Note 1:Any surplus in the subsidiary's franking account will be transferred to the head company's franking account: see subsection 709‑60(2).
Note 2:If the subsidiary's franking account is in deficit, it will be liable for franking deficit tax: see subsection 709‑60(3). This deficit may be increased by item 4 in the table in subsection (2).
Note 3:The subsidiary's franking account does not operate while it is a member of the group: see section 709‑65.
4. On 9 July 2003, the shareholding of Austral Holdings changed so that it was more than 95% owned by non-residents. As s 709-155(1) provides, the tests in Div 208 were applied to it as the head company of the Austral Group. Austral Holdings thus became an exempting entity under s 208-20 of the ITAA97.
5. On 6 February 2004, Austral Holdings ceased to be an exempting entity under s 208‑20 because it was less than 95% "effectively owned by prescribed persons" (being then owned by Hastie Holdings): sub-div 208-A.
37 As noted earlier, the question is then whether Austral Holdings became a former exempting entity? Again, the answer to that question concerns the proper construction of s 208-50 and the interaction between ss 208-50(1) and (2).
38 Section 208-50(2) provides that the period of effective ownership of Austral Holdings by prescribed persons (ie as an exempting entity) immediately preceding 6 February 2004 is to be ignored in determining whether Austral Holdings was a former exempting entity because it was a period of effective ownership of less than 12 months. As the express words of the section make clear, if an entity has been an exempt entity for less than 12 months that entity is not taken to be a former exempting entity by "so ceasing" to be, for a period of less than 12 months, an exempt entity.
39 However, that is not the end of the enquiry. The express words of s 208-50(1) provide that if at any time an exempting entity ceases to be an exempting entity it becomes a former exempting entity unless it again becomes an exempting entity. If one ignores the seven-month period from 9 July 2003 to 6 February 2004 as directed by s 208-50(2), s 208‑50(1) then requires one to ask, what was Austral Holdings status before that period? There was no dispute that Austral Holdings was a former exempting entity until 9 July 2003 by virtue of s 709-165(2), item 1. Therefore, applying the express words of s 208-50(1), it would appear that Austral Holdings on 6 February 2004 reverted to its former exempting entity status.
40 However, the Appellants attempted to avoid this result by contending that Austral Holdings' status as the head company of the Austral Group is to be ignored in determining the status of Austral Holdings as a single entity as at 6 February 2004. Taken as a single entity as at 6 February 2004, the Appellants contend that Austral Holdings was a no-status entity, having not previously been an exempting entity or a former exempting entity in its own right under Div 208. In other words, the Appellants contend that the fact that Austral Holdings was a former exempting entity as the head company of the Austral Group is to be ignored because that was not its status as a single entity. The problem with the Appellants' construction is that it would require the Court to ignore the express words of the Act and the "tax history" that Austral Holdings inherited when it became head of the Austral Group. We reject that contention.
41 First, the mere fact that on 9 July 2003 Austral Holdings became an exempting entity does not preclude it subsequently becoming a former exempting entity under s 208-50(1), because ss (1) is "subject to subsection (2)": see [38] above. Any other construction of the legislation is contrary to the express words of s 208-50.
42 Secondly, although s 709-155(3)(b) provides that Div 208 is to be applied just after Austral Holdings became a member of the Hastie Group and on the assumption that Austral Holdings was not a member of that group, that does not either expressly or impliedly strip away the "tax history" that Austral Holdings inherited when it became the head company of the Austral Group.
43 Contrary to the contentions of the Appellants, the rules in s 709-165 in fact provide for the way in which the tax history of the subsidiary members is to be inherited by the head company. Under item 1, the head company takes on a particular status at the joining time, namely as a former exempting entity. Its status is expressly altered from a no-status company (see ss (1)(a)). That result is consistent with the purposes of both the imputation regime and the consolidation regime. Consistently with the imputation regime, to ensure that franking credits accumulated by, in this case, a former exempting entity are not the object of franking credit trading (s 208-15), Items 3, 4 and 5 of the Rules transfer subsidiary members' exempting accounts (whether in surplus or deficit) to an exempting account of the head company during the period "starting just after the joining time" and "ending when the entity ceases to be a subsidiary member of the group". That is consistent with ss 709-60 and 709-65 which provide for a nil balance in the franking account of an entity that becomes a subsidiary member of a consolidated group and also stipulate that the franking account of that entity does not operate during the period beginning just after the entity becomes the subsidiary member and ending when the entity ceases to be a subsidiary member.
