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The Federal Court (Middeleton J) has upheld the taxpayer's appeals against objection decisions made by the Commissioner in relation to assessments issued to the taxpayer under Div 13 of ITAA 1936.

The taxpayer carried on the business of manufacturing and selling products, commonly called flocculants and coagulants in Australia, predominantly to end users in the mining, paper and sewage treatment industries. It purchased the products from manufacturing subsidiaries of its Frenc parent that were resident in France, the United States of America and the Peoples’ Republic of China (the suppliers).

The Commissioner argued that the taxpayer was paying the suppliers, from whom it purchased the products, more than the "arm’s length consideration", as defined in s 136AA(3)(d) of the ITAA. After reviewing the evidence, including expert evidence led by both the taxpayer and the Commissioner, the Court rejected the Commissioner's arguments, finding that the actual prices paid by the taxpayer for the acquisition of the products were lower than the large majority of prices paid by the purchasers in comparable transactions over a similar period of time.

In so finding, the Court rejected the Commissioner's contention that the actual position of the taxpayer forms part of the assumed content of the hypothetical buyer, finding no basis for that contention in Div 13. Further, in applying the comparable uncontrolled price method in determining the arm's length consideration, the Court rejected the application of the Transaction Net Margin Method, preferred by the Commissioner's expert witness.

The issue of whether the Commissioner was entitled to assess the taxpayer in accordance with the terms of the relevant Double Taxation Agreement between Australia and the country in which each of the suppliers was located was not decided, although the Court said it saw "some force" in the Commissioner's argument that he was so entitled.

SNF (Australia) Pty Ltd v FCT [2010] FCA 635 (Federal Court, Middleton J, 25 June 2010).


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