Metlife Insurance Limited v Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Federal Court of Australia (NSD 730 of 2008)
Judgment date: 3 October 2008
Date published: 25 May 2011

Summary of decision:
Outlines the Tax Office's response to the decision which concerned whether the amendment of the taxpayer's deemed notice of assessment by a notice of amended assessment issued after the period of review would otherwise have expired, was an amendment made within the meaning of subsection 170(10AA) of the ITAA 1936, for the purpose of giving effect to subsection 104-10(3) of the ITAA 1997.

Overview of facts:
The matter proceeded by way of agreed facts. The agreed facts were as follows: 1. The taxpayer, a resident of Australia, carried on a life insurance business in Taiwan. 2. Under section 18 of the Income Tax Assessment Act 1936 (ITAA 1936) the taxpayer adopted an accounting period ending 31 December in lieu of 30 June. Accordingly, the accounting period of the taxpayer for the year ended 30 June 2001 was the 12 month period that ended 31 December 2000 (the 2001 income year). 3. On 19 July 2000, the taxpayer and Fubon Life Assurance Co Limited (Fubon) entered into a Transfer of Business Agreement. On 16 November the taxpayer and Fubon entered into an Amended and Restated Transfer of Business Agreement (The Agreement). 4. Settlement of the Agreement occurred during January 2001. 5. The capital proceeds from the sale of the business amounted to $43,359,741which represented the following items: • net tangible assets: $1,998,656 • policy rights: $12,491,602 • goodwill: $28,869,482 6. On 16 July 2001, the taxpayer lodged its income tax return for the 2001 year of income. The taxpayer calculated its taxable income in the return on the basis that on the sale of the goodwill of the business it made a taxable capital gain of $28,869,482. 7. The taxpayer and the Commissioner agreed that: • for the purpose of subsection 104-10(3) of the ITAA 1997, the time of the disposal of the Business is taken to be 19 July 2000, the date of the Transfer of Business Agreement; and • but for the operation of subsection 104-10(3) of the ITAA 1997, the time of the disposal of the Business, within the meaning of subsection 104-10(2) of the ITAA 1997, would be January 2001, when the disposal actually occurred. 8. The taxpayer was a full self assessment taxpayer, within the meaning of subsection 6(1) of the ITAA 1936, in respect of the 2001 year of income. 9. Under subsection 166A(3) of the ITAA 1936, the assessment was taken to have been made on, and the notice of assessment served on, the taxpayer on 16 July 2001, the day the return was lodged. 10. By the operation of paragraph 204(1A)(b) of the ITAA 1936, the tax payable by the taxpayer for the 2001 year of income under the assessment became due and payable on 1 June 2001. 11. It was common ground between the parties that paragraph 170(2)(c) of the ITAA 1936 applied to the taxpayer in respect of the assessment for the year ended 30 June 2001. The four years in which the Commissioner could amend under that provision ended on 1 June 2005. 12. On 15 July 2005, more than 4 years after the tax became due and payable under the original assessment, the Commissioner issued to the taxpayer a notice of amended assessment for the 2001 year of income increasing the taxpayer's assessable income by $12,491,602 being the inclusion of the capital gain in relation to the disposal of the policy rights of the business in its assessable income. 13. The Commissioner had formed the view that subsection 170(10AA) provided the authority to amend the assessment and include the capital gain in relation to the disposal of the policy rights in assessable income. It was concluded that an amended assessment would be authorised as it was 'for the purpose of giving effect to ...' subsection 104 -10(3) of the ITAA 1997. | 1. The taxpayer, a resident of Australia, carried on a life insurance business in Taiwan. 2. Under section 18 of the Income Tax Assessment Act 1936 (ITAA 1936) the taxpayer adopted an accounting period ending 31 December in lieu of 30 June. Accordingly, the accounting period of the taxpayer for the year ended 30 June 2001 was the 12 month period that ended 31 December 2000 (the 2001 income year). 3. On 19 July 2000, the taxpayer and Fubon Life Assurance Co Limited (Fubon) entered into a Transfer of Business Agreement. On 16 November the taxpayer and Fubon entered into an Amended and Restated Transfer of Business Agreement (The Agreement). 4. Settlement of the Agreement occurred during January 2001. 