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The Full Federal Court (Edmonds, Gilmour and Logan JJ) has upheld the taxpayer's appeal from the decision of Stone J in RCI Pty Ltd v FCT [2010] FCA 939 (1 September 2010).

Her Honour held that the taxpayer (RCI) obtained a tax benefit 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.

In determining whether or not the taxpayer had obtained a tax benefit from the scheme, her Honour found that the taxpayer had not established that the Commissioner's counterfactual (or "alternative postulate") was unreasonable. In particular, her Honour found that RCI did not provide any evidence to support its submission "that without the benefit of the dividend the transfer of RCI’s shares in JHH(O) could not reasonably be expected to have taken place".

However, as the Full Federal Court noted (at para 140), "that is not the statutory question". Rather:

"...the statutory question is one for objective enquiry and determination – what the taxpayer might reasonably be expected to have done if it had not entered into the scheme – and the answer to that question is more likely to be found in the underlying or foundation material before the Court than in any evidence led by the taxpayer as to what it might have or might not have done; or in its failure to lead any such evidence."

Addressing this question, the Full Federal Court said, at para 145:

"...the cost of implementing the proposal is obviously a relevant consideration as to whether it would be implemented in accordance with its terms. That a step in the proposal would increase the transaction costs from $35 million to $207 million, or from 2.5% of market capitalisation to 15% of market capitalisation...compels the conclusion that if the transaction impugned as the narrower scheme or, it and the other steps which together are impugned as the wider scheme, were not entered into or carried out, the reasonable expectation is that the proposal, insofar as it involved the transfer by RCI of its shares in JHH(O) to RCI Malta would not have occurred; indeed, in our view, there is no possibility, let alone an expectation, that it that would have occurred."

The Full Federal Court concluded, at para 150:

"For the foregoing reasons, in 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."

In the event that they were wrong in this regard, and RCI had in fact obtained a tax benefit, the Full Federal Court went on to find that no party to the scheme entered into it or carried it out for the dominant purpose of enabling RCI to obtain the relevant tax benefit, as required by s 177D(b) ITAA 1936. RCI submitted that the payment of the dividend resulted in benefits that were not dependent on the sale of the shares in JHH(O), and all of them accrued immediately upon payment of the dividend. The Full Federal Court agreed, saying, at para 169:

"In our view, the only objective indicia that arguably suggests that the Court should come to a conclusion that the relevant parties – JHIL, RCI and JHH(O) – had, as their dominant purpose in entering into or carrying out the scheme – consisting of or including the payment of the...dividend – the obtaining of a tax benefit, namely, a reduction in the gain that would be realised on the transfer of the JHH(O) shares from RCI to RCI Malta, is the size of the dividend: $318 million...Without explication, it may lead to the same conclusion to which the primary judge came. However, it is totally explicable on the basis for which RCI contends and, on its own, is not sufficient to persuade us that her Honour’s conclusion on the s 177D(b) issue is correct."

RCI Pty Limited v FCT [2011] FCAFC 104 (Full Federal Court; Edmonds, Gilmour and Logan JJ; 22 August 2011).


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