News Australia Holdings Pty Limited and Commissioner of Taxation
[2009] AATA 750
•29 September 2009
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2009] AATA 750
ADMINISTRATIVE APPEALS TRIBUNAL )
) No 2007/4734
TAXATION APPEALS DIVISION ) Re NEWS AUSTRALIA HOLDINGS PTY LIMITED Applicant
And
COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal Justice Downes, President
Mr S E Frost, MemberDate29 September 2009
PlaceSydney
Decision Set aside the objection decision of the Commissioner of Taxation. Substitute a decision pursuant to s 177F(1)(c) not to determine that the capital loss of approximately $1.5 billion in issue in this case was not incurred by the taxpayer. .................[sgd]..............................
Garry Downes
President
CATCHWORDS
TAXATION –Income Tax Assessment Act 1936 Part IVA determination by Commissioner that tax benefit be cancelled – global corporate restructure of media conglomerate – relocation of head company to US – tax benefit obtained by incurring capital loss of around $1.5 billion – dominant purpose not to obtain tax benefit – decision of Commissioner set aside.
Income Tax Assessment Act 1936
Income Tax Assessment Act 1997
Commissioner of Taxation v Lenzo [2008] FCAFC 50; (2008) 167 FCR 255 at 274
Commissioner of Taxation v Hart [2004] HCA 26; (2004) 217 CLR 216
Commissioner of Taxation v Peabody [1994] HCA 43; (1994) 181 CLR 359
Federal Commissioner of Taxation v Spotless Services Ltd [1996] HCA 34; (1996) 186 CLR 404
Commissioner of Taxation v Sleight [2004] FCAFC 94; (2004) 136 FCR 211
Peabody v Commissioner of Taxation [1993] FCA 74; (1993) 40 FCR 531
Hart v Commissioner of Taxation [2002] FCAFC 222; (2002) 121 FCR 206
REASONS FOR DECISION
29 September 2009 Justice Downes, President
Mr S E Frost, MemberIntroduction
1. News Australia Holdings Pty Limited is a member of the global media conglomerate headed by News Corporation Inc.
2. During 2004 and 2005, the News Group implemented a global corporate restructure from which it obtained a “tax benefit” under Part IVA of the Income Tax Assessment Act 1936 (the so-called general anti-avoidance provisions) by the incurring of a capital loss of about $1.5 billion. The Commissioner sought to cancel the tax benefit under Part IVA. The applicant objected against the Commissioner’s determination and, when the Commissioner disallowed the objection, the applicant sought review of that objection decision by the Tribunal. We have decided that the tax benefit should not have been cancelled.
Issues
3. The question for the Tribunal is whether to uphold the Part IVA determination, by affirming the Commissioner’s objection decision, and so denying to the applicant the future benefit of the $1.5 billion capital loss. The answer to that question depends on whether, taking into account eight specified matters in s 177D(b) of the Act, “it would be concluded” that the dominant purpose of those who entered into the scheme was to enable the applicant or any other taxpayer to obtain a tax benefit.
4. Several issues are critical to our enquiry. They include the identification of the “scheme” which was entered into or carried out, the identification of the “tax benefit” that was obtained and the assessment of the eight matters in s 177D(b). Before turning to these issues, it is necessary to set out in some detail why, and how, the News Group went about its global restructure in 2004 and 2005.
The participants
5. The companies that were involved in the transactions were:
· The News Corporation Limited (“News Corp Australia”), now named News Holdings Limited – an Australian-incorporated company which, prior to the transactions, was the ultimate holding company of the News Group;
· News Corporation Inc (“News Corp US”) – the company that is now the global holding company for the Group;
· News Limited (“News Australia”) – the company that holds the Australian assets;
· News Publishing Australia Limited (“News Publishing”) – despite its name, the company holding most of the US assets;
· News Corp Investments Limited (“News Corp UK”) – the company holding most of the UK assets; and
· The applicant, News Australia Holdings Pty Limited (referred to as “News Australia Holdings”, and formerly named Carlholt Pty Limited (“Carlholt”)).
The witnesses
6. For the applicant, the following witnesses made statements and also gave oral evidence:
· John Nallen – the deputy chief financial officer and executive vice president of News Corp US;
· James Tobin – the global director of international tax services at Ernst & Young, currently located in London;
· Rose Williams – a principal of Ernst & Young LLP, located in Washington, DC;
· Michael Whyte – a partner of Ernst & Young Australia;
· Stephen Rue – the chief financial officer of News Australia.
7. In addition, two experts – Professor Leslie Book, on behalf of the applicant, and Mr David Moldenhauer, on behalf of the Commissioner – made witness statements dealing with certain of the US tax issues involved, and also in relation to whether factual matters put to the US Internal Revenue Service (IRS) in a ruling request needed to be followed strictly, at the risk of losing the protection of the ruling. There was very little disagreement between the experts. After meeting together alone they were asked to prepare, without the involvement of the parties’ legal representatives, a statement setting out the matters on which they agreed and the areas of their disagreement. Once the joint statement was finalised, it was taken into evidence as Exhibit J. It contained no areas of disagreement. Mr Bathurst QC, for the applicant, indicated that he did not propose to tender Professor Book’s statement. Mr Moldenhauer’s statement was taken into evidence as Exhibit 3. Mr Bathurst thought it unnecessary to cross-examine him.
The transactions
8. News Group executives had been considering moving its ultimate holding company from Australia from as early as the 1980s, but the Australian capital gains tax consequences for shareholders were then prohibitive. The introduction in 1999 of scrip-for-scrip roll-over relief for certain transactions, in which shareholders could exchange shares in one company for shares in another without incurring liability for capital gains tax, removed this obstacle.
9. In January 2000, members of the News Group and their advisers held a meeting in New York to discuss and plan for the Group to reincorporate in the US. The desired structure required the formation of a new head company in the US and for the US operations (under News Publishing) to become wholly owned by the new US parent. Mr Nallen also envisioned that the US parent would directly own the UK and Australian operations.
10. The proposed relocation of the head company to the US and the consequent reorganisation of subsidiaries would take place only on condition that the transactions did not create a risk that a material tax liability would arise in any jurisdiction. This condition played an important part in the development of the steps that would be undertaken. It also motivated the News Group’s request for tax rulings in the US and in Australia in relation to relevant transactions once the detail of the plan was finalised. As Mr Nallen put it, “If we didn't obtain a successful ruling on which we could rely, as I said earlier, we would not have gone ahead with the transaction”.