5. The capital proceeds from the sale of the business amounted to $43,359,741which represented the following items: • net tangible assets: $1,998,656 • policy rights: $12,491,602 • goodwill: $28,869,482 6. On 16 July 2001, the taxpayer lodged its income tax return for the 2001 year of income. The taxpayer calculated its taxable income in the return on the basis that on the sale of the goodwill of the business it made a taxable capital gain of $28,869,482. 7. The taxpayer and the Commissioner agreed that: • for the purpose of subsection 104-10(3) of the ITAA 1997, the time of the disposal of the Business is taken to be 19 July 2000, the date of the Transfer of Business Agreement; and • but for the operation of subsection 104-10(3) of the ITAA 1997, the time of the disposal of the Business, within the meaning of subsection 104-10(2) of the ITAA 1997, would be January 2001, when the disposal actually occurred. 8. The taxpayer was a full self assessment taxpayer, within the meaning of subsection 6(1) of the ITAA 1936, in respect of the 2001 year of income. 9. Under subsection 166A(3) of the ITAA 1936, the assessment was taken to have been made on, and the notice of assessment served on, the taxpayer on 16 July 2001, the day the return was lodged. 10. By the operation of paragraph 204(1A)(b) of the ITAA 1936, the tax payable by the taxpayer for the 2001 year of income under the assessment became due and payable on 1 June 2001. 11. It was common ground between the parties that paragraph 170(2)(c) of the ITAA 1936 applied to the taxpayer in respect of the assessment for the year ended 30 June 2001. The four years in which the Commissioner could amend under that provision ended on 1 June 2005. 12. On 15 July 2005, more than 4 years after the tax became due and payable under the original assessment, the Commissioner issued to the taxpayer a notice of amended assessment for the 2001 year of income increasing the taxpayer's assessable income by $12,491,602 being the inclusion of the capital gain in relation to the disposal of the policy rights of the business in its assessable income. 13. The Commissioner had formed the view that subsection 170(10AA) provided the authority to amend the assessment and include the capital gain in relation to the disposal of the policy rights in assessable income. It was concluded that an amended assessment would be authorised as it was 'for the purpose of giving effect to ...' subsection 104 -10(3) of the ITAA 1997. | • net tangible assets: $1,998,656 • policy rights: $12,491,602 • goodwill: $28,869,482 | • for the purpose of subsection 104-10(3) of the ITAA 1997, the time of the disposal of the Business is taken to be 19 July 2000, the date of the Transfer of Business Agreement; and • but for the operation of subsection 104-10(3) of the ITAA 1997, the time of the disposal of the Business, within the meaning of subsection 104-10(2) of the ITAA 1997, would be January 2001, when the disposal actually occurred. | Issues decided by the court | At first instance | The issue before the Court at first instance was whether or not the amendment of the taxpayer's 2001 deemed notice of assessment of 16 July 2001, by the notice of amended assessment issued on 15 July 2005, was an amendment made within the meaning of subsection 170(10AA) of the ITAA 1936 for the purpose of giving effect to subsection 104-10(3) of the ITAA 1997. | On 29 April 2008, the Federal Court (Emmett J) dismissed the taxpayer's appeal. His Honour concluded that: • There is no rationale for saying that the Commissioner's power to amend in order to give effect to the deeming provided for in subsection 104-10(3) of the ITAA 1997 and other provisions listed in the Table in subsection 170(10AA)of the ITAA 1936 should depend on when a tax return, giving rise to a deemed assessment, is lodged by a taxpayer. • Parliament did not enact a provision that gave the Commissioner the power to amend during the four years after any subsequent event referred to in the Table. Instead Parliament provided, in order to give effect to any of the provisions in the Table, that the Commissioner could amend 'at any time'. | • There is no rationale for saying that the Commissioner's power to amend in order to give effect to the deeming provided for in subsection 104-10(3) of the ITAA 1997 and other provisions listed in the Table in subsection 170(10AA)of the ITAA 1936 should depend on when a tax return, giving rise to a deemed assessment, is lodged by a taxpayer. • Parliament did not enact a provision that gave the Commissioner the power to amend during the four years after any subsequent event referred to in the Table. Instead Parliament provided, in order to give effect to any of the provisions in the Table, that the Commissioner could amend 'at any time'. | The Full Court | On 3 October 2008, the Full Federal Court