Genworth IPO
31 From March 2003 until 26 May 2004, the GECC group also undertook extensive planning for a potential initial public offering (IPO) of its global lenders' mortgage insurance businesses. In Australia, the businesses were conducted by two wholly owned subsidiaries of GECA - Old GEMI and Old GEMICO. GE decided to aggregate its global lenders' mortgage insurance businesses under a US company, Genworth Financial Inc (Genworth), which was to be the company listed in the IPO. Old GEMI and Old GEMICO were not direct or indirect subsidiaries of Genworth. The Australian global lenders' mortgage insurance business needed to be owned by direct or indirect subsidiaries of Genworth so that it could be included in the IPO. Vanderkley was told of the IPO in about October 2003, some four months after the commencement of Project Musketeer. Richard Hendriks (Hendriks), a director of Greenwoods & Freehills Pty Ltd (an incorporated legal practice specialising in taxation advice), was engaged in September 2003 to assist in advising GECFAsia on the IPO.
32 For the purposes of the IPO, Old GEMI and Old GEMICO would transfer the assets and liabilities of their lenders' mortgage insurance businesses to a new company, GEMICO, which was a wholly owned subsidiary of a new holding company, GEMIH. GEMIH was a wholly-owned indirect subsidiary of Genworth which, in turn, was a wholly-owned subsidiary of GECC (a non-resident). It was for this purpose that GEMIH and GEMICO were incorporated on 10 November 2003. As a result, on the date of its incorporation (10 November 2003), GEMIH was an eligible tier-1 company of GECC for the purposes of s 719-15 of the 1997 Act.
33 Around November 2003, Vanderkley, together with Graeme Barns (a tax manager who reported to Vanderkley) (Barns) and Davies, decided they would seek Steering Committee approval for GEMIH and GEMICO to form the same MEC group as GECA, the parent company of the vendors (Old GEMI and Old GEMICO) (the GECA MEC Group): see [31] above. Vanderkley's unchallenged evidence was that the reason the companies were to join the GECA MEC Group was that there was always the possibility that the IPO would not proceed and, if that occurred, he considered the businesses of Old GEMIH and Old GEMICO should remain part of the same MEC group that they would have been part of if the transfer had not occurred at all.
34 From December 2003 to January 2004, Vanderkley, Barns and Davies continued to work on the consolidation issues. There were two outstanding issues to be finalised - (1) whether GECFAsia would join the same MEC group as GECA, GEMIH and GEMICO and (2) when the MEC group would form. Two proposals were recorded in a draft advice Hendriks provided on 17 December 2003 (17 December Memorandum) as follows:
…
We understand that GE proposes to form a MEC group (as defined in section 719-5) consisting of [GECA] … and [GEMIH] and their subsidiaries from 1 January 2004, and to appoint GECA as the provisional head company.
We also understand that the GE group has alternative proposal in mind whereby GECA would form a MEC group with … GECFAsia … from 1 July 2003, and [GEMIH] would join that MEC group from 10 November 2003 (its date of incorporation). Under this proposal GECFAsia would be appointed as the provisional head company.
…
As a result of forming a MEC group containing GECA and [GEMIH] and their subsidiaries (possibly with GECFAsia), GECA (or GECFAsia) will be taken to be the owner of all of the assets and liable for all the liabilities of the MEC group for Australian tax purposes. This is a consequence of the single entity rule in section 701-1 under which all of the other entities in the MEC group are taken to be part of GECA (or GECFAsia). Consequently, the transfer [the transfer of the Australian global lenders' mortgage insurance business] under the Scheme will be ignored as it is effectively a transfer between divisions of the same legal entity.
After the transfer, the assets will still be deemed to be owned by GECA (or GECFAsia). Even though New GEMI has provided consideration for the transfer, the transferred assets will not have their tax cost reset. That is, for Australian tax purposes GECA ([or] GECFAsia) will remain the owner of the assets with the same tax cost as existed prior to the transfer.
…
35 By early January 2004, the August 2003 Spreadsheet had been substantially amended. The amendments were recorded by Davies in handwriting on the spreadsheet. The amendments were agreed by Vanderkley, Barns and a Paul Krakauer on 7 January 2004. The amendments included Old GEMI and Old GEMICO joining a consolidatable group with GECFAsia as the head company with an entry date of 1 July 2003.
36 On 12 January 2004, Davies sent an email to Barns, Vanderkley and Paul Krakauer enclosing a spreadsheet showing "our agreed status of the consolideatable (sic) groups for the Capital and Funding entities" (the 12 January 2004 Spreadsheet). The email went on to state:
The … spreadsheet ties into the structure chart identifying each group and its entry date into consolidations as either 1 July 2003 or 1 January 2004.
