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The Full Federal Court (Dowsett, Jessup and Gordon JJ) has dismissed the taxpayer's appeal from the decision of Emmett J in British American Tobacco Australia Services Limited v FCT [2009] FCA 1550, in which his Honour upheld an assessment made by the Commissioner pursuant to a determination made under Part IVA ITAA 1936, the effect of which was to include a capital gain of $118,128,953 in the taxpayer company's assessable income.

The capital gain arose from the sale by the taxpayer of certain tobacco brands. The sale was necessary in order to obtain the approval of the ACCC to the merger of the British American Tobacco group of companies and the Rothmans group of companies. The capital gain was not included in calculating the taxpayer company's net capital gain for the income year because it chose CGT rollover relief on the disposal (at market value) of the brands to a company that, as a result of the merger, was within the same group. That company then disposed of the brands to a third party, incurring the capital gain which was then offset by net capital losses transferred to it from other Rothmans group companies.

The taxpayer argued firstly that it was the choice or election to obtain the rollover relief under subdiv 126-B of the 1997 Act which was the "scheme" for the purposes of s 177C(2A) on the basis that the choice or election was the only step which produced the tax benefit. This was rejected by Emmett J, and was also rejected by the Full Federal Court which said, at para 34:

"Here, contrary to the Appellant’s submissions, there were relevant steps that took place both before...and after the rollover...Those steps were not "merely context" but part of the scheme. The Appellant did not satisfy the exclusion. The Scheme did not consist solely of the making of the choice. The making of the choice was part of a wider scheme."

The Full Court also rejected the taxpayer's second argument that Emmett J had expressed the object of the scheme as being "the utilisation of tax losses", rather than the non-inclusion of the net capital gain of $118,128,953 in the taxpayer's assessable income, which was the subject of the Commissioner's Part IVA determination. Emmett J's references to "the utilisation of tax losses" was a matter which he properly took into account in considering the matters mentioned in ss 177D(b)(vi), (vii) and (viii).

Finally, the Full Court rejected the taxpayer's third argument that, in determining dominant purpose, Emmett J had applied a "but for" test. The Full Court said that Emmett J correctly addressed each of the factors in s 177D(b) and, after posing the correct question, concluded that the eight factors required to be considered point strongly to the conclusion that the taxpayer and Rothmans, both of whom entered into or carried out the Scheme, together with other parties, did so for the purpose of enabling the taxpayer to obtain the tax benefit from the rollover choice [see para 52].

The taxpayer's appeal was dismissed: British American Tobacco Australia Services Limited v FCT [2010] FCAFC 130 (Full Federal Court; Dowsett, Jessup and Gordon JJ; 10 November 2010).


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