REASONS FOR JUDGMENT
PAGONE J:
110 I have had the benefit of reading the joint reasons for judgment of Edmonds and Gordon JJ but respectfully differ from their conclusions in some respects.
111 The three questions posed for the Court concern an important matter of general tax administration, namely the application of the general anti-avoidance provision in Part IVA of the Income Tax Assessment Act 1936 (Cth) ("the 1936 Act") to companies governed by the consolidation regime in Part 3-90 of the Income Tax Assessment Act 1997 (Cth) ("the 1997 Act") where the statutory consequence arising from a company joining a consolidated group is an essential element in what the Commissioner contends to be a tax benefit for the application of Part IVA. The Commissioner has made alternative determinations and has raised alternative assessments to apply the anti-avoidance rule in Part IVA which the taxpayers contend cannot be made consistently with the consolidation provisions because of the single entity rule in Div 701 of the 1997 Act.
112 The Commissioner has sought to tax, pursuant to Part IVA, an amount of $33,795,402 arising from a sale by Channel Cattle Co Pty Ltd ("CCC") of pastoral leases, associated trading stock and depreciating assets under a contract entered into in February 2008 by CCC with an unrelated third party purchaser, namely, Baldy Bay Pty Ltd. For present purposes it may be accepted that the sale would have resulted in a taxable capital gain to CCC but for the formation of a consolidated group with Channel Pastoral Holdings Pty Ltd ("CPH") as head entity, and CCC as a subsidiary entity, with effect from 1 January 2008. Until then CPH had been a dormant company and CCC had been the owner of two cattle stations known respectively as "Alroy Downs" and "Dalmore Downs" which it had acquired in 2004. The stations comprised land in the Northern Territory, associated plant and equipment, trading stock (cattle and horses) and the stations' stock brand. CCC had been incorporated in 1981 and all of its shares were owned by Mr and Mrs Sherwin until 31 December 2007 when they agreed to transfer their shares in CCC to CPH for consideration totalling $61,232,074. Mr and Mrs Sherwin had acquired those shares before 20 September 1985 and their transfer to CPH was not taxable as a capital gain to Mr and Mrs Sherwin. CPH was incorporated on 6 July 2006 with each of Mr and Mrs Sherwin holding one of the only two issued shares until 28 December 2007 when Mrs Sherwin transferred her share in CPH to her husband resulting in Mr Sherwin becoming the sole owner of CPH. A consequence of these transactions was to enable CCC and CPH to become a consolidated group under Part 3-90 of the 1997 Act.
113 CPH elected to form a consolidated group with effect from 1 January 2008 with itself as the head entity. The consequences of CCC joining the CPH consolidated group included, significantly, that the tax cost of each of CCC's reset cost base assets was reset to its "tax cost setting amount" with effect from 1 January 2008 pursuant to s 705-35(1)(c) of the 1997 Act. The result of that was to increase, for the purposes of Part 3-1 (which deals with capital gains and losses) of the 1997 Act, the cost base of the land, plant and equipment and trading stock owned by CCC when joining the CPH consolidated group. CPH accounted for the transaction as head entity of the group by claiming a capital loss on the sale of the land, returning the derivation of $25,405,000 in assessable income from the sale of the trading stock, and claiming a deduction of $23,260,930 by way of allowance for the amount by which the tax cost setting amount of the trading stock exceeded the value of the trading stock as at 30 June 2008 (by which time the trading stock had been sold).
114 The Commissioner contends, however, that a tax benefit has been obtained by a taxpayer in connection with a scheme within the meaning of the provisions of Part IVA of the 1936 Act. For present purposes it is to be accepted that the sale by CCC as a subsidiary in the CPH consolidated group, in the absence of the application of Part IVA, would produce the tax consequences of resetting the tax cost setting amount of each of CCC's reset cost base assets described above. It may also be assumed for the purposes of this proceeding that CCC would have been assessed for its sale of its assets had it sold them other than as a subsidiary member of the consolidated group which was created two months before the sale. That may be assumed because the parties have narrowed their dispute in this proceeding and do not require the Court to determine the correctness of the conflicting contentions about whether CCC would have made a taxable capital gain had CCC not joined the CPH consolidated group. The three questions posed for the Court, in this context, therefore, are all concerned with determining whether, and if so how, the Commissioner can apply Part IVA where a tax benefit is said to have been obtained in connection with a scheme which involves the creation of a consolidated group with the consequence that the entity that would otherwise have been taxable comes within the terms and operation of the single entity rule in the consolidation provisions in Part 3-90. The critical point in issue in each of the questions is whether Div 701 of Part 3-90 of the 1997 Act prevents the operation of Part IVA where an element in the scheme which is said to produce a tax benefit is the consequences which arise under the 1997 Act by the consolidation. The "Act" for the purposes of the 1997 Act includes the 1936 Act (see the definition of "this Act" in s 995-1(1) of the 1997 Act) and vice versa (see the definition of "this Act" in s 6(1) of the 1936 Act).
115 The Commissioner has sought to navigate the inter-relationship between the consolidation provisions and the general anti-avoidance provision by making alternative determinations and alternative assessments to negate the fiscal effect of the consolidation upon the sale by CCC to Baldy Bay Pty Ltd. Each of the three questions posed for the Court to answer seeks to explore whether, in light of Div 701 in Part 3-90 of the 1997 Act, the Commissioner was able to make the alternative determinations and then to give effect to them in the various ways described in the three questions. In each case CCC and CPH contend that Div 701 of the 1997 Act prevents the Commissioner from relying upon Part IVA of the 1936 Act.
