Further factual matrix
18 On 6 August 1992, a draft taxation ruling (TR 92/D24) was issued by the Commissioner. It was entitled as follows:
INCOME TAX: APPLICATION OF SECTIONS 51, 23AJ, 79D & PART IVA TO THE DEDUCTIBILITY OF INTEREST EXPENSE OF A RESIDENT COMPANY
19 The draft ruling was directed to arrangements of the kind described above, as made clear by the first three paragraphs of the draft ruling:
1. This Ruling provides guidelines for how Part IVA of the Income Tax Assessment Act 1936 is to be applied in determining whether a deduction is allowable for certain interest expense incurred by a resident company.
2. The interest expense relates to loans taken by a company to acquire shares in foreign companies in a way that is claimed to avoid the operation of section 79D.
3. The Ruling considers, in particular, the case where a resident company (the parent) in a company group incurs interest expenses on money borrowed by the company for the purchase of shares in a foreign company. However, instead of investing directly overseas, the parent capitalises another resident company (the subsidiary) in the same company group. The subsidiary uses those funds to acquire shares in a non-resident company.
…
20 A summary of the draft ruling was contained in the relevant commercial publisher's digest, in the following terms:
This draft Ruling considers the circumstances in which the Commissioner will apply the anti-avoidance provisions of Pt IVA to deny a deduction for interest expenses incurred by a parent company on money borrowed to capitalise a subsidiary where the funds are used for the acquisition of shares in non-resident company.
Part IVA will be applied where it would be concluded that a dominant purpose of a company group in structuring transactions in a particular way is to avoid the application of sec 51(1) or 79D in relation to the interest expense.
The temporary application of the funds for some other purpose does not preclude a finding that the funds were earmarked for the purchase of shares in foreign companies if that was the ultimate purpose of the borrowing.
The mere fact that the overall purpose of the set of transactions is the commercial purpose of acquiring shares in foreign companies will not preclude the application of Pt IVA to the transactions.
21 The draft ruling also dealt with the status of the draft ruling in the following terms:
· Draft Taxation Rulings (TR 92/Ds) represent the preliminary, though considered, views of the Australian Taxation Office.
· Draft Taxation Rulings may not be relied on by taxation officers, taxpayers and practitioners. It is only final Taxation Rulings which represent authoritative statements by the Australian Taxation Office of its stance on particular matters covered in the Ruling.
22 On 18 December 1992, five officers of the Australian Taxation Office (the ATO) met with five members of the Group's taxation advisers Ernst & Young ("EY") about the Group's affairs, which were the subject of an audit by the ATO. At all relevant times, EY were the taxation advisers for all companies in the Group. (I will generally refer to EY in the plural in order to refer to the partners and employees apparently charged with the responsibility of handling the Group's tax affairs.) The most senior of the ATO Officers identified the purpose of the meeting as follows:
Purpose of meeting to put issues on the table, a run-down of where we are at and for you to throw in any comments.
23 The meeting was said by the senior ATO officer to be "[p]ut on a without prejudice [basis]" as this "facilitates where we are."
24 At the meeting, the application of draft ruling TR 92/D24 to the arrangements described earlier, including the substitution of ACP by Mancross (to become AFT), was raised. There was evidence before the primary judge that no mention was made at the meeting of any particular year of income.
25 On 7 April 1993, the "case manager" at the ATO of the Group's tax audit sent a "without prejudice" paper to EY dealing with matters of concern in the audit. The covering letter stated, amongst other things, the following:
The matters outlined herein represent the Commissioner's view as to the facts, law and issues based on the evidence in possession of this office. It is pointed out that no decision or determination has been made in respect of any of these matters.
This information is supplied in order to fully appraise [sic] you of the Commissioner's views, so that you may be in a position to respond to the points raised. Without limiting in any way the scope of your response, it is anticipated that your submission will cover:-
(a) any variance as to the Commissioner's factual understanding;
(b) your views on the relevant tax law; and
(c) your comments on the issues raised herein.
It is reiterated that should you decide not to respond to these matters, in raising assessments the Commissioner must rely upon the information currently in his possession.
The paper was entitled:
WITHOUT PREJUDICE
RE: ACP, MLG and MANCROSS SHARE TRANSACTIONS
[Capitalisation in original]
The paper outlined the detailed facts of the arrangements from October 1988 to January 1992. In stating the relevant law and ATO policy, the paper stated:
2.2 Interest paid by ACP to CPF during the years ending 30 June 1989, 1990 and 1991, in respect of the amounts borrowed on 28 April 1989 of $300,600,000 and on 10 and July 1989 of $130,260,000, is not an allowable deduction to the extent it was incurred in relation to the gaining or production of exempt income by virtue of the operation of s 51(1) and Part IVA of the ITAA.
2.3 Interest paid by ACP to CPF during the years ending 30 June 1989, 1990 and 1991, in respect of the amounts borrowed on 28 April 1989 of $300,600,000 and on 10 July 1989 of $130,260,000 is limited as an allowable deduction to the amount of the class of foreign assessable income to which it relates by virtue of the operation of s 79D and Part IVA of the ITAA.
2.4 The discount of $64,629,000 on the Bill of Exchange between Mancross and CPF is not an allowable deduction to Mancross in the year ended 30 June 1992 to the extent it was incurred in relation to the gaining or production of exempt income by virtue of the operation of s 51(1) and Part IVA of the ITAA.
2.5 The discount of $64,629,00 on the Bill of Exchange between Mancross and CPF is limited as an allowable deduction to the amount of the class of foreign assessable income to which it relates by virtue of the operation of s 79D and Part IVA of the ITAA.
26 Thus, by April 1993 the ATO, in the context of the earlier years of income, had expressed a ("without prejudice") view of the application of Part IVA to the arrangements involving s 79D and both ACP and Mancross (AFT); in the case of Mancross (AFT) the specific reference had been to the amount of the bill discount. Further information was requested by the ATO of EY.
27 On 16 July 1993, the relevant taxation partner of EY provided the information requested. In the covering letter he said:
I enclose our responses to the queries raised by you in Section 4 of the correspondence and advise that, as discussed during the course of our recent meeting and in accordance with the position previously taken by the taxpayer, the first three sections of the paper have not been commented on. Our position in relation to the so-called concept of "tracing" funds is also unchanged.
Thus, at this point, no debate was to be entered into on the legal questions involved, or comment made on the accuracy of the factual substructure identified by the ATO. Nevertheless, EY were aware of the view of the ATO that Part IVA applied to AFT's participation in the relevant arrangements.
28 On 26 July 1994, a meeting took place between four ATO officers and three members of EY and an officer of the Group. The purpose of the meeting was explained by the senior ATO officer as being to:
present draft adjustment sheets;
explain calculations and reasons for the adjustments; and
invite comments on those adjustments.
The draft adjustment sheets included adjustments concerning the 1990 and 1991 years of income to ACP and the discount on the bill drawn by Mancross (AFT).
29 There was evidence before the primary judge that discussion took place as to the question of "dividend stripping" and the application of Part IVA (as to the issues raised by "dividend stripping" see the reasons of Hill J at 88 FCR at 44 - 50 and s 79D and Part IVA. The notes of an employee of EY at the meeting (Ms Quinlan) included the following:
The ATO contends that the reorganisation was effected for the dominant purpose of avoiding the application of Section 79D and as such, Part IVA would be invoked to reconstruct the scheme and disallow the interest deductions. Per DM [ATO] - in other words, the interposition of MLG to incur interest deductions which otherwise would have been quarantined by ACP and Mancross.
MJ [EY] requested an identification of the "scheme" and was told that they believed that this scheme had been identified in the position paper. The ATO undertook to get back to us on this matter.
[emphasis added]
30 The "position paper" was apparently the paper prepared in April 1993 and referred to at [25] above.
31 On 25 August 1994, EY applied for private rulings, on behalf of seventeen companies in the Group, some of whom were the Income Companies, including, relevantly, ACP. The requests concerning ACP arose from the adjustment by way of disallowance of interest under s 79D in the order of $81,185,334. In substantiation of the request EY said:
…and furthermore the company could not as at 30 June 1990 have predicted your proposed assessments to Consolidated Press Holdings Limited, Murray Leisure Group Limited and the company itself [ACP] for the 1990 year of income and either could not or would not have effected such subsequent transfers and/or recoupments to the same extent and/or amount had the company known at that time of the assessments you now propose, it is now requested that you:
(a) allow the company to be restored to the position that would have existed had the aforementioned transfers and recoupments not taken place;
(b) allow further time for the company [ACP]and Consolidated Press Holdings Limited and/or Murray Leisure Group Limited to agree to transfer in the year ended 30 June 1990 such amount of losses as may ultimately be required after the exhaustion of relevant and appropriate appellate processes to offset the additional income assessed to those companies for that year;
(c) allow further time pursuant to S 80G(6A) for members of the CPH group to agree to transfer losses in subsequent years in substitution for transfers and/or recoupments made ineffectual by the actions described above.
[emphasis added]
32 Putting to one side the question of whether or not EY and the Group agreed with the apparent views of the ATO as to the application of Part IVA to the arrangements to which ACP was a party, there can be no doubt that they were on notice of those views. These views concerned ACP; and also concerned AFT. The view of the ATO that ACP and AFT were in the same position had been made clear in the paper sent to EY on 7 April 1993.
33 On 26 August 1994, EY put submissions to the ATO on the question of the re-organisation of the Group, including the reasons for the introduction of the Bahamian company in place of CPIL (UK). The submissions also made reference to s 79D and Part IVA. The following was stated:
3. You also seek to invoke Part IVA in conjunction with s 79D to disallow interest deductions claimed by ACP on the basis (as advised in our meeting on 26 July 1994) that your reconstruction of the facts for Part IVA purposes involved MLG being replaced by ACP, such that ACP should be regarded as investing directly into CPIL (UK), or CPIL (Bahamas), as relevant. We must point out we strenuously disagree with you in relation to this interpretation of the application of s 79D and Part IVA. Leaving aside the fact that at no stage have you requested a commercial explanation of the transactions in question, you have clearly failed to consistently apply this substituted fact pattern. For example:
(a) If ACP was directly investing in the international group, then the deemed dividend pursuant to Section 177E (refer 2 above) should have been deemed to have been received by ACP in lieu of MLG; and
(b) If ACP was directly investing in the international group, then ACP should have received all attributable income which has to date been attributed to MLG.
The effect of your draft adjustments is to ignore foreign sourced income of ACP the existence of which must follow from your analysis of Part IVA as advised to us. Such foreign source income would be available for offset against the interest deductions supposedly quarantined under Section 79D.
We request that this matter be readdressed.
The letter concluded with the following paragraph:
As you are aware our client group has available by way of legitimate offset in respect of any proposed assessments Group losses pursuant to s 80G of the Act, subject to the exercise of your approval pursuant to sub-section (6A) thereof. Whilst appreciating that your foreshadowed assessments have not yet issued, and hopefully will not be issued in the light of the submissions made in this letter, we would expect that such assessments would not be issued while you have before you for consideration the ruling request filed by this office on 25 August 1994.
[emphasis added]
34 The language emphasised above reflected what no doubt was the position, and certainly reflected what was put forward as the position: that the tax affairs of the Group were dealt with, on a group basis, by EY. No particularity or singularity of one or more companies in the Group was raised. No suggestion was made that any one or more of the companies in the Group would be giving independent consideration to its position in the proposed transfers.
35 On 12 September 1994, Ms Quinlan met with two ATO officers for five hours. Ms Quinlan's notes identified the purpose of the meeting as follows:
…to determine the quantum of losses available within the CPH Corporate Group and to identify the companies which had incurred those losses.
