100 Section 115-45 was (and is) an integrity measure. Broadly, it was (and is) designed to deny a discount capital gain where a taxpayer disposes of a share in a company or an interest in a trust in circumstances where the taxpayer would not have been entitled to a discount capital gain on the majority of CGT assets underlying the share or interest. Prior to the 2010 Amendments, the section provided:
115-45 Capital gain from equity in an entity with newly acquired assets
Purpose of this section
(1) The purpose of this section is to deny you a *discount capital gain on your *share in a company or interest in a trust if you would not have had *discount capital gains on the majority of *CGT assets (by cost and by value) underlying the share or interest if:
(a) you had owned them for the time the company or trust did; and
(b) *CGT events had happened to them when the CGT event happened to your share or interest.
When a capital gain is not a discount capital gain
(2) Your *capital gain from a *CGT event happening to:
(a) your *share in a company; or
(b) your *trust voting interest, unit or other fixed interest in a trust;
is not a discount capital gain if the 3 conditions in subsections (3), (4) and (5) are met. This section has effect despite section 115-5 and subsection 115-30(2).
Note: This section does not prevent a capital gain from being a discount capital gain if there are at least 300 members or beneficiaries of the company or trust and control of the company or trust is not and cannot be concentrated (see section 115-50).
You had at least 10% of the equity in the entity before the event
(3) The first condition is that, just before the *CGT event, you and your *associates beneficially owned:
(a) at least 10% by value of the *shares in the company (except shares that carried a right only to participate in a distribution of profits or capital to a limited extent); or
(b) at least 10% of the *trust voting interests, issued units or other fixed interests (as appropriate) in the trust.
Cost bases of new assets are more than 50% of all cost bases of entity's assets
(4) The second condition is that the total of the *cost bases of *CGT assets that the company or trust owned at the time of the *CGT event and had *acquired less than 12 months before then is more than half of the total of the *cost bases of the *CGT assets the company or trust owned at the time of the event.
Note: Section 115-30 may affect the time when the company or trust is treated as having acquired a CGT asset.
Net capital gain on entity's new assets would be more than 50% of net capital gain on all the entity's assets
(5) The third condition is that the amount worked out under subsection (6) is more than half of the amount worked out under subsection (7).
(6) Work out the amount that would be the *net capital gain of the company or trust for the income year if:
(a) just before the *CGT event, the company or trust had *disposed of all of the *CGT assets that it owned then and had *acquired less than 12 months before the *CGT event; and
(b) it had received the *market value of those assets for the disposal; and
(c) the company or trust did not have any *capital gains or *capital losses from *CGT events other than the disposal; and
(d) the company or trust did not have a *net capital loss for an earlier income year.
Note: Section 115-30 may affect the time when the company or trust is treated as having acquired a CGT asset.
(7) Work out the amount that would be the *net capital gain of the company or trust for the income year if:
(a) just before the *CGT event, the company or trust had *disposed of all of the *CGT assets that it owned then; and
(b) it had received the *market value of those assets for the disposal; and
(c) all of the *capital gains and *capital losses from those assets were taken into account in working out the net capital gain, despite any rules providing that one or more of those capital gains or losses are not to be taken into account in working out the net capital gain; and
(d) the company or trust did not have any *capital gains or *capital losses from *CGT events other than the disposal; and
(e) the company or trust did not have a *net capital loss for an earlier income year.
101 The amendments made by the 2010 Amending Act were designed to address problems with the application of these provisions in cases where a taxpayer had entered into a replacement-asset roll-over within 12 months of the relevant CGT event. Sections 115-32 and 115-34 were introduced to address those problems. The problems are explained in the Explanatory Memorandum (at pp 209-211):
These amendments give effect to a suggestion made through TIES 0042-2009.
Section 115-30 provides for a different acquisition date for a CGT asset that its owner acquired because of a same asset, or replacement asset, roll-over.
Sections 115-30 and 115-45 may operate in certain circumstances to deny taxpayers access to the CGT discount if they sell their replacement interests within 12 months of receiving a roll-over because the acquirer entity will not have owned the interests in the original entity for at least 12 months.
