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01 Jul 1010 Commissioner's appeal on Part IVA dismissed - News Australia Holdings

The Full Federal Court (Stone, Jessup and Jagot JJ) have dismissed the Commissioner's appeal against the decision of the AAT, which held that Part IVA did not apply to cancel a tax benefit (being a capital loss of approximately $1.5 billion) arising from the global corporate restructure of the News group.

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 AAT's decision was vitiated by three errors of law.

One of the alleged errors of law was that the AAT impermissibly took into account the actual or subjective motives of News Australia (and other persons) in applying s 177D(b) of the Act, namely, that the restructuring should not involve any adverse Australian taxation consequences (referred to as "no tax, no tax risk"). The Full Court said, at para 30:

"The Commissioner’s submissions fail to distinguish between objective and subjective intention. Section 177D(b) of the Act requires a conclusion about a person’s objective intention or purpose. That intention must be objectively ascertained by a consideration of the factors listed in s 177D(b) of the Act. It is, however, hardly surprising if objective intention in fact accords with the person’s subjective intention. If subjective intention is reflected in objective evidence, no error is made by taking that evidence into account albeit that it is consistent with the person’s subjective intention. The Tribunal recognised this distinction when it rejected subjective intention as irrelevant while at the same time recognising that the "no tax, no tax risk" policy of News Group was a significant matter "which must be addressed".

The Full Court concluded that none of the Commissioner’s three alleged errors of law could be sustained on a fair reading of the AAT’s reasons. The appeal was dismissed.

FCT v News Australia Holdings Pty Limited [2010] FCAFC 78 (Full Federal Court; Stone, Jessup and Jagot JJ; 30 June 2010).


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