116 Each question has two parts: the first is concerned with the power under s 177(1)(a) to make a determination and the second with the power under s 177F(1) to give effect to the determination which was made (assuming it to be effective). The first two questions depend upon a reconsideration by this Court of the decision, and reasoning, of the majority in Federal Commissioner of Taxation v Macquarie Bank Ltd (2013) 210 FCR 164 which had been decided at first instance in Macquarie Bank Ltd v Federal Commissioner of Taxation [2011] FCA 1076 ("Macquarie Bank"). The Commissioner challenges the correctness of that decision and contends that it is plainly wrong and ought not to be followed. The third question raises an argument that was not considered in Macquarie Bank and, to that extent, does not necessarily call for a reversal of the decision but nonetheless requires some consideration of the reasoning in Macquarie Bank if only to consider whether it has application to the new argument. Each question, and the reasoning in Macquarie Bank, requires a construction and understanding of what Div 701 does and its impact, if any, upon Part IVA. It may be desirable, therefore, to consider those provisions generally before turning specifically to the reasoning in Macquarie Bank.
117 The first question asks whether Div 701 prevents the Commissioner from applying Part IVA by making a determination to CCC and then to give effect to that determination by issuing an amended assessment to CPH. Section 177F(1) confers upon the Commissioner power first to make a determination of the kind described in the section and then to give effect to such a determination. The scenario contemplated by the first question supposes that CCC is the taxpayer which has, or would but for the application of the section have, obtained a tax benefit. The relevant tax benefit contemplated by the scenario is the non-inclusion of an amount in the assessable income of CCC in connection with a scheme through which, relevantly, CCC was a member of a consolidated group at the point of sale of its assets such as to invoke reliance upon the operation of Part 3-90 including Div 701.
118 The taxpayers in this proceeding contend that Div 701 prevents the Commissioner from making a determination under s 177F(1)(a) to include a tax benefit in the assessable income of CCC. It is, therefore, necessary to consider the terms of Div 701. Section 701-1(1) provides:
701-1 Single entity rule
(1) If an entity is a *subsidiary member of a *consolidated group for any period, it and any other subsidiary member of the group are taken for the purposes covered by subsections (2) and (3) to be parts of the *head company of the group, rather than separate entities, during that period.
An effect of s 701-1(1) is that CCC must be taken to be part of CPH rather than as a separate entity. That effect, however, is specifically limited to the purposes covered by subsections (2) and (3) which provide:
Head company core purposes
(2) The purposes covered by this subsection (the head company core purposes) are:
(a) working out the amount of the head company's liability (if any) for income tax calculated by reference to any income year in which any of the period occurs or any later income year; and
(b) working out the amount of the head company's loss (if any) of a particular sort for any such income year.
Note: The single entity rule would affect the head company's income tax liability calculated by reference to income years after the entity ceased to be a member of the group if, for example, assets that the entity held when it became a subsidiary member remained with the head company after the entity ceased to be a subsidiary member.
Entity core purposes
(3) The purposes covered by this subsection (the entity core purposes) are:
(a) working out the amount of the entity's liability (if any) for income tax calculated by reference to any income year in which any of the period occurs or any later income year; and
(b) working out the amount of the entity's loss (if any) of a particular sort for any such income year.
Note: An assessment of the entity's liability calculated by reference to income tax for a period when it was not a subsidiary member of the group may be made, and that tax recovered from it, even while it is a subsidiary member.
Each of these subsections refers to a "sort" of loss which is provided for by s 701-1(4) to include a tax loss and a net capital loss.
119 It is convenient to speak of Div 701 as the "single entity rule" applying to the members of a consolidated group, as the heading to s 701-1 indicates, but it is important not to confuse whatever might be understood by such a label or description with what the section actually provides. The effect of Div 701 has been described as creating a statutory fiction but it may be more helpful, and more accurate, to describe its effect as a statutory direction concerned with the calculation of a composite liability. The statutory direction in s 701-1(1) is not that a subsidiary of a consolidated group is to be treated as non-existent, or that it ceases to be a taxpayer or that it does not derive or make assessable income or gains, or does not incur losses or outgoings. The statutory direction, rather, contemplates the continued existence of a subsidiary of a consolidated group but directs that for the limited purposes of determining "liability" or "losses" of the members of the group, the subsidiary is to be treated as part of the head company. The head company, for its part, is no longer to be treated as if it were a separate company because it must, for the mechanical purposes of working out liability and losses, be taken to include all of the parts of the consolidated group. The requirement that the subsidiary is to be taken to be part of a composite whole is an indication of a statutory direction that the parts continue to exist as parts of the composite whole, and that their individual portions of income and gains, or losses and outgoings, will be taken into account in the calculation of the aggregated composite whole. The identification of the purposes for requiring that the subsidiary be taken to be part of the head company, namely for working out the liability and losses of the head company and of the subsidiary, is another indication that each continues to exist and to derive or make assessable income and gains, and to incur or to make deductible losses and outgoings, because it will be those individually derived or incurred by each of the separate parts of the whole which, after derivation or incurrence by them individually, will be taken into account in working out the head company's liability or loss. Division 701 does not alter the points of derivation or incurrence (or other such relevant fiscal events) which arise by force of the 1997 Act or of the 1936 Act or by general principle. The liability or loss of the head company to be worked out as required by s 701-1 contemplates that there have been fiscal events by the group members. The function of the individual group members in the working out required by Div 701 is for their individual fiscal amounts to be taken into account in the calculation of the one final composite liability or loss of the whole through the head company. The single entity rule is a statutory direction which removes the need, which had previously existed under the former grouping provisions, for separate returns and assessments, but the rule does not create a general statutory fiction that the individual parts of the consolidated group do not continue to have an existence or that their individual existence is not specifically relevant in the working out of the liability ultimately falling upon the head company. On the contrary, it is plain from s 701-1 itself that each continues to have a fiscal function by their individual contributions to the working out of the liability of the head company in its particular capacity as head company of the group.