Amended adjustment sheets were provided by the ATO officers at the meeting. The draft adjustment sheets included one for AFT for the years ended 30 June 1991 and 1992, which amended slightly the position taken earlier by the ATO and reflected in the April 1993 paper.
36 On 14 September 1994, another meeting took place between the same people who had met on 26 July 1994. (See [28] above.) A letter of the same date (14 September 1994) from EY was given to the ATO officers. That letter included the following:
…Judy Quinlan has met with Darren Magro and Graeme Boulton of your office in an attempt to determine the exact quantum and location of losses within the CPH corporate group. I understand you are to deal with the section 80G ruling request before you issue any notices of assessment and intend allowing an "unbundling" of loss transfers and recoupments which have taken place, followed by new transfers pursuant to section 80G to offset the effects of newly created taxable income as a result of your proposed adjustments. If on appeal your proposed adjustments are found to be without merit either in whole or in part, the same process of unbundling and reallocation will be permitted. Put very simply, you intend to exercise your discretion in a fashion which will place the companies in the group in exactly the situation they would have been in had they been aware of your proposed adjustments prior to lodging returns of income for the years of income to which the adjustments relate.
In the circumstances it is appropriate for me to seek your undertaking that no assessments will issue until I have had an opportunity to consider your responses to the ruling requests and take whatever action, if any, such responses dictate. I would therefore ask you to give me three clear working days' notice of your intention to issue any assessments; such days to be days subsequent to the receipt by me of your responses to the ruling requests.
[emphasis added]
37 The notes of the meeting made by Ms Quinlan (who was in attendance) stated the following:
JC [an officer of the Group] mentioned AV's [EY] request for the elapsing of some time between the determination of the ruling request and the issue of assessments due to the jurisdiction/forum problem that could otherwise arise. WP [ATO] eventually said: "I will give you a little window of time". He also noted that the following sentence of our 14 September 1994 was reasonable, ie:-
"Put very simply, you intend to exercise your discretion in a fashion which will place the companies in the group in exactly the situation they would have been in had they been aware of your proposed adjustments prior to lodging returns of income for the years of income to which the adjustments relate."
WP [ATO] also restated that he himself had no problems with the Section 80G ruling request. However, he also restated that this was only his personal viewpoint.
WP [ATO] said that his original intention had been to leave the recasting of the losses until the issues had been determined. However, he thought that the exercise undertaken on Monday had been valuable as a guide to the overall position.
[emphasis added]
38 "JC" was a reference to Mr Cherry from the Group; "AV" to Mr Verzi, at the time, the tax partner from EY apparently attending to the Group's affairs; and "WP" to Mr Perry, the then senior ATO Officer. Two matters are worthy of note about this meeting: first, the parties discussed the question of the replacement of loss transfers as a question for the Group, without any member giving it separate consideration; secondly, the ATO officer at the time expressed his personal view as to an exercise of discretion under s 80G(6A)(b) which was sympathetic to the Group. (A view that did not, ultimately, prevail with his successors.)
39 Another meeting appears to have taken place on 28 September 1994.
40 On 18 October 1994, Mr Perry (of the ATO) wrote to Mr Verzi (of EY). In referring to the request for the private rulings (see [31] above) Mr Perry said:
As discussed in our meeting held on 28 September 1994, concerns were expressed on whether your application for Private Ruling was valid. Notwithstanding, details of the manner in which you seek to recast the losses should be forwarded to this office prior to consideration of the Private Ruling application.
Final adjustment sheets were enclosed with the letter, including an adjustment sheet in respect of AFT for the year ending 30 June 1992. The letter also stated that, as had been discussed at the meeting of 28 September 1994, further information was sought in relation to the years ended 30 June 1992 and 1993 in order to finalise assessments.
41 On 28 October 1994, Ms Quinlan met with Mr Boulton, one of the relevant ATO officers. Most of Mr Quinlan's note of the meeting concerns the various compensating adjustments based on the approach of the ATO. However, the context of this discussion was noted by Ms Quinlan as:
I advised that I was preparing a summary of the loss utilisation on the assumption that the compensating adjustments, as detailed on page 7 of their letter dated 18 October 1994, would be allowed. …
42 On 1 November 1994, EY sent to the ATO schedules concerning the years ended 30 June 1990 to 1993, that set out EY's:
…recommended utilisation of losses within the CPH corporate group as a result of adjustments proposed by your office.
The schedules were stated not to be an admission of the correctness of the ATO adjustments, but were stated to be prepared on the basis that the loss transfers in the private ruling request would be allowed.
43 On 9 November 1994, there was another meeting between Mr Cherry (of the Group), Mr Verzi and Ms Quinlan (of EY) and the four relevant ATO officers. On the previous day, the ATO had apparently sent a "draft letter" to EY. Its contents can be inferred from the discussion recorded in Ms Quinlan's notes:
ISSUE 1 - RULING REQUEST
Warwick Perry referred to the draft letter which was sent to Tony Verzi on 8 November 1994. He advised that the Tax Office must proceed on the basis that everything would be litigated. The only area that would follow a different line is in relation to the losses. The line that Warwick was following in relation to the losses is the line that his advisers would prefer him not to follow.
John Cherry asked whether, among all the words of his draft letter, he was of the same view to allow the losses to be recast.
Warwick advised that he would allow recasting, and he would stand by that. The only way he could be overruled was if Carmody or the Second Commissioner "came over the top". He went on to say that legally, he shouldn't allow such recasting.
Judy Quinlan asked whether the absence of one of the previous grounds of invalidity indicated that our submission had been in part successful. Warwick advised that there was still some debate in relation to the agreement being a "pre 1 July 1992 Arrangement" and they had "let this second point go" rather than readdressing it in the draft letter.
John Cherry said the only difficulty he had was in trying to prevent a future recasting of losses in the event that we were ultimately successful.
Warwick said that he could not administratively bind himself in the exercise of his discretion at some point in the future. He said that further in the future, the matter may be referred to him and he could go the same way. Notwithstanding, he could not bind himself now in this regard.
John asked whether, in the event that in due course the additional income assessed was found not to exist, the loss transfers now being executed would be invalid and must necessarily be unwound. Warwick advised that this was correct.
John said that it could be that he would get instructions from the company to protect their future position. He said that he hoped that Warwick would understand if the company asked him to lodge an objection against the perceived invalidity of the ruling request by the Taxation Office.
Warwick said he understood. He advised that the response was framed in a non-legal way. If, however, we were planning to obtain a legal ruling on the validity of the request, they would take a more realistic stance.
John said that as a basic matter, he wanted the recasting to stand. Warwick said this would occur. John reiterated that he was only concerned about protecting the company's future, and thereby was looking at questioning the decision of the ATO as to the request's validity.
Warwick then reiterated that it was his point of view that he wanted us to have the recasting.
After some further discussion, it was agreed that Warwick would issue a formal letter, simply advising that the request was considered to be invalid. However, a further letter would be issued advising that he was planning to allow loss transfers on the basis of loss transfer notices to be prepared on the basis of the loss transfer summary.
[emphasis added]
Ms Quinlan's notes record that Mr Perry, the senior relevant ATO officer suggested the following timetable:
1. He would formally issue a letter denying the validity of the ruling request. The letter would say very little else, and would be the basis for any action which we would take to challenge this decision of the ATO.
2. We would be required to lodge formal loss transfer elections, properly completed and signed, on the basis of the loss summary prepared by Judy Quinlan.
3. The ATO would write to Ernst & Young formally accepting the loss transfer notices and agreeing that they would permit the additional time for lodgement of such notices.
4. The ATO would then permit a one week "window of opportunity"/"breathing space" in which any other issues could be discussed.
5. After the one-week period had elapsed, the ATO would proceed to issue the assessments.
44 Thus, it was evident in 1994 that there were different views in the ATO about the question of "recasting" the Group's loss transfers.
45 On 14 November 1994 Mr Cherry and Ms Quinlan spoke with Mr Perry. There was some dispute in the evidence before the primary judge as to whether Mr Cherry (from the Group) said that an imposition of a 45% to 50% culpability penalty for the s 79D issues was "fair and just". The notes of Ms Quinlan record the following about the transfer of losses:
(d) Private Ruling - Section 80G
Warwick advised that the two Private Ruling letters would issue today. The first, as discussed, was the "straight denial" of the validity of the ruling request. The second was the decision by Warwick to allow the recasting of the losses in any event. Again, these letters were subsequently received this afternoon via fax.
46 After some discussion of the detail, on 30 November 1994 and 2 and 13 December 1994, the ATO approved the loss transfers and requests for extension of time under s 80G(6A)(b).
47 On 21 December 1994, the ATO issued assessments and amended assessments to CPH, MLG and ACP covering the years ending 30 June 1990 to 30 June 1993 for CPH and MLG, and 30 June 1989 to 30 June 1991 for ACP. CPH, MLG and ACP lodged objections.
48 On the same day, 21 December 1994, the ATO issued adjustment sheets for AFT for the years of income ending 30 June 1992 and 30 June 1993, which reflected the quarantining of the available deduction of the discount on the bill of exchange, to the extent of foreign income. The 1992 and 1993 adjustment sheets were in the following terms:
ADJUSTMENT SHEET
AUSTRALIAN FINANCIAL TIMES PTY LTD 85 546 044
The following adjustments have been made to the loss previously determined in the return for the year ended 30 June 1992.
$ $
Net Loss as returned (100,453,534)
Less:
Deduction for discount on bill of exchange
quarantined 64,629,000
Add:
Foreign income deduction now allowed (27,254,460) 37,374,540
Adjusted Net Loss (63,078,994)
N.B.
1. In terms of section 79D of the Income Tax Assessment Act (the Act) the amount of foreign income deductions which exceed the assessable foreign income of that class derived in the year of income has been quarantined.
Without prejudice to the above grounds, determinations have been made in terms of sub-section 177F(1) in respect of the quarantined deductions.
2. Foreign income deduction of $37,374,540 now quarantined.
3. Section 80G loss transferred to Murray Publishers Pty Ltd (92) now reduced from $5,918,176 to $3,917,078 in accordance with your letter dated 6 October 1993.
ADJUSTMENT SHEET
AUSTRALIAN FINANCIAL TIMES PTY LTD 85 546 044
The following adjustments have been made to the loss previously determined in the return for the year ended 30 June 1993.
$
Net Loss as returned (36,129,667)
Add:
Foreign income deduction now allowed (9,370,229)
Adjusted Net Loss (45,499,896)
N.B.
1. Section 80G loss transferred to Consolidated Press Holdings Ltd (92) now reduced from $6,414,229 to $508,949.
2. Section 80G loss transferred to Murray Publishers Pty Ltd (92) now reduced from $6,657,558 to $1,950,535.
3. Section 80G loss transferred from Consolidated Press (Finance) Ltd (91) of $4,707,023 now allowed.
4. Foreign income deductions quarantined as follows:
$
1992 28,004,311
49 On the same day, 21 December 1994, the ATO prepared a Part IVA Determination Report. This report was provided to EY three days later on 24 December 1994. The report refers to the adjustments in respect of AFT for the years of income ended 30 June 1992 and 1993 as follows:
Australian Financial Times Pty Ltd. (Formerly Mancross)
Year ended 30 June 1992
27,254,460 Interest previously quarantined under 79D now allowed to the extent of attributable income received by MLG which is refereable to its investment in CPIL(B)
Year ended 30 June 1993
9,720,947 Interest previously quarantined under 79D now allowed to the extent of attributable income received by MLG which is refereable to its investment in CPIL(B)
[emphasis added]
50 Although the report uses the word "interest", the adjustment sheets deal only with the bill discount amounts. The question as to the continuing interest payable by AFT to CPF on the loan used to pay out the bill of exchange does not appear to have been the subject of consideration. Precisely why this was the case was not the subject of evidence. The original Part IVA determination signed on 21 December 1994 concentrated on years prior to 1992, being the years in which the arrangements were set up and amended. Precisely when the ATO realised that there was a continuing issue is not clear. The s 13 reasons of Mr Bridge included paragraphs ([5], [7] and [8]) which dealt with the background and which threw some light on the issue:
5. The Commissioner began an audit into the Group in 1992 ("the previous audit") which included an investigation into the deductions claimed by CPH Property Pty Ltd for interest in the arrangement referred to in paragraphs 4 A-S. In that investigation the Commissioner relied upon s 79D and Part IVA of the Act, which relates to "Schemes to Reduce Income Tax."