There are 3 questions that [Barns] agreed to follow up. They are noted on the spreadsheet in the comments column and are:
• [Barns] to advise whether GECA/Mortgage Insurance group to form MEC with GECFA'sia [sic] group effective 1 July 2003 or, whether these 2 groups to remain separate.
…
37 On 19 January 2004, Davies sought advice from Hendriks. The question Davies posed for Hendriks was:
Our consol group (GECA and old Mortgage subs) is forming as at 1 July 2003. The 2 new Genworth entities were incorporated in November 2003. They are dormant from date of incorporation until first balance date, being 31 December 2003. They will join our existing consol group from November 2003 and thereby change our consol group into a MEC group at that date. Could you please consider the implications of this change of status from a consol group to a MEC group.
The question posed recognises, as was the fact, that GEMIH and GEMICO were incorporated in November 2003, were dormant from incorporation until 31 December 2003 and that they would join the existing consolidated group from the date of incorporation. The question is important because the detail of GEMIH and GEMICO on the 12 January 2004 Spreadsheet inaccurately recorded their incorporation as "Sept".
38 On 15 January 2004, a conference call was held attended by, among others, Hendriks and Davies. A handwritten note by Davies on 15 January 2004 records, as was the fact, that Hendriks would provide a note of the discussions and conclusions at that meeting. He did on 28 January 2004 in the form of a memorandum (28 January Memorandum). Before receiving the memorandum, Davies wrote again to Hendriks on 19 January stating:
Our consol group (GECA and old Mortgage subs) is forming as at 1 July 2003. The 2 new Genworth entities were incorporated in November 2003. They are dormant from date of incorporation until first balance date, being 31 December 2003. They will join our existing consol group from November 2003 and thereby change our consol group into a MEC group at that date. Could you please consider the implications of this change of status from a consol group to a MEC group.
39 The 28 January Memorandum from Hendriks set out the issues discussed on 15 January and the additional question posed by Davies on 19 January. The 28 January Memorandum described the alternatives then under consideration as follows:
…
It is proposed that a consolidated tax group will be formed with effect from 1 July 2003 with GECA as the head company and the initial subsidiary members being … [Old GEMI] and [Old GEMICO].
In November 2003, two new Australian companies (called for present purposes, [GEMIH] and [GEMICO]) were incorporated as subsidiaries of Genworth for the purpose of acquiring the mortgage insurance business assets from [Old GEMI] and [Old GEMICO]. It is intended that GECA and [GEMIH] and [GEMICO] will form a … [MEC group], effective from the time [GEMIH] and [GEMICO] are incorporated in November 2003.
Subject to obtaining court approval, [Old GEMI] and [Old GEMICO] will transfer the mortgage insurance business to [GEMICO] and, shortly afterwards, approx 30% of Genworth will be floated in an IPO.
Two other Australian subsidiaries (GE Mortgage Insurance Finance Holdings Pty Limited and GE Mortgage Insurance Finance Pty Limited, together "the Genworth finance companies") were incorporated as subsidiaries of Genworth in November 2003 for the purpose of financing the acquisition of the mortgage insurance business by [GEMICO]. The Genworth finance companies will not be part of the GEC AMEC Group.
As an alternative to GECA forming a consolidated group on 1 July 2003, consideration is also being given to [GECFAsia] forming a MEC group with GECA with effect from 1 July 2003 with [GECFAsia] as the nominated head company ("the Alternate Proposal"). In this event, [GEMIH] and [GEMICO] would simply become part of the [GECFAsia] MEC Group at the time those companies are incorporated.
The memorandum again recorded, as was the fact, that GEMIH and GEMICO were incorporated in November 2003. As is apparent, a decision had still not been made on which alternative would be adopted.
40 On 6 February 2004, Davies sent a further version of the spreadsheet to Barns and the GE US Corporate tax team. Questions to be answered were identified. One question was "[Barns] to advise whether GECA group to form MEC with GECFA'sia (sic) group, effective 1/7/03 (7/1/04)". The spreadsheet recorded, in Davies' handwriting, two important matters he was told by Barns. First, that on 16 February 2004 no decision had been made and, secondly, that on 27 February 2004, Barns told him that "NOW 99% CERTAIN THAT THIS GROUP WILL FORM MEC [WITH] GECFASIA". The reference to the "group" was, of course, a reference to the GECA MEC Group. Davies accepted in cross-examination that his note did not record a final decision having been made.
