Harts Australia Limited v Commissioner of Taxation

On appeal from a Judge of the Federal Court of Australia

MERKEL J: 2 Harts Australia Ltd ("Harts") and Harts Consulting Pty Ltd ("Harts Consulting") (together referred to as "the appellants") have been granted leave to appeal against an interlocutory judgment of the primary Judge in which his Honour answered certain questions which he had ordered be separately determined as a preliminary issue. The questions related to whether the form of three agreements, entered into by Harts or Harts Consulting with other companies in the Harts group, satisfied the requirements of s 80G of the Income Tax Assessment Act 1936 (Cth) ("the Act"). Section 80G provides for a company within a group to agree to transfer its right to an allowable deduction for losses it has incurred to another company in the group to enable that other company to offset the losses against its taxable income in a particular year of income. 3 The questions arose in proceedings commenced by the appellants in which each "appealed" to the Court against "appealable objection decisions" of the respondent ("the Commissioner"). The decisions disallowed objections to assessments issued to Harts, in respect of the years of income ended 30 June 1993 and 30 June 1996, and to Harts Consulting, in respect of the year of income ended 30 June 1992. 4 An issue arising on the taxation appeals was whether the form of the three agreements, by failing to specify the quantum of the losses transferred, did not comply with the requirements of ss 80G(6)(c) and 80G(6A). Section 80G(6) of the Act provides that where one company in a group ("the loss company") agrees with another company in the group ("the income company") that the right to an allowable deduction in respect of past, but unused, losses should be transferred to the income company in the income year, the losses transferred are deemed to be losses incurred by the income company in that year. Section 80G(6A) provides that the agreement must be in writing and signed by the public officer of each company and be made before the date of lodgment of the return of income of the income company for the income year, or within such further time as the Commissioner allows. 5 The three agreements, which were in the same form, each contained the following provision: "(e) The amount to be transferred is so much of the losses required which make [the income company's] taxable income NIL." 6 At a directions hearing the primary Judge ordered that questions for separate determination be answered in relation to the agreements. The questions asked in respect of each agreement were: · whether the agreement "may constitute an agreement for the purposes of s 80G(6)(c) of the Act, insofar as it does not specify an amount to be transferred" ("the first question"); and · if the answer is "yes" and "assuming that the agreement was otherwise valid", whether the effect of the agreement was spent by the transfer from the loss company to the income company of the amount stated to have been transferred in the income company's tax return ("the second question"). 7 The Commissioner proposes to contend at the final hearing that the agreements did not satisfy the requirements of s 80G(6A) in any event, because they had not been executed prior to the lodging of the income tax return of the income company for the relevant year of income. The primary Judge made the orders for the separate determination of the questions on the basis that: · the appellants undertake not to raise an argument of estoppel against the Commissioner in relation to any facts that were agreed between the parties pursuant to O 29 r 2(a) of the Federal Court Rules for the purpose of the determination of the separate questions as preliminary issues; · the facts agreed upon between the parties were agreed to only for the purpose of the determination of the preliminary issues. 8 The primary Judge determined that each agreement did not constitute an agreement for the purposes of s 80G(6)(c) of the Act, insofar as none of the agreements specified the particular amount to be transferred. His Honour therefore ordered that the first question be answered "No", and that it was unnecessary to answer the second question. The decision of the primary Judge effectively upheld the Commissioner's Taxation Ruling 98/12 which, in [15], stated that a "formula document" as defined in [5] does not satisfy s 80G(6)(c) of the Act. 9 The appellants and the Commissioner accept that the issue of law sought to be raised by the proposed appeals from his Honour's orders is of importance. 10 Section 80G, relevantly, provides:

80G(1A) [No operation from 1997/98 year onwards] The right to a deduction for an amount of a loss cannot be transferred under this section in the 1997-98 year of income or a later year of income.

