Commissioner of Taxation v Futuris Corporation Limited
Document type: Decision Impact Statement
Venue: Federal Court of Australia (SAD 139 of 2010)
Judgment date: 19 March 2012
Date published: 3 November 2016

Summary of decision:
Outlines the ATO's response to this decision concerning the application of the general anti-avoidance provisions to increase the net capital gain returned as a result of a public float.

Overview of facts:
This case concerns the amount of the net capital gain assessable to the taxpayer from the public float of the Futuris group's Building Products Division (BPD). | Futuris Corporation Limited (the taxpayer) undertook a complex series of steps prior to the public float of the BPD. As a result of those steps the value shifting provisions of Division 19A of the former Part IIIA of the Income Tax Assessment Act 1936 operated in such a way that there was an increase of $82.95m in the cost base of the shares in the float vehicle. This in turn resulted in the taxpayer returning a net capital gain of $9.7m. The Commissioner applied Part IVA of the Income Tax Assessment Act 1936 , identifying a primary scheme and an alterative scheme, and increased the taxpayer's assessable net capital gain by $82.95m. | At first instance the taxpayer put on expert evidence from a chartered accountant who specialises in corporate finance. The expert concluded that in the absence of the scheme identified by the Commissioner it was reasonable to expect that a different company in the group would have been the float vehicle and consequently a different entity in the group would have made the capital gain (referred to as Counterfactual 1). Evidence before the Court showed that the assessable net capital gain to this subsidiary would have been approximately $95.7m. | Federal Court decision | Besanko J, at first instance, accepted this evidence. His Honour found that in the absence of the scheme identified by the Commissioner the taxpayer would, as a matter of reasonable expectation, have carried out the sale of the BPD in accordance with Counterfactual 1. That led to the conclusion that the taxpayer did not obtain a tax benefit within the meaning of section 177C(1)(a) of the Income Tax Assessment Act 1936 . | However, his Honour also noted that if a tax benefit had been obtained in connection with the scheme identified by the Commissioner, then he would have concluded that the taxpayer had entered into the scheme for the dominant purpose of obtaining a tax benefit. | Additionally, his Honour decided a number of points of law raised by the taxpayer favourably to the Commissioner. Of particular interest are the following points. • The application of a specific anti-avoidance provision does not impliedly limit the operation of Part IVA. • The scheme identified by the Commissioner does not have to include the transaction that gives rise to the tax benefit. It is sufficient if the tax benefit arose in 'connection' with the scheme. • The Commissioner is not required to identify a counterfactual. • The taxpayer must show that "it would have undertaken or might reasonably be expected to undertake a particular activity in lieu of the scheme and that that activity would or might reasonably be expected to have resulted" in assessable income no more in amount than was returned by the taxpayer. • If, on the evidence, it is not possible to make a reliable prediction about the counterfactual, then the taxpayer must fail. • The question posed by section 177C (1) (a) is whether, because of the scheme, a particular amount has not been included as assessable income. It is not relevant to that question to consider whether the taxpayer's assessable income included some other amount, such as a dividend. Capital gains and dividends are different amounts. | • The application of a specific anti-avoidance provision does not impliedly limit the operation of Part IVA. • The scheme identified by the Commissioner does not have to include the transaction that gives rise to the tax benefit. It is sufficient if the tax benefit arose in 'connection' with the scheme. • The Commissioner is not required to identify a counterfactual. • The taxpayer must show that "it would have undertaken or might reasonably be expected to undertake a particular activity in lieu of the scheme and that that activity would or might reasonably be expected to have resulted" in assessable income no more in amount than was returned by the taxpayer. • If, on the evidence, it is not possible to make a reliable prediction about the counterfactual, then the taxpayer must fail. • The question posed by section 177C (1) (a) is whether, because of the scheme, a particular amount has not been included as assessable income. It is not relevant to that question to consider whether the taxpayer's assessable income included some other amount, such as a dividend. Capital gains and dividends are different amounts. | Issues decided by the Full Federal Court | The Court noted that the definition of 'tax benefit' in section 177C(1)(a) requires that there be a prediction as to what 'might reasonably be expected to have been included in the assessable income of the taxpayer' in the absence of the scheme. That prediction necessarily involves an opinion as to events and transactions that have not taken place. It must be not just a possibility but 'sufficiently reliable for it to be regarded as reasonable': Peabody . | It is for the taxpayer to establish that there is no tax benefit in connection with the scheme (see [62]). The Commissioner is under no obligation to adduce evidence about transactions to which he is a stranger: it is the taxpayer who must establish why an assessment is excessive ([55] and [62]). The '... taxpayer may seek to prove in its own way, that the assessment is excessive' ([62]). Ultimately, it is for the Court to make the '... objective determination of the alternative postulate' ([62] quoting from the decision in FC of T Trail Bros Steel & Plastic Ltd (2010) 186 FCR 410). In some cases the Court may need to decide if there is sufficient evidence to allow such a determination to be made. That is, whether the taxpayer has met its evidential onus. In this context the weight to be given to the taxpayer's expert witness '... must be assessed in the context of other evidence adduced by Futuris' ([68]). | The Court found that direct evidence of contemporaneous consideration of the alternative postulate is not the only way to establish the reliability of a prediction ([80]). The expert's evidence was relevant and persuasive and there was no error in the primary judge accepting his evidence ([81]). | The Court found that the primary judge was correct in concluding that there was no tax benefit in connection with the primary scheme or the alternative scheme within section 177C(1)(a). | The Court found it unnecessary to consider dominant tax purpose under section 177D(b) in view of its decision that the primary judge was correct that there was no tax benefit. | The Full Court's decision did not directly overturn any of the primary judge's rulings on the other points of law raised by the taxpayer.

