Handbury Holdings Pty Ltd v Federal Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Federal Court of Australia (VID 1021 of 2008)
Judgment date: 9 October 2009
Date published: 7 July 2010
Decision outcome: Favourable Taxpayer's application for special leave to appeal to the High Court refused on 23 April 2010

Summary of decision:
Outlines the ATO's response to the decision of the Full Federal Court in Handbury Holdings Pty Ltd v FC of T [2009] FCAFC 141, following the High Court's refusal of the taxpayer's application for special leave to appeal the decision to the High Court. At issue was how a head company of a consolidated group works out its allocable cost amount for a leaving entity. The case turned on whether the allocable cost amount had to be reduced to recognise liabilities of the leaving entity just before the leaving time or only to recognise liabilities that the leaving entity took with it.

Overview of facts:
Handbury Holdings Pty Ltd was the head company of a consolidated group from 1 July 2003. Murdoch Magazines Pty Ltd was a subsidiary member of that group from 1 July 2003 to 30 July 2004. | On 29 July 2004 Murdoch Magazines Pty Ltd was indebted to two external creditors for amounts totalling $26,140,360. | On 30 July 2004 Murdoch Magazines Pty Ltd left the consolidated group when these liabilities converted to shares in a debt for equity swap. | On 30 July 2004 Handbury Holdings Pty Ltd transferred its shares in Murdoch Magazines Pty Ltd to a third party. | The Commissioner assessed Handbury Holdings Pty Ltd on a capital gain of $16,934,891 under CGT event L5 pursuant to section 104-520 of the Income Tax Assessment Act 1997 (ITAA 1997) on the basis that its allocable cost amount in Murdoch Magazines Pty Ltd was negative when that company ceased to be a subsidiary member of the consolidated group. | The Commissioner also assessed Handbury Holdings Pty Ltd on a capital gain of $50,226,752 under CGT event A1 pursuant to section 104-10 of the ITAA 1997 on the sale of its shares in Murdoch Magazines Pty Ltd to the third party. | These capital gains were calculated on the basis that Handbury Holdings Pty Ltd's allocable cost amount for Murdoch Magazines Pty Ltd had to be worked out by subtracting the amounts of liabilities owed to the two external creditors just before the leaving time under step 4 in the table in subsection 711-20(1) of the ITAA 1997. | Handbury Holdings Pty Ltd objected on the basis that no capital gain arose under CGT event L5 and the capital gain that arose under CGT event A1 was overstated by $9,205,469 because these liabilities were extinguished at the leaving time and were not "liabilities that the leaving entity takes with it when it ceases to be a subsidiary member" for the purpose of subsection 711-20(1). | The Commissioner disallowed the objection and Handbury Holdings Pty Ltd appealed to have this decision set aside by allowing the objection and reducing its assessable income by $26,140,360. | Appeals | At first instance, the Federal Court (Kenny J) [2008] FCA 1787 dismissed the appeal holding that the language used in step 4 in subsection 711-20(1) was not determinative. The phrase "liabilities that the leaving entity takes with it when it ceases to be a subsidiary member" in step 4 in subsection 711-20(1) is a descriptive rather than an operative statement which does not modify or qualify the terms of subsection 711-45(1) of the ITAA 1997. On a proper construction of subsection 711-45(1) a liability of the leaving entity at the leaving time meant a liability of the leaving entity just before it ceases to be a subsidiary member of the consolidated group. The object of Division 711 as stated in subsection 711-5(2) is to preserve an alignment between a head company's costs for its membership interests in a subsidiary member and the assets of that subsidiary member. This object is achieved by recognising the head company's cost for those membership interests just before the leaving time (subsection 711-5(3) of the ITAA 1997). | The taxpayer appealed to the Full Federal Court. The Full Federal Court (Finn, Sundberg and Perram JJ) [2009] FCAFC 141 dismissed the taxpayer's appeal and unanimously agreed that the proper relation between the steps in the table in subsection 711-20(1) and the sections referred to in those steps is that the latter are paramount over the former. Section 711-45 prevails over step 4 in the table in subsection 711-20(1). The same meaning should be given to the phrase "at the leaving time" in section 711-45 as the meaning given to that phrase in other sections referred to in the steps such as subsection 711-25(1) of the ITAA 1997. Consequently it was 'preferable to read "at the leaving time" in section 711-45 as "just before the leaving time" and to read the words in step 4 as a reference to the liabilities of the leaving entity just before the leaving time'. | The taxpayer applied for special leave to appeal from the Full Federal Court to the High Court but leave was refused by Hayne and Crennan JJ on the basis that there were insufficient reasons to doubt the correctness of the decision of the Full Federal Court. | Issue decided by the Court | At issue was how a head company of a consolidated group works out its allocable cost amount for a leaving entity. The case turned on whether step 4 in the table in subsection 711-20(1) required a subtraction of an amount worked out under section 711-45 in respect of liabilities owed to two external creditors that were extinguished by the debt for equity swap that caused the leaving entity to cease to be a subsidiary member of the consolidated group. | The courts had to determine whether the words "a liability of the leaving entity at the leaving time" in subsection 711-45(1) and the words "the liabilities that the leaving entity takes with it when it ceases to be a subsidiary member" in the description of what section 711-45 is about in the second column of step 4 in the table in subsection 711-20(1) should be construed in accordance with their ordinary meaning or in accordance with their statutory context. | At first instance and on appeal to the Full Federal Court, the courts concluded that the phrase "at the leaving time" in subsection 711-45(1) had to be interpreted as meaning "just before the leaving time". This meant that the liabilities of the leaving entity owed to external creditors just before the leaving time had to be subtracted in working out the old group's allocable cost amount.