80G(1) ['Group Company'] For the purposes of this section, a company shall be taken to be a group company in relation to another company in relation to a year of income if-

(a) one of the companies was a subsidiary of the other company; or

(b) each of the companies was a subsidiary of the same company,

80G(6) [Year loss deemed to be incurred] Subject to this section, where:

(a) a resident company other than a prescribed dual resident (in this section referred to as the 'loss company') is deemed to have incurred a loss for the purposes of section 79E or 80 in the year of income that commenced on 1 July 1984 or in a subsequent year of income (in this section referred to as the 'loss year');

(b) a resident company other than a prescribed dual resident (in this section referred to as the 'income company') has, or would but for the operation of this section have, a taxable income in the year of income that commenced on 1 July 1984 or in a subsequent year of income (in this section referred to as the 'income year');

(ba) the loss company is not a dual resident investment company in relation to the loss year nor in relation to the income year;

(c) the loss company and the income company agree that the right to an allowable deduction under subsection 79E(3), 79F(6), 80(2), 80AAA(7) or 80AA(4), as the case requires, in respect of so much of the whole or part of the loss as has not been allowed as a deduction should be transferred to the income company in the income year;

(d) in a case where the loss year is the same year of income as the income year:

(i) the loss company is a group company in relation to the income company in relation to the loss year; and

(ii) if the loss company had incurred the loss in the year of income immediately preceding the loss year and had derived sufficient assessable income (including film income) in the loss year, the loss or that part of the loss, as the case may be, would, but for this section, be allowable as a deduction from the assessable income of the loss company in the loss year (ignoring any exempt income derived by the loss company in the loss year or in that preceding year); and

(e) in a case where the income year is a year of income subsequent to the loss year:

(i) the loss company is a group company in relation to the income company in relation to the loss year and the income year and in relation to any year of income commencing after the end of the loss year and ending before the commencement of the income year; and

(ii) if the loss company had derived sufficient assessable income (including film income) in the income year, the loss or that part of the loss, as the case may be, would, but for this section, be allowable as a deduction from the assessable income of the loss company in the income year (ignoring any exempt income derived by the loss company in the income year),

the amount of the loss or of that part of the loss, as the case may be, shall, for the purposes of the application of the provisions of this Act other than this section in relation to the income company in relation to the income year, be deemed to be a loss incurred by the income company for the purposes of section 79E, 79F, 80, 80AAA or 80AA, as the case requires, in:

(f) a case to which paragraph (d) applies - the year of income immediately preceding the loss year; or

(g) a case to which paragraph (e) applies - the loss year.

80G(6A) [Form and time of agreement] An agreement under paragraph (6)(c) must be:

(a) in writing and signed by the public officer of each of the loss company and the income company; and

(b) made before the date of lodgment of the return of income of the income company for the income year or within such further time as the Commissioner allows.

80G(7) [Loss exceeds net income] An agreement under paragraph (6)(c) relating to the transfer to the income company of a right to an allowable deduction under subsection 79E(3), 80(2) or 80AA(4) from the assessable income of the income company of the income year in respect of a loss or a part of a loss has no effect to the extent that the sum of the amount specified in the agreement and any amount specified in an agreement previously made under paragraph (6)(c) and any amounts specified in notices given under paragraph (6)(c) … by any company in relation to allowable deductions under subsection 79E(3), 79F(6), 80(2), 80AAA(7) or 80AA(4) from that assessable income exceeds:

(a) in a case where the income company has not in the income year derived exempt income - the amount by which the assessable income of the income company of that year exceeds the allowable deductions (other than deductions allowable by virtue of this section) from that assessable income; or

(b) in a case where the income company has in the income year derived exempt income - the amount by which the sum of the assessable income of the income company of that year and the net exempt income of the income company of that year exceeds the allowable deductions (other than deductions allowable by virtue of this section) from that assessable income.

80G(8) [Film income] An agreement under paragraph (6)(c) relating to the transfer to the income company of a right to an allowable deduction under subsection 79F(6) or 80AAA(7) from the assessable income of the income company of the income year in respect of a loss or part of a loss has no effect to the extent that the sum of the amount specified in the agreement and any amount specified in an agreement previously made under paragraph (6)(c) … by any company in relation to allowable deductions under that subsection from that assessable income exceeds the sum of the net assessable film income within the meaning of section 79F or 80AAA, as the case requires, of the income company of that year and the net exempt film income within the meaning of that section of the income company of that year.

