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The Full Federal Court (Ryan, Kenny and Stone JJ) has upheld the Commissioner's appeal from the decision of Heerey J, who held that although the commercial debt provisions of Div 245 of Schedule 2C of ITAA1936 applied to debts of $118,696,459 owed by the taxpayer to its former parent, the assumption of solvency in ss 245-55(2), (3) did not apply in the valuation of those debts because of the application of the exception in s 245-55(4).

The taxpayer was formerly known as SBA Foods Pty Ltd (SBAF). It was a wholly owned subsidiary of a Japanese corporation (SBC). In November 1996 SBAF was used by SBC as the entity to acquire a meat processing and exporting business. The acquisition was funded partly by share capital and partly by loans from SBC. The business was not a success and incurred heavy trading losses. SBC advanced further loans totalling $118,696,459. By a share sale agreement dated 27 February 2002 SBC sold its shares in SBAF to Tasman Group Holdings Pty Ltd for about $17 million. None of SBC’s loans were repaid to it by SBAF. By cl 8.2(a) of the agreement SBC agreed to "ensure" that on the Completion Date (1 March 2002) "no amount of Financial Indebtedness exists".

In upholding the Commissioner's appeal, the Full Federal Court held that the exception to the assumption of solvency did not apply to the taxpayer and, in particular, that s 245-55(4)(a)(ii) was not satisfied.

At the same time, the Full Federal Court dismissed the taxpayer's cross appeal from the decision of Heerey J that Div 245 applied to the debts: FCT v Tasman Group Services Pty Ltd [2009] FCAFC 148 (Full Federal Court; Ryan, Kenny and Stone JJ; 22 October 2009).

For a copy of the decision, go here


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