…
7. Mr Glenn Carroll, of the ATO, was involved in the hearing of the case referred to in paragraph 6 above. During the preparation of the hearing before the High Court Mr Carroll queried whether the arrangement put in place by the Group had a "follow on" effect for subsequent years of income after 30 June 1991. As a result of that further enquiries were made by this office.
8. As a result of those further enquiries a scheme within the meaning of s177D of the Act was identified which applied to the years of income 30 June 1992 to 30 June 1998. Determinations pursuant to s177F were made on 15 May 2000 to cancel the tax benefits obtained in connection with the scheme, being the deductions claimed by AFT for the interest paid to CPF for the years of income ended 30 June 1992 to 30 June 1998 and on 16 May 2000 the Commissioner issued notices of assessment to AFT for the years of income ended 30 June 1994 to 30 June 1998. Notices of assessment were not issued to AFT for the years ended 30 June 1992 and 30 June 1993 as AFT was still in a "loss" position for those years. Those assessments rely on s51(1) and, in the alternative, s79D and Part IVA of the Act.
Also, in [42(c)] of his reasons, Mr Bridge stated:
[T]he Commissioner did not begin to fully investigate the AFT arrangement until November 1999.
51 In any event, EY knew by December 1994 that the ATO was of the view that the bill discount was affected by s 79D and Part IVA.
52 On 30 December 1994, EY took up the question concerning the disallowance of AFT's deduction of $64,629,000 representing the discount on the bill and requested "further and better particulars" as follows:
1. Who on behalf of the Commissioner of Taxation made the determination?
2. What precisely were the facts taken into account in making the determination and in particular (with reference to the definitions in Part IVA of the Assessment Act):-
(a) what was identified as the "scheme"?
(b) what was identified as the "tax benefit"?
(c) who was identified as the person having the purpose referred to in Section 177D?
(d) was that person a party to the scheme or only part of the scheme and, if only part, which part?
(e) who was identified as the "relevant taxpayer" for the purposes of Section 177D?
(f) to which of the matters referred to in Section 177D(b) was regard had by the person making the determination?
(g) what were the findings of the person making the determination in relation to each of those matters to which regard was had?
(h) were that person's findings of fact evidenced in writing? If so, please supply a copy of the same.
53 A little over nine months later, on 21 September 1995, the ATO responded to this request as follows:
Reference is made to your letter of 30 December 1994 requesting further and better particulars on assessments issued to Australian Financial Times Pty Limited on 21 December 1994. The following particulars are now provided. In providing the particulars, I will use the following references to refer to the following companies:
ACP Australian Consolidated Press Ltd (now CPH Property Ltd)
Mancross Mancross Pty Ltd (now Australian Financial times Pty Ltd)
Year of Income ended 30 June 1992
1. James W Perry
2. The facts are those referred to in:
(i) the position paper dated 7 April 1993 ("the Section 79D Position Paper"), of which a copy is in the accompanying papers at divider 1.
(ii) the Part IVA determination report dated 21 December 1994 ("the Section 79D Report"), of which a copy is in the accompanying papers at divider 2.
And in response to the particular questions asked in A.2 of the request, I provide the following answers without limiting reliance on the matters previously referred to:
(a) The scheme is constituted by those transactions and arrangements by which ACP and Mancross acquired funds on which they incurred losses and outgoings for which they claimed deductions under the Income Tax Assessment Act 1936 ("the Assessment Act") and were applied by subsidiaries on the derivation of foreign source income in circumstances which, but for the scheme, would not have enabled deductions to be claimed because of s 79D of the Assessment Act.
(b) The tax benefit is each of the deductions claimed and allowed to the taxpayer. The calculation of the amounts of the tax benefits are shown at attachment D to the Section 79D Report and are based on the materials of which copies are in the accompanying papers at divider 3.
(c) ACP and/or Mancross.
(d) Yes.
(e) ACP.
(f) All of them.
(g) The findings are as referred to in the Section 79D Position Paper and the Section 79D Report, and the conclusion that the scheme was entered into for the purpose of enabling the taxpayer to obtain the tax benefit.
(h) The findings of the person making the determination are not evidence in writing separately from the Section 79D Position Paper and the Section 79D Report.
54 On 25 September 1996, draft taxation ruling TR 92/D24 was withdrawn. The notice of withdrawal stated:
The issue is under litigation and the Draft Ruling is withdrawn pending the outcome of the litigation. The matter will be reviewed when the outcome of the court case is known.
55 On 8 July 1998, the ATO released ruling TR 98/12 (the "Ruling") which dealt with the transfer of losses within a wholly owned company group pursuant to s 80G. Amongst the subject matters dealt with was the question of extension of time under s 80G(6A)(b). I will return to the Ruling in due course.
56 On 22 January 1999, amended assessments were issued to CPH for the years ending 30 June 1992 and 1993. This related to inclusion of income by way of profit on the defeasance of certain bonds. This prompted a request by EY in letters dated 23 February 1999 and 20 May 1999 for an extension of time under s 80G(6A)(b) to transfer losses to CPH and MLG from CPF. On 28 May 1999, the ATO wrote to EY and refused the application. The letter included the following:
…
I also refer to your letters of 23 February 1999 and 24 July 1998 wherein you requested an extension of time pursuant to section 80G(6A)(b) of the Income Tax Assessment Act (1936) to allow Consolidated Press (Finance) Limited to enter into agreements with Consolidated Press Holdings Limited and Murray Leisure Group Pty Limited to transfer losses to those companies.
…
In relation to the transfer documents dated 23 February 1999, it is not proposed to amend the 1991 year assessments for Consolidated Press Holdings Limited, Murray Leisure Group Pty Limited and CPH Property Group Pty Limited [ACP] as these assessments are the subject of an appeal to the Full Federal Court. Accordingly, the losses proposed to be transferred pursuant to the these [sic] documents are not available for transfer, and your request cannot be granted. Should the taxpayers be successful in the Court the Commissioner will consideration [sic] to a request pursuant to section 80G(6A)(b), at that time.
57 On 16 July 1999, EY wrote to the ATO about the applications for extension of time under s 80G(6A)(b) that had been made to this point. The letter stated:
We refer to your letter of 28 May 1999 wherein you provide a response to our letters of 24 July 1998 and 23 February 1999 requesting an extension of time pursuant to Section 80G(6A)(b) of the ITAA 1936 to allow the CPH Group to enter into loss transfer agreements.
As you will be aware from our earlier correspondence and, in particular, our letter to you of 20 May 1999, the utilisation of revenue losses within the CPH Group as a result of the audit activity conducted by your office has become a very complex matter.
In due course, it is likely that the CPH Group will again seek the exercise of the Commissioner's discretion to allow certain loss transfers pursuant to Section 80G(6A)(b) of the ITAA 1936.
In view of the foregoing, we seek clarification that the only reasons our earlier requests for extensions of time pursuant to Section 80G(6A)(b) of the ITAA 1936 to transfer losses were denied were as stated in your letter and relate to the fact that the Commissioner believes:
(i) [The letter then dealt with the request in the EY letter of 24 July 1998, which need not be referred to.]
(ii) the loss transfer requested by way of our letter dated 23 February 1999 could not be acceded to pending the outcome of the appeal currently before the Full Federal Court. That is, the losses which the taxpayer sought to transfer are "not able" to be transferred until such time as amended assessments reflecting the fact that the CPH Group has been successful in relation to the matters before the Federal Court (should the CPH Group ultimately win some or all of the issues in dispute) are issued.
58 The ATO responded by letter of 22 July 1999 by stating:
It is advised that the two reasons stated in our letter of 28 May 1999 for not granting your request were considered to be significant to prohibit the exercising of the Commissioner's discretion under section 80G(6A)(b).
You will appreciate that the question of whether other reasons may prevent the exercise of the Commissioner's discretion in respect of future applications on behalf of the Group cannot be determined at this stage. When the time comes to consider the exercise of the discretion, the law as it exists will be applied to the established facts.
59 On 7 September 1999, the judgment of the Full Court was handed down. On 8 November 1999, the ATO sought information from EY concerning interest and bill discounts claimed by AFT in its taxation returns for the years of income ending 30 June 1992 to 30 June 1997. Detailed information was provided by EY on 6 December 1999.
60 Correspondence then ensued between EY and the ATO about the issue of proposed adjustment sheets and assessments to AFT for the years ending 30 June 1992 to 30 June 1998 inclusive. On 17 December 1999, Mr Bridge (now in charge of the affairs of the Group at the ATO as "Team Leader Large Business and International") sent a letter to EY concerning AFT stating:
After reviewing your response and the taxation returns of the above company, it is considered that the "79D scheme" identified in the previous ATO audit and confirmed by the Full Federal Court has continued to operate in later years.
Accordingly, it is proposed to disallow the company's claim for interest deductions in the years ended 30 June 1992 to 1997 and any subsequent years if applicable. Consequently the amount of losses transferred to other companies pursuant to 80G of the Income Tax Assessment Act will be reduced. The income of the transferee companies will be accordingly adjusted and the imposition of incorrect penalties considered.
You are invited to comment on the above proposal including submissions in regard to the imposition of penalties. It would be appreciated if your response is received by 17 January 2000.
61 The adjustment sheets of 21 December 1994 and the report of 7 April 1993 had only dealt with the bill discount (paid in the 1992 year of income). They had not dealt with the interest payable by AFT to the lender of the replacement loan (CPF) in the same way.
62 On 17 January 2000, Mr Williams, the relevant tax partner at EY at this time, wrote to the ATO and stated the following:
We refer to your letter of 17 December 1999 inviting our comments regarding your assertion that the "79D scheme" identified in the previous ATO audit has continued and that you propose to disallow Australian Financial Times Pty Ltd's (AFT) claim to interest deductions in the years ended 30 June 1992 to 30 June 1997.
As you are aware, the taxpayer has sought the High Court's leave to appeal the decision of the Full Court in relation to the "79D scheme". We, therefore, request that you extend the time within which we are required to comment on the continued operation of the "79D scheme" until such time as the section 79D issues are finalised by the courts (be it via the refusal of the High Court to grant leave to appeal, in which case the Full Federal Court's decision on section 79D will be determinative or, if leave to appeal is granted, the ultimate decision for the High Court is handed down). We believe it would be more appropriate to comment on your assertion that the "79D scheme" continued after the law in relation to this issue is settled. Once the law concerning the application of section 79D is settled, we will be in a position to review how it applies to AFT in view of any relevant facts or circumstances.
In relation to your comments that losses transferred by AFT will be reduced, we request that the Commissioner exercise his discretion and allow a period for companies in the Consolidated Press Holdings Groups (CPH Group) to enter into loss transfer agreements to replace any loss transfers that may be affected by your proposed application of section 79D. We propose to prepare any additional loss transfer notices that may be required after the section 79D matter before the Court is resolved. However, in the event you propose to issue amended assessments prior to this time, please contact this office so that we may prepare any additional loss transfer notices that my be required before those assessments are issued.