80G(13) [Further agreement to transfer] Where the loss company makes an agreement in accordance with paragraph (6)(c) in relation to a part of a loss incurred by the loss company, that company must not make a further agreement in accordance with that paragraph in relation to that loss that purports to transfer to a company the right to an allowable deduction in respect of an amount that exceeds the amount obtained by deducting from the amount of that loss the amount of that part of that loss or the sum of the amounts of those parts of that loss specified in the first-mentioned agreement.

(a) the right to an allowable deduction in respect of a loss or a part of a loss incurred by the loss company is transferred to the income company pursuant to subsection (6); and

(b) that loss or a part of that loss was not deemed to have been incurred by the loss company,

nothing in section 170 prevents the amendment of an assessment of the income of the income company to disallow the whole or a part of the deduction referred to in paragraph (a).

80G(16) [Retention of right to deduction] If, as a result of the amendment of an assessment or for any other reason, a deduction is not allowable from the assessable income of the income company in respect of the whole of an amount specified in an agreement under paragraph (6)(c) or specified in a notice given under paragraph (6)(c) … this section applies as if only that part of the amount specified in that agreement or that notice in respect of which a deduction is allowable to the company were so specified."

11 The Commissioner contends that the above provisions, which include amendments to s 80G made by the Taxation Laws Amendment (Self Assessment) Act 1992 (Cth), apply to an agreement made after 30 June 1992, being the commencement date of the amending Act, to transfer the right to an allowable deduction in respect of losses irrespective of when the losses were incurred: see ss 2, 33(2) and (10) and Schedule 2 of the amending Act. While the Commissioner's contention appears to be correct, it is unnecessary to finally decide that issue for the purpose of the present applications. 12 The Commissioner submitted to the primary Judge and to the Full Court that, properly construed in context, ss 80G(6)(c) and (6A) require that the particular dollar amount of the losses being transferred be specified in the agreement. The appellants submitted to the primary Judge and to the Full Court that, consistently with the object of s 80G, specification of the amount transferred by a formula of the kind used in the agreements, albeit that it may be self adjusting, is a sufficient specification of the amount of the losses being transferred for the purposes of ss 80G(6)(c) and (6A). 13 The primary Judge appeared to accept that the dollar amount of the losses being transferred need not necessarily be recorded in the agreement, but stated that the amount specified must be identifiable as a specific dollar amount, at the latest, at the time the transfer agreement is made. His Honour, referring in particular to ss 80G(7), (13) and (16), stated that the assumption made in those sub-sections, and underlying s 80G itself, was that the amount of the loss transferred must be "specified" in the agreement, in the sense that the amount must be stated "in detail or with particularity": see TCN Channel Nine Pty Ltd v Australian Mutual Provident Society (1982) 42 ALR 496 at 503. 14 The primary Judge did not accept that the formula employed by the appellantsof reducing the income company's taxable income to nil for the particular year of income specified a fixed and identifiable amount as required by s 80G(6)(c). His Honour stated: "12. Section 80G operates to give the income company the right to make a reduction in its assessable, and thus its taxable, income which it would not have, but for the transfer agreement. That right is not, however, freestanding. It can be exercised only within the process of assessment of the income company's taxable income, whether that assessment is made by the company itself under s 166A, by the Commissioner by amendment of that deemed assessment under s 170(1) or by the Commissioner under s 170(7) at the conclusion of any litigation over his amended assessment. That assessment is the process of ascertaining an immutable figure, Henderson v Commissioner of Taxation of the Commonwealth of Australia (1970) 119 CLR 612 at 647 - 648, does not alter the fact that the ITAA makes provision for differing assessments of that figure each of which, after actual or deemed service of notice of the particular assessment, will impose a legally binding obligation on the taxpayer company to pay the tax so assessed. … 14. The object of s 80G is to permit the transfer of a right to deduct a loss from one company's assessable income to an associated company so that it can deduct that same loss from its own assessable income. And since this right to deduct a transferred loss is a right exercisable only within this process