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05 Nov 12 Losses incurred in profit-making scheme deductible - Visy Packaging Holdings Pty Ltd

The Visy Packaging Group has succeeded in its claims for deductions for losses and loss transfers incurred in the course of a profit-making scheme, which involved the acquisition of the Southcorp packaging business with the intention of selling some of the acquired assets at a profit. In the event, however, losses were incurred on the divestments. The Federal Court has held that those losses were deductible.

The context in which the deductions and loss transfers arose involved a common plan, scheme or strategy on the part of the participants, which were various members of the Visy corporate group. That common scheme involved the acquisition and on-sale by Visy of various packaging businesses and assets of Southcorp Limited, specifically as a result of which Southcorp businesses and assets were acquired by various special purpose Visy subsidiaries. The special purpose Visy subsidiaries were, in turn, on-sold by their shares.

The court was prepared to accept, on the evidence, that at all relevant times the Visy group, by its controlling minds (the executives who were involved in planning and implementing the scheme), intended to acquire all of the diversified components of the Southcorp packaging business, to retain those components that were a synergistic fit with the Visy group’s business operations, and to sell at a profit those Southcorp assets which it did not intend to retain. The divestment of those assets was to be carried out by selling the shares in the Visy special purpose subsidiaries which had acquired the assets. In the event, however, losses were incurred on the sales of the shares.

The court held that Visy had entered into a profit-making undertaking or scheme. Accordingly, when the anticipated profits did not accrue, and losses were incurred instead, those losses were deductible under s 8-1 of the ITAA 1997.

The court set out the following principles:

“The principle of law which is at the centre of this case is clear: if the intention or purpose of the relevant entity in entering into a transaction or upon acquiring an asset was to make a profit or gain, that profit or gain will be income, even if the transaction was extraordinary by reference to the ordinary course of that entity’s business [citations omitted]. Similarly, if the intention or purpose was to make a profit or gain but a loss was ultimately in fact sustained, then a deduction in the amount of that loss would be permitted.”

“It is not necessary that the sole or dominant purpose of entering into the relevant transaction is to make a gain or profit. It is enough if a ‘not insignificant purpose’ of the relevant transaction was to obtain a profit or gain”.

Visy Packaging Holdings Pty Ltd v FCT [2012] FCA 1195 (Middleton J, 2 November 2012).

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