You state that you intend to consider the imposition of incorrect penalties on loss transferee companies whose loss transfers may be reduced by virtue of the application of section 79D to AFT. Provided the Commissioner does exercise his discretion to allow CPH Group companies to enter into loss transfer agreements to replace those which may be invalid, and we see no reason why he should not, the loss transferee companies will not have any tax shortfall. That is, the quarantining of AFT's interest deductions would not, in the ordinary course, result in the CPH Group being in a tax payable position due to the availability of transferable revenue losses in other CPH Group companies. Had the taxpayers been aware section 79D applied to the interest expenses incurred by AFT (which is not conceded), transferable revenue losses from another company would have been transferred to the transferee companies.
However, should the Commissioner not exercise his discretion to allow CPH Group companies to enter into loss transfer agreements to replace those which may be invalid, a matter which would be contested, the loss transferee companies will have a tax shortfall. The CPH Group companies have not, however, engaged in any culpable behaviour. The decision of Justice Hill in the Federal Court, at first instance, clearly demonstrates that the taxpayers' position that section 79D was not applicable was correct at that time, and most certainly at the time of the lodgement of loss transfer notices. How then can it be said that penalties should be imposed at all? However, if despite the foregoing, they are imposed, they should be remitted in full.
We look forward to your confirmation that we may postpone our comments regarding the continued application of the "79 D scheme" until such time as the matter is resolved by the Court.
63 It should be noted that Mr Williams did not express a view that the Group was being treated unfairly in some way by the re-agitation of the position of AFT five years after the 21 December 1994 adjustment sheets concerning AFT. There was no assertion that in some fashion AFT had been misled into thinking that the ATO took a more benign view of the amended arrangements with AFT inserted, than it did of the original arrangements with ACP that had been the subject of litigation for some years or that the ATO had taken a more benign view of AFT's interest payments than it had of the payment of the bill discount. One can perhaps assume a relationship between the timing of the delivery of judgment of the Full Court in September 1999 and the movement of the consideration by the ATO of AFT's position from its chrysalis.
64 At this point, it is necessary to weave into the chronology of events the various internal considerations in the ATO that led up to the decision on 30 October 2001 to refuse the extension of time, which is the subject of these proceedings. As a background to those matters, I should first deal with the Ruling that had been released on 8 July 1998.
65 Paragraphs 18 to 20 of the Ruling set out the framework of decision-making for an extension of time under s 80G(6A)(b). Circumstances were divided into two categories - first, where for some reason there had been delay [19], and, secondly, where there had been an adjustment [20]. The text of [18] and [20] is relevant and was as follows:
18. In exercising the discretion under subsection 80G(6A) (paragraph 170-50(2)(d)), the Commissioner is guided by administrative law principles. These include an obligation to identify and consider all factors that may be relevant to the exercise of the discretion and to give them an appropriate weighting. In determining the relevant factors and their weighting, the Commissioner has regard to the policy of section 80G (Subdivision 170-A) and its context within the Act. Although each case must be decided on its merits, this Ruling provides a guide to taxpayers and ATO officers as to what factors may be relevant in the exercise of the discretion.
…
20. In cases where an agreement is sought to be made out of time as a result of an adjustment to the tax position of the company group by the Commissioner, a relevant fact is conduct giving rise to the adjustment. For example, where there is fraud or evasion, or a scheme to which Part IVA of the Act applies, this factor weighs heavily against a favourable exercise of the discretion. Conversely, where an adjustment stems from conduct which could not be regarded as culpable, this factor would be weighted in favour of the extension of time bring granted.
66 The exercise of discretion was dealt with in detail in section E of the Ruling at [81] to [93]. This part of the Ruling was a "general guide", in the manner set out in [82]:
82. This part of the Ruling provides a general guide for taxpayers and officers of the ATO when considering the exercise of the discretion. This is desirable in the interests of consistent, efficient administration and equity among taxpayers in similar circumstances. However, the decision-maker must exercise the discretion according to the merits of each case and should not fetter the discretion by inflexibly applying, or acting in blind obedience to a policy or rule (see R v Moore; Ex parte Australian Telephone and Phonogram Officers' Association (1982) 148 CLR 600; (1982) 39 ALR 1.
67 The relevant factors were dealt with in [83] and [84] as follows:
Factors relevant to the exercise of the discretion
83. The exercise of the discretion under subsection 80G(6A) (paragraph 170-50(2)(D)) includes a two-step process of identifying relevant factors and applying a weighting to each of those factors, having regard to the circumstance of the case. Further, it is for the decision-maker to determine the appropriate weighting to be applied to these factors - see Minister for Aboriginal Affairs and Anor v Peko Wallsend Ltd and Ors (1986) 162 CLR 24.
84. Applications for the exercise of the discretion usually fall into one of two broad categories. The first is where it can be said that there has been delay on the part of the taxpayer that results in non-compliance with the subsection 80G(6A) (paragraph 170-50(2)(d)) time limit. The second is where the request for an extension of time to make an agreement arises out of an adjustment to the tax position of the company group by the Commissioner. The following paragraphs outline the factors the Commissioner considers to be relevant to the exercise of the discretion under subsection 80G(6A) (paragraph 170-50(2)(d)) in both categories, although they are by no means exhaustive.
68 The first of the "two broad categories", delay by the taxpayer, was dealt with in [85] to [90]. Within that part of the Ruling, in [87], there was an important recognition of the policy underlying s 80G:
87. The Commissioner also considers these general principles need to be balanced with a consideration of the underlying policy of section 80G (Subdivision 170-A) (to broadly align the treatment of company groups with divisional companies) and the wider consideration of the proper administration of the Act.
69 The second of the "two broad categories", involving requests arising from ATO adjustments, was dealt with in [91] to [93], as follows:
91. In this category, there is generally compliance with the requirement to enter into loss transfer agreements within the time stipulated in subsection 80G(6A) (paragraph 170-50(2)(d)). However, as a result of an adjustment to the taxation position of the group by the Commissioner, there is a request for an extension of time to enter into a further agreement or further agreements.
92. In Bond Corporation Holdings Ltd and Ors v Australian Broadcasting Tribunal (1988) 84 ALR 669, Gummow J stated the range of factors that can be considered in the exercise of an unfettered discretion (such as that contained in subsection 80G(6A) (paragraph 170-50(2)(d)) is unconfined, subject to any implied limitation within the relevant legislation. It is considered there is nothing within the subject matter, scope and purpose of section 80G (Subdivision 170-A) (or the rest of the taxation legislation) that would imply any limitation upon the Commissioner to consider the conduct of a company group giving rise to an adjustment as being a relevant factor to the exercise of the discretion.
93. Accordingly, where an adjustment is made, for example, as a result of fraud or evasion, or a scheme to which Part IVA applies, then this factor generally weighs heavily against a favourable exercise of the discretion. In a sense, it could be said in these circumstances the delay is directly attributable to the actions of the taxpayer. Conversely, in cases where it cannot be said the conduct of the group is culpable in respect of its failure to comply with its obligations under the law, this is a factor which weighs in favour of an extension of time being granted eg, where a company was unclear as to the appropriate tax treatment for bill discounts prior to the High Court decision in Coles Myer Finance Ltd v FC of T (1993) 176 CLR 640).
[emphasis added]
70 It will be necessary to return to these paragraphs to deal with the arguments concerning the approach of the learned primary judge. For now, it is sufficient to recognise that the text of the Ruling set the background for the decision-making process.
71 On 27 January 2000, Mr Philip Jones prepared a memorandum in which he sought the advice of the "Losses Network" about the question of further time for making loss transfer agreements in the Group. The Losses Network was a specialised group within the ATO providing advice to persons in the ATO, such as Mr Jones, dealing with the affairs of companies such as those in the Group. As the primary judge found at [59] of his reasons, the "structure of the Losses Network and the training of its members were designed to ensure there was consistent decision-making in respect of loss recoupment matters within the ATO." The memorandum of Mr Jones contained, relevantly, the following:
Background
Subsequent to a decision in the Full Federal Court, which held that a Part IVA scheme existed, it is the intention of this office to disallow interest payments claimed by the taxpayer for the 1992 to 1997 years. These interest payments created losses.
During the years 1992 to 1997, these losses were transferred out pursuant to section 80G. The disallowance of interest deductions will result in a corresponding disallowance for the losses transferred to the income companies. As a consequence most of those income companies will now become taxable.
Written advice is sought from you in respect of the following:
1. As the adjustments to the loss company will be made as a result of a Part IVA determination, should the Commissioner exercise his discretion to allow further time for the income companies to make loss transfer agreements?
…
3. Can we impose culpability penalties on the income companies as a result of Part IVA to the loss company? Do you hold external advice, opinions, etc in relation to the application of penalties to the income company?
…
72 On 6 March 2000, the Losses Network provided an opinion. The opinion, insofar as it related to the first question, is set out in full in Appendix 1 to the primary judge's reasons. The answer to the first question posed by Mr Jones was given over five pages. Parts of the report are identified by number for reference later in these reasons. After referring to the Ruling the report continued:
Generally, where an adjustment is made (as a result of audit or similar activity by the Commissioner) to the income of a company and there is manifest culpability, this generally weighs heavily against the exercise of the discretion under s 80G(6A)(b) for the grant of additional time during which an agreement may be made for the transfer of losses from a loss company to an income company.
It would be [1*: an anomalous and somewhat curious result if a taxpayer were able to evade a culpability penalty by successfully requesting the Commissioner to exercise a discretion to allow additional time for the making of a (further) loss transfer agreement with the result that the sanctions imposed by legislation for the making of an incorrect claim in a self-assessment environment are circumvented.] This is probably the tax advantage that is covered by the Part IVA determination. Paragraph 93 of Taxation Ruling TR 98/12 states: (Taxation Ruling Income Tax: transfer of losses: section 80G (Subdivision 170-A)
"… where an adjustment is made … … a scheme to which Part IVA applies, then this factor generally weighs heavily against a favourable exercise of the discretion (to allow an extension of time to lodge a loss transfer agreement)"
The TR is not saying the factor always weighs heavily, but clearly remains an obstacle to the favourable exercise of the discretion that the taxpayer must overcome.
73 Other considerations which might bear upon the discretion to extend time were discussed. The opinion then dealt with the question of the place of the separate corporate entity in any consideration. The following was stated:
[2*: Whilst we still have the doctrine of "separate legal entity" in relation to companies, the principles upon which s 80G are based must, of necessity, ignore that principle to some extent.] Therefore, again [3*: for the purposes of s 80G, it is necessary to treat "group companies" in a different manner than one would treat companies dealing with each other at arm's length.] [4*: To do this, we need to attribute some form of "controlling mind" to the activities of the group in relation to their taxation affairs in order for the provisions of s 80G to be effective in its present form] however before we can attribute anything we must look at the particular factual background of a loss transfer in a 100% owned group of companies.
Certainly in commonly owned (ie, 100% owned) company groups it is to be expected that there is, ultimately, some form of 'common control' exercised over subsidiaries in the group. That would generally emanate from the board of directors of the holding company or, if not that board as such, then by the managing director individually or a particular director(s) or perhaps even a committee of directors to whom that responsibility has been delegated, (or further, some other persons(s) acting for and on behalf of the managing director, directors(s)) within the holding company, such as the group taxation manager.