of ascertaining the figure that expresses the income company's taxable income, it must I think be the right to deduct a figure that is identifiable as a specific dollar amount, at the latest, at the time the transfer agreement is made. 15. …I cannot accept that sub-section (6)(c) can be satisfied by an agreement for the transfer by the loss company of its right to a deduction in respect of the whole or a part of a loss available to it, the precise dollar amount of which is not fixed and identifiable at the date of the agreement, but which may thereafter change at each point in time at which the process of assessment of the income company's taxable income for a particular year may have to be undertaken and which will only finally be identifiable when the last stage of that process is complete. 16. A transfer agreement in the form adopted…is not one which meets the requirements of s 80G(6)(c) the ITAA because it operates in terms to permit the transfer from [the loss company] to [the income company] of an amount that is intended to change, to the extent necessary to reduce the [income] company's taxable income to nil, each time an assessment of that taxable income may be made in accordance with the ITAA. 17. This is not to say, at least so far, that the dollar amount of the loss the subject of the transfer agreement must be recorded in the agreement if it is to satisfy s 80G(6)(c). But the amount of the loss must be fixed and identifiable at the date of the agreement. That much follows from a consideration of the wording of s 80G(6)(c) and of the fact that the right of deduction the subject of an agreement within that sub-clause can only be exercised in the process of assessment of the transferee company's taxable income. …" 15 Thus, as the taxable income of the income companies, the subject of the three agreements, might be calculated, ascertained, and assessed under the Act from time to time in differing amounts, his Honour concluded that a formula based on that income failed to specify an amount that was fixed or identifiable at the date of the agreement. The primary Judge also found that one of the agreements was prohibited by s 80(G)(13) and, on that additional ground, failed to meet the requirements of the s 80G(6)(c). 16 I agree with the primary Judge's view that the amount required to be specified in an agreement, if it is to comply with s 80G(6)(c), must be an amount that is both fixed and identifiable, in the sense that it is ascertainable, at the date of the signing of the transfer agreement. Plainly, the purpose of requiring that the agreement be in writing and be made prior to the lodging of the income company's tax return is to ensure that the amount of the deductible losses the subject of the transfer under s 80G(6)(c) be determined and fixed no later than when the agreement is made. Further, ss 80G(7), (13) and (16) assume that s 80G(6)(c), consistently with that purpose, requires that the amount of the losses being transferred are specified in the agreement. 17 It does not follow, however, that only an expressly stipulated dollar amount will meet the specification requirement, or that the use of a formula will necessarily fail to meet that requirement. However, it does follow that a self adjusting formula, that can result in differing amounts after the date of the agreement, will not comply with s 80G(6)(c). 18 There can be no doubt the Commissioner was correct in contending that s 80G(6)(c) must be construed in context and consistently with the general purpose and policy underlying s 80G: see Commissioner for Railways (NSW) v Agalianos (1955) 92 CLR 390 at 397 per Dixon CJ. However, that general purpose and policy is beneficial to the taxpayer, in that it is to enable group companies to transfer their rights to an allowable deduction in respect of deductible losses within the group to ensure a group company with taxable income in a particular year can offset that income against the deductible losses transferred to it from another group company for tax purposes. Further, ss 80G(6)(c) and (6A) do not appear to be concerned with an agreement that is legally enforceable, as such, under the law of contract. Rather, the sub-sections are concerned with what will usually be a non-arms length agreement that evidences and records the allowable deduction being transferred. Those factors suggest that a liberal, rather than a narrow or technical approach, is to be taken to the construction of s 80G. 19 The requirements as to the form and the timing of the agreement are set out in s 80G(6A) and the requirements as to its content are set out in s 80G(6)(c). As explained above, the specification of the amount of the deductible losses the subject of the transfer, in the sense that the losses must be fixed and ascertainable at the date of the agreement to transfer, is an implicit requirement in respect of content. I can see no reason for super-imposing a further requirement that the dollar amount of the losses must also be specified in the agreement. Obviously, it may be wise to do so to avoid disputation over that issue at a later date. However, there is nothing that can be discerned from the policy or purpose underlying s 80G that requires the amount transferred to be expressly quantified in a dollar amount in the agreement. If the legislature intended to require such a quantification it could be expected to have done so in s 80G(6A). It is also relevant that the agreement is not required to be disclosed or sent to the Commissioner, who will only become aware of the transfer from the returns of income lodged by the relevant group companies after the date of the agreement. 