Issues decided:
At issue was how a head company of a consolidated group works out its allocable cost amount for a leaving entity. The case turned on whether step 4 in the table in subsection 711-20(1) required a subtraction of an amount worked out under section 711-45 in respect of liabilities owed to two external creditors that were extinguished by the debt for equity swap that caused the leaving entity to cease to be a subsidiary member of the consolidated group. The courts had to determine whether the words "a liability of the leaving entity at the leaving time" in subsection 711-45(1) and the words "the liabilities that the leaving entity takes with it when it ceases to be a subsidiary member" in the description of what section 711-45 is about in the second column of step 4 in the table in subsection 711-20(1) should be construed in accordance with their ordinary meaning or in accordance with their statutory context. At first instance and on appeal to the Full Federal Court, the courts concluded that the phrase "at the leaving time" in subsection 711-45(1) had to be interpreted as meaning "just before the leaving time". This meant that the liabilities of the leaving entity owed to external creditors just before the leaving time had to be subtracted in working out the old group's allocable cost amount.

ATO view of decision:
The decision is consistent with the object in subsection 701-15(2) of the ITAA 1997 to preserve the alignment of the head company's costs for membership interests in a leaving entity with the costs of the leaving entity's assets reduced by the amounts of its liabilities. | Tax Laws Amendment (2010 Measures No. 1) Act 2010 clarifies that when an entity leaves a consolidated group on or after 10 February 2010 the liabilities to be subtracted under step 4 in the table in subsection 711-20(1) in working out the old group's allocable cost amount are the liabilities held just before the leaving time. | The decision of the Full Federal Court in Handbury Holdings Pty Ltd v FC of T [2009] FCAFC 141 in respect of which special leave to appeal was refused by the High Court of Australia confirms that when an entity left a consolidated group before 10 February 2010 the liabilities to be subtracted under step 4 in the table in subsection 711-20(1) in working out the old group's allocable cost amount are the liabilities held just before the leaving time.

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

Legislative references: Acts Interpretation Act 1901 15AA Corporations Act 2001 254V(2) Income Tax Assessment Act 1997 104-10 104-520 701-1 701-5 701-15 710-55 701-60 711-1 711-5 711-10 711-15 711-20 711-25 711-30 711-35 711-45
Case references: Cooper Brookes (Wollongong) Pty Ltd v FC of T (1981) 147 CLR 297 81 ATC 4292 11 ATR 949 Envestra Ltd v C of T [2008] FCA 249 70 ATR 115 169 FCR 300 Institute of Patent Agents v Lockwood [1894] AC 347 Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 [1998] HCA 28 153 ALR 490 Re Columbian Fireproofing Co Ltd [1910] 1 Ch 758 Re Port Supermarket Ltd (in liquidation) [1978] 1 NZLR 330 Sakhuja v Allen [1973] AC 152 [1972] 2 All ER 311 Carr v Western Australia (2007) 232 CLR 138 Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (2009) 239 CLR 27 2009 ATC 20-134 73 ATR 256 Institute of Patent Agents v Lockwood [1894] AC 347 Federal Commissioner of Taxation v Patcorp Investments (1973) 140 CLR 247 76 ATC 4225 6 ATR 420 Hepples v Federal Commissioner of Taxation (1992) 173 CLR 492 22 ATR 852 92 ATC 4013 [1992] HCA 3 Anderson v Commissioner of Taxes (Vic) (1937) 57 CLR 233 Doe d Ellis v Owens (1843) 12 LJ Ex 53 Tio v Minister for Immigration and Multicultural and Indigenous Affairs (2003) 126 FCR 185 [2003] FCAFC 53 Whim Creek Consolidated (NL) v FC of T (1977) 17 ALR 421 Commonwealth Homes and Investment Company Ltd v Smith (1937) 59 CLR 443 [1937] HCA 73 Central Piggery Co Ltd v McNicoll and Hurst (1949) 78 CLR 594 [1949] HCA 19 Spitzel v Chinese Corporation (1899) 80 LT 347 F C of T v St Helens Farm (ACT) Pty Ltd (1981) 146 CLR 336 11 ATR 544 81 ATC 4040 [1981] HCA 4 Pilmer v Duke Group Ltd (In Liq) (2001) 207 CLR 165 [2001] HCA 31 (2001) 49 ATR 324
Subject references: income tax consolidated group exit tax cost setting rules leaving time allocable cost amount for a leaving entity liabilities at Step 4 capital gain CGT event L5 CGT event A1
Other references: ATO ID 2007/118