14 Jan 1010 Roll-over benefit cancelled under Part IVA - British American Tobacco
The Federal Court (Emmett J) has upheld an assessment made by the Commissioner pursuant to a determination made under Part IVA ITAA 1936, the effect of which was to include a capital gain of $118,128,953 in the taxpayer company’s assessable income.
The capital gain arose from the sale by the taxpayer of certain tobacco brands. The sale was necessary in order to obtain the approval of the ACCC to the merger of the British American Tobacco group of companies and the Rothmans group of companies. The capital gain was not included in calculating the taxpayer company’s net capital gain for the income year because it chose CGT rollover relief on the disposal (at market value) of the brands to a company that, as a result of the merger, was within the same group. That company then disposed of the brands to a third party, incurring the capital gain which was then offset by net capital losses transferred to it from other Rothmans group companies.
The taxpayer argued that the tax benefit obtained in relation to the scheme was excluded from the operation of Part IVA because of s 177C(2A) ITAA 1936; the tax benefit (so it was argued) was attributable to the making of the choice for rollover relief and the scheme consisted solely of the making of the choice.
Emmett J rejected the taxpayer company’s contentions. His Honour said that the planning for and implementation of the scheme identified by the Commissioner in relation to the making of the choice by the taxpayer company commenced many months before the actual disposal by the taxpayer of the brands and continued for some time after that disposal. Thus, the scheme consisted of much more than the mere making of the roll-over choice.
In relation to dominant purpose, Emmett J noted at para 89:
"...the essential element is to be found in the disposal of the 9 Wills Brands by the Taxpayer to Rothmans and the subsequent disposal by Rothmans to the [third party] of the 9 Wills brands, together with the Rothmans Brands. The desired objective of the disposition of all of the relevant brands, both the 9 Wills brands and the Rothmans Brands, to the [third party] could have been achieved by a transfer direct from the Taxpayer to the [third party] of the 9 Wills Brands and a transfer direct from Rothmans to the [third party] of the Rothmans Brands. The requirements of the [ACCC] would have been satisfied and the intended object of the merger would have been achieved. There was no commercial or legal reason why the disposition to the [third party] of both the 9 Wills Brands and the Rothmans Brands should have been effected from a single vendor, transferor or disposer rather than a disposition from separate vendors, transferors or disposers. Precisely the same commercial and legal object could have been achieved without the transfer, sale or disposal by the Taxpayer to Rothmans followed by transfer, sale or disposal by Rothmans to the [third party].
In relation to the eight factors in s 177D(b), Emmett J concluded, at para 99:
"I consider that, overall, the eight factors required to be considered point strongly to the conclusion that the Taxpayer and Rothmans, both of whom entered into and carried out the scheme, together with other parties, did so for the purpose of enabling the Taxpayer to obtain the tax benefit resulting from the rollover choice. That had the consequence that the Taxpayer was not required to bring into account as assessable income the capital gain of $118,128,953 derived on the disposition of the 9 Wills Brands that would have been derived, without the benefit of set off against tax losses, had they been disposed of direct to the [third party] subsidiaries rather than to Rothmans."
Finally, Emmett J held that the taxpayer company had not made a voluntary disclosure for the purposes of the former s 226E ITAA 1936, and thus was not entitled to a reduction of the penalty tax imposed by the Commissioner. Emmett J said, at para 107: "[Section 226E] applies only to a taxpayer who does something of his, her or its own initiative, without prompting or apprehended pressure from the Commissioner."
British American Tobacco Australia Services Limited v FCT  FCA 1550 (Federal Court, Emmett J, 21 December 2009).
For a copy of the decision, go here