11. The relocation of the head company became referred to by News executives and advisers as the “Flip”. The post-Flip reorganisation, whereby News Publishing and News Corp UK were elevated from News Corp Australia to the new US parent, was called the “Spin”.
Stage one – the “Flip”
12. Much planning took place before either the Flip or the Spin could occur, but by 2003 a detailed “step plan” had been developed. The steps involved in the Flip would be as follows:
(a)News Corp Australia would issue 100 redeemable ordinary shares in itself to News Corp US;
(b)News Corp US would issue shares in itself to News Corp Australia shareholders in exchange for all the News Corp Australia shares, at a ratio of one News Corp US share to two News Corp Australia shares;
(c)News Corp Australia would cancel all its issued shares, other than the 100 shares owned by News Corp US;
(d)News Corp Australia, now wholly owned by News Corp US, would issue to Carlholt the same number of shares in itself as were to be cancelled in step (c) (referred to as “mirror shares”); in consideration, Carlholt would issue a note for the market value of the shares to News Corp US.
13. Carlholt’s role in the Flip was to be the new head company of the Australian consolidated group. Carlholt was suitable for this role as it could elect to be a disregarded entity for US tax purposes. Accordingly, its presence had no effect on the US tax position.
Stage two – the “Spin”
14. The Flip would achieve the desired outcome of having a US corporation as the head company of the Group. However, the structure immediately after the Flip would be inefficient. It was described as a “sandwich” structure, with two Australian companies, Carlholt and News Corp Australia, sitting between two US companies, News Corp US and News Publishing. It was perceived that this structure would create regulatory compliance problems, potential cash flow problems and double taxation and other complications. The News Group formed the view, based on advice and its own analysis, that, following the Flip, News Corp Australia should transfer News Publishing and News Corp UK to the new US parent (the “Spin”), to create a more logical and efficient corporate structure.
15. In planning the Spin, the News Group wished to achieve an elevation of News Corp Australia’s non-Australian businesses to News Corp US, but to do so without triggering a material tax liability in any jurisdiction. At least since 1999, advisers to the News Group had thought that News Corp Australia was likely to have a large unrealised capital gain on its shares in News Publishing and News Corp UK. Therefore, they considered distributing the capital appreciation portion of the value of News Publishing and News Corp UK to News Corp Australia in the form of a dividend, which would be non-assessable, non-exempt income in Australia under s 23AJ of the Act.
16. However, in March 2003, Morris Zelkha, a tax adviser to the News Group based in Deloitte’s UK office, advised that a dividend paid by News Publishing would be taxable to News Publishing’s minority shareholder, News Corp UK, in the UK, despite being exempt to the majority shareholder in Australia. A tax liability arising from a dividend payment of this type would not, of course, meet the Group’s requirement that the Spin avoid the triggering of a material tax liability in any jurisdiction. For that reason, that part of the plan could not go ahead. Instead, Mr Zelkha suggested that a redemption by News Publishing of its shares held by News Corp Australia may be an alternative worth exploring. Mr Zelkha saw this as a way for News Publishing to remove its majority shareholder, News Corp Australia, without paying a dividend (which would be taxable in the UK) to its minority shareholder, News Corp UK.
17. The form of redemption suggested by Mr Zelkha was a share buy-back. This would be acceptable for UK purposes. As far as the Australian position was concerned, Division 16K of the Act would apply, such that the consideration paid by the company to the shareholders (in the context of an off-market share buy-back) would be deemed partly a dividend and partly a return of capital.
18. Michael Whyte, of Ernst & Young Australia, recommended that News Publishing conduct a selective off-market buy-back from News Corp Australia, as from an Australian perspective it achieved the commercial outcome, and provided sufficient certainty in that it could be the subject of a ruling from the Australian Taxation Office (ATO) to confirm that Part IVA would not apply to include a capital gain in assessable income.
The Group requests a ruling from the US Internal Revenue Service
19. The Group also considered it necessary to obtain a ruling from the IRS. This was consistent with what Mr Nallen said was the policy of the Group in relation to tax rulings – namely, that if a tax authority would rule on a transaction involving large numbers and any degree of tax risk, then the News Group would request a ruling. Mr Nallen expressed his philosophy and that of the News Group in this regard as “take no risk on big numbers. Even a small risk on big numbers is a big risk.” Accordingly, the Group asked the IRS to issue a ruling that the Spin could be regarded as a “tax-free spin-off” for the purposes of section 355 of the Internal Revenue Code.
20. If the Spin did not meet the requirements of section 355, the US tax consequences would be significant. The value of the News Publishing and News Corp UK shares could be taxable in the US as a dividend to News Corp US; this potential tax was estimated at approximately $21 billion. Another potential consequence would be that News Corp Australia would realise a capital gain on the News Publishing and News Corp UK shares.
21. The IRS ruling request, prepared by Rose Williams of Ernst & Young US on behalf of the News Group, was submitted on 8 August 2003, the last day on which the IRS would accept section 355 ruling requests which addressed the critical “business purpose” requirement. That requirement, according to the guidelines issued by the IRS, is that:
… a distribution must be motivated, in whole or substantial part, by one or more corporate business purposes. A corporate business purpose is a real and substantial non-federal tax purpose germane to the business of the distributing corporation, the controlled corporation, or the affiliated group to which the distributing corporation belongs.
22. The claimed business purposes referred to in the ruling request were, in summary:
· an expected increase in share value and a consequent increase in the ability of the new parent company to make acquisitions;
· the reduction or elimination of tax, legal and treasury inefficiencies created by the complexity of ongoing Australian cross-ownership; and
· the simplification of financial reporting practices.
23. The detailed fact pattern on which the IRS was asked to rule included the following steps:
· the Flip, as described above at [12];
· News Publishing buys back the approximately 66% of its shares held directly by News Corp Australia for a newly issued note of approximately equal value (“Note 2”);
· News Corp Australia distributes Note 2 to Carlholt;
· Carlholt distributes Note 2 to News Corp US;
· News Corp US contributes Note 2 to New News Publishing Australia Limited (“New News Publishing”) as capital; and
· News Corp US merges New News Publishing into News Publishing.
Receipt of the IRS ruling
24. On 13 February 2004 News Corp Australia received the IRS ruling in a form substantially as requested. That ruling confirmed that the transaction would be treated as a tax-free spin-off under section 355 of the Internal Revenue Code.
