Consideration
55 I turn first to the question, whether, on the proper construction of Pt 3-90, liabilities that are extinguished as the consideration for shares to persons outside the group fall within the words "a liability of the leaving entity at the leaving time" in s 711-45(1) of the 1997 Act. As we have seen, the taxpayer argued that they did not, whilst the Commissioner argued that they did. There is a further question, to which I turn below, as to whether the assumptions on which this question is based are correct.
56 Under Pt 3-90 of the 1997 Act, the consolidated group is treated as a single taxpayer represented by the head company. The assets of a subsidiary member are treated as being held by the head company. As already noted, the head company inherits the tax history of the subsidiary member when it joins the group. Plainly enough, the regime established by Pt 3-90 is intended to reflect, within the tax framework, the commercial and economic realities of corporate group dealings: compare s 700-10. See generally Envestra Limited v Commissioner of Taxation [2008] FCA 249 at [6]-[9] per Mansfield J. As his Honour commented in Envestra at [6], "[t]hat process obviously required rules, including to set the cost for income tax purposes of the assets that a subsidiary member would bring into the group". Just as rules are needed for this purpose, so too rules are needed to govern the situation when a subsidiary member leaves the group. A subsidiary member leaves the group when it ceases to be a wholly-owned subsidiary of the head company.
57 As the earlier discussion shows, the drafting style used in Pt 3-90 is a distinctive one: it specifically directs attention to the objects of the scheme as a whole and in respect of aspects of the scheme, and to the particular principles that are instrumental in achieving these objects: see e.g., ss 700-10, 701-15(2) & (3), 705-10(2) & (3) and 711-5(2) & (3). The more detailed provisions, or 'rules', that are to be applied to give effect to these principles are to be construed in light of these principles and objects.
58 This appeal is concerned with what happens when a subsidiary leaves the group. The object of Division 711, which governs this situation, is set out in s 711-5, namely, "to preserve the alignment of the head company's costs for membership interests … established when entities become subsidiary members": s 711-5(2). The means by which this is to be achieved is "by recognising the head company's cost for those interests, just before the leaving time, as an amount equal to the cost of the leaving entity's assets at the leaving time reduced by the amount of its liabilities": s 711-5(3). The legislation is directed to quantifying the head company's cost for membership interests "just before the leaving time", to be done in the manner indicated. This is the principle that is intended to achieve the object of preserving the relevant alignment.
59 As noted above, s 711-20 sets out the rules for calculating the allocable cost amount for the leaving member and involves five separate steps. Generally speaking, the statutory methodology gives a result that is tax neutral, irrespective of whether the group disposes of an asset directly or sells an entity that takes the asset with it: compare s 701-15(3).
60 This tax appeal is specifically concerned with the working out of step 4, in s 711-20: see [22] above. Step 4 is worked out in accordance with s 711-45 - i.e., "by adding up the amounts of each thing … that, in accordance with accounting standards … is a liability of the leaving entity at the leaving time that can or must be identified in the entity's statement of financial position": see s 711-45(1), emphasis added.
61 When used in connection with time, for example in such phrases as "at the time of", the word "at" conveys no very precise meaning. As Casey J said, in Re Port Supermarket Ltd (In liquidation) [1978] NZLR 330 at 337, "[t]he ordinary meaning of 'at the time of' suggests some indefiniteness, 'at' having the meaning of 'near' for example, 'at Christmas time' doesn't mean on Christmas day - a period a few days either side is also included", citing Re Columbian Fireproofing Co Ltd [1910] 1 Ch 758 at 765. See also Doe d Ellis v Owens (1843) 12 LJ Ex 53 at 56 per Lord Abinger and Sakhuja v Allen [1973] AC 152 at 175-76 per Viscount Dilhorne. What is intended by the word "at" in s 711-45(1) depends on the context in which it is used, including the subject matter and the legislative objects and principles.
62 The broad subject matter is the tax treatment of consolidated groups and leaving members. Section 711-5(3) expressly states that the object in s 711-5(2) - preserving the relevant alignment of head company's costs for membership interests - is to be "achieved by recognising the head company's cost for those interests, just before the leaving time" as equalling "the cost of the leaving entity's assets at the leaving time" reduced by its liabilities. In this context, the phrases "just before the leaving time" and "at the leaving time" are intended to refer to essentially the same time. Whilst it might be thought that the use of different words was intended to refer to different points in time ("just before" as opposed to "at"), this interpretation would not, so it seems to me, make much sense in this context. It is to be borne in mind that the calculation under s 711-45(1) is for the purpose of determining the tax liability of the consolidated group be reference to the assets in the subsidiary company that is about to leave the group. Absent any contrary indication, it seems most reasonable to make this calculation done just before the company leaves the group. It therefore makes much better sense if the expression "at the leaving time" (a somewhat elastic phrase) is understood as synonymous with the phrase "just before the leaving time". The phrase "at the leaving time" has a different connotation from the phrase "at midnight", which was discussed by Stone J in Tio v Minister for Immigration and Multicultural and Indigenous Affairs (2003) 126 FCR 185 at [41].
