Financial Synergy Holdings Pty Ltd v Federal Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Federal Court of Australia (VID 88 of 2015; M46 of 2016)
Judgment date: 10 March 2016
Date published: 17 January 2017

Summary of decision:
Outlines the ATO's response to this case which concerns whether the deeming rule in subsection 122-70(3) of the Income Tax Assessment Act 1997 (ITAA 1997) operates only to preserve the pre-CGT status of an asset subject to a Subdivision 122-A roll-over or also determines the time the asset is acquired for the purpose of calculating its cost base under paragraph 110-25(2)(b) of the ITAA 1997.

Overview of facts:
A trustee of a family trust acquired units in the Financial Synergy Unit Trust (the unit trust) before 20 September 1985 (pre-CGT units). The market value of the units in the unit trust as at 1 July 1985 was $1,560,649. | On 29 June 2007 the trustee disposed of all of its pre-CGT units to Financial Synergy Holdings Pty Ltd (the taxpayer) in consideration of the issue of 30 million shares at $1 each by the taxpayer. The trustee chose to obtain CGT roll-over relief under Subdivision 122-A of the ITAA 1997 in respect of this disposal. | The taxpayer formed a consolidated group with effect from 1 July 2007, comprising itself, the unit trust and number of other entities. The cost base of the units in the unit trust determined under paragraph 110-25(2)(b) of the ITAA 1997 became the amount in item 1 in the table in subsection 705-65 of the ITAA 1997 for step 1 in working out the allocable cost amount for the unit trust as an entity joining a consolidated group. The taxpayer lodged tax returns for the 2008 to 2013 income years on the basis that the cost base of the pre-CGT units acquired on 29 June 2007 was $30 million. | In Financial Synergy Holdings Pty Ltd v Commissioner of Taxation [2015] FCA 53 the primary judge held that the time of acquisition for the purpose of calculating the cost base of the pre-CGT units under paragraph 110-25(2)(b) of the ITAA 1997 was deemed by subsection 122-70(3) of the ITAA 1997 to be before 20 September 1985 rather than the actual date of acquisition of 29 June 2007. | Issues decided by the court | The main issue before the Full Federal Court was whether the cost base of the units was the market value of the taxpayer's shares issued in consideration for the pre-CGT units as at 29 June 2007 or at a date before 20 September 1985 by virtue of subsection 122-70(3) of the ITAA 1997. | Middleton and Davies JJ (with Logan J agreeing) concluded that the time of acquisition of the units in the unit trust was 29 June 2007 because: • the reference to an acquisition time of an asset being "before 20 September 1985" in subsection 122-70(3) of the ITAA 1997 is used in contradistinction to an asset being acquired on or after 20 September 1985 which is provided with a cost base under subsection 122-70(2). The legislative scheme is to exempt pre-CGT assets from the operation of the CGT provisions. The purpose served by subsection 122-70(3) is to preserve the pre-CGT status of an asset which has been rolled-over. The function of the deeming provision does not need to extend beyond that purpose in the context of Division 122: Commissioner of Taxation v Comber (1986) 10 FCR 88 at 96 [34] ; • the definition of 'acquire' in section 995-1 of the ITAA 1997 does not extend the ambit of the deeming provision. The time deemed by subsection 122-70(3) does not govern the time of acquisition for the purposes of applying the meaning of 'acquire' under section 995-1 and subsection 110-25(2). Subdivision 109-B is not an operative part of the ITAA 1997 and does not of its own force govern the time of acquisition for the purposes of subsection 110-25(2) [35]; and • the legislature specifically introduced section 716-855 of the ITAA 1997 to contain a special rule for consolidated groups in relation to Subdivision 126-B roll-overs and it was telling against the Commissioner's construction that there was no such cognate provision in respect of a Division 122 roll-over [36]. | • the reference to an acquisition time of an asset being "before 20 September 1985" in subsection 122-70(3) of the ITAA 1997 is used in contradistinction to an asset being acquired on or after 20 September 1985 which is provided with a cost base under subsection 122-70(2). The legislative scheme is to exempt pre-CGT assets from the operation of the CGT provisions. The purpose served by subsection 122-70(3) is to preserve the pre-CGT status of an asset which has been rolled-over. The function of the deeming provision does not need to extend beyond that purpose in the context of Division 122: Commissioner of Taxation v Comber (1986) 10 FCR 88 at 96 [34] ; • the definition of 'acquire' in section 995-1 of the ITAA 1997 does not extend the ambit of the deeming provision. The time deemed by subsection 122-70(3) does not govern the time of acquisition for the purposes of applying the meaning of 'acquire' under section 995-1 and subsection 110-25(2). Subdivision 109-B is not an operative part of the ITAA 1997 and does not of its own force govern the time of acquisition for the purposes of subsection 110-25(2) [35]; and • the legislature specifically introduced section 716-855 of the ITAA 1997 to contain a special rule for consolidated groups in relation to Subdivision 126-B roll-overs and it was telling against the Commissioner's construction that there was no such cognate provision in respect of a Division 122 roll-over [36].