The “Spin” becomes split into the “First Spin” and the “Second Spin”
25. Also in February 2004, the News Group decided it was necessary to change some of the transaction steps that had been described to the IRS in the original ruling request. This was because the Group had now decided to split the Spin into two stages: the “First Spin” and the “Second Spin”. The First Spin would achieve effectively the same result, from a US tax perspective, as the Spin as described in the original IRS ruling request, and would be disregarded for Australian tax purposes because it would take place within an Australian consolidated group. This would allow the News Group to progress with the First Spin without waiting for an ATO ruling on the Spin, and take advantage of anticipated increases in the News Group parent company share price.
The supplemental IRS ruling request
26. Rose Williams advised that making these changes would necessitate a supplemental ruling request to the IRS, as in her opinion the original IRS ruling could not be relied on if some of the underlying transaction steps were to be changed. Accordingly, the News Group submitted a supplemental ruling request to the IRS on 15 March 2004.
27. The supplemental IRS ruling request described the First Spin and the Second Spin, relevantly, as follows:
(a)the Flip is achieved in a manner materially the same as before; and
(b)News Corp Australia distributes its shares in News Publishing to Carlholt (the First Spin);
(c)News Publishing buys back the approximately 66% of its shares held directly by Carlholt for a newly issued note of approximately equal value (“Note 2”);
(d)Carlholt distributes Note 2 to News Corp US;
(e)News Corp US contributes Note 2 to New News Publishing as capital; and
(f)News Corp US merges New News Publishing into News Publishing.
28. Steps (c) to (f), the Second Spin, would take place only after the receipt of a favourable ruling from the ATO.
29. The supplemental IRS ruling request said that transactions “substantially similar” to the above would take place, but the supplemental ruling that was granted by the IRS removed the “substantially similar” phrase, listing the precise steps without that qualification. The steps listed in paragraph 27 were the transactions that ultimately took place – the First Spin on 14 March 2005 and the Second Spin on 8 June 2005.
30. From a US tax perspective, the First Spin would achieve the elevation of News Publishing so that it would sit directly under News Corp US. This is because Carlholt was a disregarded entity for US tax purposes so that its assets were treated for US tax purposes as being owned directly by News Corp US. In addition, the First Spin would be disregarded for Australian tax purposes because it was a transaction between members of an Australian consolidated group.
31. Although the First Spin had eliminated most of the problems caused by an Australian company being situated between US companies in the News Group corporate structure, it had not eliminated all of them. From an Australian perspective there was still a “sandwich structure” which would continue to have some major disadvantages. For example, News Publishing would have to prepare accounts in accordance with Australian standards as well as US standards. Also, News Publishing and its subsidiaries would be controlled foreign corporations under the Australian rules, and this would add to compliance costs and would create other difficulties.
32. Despite these disadvantages, Mr Nallen said that the News Group would not have proceeded with the Second Spin if it had been unable to obtain an ATO ruling confirming that the Second Spin would not trigger a taxable capital gain.
Receipt of the supplemental IRS ruling
33. On 5 August 2004 the News Group received the IRS ruling based on the supplemental ruling request.
Information Memorandum
34. The News Group announced in a press release on 6 April 2004 that it intended to achieve the Flip by the end of 2004, in a manner that would be tax-free for most shareholders. The proposed transactions were expressed to be subject to tax rulings and other conditions.
35. The Information Memorandum in relation to the schemes was published on 15 September 2004. It related primarily to the Flip, but it mentioned the Spin transactions as consequential upon the Flip. The First Spin was described in the Information Memorandum as the “post-transaction internal restructure”, which was to happen “immediately” following the Flip. The Second Spin was not described in detail, but the Information Memorandum noted that “[a]t a future date News Corp US intends that Carlholt will distribute the ownership of the News Group’s non-Australian businesses from Carlholt to News Corp US”.
36. In both the press release and the Information Memorandum relating to the Reincorporation, the News Group represented that the Flip would be tax-free to the majority of shareholders. This was confirmed when the News Group obtained an ATO class ruling that scrip-for-scrip roll-over relief under Subdivision 124-M of the Income Tax Assessment Act 1997 (“1997 Act”) would be available to most shareholders. The Information Memorandum also contained a representation that the Flip would be conducted free of material tax liability to News.
Deferral of the Spin
37. In October 2004, shortly after the publication of the Information Memorandum, the News Group decided to defer the First Spin because of the risk that it would trigger payment under an indemnity agreement with a shareholder of News Corp Australia. The deferral was to be until the News Group received an IRS ruling in relation to s 367 of the Internal Revenue Code confirming that the indemnity would not be triggered, or, in the absence of such a ruling, until 31 December 2006, which was the effective expiry date of the indemnity.
38. To communicate the decision to defer the Spin, on 15 October 2004 the News Group sent a letter to shareholders by way of a supplement to the Information Memorandum.
Scheme of Arrangement
39. In October 2004, News Corp Australia shareholders voted to approve the scheme of arrangement, based on the Information Memorandum that was published on 15 September 2004. The Federal Court approved the scheme of arrangement on 3 November 2004.
40. Under the scheme of arrangement, on 12 November 2004, News Corp Australia shareholders contributed their News Corp Australia shares to the applicant (then called Carlholt), in exchange for shares in the new US parent, News Corp US. Also on 12 November 2004, Carlholt changed its name to News Australia Holdings Pty Limited, and News Corp Australia changed its name to News Holdings Limited.
ATO private ruling request regarding Division 16K, consolidation and other provisions
41. News Group instructed Michael Whyte to request ATO rulings, where available, that the Spin would not give rise to an Australian income tax liability. On behalf of the group, Mr Whyte sent a draft request for private ruling to the ATO on 3 September 2004, and discussed the draft request at a meeting with the ATO on 9 September 2004. That draft request sought confirmation about the way that several different provisions would apply to the Reincorporation (the Flip and Spin), including confirmation:
(a)as to the way that the Australian tax consolidation provisions would apply in the Reincorporation;
(b)that, under Division 16K of the Act, part of the purchase price of the shares that News Publishing would buy back from Carlholt in the off-market buy-back in the Second Spin would be a dividend, and that s 23AJ would apply to render that dividend non-assessable non-exempt income to Carlholt; and
(c)that Part IVA would not apply to the Reincorporation.
42. The ATO requested that the private ruling request in relation to Part IVA be separated from the balance of the request.