delivered a joint judgement allowing the taxpayer's appeal from the decision at first instance. | The Full Court considered that the answer to the matter turned on the meaning of the phrase in subsection 170(10AA) of ITAA 1936 'for the purpose of giving effect to'. | The Court was of the view that an amendment taking account of a CGT event or an amendment that relates to the consequences of the CGT event is not one which is necessarily an amendment of an assessment 'for the purpose of giving effect to' any of the provisions of the ITAA 1997 as set out in the table in subsection 170(10AA) of the ITAA 1936. | The Court found that, on the facts of this case, any work which subsection 104-10(3) of the ITAA 1997 had to do in 'backdating' the sale to the time of entry into the contract had been performed by 16 July 2001, the date of the original assessment. To now seek to amend the assessment so as to include as income the capital gain on the disposal of the policy rights would be doing more than giving effect to the operation of subsection 104-10(3). | In their Honours' view, the provisions set out in the table to subsection 170(10AA) of the ITAA 1936 reinforce their interpretation of the correct construction of subsection 170(10AA). In each of the examples in that table, power is given to the Commissioner to amend at any time an original assessment where a new fact occurs after the assessment and where certain provisions of the tax legislation would be frustrated if the Commissioner were not able to take the new facts into account by so amending the original assessment. | In addition they stated that in their view, subsection 170(10AA) of the ITAA 1936 was designed to address new facts which could occur at any time after the original assessment, enlivening the operation of subsection 104-10(3) of the ITAA 1997. In situations where the settlement occurs before the making of the assessment, s170(10AA) will generally have no work to do; this is because s104-10(3) will already have been taken into account by the Commissioner in his assessment. | The Court did not think that if subsection 170(10AA) item 30 only gave the Commissioner an unlimited power to amend in circumstances where settlement occurred after the lodgement of the return and deemed assessment, that this would give rise to an anomaly. Instead, the words 'for the purpose of giving effect to' were chosen deliberately to distinguish between a provision which would give an indefinite power to amend an assessment where the entering into, and settling of, a contract for the disposal of a CGT asset occurred at different times, and a provision which was necessary in order to simply effect a 'backdating' provision which would otherwise be entirely frustrated. Subsection 170(10AA) was only intended to do the latter.

Issues decided:
At first instance: The issue before the Court at first instance was whether or not the amendment of the taxpayer's 2001 deemed notice of assessment of 16 July 2001, by the notice of amended assessment issued on 15 July 2005, was an amendment made within the meaning of subsection 170(10AA) of the ITAA 1936 for the purpose of giving effect to subsection 104-10(3) of the ITAA 1997. On 29 April 2008, the Federal Court (Emmett J) dismissed the taxpayer's appeal. His Honour concluded that: • There is no rationale for saying that the Commissioner's power to amend in order to give effect to the deeming provided for in subsection 104-10(3) of the ITAA 1997 and other provisions listed in the Table in subsection 170(10AA)of the ITAA 1936 should depend on when a tax return, giving rise to a deemed assessment, is lodged by a taxpayer. • Parliament did not enact a provision that gave the Commissioner the power to amend during the four years after any subsequent event referred to in the Table. Instead Parliament provided, in order to give effect to any of the provisions in the Table, that the Commissioner could amend 'at any time'. • There is no rationale for saying that the Commissioner's power to amend in order to give effect to the deeming provided for in subsection 104-10(3) of the ITAA 1997 and other provisions listed in the Table in subsection 170(10AA)of the ITAA 1936 should depend on when a tax return, giving rise to a deemed assessment, is lodged by a taxpayer. • Parliament did not enact a provision that gave the Commissioner the power to amend during the four years after any subsequent event referred to in the Table. Instead Parliament provided, in order to give effect to any of the provisions in the Table, that the Commissioner could amend 'at any time'. | The Full Court: On 3 October 2008, the Full Federal Court delivered a joint judgement allowing the taxpayer's appeal