Submissions Based on Context and Purpose
56 The contention that Div 615 was premised on an interposed company being a shelf company was said to be supported by the following context and purpose.
57 First, s 615-25(3)(b) was said to contemplate a circumstance where the "interposed company" may have had up to five shareholders who have retained their shareholdings but the market value of those shares is no more than nominal. It was contended that this section supported a conclusion that an interposed company was not contemplated as being capable of encompassing a company of substantial value.
58 The predecessor section in the Income Tax Assessment Act 1936 (Cth) (ITAA36) was s 160ZZPA(10). That section was relevantly in the following terms:
(10) Where
(a) immediately after the completion time, the exchanging taxpayers are the owners of some, but not all, of the shares in the interposed company;
(b) the number of the remaining shares does not exceed 5; and
(c) the Commissioner is of the opinion that, having regard to:
(i) the ratio calculated in accordance with the formula:
MV of remaining shares
MV of total shares
where:
MV of remaining shares is the number of dollars in the market value of the remaining shares immediately after the completion time; and
MV of total shares is the number of dollars in the market value of the replacement shares immediately after the completion time; and
(ii) such other matters as the Commissioner considers relevant;
it would be unreasonable not to treat the exchanging taxpayers as being the owners of all the shares in the interposed company…
59 The explanatory memorandum to s 160ZZPA(10) stated:
This means that arrangements where up to 5 shares are not owned by the former unitholders after the re-organisation are not necessarily ineligible for roll-over relief under this section. The cases in contemplation here are where a small number of the original shares were subscribed for on incorporation of the company. Arrangements of this kind may be necessary to facilitate the carrying out of the re-organisation. The requirement of subparagraph 160ZZPA(10)(c)(i) that the Commissioner have regard to the market value of the remaining shares compared with that of the other shares is intended to safeguard against arrangements where a disproportionately high value might be attached to the remaining shares.
60 The remaining shares would not have a nominal value if the interposed company had held assets of a substantial value immediately prior to the completion time.
61 Second, it was a requirement under Div 615 that the exchanging members dispose of their shares in the original company to the interposed company in exchange for shares in the interposed company "and nothing else". It was contended that by the time of the Distribution scheme, the shareholders entering into the Distribution scheme received shares in an entity carrying on businesses that Distribution did not previously carry on, with different tax attributes (franking credits rather than carried forward tax losses). In oral submissions, it was submitted that the requirement of "and nothing else" supported the contention that the interposed company itself brought nothing else to the group other than its existence as a company and that here Distribution shareholders did not get shares in a shelf company in return for their shares in Distribution. It was submitted that:
Distribution shareholders did not get shares in a shelf - company in return for their shares [in] Distribution.
[The Distribution shareholders] got additional shares in the applicant, being an entity that they already owned outright, that already owned enormously valuable businesses. They did it in a way that facilitated the payment of the finance loans. They did it despite knowing that the scheme itself would deprive them of the ability to use some half a billion dollars in losses, and they created value in something else that they already owned, being the other shares that they already owned in the applicant…what the Distribution shareholders gave up was $2 billion worth of shares in [D]istribution. But what they received in exchange by way of shares was 1.8 billion in value of shares in the new combined entity.
62 Although acknowledging that it was "counterintuitive" that Distribution shareholders would "give up" shares with a value of $2bn to receive shares worth $1.8bn, the outcome was explained by the applicant's Senior Counsel in the following way:
The Distribution scheme involved contributing all of the Distribution assets to the Transmission group which thereby increased in value. So the Transmission group, as a result of the Distribution scheme, was worth $2 billion more than it had been before the Distribution scheme was undertaken, and because each of the exchanging members of Distribution was already a shareholder in the applicant they already owned the Distribution group; they got the benefit of that value through their existing shareholding. To make them equal in terms of value with where they were at the beginning of the day, they had to be given $1.8 billion worth of shares in the newly engrossed… [t]he newly enlarged entity being the applicant. So what they got was $1.8 billion in shares plus a boost in the value of something they already had. Although, in our submission they did get something else. They got their shares, and they got the value. I mean, they didn't lose anything, but that's just how it happened; that was the - that's just the maths of how the value was worked out.
63 Third, the purpose of Div 615 as evidenced by the extrinsic material and legislative history was said to support the proposition that Div 615 was only intended to apply to an interposed company that was a "shelf company".
64 The immediate statutory predecessor to Div 615 is relevantly Sub-div 124-G. This in turn was the successor to ss 160ZZPA, 160ZZPB, 160ZZPC and 160ZZPD of the ITAA36.
