Part IVA did not apply to consolidation uplift on sale of shares - Macquarie Bank
28 Sep 2011
The Federal Court (Edmonds J) has upheld the taxpayer's appeal against the Commissioner's objection decision, in which the Commissioner disallowed the taxpayer's objection to an assessments based on Part IVA determinations.
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 the 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.
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.
Edmonds J firstly held that the Commissioner could not rely on either amended assessment nor, in relation to the amended assessment issued to MBL, on either Part IVA determination.
The Commissioner's argument was 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 consoldidated group. On the basis of this hypothesis, MBL could never have obtained a tax benefit.
In relation to the Mongoose amended assessment, Edmonds J held that Part IVA does not authorise the Commissioner to issue an assessment including an amount in the assessable income of a subsidiary member of a consolidated group.
In case he was wrong in this regard, Edmonds J went on to consider whether Part IVA could apply. One problem facing the Commissioner was that none of the different parties to the scheme identified by the Commissioner entered into or carried out all of the steps in the scheme. Edmonds J considered the dominant purpose of each party in relation to those steps that they were parties to, and concluded that none of them had the (objective) dominant purpose of enabling Mongoose to obtain the tax benefit identified by the Commissioner.
The taxpayer's application was upheld: Macquarie Bank Limited v FCT  FCA 1076 (Federal Court, Edmonds J, 26 September 2011).