Federal Commissioner of Taxation v Citigroup Pty Ltd
Document type: Decision Impact Statement
Venue: Federal Court of Australia (NSD 1016/1117 of 2010)
Judgment date: 10 May 2011
Date published: 22 February 2013

Summary of decision:
Outlines the ATO's response to this case which concerns the application of Part IVA to foreign tax credits (FTC) arising from tax paid in Hong Kong on a bond transaction and whether the taxpayer is liable to pay general interest charge (GIC) on the disallowed FTC.

Overview of facts:
In essence, the transaction involved a Hong Kong partnership set up by the taxpayer and one of its wholly owned subsidiaries borrowing funds and investing in a 5 year bond issued by Healthcote, a Hong Kong incorporated Citigroup special purpose company. | The partnership then sold the coupons on the bond to the Bank of China (BOC) and returned the gross proceeds on the sale in Hong Kong. Tax was paid in Hong Kong by the partners. | The complex structured transaction enabled BOC to claim a tax deduction in Hong Kong and Citigroup Pty Ltd to return income in Australia against which a foreign tax credit was claimed. | Issues decided by the court | Whether Part IVA applies to cancel the benefit of foreign tax credits claimed by the taxpayer. | If Part IVA does apply, whether the taxpayer is liable to pay the general interest charge (GIC) on the increased tax liability from the date that tax was due and payable. | Part IVA appeal | In NSD 1117 of 2010, the Full Federal Court dismissed the taxpayer's appeal, confirming the decision of the primary judge that Part IVA applies to cancel the benefit of the foreign tax credits claimed by the taxpayer. | The Court concluded that 'obtaining a foreign tax credit ... was more than a condition of the viability of the scheme: it was ultimately the commercial engine which drove the scheme'. The Court was satisfied that the taxpayer's dominant purpose for entering into and carrying out the scheme was to obtain the foreign tax credit generated by the payment of Hong Kong tax on the sale of the interest coupons. | GIC appeal | The Court dismissed the Commissioner's appeal in the s 39B proceedings (NSD 1116 of 2010), confirming the decision of the primary judge that s 204(3) of the Income Tax Assessment Act 1936 (1936 Act) did not impose the general interest charge in the facts of the present case. | The Court accepted the taxpayer's argument that the Commissioner had applied the foreign tax credits to discharge the taxpayer's liability and the taxpayer was deemed to have paid the tax against which the credits were applied. Therefore, there was no tax that 'remained unpaid' within the meaning of s 204(3). The Commissioner's remedy was in section 160AN(5) of the 1936 Act, which entitled him to recover the amount of the excess 'as if it were ... tax due and payable', but did not deem the excess to be tax. | The Court concluded that the statutory scheme is such that, upon the application of a credit to a tax liability, the tax is deemed to have been paid by virtue of section 160AN(3), and the later amendment of the relevant foreign tax credit determination does not undo that. However, the excess credits can be recovered under section 160AN(5).

Issues decided:
Whether Part IVA applies to cancel the benefit of foreign tax credits claimed by the taxpayer. If Part IVA does apply, whether the taxpayer is liable to pay the general interest charge (GIC) on the increased tax liability from the date that tax was due and payable. | Part IVA appeal: In NSD 1117 of 2010, the Full Federal Court dismissed the taxpayer's appeal, confirming the decision of the primary judge that Part IVA applies to cancel the benefit of the foreign tax credits claimed by the taxpayer. The Court concluded that 'obtaining a foreign tax credit ... was more than a condition of the viability of the scheme: it was ultimately the commercial engine which drove the scheme'. The Court was satisfied that the taxpayer's dominant purpose for entering into and carrying out the scheme was to obtain the foreign tax credit generated by the payment of Hong Kong tax on the sale of the interest coupons. | GIC appeal: The Court dismissed the Commissioner's appeal in the s 39B proceedings (NSD 1116 of 2010), confirming the decision of the primary judge that s 204(3) of the Income Tax Assessment Act 1936 (1936 Act) did not impose the general interest charge in the facts of the present case. The Court accepted the taxpayer's argument that the Commissioner had applied the foreign tax credits to discharge the taxpayer's liability and the taxpayer was deemed to have paid the tax against which the credits were applied. Therefore, there was no tax that 'remained unpaid' within the meaning of s 204(3). The Commissioner's remedy was in section 160AN(5) of the 1936 Act, which entitled him to recover the amount of the excess 'as if it were ... tax due and payable', but did not deem the excess to be tax. The Court concluded that the statutory scheme is such that, upon the application of a credit to a tax liability, the tax is deemed to have been paid by virtue of section 160AN(3), and the later amendment of the relevant foreign tax credit determination does not undo that. However, the excess credits can be recovered under section 160AN(5).

ATO view of decision:
The Commissioner did not seek special leave to appeal from the decision of the Full Court to the High Court in regards to the GIC. The Court has authoritatively decided that sub-section 204(3) of the 1936 Act did not have operation in the case of an amended foreign tax credits determination.

Administrative treatment:
The foreign tax credits regime under Division 19 of Part III of the 1936 Act, including the procedure of making foreign tax credit determinations, has been repealed from 24 September 2007 (applying to income years commencing on or after 1 July 2008). | It has been replaced by the foreign income tax offset regime, under which a foreign income tax offset directly impacts the amount of income tax payable by an entity. | As such, the decision of the Full Court has no ongoing impact in relation to the imposition of GIC for disallowed foreign income tax offsets. | Implications for ATO precedential documents (Public Rulings & Determinations etc) | Nil | Implications for Law Administration Practice Statements | Nil

Legislative references: Income Tax Assessment Act 1936 PtIVA 204(3) 160AF(1) 160AI(1) 160AI(2) 160AK 160AIA 160AJA 160AN 160AN(5)
Subject references: Income Tax Foreign tax credits Foreign tax credits arising from tax avoidance scheme Part IVA scheme General interest charge GIC payment date GIC liability