Cost base re-setting after the formation of the consolidated group
43. The income tax consolidation regime in Part 3-90 of the 1997 Act was introduced in 2002. Under this regime a wholly-owned corporate group can elect to “consolidate” so as to operate as if it were a single entity for income tax purposes.
44. The News Group elected to consolidate. As a consequence of that election, the cost base of News Publishing was re-set in December 2004 under Division 705 of the 1997 Act. This process involved an allocation of cost, based on relative market values of assets. This reduced the cost base of News Corp Australia’s holding in News Publishing from approximately $57 billion to approximately $39 billion, and eliminated the unrealised $17 billion capital loss on News Corp Australia’s shares in News Publishing.
ATO private ruling request under Part IVA
45. The News Group submitted its private ruling request in relation to Part IVA on 10 January 2005. At that time, the News Group did not know whether the Second Spin would take place before or after 31 December 2006. The relevant question put to the ATO was:
In respect of the CGT events arising from the disposal by Carlholt of its direct share interests in each of [News Publishing] and [News Corp UK], would Part IVA of [the Act] apply to include any amount as assessable income to Carlholt?
Receipt of ATO ruling dealing with Division 16K, consolidation and other issues
46. On 21 February 2005 the ruling dealing with these topics was issued by the ATO in materially the same form as the News Group had requested. The ruling confirmed, among other things, that Division 16K of the Act would apply to the buy-back to treat the amount debited to News Publishing’s retained earnings account as capital proceeds and the difference between that amount and the buy-back purchase price as a dividend which would be non-assessable, non-exempt income under s 23AJ of the Act.
Receipt of IRS ruling on section 367 of the Internal Revenue Code
47. On 4 March 2005, the News Group received the IRS ruling on section 367 of the Internal Revenue Code confirming that the indemnity would not be triggered. This meant the First Spin could take place and did not have to be deferred to 2007.
Implementation of the First Spin
48. The First Spin took place on 14 March 2005, with News Corp Australia distributing its News Publishing shares and its News Corp UK shares to the applicant, now known as News Australia Holdings.
Receipt of the ATO ruling dealing with Part IVA
49. The ATO issued its private ruling on Part IVA on 12 April 2005, stating that it would not make a determination under section 177F(1)(a) to include an amount in Carlholt’s assessable income arising out of its disposal of its News Corp UK and News Publishing shares. The ruling applied for the 2005, 2006 and 2007 income years, and so the spin could occur up to 30 June 2007. In the “Explanation” section of the ruling, the ATO stated that “[t]here is no paragraph 177C(1)(a) tax benefit that arises in connection with the identified schemes”. In a covering letter to the ruling, the ATO wrote:
The Commissioner was not specifically asked whether Part IVA would apply to cancel the expected capital loss arising to Carlholt in relation to the proposed disposal of its shares by way of share buy-back. In respect of this expected capital loss, the Commissioner is presently actively considering whether Part IVA should be invoked to cancel the capital loss.
Implementation of the Second Spin
50. News Corp UK issued bonus shares to the applicant on 8 June 2005. The issue of bonus shares by News Corp UK was not a step notified to the IRS as part of the original or supplemental requests for rulings. Because of this, Michael Whyte sought advice from his Ernst & Young colleagues in the United States about whether this step could jeopardise the IRS ruling. Victoria Fernandez of Ernst & Young US advised Mr Whyte that since the News Corp UK bonus share issue was not a step different to that which had been notified to the IRS, and in any event it was a disregarded share issue, it would not jeopardise the IRS ruling and could take place.
51. On 24 April 2005, Stephen Rue, chief financial officer of News Limited in Australia, sought and was provided with Michael Whyte’s written confirmation “that the Spin transaction is being done in exactly the same manner and order that we outlined in the tax ruling requests”.
52. The Second Spin took place on 8 June 2005. In relation to the off-market buy-back by News Publishing of its shares from News Australia Holdings:
(a)since the market value of the News Publishing shares held by News Australia Holdings was at that time $38.74 billion, this was the buy-back consideration and the face value of Note 2;
(b)the capital component of the buy-back consideration received by News Australia Holdings, being the amount News Publishing debited to its share capital accounts, was $34.68 billion;
(c)the dividend component of the buy-back consideration received by News Australia Holdings, being the difference between the total consideration and the capital component, was $4.07 billion;
(d)News Australia Holdings’ reduced cost base in the News Publishing shares was $38.67 billion;
(e)News Australia Holdings incurred a prima facie capital loss (being the capital component minus the reduced cost base) of approximately $4 billion on the disposal of its News Publishing shares to News Publishing; and
(f)this prima facie capital loss was reduced by the Active Foreign Business Asset Percentage (Subdivision 768-G of the 1997 Act) of approximately 63%, leaving News Australia Holdings with a capital loss on disposal of its News Publishing shares of approximately $1.479 billion.
53. The News Group determined the split of the buy-back purchase price between capital and dividend components by applying the proportion of News Publishing shares owned by News Australia Holdings to News Publishing’s share capital account. In other words, since News Australia Holdings owned 70.8785% of News Publishing, the capital component represented a return of 70.8785% of News Publishing’s share capital to News Australia Holdings. This was approximately $34.68 billion. The dividend component was the balance of the purchase price, approximately $4.07 billion.
54. The buy-back consideration, embodied in the value of the News Publishing note, was $38,740,988,280. This was the book value of News Australia Holdings’ majority shareholding in News Publishing on the date of the transaction, 8 June 2005, but Mr Rue, the chief financial officer of News Limited in Australia, determined that this was also its market value on that day. That was because, in his view, nothing had occurred, including any material variation in the share price or the operations of the Group, to cause a change in market value since the time that the market value had been determined some months earlier, in the detailed valuation processes undertaken for the purposes of the Flip. We accept this evidence.
55. After the buy-back, News Australia Holdings distributed the News Publishing note to News Corp US as a reduction of capital, and News Corp US contributed it to equity in New News Publishing. The final step of the Second Spin as regards News Publishing was the merger of New News Publishing and News Publishing. In this merger, News Publishing issued News Publishing shares to News Corp US.
56. We now turn to a consideration of the issues arising under Part IVA of the Act.
Summary of Part IVA
57. Part IVA of the Act applies to a scheme where the following matters are satisfied:
(a)there is a “scheme” as defined in s 177A(1);
(b)a “tax benefit”, as defined in s 177C, is obtained by a taxpayer in connection with the scheme; and
(c)having regard to the eight matters in s 177D(b), 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.