120 There is, therefore, no reason in Div 701 of the 1997 Act to exclude from the operation of s 177F(1)(a) of the 1936 Act an ability for the Commissioner to determine that an amount be included in the assessable income of CCC if an amount had not been included in its assessable income by CCC having obtained a tax benefit in connection with a scheme to which Part IVA applies. Such an amount, by force of s 701-1, may come to form part of the liability of the head company but may do so by its inclusion first into the assessable income of the subsidiary in the same way that any item of income derived by the subsidiary in the ordinary course of its activities would come to form part of the liability of the head company worked out under Div 701. Section 177F(1)(a) empowers the Commissioner to determine that an amount of a tax benefit obtained by a "taxpayer" be included in the assessable income of a "taxpayer". "Taxpayer" is defined in s 6(1) of the 1936 Act broadly to mean a person deriving income or deriving profits or gains of a capital nature. The making of a determination to a "taxpayer" within the meaning of s 177F(1) is a necessary procedural step in the application of Part IVA that does not itself create substantive liability: see WR Carpenter at [43]-[50]. The power to make a determination under s 177F(1)(a) is conditioned upon a tax benefit having been obtained, or which but for the section would be obtained, "by a taxpayer in connection with [the] scheme to which" Part IVA applies. The power to cancel a tax benefit by making a determination is conferred by the word "may" but, in this context, it does not confer upon the Commissioner any overriding discretion: Cumins v Federal Commissioner of Taxation [2007] ATC 4303, [41]; Federal Commissioner of Taxation v Sleight (2004) 136 FCR 211, [103]-[104]; WR Carpenter Holdings Pty Ltd v Federal Commissioner of Taxation (2007) 161 FCR 1, [48]-[51]. The Commissioner has a discretion about the quantum of a tax benefit to determine (see Federal Commissioner of Taxation v Sleight (2004) 136 FCR 211, [114]) but the section otherwise proceeds upon objective facts and conclusions: Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359, 382. The liability arising by application of Part IVA, does so, if at all, by the Commissioner "giving effect" to the determination by the exercise of such assessing, or other relevant, power conferred upon him elsewhere.
121 CCC derived the relevant profits or gains from the sale of the agricultural assets to Baldy Bay Pty Ltd in February 2008. It was the subsidiary, not the head company, which entered into the contract which gave rise to the fiscal consequences to which Div 701 applies. The fiscal character and consequences of the sale for the group are given to it by the subsidiary, and it is the subsidiary as an entity (rather than its assessable income or losses) which by s 701-1 is taken to be "part of" the head company of the group. In other words, the provisions assume, as will be the fact, that it is the subsidiary that acts in the ordinary way and that it will attract the operation of the ordinary taxing provisions, but that the subsidiary is to be taken to be part of the group for the purposes of working out liability and losses. The amount determined by the Commissioner to be included in the assessable income of CCC is no more than the substitution of the amount which would otherwise have been included in the assessable income of CCC and which is required to be taken into account when CCC is taken to be part of CPH as the head company in accordance with Div 701. The provisions of Div 701, relevantly, do not deem derivation (or corresponding losses or outgoings) to be taken to be those of the head company. It may be that CCC is not to be considered as a separate entity for the purposes described in s 701-1, but it must, at least, be considered to be a "part of" the head company and, in that capacity, to have its individual fiscal components taken into account in working out the ultimate liability of the group through the head company in its capacity as head company.
122 A determination to CCC by the Commissioner to include an amount of assessable income is consistent with s 701-1 so construed. The consequences for the liability of the group as a whole of the inclusion of an amount in the assessable income of a part of the group is a separate, and subsequent, question. The ability of the Commissioner to determine that an amount be included in the assessable income of the relevant part of a group is no more than the statutory mechanism to do by administrative action what would have occurred, and which ordinarily does occur, had the event by a subsidiary given rise to assessable income which needed subsequently to be taken into account to work out the liability of the head company. In the ordinary case where Part IVA has no application, the inclusion of amounts of assessable income, or the allowance of deductions, occur upon transactions by force of the legislation without the need for administrative action. Part IVA, in contrast, enables the Commissioner to undo the ordinary operation of the taxing provisions: s 177F provides the mechanism for the Commissioner (a) to deem amounts to be included as assessable income (or for amounts to be excluded as deductions, losses or credits where relevant), and (b) to exercise the other powers given by other provisions (including the powers of assessment in ss 166, 168 and 169 of the 1936 Act) to "give effect" to the determination. The determination in this case to CCC, therefore, takes the place (for the purposes of Part IVA) of the ordinary provisions by permitting inclusions or disallowances to CCC (whatever may then be required by Div 701 for the purpose of working out liability).