The amendment allows a taxpayer who sells their interest in the acquirer entity to 'look through' to the assets of the original entity to establish whether the interests in the original entity, which are now owned by the acquirer entity, can be considered to have been owned for at least 12 months. [Schedule 6, item 136, section 115-32]
This means that the requirements in subsections 115-45(4) and (5) need to be applied to the shares or trust interests now owned by the acquirer entity to determine whether they have been owned for at least 12 months. These requirements will be satisfied if the cost bases and the net capital gain of assets of the original entity that have been owned for less than 12 months are not more than 50 per cent of the cost bases and net capital of all the original entity's assets.
This result is then used to test whether the taxpayer is entitled to the discount under section 115-45 by applying subsections 115-45(4) and (5) to the acquirer entity's assets.
The amendment does not apply to replacement assets acquired under the replacement asset roll-overs provided by Subdivisions 122-A, 122-B and 124-N. [Schedule 6, items 135, 136, 139 to 145, section 115-32, subsections 115-45(4) and (6)]
Sections 115-30 and 115-45 may also deny taxpayers access to the CGT discount if they sell a company share received as a replacement asset under a Subdivision 122-A or 122-B replacement-asset roll-over (disposal of assets to a wholly-owned company) or a Subdivision 124-N replacement-asset roll-over (disposal of assets by a trust to a company) before they have owned the share for 12 months. Also, as the company acquires its assets at the time of the roll-over, selling a share in the company before owning it for at least 12 months will mean the conditions in subsections 115-45(4) and (5) may be met as the company has held its assets for less than 12 months. This results in denying the taxpayer the CGT discount.
The amendment for these specific replacement-asset roll-overs treats the taxpayer's replacement asset (share) for the purpose of the CGT discount as being owned for a period of at least 12 months where the share is sold within 12 months of its actual acquisition. The taxpayer therefore does not need to establish an acquisition date for the replacement asset under item 2 in the table in subsection 115-30(1), which is turned off for the purpose of new section 115-34. [Schedule 6, item 142, section 115-34]
Also, the amendment allows for the assets owned by the acquiring company to be taken to be owned from the time when the taxpayer originally acquired them for the purposes of subsections 115-45(4) and (6).
The amendments result in the taxpayer being able to sell their share within 12 months of acquisition and still receive the discount where not more than 50 per cent (by cost base and net capital gain) of the company's assets have been owned for less than 12 months including the period they were owned by the taxpayer. [Schedule 6 items 142 to 145, section 115-34, subsections 115-45(4) and (6)]
The amendments apply to assessments for the income year including 21 September 1999 and for later income years, in relation to CGT events happening after 11.45 am (by legal time in the Australian Capital Territory) on that day. This makes the application of the amendments consistent with the general approach taken to the application of the CGT discount. However, standard amendment periods still apply. The retrospective application of these amendments does not have a negative affect [sic] on taxpayers. [Schedule 6, item 146]
(Bold emphasis added.)
102 The TIES document is consistent with the description of the first problem set out in the Explanatory Memorandum. The TIES document does not provide any additional useful information.
103 Section 115-32 (introduced by the 2010 Amending Act) provides as follows:
115-32 Special rule about time of acquisition for certain replacement-asset roll-overs
(1) This section applies if:
(a) a *CGT event happens to:
(i) your *share in a company; or
(ii) your *trust voting interest, unit or other fixed interest in a trust; and
(b) you *acquired the share or interest as a replacement asset for a *replacement‑asset roll‑over (other than a roll‑over covered by paragraph 115‑34(1)(c)); and
(c) at the time of the CGT event, the company or trust:
(i) owns a *membership interest in an entity (the original entity); and
(ii) has owned that membership interest for less than 12 months; and
(d) that membership interest is the original asset for the roll‑over.
Note: This section does not affect the time when you are treated as having acquired the replacement asset. That time is worked out under item 2 of the table in subsection 115‑30(1).
Application of tests about the assets of the company or trust
(2) Subsection 115‑45(4) applies as if the company or trust had *acquired the original asset at least 12 months before the *CGT event, if the condition in that subsection would not be met were it to be applied to the original entity and the CGT event.