Issues decided:
The Court noted that the definition of 'tax benefit' in section 177C(1)(a) requires that there be a prediction as to what 'might reasonably be expected to have been included in the assessable income of the taxpayer' in the absence of the scheme. That prediction necessarily involves an opinion as to events and transactions that have not taken place. It must be not just a possibility but 'sufficiently reliable for it to be regarded as reasonable': Peabody . It is for the taxpayer to establish that there is no tax benefit in connection with the scheme (see [62]). The Commissioner is under no obligation to adduce evidence about transactions to which he is a stranger: it is the taxpayer who must establish why an assessment is excessive ([55] and [62]). The '... taxpayer may seek to prove in its own way, that the assessment is excessive' ([62]). Ultimately, it is for the Court to make the '... objective determination of the alternative postulate' ([62] quoting from the decision in FC of T Trail Bros Steel & Plastic Ltd (2010) 186 FCR 410). In some cases the Court may need to decide if there is sufficient evidence to allow such a determination to be made. That is, whether the taxpayer has met its evidential onus. In this context the weight to be given to the taxpayer's expert witness '... must be assessed in the context of other evidence adduced by Futuris' ([68]). The Court found that direct evidence of contemporaneous consideration of the alternative postulate is not the only way to establish the reliability of a prediction ([80]). The expert's evidence was relevant and persuasive and there was no error in the primary judge accepting his evidence ([81]). The Court found that the primary judge was correct in concluding that there was no tax benefit in connection with the primary scheme or the alternative scheme within section 177C(1)(a). The Court found it unnecessary to consider dominant tax purpose under section 177D(b) in view of its decision that the primary judge was correct that there was no tax benefit. The Full Court's decision did not directly overturn any of the primary judge's rulings on the other points of law raised by the taxpayer.

ATO view of decision:
The appeal focused on whether there was sufficient relevant and persuasive evidence to allow the primary judge to make his finding in respect of section 177C. | The Full Court's decision turned largely on the question as to whether the taxpayer has met its onus to establish that there was no tax benefit in connection with the scheme. The Full Court concluded that the judge at first instance was correct in concluding that the onus had been met. That is, the case turned on the weight to be given to the evidence, and as such does not appear to have significant implications for other cases. | The Full Court's decision is one of a number of recent Federal Court decisions on the principles to be applied in determining whether a tax benefit is obtained in connection with a scheme. See the ATO's decision impact statement for Commissioner of Taxation v RCI Pty Ltd. | The decision did not overturn any of the findings at first instance on points of law raised by the taxpayer. | The Government has announced that it will introduce amending legislation, with effect from 1 March 2012, dealing with the operation of the 'tax benefit' provisions of Part IVA.

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

Legislative references: Income Tax Assessment Act 1936 Part IIIA Division 19A Part IVA 177B(1) 177C(1) 177C(1)(a) 177D(a) 177D(b) 177F 160ZZO Taxation Administration Act 1953 14ZZO
Case references: Commissioner of Taxation v Consolidated Press Holdings Ltd (No 1) (1999) 91 FCR 524 99 ATC 4945 (1999) 42 ATR 575 Commissioner of Taxation v Hart (2004) 217 CLR 216 2004 ATC 4599 (2004) 55 ATR 712 Commissioner of Taxation v Trail Bros Steel & Plastic Ltd (2009) 75 ATR 916 2009 ATC 20-141 [2009] FCA 1210 Federal Commissioner of Taxation v Lenzo (2008) 167 FCR 255 [2008] FCAFC 50 2008 ATC 20-014 Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359 94 ATC 4663 28 ATR 344 Federal Commissioner of Taxation v Spotless Services Limited (1996) 186 CLR 404 (1996) 34 ATR 183 96 ATC 5201 (1996) 141 ALR 92 Federal Commissioner of Taxation v Trail Bros Steel & Plastics Pty Ltd (2010) 186 FCR 410 2010 ATC 20-198 (2010) 79 ATR 780 Futuris Corporation Limited (ACN 004 336 636) v Commissioner of Taxation (2009) 75 ATR 365 [2009] FCA 600 2009 ATC 20-115 Futuris Corporation Limited ACN 004 336 636 v Commissioner of Taxation [2010] FCA 935 2010 ATC 20-206 (2010) 80 ATR 330