123 The conclusion that the Commissioner may, as a matter of power, make a determination directed to a subsidiary of a consolidated group is consistent with the conclusions reached at first instance in Macquarie Bank and by the Full Court on appeal. At first instance Edmonds J said at [51]:
There was considerable argument from both sides of the bar table on the issue of the authority of the Commissioner to make this determination. For the applicants it was said that even if Mongoose was a 'taxpayer' as defined by s 6(1) of the 1936 Act, it was not capable of obtaining a tax benefit, at least one comprising its non-derivation of assessable income because, for the purpose of determining its liability to income tax, it was deemed not to be a separate entity and events relating to it were deemed to occur in relation to MBL, not Mongoose. Put another way, after Mongoose joined the MBL consolidated group, even if it was a 'taxpayer' as defined, it was not liable to be assessed as a 'taxpayer', viz, 'a person deriving income or deriving profits or gains of a capital nature'. For the Commissioner it was said that once it was accepted that Mongoose is a 'taxpayer' as defined, s 177F authorised the making of a determination to include an amount in its assessable income in the circumstances contemplated by the section; that it could not be assessed on such income, a matter the Commissioner disputed, was beside the point. While not actually deciding this point because I am of the view, for other and better reasons detailed below, that the Commissioner's primary and secondary positions cannot be sustained, I incline to the view that the Commissioner's view on this issue may be correct and that the Mongoose determination is authorised by s 177F. After all, the determination is made on the hypothesis that at the time Mongoose sold the Minara shares it was not a subsidiary member of the MBL consolidated group and on that hypothesis Mongoose was certainly capable of deriving assessable income and, in consequence, capable of obtaining a tax benefit by its non-derivation.
The members of the Full Court also concluded that a subsidiary in a consolidated group remained a taxpayer within the meaning of Part IVA notwithstanding the fact of consolidation and operation of the single entity rule. Middleton and Robertson JJ said at [131]:
Section 177A(1) provides that a "taxpayer" as referred to in Pt IVA "includes a taxpayer in the capacity of trustee". The core definition of "taxpayer" is found in s 6(1) of the 1936 Act, where the word is defined as "a person deriving income or deriving profits or gains of a capital nature". As was accurately conceded by the respondents in their submissions, "most if not all active subsidiary members of a consolidated group will in fact receive income or derive gains, and - Part 3-90 apart - will be 'taxpayers'". We have no trouble finding that Mongoose is technically a "taxpayer" insofar as the s 177A definition goes. It is at the next stage of the inquiry - when seeking to carry that conclusion forward - that conceptual complications arise.
Emmett J similarly concluded at [39]-[40] that the subsidiary in a consolidated group remained a taxpayer for the purposes of the application of Part IVA. The majority in the Full Court, and Edmonds J at first instance, however, went on to conclude that the assessments in question were not authorised by reason of Div 701. It may be useful, therefore, to consider the reasoning in Macquarie Bank in the context of the second parts of the first two questions posed for the Court, namely whether Div 701 prevents the Commissioner from giving effect to a determination (whether made to a subsidiary or to the head company) by the issue of an assessment to the head company.
124 The second part of the first question posed for the Court's determination is whether a determination made to CCC can be given effect to by the making of an assessment to CPH. In Macquarie Bank Edmonds J at first instance, and Middleton and Robertson JJ on appeal to the Full Court, considered that an assessment could not be issued to a head company where the tax benefit had been obtained by the subsidiary. Edmonds J reached that conclusion on the basis that the assessment to the head company could not be said to be "giving effect to" the determination because the assessment would not be "factually consistent with the hypothesis upon which the [subsidiary's] determination [was] predicated". His Honour said at [61]:
Even if it is possible and permissible in certain limited circumstances to give effect to a determination to include an amount in the assessable income of one taxpayer by the issue of an assessment including the amount in the assessable income of a different taxpayer, and that one of those limited circumstances may include the issue of an assessment including an amount in the assessable income of a head company of a consolidated group to give effect to a determination to include that amount in the assessable income of a subsidiary member of that group, the present case is not one of them. In my view, any assessment to give effect to an anterior determination to include an amount in the assessable income of a taxpayer must be factually consistent with the hypothesis upon which that determination is predicated, whether the assessment is issued to the taxpayer referred to in the determination or a different taxpayer. The MBL amended assessment is not factually consistent with the hypothesis upon which the Mongoose determination is predicated - that Mongoose sold the Minara shares otherwise than as a subsidiary member of the MBL consolidated group - and it follows, in my view, that the MBL amended assessment cannot, and does not, give effect to the Mongoose determination.
In contrast, but to the same effect, the majority on appeal reasoned that the subsidiary, albeit technically a "taxpayer", could not be "directly assessed" for the purposes of Part IVA because, as their Honours said at [135], the subsidiary of a consolidated group is "deemed not to have a separate existence" for the purposes required for the application of Part IVA. Emmett J, in dissent, reasoned at [33]-[34] that there was "no reason why a determination issued to one taxpayer cannot be given effect to by issuing an assessment or an amended assessment to another taxpayer", and that the "relationship between the head company of a consolidated group and a subsidiary member of that group, being the relationship created by the single entity rule in s 701-1 of the 1997 Act, [was] a particular example of circumstances where a determination to one taxpayer may be given effect to by the issue of an assessment to another taxpayer".