(3) Subsection 115‑45(6) applies as if the company or trust had *acquired the original asset at least 12 months before the *CGT event, if the condition in subsection 115‑45(5) would not be met were it to be applied to the original entity and the CGT event.
104 Section 115-34, also introduced by the 2010 Amending Act, has been set out at [14] above.
105 Section 115-30 was amended by the 2010 Amending Act. The words underlined in [10] above were inserted.
106 It is not necessary for present purposes to set out the amendments made to s 115-45.
107 While both ss 115-32 and 115-34 are concerned with avoiding the operation of s 115-45 to deny a discount capital gain after a replacement-asset roll-over, they each operate differently. Broadly:
(a) Section 115-32 (which does not apply to roll-overs under Subdiv 122-A, 122-B or 124-N) does not deem the taxpayer to have acquired the replacement asset at a different time. Item 2 in the table to s 115-30(1) is left to do the work of determining the time of acquisition of the replacement asset. If the original asset was not acquired more than 12 months ago, the capital gain will not be a discount capital gain because s 115-25(1) will not be satisfied and there will be no need to consider s 115-45. If the original asset was acquired more than 12 months ago, it will be necessary to consider s 115-45. Sections 115-45(4) and (6) are, in effect, applied to the original entity - that is, one 'looks through' the interposed entity.
(b) Section 115-34 (which only applies to roll-overs under Subdivisions 122-A, 122-B and 124-N) does deem the taxpayer to have acquired the replacement asset at a different time - namely, "at least 12 months before the CGT event". Moreover, item 2 in the table to s 115-30(1) was amended so that it did not apply to such roll-overs. Even if the original assets were acquired less than 12 months ago, s 115-25(1) will be satisfied. It will then be necessary to consider s 115-45. Special rules then apply for the purposes of ss 115-45(4) and (6).
108 Item 2 in the table to s 115-30(1) accommodates the collapse of multiple replacement-asset roll-overs, provided they occur in an unbroken series. However, as amended in 2010, it does not extend to roll-overs under Subdivision 122-A, 122-B or 124-N. It may be inferred that, in making the amendments described above, the legislature did not intend that the special acquisition rules applying to replacement-asset roll-overs under Subdivision 122-A, 122-B or 124-N could be combined with those applying to other kinds of replacement-asset roll-overs.
109 The appellants submit that, based on the legislation as it stood in 2008 (before the amendments), the appellants would have been entitled to discount capital gains. The appellants submit that the amendments were designed to overcome the problems described above, and not to affect the position of taxpayers in the position of the appellants. We do not accept this approach to ascertaining the legislative intention. The legislative history indicates that the relevant provisions were introduced or amended in order to address the two problems described in the Explanatory Memorandum. Those problems were addressed by the introduction of ss 115-32 and 115-34 and the related amendment of other provisions. The resulting provisions are complex and detailed. Given the nature of the provisions, we do not consider it possible to say that the legislature intended discount capital gains to continue to be available in the types of situations covered by the present case (even assuming that discount capital gains would have been available under the provisions as they stood in 2008, before the amendments). Further, there is no indication in the Explanatory Memorandum or other legislative materials that ss 115-30 and 115-34 were intended to have a combined operation as contended for by the appellants.
110 For these reasons, we reject the appellants' principal contention, which is based on the combined operation of ss 115-30 and 115-34. The primary judge was correct to reject this contention, as advanced at first instance.
111 The appellants' first alternative contention involves applying paragraph (a) of item 2 in the table to s 115-30(1) to each replacement-asset roll-over. Thus, for example, in relation to the S&TP Trust, paragraph (a) of item 2 would be applied to each of:
(a) the replacement-asset roll-over under Subdiv 124-N by which the trust's ownership of the units in the Lifeplan Unit Trust ended and was replaced by shares in STP Holdings;
(b) the replacement-asset roll-over under Subdiv 124-M by which the trust exchanged all of its shares in STP Holdings for newly issued shares in E-Quest; and
(c) the replacement-asset roll-over under Subdiv 124-M by which the trust exchanged all of its shares in E-Quest for shares in Findex.