Section 177A(1) – the “scheme”
58. The Commissioner identified two schemes to which Part IVA might apply. The first, identified simply as the “Scheme”, comprised the following steps, labelled as steps (g) to (i) in paragraph 37(i) of the Commissioner’s Statement of Facts, Issues and Contentions:
(g)The off-market share buy-back on 8 June 2005 by News Publishing of all of its shares owned by the applicant at that time (being 70.8785% of the shares in News Publishing). The shares bought back were 5544.497612 Class A ordinary and 1561.0092 Class B redeemable ordinary shares. The consideration for the share buy-back consisted of a promissory note (“the News Publishing Note”) issued by News Publishing to the applicant. The News Publishing Note had a face value of A$38,740,988,280;
(h)The transfer by the applicant of the News Publishing Note to News Corp US by way of a distribution in satisfaction of a reduction in capital of the applicant on 8 June 2005. The reduction in the capital account of the applicant being in an amount equal to the face value of the News Publishing Note of A$38,740,988,280;
(i)The transfer by News Corp US of the News Publishing Note by way of subscription to the equity capital of News Publishing on 8 June 2005. This was achieved by News Corp US contributing the News Publishing Note to its wholly-owned subsidiary, New News Publishing. New News Publishing then merged with and into News Publishing, with News Publishing being the survivor entity. As a result of the merger of News Publishing and New News Publishing, News Publishing credited its capital contribution account in the amount of the value of the New News Publishing assets received (being the News Publishing Note and other assets) for shares.
59. The second scheme the Commissioner identified was described as the “Alternative Scheme”, and it differed from the Scheme only by the addition of an extra preliminary step, labelled as paragraph (a) and described as “the decision to undertake steps (g) to (i)” as set out immediately above.
60. The applicant does not dispute that the Scheme and the Alternative Scheme are both capable of being a “scheme” under section 177A(1) of the Act.
Section 177C – the “tax benefit”
61. The next question is whether the applicant obtained “a tax benefit in connection with a scheme”. The answer depends on whether the applicant incurred a capital loss that either would not have been incurred, or might reasonably be expected not to have been incurred, if the scheme had not been entered into or carried out.
62. These words require an analysis of what has been referred to in the cases as the “counterfactual” (for example, Commissioner of Taxation v Lenzo [2008] FCAFC 50 at [106]; (2008) 167 FCR 255 at 274), or sometimes as the “alternative postulate” (Commissioner of Taxation v Hart [2004] HCA 26 at [66]; 217 CLR 216 at 243).
63. The parties do not agree on an alternative postulate. On the one hand, the Commissioner contends that if the Scheme or the Alternative Scheme had not been entered into or carried out, it is reasonable to expect that the applicant would have transferred or distributed its shares in News Publishing to News Corp US in return for a reduction of capital. The applicant, on the other hand, says that the Commissioner’s alternative postulate is not a reasonable one because it does not satisfy the “no tax, no tax risk” condition that the Group imposed on the Reincorporation. It cites the words of the High Court in Commissioner of Taxation v Peabody [1994] HCA 43 at [31]; 181 CLR 359 at 385:
A reasonable expectation requires more than a possibility. It involves a prediction as to events which would have taken place if the relevant scheme had not been entered into or carried out and the prediction must be sufficiently reliable for it to be regarded as reasonable.
64. The applicant says that if the Scheme had not been entered into (for example, if the applicant had not received an ATO ruling confirming that Part IVA would not apply to include a capital gain in its assessable income), then the Group would not have entered into an alternative transaction. It would have stopped after the First Spin, it would have tolerated the inefficiencies of the “sandwich” structure and it would have waited for some other way to elevate News Publishing to News Corp US without triggering a taxable gain. In other words, the applicant’s alternative postulate is to do nothing after the First Spin.
65. Despite the disagreement between the parties as to the alternative postulate, it is common ground that the applicant obtained a tax benefit in connection with the scheme, no matter how the scheme is formulated – whether as the Scheme, or as the Alternative Scheme (see [58] and [59] above). Nevertheless, that disagreement as to the alternative postulate will assume some significance when we come to consider the matters in s 177D(b).
66. Before we do that, it is appropriate to note the principles by which those matters are to be assessed.
Section 177D(b) – the general principles
67. The question in s 177D is whether, having regard to the eight matters in paragraph (b), and only those matters, “it would be concluded” that the dominant purpose of the taxpayer’s entry into the transaction was to obtain a tax benefit. In that context, the following propositions have been established:
(a)The fact that a particular commercial transaction is chosen from a number of possible alternative courses of action because of tax benefits associated with its adoption does not of itself mean that there must be an affirmative answer to the question posed by s 177D (Hart, at [15]; 217 CLR 216 at 227, per Gleeson CJ and McHugh J);
(b)Equally, the existence of a rational commercial objective does not mandate a negative answer to the question (Federal Commissioner of Taxation v Spotless Services Ltd [1996] HCA 34; (1996) 186 CLR 404 at 416, per Brennan CJ, Dawson, Toohey, Gaudron, Gummow and Kirby JJ);
(c)There is no room in the enquiry under s 177D for a consideration of the subjective purpose or motivation of a particular person, because that is not one of the eight matters specified (Commissioner of Taxation v Sleight [2004] FCAFC 94 at [67]; (2004) 136 FCR 211 at 229-230, per Hill J; Hart, at [65]; 217 CLR at 243, per Gummow and Hayne JJ); and
(d)Some of the eight matters may point one way, others may point in the opposite direction, and some may be neutral: it is the evaluation of these matters, alone or in combination, some for, some against, that s 177D requires in order to reach the conclusion to which s 177D refers (Peabody v Commissioner of Taxation [1993] FCA 74; (1993) 40 FCR 531 at 543, per Hill J).
Consideration
68. In considering the application of Part IVA it is impossible to ignore that the scheme related to a complex reconstruction of a very large and complicated company structure. The reconstruction was concerned with relocating assets, not with manipulating the incidence of income tax provisions on inevitable events which might be expected to have less favourable income tax consequences. It was not, for example, a scheme associated with diversion of the receipt of expected income. Because it was intended to move very substantial assets from an Australian corporation to a related US corporation, it is not surprising that the process was both complex and complicated and that mechanisms other than transfers were considered for parts of the process.
69. In summary, the mechanism chosen for the Second Spin was for the applicant’s shares in News Publishing to be converted into a liability represented by a note. The corresponding asset, being the benefit of the note, was distributed to its substantial shareholder, News Corp US, the corporation intended to hold News Publishing’s assets. That required a reduction in capital. The asset was used to subscribe for shares in a US company which merged with News Publishing.