125 The Commissioner challenges the decision in Macquarie Bank and contends that the decision of the majority was manifestly or plainly wrong: Telstra Corporation Ltd v Treloar (2000) 102 FCR 595, 602-3; Nguyen v Nguyen (1990) 169 CLR 245, 269. In my view the decision of the majority in Macquarie Bank was manifestly or plainly wrong and should not be followed. The decision, in my respectful opinion, rests upon a mistaken view of the operation of s 701-1. Their Honours construed Part 3-90 to deem a subsidiary of a consolidated group "not to have a separate existence" for purposes beyond those in s 701-1(2) and (3). Their Honours construed Part 3-90 to prevent a subsidiary of a consolidated group from being "directly assessed", in the sense that the subsidiary could not have assessable income, rather than construing Div 701 as providing the mechanism by which the separate parts of a consolidated group were made liable through the head company in its capacity as head company of a group. Their Honours, with respect, failed to consider s 701-1(1) to require that a subsidiary in a consolidated group continued to exist and was required to be taken into account as a part of the group and not as if it had ceased to exist, or was not part of the group, when working out the liability of the group in accordance with s 701-1. Similarly their Honours failed to consider that s 701-1(1) also required that the head company be taken to include the subsidiaries as part of the head company. The analysis which their Honours ought to have undertaken, as was undertaken at first instance by Edmonds J, was first to have asked whether the provisions of Part IVA, on their terms, authorised the making of a determination to the subsidiary. The answer to that question depended upon whether the subsidiary was, in light of operative terms of "the single entity rule" in Div 701, precluded from having included in the subsidiary's assessable income the amount determined to be the tax benefit as a taxpayer within the meaning of s 177F(1) in Part IVA of the 1936 Act. The answer to that question depended in part upon the fact that Div 701 directed that working out the liability of the head company required the subsidiaries of the group to be taken to be parts (with operative effects) of the group. Once that question was answered it would then be relevant to ask whether the raising of an assessment to the head company would "give effect to" the determination made to the subsidiary. In answering that question it would also be necessary to consider that Div 701 required that the subsidiary be taken to be part of the consolidated group and not as if it had ceased to exist. Their Honours did not consider whether an assessment to the head company would give effect to a determination made to the subsidiary within the meaning of s 177F(1). The reasons of the majority have two strands; namely, (a) that the assessment to the subsidiary is an impermissible step in light of their Honours construction of Part 3-90 of the 1997 Act (see at [132]) and, (b) that the assessment to the head company could not be sustained because it could not have obtained the tax benefit hypothesized by the Commissioner (see at [158]-[166]). At [160] their Honours had reasoned that there needed to "be a sufficient connection between the taxpayer in question, their [sic] assessable income and the tax benefit that has not been included therein (but would or might reasonably be expected to have been included if the scheme had not been entered into or carried out)". Neither strand dealt with whether an assessment to the head company could give effect to a determination if validly made to either a subsidiary or the head company. Neither strand allowed for the subsidiary to have a role, as "part of" the consolidated group, in working out the liability of the head company in its capacity, not as a separate company, but as the head company of the consolidated group. The final liability may fall upon the head company by force of Div 701 but it does so only by taking into account the amounts otherwise assessable or allowable of, and through, the parts which make up the consolidated group as an aggregated whole.
126 What must be asked to answer the second part of the first question posed for the Court is whether, in light of the terms of Div 701, the assessment to CPH gives effect to the determination to CCC. Part IVA provides that the Commissioner may make determinations in relation to a "taxpayer" and is given a broad power "to give effect" to such determinations by s 177F(1). The power is conferred in broad terms to accommodate, no doubt, the many circumstances in which a tax benefit obtained by a taxpayer may require the Commissioner to do something other than raising an assessment against the taxpayer who had obtained the tax benefit. The way s 177F(1) operates is to permit the Commissioner to add amounts to, or remove amounts from, a taxpayer's taxable income that would in the usual case be added or removed by force of the general provisions. The section assumes that the powers otherwise available to the Commissioner remain available to "give effect" to what is determined. The section assumes, in other words, that the ordinary provisions of assessment are available, in addition to the provisions in s 177F(3), for the Commissioner to give effect to a determination.
127 The general taxing provisions ordinarily operate by their own force without administrative action with an assessment being the trigger by which amounts brought to tax are made payable. Part IVA is an exception to that general scheme by permitting the fiscal obligation to arise by the Commissioner first making a determination under s 177F. It is not the determination, however, that will cause an amount to be payable. It is the power in s 177F to "give effect" to the determination which permits the Commissioner to rely upon other powers to raise an assessment (Commissioner of Taxation v Jackson (1990) 27 FCR 1) and to take any other action permitted to the Commissioner under other provisions. There is no reason to confine the breadth of the power to "give effect" to a determination beyond the requirement that what is done by the Commissioner to give effect to a determination be "appropriate and adapted" to that end. The relationship created by the single entity rule in Div 701 of the 1997 Act is, as Emmett J observed at [34], "a particular example of circumstances where a determination to one taxpayer may be given effect to by the issue of an assessment to another taxpayer". That is because to include an amount of income in the assessment of a subsidiary of a consolidated group requires that its liability be worked out as a part of that of the group. The requirement in s 701-1 that CCC, as a subsidiary member of the CPH consolidated group, be taken to be part of that group requires that the tax benefit determined by the Commissioner to be included in the assessable income of CCC be assessed to CPH as part of the liability of the head company. Division 701 does not provide, or require, that CCC does not have, or does not have added under Part IVA, assessable income, but, rather, that whatever be the assessable income of CCC, it be taken into account in working out the liability of CPH and CCC as parts of the group. That view accords with the conclusion of Emmett J in Macquarie Bank at [46].