It would be fair to say that the 'common controller' may not be familiar with each and every facet of a subsidiary company's business. Some aspects/transactions of a subsidiary company's business may be nothing more than ordinary 'every day affairs', so that the 'common controller' would not need to be familiar therewith. Those persons having knowledge of those transactions would be the directors and/or (tax) managers of the subsidiary itself.
The tax law enables transfers of losses within a wholly-owned company group. This is a strategic benefit available to a group. Loss transfers made prudently would necessarily involve the deliberate selection of a loss company and accompanying income company(s). Although that selection could theoretically be left to the directors of each group subsidiary company, it is reasonable to submit that it is more likely to flow from the influence of 'common control', so that a loss transfer can produce the best result for the group as a whole.
However, the doctrine of 'separate legal entity' remains alive and application of that doctrine can present difficulties. A company is a legal person but it is not a natural person. As noted in 'Ford's Principles of Corporations Law' [6th edition Butterworths. Paragraph 305 at p 72.]
"Although a company is not a sentient being, the working of the legal system requires that it be deemed capable of acquiring knowledge through its organs, agents and employees, or forming an intention to or purpose …"[FCT v Whitfords Beach Pty Ltd (1982) 39 ALR 521]
The above quotation is very simplistic account of those circumstances in which the Courts have lifted the 'corporate veil', be it pursuant to statutory warrant or general law". [That the 'corporate veil' cannot be casually 'lifted' is a point known to us all, and the rather limited circumstances in which the Australian courts would apparently approve of such lifting are shown in, for example. "Understanding Company Law" by Lipton and Herzberg (LBC Information Services. 1999. 8th edition) at pages 31-36.] However, it is our view that [5*: the ATO should argue the point that where a loss is, at least, possibly vulnerable to Part IVA, it is a reasonable expectation that the "common controller" would, or ought to have been, sufficiently aware of both the existence of the loss and how it was constituted.
On that line of thinking, the income company, via its human controller(s) and agents(s), is obliged to be cognisant of the nature and integrity of any loss transferred to it. Any culpability attaching to the loss company in respect of the loss must also attach to the income company because of common knowledge.]
74 The author of the opinion (Mr Mooney) believed, however, that this approach required some factual foundation; the opinion continued as follows:
Loss transfer agreements must be signed by the public officer of each of the loss company and the income company. "Public officer" is not a term known under Corporations Law. It exists only for the purposes of the ITAA.
A number of questions need to be addressed, for example:
(a) On what basis, or on what authority would a public officer "commit" himself/herself to a loss transfer agreement?
(b) Does the public officer hold proper authority to effectively authorise the loss transfer itself?
(c) If so, what is that authority?
(d) Does the public officer simply react to directions given by others.
The answers to these questions must inevitably be provided by the facts pertinent to each claimed loss transfer.
Alternatively, if we should encounter difficulty before the AAT or court with that argument, which relies upon penetrating the corporate veil, we can then advance a second argument.
75 A "second argument" was then identified in the opinion. It was expressed as follows:
[6*: Once a loss is transferred to it, the income company is then taken to have incurred that loss itself for the purposes of the Act; see paragraphs 80G(6)(e) & (f). Therefore, the income company should, logically, be subject to the precisely the same obligations as the loss company in ensuring the integrity of the amount of loss before such is transferred. It does not seem right that an income company can receive a loss transferred in, and enjoy the tax benefit by claiming that loss as a deduction, and yet be free from any obligation to check, at any time, the veracity of that loss.]
We consider that if the loss company properly held a "reasonably arguable position" in respect of the loss, there can be no manifest culpability on the part of either the loss company or the income company.
In our opinion, [7*: the income company(s) took a risk in accepting a loss(s) from a loss company(s) that was involved in a "scheme", to which Part IVA is considered applicable, that itself generated the loss(s) which have been transferred, unless the loss company was properly entitled to a RAP. If the loss company was not properly entitled to a RAP, the income company could have sought a loss (from another group company) that was not "potentially tainted" by Part IVA.]
76 The two arguments were then knitted together in the following conclusion:
[7* continued: In other words, there is the matter of group companies having a "common controller(s)", who would be at the very least aware of, if not privy to, the tax affairs of each group company and the circumstances in which a loss is claimed to exist. If the loss company participated in a scheme that is ultimately apprehended by Part IVA, it is eminently reasonable for us to submit that the original income company(s), by virtue of the "common controller", would have been well aware of how that loss was caused. For those income companies to now seek additional time within which to make further loss transfer agreements with another loss company(s) within the commonly-owned group means that the delay in wanting to make those further agreements is, prima facie, caused by the income companies actions in having agreed to originally accept a "Part IVA tainted" loss.]
Paragraphs 91-93 of TR 98/12 are applicable here, with the result that it would not be appropriate for the exercise of the Commissioner's discretion to allow further time to lodge loss transfer agreement(s) for either the loss company or the income companies.
77 At the end of the opinion, the following summary conclusion which recognised the relevance of the facts pertaining to the Group was given to the first question:
Q1. After due consideration of all the relevant facts, it is likely that the Commissioner would not exercise the discretion to allow further time to transfer losses;
78 Another question answered in the opinion concerned culpability penalties. (See question 3 in Mr Jones' memorandum at [71] above.) The opinion returned to the question of the controlling mind in this context, as well as referring to the dependence of this issue on the facts. The opinion stated:
Although what has been said above, in relation to question 1, that we treat the companies on the basis of the one "controlling mind" in relation to the grant of an extension of time to make further loss transfers, we are unsure how successful the ATO can be in relation to the imposition of culpability penalties for the income companies.
About the best thing to say in this instance is "it depends on the facts". For example, questions may need to be addressed on how "close" the management of the two companies were to each other, whether, as a result of the activity of the loss company the income company was able to obtain a benefit in addition to the loss transfer, how likely it would be that the management of the income company was aware of the operation of the loss company in relation to the matter which was the subject of the audit action and so on.
79 A number of things can be said about the approach reflected in the opinion. First, consideration of the relevant facts as to the control, and the "controlling mind", of the Income Companies was recognised, to some degree, as something to be addressed; secondly, it was recognised that a "reasonably arguable position" (referred to in other places in the papers by the acronym "RAP") was very relevant to the question of the presence, or absence, or degree, of "culpability"; thirdly, that the Income Companies were obliged to understand the veracity of the loss transferred in; and, fourthly, and it would seem most importantly, it was said that the Income Companies could be seen to have taken the risk on receiving losses potentially tainted by Part IVA, unless they had a reasonably arguable position. I will discuss later, in more detail, the content of the Losses Network Report in dealing with the attack on the decisions of Mr Bridge. It suffices to say at this point that central to the consideration as to whether the report contained a vitiating flaw is understanding what, in effect, the report was stating. In particular, it is important to understand whether some heretical legal principle was being propounded to guide the exercise of the discretion in s 80G(6A)(b) or whether a legally uncontroversial, though perhaps muddled, approach was being taken to assessing, subject to the facts in any given circumstances, the state of corporate knowledge in a 100% commonly owned group of companies.
80 On 14 April 2000, Mr Bridge wrote to Mr Williams (of EY) about AFT and stated:
You are advised that it is my intention to issue assessments to Australian Financial Times for the years ended 30 June 1992 to 1998 on or about 8 May 2000.
Adjustments will be made to disallow the company's claim for interest paid to Consolidated Press (Finance) Ltd as follows:
1992 $35,824,534
1993 $36,129,320
1994 $33,762,870
1995 $47,774,153
1996 $53,666,908
1997 $50,742,088
1998 $44,164,469
Further I will be considering the imposition of penalties including those in accordance with Section 226 of the Income Tax Assessment Act.
You are advised that in respect of the loss transferee companies, it is not proposed to consider any amendment action until after the above assessments have issued to AFT. At such time I will be happy to discuss and raise submissions on loss transfers or on any other issue you may care to raise.
81 On 19 April 2000, Mr Williams wrote to the ATO discussing the question of compensating adjustments and said, amongst other things, the following:
We refer to our meeting of 14 April 2000 and your letter of the same date concerning your proposal to disallow AFT's claim for interest paid to Consolidated Press (Finance) Ltd during the years ended 30 June 1992 to 30 June 1998 inclusive.
We acknowledge your comment that we have not requested that we be afforded an opportunity to meet with you to discuss transferring losses to AFT to "cover off" the adjustments you propose to make.
Given that "notional compensatory adjustments" were previously made by your office when you sought to quarantine interest expenses incurred by AFT (in this regard we refer to the adjustment sheets issued to AFT in December 1994/January 1995 in respect of the years ended 30 June 1992 and 30 June 1993 - copies enclosed), we believe similar compensatory adjustments should also accompany the adjustments you are now proposing to make.
Provided such compensatory adjustments are made (which we would expect to be the case as such a course of action is a logical and practical extension of what has occurred to date and attempt to progress this matter in any other way would be inconsistent and would prejudice the taxpayer), AFT will be in a tax loss position for the years of income ended 30 June 1992 to 30 June 1998 inclusive despite the fact that a portion of its interest expenses are purportedly quarantined.
…
In light of the foregoing, we did not believe it was necessary to seek an opportunity to transfer losses to AFT in the event you sought to quarantine its interest deductions. That is, the compensatory adjustments which we believe should accompany any loss quarantining you propose to make will not result in AFT being in a tax payable position.
In the event you do not propose to make compensatory adjustments similar to the adjustments notified in AFT's 1992 and 1993 adjustment sheets referred to above, we would seek the exercise of the Commissioner's discretion to allow loss transfers from other entities within the CPH Group to AFT pursuant to sections 80G(6A)(b) and 170-50(2)(d) of the Tax Acts. We note that the CPH Group has on previous occasions been afforded an opportunity to seek the exercise of the Commissioner's discretion to allow late loss transfers in such circumstances.
82 On 20 April 2000, Mr Bridge wrote to EY and stated that, for the reasons set out, he did not propose any compensating adjustments. He concluded as follows:
Further in regard to your request for the exercise of the Commissioner's discretion to allow loss transfers from other entities, you are referred to ATO policy as outlined in TR98/12. Your attention is drawn in particular to the first sentence of paragraph 93 and I invite you to advise me as to reasons why this should not have application to your circumstances.
83 On 2 May 2000, Mr Bridge wrote to EY, foreshadowing the issue of adjustment sheets and notice of assessments in respect of AFT. He also indicated that he had reconsidered the question of compensating adjustments and proposed to make another decision on that matter. In respect of that decision the following invitation was made:
Before making a fresh decision I wish to give you an opportunity to furnish me with details of any facts that you wish me to take into account, furnish me with any documents evidencing those facts and make submissions you may wish to make. In particular I would be grateful if you could precisely identify each item of assessable foreign income derived by Murray Leisure Group Pty Ltd which you say should be taken into account in the notional operation of s 79D, furnish me with evidence of each item and set out fully your reasons for submitting that it would be fair and reasonable in all the circumstances that any amount should be allowable as a deduction to AFT.
84 On 15 May 2000, Mr Bridge signed and approved the Part IVA Determination Report on the "Section 79D Scheme" as it affected AFT and dealing with AFT's claimed deductions in the 1992 to 1998 years of income. The amounts were as set out in the letter of 14 April 2000 (see [80] above) and totalled $302,064,342.
85 The scheme was seen by the ATO as "an extension of [that] involving ACP" and which had been dealt with, by this time, by Hill J and the Full Court.