70. The Commissioner’s counterfactual highlights a direct transfer by the applicant to News Corp US of its shares in News Publishing. A transfer seems simple and achieves the desired result. The transfer is not, however, a transfer for which payment is to be made out of existing assets of News Corp US. It is, to quote the respondent’s written submissions, to be a “sale in satisfaction of a reduction of capital”. The applicant, which was a company with substantial assets, is no longer to have those assets. It is proposed, in a sense, to distribute the assets to News Corp US. Indeed, the Commissioner posited a distribution as an alternative to transfer. In either event a reduction of capital is required. It is difficult to see that the complexity of a buy-back followed by dealings in a note, including a reduction of capital, is any more explicable by reference to tax purposes, than a transfer or a distribution incorporating a reduction of capital. A buy-back which leaves the applicant with assets which can be used to acquire equity in News Publishing might seem at least equally to be a natural way of achieving the desired result.
71. A transfer of ownership from one company to another without real consideration moving from the existing resources of the transferee, even when there is a vertical relationship between the companies, is never run of the mill. The problem is not the transfer, it is how the consequential situation is regularised. It does not seem to us that much significance can be attached alone to the difference between a share buy-back followed by dealings with the assets arising and a transfer or distribution followed by a reduction of capital.
72. Although invited to identify the documents which the Commissioner’s counterfactual would require, the Commissioner did no more than describe the broad transactions. We note, however, that in the same document the Commissioner described the documents employed in the scheme in detail. The latter takes up much more space than the former. Although the result might be a superficial appearance of a scheme of great complexity, by comparison with a simple transfer or distribution, we do not think that that appearance is reflected by the reality. It is a product of describing one scheme by reference to documents and the other by reference to broad transactions.
73. The applicant has calculated that had the scheme transactions been carried out in accordance with the Commissioner’s counterfactual on the same day, 8 June 2005, a capital gain of approximately $25 million would have resulted. Absent the ATO ruling, this might have been taxable, although it would have been easily offset by the applicant’s existing capital losses exceeding $600 million.
74. Whether the counterfactual would yield a capital gain or loss for the applicant depends, in part, on the exchange rate between the Australian and US dollars. The result was accordingly subject to variation with movements in the exchange rate.
75. The profit of $25 million was calculated on an exchange rate of 0.7493. This figure derives from rates for profit and loss calculations kept by the applicant. It is calculated as at 8 June 2005. Significant changes in the result will flow from relatively small changes in the rate. Thus, a five cent rise in the value of the Australian dollar (0.7993) would result in a loss of $872 million and a 5 cent fall in the Australian dollar (0.6993) would result in a gain of slightly more than one billion dollars.
76. Comparable profit and loss exchange rates for the calendar years 2003 to 2006 show a variation of more than 20 cents during the period. The rate one year earlier, on 9 June 2004, was 0.7130 and one year later, on 9 June 2006, was 0.7478. Calculations made on behalf of the applicant show that those rates would have yielded a gain of more than $600 million and an approximate break even respectively. Had the exchange rate on 8 June 2005 been as it was three months earlier (0.7419) there would have been a break even and three months later (0.7584) a loss of more than $100 million. At the extremes, there would have been a gain in the billions (1 January 2003: 0.5537) or a substantial loss approximating $350 million (29 December 2006: 0.7632).
77. Taking into account that a decision to proceed by way of buy-back had been taken in principle in 2003, these calculations tend against the suggestion that that decision would have been taken for the dominant purpose of obtaining a tax benefit. A dominant purpose would more likely have been the avoidance of a capricious and uncertain outcome.
78. The capriciousness of the potential situation can also be seen from the following submission of the Commissioner:
Prior to May 2004 Mr Whyte thought there was likely to be a capital gain on disposal of the NPAL shares, and that the design of the buyback was to eliminate the capital gain in the process of having NPAL directly owned by News US. But by September 2004 he believed that there was likely to be a capital loss. A new cost base would have to be established (which occurred in December 2004) reducing the cost base of $57 billion to $38 billion.
79. A significant matter which must be addressed in the present case is the News Group’s determination that the restructuring should not involve any adverse taxation consequences. It may be understandable that a conglomerate in the position of News Group would not want a restructuring to have adverse tax consequences. After all, the proposal was neutral so far as its income earning business operations were concerned except to the extent to which the restructuring itself might lead to those operations becoming more profitable. That consideration is, however, irrelevant to the question before us. If any scheme implemented as part of the restructuring would be entered into to obtain a tax benefit the powers under Part IVA are attracted however normal the underlying reasoning might be.
80. It does not follow, however, that merely because a taxpayer takes taxation considerations into account in selecting one form of transaction over another, any tax benefit which results from the choice will be within Part IVA. The test is concerned with the dominant purpose, or “the ruling, prevailing, or most influential purpose” Federal Commissioner of Taxation v Spotless Services Ltd [1996] HCA 34; (1996) 186 CLR 404 at 416. A condition that a transaction be carried out in a way that does not involve adverse tax consequences need not be the dominant purpose for the transaction as carried out or even for its preferment over an alternative which would have adverse tax consequences.
81. The Commissioner placed significant reliance on what was described as the circular nature of the steps constituting the scheme. The label “circular”, when applied to a scheme, injects a pejorative element. A good example of circularity warranting disapproval is a “round robin” of cheques in which the illusion of the making of substantial payments of money is achieved although no money actually changes hands because the person who draws the original cheque almost immediately receives a cheque for the same amount. In reality, nothing happens.
82. The present scheme, and its steps, are entirely different. The ownership of a very substantial company changes. There are reasons for the movement of the note between the companies concerned.
83. We now address, in turn, each of the eight matters in s 177D(b) of the Act. Our analysis focuses mainly on the Scheme, rather than the Alternative Scheme, but unless otherwise indicated, the comments we make about the Scheme are equally relevant to the Alternative Scheme.
The first matter – the manner in which the scheme was entered into or carried out
84. Under this heading the Commissioner has five broad issues. They are:
· that numerous steps were involved in the scheme;
· that significant legal documentation was required;
· that there was a degree of “complexity” in the transactions which is only explained by the Australian tax outcome;
· that the scheme was “contrived” to attract the operation of Division 16K; and
· that the “buy-back” involved a mere transitory reduction of capital and a recapitalisation by a related entity.