128 A different view from that expressed by Emmett J had been expressed by Edmonds J at first instance in Macquarie Bank. Edmonds J reasoned that an assessment to the head company would not "give effect" to a determination made to the subsidiary. At [54] his Honour said:
Part IVA does not authorise the Commissioner to issue an assessment including an amount in the assessable income of a subsidiary member of a consolidated group. The Commissioner's s 177F power to take 'such action as he considers necessary' is not at large. It is limited to action which gives effect to a determination. A determination under s 177F only informs the calculation of a taxpayer's assessable income on a particular hypothesis: it does not and cannot authorise the exclusion of a company from a consolidated group in fact so as to constitute it an entity liable to tax, nor authorise the Commissioner to disregard s 701-1 or s 701-30 and assess the subsidiary member in disregard of those provisions.
His Honour went on to explain at [61] (quoted above) that an assessment to the head company in that case could not, and did not, "give effect" to the determination made to the subsidiary member in the consolidated group because the assessment was "not factually consistent with the hypothesis upon which the [subsidiary's] determination [was] predicated". The contrary view expressed by Emmett J on appeal at [33], in contrast, was that the power in s 177F was wide enough to permit the Commissioner to give effect to a determination to one taxpayer by the issue of an assessment to another taxpayer: see also McCutcheon v Federal Commissioner of Taxation (2008) 168 FCR 149, [33]-[35]. His Honour reasoned, as mentioned above, that the specific relationship between the head company of the consolidated group and a subsidiary member of that group was a particular example of circumstances where a determination to one taxpayer may be given effect to by the issue of an assessment to another taxpayer. At [33]-[34] his Honour said:
33 There is no reason why a determination issued to one taxpayer cannot be given effect to by issuing an assessment or an amended assessment to another taxpayer. There is no limitation to that effect in the words of s 177F and there is no reason to imply such a limitation. The Commissioner's power and obligation to take such action as he considers necessary to give effect to a determination are limited only by what the Commissioner could reasonably consider necessary to give effect to a determination. Necessary must be understood as meaning clearly appropriate and adapted for (see Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47 at 56). It may be that, in the usual case, giving effect to a determination will result in the issue of an assessment or an amended assessment to the taxpayer that is the subject of the determination. However, that need not always be so. There is no reason why the issue of an assessment to one taxpayer may be appropriate and adapted for giving effect to a determination issued to a different taxpayer, having regard to the relationship between the two taxpayers (see, for example, McCutcheon v Federal Commissioner of Taxation (2008) 168 FCR 149 at [33]-[35]).
34 The relationship between the head company of a consolidated group and a subsidiary member of that group, being the relationship created by the single entity rule in s 701-1 of the 1997 Act, is a particular example of circumstances where a determination to one taxpayer may be given effect to by the issue of an assessment to another taxpayer. By s 701-1, a subsidiary member of the consolidated group is, for certain purposes, to be taken to be part of the head company of the group, rather than a separate entity. One of those purposes is the working out of the amount of the entity's liability, if any, for income tax, as provided in s 701(3)(a). That is to say, where a subsidiary member of a consolidated group has an income tax liability, it is to be taken to be the liability of the head company and the issue of an assessment to the head company may well be appropriate and adapted for giving effect to the determination issued to the subsidiary member, as is the case in the present circumstances. So long as action taken by the Commissioner can be reasonably considered to be appropriate and adapted to giving effect to the determination, there is no other restriction to be read into s 177F as to what the Commissioner can do.
I respectfully agree with and adopt the reasoning and analysis of Emmett J. The power conferred upon the Commissioner in s 177F(1) is expressed in broad terms. It is, in particular, a power to give effect to a determination which, in this instance, works upon the hypothesis that a member of a consolidated group has obtained a tax benefit in connection with a scheme. An assessment to the head company, in this instance CPH, is apt to give effect to a determination that one of the subsidiaries in the group has had included in its assessable income an amount which had been excluded from its income by reason of the scheme in connection with which CCC obtained the tax benefit. An assessment to CPH in this case is, to adopt the words used by Emmett J at [33], "appropriate and adapted for giving effect to a determination issued" to CCC (especially where that which produced the tax benefit was so intimately involved with the creation and joining of the consolidated group which were necessarily steps for the tax benefit to be obtained by the group member). The assessment to CPH, in its capacity as the head company of a consolidated group, in my view, is not factually inconsistent with the hypothesis upon which the determination was predicated because the assessment would be to CPH as the group entity which is made liable for the determination which was made to a member of the group. Accordingly, the answer to the first question is "no"; in other words, that the Commissioner is permitted to make a determination to CCC and to give effect to that determination by an assessment to CPH consistently with the provisions in Div 701 of the 1997 Act.
129 The second question asks whether the provisions of Part IVA permit both the determination and the assessment to be made to CPH. In considering that question it is useful to bear in mind that the tax benefit said to have been obtained in this case is one which necessarily depended upon forming, and CCC joining, a consolidated group. In other words, that the tax benefit was obtained by the elements of a scheme which necessarily produced the consequence that CCC would not be liable for tax on the proceeds of its sale to Baldy Bay Pty Ltd, and on which (on the hypothesis of the scheme) CCC would have been liable had Part 3-90 (a) not effected a resetting of the taxed costs of CCC's assets, (b) not produced the consequence that CCC would become a subsidiary member of a consolidated group of which CPH was the head entity and (c) not provided that the amount of the liability of CPH was to be worked out on the basis that CCC was part of CPH rather than a separate entity. The tax benefit thus identified is the non-inclusion of an amount in the assessable income not of CPH as a separate company but in its assessable income as a part of the CPH consolidated group of which CCC (that is to say, the group member which on the hypothesis in question obtained the tax benefit) is to be taken to be part. On that basis a determination to CPH, followed by an assessment to CPH, is consistent with both the provisions of Part IVA of the 1936 Act and of Div 701 of the 1997 Act.