112 The difficulty with this approach is that paragraph (b) is specifically directed to a situation where there is "an unbroken series of replacement-asset roll-overs (other than roll-overs covered by paragraph 115-34(1)(c)". It is unlikely that paragraph (a) was intended to operate in the very situation described in paragraph (b). For these reasons, we reject the appellants' first alternative contention. The primary judge was correct to reject this contention.
113 The appellants' second alternative contention is that a reference to s 115-30 should be read into s 115-34(2) in accordance with the principles set out in Cooper Brookes and Taylor.
114 In Taylor, French CJ, Crennan and Bell JJ said at [37]-[40]:
37 Consistently with this Court's rejection of the adoption of rigid rules in statutory construction, it should not be accepted that purposive construction may never allow of reading a provision as if it contained additional words (or omitted words) with the effect of expanding its field of operation. As the review of the authorities in Leys [Director of Public Prosecutions v Leys (2012) 296 ALR 96] demonstrates, it is possible to point to decisions in which courts have adopted a purposive construction having that effect. And as their Honours observed by reference to the legislation considered in Carr v Western Australia, the question of whether a construction "reads up" a provision, giving it an extended operation, or "reads down" a provision, confining its operation, may be moot.
38 The question whether the court is justified in reading a statutory provision as if it contained additional words or omitted words involves a judgment of matters of degree. That judgment is readily answered in favour of addition or omission in the case of simple, grammatical, drafting errors which if uncorrected would defeat the object of the provision. It is answered against a construction that fills "gaps disclosed in legislation" or makes an insertion which is "too big, or too much at variance with the language in fact used by the legislature".
39 Lord Diplock's three conditions (as reformulated in Inco Europe Ltd v First Choice Distribution) accord with the statements of principle in Cooper Brookes … However, it is unnecessary to decide whether Lord Diplock's three conditions are always, or even usually, necessary and sufficient. This is because the task remains the construction of the words the legislature has enacted. In this respect it may not be sufficient that "the modified construction is reasonably open having regard to the statutory scheme" because any modified meaning must be consistent with the language in fact used by the legislature. Lord Diplock never suggested otherwise. Sometimes, as McHugh J observed in Newcastle City Council v GIO General Ltd, the language of a provision will not admit of a remedial construction. Relevant for present purposes was his Honour's further observation, "[i]f the legislature uses language which covers only one state of affairs, a court cannot legitimately construe the words of the section in a tortured and unrealistic manner to cover another set of circumstances".
40 Lord Diplock's speech in Wentworth Securities laid emphasis on the task as construction and not judicial legislation. In Inco Europe Lord Nicholls of Birkenhead observed that even when Lord Diplock's conditions are met, the court may be inhibited from interpreting a provision in accordance with what it is satisfied was the underlying intention of Parliament: the alteration to the language of the provision in such a case may be "too far-reaching". In Australian law the inhibition on the adoption of a purposive construction that departs too far from the statutory text has an added dimension because too great a departure may violate the separation of powers in the Constitution.
(Footnotes omitted.)
115 In the same case, Gageler and Keane JJ stated at [65]-[66]:
65 Statutory construction involves attribution of legal meaning to statutory text, read in context. "Ordinarily, that meaning (the legal meaning) will correspond with the grammatical meaning … But not always". Context sometimes favours an ungrammatical legal meaning. Ungrammatical legal meaning sometimes involves reading statutory text as containing implicit words. Implicit words are sometimes words of limitation. They are sometimes words of extension. But they are always words of explanation. The constructional task remains throughout to expound the meaning of the statutory text, not to divine unexpressed legislative intention or to remedy perceived legislative inattention. Construction is not speculation, and it is not repair.
66 Context more often reveals statutory text to be capable of a range of potential meanings, some of which may be less immediately obvious or more awkward than others, but none of which is wholly ungrammatical or unnatural. The choice between alternative meanings then turns less on linguistic fit than on evaluation of the relative coherence of the alternatives with identified statutory objects or policies.
(Footnotes omitted.)
