30 Sep 099 Capital loss not subject to Part IVA - News Australia Holdings Pty Limited
The AAT (Downes J, President and Frost M) has upheld the taxpayer's objection to the Commissioner's decision in relation to a determination made by the Commissioner under Part IVA 1936. The Commissioner sought to cancel a tax benefit, being a capital loss of approximately $1.5 billion, that arose from the global corporate restructure of the News group. The AAT held that the tax benefit should not have been cancelled.
The restructure was complex. After the first stage of the restructure, the taxpayer, an Australian company, was owned by a United States parent. However, the taxpayer continued to hold substantial non-Australian assets (a "sandwich structure"), which it was considered created significant inefficiencies. Therefore, it was proposed to effect a "transfer" of the taxpayer's assets in one of its subsidiaries to the US parent. This was achieved by the subsidiary acquiring, by means of an off-market share buy-back, all of the taxpayer's shares in the subsidiary in return for the issue of a promissory note. The note was then distributed by the taxpayer to its parent by means of a reduction of capital. The parent then used the note to subscribe for shares in a company that merged with the taxpayer's then former subsidiary. The capital loss arose on the share buy-back.
The Commissioner argued that the "alternative postulate" to what the taxpayer actually did was a straightforward sale or distribution of the shares in the subsidiary to the taxpayer's parent in return for a reduction of capital. The Commissioner argued that this would have given rise to a capital gain of $25 million, which would have been offset by existing capital losses of $600 million.
After reviewing the eight factors in s 177D(b), the AAT said, at para 107:
"The objective purpose of the [transactions] (using that expression as shorthand for the requirement of s 177D(b) as to what “would be concluded”) was to remove the sandwich structure. We think that the matters we have referred to, including the circumstances in which the original decision to use a buy-back were made, the need to comply with taxation rulings to benefit from them, the need to use a structure capable of permitting a ruling which would achieve near certainty that the reconstruction would remain tax neutral and the associated need to avoid a mechanism which could over a short time change from yielding a capital loss to yielding a capital gain, all suggest that while taxation considerations were very much in the mind of the News Group and its advisers, it would not be concluded that those involved with the scheme employed it for the purpose of obtaining a tax benefit. The objective dominant purpose remained a commercial one. It involved the selection of the transaction as carried out because it better achieved the commercial purpose whether or not it also yielded a tax benefit."
The AAT set aside the Commissioner's objection decision, and substituted a decision pursuant to s 177F(1)(c) that it was not determined that the capital loss of approximately $1.5 billion was not incurred by the taxpayer: News Australia Holdings Pty Limited and FCT  AATA 750 (AAT; Downes J, President and Frost M; 29 September 2009).
For a copy of the decision, go here