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The High Court (Gummow, Hayne and Heydon JJ) has refused the Commissioner special leave to appeal from the decision of the Full Federal Court in RCI Pty Limited v FCT [2011] FCAFC 104 (22 August 2011). The Full Federal Court had allowed the taxpayer's appeal from the decision of Stone J in RCI Pty Ltd v FCT [2010] FCA 939 (1 September 2010).

The question before the Full Federal Court was whether the taxpayer (RCI) obtained a tax benefit (as defined in s 177C ITAA 1936) to which Part IVA applied when it sold its shareholding in its wholly owned United States subsidiary (JHH(O)) to another company in the group (RCI Malta) as part of a corporate restructure. Prior to the sale of the shares, JHH(O) revalued its assets and paid a non-assessable non-exempt dividend of US$318m to the taxpayer, thereby reducing the value of RCI's shares in JHH(O) and thereby reducing the amount of the capital gain that RCI would otherwise have derived on the sale. The Full Federal Court held that it did not obtain a tax benefit.

The Full Federal Court said: " our view, if the scheme in either of its manifestations had not been entered into or carried out, the reasonable expectation is that the relevant parties would have either abandoned the proposal, indefinitely deferred it, altered it so that it did not involve the transfer by RCI of its shares in JHH(O) to RCI Malta or pursued one or more of the other alternatives referred to in the Information Memorandum; but they would not have proceeded to have RCI transfer its shares in JHH(O) to RCI Malta at a tax cost of $172 million. On this view, RCI did not obtain the tax benefit it was alleged by the Commissioner to have obtained in connection with the scheme."

On the special leave application, Counsel for the Commissioner argued that the Full Federal Court misapplied the test in s 177C ITAA 1936 regarding tax benefit. Counsel said:

"So from a section that asks whether there is one reasonable possibility by which the amount might have been included, bearing in mind the threshold or gatekeeper role of tax benefit, a large part of the work in this part is done by the dominant purpose test. If there is one way, according to the section, in which it might reasonably be expected that the amount might be included, then it is satisfied. The Full Court said, well, if there is one way in which it might reasonably be expected that it would not be included, then the section is not satisfied."

In dismissing the Commissioner's application, Gummow J said:

"We are not satisfied that the applicant has sufficient prospects of success in demonstrating error by the Full Court in its finding respecting the criterion in section 177C of the statute to warrant the grant of special leave. It is on that ground that special leave is refused with costs."

For a transcript of the special leave application, go here


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