Part IVA (general anti-avoidance rule) and tax consolidation

The Full Court of the Federal Court has recently removed previous doubts concerning whether Part IVA could be applied to a scheme involving the formation of a tax consolidated group.

In the case that was before the Full Court, a company (Subco) joined a tax consolidated group and as a result, obtained an uplift in the cost base of certain CGT assets held by that company. However almost immediately after Subco joined the tax consolidated group it sold the CGT assets to a third party. This resulted in a capital loss rather than a capital gain because of the uplift in the cost base of those CGT assets that was obtained upon the company joining the tax consolidated group.

Under the single entity rule applying to tax consolidated groups, for income tax purposes, the subsidiary companies are considered part of the head company. Therefore assessments are issued to the head company rather than the subsidiary companies.

Part IVA applies to a scheme if it would be concluded (having regard to 8 specified matters) that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling a taxpayer (a relevant taxpayer) to obtain a tax benefit in connection with the scheme or enabling the relevant taxpayer and another taxpayer (or other taxpayers) each to obtain a tax benefit in connection with the scheme whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer or is the other taxpayer or one of the other taxpayers.

Under Part IVA, the Commissioner may make a determination that the whole or a part of an amount that was not included in the assessable income of the taxpayer shall be included in the assessable income of the taxpayer where a tax benefit has been obtained, or would but for the determination of the Commissioner be obtained, by a taxpayer in connection with a scheme to which Part IVA applies.

The scheme was carried out before the recent amendments to Part IVA.

Under Part IVA in the form in which it was enacted at the time that the scheme in this case was carried out, in determining whether a tax benefit had been obtained, a comparison had to be made between what the identified scheme produced and what would have been produced under an alternative postulate or counterfactual. If the income tax was higher under the alternative postulate or counterfactual then a tax benefit was produced by the scheme.

In this case the alternative postulate or counterfactual of the Commissioner was that Subco would not have joined the consolidated group prior to selling the CGT assets and therefore would have sold the CGT assets with a lower cost base giving rise to a significant capital gain. Thus, but for the scheme, no tax benefit would have been obtained by Subco.

Therefore the Commissioner issued a determination that the subsidiary company had obtained a tax benefit and issued an assessment to the head company (Headco).

The problem with this was that any assessment made to give effect to the determination by the Commissioner under Part IVA that a tax benefit had been obtained by the taxpayer whether the assessment is issued to the taxpayer referred to in the determination or a different taxpayer, has to be consistent in all material respects, with the postulate upon which that determination was predicated. In other words, one cannot “give effect” to a determination by assessing someone whose only relationship with the taxpayer in the determination is denied by a postulate in connection with the scheme not being entered into and founding the determination.

In this case the assessment that was issued was not consistent with the postulate upon which that determination was predicated because under that postulate, Subco sold the CGT assets as a stand alone entity and not as part of a consolidated group.

Therefore the majority of the Full Court held that the issue of the assessment to Headco did not give effect to the determination by the Commissioner.

However by a majority the Full Court held that the single entity rule did not prevent the Commissioner issuing the determination and assessment to the subsidiary company even though at the time Subco was part of a consolidated group. Therefore the majority held that the Part IVA determination should be made by the Commissioner with respect to the Subco and the assessment issued with respect to that determination to Subco.