86 The Part IVA Determination Report concluded with a discussion of penalty tax under s 226 of the ITAA. Section 226 dealt with penalty tax in circumstances where Part IVA applied. The terms of s 226 are relevant. Subsection 226(1) provides for penalty tax, calculated by reference to subs 226(2), upon the amount of tax payable by the taxpayer, less any tax which the taxpayer had claimed to be payable before the determination of the Commissioner under s 177F; that is, the penalty tax does not stand alone; it can only apply if, after the determination by the Commissioner under Part IVA, there is tax payable and more tax payable than originally claimed by the taxpayer. It is important to understand this structure when examining the approach of the primary judge. It is also to be noted that by s 226, in particular subsection (2) thereof, penalty tax is imposed by force of the provision and its rate is either 50% or 25%. It is only 25% if s 226(2)(b) is satisfied: that is "if it is reasonably arguable that Part IVA does not apply". In all other circumstances it is 50%.
87 In this statutory context, it is also important to appreciate what the Part IVA Determination Report said about culpability:
2. Culpability Component
This part reflects the seriousness of the offence, and is a flat percentage of the tax shortfall.
Section 226 of the Income Tax Assessment Act applies to penalty tax in Part IVA cases allowing for 50% penalty unless the taxpayer has a reasonably arguable case and in these cases a 25% penalty would apply.
It is held that the taxpayer would have a reasonably arguable case as the scheme is similar to a scheme which the taxpayer had won on appeal in the Federal Court. This office won the decision on appeal in the Full Federal Court and the taxpayer is seeking special leave to the High Court to appeal the decision in the Full Federal Court. This matter is set down for 26 May 2000.
In view of the above it is proposed to impose additional tax of 25%.
88 It was therefore Mr Bridge's view (he having approved and signed the report) that the taxpayers had a reasonably arguable position for the purposes of penalty.
89 The Part IVA Determination Report was not provided to the respondents until October 2000, that is, after the sending by EY of the letter of 8 June 2000, as to which see below.
90 On 15 May 2000, the ATO sent adjustment sheets to EY for AFT for the years of income ended 30 June 1992 to 30 June 1998. These sheets reflected the disallowance of interest expenses to CPF in the sums referred to above. On the following day, notices of assessment were sent to AFT for the years of income ending 30 June 1994 to 30 June 1998. (Notwithstanding the adjustments to the 1992 and 1993 years of income AFT still had adjusted net losses for those years - so no assessments issued for those years.)
91 On 17 May 2000, a meeting was held among a number of officers of the ATO who were described as the "Part IVA Panel". The officers included Mr Bridge and Mr Jones. The document in evidence recording the panel's views stated, amongst other things, the following:
The Part IVA Panel was of the view that this arrangement was not materially different from the arrangement in which section 79D was applied to ACP. In essence, the Panel believed that the arrangement was substituting ACP for AFT in a section 79D scheme. Neither the Panel nor the BSL were able to discern the impetus for this change in scheme arrangements.
With respect to the taxpayer's request for a compensating adjustment under section 177F(3), the Panel was of the view that the Commissioner should defer making any decision with respect to the exercise of this discretion until the substantive issues have been resolved by the Court. Although the BSL did raise the possibility that the ATO may face an ADJR action if a decision is not made, in the panel's opinion it would still be premature to form any view on the compensating adjustment until the preliminary issues have been addressed and that should any ADJR action be brought by the taxpayer there would be little to no chance of success.
…
On the separate issue of whether additional time should be granted to all the loss companies and income companies in the group to make transfer arrangements under section 80G(6A)(b), the Panel was of the view that the applicability of Part IVA to the arrangements weighs heavily against the Commissioner granting an extension of time. The Panel was of the opinion that the BSL should be guided by the Taxation Ruling TR98/12.
On the final issue of whether penalties should be imposed on the income companies under section 226, the Panel was in favour of disallowing the deductions sought by the income companies and levying penalties on those companies.
92 A little over a week later, on 26 May 2000, the High Court granted special leave to appeal to CPH Property.
93 By letter dated 8 June 2000, EY made various requests for the extension of time for the transfer of revenue losses. The letter dealt with what were referred to as three "distinct but related issues in relation to the transfer of revenue losses within the CPH Group". The first issue was expressed as "tentative" and concerned the possible transfer of losses to AFT if compensating adjustments under s 177F were not allowed; the second dealt with aspects of the CPH assessments concerning debt defeasance; and the third dealt with "unavailable losses".
94 The first issue was not limited to transfers of losses to AFT. Included in this part of the letter were matters dealing with the transfer of losses to other companies in the Group (the Income Companies) which previously had losses transferred to them by AFT, which losses, based substantially on the deductions for interest paid to CPF, had now been disallowed.
95 The letter also sought the views of the ATO on the application of s 80G(6A)(b) as follows:
On the basis of the foregoing, the taxpayers hereby seek your views as to the application of Section 80G(6A)(b) of the Income Tax Assessment Act 1936 (the Act) to the transfer of losses, details of which are shown in Appendix 1. We appreciate the unusual nature of the request, but feel that in all the circumstances contemplated by your actions, the taxpayers have no other alternative.
96 These two aspects of this first issue were the subject of two and a half pages of submission in the body of the letter and nearly three pages of submissions in an appendix. Earlier correspondence was annexed, including the EY letters of 23 February 1999, 16 July 1999, 17 January 2000 and 19 April 2000.
97 The first aspect of this first issue (the further transfer of losses to AFT) was only relevant if the Commissioner refused compensating adjustments under s 177F. Against this possibility, the exercise of the Commissioner's discretion under s 80G(6A)(b) was sought. The letter then dealt with the ATO's letter of 20 April 2000 and its reference to TR98/12 and, in particular, the first sentence of [93] of the Ruling. The letter then set out that part of [93] of the Ruling and dealt with it as follows:
It is acknowledged that where Part IVA is prima-facie present this sentence would, read in isolation, give cause for the Commissioner to refuse to exercise the relevant discretion. However, the AFT circumstances can be distinguished on the basis of the following:
· Part IVA has yet to be affirmed by the Courts as to its application to CPH Property's circumstances, and by extension, on the hypothesis proposed in your letter dated 17 December 1999; to AFT's circumstances;
· If ultimately the Courts found Part IVA had application to AFT, it would be in a manner not previously contemplated by this or any other taxpayer;
· In any event the first sentence of paragraph 93 of TR 98/12 can not be read in isolation from that which follows immediately thereafter, that is:
"in a sense it could be said in these circumstances the delay [in seeking loss grouping] is directly attributable to the actions of the taxpayer."
In AFT's circumstances, the ATO would have been aware in December 1994, if not before, that if its views of the application of s 79D to CPH Property were to prevail, then there would be some possibility of applying Part IVA to AFT. Had this been conveyed to AFT at that time, and not some five to six years later, it would have foreseen an opportunity to seek loss grouping at the time of lodging AFT's income tax returns for the years ended 30 June 1994 to 30 June 1998 inclusive. It therefore cannot be said that the delay [in seeking loss grouping] was caused by the taxpayer.
In addition paragraph 93 of TR98/12 goes on to state:
"Conversely, in cases where it cannot be said the conduct of the group is culpable in respect of its failure to comply with its obligations under the law, this is a factor which weighs in favour of an extension of time being granted (eg. where a company was unclear as to the appropriate tax treatment for bill discounts … … …)"
Clearly, given the uncertainty expressed above as to the application of Part IVA to AFT and by the courts in these circumstances generally, it could be easily argued that in fact AFT's circumstances are not dissimilar to those where paragraph 93 expressly calls for added weight to be given to this factor.
[emphasis in original]
98 The letter then went on to deal with why the Commissioner should extend time for the Income Companies to enter into new loss transfer arrangements. The question of delaying assessments until the delivery of the High Court judgment was handed down was raised. On the basis of there being no postponement of the issue of amended assessments to the transferee companies, the letter stated:
If, however, you are not prepared to postpone issuing amended assessments to the loss transferee companies, to the extent AFT losses transferred to those entities are no longer available, we request the Commissioner exercise his discretion pursuant to Section 80G(6A)(b) of the Act to allow loss transfers in terms of Section 80G(6)(c) as set out in the attached Appendix A (sic: Appendix 1).
As to the application of TR98/12 to these transfer requests, we refer you to the comments made above concerning paragraph 93 and in addition we note that prima-facie Part IVA does not have application to the loss transferee companies as they were bona fide transferees without notice, as is, in part, evidenced by the fact that they were not and furthermore were not identified to be parties to the so-called "Section 79D Scheme".
99 So, in relation to an extension of time for the Income Companies the submissions made concerning AFT's position earlier in the letter were repeated and the Income Companies were said to be "bona fide transferees without notice" (presumably, that is, without notice of the scheme).
100 Appendix 1 to the letter of 8 June 2000 dealt with the factual circumstances of AFT for the years ending 30 June 1994 to 1998, commencing with the letter of the ATO dated 17 December 1999 advising of the ATO's views as to the "s 79D scheme" identified in the previous audit continuing to operate.
101 That the letter of 8 June 2000 was seen as the occasion for EY to put on behalf of any relevant company any and all matters to the ATO concerning the question of an extension of time under s 80G(6A)(b) to transfer losses to the Income Companies, can be seen by the submission put to the ATO on the third issue dealt with by the letter of 8 June 2000: the question of so-called "unavailable losses". The issue was dealt with in the letter and in some factual detail in Appendix 3 to the letter. The letter posited the issue as follows:
The issue relating to unavailable losses is a straightforward one. To the extent to which losses have been used against the 1994 audit assessments they can not be used elsewhere because, in accordance with the ATO letter of 28 May 1999 they are not available to be transferred until such times as assessments are raised to give effect to the Full Federal Court's decision.
Accordingly loss transfers purportedly made against certain taxable income of the Group in respect of the 30 June 1997 and 1998 years were not valid on the assumption the ATO's view of Section 80G(11) of the Act is the correct one at law.
In view of the above, the taxpayers seek the exercise of the Commissioner's discretion in terms of Section 80G(6A)(b) of the Act to enter into late loss transfer agreements in terms of Section 80G(6)(c) and the details of which are included at Appendix 3.
102 Appendix 3 to the letter included submissions as to why returns and loss transfer agreements were made as they were. The explanation included the following statements:
· In December 1994, and as a result of the ATO audit of the CPH Group, the ATO issued various original and amended assessments for certain CPH Group companies for the income tax years 1989 to 1993 inclusive ("the audit assessments"). Since then, those audit assessments have been further amended more than once by the ATO and further assessments have issued to the CPH Group.
· Prior to the audit assessments being issued, the Commissioner permitted the CPH Group to transfer certain losses within the Group to "cover-off" the tax liability consequences of the assessments.
· The ATO's allowance of those transfers was said to be in accordance with ATO policy as it stood at that time and was granted in circumstances where the ATO was aware that those transfers involved "clawing back" or "recasting" previous loss transfers.
· The CPH Group's 1994 to 1998 income tax returns were prepared without regard to the impact of the audit assessments and recast loss transfers. This approach was taken on the basis that:
Ř There appeared to be no agreed understanding on the part of either party (ie the CPH Group or the ATO) that the CPH Group's actual carry forward losses would be amended to reflect the losses recast. That is, the recasting was taken to be a notional exercise whereby if the ATO was ultimately successful before the Courts' those loss recasting would become effective.
Ř There was a concern that if those recast losses were not taken into account for ongoing loss grouping there would be a breach of the loss ordering rules - a situation which was not clarified until the ATO letter of 28 May 1999 (see discussion further below); and
Ř The ATO has since December 1994 issued numerous assessments/amended assessments including alternative assessments. This has led to uncertainty as to which assessments, if any would ultimately stand and as such, to put to one-side losses notionally set against those assessments would have greatly distorted the Groups' actual loss position, for example, the so-called "Alternative 2" assessments which required loss grouping and were some time later amended.
