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The Full Federal Court (Kenny, Stone and Logan JJ) has dismissed the Commissioner's appeal from the decision of Besanko J in Futuris Corporation Limited v FCT [2010] FCA 935 (31 August 2010).

In that decision, Besanko J upheld the taxpayer's appeal against the Commissioner's objection decision, which disallowed the taxpayer's objection against an amended assessment that included a capital gain of $82,950,090 in the taxpayer's assessable income for the year ended 30 June 1998. Besanko J held that the taxpayer did not obtain a tax benefit in the amount identified by the Commissioner for the purposes of Part IVA ITAA 1936.

The scheme that the taxpayer entered into was complex but, in general terms, involved the sale of assets by one of the taxpayer's subsidiaries (Bristile Limited) to another of the taxpayer's subsidiaries, Walshville Holdings Pty Limited (Walshville), and the subsequent public float of Walshville. As a result of various steps in the scheme, the cost base of shares in Walshville significantly increased through the operation of the value shifting provisions in the former Div 19A of Part IIIA of ITAA 1936, and the capital gain on the sale of the shares in Walshville was correspondingly reduced.

In arguing that the taxpayer obtained the relevant tax benefit under s 177C ITAA 1936, the Commissioner advanced a "presumed counterfactual" involving all of the steps actually taken other than those identified as part of the scheme. This was rejected by Besanko J on the basis that it resulted in a doubling up of the capital gain on the disposal of the assets, and the Full Federal Court agreed (see para 71 of the Court's decision).

In its case before Besanko J, the taxpayer led expert evidence as to what it might reasonably be expected to have done if it had not entered into or carried out the scheme. The expert (Mr Duivenvoorde) proposed two alternative counterfactuals, referred to as Counterfactual 1 (a float of Bristile Limited) and Counterfactual 2.

Besanko J accepted Counterfactual 1 as the most likely prediction of what the taxpayer could reasonably be expected to have done but for the scheme. However, although significant capital gains would have been realised under Counterfactual 1, they would have been realised by other members of the Futuris group and not by the taxpayer.

The Commissioner argued that the expert's evidence should have been given no weight. The Full Federal Court disagreed. It said, at paras 80 and 81 as follows:

"The reliability of a prediction might be established by direct evidence of contemporaneous consideration of the alternative postulate; or by evidence from company officers as to established commercial parameters for sale and whether the alternative postulate met those parameters; or evidence from those who were involved in the transactions challenged under Pt IVA. But that is not the only way to establish reliability. To the extent that the Commissioner submits that it is only by such direct evidence that a reliable prediction can be made, we reject that submission. This much was recognised by the Full Federal Court in [FCT v Trail Bros Steel & Plastics Pty Ltd [2010] FCAFC 94]...Mr Duivenvoorde’s evidence was relevant and persuasive. We see no error in the primary judge accepting his evidence."

The Commissioner's appeal was dismissed.

FCT v Futuris Corporation Limited [2012] FCAFC 32 (Full Federal Court; Kenny, Stone and Logan JJ; 19 March 2012).


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