130 The argument against a valid determination to CPH was that it could not be said that it had obtained a tax benefit in connection with the scheme because it would have been the subsidiary member which would have made the taxable gain but for the scheme. At first instance Edmonds J said in Macquarie Bank at [45]:
The Commissioner's position with respect to which alternative he primarily relies on seemed to undergo a metamorphosis during the course of the hearing. At the outset, he seemed to place primary reliance on the MBL determination and the MBL amended assessment to give effect to the MBL determination. This is what one might expect where a subsidiary member of a consolidated group enters into a scheme to which s 177D applies: the Commissioner is authorised to make a determination under s 177F(1), but the authorised determination will be (in a para (a) case) one to include an amount in the assessable income of the head company, to which for tax assessment purposes the activities of the subsidiary member are, by s 701-1, attributed. However, it obviously became apparent to the Commissioner during the course of the hearing that, having regard to his identification of the counterfactual, upon which the tax benefit the subject of the MBL determination was predicated, namely, that Mongoose would have, or might reasonably be expected to have, sold the Minara shares otherwise than as a subsidiary member of the MBL consolidated group, MBL could never, and did not, obtain such a tax benefit from such a sale.
It is respectfully correct to conclude that the alternative postulate of the arrangements entered into in question did not in fact, and could not in fact, have resulted in the head company in Macquarie Bank, or CPH in this case, obtaining a tax benefit in its separate capacity. Emmett J on appeal reasoned, however, that it was the effect of s 701-1 which permitted the issuing of a determination to the head company. At [46] his Honour said:
While Mongoose is a taxpayer for the purposes of determining whether it has assessable income, the effect of Pt 3-90 is to put Macquarie in the shoes of Mongoose. Certainly, Pt IVA must be construed and applied according to its terms. The question is whether the terms of Pt IVA apply to the facts and circumstances of the particular case. That question must be decided in the context of the way in which Pt 3-90 is clearly intended to operate. While Mongoose cannot be the subject of direct application of s 177C, the assessable income of Mongoose must be taken to have been assessable income of Macquarie. I consider that a tax benefit was obtained by Mongoose and that, if there were a Pt IVA scheme, then Macquarie, as the head company, would be the correct entity to whom the Commissioner would issue a determination and amended assessment.
In other words, although it is true in point of fact that CPH could never itself (as a separate entity) have obtained the tax benefit but for the scheme, the operation of Div 701 requires the subsidiary to be taken to be part of the head company for the purpose of working out their liability. The effect of Div 701 is, in other words, to put CPH "in the shoes of" the subsidiary for that purpose. On this reasoning the relevant inquiry may more practically be understood by posing the question as being whether that part of the head company which formed part of the consolidated group obtained the tax benefit, rather than whether the head company without the relevant subsidiary had obtained the tax benefit. On that reasoning a determination to CPH can be seen as the formal mechanism contemplated by s 701-1 to include in the liability of the group the tax benefit obtained by a member of the group, namely by CCC. In this way the determination made to the head company (not as a separate company but in its capacity as the head company which is taken to include all of its parts) is the means by which the tax benefit is included in the relevant part of the consolidated group. To characterise such a determination as if it were a determination to include an amount of assessable income to CPH independently of CCC would not give effect to s 701-1. A determination to CPH in its capacity as the head company of the group is consistent with the purposes in s 701-1(2) and (3) of "working out" the liability and losses of the head company as the aggregate of the parts. The assessment to CPH following the determination to CPH would give effect to the determination because in each case CPH, to adopt the words of Emmett J in Macquarie Bank at [46], is relevantly put by Part 3-90 "in the shoes of" the subsidiary. To see either the determination or the assessment to CPH as if CPH was not a group which was taken to include CCC would not give effect to Div 701. Accordingly, I would answer "no" to question 2; that is, that the provisions of Div 701 do not prevent the Commissioner from making the determination to CPH and then raising the assessment to CPH.
131 The third question posed for the Court does not depend upon a consideration of the correctness of the decision in Macquarie Bank but also depends upon a construction of the interrelationship between Part IVA of the 1936 Act and Div 701 of the 1997 Act. It does not, however, concern the determinations and assessments already considered, but the alternative determinations to CCC and an alternative assessment made to CCC on 14 March 2014 in reliance upon ss 168 and 169 of the 1936 Act. The Commissioner is not precluded from raising alternative assessments upon the same income but may not recover upon each: Richardson v Federal Commissioner of Taxation (1932) 48 CLR 192; Lever Bros Pty Ltd v Federal Commissioner of Taxation (1948) 77 CLR 78; Cadbury-Fry-Pascall Pty Ltd v Federal Commissioner of Taxation (1944) 70 CLR 362.
132 CCC joined as a member of the CPH consolidated group with effect from 1 January 2008. It had lodged a separate tax return for that part of the relevant year of income before joining the CPH consolidated group. On 31 March 2009 it had lodged a tax return for the period between 1 July 2007 and 31 December 2007 which, pursuant to s 166A of the 1936 Act, deemed the Commissioner to have made and served an assessment to CCC in respect of its taxable income before joining the CPH consolidated group. CCC did not lodge a separate tax return and was not separately assessed for any period after 1 January 2008.