85. The applicant answers with the simple proposition that the manner in which the scheme was entered into or carried out was the only manner reasonably open to it to achieve its commercial objectives. In particular it relies on the “no risk, no tax risk” condition imposed by the Group. It says that the Commissioner’s alternative postulate – that the applicant could have sold or distributed its shares in News Publishing to News Corp US in return for a reduction of capital – does not satisfy that condition and therefore is not a reasonable (or even possible) alternative.
86. The applicant also says that even if the Commissioner’s alternative postulate is the correct one, the fact that the alternative has a less advantageous tax outcome does not lead to a conclusion that Part IVA would apply. It cites the comments of Gleeson CJ and McHugh J in Hart, at [15] (summarised above at [67](a)) and those of Gummow and Hayne JJ, to similar effect, in the same case, at [52]-[53].
87. The apparent “complexity” of the arrangements is hardly surprising, given the size and global reach of the News Group and the ambitious nature of the reincorporation exercise. The taking of numerous steps and the need for significant legal documentation were unavoidable. The Commissioner’s suggestion that the alternative postulate could have been undertaken in three or four straightforward steps is an extreme over-simplification. On any measure this was a major undertaking, no matter how it was to be put into effect.
88. The particular steps undertaken were sensible and rational when measured against the “no tax, no tax risk” requirement. The alternative postulate, to the extent that it could have exposed the Group to a potential capital gain in the billions of dollars, depending on the prevailing currency exchange rate (see [76] above), would have been so uncertain in its outcome as to be almost reckless. In addition, the particular arrangement undertaken was capable of providing the certainty of a private ruling, whereas the alternative was not.
89. We accept that the buy-back element of the Scheme was decided upon for UK tax reasons. We also accept that, once it became part of the fact pattern disclosed to the IRS, the Group acted on advice that it should not change any of the transaction steps, for fear of losing the protection of the IRS ruling. Whether that advice was correct, or unnecessarily conservative, is beside the point. It is even beside the point to suggest that the advice was not carried out to the letter, providing it was, as we find, very substantially carried out.
90. On the question of the arrangement being “contrived” to attract favourable taxation treatment, the Commissioner says that “the share buy-back step itself makes no sense”, suggesting a conclusion similar to that drawn by Hill J in the Full Federal Court in Hart v Commissioner of Taxation [2002] FCAFC 222; (2002) 121 FCR 206 at 226 [65], that the buy-back is explicable only by the taxation consequences. We do not accept this. However, even if it were so, it is not correct, in our opinion, to view the dominant purpose as the obtaining of a capital loss. From an Australian perspective, the taxation consequences which the applicant sought were a set of outcomes that could provide it with the certainty of a ruling that an amount of assessable income would not be attributed to it, as opposed to outcomes that would potentially provide it with tax liability for a large capital gain.
91. In summary, we think the manner in which the scheme was entered into or carried out does not point to an objective purpose of obtaining a tax benefit.
The second matter – the form and substance of the scheme
92. The Commissioner focuses on the allegedly complex nature of the steps involved, but we have already dealt with that issue at [87].
93. The Commissioner also says that, while there is a share buy-back in form, there is not one in substance because there is only a temporary reduction in the capital of News Publishing, followed on the same day by a complete replenishment, with the exception that it has a new shareholder, News Corp US. Of course, the buy-back is only part of the scheme, and so the Commissioner’s complaint is about the form and substance of a part of the scheme, rather than the matter identified in s 177D(b)(ii), which is the form and substance of the scheme itself. Nevertheless, it is clear that, both in form and in substance, News Publishing did undertake a buy-back of its shares from the applicant. The purpose of the buy-back was to remove the applicant as a shareholder of News Publishing. That is exactly what happened. In accordance with the requirements of the Corporations Act 2001, the shares previously owned by the applicant will have been cancelled. After cancellation of those shares, an identical number of new shares were issued to News Corp US. The buy-back was a real transaction, and it was a transaction that needed to occur so that the restructure could proceed in accordance with the Group’s commercial objectives.
94. As far as the form and substance of the scheme overall are concerned, there is no suggestion that the substance of the overall set of transactions was anything other than the elevation of News Publishing to sit directly under News Corp US, and we find that the form by which the transactions were undertaken was designed to achieve that very outcome.
The third matter – the time at which the scheme was entered into and the length of the period during which the scheme was carried out
95. All the transactions involved in the Scheme took place on the one day. That in itself is not unusual since corporate reorganisations generally take place on the one day. The Second Spin had to await the issue of the Part IVA ruling (which occurred on 12 April 2005), and once the ruling was issued, the preference was that the Second Spin should take place prior to 30 June 2005 so as to avoid financial reporting duplication. The Second Spin took place on 8 June 2005.
96. The Alternative Scheme was entered into in February 2004, with a “pre-ordaining”, at that time, of the steps that were ultimately carried out on 8 June 2005.
97. There is nothing about the timing of the entry into the Scheme, or the Alternative Scheme, or the length of time during which either of them was carried out, that points either in favour of or against the obtaining of a tax benefit.
The fourth matter – the result in relation to the operation of this Act that, but for Part IVA, would be achieved by the scheme
98. The result of the Scheme is a substantial capital loss, capable of being offset against future capital gains. The reason for the capital loss was the particular structure that was chosen, and that, in turn, was a consequence of the imperative to structure the arrangements in a way that would provide taxation certainty to the applicant.
99. The applicant says that because the tax benefit is remote rather than immediate, its case should be distinguished from the typical Part IVA case, where an immediate advantage might be expected. In our view, the timing of the availability of the potential advantage is a matter to be taken into account, but it is not a compelling factor in the applicant’s favour.
The fifth matter – 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
100. The applicant has the potential to obtain substantial future income tax savings from the generation of the capital loss.
The sixth matter – 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
101. The Scheme did not change the financial position of the News Group as a whole.
The seventh matter – 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
102. There were substantial commercial benefits accruing to the applicant and to other members of the Group. These included better access to US capital markets, a simpler and more logical corporate structure, the elimination of potential accounting, treasury and taxation complexity and duplication, and the removal of the US and UK groups from Australia’s controlled foreign corporation taxation regime. The other significant consequence was the certainty that resulted from the protection of the IRS and ATO rulings.
103. The existence of these commercial benefits is favourable to the applicant, although not determinative: Spotless, 186 CLR 404 at 416.
