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04 Oct 07 Refusal of tax loss transfer extension of time quashed - BHP

The Federal Court (French J) has quashed the decision of the Commissioner to refuse an extension of time under s 170-50(2)(d) of ITAA 1997 for the applicant taxpayer (referred to in the judgment as "DRI", being a wholly owned subsidiary of BHP Billiton Ltd) to enter into an agreement for the transfer of tax losses in the sum of $89,848,367 from the applicant to another wholly owned subsidiary of BHP Billiton Ltd (referred to in the judgment as "Development Finance") in respect of the income year ended 31 May 1999.

As explained in para 5 of the Court's judgment, a significant factor in the delay that occurred between the 1999 year of income and the agreement to transfer losses in 2005 was the time taken to resolve disputes between DRI, Development Finance and the Commissioner. There were two separate lines of disputation, one relating to DRI and the deductibility of certain expenditure, the other relating to Development Finance and the writing off of a bad debt to a BHP Billiton Ltd subsidiary. The latter event gave rise to a Pt IVA determination by the Commissioner and the imposition of additional tax by way of penalty on Development Finance. The writing off of the bad debt had an impact on the Commissioner’s decision to refuse an extension of time to transfer the losses between DRI and Development Finance, purportedly based on the terms of Taxation Ruling TR 98/12, which suggests that serious non-compliance activities should be taken into account in determining whether or not to exercise the discretion to extend time.

The Court summarised its findings at para 6 of the judgment:

"Having regard to the history of the matter, which is outlined below, and the reasons for the decision to refuse the extension of time sought, it is my opinion that the decision-maker’s discretion has miscarried. It has miscarried in part because the narrow focus of his reasons for refusing to extend time to allow DRI and Development Finance to enter into a transfer agreement has led him to overlook matters directly relevant to the exercise of the discretion including the legislative purpose of the loss transfer provisions, the absence of any adverse impact of the proposed extension on the administration of the Act and the repeatedly stated intention of the group to seek to transfer the losses in question on crystallisation of the relevant company’s tax position. In addition the discretion has miscarried because the decision-maker took the view that allegedly culpable conduct on the part of Development Finance attracted a heavy weighting said to reflect the need to penalise "to a greater extent" taxpayers involved in serious non-compliance activities."

The matter was remitted to the Commissioner to be determined in accordance with law: BHP Billiton Direct Reduced Iron Pty Ltd (ACN 058 025 960) v Duffus, Deputy Commissioner of Taxation [2007] FCA 1528 (Federal Court, French J, 2 October 2007).

For a copy of the decision, go here

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