63 If the phrase "at the leaving time" is properly to be understood as meaning "just before the leaving time" in s 711-5(3), then, in the absence of any contrary indication, the same phrase is to be understood in the same way elsewhere in Div 711 and Pt 3-90 and, in particular, in s 711-45(1). I reject the taxpayer's submission that the phrase "just before the leaving time" and "at the leaving time" refer to different and distinct concepts.
64 There are a number of considerations that provide further support for this approach. First, as the analyses accompanying the Commissioner's written submissions showed, the taxpayer's construction would mean that the gain made on the sale of the shares was not brought to tax under Pt-3-90. That is, the taxpayer's construction would leave out of account under this regime the deduction of liabilities of about $25 million, which were said to be due to Mr Handbury and Nominees, although, as the taxpayer pointed out, part at least might be taxed on some other basis. The result would appear to be inconsistent with the principles on which Pt 3-90 is said to be based, especially s 711-5(3), and with its stated objects. It is worth emphasizing that the overarching object is to align the cost of the membership interests in a leaving entity with the cost of the net assets of the entity when the head company held all the membership interests in the leaving entity: see ss 701-15(2) and 711-5(2). It is scarcely necessary to refer to s 15AA of the Acts Interpretation Act 1901 (Cth) to affirm the principle that a construction that promotes the objects of the statutory regime in Pt 3-90, as a whole and in specific aspects, is to be preferred to a construction that does not promote these objects. Whilst I accept that, in the taxation context, a consideration of this kind is not necessarily determinative, nonetheless it seems to me an important one. I reject the taxpayer's argument that I should not place much weight on this consideration.
65 A number of contextual factors also support the view that "at the leaving time" refers to a time just before the shares are issued in order to preserve the alignment referred to in ss 701-15(2) and 711-5(2). These factors are:
(a) The words "at the leaving time" in s 711-25(1) apparently refer to a period before any new shares are issued to a third party, when the single entity rule is still operating, otherwise no assets would be held by the head company at the leaving time to be counted at step 1 in the table in s 711-20(1);
(b) The adjustment under s 711-25(2) for goodwill at "the leaving time" is at a time when the head company still has ownership and control of the business of the leaving entity;
(c) The reference in s 711-45(6) to disregarding employee shares "at the leaving time" apparently refers to a time when the leaving entity is still "a wholly-owned subsidiary of the head company at the leaving time", that is, before the issue of new shares to a third party;
(d) Section 711-65 works out the pre-CGT proportion of the shares in the leaving entity on the basis of the pre-CGT factor assets held by the head company under the single entity rule. Accordingly, the phrase "at the leaving time" in s 711-65(1)(a) presumably signifies a time before any new shares are issued to a third party; and
(e) The use of the words "the interest's tax cost is set just before the entity ceases to be a subsidiary member" in s 701-15(3) apparently indicates the membership interests are recognised just before the leaving time.
66 The taxpayer emphasized that, after it ceased to be a subsidiary member of the group, Magazines did not take with it the liabilities due to Mr Handbury and Nominees, as the description of step 4 (and other steps) in s 711-20 apparently contemplated. Since liabilities extinguished at the leaving time did not fall within the description of step 4 in s 711-20, they were, so the taxpayer said, to be left out of account. Two things may be said about this point. First, s 711-45, not s 711-20, provides the rule for calculating step 4: this is clear from the terms of ss 711-20 and 711-45. Secondly, the statement referred to by the taxpayer ("s 711-45 … is about the liabilities that the leaving entity takes with it … and membership interests in the leaving entity that are not held by members of the old group") is essentially a descriptive, as opposed to, an operative statement. In keeping with the distinctive drafting style of Pt 3-90, it is a descriptive statement that is, presumably, intended to guide the reader. It operates neither as a 'rule' nor as a direction. It does not modify or qualify the terms of s 711-45(1). Further, taken as a whole, the broad thrust of the statement is to the effect that the calculation under s 711-45 is about the liabilities and membership interests that were formerly, but are no longer, within the old group.
67 Accordingly, I would not regard the language used in connection with step 4 in s 711-20 as determinative of the present question. Whilst the question before the Court does not admit of an easy answer, for the reasons stated, I consider the construction advanced by the Commissioner to be correct.
68 I accept, therefore, that on a proper construction of s 711-45(1), a liability of the leaving entity at the leaving time means a liability of the leaving entity just before it ceases to be a subsidiary member of the consolidated group. The liabilities of Magazines to each of Nominees and Handbury were liabilities of Magazines just before it left the consolidated group, and should be included in the calculation of the step 4 amount under s 711-45(1) and the calculation of the taxpayer's allocable cost amount for Magazines under s 711-20.
69 I turn briefly to another argument raised by the Commissioner, which was that, in the circumstances of the case, the "leaving time" for the purposes of Pt 3-90 was 29 July 2004, as opposed to 30 July 2004. If this were so, then the extinguishment of Magazines' liabilities to Nominees and Mr Handbury was not co-incident with Magazines leaving the consolidated group. The argument had essentially two stages.