The eighth matter – 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)
104. The parties to the Scheme were members of the News Group, undertaking a substantial global restructure.
An overall assessment of the eight matters
105. The dominant purpose, concluded in accordance with Part IVA, for the whole reconstruction was the transfer of the head company of the News Group from Australia to the US. This purpose included the avoidance of a sandwich structure in which US and UK assets, although ultimately owned by the US head company, were owned through an Australian subsidiary. We are concerned, however, with that part of the reconstruction which the Commissioner has proffered as the relevant scheme. The scheme is confined to the elimination of the sandwich structure. It is that scheme, and more particularly, that part of it called the Second Spin, which we must examine. It is entirely possible that part of a wider transaction which has been identified as a relevant scheme might fall within Part IVA although the wider transaction would not. We must accordingly ask ourselves whether the means by which the Second Spin was effected fell within Part IVA and, in doing so, we must look to the likely alternatives. The Commissioner has identified a direct transfer or distribution coupled with a reduction of capital as the most likely relevant alternative. Accordingly, we must particularly address that.
106. When we take into account the matters we have discussed above and evaluate them in accordance with the eight factors in s 177D(b) we are drawn, at least, to the conclusion that the dominant purpose would not be concluded to be one of enabling the obtaining of a tax benefit whether that relevant tax benefit be an amount not being included in assessable income (s 177(1)(a)) or the incurring of a capital loss (s 177C(1)(ba)). Our conclusion is the same whether the counterfactual or alternative postulate addressed is the Commissioner’s alternative of transfer or distribution, or the applicant’s alternative of doing nothing.
107. The objective purpose of the Second Spin (using that expression as shorthand for the requirement of s 177D(b) as to what “would be concluded”) was to remove the sandwich structure. We think that the matters we have referred to, including the circumstances in which the original decision to use a buy-back were made, the need to comply with taxation rulings to benefit from them, the need to use a structure capable of permitting a ruling which would achieve near certainty that the reconstruction would remain tax neutral and the associated need to avoid a mechanism which could over a short time change from yielding a capital loss to yielding a capital gain, all suggest that while taxation considerations were very much in the mind of the News Group and its advisers, it would not be concluded that those involved with the scheme employed it for the purpose of obtaining a tax benefit. The objective dominant purpose remained a commercial one. It involved the selection of the transaction as carried out because it better achieved the commercial purpose whether or not it also yielded a tax benefit.
108. We also note that a restructure of this kind, although the Group had a preference to effect it for the commercial reasons we have outlined, was entirely optional. The Group could have chosen to continue to live with the commercial disadvantages of the previous structure and leave things as they were. Instead, it decided that the restructure should take place, but only on condition that it did not expose any member of the Group to a material tax liability. That is a perfectly rational way to approach an undertaking of this nature. The decision to approach it in this way does not, objectively, point to the arrangement having been entered into with the dominant purpose of obtaining a tax benefit.
109. The circumstances of the Group stand in stark contrast to those of a taxpayer who derives income and then seeks to shelter that income through the use of artificial or contrived arrangements which serve no useful commercial purpose (other than to avoid tax). The transactions that were undertaken here, although complex in some respects, had the valid purpose of effecting the restructure for the ultimate commercial benefit of the Group and its shareholders. The triggering of a material tax liability would have undermined that purpose and that ultimate commercial benefit.
110. There are two matters which were addressed during the hearing which, on the decision we have reached, we are not required to resolve. The first is whether the most appropriate counterfactual for examination was transfer or distribution, on the one hand, or doing nothing on the other. This raised legal questions of when a counterfactual of doing nothing could be used and factual questions of what the News Group would have done. The second is what is the effect of the Commissioner’s ruling under Part IVA.
111. So far as the first is concerned we see no reason not to accept Mr Nallen’s evidence that the News Group would have tolerated the sandwich structure, particularly as this statement was qualified by his saying that they would have continued to look for an alternative. It might be said, against this, that a gain of approximately $25 million, which could be set off against existing capital losses of around $600 million, would hardly have been a disincentive to adopting the alternative of a transfer. However, that is not the question. The question is what was the objective purpose for what was done. We do not think this matter is relevant, but, even if it is, it does not affect our conclusion.
112. The second matter arises this way. The Commissioner’s ruling is that he would not use s 177F(1)(a) to include an amount in assessable income. The ruling was given at a time when it was anticipated that there might be a capital loss from the Second Spin even if effected by transfer or distribution. Nevertheless, the Commissioner ruled favourably to the News Group under s 177C(1)(a). He was not considering s 177C(1)(ba). Problems may arise as to how s 177D(b) is to be applied to a single scheme which may lead either to the non-inclusion of an amount in assessable income (s 177C(1)(a)) or to the incurring of a capital loss (s 177C(1)(ba)). Notwithstanding the fact that different categories of tax benefit within s 177C are involved it seems to us that it will be a rare case in which the application of s 177D(b) to one scheme could yield a different result depending upon the identification of one category of tax benefit in preference to another. However, unless the Commissioner gave his ruling that there was no tax benefit under s 177C(1)(a) simply on the basis that even under any counterfactual there would be a loss, a basis which was not reflected by the facts, the Commissioner seems to have proceeded on the basis that the same scheme could yield a different result whether ruled on under s 177C(1)(a) or s 177C(1)(ba).
113. We have not found it necessary to resolve this matter. We, note, however, that the parties apparently remain in dispute as to the precise effect of the ruling. That dispute will not, on our decision, give rise to any future problem.
114. We also note, for completeness, that the parties are not agreed as to the precise amount of the capital loss. That matter is not before us because it was not part of the Part IVA decision. We merely note that should the applicant’s capital losses be offset by capital gains in the future a question may then arise as to the precise calculation of the capital losses.
115. The objection decision of the Commissioner of Taxation must be set aside. We substitute a decision pursuant to s 177F(1)(c) that it is not determined that the capital loss of approximately $1.5 billion in issue in this case was not incurred by the taxpayer.
I certify that the 115 preceding paragraphs are a true copy of the reasons for the decision herein of Justice Downes, President and Member Frost.
Signed: ...........................[sgd]..........................................
Claire Doherty, AssociateDate/s of Hearing: 10 - 12, 15 - 19 June 2009
Date of Decision: 29 September 2009
Solicitor for the Applicant: Duncan Cotterill Solicitors
Counsel for the Applicant: T Bathurst QC, A Payne SC, C Burnett
Solicitor for the Respondent: Australian Government Solicitor
Counsel for the Respondent: D McGovern SC, M Hirschhorn
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