Issues decided:
The main issue before the Full Federal Court was whether the cost base of the units was the market value of the taxpayer's shares issued in consideration for the pre-CGT units as at 29 June 2007 or at a date before 20 September 1985 by virtue of subsection 122-70(3) of the ITAA 1997. Middleton and Davies JJ (with Logan J agreeing) concluded that the time of acquisition of the units in the unit trust was 29 June 2007 because: • the reference to an acquisition time of an asset being "before 20 September 1985" in subsection 122-70(3) of the ITAA 1997 is used in contradistinction to an asset being acquired on or after 20 September 1985 which is provided with a cost base under subsection 122-70(2). The legislative scheme is to exempt pre-CGT assets from the operation of the CGT provisions. The purpose served by subsection 122-70(3) is to preserve the pre-CGT status of an asset which has been rolled-over. The function of the deeming provision does not need to extend beyond that purpose in the context of Division 122: Commissioner of Taxation v Comber (1986) 10 FCR 88 at 96 [34] ; • the definition of 'acquire' in section 995-1 of the ITAA 1997 does not extend the ambit of the deeming provision. The time deemed by subsection 122-70(3) does not govern the time of acquisition for the purposes of applying the meaning of 'acquire' under section 995-1 and subsection 110-25(2). Subdivision 109-B is not an operative part of the ITAA 1997 and does not of its own force govern the time of acquisition for the purposes of subsection 110-25(2) [35]; and • the legislature specifically introduced section 716-855 of the ITAA 1997 to contain a special rule for consolidated groups in relation to Subdivision 126-B roll-overs and it was telling against the Commissioner's construction that there was no such cognate provision in respect of a Division 122 roll-over [36]. • the reference to an acquisition time of an asset being "before 20 September 1985" in subsection 122-70(3) of the ITAA 1997 is used in contradistinction to an asset being acquired on or after 20 September 1985 which is provided with a cost base under subsection 122-70(2). The legislative scheme is to exempt pre-CGT assets from the operation of the CGT provisions. The purpose served by subsection 122-70(3) is to preserve the pre-CGT status of an asset which has been rolled-over. The function of the deeming provision does not need to extend beyond that purpose in the context of Division 122: Commissioner of Taxation v Comber (1986) 10 FCR 88 at 96 [34] ; • the definition of 'acquire' in section 995-1 of the ITAA 1997 does not extend the ambit of the deeming provision. The time deemed by subsection 122-70(3) does not govern the time of acquisition for the purposes of applying the meaning of 'acquire' under section 995-1 and subsection 110-25(2). Subdivision 109-B is not an operative part of the ITAA 1997 and does not of its own force govern the time of acquisition for the purposes of subsection 110-25(2) [35]; and • the legislature specifically introduced section 716-855 of the ITAA 1997 to contain a special rule for consolidated groups in relation to Subdivision 126-B roll-overs and it was telling against the Commissioner's construction that there was no such cognate provision in respect of a Division 122 roll-over [36].

ATO view of decision:
The Full Federal Court has clarified the scope of the deeming rule in subsection 122-70(3) of the ITAA 1997. This deeming rule only applies for the purpose of exempting pre-CGT assets from the operation of the CGT provisions. The deeming rule does not determine the acquisition time for the purpose of calculating the cost base of a pre-CGT asset under paragraph 110-25(2)(b) of the ITAA 1997. | Implications for advice or guidance | ATO ID 2014/14 was withdrawn on 13 January 2017. This ATO ID contained a view that subsection 122-70(3) of the ITAA 1997 determines the acquisition time of a pre-CGT asset for the purpose of calculating its cost base under paragraph 110-25(2)(b) of the ITAA 1997. That view was found to be incorrect by the Full Federal Court in this case. | Implications for impacted Law Administration Practice Statements | Nil | Date of Amendment Part Comment 17 January 2017 Implications for impacted advice or guidance Updated to advise the withdrawal of ATO ID 2014/14.

Administrative treatment:

Legislative references: Income Tax Assessment Act 1997 Div 109 Div 110 Subdiv 109-B Subdiv 110-A Subdiv 122-A Subdiv 126-B 102-20 104-5 104-10 109-5 109-50 109-55 110-25(2) 122-15 122-20 122-40 122-70 701-1 701-10 705-10 705-60 705-65 716-855 950-100 950-150 995-1(1)
Case references: Commissioner of Taxation v Comber (1986) 10 FCR 88 (1986) 17 ATR 413 86 ATC 4171 Cooper Brookes (Wollongong) Pty Ltd v Commissioner of Taxation (1981) 147 CLR 297 (1981) 11 ATR 949 81 ATC 4292
Other references: ATO ID 2014/14