· Given the above, certain losses from the 1991 income year were used firstly as against the "audit assessments" and then purportedly against taxable income in the CPH Group for the years ended 30 June 1997 and 1998.
…
· In view of both the uncertainty as to the impact of the outcome of the ATO's appeals against Justice Hill's decision on the pool of losses available for transfer within the CPH Group and the Group's stated concern not to breach the loss transfer rules, the CPH Group sought from the ATO:
Ř an extension of time for lodging certain CPH Group income tax returns for 1998; and
Ř an extension of time for lodging loss transfer agreements.
· The CPH Groups' application for an extension of time to lodge the 1998 return was made on the explicit basis of the Group's concerns stemming from the uncertain impact of the ATO's appeal proceedings on the operation of the loss transfer rules for the Group's 1998 income tax returns. In particular, the ATO's attention was drawn to the Group's concerns regarding breaches of the loss transfer rules;
· The application for extension of time were rejected by the ATO in a letter dated 28 May 1999. The ATO stated there that:
Ř In accordance with TR 98/12. transfer documents containing a formula, as opposed to a finite amount, were invalid.
Ř For the purposes of s.80G(11) of the ITAA 1936, certain other losses proposed to be transferred were not "able" to be transferred under subsection 80G(6) of the ITAA 1936 pending determination of the Full Federal Court appeals.
Ř Transfer of losses would only be "able" to be transferred if and when assessments were raised by the ATO to give effect to the Full Federal Court appeals.
Ř Transfer of losses would only be "able" to be transferred if and when assessments were raised by the ATO to give effect to the Full Federal Court's decision.
Ř If the CPH Group was successful before the Full Federal Court, the ATO would then consider an extension of time to enter into loss transfer agreements.
103 I will return in due course to the question of the 8 June 2000 letter. At this point, it only need be stated that EY was apparently aware of the importance of putting all matters to the ATO which would explain why loss transfer agreements were entered between AFT and the Income Companies set in the background of the tax audit in the early 1990s and the earlier known views (right or wrong) of the ATO of the arrangements involving CPIL (UK), MLG, ACP, CPF and s 79D, and of the placement of AFT into those arrangements from October 1990, at least as regards the bill of exchange discount.
104 After the request for an extension of time in the letter of 8 June 2000, the ATO gave considerations to the request, albeit conditional on the outcome of the High Court litigation, that was now (after the granting of special leave) to proceed.
105 Mr Jones, armed with the Losses Network report, prepared a report of his own dated 21 November 2000, which he provided to Mr Bridge. This report dealt specifically with the first issue in the letter of EY of 8 June 2000 to extend time to transfer losses into AFT and the Income Companies. Mr Jones set out the background. He then extracted verbatim the whole of the report of the Losses Network insofar as it provided an answer to the first question posed to it (by him). Mr Jones then stated that the "Losses Network's views" were supported by the Part IVA Panel's views, quoting the third paragraph quoted at [91] above. Mr Jones then went on to consider the invitation issued to EY by the ATO in the letter of 20 April 2000 (see [82] above) to deal with the first sentence of [93] of the Ruling, and continued:
The taxpayer responded to the Commissioner's invitation in his letter of 8 June 2000.
The taxpayer acknowledges that read in isolation this sentence would give cause to the Commissioner to refuse additional time for transfer. However, the taxpayer does not concede Part IVA has any application to AFT.
The taxpayer then quotes the second sentence from paragraph 93 of TR98/12 which reads:
"In a sense it could be said in these circumstances the delay (in seeking loss grouping) is directly attributable to the taxpayer".
The taxpayer argues that the delay was primarily caused by this office, however, it is our view that the taxpayer was fully aware in 1994 when the previous audit adjustments were made what the Commissioner's views were.
The taxpayer quotes further from paragraph 93 of TR98/12 which states:
"Conversely, in cases where it cannot be said the conduct of the group is culpable in respect of its failure to comply with its obligations under the law, this is factor which weighs in favour of an extension of time being granted (eg, where a company was unclear as to the appropriate tax treatment for bill discounts …)."
The taxpayer states the following:
"Clearly, given the uncertainty expressed above as to the application of Part IVA to AFT and by the Courts in these circumstances generally, it could be easily argued that in fact AFT's circumstances are not dissimilar to those where paragraph 93 expressly calls for added weight to be given to this factor."
The Commissioner would vehemently refute this claim. In the CPH Property case the Federal Court and the Full Federal Court both found that Part IVA did apply and the Commissioner argues that this scheme continues today with different participants.
In view of the above opinions from the Losses Network and the Part IVA Panel it is proposed that no additional time to transfer losses under Section 80G(6A)(b) of the Income Tax Assessment Act 1936 or Section 170-50(2)d of the Income Tax Assessment Act 1997 to either the income companies or the loss companies for the years ended 30 June 1992 to 30 June 1998 be granted.
106 Relevant to what was said by the primary judge to be an error of law made by Mr Bridge in the decision made by him is the fact that it can be seen that Mr Jones strongly contested the proposition put in the letter of 8 June 2000 that the application of Part IVA to AFT's position was uncertain (or, a fortiori, surprising) at a point of time earlier than the letter of 8 June 2000. There can be no doubt (as dealt with below) that Mr Bridge agreed with the views of Mr Jones.
107 By letter dated 28 November 2000 signed by Mr Bridge, the ATO responded to the letter of EY of 8 June 2000. The ATO said that the Commissioner would not grant an extension of time to "transfer in" revenue losses to AFT (the loss company) and to the Income Companies as requested in the letter, as the first issue. The request for the extension of time sought in respect of "unavoidable losses", that is, the third issue, was granted.
108 Correspondence continued into 2001. By letter dated 23 May 2001, EY made a further request for an extension of time. The letter contained the following:
The Consolidated Press Holdings Group by way of letter dated 8 June 2000 sought, on a hypothetical basis, the Commissioner's discretion to allow further time in which to transfer losses from other group companies to those group companies which had previously been recipients of loss transfers from AFT if the Commissioner was to proceed to the issue of assessments which was not clear at that time. Within that letter full details of the proposed transfers together with the relevant loss transfer agreements (unsigned at that time) were included. By way of letter dated 28 November 2000 you advised that you would not in the circumstances be prepared to exercise your discretion favourably if called upon to do so.
With greater reason at this time each of the taxpayers listed above together with AFT wish to draw to the Commissioner's attention our letter dated 8 June 2000 and in particular the discussion contained therein under the heading of "The AFT Assessments" and Appendix 1. We urge the Commissioner to consider this matter in the light of the fact the issue of assessments is now imminent.
109 On 31 May 2001, the High Court delivered judgment.
110 On 7 June 2001, EY once again wrote to the ATO about the question of loss transfers, stating:
We refer to our ongoing correspondence in relation to the above matter and in particular our letters of 23 May 2001 and 8 June 2000 concerning the transfer of revenue losses within the CPH Group.
By way of letter dated 8 June 2000, the CPH Group requested, on a hypothetical basis, the Commissioner of Taxation's ('COT') discretion to allow further time in which to transfer losses from other group companies to those companies which had previously been recipients of loss transfers from AFT, if the COT was to proceed with the issue of assessments. The letter included full details of the proposed loss transfers together with loss transfer agreements.
By way of letter dated 28 November 2000 you advised that you would not in the circumstances be prepared to exercise your discretion favourably if called upon to do so. In our letter of 23 May 2001 we urged the COT to consider the matter in light of the fact that the issue of assessments was imminent.
Implications of High Court Decision
As a result of the recent High Court decision pertaining to the dividend stripping issue falling in favour of Consolidated Press Holdings Limited ('CPH') and Murray Leisure Group Pty Ltd ('MLG') the amounts sought to be assessed to CPH and MLG by the COT were found not to be assessable to them. The orders of the High Court as a result of the decision reverted to those of Hill J in the Federal Court at first instance being "that the objection decision(s) be set aside".
On one view, these orders immediately result in certain revenue loss transfers made in relation to the purported dividend stripping amounts being invalidated and hence the relevant losses ('freed up losses') reverting back to the applicable transferor companies. If this view is correct, the loss ordering rules will require the freed up losses to be utilised before losses relating to subsequent years of income.
The proposed loss transfers previously requested were set out in Appendix 1 of our letter of 8 June 2000 (see Appendix A). These loss transfers were requested prior to the High Court decision and as such did not seek to utilise the freed up losses. If this view is correct, we request the COT consider the relevant taxpayers' requests for extensions of time to transfer losses, based on the modified loss transfers outlined in Appendix B. These proposed transfers take into account the freed up losses as required by the loss ordering rules. We also attach for your reference, loss transfer agreements reflecting these transfers. Signed copies of the relevant agreements will be delivered to you shortly.
An alternative view is that this same result occurs only upon issue of amended assessments to CPH and MLG for the 1990 year of income which may be necessary to give effect to the orders of the High Court. Accordingly, if this alternative view finds favour with you, we request that the COT consider the relevant taxpayers' requests as previously submitted.
111 On 15 June 2001, EY submitted the proposed loss transfer agreements.
112 By letter dated 19 June 2001, the ATO advised EY that the position as stated in the ATO's letter of 28 November 2000 refusing the transfers remained and would not be changed. It was also made clear that any adjustments in favour of the Group arising from the High Court's reasons would be made.
113 On 21 June 2001, the ATO advised the Group of proposed adjustments to the assessments of the Income Companies. Amended assessments issued shortly thereafter.
114 On 10 July 2001, EY requested reasons for the refusal of the Commissioner to extend time.
115 On 27 July 2001, the ATO responded, denying that a decision had been made for the following expressed reasons:
Pursuant to s 80G(6A)(b) of the Income Tax Assessment Act 1936, no valid request has yet been received. The Commissioner of Taxation has not made a decision in relation to the exercise of his discretion for either AFT or the income companies.
It should be noted that the views expressed in my letters of 19 June 2001 and 28 November 2000 was based upon hypothetical scenarios as listed in your letter of 8 June 2000.
116 By letter dated 6 August 2001, EY responded as follows:
In our view valid requests have been made pursuant to our letters of 7 and 15 June 2001, and the references therein to our letter of 23 May 2001. However, rather than disputing this somewhat technical point, and for the purposes of moving this matter forward and maintaining focus on the substantive issue, we attach letters on behalf of each relevant company again requesting further time to make loss transfer agreements pursuant to ss 80G(6A)(b) of the Income Tax Assessment Act 1936.
For the avoidance of any possible doubt, please be advised that the attached letters are actual requests pursuant to ss 80G(6A)(b) and are in no way hypothetical. It is the intention of each relevant company that the letters constitute valid requests. Should you consider them to be invalid in any way, please contact the writer immediately and advise the reasons(s).
[emphasis in original]
117 On 27 August 2001, the Income Companies lodged notices of objection to the amended assessments issued in late June 2001.
118 On 28 August 2001, Mr Bridge and two colleagues from the ATO met with Mr Cherry (from the Group) and Mr Williams and a colleague from EY. From the notes of the meeting in evidence it can be said that some frankness of expression was exhibited. Mr Cherry expressed some complaint that since the retirement of Mr Perry he had no prompt available point of contact for free discussion. Discussion took place as to the position of the parties after the High Court decision. The questions of compensating adjustments, "loss regroupings" and of the application of Part IVA or s 51(1) were discussed. This conversation included the following:
TB So, to refer to the comment made earlier "where are we with this" matter? We have assessments issued and objections have been lodged, where are we headed?
JC Well depending on the decision you make on our objections then the appeal process may be the next step. You might allow the objections (ha!)
TB Are there any other avenues available to avoid this matter going to court? Are there any alternatives? Are we really keen to embark on another five year court action?
