Keycorp Ltd v Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Federal Court of Australia (NSD121 of 2006)
Judgment date: 7 February 2007
Date published: 4 April 2007

Summary of decision:
Outlines the Tax Office's response to this case which concerned whether the taxpayer was entitled to transfer a loss incurred in a particular part of an income year being that period after a disqualifying event of a change of ownership occurred.

Overview of facts:
1. In September 1982 Keycorp Ltd (KYC) was incorporated; | 2. On 21 August 2000 Keycorp Solutions Ltd ("KSL") was incorporated (wholly owned by KYC) as a special purpose entity to acquire a particular business from Telstra Corporation Ltd ("Telstra") but remained a dormant company until 14 December 2000; | 3. On 25 October 2000 Telstra through its wholly owned subsidiary Telstra cb.fs Ltd agreed to subscribe for 38,700,000 shares in the capital of KYC. The shares were not issued to Telstra until 14 December 2000 and represented approximately 51% of the total capital of KYC at the time of issue. | 4. On 14 December 2000 Telstra transferred the business to KSL. The only activity 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 the transfer of the business from Telstra, the business of KSL commenced on that date. | 5. During the income year 2001 KYC reverted to a 30 June year end resulting in a transitional income year from 1 January 2000 to 30 June 2001. KYC incurred a tax loss of $39,068,802 in the 18 month period from 1 January 2000 to 30 June 2001. After utilising losses in that income year there were tax losses available to be carried forward of $27,470,209; | 6. In the 2002 year KSL derived a taxable income of $27,748,457. | 7. An attempt to transfer tax losses incurred by KYC for the period 1 January 2000 to 30 June 2001 was ineffective as KYC failed the continuity of ownership test in s165-12 due to the sale of its shares to Telstra on 14 December 2000. | 8. To overcome this difficulty, on 21 July 2005 KYC and KSL sought a private ruling from the Commissioner on whether the part of the tax loss incurred by KYC in the period 14 December 2000 to 30 June 2001 could be transferred to KSL The loss transfer agreement that would be entered into was to transfer $27,748,457 in tax losses from KYC to KSL to reduce the taxable income of KSL to nil. | 9. Subsequent to the ruling request KSL changed its name to Telstra Payment Solutions Ltd | Issues decided by the court or tribunal | 1. Does Subdivision 170-A of the ITAA 1997 allow the transfer of "part of a tax loss incurred in part of an income year" between companies in the same wholly-owned group? A key question in respect of this issue is whether the expression "part of the tax loss" in s 170-10 of the ITAA 1997 refers only to the amount of the tax loss to be transferred or extends to losses incurred in a particular part of an income year. | His Honour held that, 'Ultimately, I think the matter is capable of being rendered to one issue: Is Division 170 and, in particular, s 170-10 directed in any circumstances to the transfer of a tax loss that is referable to part of an income year and as such able to be described as "part of a tax loss for an income year"? The view that I have come to is that the answer to this question is, "no". ' | His Honour acknowledged that this leads to a lack of conformity between the regime for deduction under Division 165 and that for transfer under Division 170 but went on to say that "I do not see that as an oddity or inconvenience. It is merely what Parliament has chosen. It would be odder and possibly more inconvenient if the taxpayer were left freely able to choose the time unit of its tax affairs to transfer its losses, in circumstances where the Parliament has set down a detailed regime for dealing with working out taxable income and tax loss where, for one reason, there are two or more temporal units of the basal income year."

Issues decided:
1. Does Subdivision 170-A of the ITAA 1997 allow the transfer of "part of a tax loss incurred in part of an income year" between companies in the same wholly-owned group? A key question in respect of this issue is whether the expression "part of the tax loss" in s 170-10 of the ITAA 1997 refers only to the amount of the tax loss to be transferred or extends to losses incurred in a particular part of an income year. His Honour held that, 'Ultimately, I think the matter is capable of being rendered to one issue: Is Division 170 and, in particular, s 170-10 directed in any circumstances to the transfer of a tax loss that is referable to part of an income year and as such able to be described as "part of a tax loss for an income year"? The view that I have come to is that the answer to this question is, "no". ' His Honour acknowledged that this leads to a lack of conformity between the regime for deduction under Division 165 and that for transfer under Division 170 but went on to say that "I do not see that as an oddity or inconvenience. It is merely what Parliament has chosen. It would be odder and possibly more inconvenient if the taxpayer were left freely able to choose the time unit of its tax affairs to transfer its losses, in circumstances where the Parliament has set down a detailed regime for dealing with working out taxable income and tax loss where, for one reason, there are two or more temporal units of the basal income year."

ATO view of decision:
This decision accords with the longstanding treatment of this issue by the Commissioner.

Administrative treatment:
Implications on current Public Rulings & Determinations | None

Legislative references: Income Tax Assessment Act 1997 36-10 36-17 165-10 165-12 165-13 165-20 170-10 170-10(2) 170-15(1) 170-30(2) 170-40(2) 170-50(2)
Case references: Braverus Maritime Inc v Port Kembla Coal Terminal Ltd (2005) 148 FCR 68 Brennan v R (1936) 55 CLR 253 CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 Commissioner of Taxation of the Commonwealth of Australia v Murry (1998) 193 CLR 605 Commissioner of Taxation of the Commonwealth of Australia v Linter Textiles Australia Limited (2005) 220 CLR 592 2005 ATC 4255 59 ATR 177 Commissioner of Taxation v Asiamet (No 1) Resources Pty Ltd (2004) 137 FCR 146 2004 ATC 4303 55 ATR 239 Federal Commissioner of Taxation v Comber (1986) 10 FCR 88 86 ATC 4171 17 ATR 413 Federal Commissioner of Taxation v McMahon (1997) 79 FCR 127 97 ATC 4986 37 ATR 167 Federal Commissioner of Taxation v Reynolds Australia Alumnia Ltd (1987) 77 ALR 543 87 ATC 5018 19 ATR 598 Federal Commissioner of Taxation v Top of the Cross Pty Ltd (1981) 37 ALR 623 81 ATC 4563 12 ATR 413 Harts Australia Ltd v Commissioner of Taxation (2001) 109 FCR 405 2001 ATC 4394 47 ATR 371 Harts Australia Pty Ltd v Commissioner of Taxation 2000 ATC 4566 45 ATR 51 Plessey Australia Pty Ltd v Federal Commissioner of Taxation (1989) 89 ALR 395 89 ATC 5163 20 ATR 1538
Subject references: Company losses Continuity of ownership test Group company loss transfers Same business test Tax loss Part of a loss