65 The relevant ratio requirement was originally in s 160ZZPA(1)(m) which was in the following terms:
in the case of each exchanging taxpayer - the ratio calculated in accordance with the formula:
MV of taxpayer's shares
MV of total shares
where:
MV of taxpayer's shares is so much of the market value, immediately after the completion time, of the replacement shares owned by the taxpayer immediately after that time as is attributable to the exchange units held by the interposed company; and
MV of total shares is so much of the market value of all the replacement shares, immediately after the completion time, as is attributable to the exchange units held by the interposed company;
is the same as the ratio calculated in accordance with the formula:
MV of taxpayer's units
MV of total units
where:
MV of taxpayer's units is the market value, immediately before the exchanging taxpayer's disposal time, of the exchange units held by the taxpayer immediately before that time; and
MV of total units is the market value of all the exchange units immediately before the exchanging taxpayer's disposal time;
66 By operation of s 160ZZPC, s 160ZZPA applied in a corresponding way to a scheme for the reorganisation of the affairs of a company (being the original company rather than the unit trust).
67 When the former Part IIIA of the ITAA36 was rewritten into the ITAA97, s 160ZZPA(1)(m) was replaced with s 124-365(3) of the ITAA97 by the Tax Law Improvement Act (No 1) 1998 (Cth). That section was in the following terms:
(3) The ratio of:
• the *market value of each exchanging member's *shares in the interposed company to the market value of the shares in the interposed company issued to all the exchanging members (worked out just after the completion time);
must equal the ratio of:
• the market value of that member's shares in the original company that were *disposed of to the interposed company to the market value of all the shares in the original company that were disposed of to the interposed company (worked out just before the first disposal).
Example: There are 100 shares in A Pty Ltd (the original company), all having the same rights. B Pty Ltd (the interposed company) acquires all the shares in A by issuing each shareholder in A 10 shares in itself for each share they have in A. All shares in B have the same rights. Bill owned 15 shares in A and received 150 shares in B in exchange.
68 The applicant relied upon the omission of the phrase "as is attributable to the exchange [shares] held by the interposed company" in the first part of the ratio found in s 124-365(3) (which is now replicated in s 615-20(2)(a)) as having "the result that the first part of the ratio required the taking into account of not just shares held in place of the 'exchange units' but all the shares held in the interposed company". It was contended that this "change (later replicated in s 615-20) means that the ratio does not accommodate circumstances where valuable shares were held in the interposed entity prior to the reorganisation". As a result, it was contended, Div 615 rollover is "in effect confined to situations in which the interposed company is a shelf company".
69 The requirement that the interposed company be a shelf company was said to be consistent with the publicly expressed views of the Commissioner in his Taxation Ruling TR 97/18 and its addendum. The addendum relevantly stated (emphasis added):
6. In effect, schemes for reorganising the affairs of more than one entity can only satisfy the legislative requirements for roll-over relief where:
• exchanging members are the same across each entity whose affairs are being reorganised;
• an exchanging member holds the same proportion of shares in each entity being reorganised; and
• the reorganisation of each entity occurs at the same time thus ensuring that a shelf company is interposed and that economic interests in the underlying assets of each entity are maintained just after its reorganisation.
70 The applicant referred to the Explanatory Memorandum to the New Business Tax System (Capital Gains Tax) Bill 1999 (Cth) that introduced Sub-div 124-M (scrip for scrip rollover). The explanatory memorandum to that bill states (emphasis added):
2.48 A common feature of a takeover or merger is the interposition of the acquiring entity, the takeover or merger target, or another entity as part of the process of acquiring at least 80% of the equity in the target. Existing roll-over relief under Subdivisions 124-G and 124-H ensures that the full effect of the interposition is recognised and dealt with appropriately for wholly internal reconstructions with 100% beneficial ownership of the interposed entity. The provisions do not apply to mergers or takeovers of the type contemplated by the scrip for scrip proposals.
2.49 The Government is examining options for dealing with the cost base of assets acquired by an interposed entity as part of a takeover or merger process where the scrip for scrip roll-over applies to the exchanging shareholders or unitholders, and will be consulting on this issue.
71 The applicant contended that the interaction of Div 615 with the consolidation rules in Part 3-90 and in particular the interaction between s 615-30(2) and ss 703-65 to 703-80 supported the contention that Div 615 was only intended to apply to an interposed company that was a "shelf company". Sections 703-65 to 703-80 are entitled "Effects of choice to continue group after shelf company becomes new head company". Additionally, a note to s 703-5(2) and an annotation in s 719-90(2)(c) each expressly refer to a "shelf company" becoming the new head company after a consolidation.