Although Gageler and Keane JJ were in dissent in Taylor, that does not appear to affect their Honours' statement of the relevant principles in the above passage. We note that their Honours' judgment at [65] was cited in HFM043 at [24] by Kiefel CJ, Gageler and Nettle JJ.
116 Applying these principles, we are not persuaded that it is necessary, in order for the provisions to achieve their purpose, to read into s 115-34(2) a reference to s 115-30 so as to give the provisions a combined operation as contended for by the appellants. The legislative materials do not demonstrate or indicate that the provisions were intended to operate in this way.
117 Neither the first nor the second of Lord Diplock's conditions (as reformulated in Inco Europe Ltd v First Choice Distribution [2000] 1 WLR 586 at 592) is satisfied in the present case. In relation to the first condition (namely identification of the precise purpose of the provision), it is not possible to identify from the terms of the provisions or the legislative materials an intention that the provisions operate in a combined way. In relation to the second condition (namely, satisfaction that the drafter and Parliament inadvertently overlooked an eventuality that must be dealt with if the provision is to achieve its purpose), it is not demonstrated that the drafter and Parliament inadvertently overlooked such an eventuality.
118 For these reasons, we reject the appellants' second alternative contention. The primary judge was correct to reject this contention.
119 It follows that, in the case of the S&TP Trust, the trust is taken to have acquired the shares in Findex on 14 January, when it acquired the shares in STP Holdings: paragraph (b) of item 2 in the table to s 115-30(1). The steps in the application of this provision are set out in [88]-[90] above.
120 The same analysis applies to the transactions involving the Grosvenor Trust. In that case, as in the case of the S&TP Trust, there was "an unbroken series of replacement-asset roll-overs (other than roll-overs covered by paragraph 115-34(1)(c))", namely the two Subdiv 124-M roll-overs. The fact that the other roll-over was under Subdiv 122-A rather than Subdiv 124-N (both of which are covered by s 115-34(1)(c)) does not affect the analysis.
121 The analysis is not precisely the same in relation to the STP Trust and the SP Trust. In summary, the relevant paragraph in item 2 in the table to s 115-30(1) is paragraph (a) rather than paragraph (b). However, this does not affect the outcome. The steps in the application of the provisions to these trusts are as follows. In each case, the asset disposed of by the trust was the shares in Findex. The trust acquired the shares as a replacement asset for a replacement-asset roll-over under Subdiv 124-M (being a type of roll-over that is not covered by s 115-34(1)(c)). Accordingly, item 2 in the table to s 115-30(1) applies. Unlike the other cases, paragraph (b) of item 2 is inapplicable. That is because paragraph (b) refers to a situation where the acquirer (the trust) acquired the replacement asset for a roll-over that was the last in "an unbroken series of replacement-asset roll-overs (other than roll-overs covered by paragraph 115-34(1)(c))". In these cases, once the roll-over under Subdiv 124-N is excluded (this being a type of roll-over referred to in s 115-34(1)(c)), there is only one roll-over remaining, namely a Subdiv 124-M roll-over. Paragraph (a) of item 2 is applicable to these cases. That paragraph provides that the trust is taken to have acquired the CGT asset (the shares in Findex) "when the acquirer [the trust] acquired the original asset involved in the roll-over". The original asset involved in the Subdiv 124-M roll-over (this being the roll-over referred to in the first column of item 2) was, in each case, the shares in E-Quest. In each case, the shares in E-Quest were acquired on 15 January 2008.
122 It follows that, in all cases, the relevant threshold requirement for a "discount capital gain", namely that the taxpayer must have acquired the asset giving rise to the capital gain (the shares in Findex) at least 12 months before the CGT event, is not satisfied. Accordingly, the appellants are not entitled to "discount capital gains" under Subdiv 115-A of the ITAA 1997.
123 As noted above, the primary judge observed at [6]-[7] of the Reasons that the outcome was in some ways an unpalatable result and that it seemed to be at odds with the underlying policy of the legislation. Given the detail and complexity of the provisions, it is difficult to assess whether the result is contrary to the underlying policy of the provisions. Nevertheless, it is fair to say that the technical requirements of the provisions are such that there may be practical outcomes that appear to be inconsistent or hard to reconcile.