70 First, the Commissioner argued that Magazines incurred a liability to the taxpayer on 29 July 2004. This may be accepted. It was common ground that the directors of Magazines declared a dividend of $14,850,360 on 29 July 2004. Magazines incurred a debt to the taxpayer when the dividend was declared (see Corporations Act, s 254V(2)), which was payable on 30 July 2004 "by way of crediting … the appropriate loan account". For present purposes, it may be accepted that, as the Commissioner submitted, this liability had to be taken into account in accordance with the accounting standard made by the Australian Accounting Standards Board, which was in evidence. The only argument the taxpayer made against this proposition depended on acceptance of its principal argument, which I have rejected. I also interpolate here, though little was made of the point, that Magazines had been indebted to Mr Handbury since 9 July 2004. Further, by virtue of the deed of assignment of 29 July 2004, Nominees assumed the benefit of Magazines' liability to the taxpayer.
71 Secondly, the Commissioner argued that the share allotment to Nominees and Mr Handbury was complete on 29 July 2004, referring to Mr Bourne's evidence in cross-examination that, after the meeting at 7 pm on 29 July 2004, there was nothing to do other than enter Nominee's and Mr Handbury's names on the register, issue the share certificates and notify the Australian Securities and Investments Commission. On this approach, so the Commissioner said, the "consideration was the promise that a liability in the future to Nominees … be set off in the future … the liability for the shares be set off against the amount of liability that was to become due to Nominees following the assignment coming into effect on the next day". Alternatively, the Commissioner argued that the nature of the contract pursuant to which Nominees and Mr Handbury became shareholders in Magazines had not been proven by the taxpayer. In this connection, counsel for the Commissioner drew attention to Mr Bourne's inability to identify the contractual consideration. On this approach, it might be said, presumably, that the taxpayer had failed to show that its assessment was excessive. I would reject both approaches.
72 Payment for shares may, by agreement, be effected by a set off in discharge of a debt owing by the company to the intending member: see Whim Creek Consolidated (NL) v Federal Commissioner of Taxation (1977) 17 ALR 421 at 429. This was what happened in this case. There was no execution of the contract in respect of the shares until the set-off was effected, which was on 30 July 2004. An entitlement to be registered did not arise before this date. There was therefore no "leaving time" before 30 July 2004.
73 There was some debate between the Commissioner and the taxpayer as to the significance of share allotment and issue. In the circumstances, it does not seem to me necessary to explore this issue in any detail. Speaking generally, there will be an allotment when there is a binding contract to issue and take shares and an appropriation of shares, usually by the directors, to the intending member: Commonwealth Homes and Investment Company Limited v Smith (1937) 59 CLR 443 at 461, Dixon J; Central Piggery Co Ltd v McNicoll and Hurst (1949) 78 CLR 594 at 599 per Dixon J, quoting Spitzel v Chinese Corporation (1899) 80 LT 347 at 351 per Stirling J; and Federal Commissioner of Taxation v St Helens Farm (ACT) Pty Ltd (1981) 146 CLR 336 at 371 per Mason J. Plainly enough, an allottee acquires rights against the company, depending in part on the nature of the contract between the intending member and the company. These rights do not, however, turn the allottee into a member holding the shares. This will happen only when the shares "issue", that is, when the shareholder is "put in control of the shares allotted": see Central Piggery 78 CLR at 599-600 per Dixon J.
74 Nominees and Mr Handbury did not become members of Magazines (that is, the holders of the shares in the company) until their names were entered in the share register of the company on 30 July 2004: see St Helens Farm 146 CLR at 427 per Aickin J; and Patcorp Investments 140 CLR at 293, 295-96 per Gibbs J and 303 per Jacobs J. See generally HAJ Ford, RP Austin and IM Ramsay, Ford's Principles of Corporations Law (Butterworths, Australia, 2000), vol 2, at [17.170]. When their names were entered in the register, the shares came into existence as separate items of property: see Pilmer v Duke Group Ltd (In Liq) (2001) 207 CLR 165 at [20]; St Helens Farm 146 CLRat 427 per Aickin J; also Commonwealth Homes and Investment 59 CLR at 461 per Dixon J. It follows that Nominees and Mr Handbury did not acquire any beneficial interest in shares in Magazines until 30 July 2004, at which point Magazines ceased to be a member of the consolidated group.
75 On 30 July 2004, Nominees and Mr Handbury gave consideration for the shares allotment and executed their part of the contract (by which they were to become members of Magazines) when the debts that Magazines owed them (by assignment or directly) were set off against the debt that each owed Magazines for the allotment. This was the precondition for the entitlement, which then arose, for them to be registered as members. The liabilities to Nominees and Mr Handbury are thus properly characterized as liabilities "of the leaving entity just before it cease[d] to be a subsidiary member of the consolidated group". I reject the Commissioner's argument to the contrary.