72 The applicant also referred to the Explanatory Memorandum to the New Business Tax System (Consolidation and Other Measures) Bill (No. 1) 2002 (Cth) which relevantly introduced ss 703-65 to 703-80. That explanatory memorandum states (emphasis added):
Interposed shelf head company
2.6 Generally, a consolidated group will cease to exist where the head company of the group no longer satisfies the conditions for being a head company. An exception to this rule now operates to ensure that a consolidated group will not cease to exist in limited circumstances despite an entity ceasing to be the head company of the group.
2.7 These changes will help to reduce unnecessary compliance costs. For example, by preserving a consolidated group in certain cases where nothing of substance has changed within the group, the group will be relieved of the burden of applying the consolidation cost setting rules (and obtaining the necessary market valuations). The changes will also aid in protecting the integrity of the consolidation regime. For example, the changes effectively prevent the cost bases of a group's assets from being reallocated between those assets where nothing of substance has changed within the group. Other integrity benefits of these changes are discussed in paragraphs 2.30 and 2.35.
…
2.11 Before the interposed company can make a choice that the consolidated group is to continue in existence, the share exchange which results in the interposed company being interposed between the original company and its shareholders must also be in accordance with the conditions set out in Subdivision 124-G of the ITAA 1997. For example, the interposed company needs to be a shelf company. Also, the entities described as the interposed company and the original company in paragraph 2.8 must come within the existing meanings of those terms given by Subdivision 124-G. Broadly, the term 'original company' means the existing resident company in which the shareholders originally held shares before the share exchange. The term 'interposed company' broadly means a resident company that acquires all of the shares in a company whose shares are held by the original shareholders.
73 In the New Business Tax System (Consolidation and Other Measures) Act (No. 1) 2002 (Cth) itself, Schedule 2 (which introduced the predecessor provisions in Sub-div 124-G) was titled "Schedule 2 - Consolidation: group continues when shelf company becomes new head company".
74 In 2008, the Tax Laws Amendment (2008 Measures No. 6) Bill 2008 (Cth) was introduced to modify Sub-divs 124-G and 124-M and in particular introduced s 124-784A. The applicant referred to the explanatory memorandum to that bill which states (emphasis added):
1.2 Currently, depending on circumstances, Subdivision 124-G of the ITAA 1997 (exchange of shares in one company for shares in another company) or Subdivision 124-M (scrip for scrip roll-over) may apply to allow a CGT roll-over for shareholders who dispose of shares in a company (the original entity) in exchange for shares in another company (the acquiring entity). In essence:
• the exchange of shares roll-over is designed for corporate restructures; and
• the scrip for scrip roll-over is designed for corporate takeovers.
1.3 The exchange of shares roll-over provides a tax neutral outcome for corporate restructures where there is no substantive change in the underlying assets or the ownership of the original entity. If this roll-over applies, the cost base of the shares that an acquiring entity receives in the original entity reflects the cost bases of the underlying net assets of the original entity.
1.4 The scrip for scrip roll-over can apply to an arrangement only if the exchange of shares roll-over does not apply. If the scrip for scrip roll-over applies, the market value substitution rule generally applies so that the cost base of the shares that the acquiring entity receives in the original entity reflects the market value of the underlying net assets of the original entity. This recognises that, in a commercial takeover, shares are given in consideration for the acquisition of the value represented by those assets.
…
1.6 Companies are able to gain significant tax benefits by restructuring in a way that attracts the scrip for scrip roll-over rather than the exchange of shares roll-over. These tax benefits are compounded if the entity taken over becomes a member of the acquiring entity's consolidated group.
…
Summary of new law
1.9 The scrip for scrip CGT roll-over provisions will be modified to prevent a market value cost base from arising for any qualifying interests acquired by the acquiring entity under an arrangement that is taken to be a restructure.
1.10 An arrangement will be taken to be a restructure if, broadly, just after the arrangement was completed (the completion time) the market value of the replacement interests issued by the acquiring entity under the arrangement in exchange for qualifying interests in the original entity is more than 80 per cent of the market value of all the shares (including options, rights and similar interests to acquire shares) issued by the replacement entity.
75 The applicant relied upon this explanatory material in support of a conclusion that "Subdivision 124-G was intended to be limited to a particular set of circumstances that would not always arise in the case of an entity being 'top-hatted' as part of a restructure. If this were not the case, s124-784A would have no work to do.".