is predicated on there being a reconstituted partnership. This much is clear from the following statement at paragraph 26 of the explanatory memorandum for the Bank Integration Bill 1991:
Subclause (3) will preserve the continuity of the partnerships of which the transferring bank was a member. Without this provision the acquisition by the receiving bank of the interest in any partnership previously held by the transferring bank would dissolve that partnership and a new partnership with the receiving bank would arise. That could mean that other members of the partnership would suffer detriment due to the loss of tax concessions that could not be carried forward into the reconstituted partnership.
[Emphasis added]Section 22(3) was intended to ensure that there were no adverse tax consequences as a result of the Commonwealth Bank replacing the Savings Bank in a partnership. The applicant contends that the subsection addresses potential taxation problems by deeming a partnership to continue in existence while all partnership assets are held by a single entity. On the face of it, this is an extraordinary proposition. It goes well beyond effecting by statute something that could not be done under the general law - as for instance vesting the liabilities of the transferring bank in the receiving bank. It goes well beyond commonplace deeming provisions which attribute a legal characteristic otherwise not present. For example, provisions deeming a payment made by a private company to be a dividend and assessable for tax as such (see Income Tax Assessment Act 1936 (Cth) s 109) or deeming a worker to be an employee when he or she would not be an employee at common law. The proposition for which the applicant contends would create an entity which is not only unknown at common law but which is fundamentally inconsistent with the legal concept of partnership. Moreover, as the respondent submitted:
The series of fictions upon which the applicant's case depends extends well beyond the apparently simple notion that the defunct partnership “continues”. In order for that fictional state of affairs to persist, it is necessary also to suppose that each fictional partnership has continued to exist, that its partners (notional and real) were carrying on a business and that it has continued to strike accounts, submit tax returns, claim deductions and distribute profits and losses. It is also necessary to assume that partners continue to have enforceable rights against each other and that they continue to own assets in partnership.
This is not to say that such a state of affairs might not be effected by statute. It is, however, rather more improbable than the much simpler explanation offered by the Commissioner. It offends the principle of construction referred to by Fisher J in Commissioner of Taxation v Comber (1986) 10 FCR 88 at 96:
In my opinion deeming provisions are required by their nature to be construed strictly and only for the purpose for which they are resorted to: Re Levy; Ex parte Walton (1881) 17 ChD 746 per James LJ at 756.
These sentiments were echoed by Hill J in East Finchley Pty Ltd v Federal Commissioner of Taxation (1989) 90 ALR 457 at 478. The applicant defends its approach, claiming that the purpose of the “deeming” in s 22(3) is to ensure that after integration the Commonwealth Bank is taxed with respect to the assets and liabilities transferred from the Savings Bank in the same way as the Savings Bank would have been taxed but for integration. The applicant submits that this taxation treatment applies on a continuing basis and, in support of that submission, points to s 22(2)(a) which states that the Parliamentary intention expressed therein applies “on and after the succession day”. So much may be accepted, however, it is not necessary to conclude that s 22(3) provides for a continuing partnership between a notional Savings Bank and the Commonwealth Bank, or a continuing partnership between the Commonwealth Bank and itself, in order to find a purpose for the continuing operation of the Parliamentary intention. It was relevant, for instance, to the construction of s 22(4) which provided:
(4)Where a succession day is fixed for a receiving bank and the relevant transferring bank, then, for the purposes of the Income Tax Assessment Act 1936:
(a)all assessable income derived or taken to be derived by the transferring bank; and
(b)all allowable deductions and capital losses incurred or taken to be incurred by the transferring bank; and
(c)all other consequences (…) for the transferring bank;
are taken to have been derived or incurred by, or to have occurred in relation to, the receiving bank and not the transferring bank.
The applicant points to the statutory fiction involved in the above subsection and submits that the statutory fiction of continuing partnerships is consistent with the whole approach to taxation after integration adopted in Part 4. Moreover, the applicant points to the words of wide import used in providing that “nothing” in the Act affects the continuity of “any” partnership in which the Savings Bank is a member, and submits that such words must be given an unrestricted meaning unless the contrary is shown. As an example the applicant referred to the reasons of Dixon J in Herbert Adams Proprietary Limited v Federal Commissioner of Taxation (1932) 47 CLR 222 at 228-9 where his Honour said: “… it is always less difficult to show that a word has a wider meaning than it is to establish a specialized use”. It not clear to me that this is an example of the principle which the applicant put forward. In any event, the construction for which the Commissioner contends does not restrict the meaning of those words. In order to give them their full meaning it is not necessary to construe “continuity” of a partnership as involving the novel construct for which the applicant contends.
A distinction must be drawn between the “continuity” of a partnership and the continuing existence of a partnership with only one partner. Addressing the former, as s 22(3) plainly does, involves glossing over what might be seen as a quirk of partnership law. Addressing the latter would involve re-writing the fundamental principles of partnership law and the creation of a new category of legal relationship based on an unlikely fiction. Section 22(3) purports to do no such thing. It merely affects the “continuity” of partnerships. Notwithstanding the use of words with wide import, this is the critical phrase.
