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16 May 11 Part IVA applied to Hong Kong bond transactions - Citigroup

The Full Federal Court (Stone, Jessup and Perram JJ) has dismissed both the taxpayer's and the Commissioner's appeals against the decision of Edmonds J in Citigroup Pty Limited v FCT [2010] FCA 826.

Edmonds J dismissed the taxpayer's appeals against the Commissioner's decisions in relation to the application of Part IVA ITAA 1936, under which the Commissioner sought to cancel foreign tax credits to which the taxpayer was otherwise entitled under Div 18 ITAA 1936 in consequence of its participation in two very complicated Hong Kong bond transactions.

Edmonds J considered the transactions in the light of the matters contained in s 177D(b) ITAA 1936 and concluded that absent the foreign tax credits, the Hong Kong bond transactions "did not make sense" in terms of cash flows.

However, Edmonds J also concluded that under the law as it stood when the Part IVA determinations were made, the taxpayer was not liable to pay General Interest Charge on any tax shortfall. Edmonds J noted that the law had subsequently been amended, with the result that "the position would be different today".

On appeal, the taxpayer argued that in determining purpose under s 177D(b), Edmonds J had impermissibly applied a "but for" test. The Full Federal Court explained the origins of this argument at para 49 as follows:

"It is true that it is not enough, in the application of s 177D, to consider whether a taxpayer would have entered into the putative scheme 'but for' the tax benefit postulated: British American Tobacco Australia Services Ltd v FCT [2010] FCAFC 130; (2010) 189 FCR 151, 162 [46]. But that is not because an approach to decision-making which employs thinking of the kind exemplified by the test is irretrievably toxic of itself: it is, as the Full Court pointed out in the case referred to, because Part IVA does not require recourse to such a test, and the substitution of it for what is required by s 177D would involve a misdirection."

The Full Federal Court rejected the taxpayer's argument, stating at para 52:

"It will be apparent from what we have already written that we do not accept CPL's proposition that the fee and the premium were by way of a conventional non-tax-related commercial return. To the contrary: they were ultimately generated by the Div 18 credit which CPL achieved against its liability to pay Australian tax in the 2003 year. We consider, with respect, that the primary Judge was very close to the mark when he invoked Beaumont J’s observation in Spotless, and that his use of the 'did not make sense' formula rightly related to purpose, and not merely to a condition. His Honour’s reasons do not, in our respectful view, betray a substitution of the 'but for' test for the conventional test of purpose required by s 177D."

The taxpayer's other arguments on appeal were also dismissed, as was the Commissioner's appeal in relation to Edmonds J's finding that the taxpayer was not liable to pay the General Interest Charge.

FCT v Citigroup Pty Ltd [2011] FCAFC 61 (Full Federal Court; Stone, Jessup and Perram JJ; 10 May 2011).


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