41 Preceding the discussion on 27 February, Hendriks sent a further memorandum to, among others, Vanderkley and Barns dated 20 February 2004. Hendriks prepared it for the purposes of obtaining the necessary court approval for the transfer of the assets and liabilities of the lenders' mortgage insurance businesses to GEMICO, the wholly owned subsidiary of GEMIH. Again, this memorandum contained a description of the alternatives:
…
We understand that it is proposed that a [MEC] group (as defined in section 719-5) will be formed consisting of [GECA] and GEMI Holdings and their subsidiaries from 1 January 2004, and to appoint GECA as the provisional head company.
We also understand that the General Electric group has alternative proposal in mind whereby GECA would from a MEC group with [GECFAsia] from 1 July 2003, and [GEMIH] would join that MEC group from 10 November 2003 (its date of incorporation). Under this proposal [GECFAsia] would be appointed as the provisional head company.
Australian tax analysis
Transfer of assets and liabilities under the Scheme
As a result of forming a MEC group containing GECA and [GEMIH] and their subsidiaries (possibly with [GECFAsia]), GECA (or GECF Asia) will be taken to be the owner of all of the assets and liable for all of the liabilities of the MEC group for Australian tax purposes. This is a consequence of the single entity rule in section 701-1 under which all of the other entities in the MEC group are taken to be part of GECA (or [GECFAsia]). Consequently, the transfer under the Scheme will be ignored as it is effectively treated as a transfer between divisions of the same legal entity.
After the transfer, for Australian tax purposes the assets will still be deemed to be owned by GECA (or [GECFAsia]) with the same tax cost as existed prior to the transfer.
42 After receiving that advice, Vanderkley discussed the memorandum with Barns and Davies. His evidence was that the conversation took place in late February or early March 2004. He does not recall the precise date of the conversation or the precise discussions. His evidence, however, was that he decided that the better course would be for GECFAsia to form a MEC group with GECA, being the second alternative proposal discussed in Hendriks' 20 February memorandum: see [41] above. The decision was not formally recorded. Vanderkley's evidence was that, consistent with adopted practice, he expected and believed the decision to be recorded by Davies in a spreadsheet. Davies did not refer to this conversation in his evidence. Davies only referred generally to filling out the 7024 (and 7025) Form on the basis of his "understanding" of the composition of the GECFAsia MEC Group. Davies was cross-examined about where his "understanding" that GEMIH would join the GECFAsia MEC Group once it became eligible to do so upon incorporation on 10 November 2003 came from. Davies could only point to the discussions generally between himself and Vanderkley, and the recording in the spreadsheets that GEMIH was incorporated in "Sept".
43 In any event, matters progressed. The applicants obtained approval from the Federal Court for the transfer of the insurance businesses to GEMICO on 1 March 2004: see The Application of GE Mortgage Insurance Pty Ltd [2004] FCA 154. The approved transfer date was 31 March 2004. It is this transfer which gives rise to the capital gain the subject of the Pt IVC Proceeding. The applicants contend that because GEMICO was at the time of the transfer a member of the GECFAsia MEC Group, the transfer of the businesses to GEMICO must be ignored for income taxation purposes by reason of the single entity rule in s 701-1 of the 1997 Act. The respondent contends that, at the time of the transfer, GEMICO was not a member of the GECFAsia MEC Group and the transfer is subject to capital gains tax. As noted above, the choice of joinder can be made at any time up until the filing of the return, which in the present case did not occur until 2004.
44 On 2 March 2004, Davies produced another spreadsheet. It would appear that this spreadsheet preceded the discussion referred to in [42] above. I say that because the spreadsheet records, now in typewritten form, the statement that Barns was "now 99% certain that GECA group will form MEC group with GECFA'sia [sic] group, effective 1/7/03 (27/2/04)". The final spreadsheet tendered in evidence was printed on 23 April 2004. It contains the same entry.
45 On 25 May 2004, the shares of Genworth floated on the New York Stock Exchange. As a result, Genworth ceased to be a wholly owned subsidiary of GECC and GEMIH and its subsidiary, GEMICO, ceased to be able to be members of the GECFAsia MEC Group. The issue however remains - did they, retrospectively, join that MEC group from the date of incorporation (10 November 2003) until 25 May 2004?
46 A meeting of the Steering Committee was then held on 26 May 2004 to formally approve Vanderkley's recommendation: see [42] above. In particular, on 26 May 2004 the Steering Committee was to approve of the consolidation and the MEC groups to be formed in Australia. Such approval was obtained. Vanderkley did not attend the meeting. Instead, Davies presented the final composition of the GECFAsia MEC Group to the Steering Committee. Under the heading "Finalisation of Group Structure", the minutes recorded that one of the "Groups entering consolidations on 1 July 2003" was the GECFAsia MEC Group. So far so good. The difficulty according to the respondent is that the minutes list GEMIH and its wholly owned subsidiary GEMICO under the heading of "GECFAsia". As is apparent, 1 July 2003 predates GEMIH and GEMICO's incorporation. The minutes did not refer to the date of their incorporation or that they had left the potential group by 26 May 2004, the date of the meeting.
