Commissioner of Taxation v Futuris Corporation Limited: Schemes to reduce income tax

The recent case of Commissioner of Taxation v Futuris Corporation Limited [2012] FCAFC 32 (19 March 2012) has considered Income Tax Assessment Act 1936 (Cth) (ITAA 1936) Part IVA dealing schemes to reduce income tax.

  Background   In 1997 the respondent, Futuris Corporation Ltd (Futuris) decided to dispose of its Building Products Division and to do so by a public float of its wholly owned subsidiary, Walshville Holdings Pty Ltd (Walshville). In doing so it was necessary to transfer parts of the Building Products Division that were held by other companies in the Futuris Group to Walshville. Some of the steps by which this was achieved resulted in an increase in the cost base and the indexed cost base of Futuris’ shares in Walshville. This reduced Futuris’ assessable capital gain on the disposal of its shares in Walshville.   The Commissioner of Taxation (Commisioner) claimed that in this way Futuris obtained, or would have obtained but for the operation the ITAA 1936 Part IVA, which deals with schemes to reduce income tax; a tax benefit in connection with a scheme to which Part IVA applies. The Commissioner issued Futuris with an amended assessment for the year of income ending on 30 June 1998.   Futuris lodged an objection which the Commissioner disallowed. Further, by way of penalty, the Commissioner also assessed Futuris with additional tax of $1,493,101.62 being 5% of the amount by which the tax assessed by the Commissioner exceeds the amount that Futuris claimed was payable. Futuris appealed to the Federal Court against the Commissioner’s decision.   On 31 August 2010 Federal Court delivered reasons for judgment allowing the appeal and setting aside the Commissioner’s objection decision, remitting the matter to the Commissioner “to allow the applicant’s objection by excluding the amount of $82,950,090 from taxable income and excising the additional tax assessed by way of penalty”. With the exception of certain reserved costs, the Commissioner was ordered to pay Futuris’ costs to be taxed or agreed.

Issues

The Commissioner appealed from that judgment to the Full Court of the Federal Court. The key issues for consideration being whether:

• the disposal involved a scheme in connection with which the taxpayer obtained a tax benefit within ITAA 1936 ss 177C(1)(a) and 177D(a) 

• without such a scheme the taxpayer would, as a matter of reasonable expectation, have carried out disposal of building services division in a manner such that the amount of alleged tax benefit would not have been included in its assessable income

• the onus is on the taxpayer to prove the Commissioners assessment is excessive ( see Taxation Administration Act 1953 (Cth) s 14ZZO)

• the  taxpayer may attempt to discharge onus in its own way

• whether expert evidence led by taxpayer as to alternative scenario was “sufficiently reliable for it to be regarded as reasonable”. 

Result   In dismissing the Commissioner's appeal, the Full Court held that it will decide if onus on the taxpayer to prove the assessment is excessive, has been discharged by having regard to all the evidence before it:
“ . . .  We see no error in the primary judge accepting his evidence.  As we have 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 s 177C(1)(a) it is not necessary for us to consider the issues raised in the appeal and in Furturis’ notice of contention concerning s 177D(b) and dominant tax purpose.”  

Timebase's Income Tax Point in Time Service also allows subscribers to view complete histories of legislative provisions, compare and view changes over time and search for relevant content at any date. Please contact Timebase for a free trial.