Case: Federal Commissioner of Taxation v McMahon (1997) 79 FCR 127 
Outcome: cited
The appeal is to be decided upon the facts comprising the arrangement on which the ruling was made: Federal Commissioner of Taxation v McMahon (1997) 79 FCR 127. The relevant facts, taken from the ruling are as follows: "KYC was incorporated during September 1982 and is a public company listed on the Australian Stock Exchange (ASX). The principal activities of KYC and its subsidiaries are: &#8226; Research, development and sales of devices and systems to allow secure electronic payments and transactions at the point-of-sale; &#8226; Service solutions (including installation, maintenance, help desk support, logistics and asset management services for point-of-sale terminals and automatic teller machines; &#8226; Research, development and sales of smartcard technology, including licensing of operating systems and applications for smartcards; and &#8226; Marketing and sales of secure transaction network solutions. For a number of income years prior to the 2001 tax year, KYC lodged tax returns on the basis of a substituted accounting period (SAP), being an early balancing SAP ending on 31 December. During the 2001 year, KYC reverted to a 30 June year end due to a change in ownership of the company. Transition to the 30 June year end was effected via an 18 month return covering the period 1 January 2000 to 30 June 2001. This represented KYC's 2001 year of income. KSL was incorporated in Australia on 21 August 2000 with all shares in KSL directly owned by KYC. KSL was incorporated by KYC as a special purpose entity to acquire a particular business from Telstra Corporation Ltd (Telstra) as part of the arrangements referred to below. On 25 October 2000, Telstra (through its wholly owned subsidiary Telstra cb.fs Limited) agreed to subscribe for 38,700,000 ordinary fully paid shares in the capital of KYC. These shares were not issued to Telstra until 14 December 2000. These shares represented approximately 51% of the total capital of KYC at the time of issue. The business was transferred from Telstra to KSL pursuant to an agreement between Telstra, KSL and KYC dated 25 October 2000. The business was not transferred from Telstra to KSL until 14 December 2000, immediately after the issue of KSL shares to Telstra on the same date. The only activity of KSL prior to this date was to enter into contracts for the acquisition of the business. On the basis that KSL did not trade from the time of incorporation until 14 December 2000, being the time of transfer of the business from Telstra, the business of KSL commenced on that date. During the 18 month period ended 30 June 2001, KYC incurred a tax loss of $39,068,802. After utilising losses in that income year, there were tax losses available to be carried forward of $27,470,209. During the year ended 30 June 2002, KSL derived taxable income of $27,748,457. On 28 June 2005 a Share Sale Agreement was entered into whereby the shares in KSL are to be acquired by Telstra. KYC previously sought an exercise of the discretion of the Commissioner pursuant to section 170-50(2)(d) to extend the time for making a valid loss transfer agreement. The Commissioner exercised his discretion pursuant to section 170-50(2)(d) and notified KYC in a letter dated 2 June 2005. A loss transfer agreement was entered into to transfer $27,748,457 in tax losses from KYC to KSL in order to reduce the taxable income of KSL to nil. The attempted loss transfer was ineffective as it sought to transfer the whole of the losses incurred by KYC for the period 1 January 2000 to 30 June 2001. The transfer was ineffective because the issue of 38,700,000 ordinary fully paid shares in the capital of KYC to Telstra on 14 December 2000 was an abnormal trading event and resulted in a change of ownership as the shares represented approximately 51% of the total capital of KYC at the time of issue." 4 The terms of the two questions to which the respondent was directed were expressed slightly differently in two places in the ruling. At the beginning of the ruling under the heading "WHAT THIS RULING IS ABOUT" the following appeared: "1. Can KYC pursuant to Division 170 of the Income Tax Assessment Act 1997 (ITAA 1997) transfer to KSL an amount of its tax loss for the year ended 30 June 2001, being that part of the loss incurred by KYC during the period 14 December 2000 to 30 June 2001, so that KSL may deduct the amount of loss transferred in accordance with section 36-17 of the ITAA 1997 in the year of income ended 30 June 2002? 2. Can KYC and KSL have an extension of time within which to effect a written agreement for transfer of the amount of the loss of one month from receipt of the ruling?" (The reference to "section 36-17" was an error. It should have been "section 36.10") At the end of the section of the ruling entitled "THE SUBJECT OF THE RULING" which contained the facts the following appeared: "The Commissioner is now asked to rule: 1. That KYC may transfer an amount of its tax loss incurred during part of the income year from 14 December 2000 to 30 June 2001 so as to avoid the date of the change of ownership; and 2. That KYC and KSL may make a written agreement for transfer of the amount of the tax loss within one month of receipt of the ruling referred to at 1." 5 Two assumptions were made in the ruling as follows: "&#8226; The taxpayer will apply for a Commissioner's discretion for additional time to enter into a valid loss transfer agreement pursuant to section 170-50(2)(d) of the ITAA 1997 ;and &#8226; The Commissioner will grant that additional time to make the loss transfer."