20 The real difficulty in the present case arises from the decision to determine the proper construction of the agreements as a preliminary issue. The Commissioner's reluctance to agree on facts led to the agreements being construed in the abstract and isolated from the background and factual matrix in which they were set. In Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 348-350 Mason J referred to authorities that demonstrate that factual background evidence is admissible to assist in the interpretation of the subject matter of an agreement: see for example Prenn v Simmonds [1971] 1 WLR 1381 at 1383-1384 per Lord Wilberforce. Of course, these authorities were concerned with rules of construction applying to legally enforceable contracts. In the context of agreements of the kind required by s 80G(6)(c), which may not be legally enforceable, the rules regarding the use of extrinsic material in interpreting the agreement may be even more liberal. 21 It is clear that the determination of whether the three agreements in the present case have specified a fixed and ascertainable amount for the losses being transferred can involve questions of fact which were not explored or considered in his Honour's determination of the separate questions. For example, the facts agreed upon for the purpose of the preliminary issues are limited primarily to formal matters. They afford little, if any, assistance as to whether the amount of the losses "required" to reduce the various income companies' taxable income to nil was an amount that had already been fixed and ascertained at the date of execution of the agreements, or rather, was to be fixed and ascertained at some date thereafter. Indeed, the agreed facts, although annexing the agreements, do not include any final or binding agreement as to the date on which the agreements were executed. Thus, any determination of whether, at the date of actual execution, the deductible losses the subject of the transfer were a fixed and ascertainable amount is necessarily hypothetical. This issue is not academic as because, as explained above, the Commissioner has foreshadowed that at the final hearing he intends to claim that the agreements were executed after the date of the lodgment of the appellants' income tax returns and are therefore incapable of constituting agreements for the purpose of s 80G(6)(c) by reason of s 80G(6A). 22 Further cl (e) of the agreements might be construed as specifying that the taxable income required to be reduced to nil is the taxable income then ascertained and proposed to be returned as the taxable income, the taxable income returned as the taxable income or the taxable income as calculated and ascertained under the Act, that is by an assessment or any subsequent amended assessment. Plainly, the factual matrix and background to the agreements is likely to be relevant to any determination of the meaning of cl (e). 23 I have set out the problems I see arising in relation to the construction of the agreements as they lead to a fundamental difficulty with the procedure adopted by the parties and the primary Judge in determining the questions as a preliminary issue. Of course, if the parties unconditionally agreed upon the facts necessary to finally determine the issue of construction as a preliminary question, the question of whether further or other facts might also be relevant would be of no moment. 24 However, that is not the present case. While the primary Judge endeavoured to overcome that difficulty, in part, by proceeding on the basis of certain agreed facts, those agreed facts were limited and provisional. They were provisional in the sense that they were agreed solely for the purpose of determining the preliminary issues and were not to be treated as agreed facts for the purpose of determining any substantive issues arising on the income tax appeals. Thus, the facts that might emerge at trial, including facts that could be relevant to the construction of the agreements, may be quite different to the facts agreed to solely for the purpose of determining the preliminary issues. The utility of questions being answered as a preliminary issue is lost if the facts upon which those questions are to be answered might ultimately be found to be different at trial. In such circumstances there is a real danger of the Court providing answers to hypothetical questions or giving no more than an advisory opinion on assumed facts. 