Commissioner's appeal on Part IVA/consolidation inter-relationship dismissed - Macquarie Bank
19 Feb 2013
The Full Federal Court (Emmett, Middleton and Robertson JJ) has dismissed the Commissioner's appeal from the decision of Edmonds J in Macquarie Bank Limited v FCT  FCA 1076.
Macquarie Bank Limited (MBL), the head company of the MBL consolidated group, acquired all the shares in Mongoose Acquisition LLC (MALLC), a limited liability company incorporated in Delaware, USA. MALLC owned all the shares in Mongoose Pty Ltd (Mongoose) which owned 36% of the shares in Minara Resources Ltd (Minara), a listed company incorporated in Australia.
The non-resident vendors paid no Australian tax on the sale of their shares in MALLC, because MALLC was a non-resident company.
On acquisition of MALLC, MBL appointed Australian resident directors to the company's board and, as a consequence, MALLC and Mongoose became members of the MBL consolidated group.
Mongoose subsequently sold the Minara shares to third parties at a profit.
The cost to MBL of acquiring all the membership interests in MALLC was $438,928,590. That was also MBL's pushed down tax cost of Mongoose's interest in Minara for the purposes of the consolidation provisions in Pt 3-90 of ITAA 1997 Act (see Div 705). In consequence of Mongoose's sale of the Minara shares, for the year of income ended 30 September 2004 (in lieu of the year of income ended 30 June 2004), MBL returned, as head company of the MBL consolidated group of which Mongoose was, by then, a subsidiary member, an assessable gain of $41,408,357 being the difference between the proceeds of the disposal by Mongoose of the Minara shares ($480,336,947) and MBL's tax cost of Mongoose's interest in Minara ($438,928,590).
Prior to joining the MBL consolidated group, Mongoose's cost base in the Minara shares was only $161,829,478. The Commissioner made two Part IVA determinations and issued amended assessments to both MBL and Mongoose based on Part IVA, including a gain of $318,507,469 (being the difference between $480,336,947 and $161,829,478) in their respective assessable incomes.
The Commissioner argued that if the scheme had not been entered into, Mongoose would have sold the Minara shares otherwise than as a subsidiary member of the MBL consolidated group. This was the "counterfactual" or alternative postulate that gave rise to the impugned tax benefit. However, Edmonds J held that this was inconsistent with the Commissioner's attempt to include the tax benefit in MBL's assessable income because, on the basis of the counterfactual, Mongoose would never have been a member of the MBL consolidated group and MBL could never have obtained the tax benefit.
In case he was wrong in this regard, Edmonds J went on to conclude that none of the parties to the scheme had the (objective) dominant purpose of enabling Mongoose (whom he assumed was the relevant taxpayer) to obtain the tax benefit identified by the Commissioner, as required by s 177D ITAA 1936.
On appeal, Emmett J did not see the same difficulties as Edmonds J had with the Commissioner issuing an assessment to MBL as head company of the MBL consolidated group in relation to transactions entered into by its subsidiary Mongoose - "the assessable income of Mongoose must be taken to have been the assessable income of Macquarie" (para 46). However, Emmett J agreed with Edmonds J that none of the parties to the scheme had the dominant purpose of enabling Mongoose to obtain the relevant tax benefit. His Honour concluded that the Commissioner's appeal should be dismissed.
In contrast, Middleton and Robertson JJ held that there was no "tax benefit" as defined by s 177C(1)(a) ITAA 1936, specifically because MBL was, by virtue of the consolidation provisions, the relevant taxpayer, and no amount would have been included in its assessable income on the basis of the counterfactual (that is, if the scheme had not been entered into or carried out).
Their Honours said, at para 165:
"This inconsistency was the gravamen of the primary judge’s comments at  of his reasons for judgment (as previously alluded to). We think that this issue is fatal to the Commissioner’s submission that a tax benefit was obtained in this case, as the way in which the Commissioner has pleaded the scheme and its corresponding counterfactual clashes with both the manner in which Pt 3-90 consolidated groups are to be assessed under Pt IVA (namely, by making determinations in respect of, and issuing assessments directly to, the head company), and the clear wording of s 177C. We do not think that the words of that section offer any scope to substitute a different taxpayer purely for the purpose of that part of the analysis that relates to what would or might have been included in a taxpayer’s assessable income if the scheme had not been entered into or carried out..."
In case they were incorrect in reaching the conclusion that there was no tax benefit, Middleton and Robertson J also went on to consider whether any one or more of the parties to the scheme had the (objective) dominant purpose of enabling Mongoose to obtain the tax benefit identified by the Commissioner (on the assumption the Mongoose, rather than MBL, was the relevant taxpayer). After an exhaustive analysis, their Honours concluded in the negative. Whilst allowing the parties to make submissions on orders, they, too, were of the view that the Commissioner's appeal should be dismissed.
FCT v Macquarie Bank Limited  FCAFC 13 (Full Federal Court; Emmett, Middleton and Robertson JJ; 15 February 2013)