JC I was not expecting you to raise that and it is not something I have given full consideration to. I will have to consult with my fellow directors on that. I will take that on board Tony and consider it.
DM The "ultimate issue" in practice is really loss regrouping and compensating adjustments which could bring the tax payable down to zero.
GW Yes that's right. That brings me to ask you what is the "mischief" that you are seeking to remedy by the adjustments you are making to AFT and the Income Companies. There is "no mischief". Taking a broader view of this matter, AFT has borrowed money from CPF to invest in MLG. MLG has invested in CPIL and is returning large amounts of attributable income each year. The interest expense is claimed by AFT and returned as income by CPF which gives a tax neutral result from a group perspective. "What is the mischief guys?"
I submit to you that there is no mischief here and this should be taken into account in considering the requests for loss regrouping and compensating adjustments.
…
GW I put it this way, it is "a natural extension" of the application of Part IVA you have adopted which is based on the hypothesis that AFT would have invested directly in CPIL rather than in MLG. In such circumstances the substantial attributable income that arose from CPIL would have accrued to AFT and as such released the interest expenses said to be quarantined under s 79D.
TB In response to your comments regarding 'no mischief' the High Court found there to be a Part IVA scheme in its decision.
GW That was in the circumstances of that case. The "Tax Benefit" found by the High Court is not present in AFT's circumstances. Have you checked the "Tax Benefit". I don't want to tell you how to do your job, but you should check the Tax Benefit found by the High Court, its is not there in AFT's circumstances.
…
SB You should elaborate on this issue and then we can consider it.
DM We are not sure whether compensating adjustments are technically available in these circumstances. We are not sure whether the "role" of compensating adjustments is limited to preventing double taxation such as with two taxpayers or whether they can "unravel the scheme".
GW I understand what you are saying and my response would be twofold. Firstly compensating adjustments are technically available. Secondly as said they are a natural extension of the manner in which you have applied Part IVA and they are required by fairness and equity.
JC I note that compensating adjustments were previously allowed by the ATO in similar circumstances.
SB Be that as it may, a separate decision has to be made on this request for compensating adjustments based on the current circumstances.
JC I appreciate that there is still a formal requirement for a decision to be made on this request. We are simply noting that a decision has previously been made to allow compensating adjustments in very similar circumstances and presumably the proper procedures, consideration and rationality were applied by your office in reaching that decision. This is relevant to the current request.
TB I would just like to clarify the quantum of the compensating adjustments. I think I have seen comments in correspondence to suggest that they would reduce the tax payable to nil?
GW No. The compensating adjustments and loss regrouping together would reduce the liability to nil. The compensating adjustments alone would reduce the liability by roughly 50%.
…
GW Just returning to this 'no mischief' issue again. If AFT knew at the time the ATO's view on its interest deductions, it could have left the relevant losses to be carried forward in AFT and instead utilised other losses in the CPH Group to transfer to the Income Companies. In such circumstances the current adjustments made to AFT would not have resulted in any tax payable and consequent penalties and interest, and there would be no requirement to request the Commissioner to exercise a discretion for loss regrouping etc. This should be taken into account in relation to interest and penalties imposed and the loss regrouping and compensating adjustment requests.
SB I understand the point you are making. We were not able to finalise our view until the High Court decision was handed down. We are looking at your loss regrouping and compensating adjustment requests.
DM All the issues are intertwined. The issue of compensating adjustments is affected by the ss.51(1) position and we are seeking advice on that. The compensating adjustments request affects the loss regrouping request and this is also affected by whether Part IVA applies or whether it is a ss.51(1) argument.
TB We are confidently of the view that loss regrouping should not be allowed regardless of whether ss.51(1) is relied on.
[emphasis added]
JC In practice who makes the decision on loss regrouping requests, who is it delegated to ultimately from the Commissioner?
SB That depends on the circumstances, it could be various people.
JC Could it be an Assistant Commissioner like you?
SB It could be.
JC Could it be a Team Leader? Could it be Tony.
SB It could be.
GW The ss.51(1) position you are taking is 'novel' and is out of step with existing authority. In light of this it does not seem to be in the spirit of the discretion provided by 80G(6) not to allow loss regrouping.
JC And there are different considerations where Part IVA is your argument as opposed to ss.51(1). Presumably loss regrouping would be more likely allowed in the latter case.
DM Seemed to express agreement with this.
TB I don't believe it is relevant to the loss regrouping request, whether the Part IVA or ss.51(1) position is adopted.
GW I don't think that approach is in the spirit of the discretion.
…
('TB' was Mr Bridge; 'JC' was Mr Cherry; 'SB' was Mr Burrows the relevant Assistant Commissioner; 'DM' was Darren Magro from the ATO; 'GW' was Mr Williams of EY.)
119 One can see that aspects of the letter of 8 June 2000 were repeated in this discussion.
120 On 12 September 2001, Mr Jones sent an email to Mr Michael Mooney who had signed the Losses Network Report of March 2000. (Copies of this email were sent to Mr Bridge and Mr Burrows.) The email contained the following:
Reference is made to the previous request made to the Losses Network dated 27 January 2000 and your reply (refer attachment). Subsequent to this original request the High Court found that a Part IVA scheme existed.
The original request was based on the assumption that the income companies would request additional time to transfer losses from other group companies. The income companies have now made formal requests to do this and we would like confirmation that your previous advice stands.
In addition to the above:
If the adjustments to the loss company were disallowed under Section 51 and not Part IVA should the Commissioner exercise his discretion to allow additional time for the income companies to make loss transfer agreements?
Scott Burrows has requested that the sign-off comes from Anthony Marvello.
121 The following day, 13 September 2001, Mr Mooney sent an email to Mr Marvello, who was the Manager of the "Losses Centre of Excellence" (the successor group in the ATO to the "Losses Network") forwarding Mr Jones' email of the previous day.
122 On 18 September 2001, Mr Marvello replied by email to Mr Mooney (sending a copy to, amongst other people, Mr Burrows and Mr Jones) stating the following:
I have read the paper referred to me which sets out the reasons for the decision not to allow additional time for the group companies to make loss transfer agreements that will nullify the effects of Part IVA adjustments and consulted with my colleague Ken Akhurst.
The decision and the reasoning set out in the document are in accordance with ATO policy as published in Taxation Ruling TR 98/12 and are consistent with the way in which the policy has been applied since the formation of the Losses Network & Losses CoE.
The document reflects & is consistent with the comments made by David Hess and Joseph Orland of the Losses CoE in responses prepared by them in January and February 2000.
Furthermore, I understand that this view is consistent with the comments made by the Part IVA Panel on 17 May 2000.
123 It is plain that Mr Marvello was referring to the Losses Network Report to Mr Jones of March 2000 when he referring to "the paper referred to me" and to "the document".
124 On the same day, 18 September 2001, Mr Jones forwarded the email of Mr Marvello to Mr Bridge.
125 On 10 October 2001, Mr Jones prepared a two page memorandum directed to the requests made by the companies in the Group for an extension of time to transfer tax loss as contained in the letter of 6 August 2001 (and also two letters dated 15 and 16 August 2001). Mr Jones stated the following:
In a report dated 21 November 2000 (refer attached) it was stated:
"In view of the above opinions from the Losses Network and the part IVA Panel it is proposed that no additional time to transfer losses under Section 80G(6A)(b) of the Income Tax Assessment Act 1936 or Section 170-50(2)d of the Income Tax Assessment Act 1997 to either the income companies or the loss companies for the years ended 30 June 1998 to be granted."
Subsequent to the taxpayers "actual request" a paper was referred to Anthony Marvello (Manager Losses CoE) for confirmation that the previous advice stands. Anthony agreed that,
"the reasoning set out in the document are in accordance with the ATO policy as published in Taxation Ruling TR98/12 and are consistent with the way in which that policy has been applied since the formation of the Losses Network & Losses CoE".
In view of the above it is not proposed to allow the above named companies request to allow additional time to transfer in losses in accordance with Sub-section 80G(6A)(b) of the Income Tax Assessment Act 1936.
126 On 30 October 2001, Mr Bridge wrote the following in hand on the second page of Mr Jones' two page memorandum underneath Mr Jones' signature:
- I agree with Mr Jones' submission not to allow additional time to transfer losses.
The decision is supported by Taxation Ruling TR 98/12 and by the Manager of Losses C of E.
Mr Bridge signed and dated this. This is the decision under review. I will (as the parties did on appeal) treat it as one decision, although, in point of fact, seventeen decisions were made in respect of the seventeen Income Companies.
127 On 8 November 2001, the Commissioner gave EY notice of the refusal to grant additional time to transfer in revenue losses into the income companies.
128 On 23 November 2001, EY sought a statement under s 13 of the the AD(JR) Act in respect of the decision. This statement was provided on 17 December 2001. The statement contained sections on the factual background to the issue of the assessments and on the factual background to the application to transfer losses. The statement contained the following, under the heading "REASONING" (which was set out by the primary judge in appendix 2 to his Honour's reasons):
REASONING
When making my decision, I had regard to:
- S80G of the Act which provides that a loss agreement must be "made before the date of lodgement of the return of income of the income company for the income year or within such further time as the Commissioner allows". The Act does not specify a list of matters that I should have regard to when considering whether to exercise my discretion in favour of an applicant to allow additional time.
- The Commissioner's Ruling TR 98/12 which deals with the transfer of losses. Paragraphs 81 to 93 of that Ruling deal with the exercise of discretion to allow additional time to lodge loss transfer agreements. The Ruling provides that I must exercise the discretion according to the merits of the case and not inflexibly apply any particular policy.
- The reports prepared by the Losses Network and the Part IVA Panel.
- I considered that the scheme which gave rise to the interest deductions claimed by AFT was similar to and was the successor of the scheme which the High Court considered in Federal Commissioner of Taxation v Consolidated Press Holdings Ltd & Anor. I considered that it would be inconsistent with the general intention of the Act and the anti-avoidance provisions contained within Part IVA of the Act if I allowed the Group additional time to transfer losses to the applicant once Part IVA applied to disallow a deduction claimed by AFT.
- Although the applicant did not make any submissions in its application of 6 August 2001 as to why I should exercise my discretion in its favour I had regard to the matters raised in the letter of Ernst & Young of 8 June 2000. In that letter the applicant suggested that the Commissioner was responsible for the delay in not notifying AFT in December 1994 that Part IVA may apply to the AFT arrangement. In my view this was incorrect as:
(a) the applicant requested the Commissioner to defer issuing a notice of assessment to the applicant disallowing the transfer of losses from AFT;
(b) the Group was aware in 1992 that the Commissioner was considering the application of s79D and Part IVA in relation to arrangements entered into by the Group;
(c) the Commissioner did not begin to fully investigate the AFT arrangement until November 1999.
- In that letter of 8 June 2000 Messrs Ernst & Young stated that there was uncertainty "as to the application of Part IVA to AFT, by the Courts in these circumstances generally". I did not consider that there was either at the time the letter of 8 June 2000 was written or when I made my decision on 30 October 2001 any significant amount of uncertainty as:
(a) as 8 June 2000 the Full Federal Court had agreed with the Commissioner's position in regard to the s79D and Part IVA scheme,
(b) by the time I made my decision on 30 October 2001 the High Court had handed down its decision in Federal Commissioner of Taxation v Consolidated Press Holdings Ltd & Anor, in regard to the s79D and Part IVA scheme, which was unanimously in favour of the Commissioner.
(c) I consider that the scheme which gave rise to the interest deductions claimed by AFT was similar to and was the successor of the scheme ruled upon by the courts as above.