25 An analogous problem arose recently in Director of Fisheries (Northern Territory) v Arnhem Land Aboriginal Land Trust [2001] FCA 98 ("Director of Fisheries"). In that case a Full Court allowed an appeal against answers to separate questions on the basis that it was inappropriate to answer the questions raised. Sackville J stated at [131]-[132]: "31. In Bass v Permanent Trustee Co Ltd (1999) 198 CLR 334, the High Court warned against courts providing answers to hypothetical questions or giving advisory opinions. The majority judgment pointed out (at 355) that: 'central to those descriptions [of the purpose of a judicial determination] is the notion that such a determination includes a conclusive or final decision based on a concrete and established or agreed situation which aims to quell a controversy.' The judgment quoted with approval (at 356) a passage from Zamir and Woolf, The Declaratory Judgment (2nd ed, 1993), at 132: 'If … the dispute is not attached to specific facts, and the question is only whether the plaintiff is generally entitled to act in a certain way, the issue will still be considered theoretical. The main reason for this is that there may be no certainty that such a general declaration will settle the dispute finally. Subsequent to that declaration a person (the defendant himself or someone else) may be adversely affected by a particular act of the plaintiff. It may then be doubtful whether this act is covered by the declaration. In such a case the affected person will probably be entitled to raise the issue again on its special facts. Indeed, such a declaration will in effect be a mere advisory opinion.' 32. In Bass there was no agreed statement of facts and no findings of facts had been made (at 354-355). The present case is different, since the parties have reached agreement on at least some facts. Nevertheless, it quickly became apparent in argument that the Separate Questions pose many difficulties." 26 While the difficulties arising in the present case are different from those identified by Sackville J (with whom Spender J and I agreed on this issue), the absence of a "conclusive or final decision based on a concrete and established or agreed situation which aims to quell a controversy" is common in each case. The terms on which the facts were agreed to in the present case meant that no conclusive or final decision could be made on the basis of those facts. 27 During the hearing the possibility of an amended question was raised with the parties. That question was whether cl (e) of the agreements operated to preclude the agreements from constituting agreements for the purposes of s 80G(6)(c) of the Act. The question was reluctantly embraced by senior counsel for the appellants in the alternative, if the questions answered by the primary Judge were held by the Full Court to be inappropriate to answer. However, I have concluded, assuming power to substitute such a question (see Director of Fisheries at [143]-[147] per Sackville J with whom I agreed, cf Spender J at [3]-[7]) that it is also inappropriate to answer that question. As explained above, the determination of the construction and operation of the agreements, including cl (e), cannot be divorced from the matrix of facts in which the agreements were made. Further, not only are those facts not agreed upon, but they appear to be in dispute. Thus, any determination of the amended question will suffer from the same vice as the determination of the questions answered by the primary Judge. As was observed by Sackville J in Director of Fisheries at [163] the identification of separate questions for determination "on the basis of an incomplete set of assumed facts is fraught with difficulty". 28 In further submissions, filed with the leave of the Court after the hearing, the Commissioner contended tha the appropriate course was to revoke leave to appeal. As I have concluded that the questions answered by his Honour and the proposed amended question are inappropriate and should not be answered the appropriate course is to allow the appeal, set aside the answers to the Separate Questions and, in lieu thereof, order that each question be answered: "Inappropriate to answer". 29 In all the circumstances no order should be made as to the costs of the appeal. Although the Commissioner initially opposed the procedure that was adopted by the primary

Judge, he did not pursue that objection at the hearing or on the appeal, at least not until it was raised as an issue to be addressed by members of the Full Court. I certify that the preceding twenty-nine (29) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Merkel.

Associate: Dated: 22 June 2001 Counsel for the Applicant: Mr D Russell QC with Mr P Bickford

Solicitor for the Applicant: Hawthorn Cuppaidge & Badgery

Counsel for the Respondent: Mr A Robertson SC and Mr N Williams

Solicitor for the Respondent: Australian Government Solicitor