44 Perhaps most importantly, this understanding of those provisions (both expressly and in terms of outcome) is consistent with the express words of s 700-1 that subsidiary members are treated as part of the head company of the consolidated group rather than as separate income tax identities and that, when that occurs, the head company inherits their income tax history. It would be an odd construction of the express provisions of the ITAA97 which led to the interaction between the consolidation regime and the imputation provisions achieving a result which was directly contrary to the stated objective of s 700-1 - that is, if the head company were to retain the franking credits of the subsidiaries but not their tax history as the Appellants contend. If that were the case, then an acquiring company would be able to take the tax benefits of consolidation (ie the franking credits accumulated by the head company of the acquired group from its subsidiaries) without the burden (ie the tax history inherited by the head company of the acquired group from its subsidiaries). In effect, it would present the "get out of jail free" situation described earlier.
45 One question which arises is whether the analysis changes if the acquisition in question is by one consolidated group (here, the Hastie Holdings Group) of another (here, the Austral Group). This differs from the acquisition by one entity (not part of a consolidated tax group) of some or all of the members of a pre-existing consolidated group leading to the creation of a new consolidated group. For at least two reasons, the answer to that question is that the analysis does not change. First, when an entity ceases to be a subsidiary member of a consolidated group, the subsidiary member's franking account becomes operative again, starting with a nil balance: ss 709-60 and 709-165. Moreover, it is important to remember that while a head company inherits the exempting status of its subsidiary members, the reverse is not true: ss 709-150 to 709-175.
46 Secondly, the drafters of the tax legislation considered the acquisition by one consolidated group of another consolidated group in sub-div 705-C of the ITAA97. Section 705-175 provides that:
(1) This Subdivision applies if all of the *members of a * consolidated group (the acquired group) become members of another consolidated group (the acquiring group) at a particular time (the acquisition time) as a result of the *acquisition of *membership interests in the *head company of the acquired group.
Object
(2) The object of this Subdivision is:
(a) to modify the rules in Division 701 (the core rules) to complement the treatment of the acquired group as a single entity that applied before the acquisition time; and
(b) to modify Subdivision 705‑A (which basically determines the tax cost settling amount for assets of an entity joining a consolidated group) to ensure that the *tax cost setting amount for assets of the acquired group that become those of the acquiring group reflects the cost to the latter group of acquiring the former.
47 Neither the Appellants nor the Respondent referred to sub-div 705-C of the ITAA97. The "scheme" (as set out in pars 27 and 28 of Schedule "A") provides that on 6 February 2004, Hastie Holdings acquired 100% of the ordinary shares of Austral Holdings with the result that each member of the Austral Holdings tax consolidated group became a member of the already existing Hastie Holdings tax consolidated group. On its face, the subdivision applies: see s 705-175(1). As is apparent, the object of the subdivision is, in part, "to modify the rules in Division 701 (the core rules) to complement the treatment of the acquired group as a single entity that applied before the acquisition time": s 705-175(2)(a). Notably, subdivision 705-C does not purport to modify the rules in Division 709. The construction of provisions in the consolidation regime and the interaction between those provisions and Div 208 as being unaffected by sub-div 705-C is consistent with the principle expressed in sub-div 705-C - that is, sub-div 705-C does not apply in place of (ie modify) any rules unless so specified; rather it applies in addition to (ie complements) those other rules.
48 There are two further points we should address before concluding. First, although the authorities referred to by the Appellants (Federal Commissioner of Taxation v Comber (1986) 10 FCR 88; Wiest v Director of Public Prosecutions (1988) 23 FCR 472 at 502; Commonwealth v Genex Corp Pty Ltd (1992) 176 CLR 277 at 291-292 and Marshall (Inspector of Taxes) v Kerr [1995] 1 AC 148) provide some authority for the proposition that a deeming provision is to be construed strictly and only for the purpose which it is to be resorted to, they do not alter the proper construction of Pt 3-90 and, in particular, s 709-165 and the interaction between the consolidation provisions and Div 208. Even if s 709-165 should be considered as a "deeming provision," we consider that it has been applied according to its terms and for the purpose for which it was intended.
49 Secondly, both the Appellants and the primary judge devoted considerable attention to the extent to which the purposive approach to statutory construction requires or allows deviation from the plain statutory language. The premise of this question is of course that the purpose and text of the statute are at odds with each other. As can be seen from these reasons, however, we do not consider that premise to be valid in the current context because the plain language of the relevant provisions unambiguously bears the construction we have adopted and that construction is consistent with the purpose and objectives expressed by the statute itself. Accordingly, it is not necessary in the circumstances to consider this point further.
50 As a result, we agree that the answer to question (a) in the private ruling is "No". It was common ground that the answer to question (b) followed the answer to question (a).