47 On 12 July 2004, directors of GECFAsia, GECA and GEMIH each passed the following resolutions:
1. That the Company [respectively, GECFAsia, GECA or GEMIH], being an eligible tier-1 company as defined in the tax consolidations legislation, elects to form a Multiple Entry Consolidated (MEC) Group with [GECA] and [GEMIH] (both eligible tier-1 companies as defined in the tax consolidations legislation), the full membership of the MEC Group to be determined by reference to General Electric Capital Corporation, the ultimate foreign parent company of [GECFAsia, GECA and GEMIH].
2. That [GECFAsia] is nominated as the Provisional Head Company of the MEC Group so formed.
3. That the MEC Group so formed formally enters into tax consolidation with effect from 1 July 2003.
(Emphasis added.)
48 As the respondent submitted, these resolutions record a choice pursuant to s 719-50 of the 1997 Act to form the GECFAsia MEC Group with effect from 1 July 2003 and the appointment of GECFAsia as the provisional head company of that group: see [17] above. The resolutions do not record that GEMIH was to become a member of that group on 10 November 2003, its date of incorporation. Unfortunately, it appears to proceed on a wrong factual premise - that GEMIH existed on 1 July 2003. It did not. It did however record what was intended - that GEMIH was to be a member of the GECFAsia MEC Group.
49 Next, the information given to the Commissioner. It was provided in the 7024 Form on 18 August 2004. The contents of the form are important. Davies filled in the 7024 Form after the Steering Committee's approval on 26 May 2004 (see [46] above) and after the resolutions were signed: see [47] above. Davies did not sign the 7024 Form. The 7024 Form was signed by Vanderkley as public officer of GECFAsia and by the public officers of GECA and GEMIH.
50 Part 1 of the 7024 Form contained the provisional head company details. It listed GECFAsia and identified the chosen date of consolidation as at 1 July 2003. Part 2 contained a declaration from the public officer of GECFAsia that the information given in the form was true and correct. The declaration was made by Vanderkley, as the public officer, on 13 July 2004. Part 3 listed the "current members" of the GECFAsia MEC Group. It included GEMIH. The 7024 Form contained a section which could be completed if that entity "joined after date of consolidation". The section was not completed. The applicants contend that the failure to include the date in Part 3 was an administrative or clerical error.
51 However, consideration of the 7024 Form cannot stop there. Part 4 was entitled "Previous member/s" and it stated:
List any entities, including eligible tier-1 companies, who have already left the group.
…
• Any eligible tier-1 company which has already left the group must also complete part 5.
…
For each eligible tier-1 companies who had already left the group, the 7024 Form contained a section which could be completed for notifying the date the entity joined the group if that date had not previously been notified. GEMIH and GEMICO should also have been included in Part 4 as they had left the group by the time the 7024 Form was lodged.
52 Part 5 was headed "Appointment of provisional head company by eligible tier-1 companies joining the group" (emphasis added). Part 3 contained the instruction that Part 5 be completed by "[a]ny eligible tier-1 company joining the group" (emphasis added). Section B of Part 5 was "to be completed by the public officer of each eligible tier-1 company (including any which have already left the group)". As a matter of commonsense, on the date of appointment (in this case, 1 July 2003) the provisional head company could only have been appointed by a foundation company.
53 The respondent contends that Part 5 was to be completed by the public officer of each eligible tier-1 company (including any which had already left the group) which formed the group: s 719-60(1) of the 1997 Act. The respondent sought to make much of the fact that the public officer of GEMIH signed Part 5 of the form. I reject that criticism. The wording of the 7024 Form is far from clear. The instructions in Part 5 are not framed as the respondent contends. I accept that the public officer of the named eligible tier-1 company certified the appointment of the named company as the provisional head company which "we chose to consolidate on and after the date listed in A above" and that, in this case, the date is 1 July 2003. However, given the heading, it is by no means clear that an eligible tier-1 company that later joined the group was not also required to complete Part 5.
54 On 27 August 2004, the respondent told GECFAsia that he had recorded the formation of the GECFAsia MEC Group including GEMIH and GEMICO. The respondent did not know and therefore could not identify the fact that GEMIH and GEMICO joined from the date of their incorporation.
55 Since August 2004, the applicants have prepared their taxation affairs on the basis that GEMICO was a member of the GECFAsia MEC Group from 10 November 2003 (the date of incorporation) until 25 May 2004.