The applicant further contends that unless its construction of s 22(3) is adopted “it would not be possible to ensure at any point in time after integration, that the assets assigned to [the Commonwealth Bank] receive the income-tax treatment they would have received in [the Saving Bank's] hands if integration had never occurred”.
It should be clear from the above that the difficulty facing the applicant in this proceeding is that although the partnerships referred to in [7] were dissolved when the assets and liabilities of the transferring bank were vested in the receiving bank, no new partnerships were created. There is nothing in the provisions of Part 3 of the Act or in the terms of s 22 to indicate that Parliament intended to create a new entity which is not only unknown at common law but which is fundamentally inconsistent with the legal concept of partnership. In my view the problem is not one of continuity which would be addressed by s 22(3) but rather a much more basic problem: the non existence of a partnership for s 22(3) to operate upon.
Furthermore, the construction for which the applicant contends would subvert the key purpose of the Bank Integration Act. The Act was designed to facilitate the integration of the transferring and the receiving bank. Where partnerships between the transferring bank and third parties are concerned Part 3 effects the transfer of assets and liabilities so that the receiving bank becomes the successor to the transferring bank in those partnerships. It is a comparatively simple matter for s 22(3) to ensure that no party suffers an adverse tax consequence by reason of the fact that integration has caused an interruption to the continuity of the partnership by deeming the integration not to have occurred.
In contrast, the applicant's construction would involve the receiving bank maintaining a complex fiction over an extended period of time. In its written submissions the respondent referred to some of the difficulties that might arise from the applicant’s construction. They include:
(a)The mechanism by which the non-existent partner in the notional partnership brings its share of partnership income to account and, if tax is to be paid, the identity of the (real) person on whom that liability rests.
(b)If the notional partnership is in a loss position, the mechanism by which the non-existent partner in the notional partnership deals with that loss, such as by transferring it to a person able to use it.
(c)Whether the notional partnership exists only for “tax purposes” and, if so, the nature of the relationship, if any, which exists between the receiving bank and the third party.
(d)How the notional partner owns partnership assets and, if a third party has an interest in them (such as where they are jointly owned) the nature of the parties' respective interests in the property and the interest, if any, held by the receiving bank in those assets.
It is not necessary to accept the reality of all these difficulties in order to see that the seemingly simple analysis put forward by the applicant is fraught with complexity.
Finally, the expressed intention of Parliament that integration should be “revenue neutral” is a key plank in the submissions of the applicant. It contends that if the Commissioner's construction is adopted the principle of “revenue neutrality” will be offended because the applicant will be deprived of the benefits of consolidation (see above) which would have been available to it if integration had not occurred. This is not, however, a “revenue neutral” position. The applicant is seeking a tax benefit. Had integration not occurred then on consolidation the Savings Bank would have become a member of the applicant's consolidated group. As the respondent’s submissions point out, “it is only by working out the tax effect of [the Savings Bank] continuing in existence that it is possible to know what the tax effect of not integrating would have been”. The submissions continued:
Specifically, upon the assumption that the banks did not integrate but that [the Savings Bank] joined the consolidated group on 1 July 2002, it would be necessary to work out the theoretical “allocable cost amount” (or “ACA”) for the whole of [the Savings Bank] at the time of consolidation. The ACA for an entity is worked out by reference to the eight matters listed in the table in s 705-60 of the 1997 Act, which would require a detailed calculation based upon the hypothetical tax and financial position of [the Savings Bank] as at 1 July 2002, some nine years after it ceased to exist, and a hypothetical calculation of the tax cost of its notional assets at that time.
I do not accept that Parliament's intention that integration be revenue neutral extends to such complex nebulous arrangements especially when there is an alternative construction of s 22(3) which is simple, coherent, focused on the effect of integration and, consistent with the policy of the Act. I accept the alternative construction: that s 22(3) applies only to partnerships between the transferring bank and third parties. It deems that, for taxation purposes, there is no break in continuity between the reconstituted partnership and the pre-integration partnership. For the reasons given above it does not apply to partnerships between the transferring and receiving banks.
As I have decided that after the succession day the four partnerships did not continue to exist and are not deemed to exist, even for tax purposes, the second issue identified in [11] above does not arise. The application must be dismissed with costs.
I certify that the preceding thirty-three (33) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Stone. Associate:
Dated: 13 March 2009
Counsel for the Applicant: T Bathurst QC with DFC Thomas Solicitor for the Applicant: Freehills Counsel for the Respondent: A Robertson SC with J Hmelnitsky Solicitor for the Respondent: TressCox Lawyers
Date of Hearing: 20 November 2008 Date of Judgment: 13 March 2009
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