from the decision at first instance. The Full Court considered that the answer to the matter turned on the meaning of the phrase in subsection 170(10AA) of ITAA 1936 'for the purpose of giving effect to'. The Court was of the view that an amendment taking account of a CGT event or an amendment that relates to the consequences of the CGT event is not one which is necessarily an amendment of an assessment 'for the purpose of giving effect to' any of the provisions of the ITAA 1997 as set out in the table in subsection 170(10AA) of the ITAA 1936. The Court found that, on the facts of this case, any work which subsection 104-10(3) of the ITAA 1997 had to do in 'backdating' the sale to the time of entry into the contract had been performed by 16 July 2001, the date of the original assessment. To now seek to amend the assessment so as to include as income the capital gain on the disposal of the policy rights would be doing more than giving effect to the operation of subsection 104-10(3). In their Honours' view, the provisions set out in the table to subsection 170(10AA) of the ITAA 1936 reinforce their interpretation of the correct construction of subsection 170(10AA). In each of the examples in that table, power is given to the Commissioner to amend at any time an original assessment where a new fact occurs after the assessment and where certain provisions of the tax legislation would be frustrated if the Commissioner were not able to take the new facts into account by so amending the original assessment. In addition they stated that in their view, subsection 170(10AA) of the ITAA 1936 was designed to address new facts which could occur at any time after the original assessment, enlivening the operation of subsection 104-10(3) of the ITAA 1997. In situations where the settlement occurs before the making of the assessment, s170(10AA) will generally have no work to do; this is because s104-10(3) will already have been taken into account by the Commissioner in his assessment. The Court did not think that if subsection 170(10AA) item 30 only gave the Commissioner an unlimited power to amend in circumstances where settlement occurred after the lodgement of the return and deemed assessment, that this would give rise to an anomaly. Instead, the words 'for the purpose of giving effect to' were chosen deliberately to distinguish between a provision which would give an indefinite power to amend an assessment where the entering into, and settling of, a contract for the disposal of a CGT asset occurred at different times, and a provision which was necessary in order to simply effect a 'backdating' provision which would otherwise be entirely frustrated. Subsection 170(10AA) was only intended to do the latter.

ATO view of decision:
The Commissioner accepts the Full Federal Court's interpretation of subsection 170(10AA) of the ITAA 1936. | Subsection 170(10AA) is intended to allow the Commissioner to amend an assessment in circumstances where the Commissioner would otherwise not be able to give effect to the specific CGT timing rule contained in subsection 104-10(3) because the time of the CGT event was outside the normal amendment period. | The facts of this case were that settlement of the contract had occurred prior to the original assessment and the backdating of the time of the CGT event to the date of entering into the contract [the specific CGT timing rule in subsection 104-10(3)] had been given effect to at the time of the original assessment. The Commissioner accepts that in these circumstances subsection 170(10AA) cannot be relied on to amend the assessment.

Administrative treatment:
Implications on current Public Rulings & Determinations | The Commissioner's power to amend pursuant to subsection 170(10AA) item 30 (ss104-10(3) of the ITAA 1936 was the subject of ATO ID 2007/78: Capital Gains Tax: amendment of assessments to give effect to the timing rule. | The view expressed in ATO ID 2007/78 was contrary to the Court decision and the ATO ID has been withdrawn.

Legislative references: Income Tax Assessment Act 1936 (Cth) 166A(3) 170 170(2)(c) 170(10AA) Income Tax Assessment Act 1997 (Cth) 104-10(1) 104-10(3)
Case references: Metlife Insurance Ltd v Commissioner of Taxation, reversed [2008] FCA 568 2008 ATC 20-025 70 ATR 125
Subject references: Income Tax amendment of assessments where backdating provision provides that time of CGT event is time of entering into contract rather than actual disposal of CGT asset where further provision allows amendment of assessment 'at any time' where amendment is 'for the purpose of giving effect to' backdating provision whether amended assessment was 'for the purpose of giving effect to' CGT backdating provision