133 The Commissioner made alternative determinations under s 177F(1)(a) on 13 March 2014 that CCC had obtained tax benefits referable to the capital gain made from the sale of the land and the non-inclusion of assessable income from the sale of trading stock during the period 1 January 2008 to 30 June 2008. The following day, on 14 March 2014, the Commissioner took action to give effect to the alternative determinations by issuing an assessment to CCC in reliance upon s 168 and, alternatively, upon s 169 of the 1936 Act. The relevant issue raised by the third question is, therefore, whether Div 701 prevented the Commissioner from making the alternative determinations and alternative assessment. The reasons for concluding above that Div 701 did not prevent determinations to CCC would also apply in answer to whether the Commissioner was prevented from making the alternative determinations to CCC and will not be repeated. The next issue to consider, therefore, is whether Div 701 prevented the Commissioner from making assessments to CCC under ss 168 or 169 to give effect to the determinations to CCC.
134 The powers in ss 168 and 169 are to assess a taxpayer for the liability which arises by operation of other provisions, including Part IVA. The assessing sections provide:
168 Special assessment
(1) The Commissioner may at any time during any year, or after its expiration, make an assessment of:
(a) the taxable income derived (or that there is no taxable income) in that year or any part of it by any taxpayer; and
(b) the tax payable thereon (or that no tax is payable); and
(c) the total of the taxpayer's tax offset refunds for that year or that part of it (or that the taxpayer can get no such refunds).
(2) Where the income, in respect of which such an assessment is made, is derived in a period less than a year, the assessment shall be made as if the beginning and end of that period were the beginning and end respectively of the year of income.
169 Assessments on all persons liable to tax
Where under this Act any person is liable to pay tax (including a nil liability), the Commissioner may make an assessment of the amount of such tax (or an assessment that no tax is payable).
The Commissioner's power to raise assessments under ss 168 and 169 was considered in Deputy Commissioner of Taxation v Jones (1999) 86 FCR 282 where the Court said at [21]-[22]:
21 There has been little discussion in the cases as to the application of s 168. No doubt the section can be applied in a variety of circumstances. It may be necessary for the Commissioner to assess under the section in respect of a taxpayer who dies, where the liability to income tax of the deceased person comes to an end with death and a new liability arises thereafter upon the trustees of the estate. It may be necessary to assess a taxpayer who, part way through the year of income ceases to be a resident of Australia and the Commissioner wishes to ensure that tax is collected before departure. It may also be used where a company is dissolved part way through the year of income. These are but examples. They are not intended to be exhaustive.
22 It may be that the right of the Commissioner to assess under s 168 like the right to assess under s 169 is separate and distinct from the right to assess under s 166: cf Lever Bros Pty Ltd v Commissioner of Taxation (Cth) (1948) 77 CLR 78 at 83 per Williams J. It is unnecessary here to decide that. What is important is that s 168 authorises assessments of income tax to be made in respect of part only of a year of income. There is no reason either in principle or language to confine s 168 to a power to assess once only in respect of a particular financial year (that is to say in respect of only one portion of that year), although the section would clearly authorise such a course. The singular where used in the section can be converted to the plural without difficulty. Put in another way, the Commissioner is authorised by s 168 to assess a taxpayer who has become bankrupt in respect of the taxable income of that taxpayer in that part of the financial year which ends with the bankruptcy and separately in respect of that part of the taxable income of that taxpayer which covers the period from the bankruptcy to the end of the year of income.
The power of assessment conferred by these provisions operates to impose a liability created by the general provisions, including Part IVA. Part IVA does not itself provide a separate power to assess someone to tax, but s 177F(1) contemplates that the Commissioner's powers of assessment may be exercised to give effect to a determination (subject, of course to any limitations or exclusions which the powers invoked may have).
135 The need for the Commissioner to rely upon either s 168 or s 169 arises only if the Commissioner is precluded by Div 701 from making the determinations and assessments as contemplated by the first two questions. Part IVA must be applied according to its terms (Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404, 414; Federal Commissioner of Taxation v Hart (2004) 217 CLR 216, 239 [51]; Mills v Federal Commissioner of Taxation (2002) 250 CLR 191, 200 [58]) and by, s 177B, overrides any provisions to the contrary. Section 177B provides that nothing in the provisions in the Act, apart from an exception not presently relevant, shall be taken to limit its operation. The "Act" referred to in this provision is made by the definition in s 6(1) to include the 1997 Act which includes Part 3-90 and Div 701. Section 701-85 in Part 3-90, in turn, also provides that the provisions of Div 701 are subject to any provision that so requires either expressly or impliedly. Division 701, therefore, does not prevent the Commissioner from making determinations to CCC under s 177F(1), and the power to give effect to such determinations by assessments to CCC under the assessing powers in ss 168 and 169 are within the power of s 177F(1) as a means by which determinations to CCC may be given effect by assessments directly to CCC. The operation of ss 168 and 169, through s 177F, override any contrary provision in Div 701 because of s 177B of the 1936 Act and s 701-85 of the 1997 Act. Accordingly, I would also answer "no" to question 3; that is, that s 701 does not prevent the Commissioner from making alternative determinations and assessments.
I certify that the preceding twenty-six (26) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Pagone.