Court dismisses dispute over capital allowance deductions
The Federal Court has ruled in favour of the ATO in a dispute concerning the restructure of an energy services company and a capital allowance deductions claim.
The Court handed down a decision late last week which determined whether a company, AusNet Services Limited, was entitled to an uplift in the cost bases of certain assets involved in a restructure.
The case examined whether AusNet Services Limited had made a valid rollover election under Division 615 of the Income Tax Assessment Act 1997.
The dispute between AusNet Services and the Commissioner involved the restructure of a stapled group, consisting of AusNet Services (Transmission) Limited (Transmission), AusNet Services Finance Trust (Finance) and AusNet Services (Distribution) Limited.
Each unit in Finance was linked (or stapled) to a share in Transmission and a share in Distribution such that none could be transferred or otherwise dealt with without the others.
Together, these stapled securities had been listed on the Australian and Singapore stock exchanges.
Following a series of schemes of arrangement, on 18 June 2015, AusNet Services Ltd acquired all of the shares in Transmission, the units in Finance and the shares in Distribution.
The former holders of the stapled securities became shareholders of AusNet Services. The Distribution company then became a subsidiary member of a TCG, with the applicant as the head company.
The Court determined whether the applicant was entitled to an uplift in the cost bases of the assets formerly held by the Distribution TCG.
An uplift in the cost bases would have increased the capital allowance deductions that could be claimed by AusNet Services.
The Commissioner submitted that AusNet Services had made a valid rollover election for Division 615 to apply, with the consequence that the applicant was not entitled to an increase in those cost bases.
AusNet Services disputed this, stating that the requirements of section 615-5(1)(c) and 615-20 could not be satisfied in relation to Distribution because of the characteristics of the company as the interposed company at the time of the Distribution scheme.
The applicant’s submission was that Div 615 was premised on a rollover involving a valuable or substantial original entity and the interposition of a company of nominal value, or ‘shelf company’.
It submitted that there had been a merger or amalgamation or reorganisation of two valuable entities because at the time of the Distribution scheme, the interposed company was not a shelf company.
AusNet Services stated that because it had, at that moment, already acquired the Transmission and Finance businesses, it was a company with a substantial market value.
Justice Lisa Hespe did not accept AusNet Services’ reliance on section 615-25(3) to support its contention that the interposed company must be a shelf company.
“Section 615-25(3) is a requirement that is additional to the other requirements of Div 615,” said Justice Hespe.
She noted that AusNet Services relied on the interaction between s 615-30(2) and ss 703-65 to 703-80 to demonstrate that if Div 615 was capable of applying to an interposed company that was not a “shelf company” but instead was a company with significant assets, anomalous results could arise.
“A consequence of the application of s 703-75 is that the actual history of the interposed entity is substituted with the history of the original entity. If the interposed entity had substantial assets prior to the completion time, and the requirements of s 615-30(2) could be satisfied, the tax history of those pre-existing assets would be lost,” said Ms Hespse.
“This hypothetical anomaly does not arise in the present case. There was no suggestion that s 615-30(2) could apply in the present case. That is because on any view, immediately after the Distribution scheme, the applicant was not the head company of a group that consisted only of the applicant and Distribution (together with Distribution’s subsidiaries).
“If there is a lacuna in the interaction of the consolidation rules and Div 615 when applied to a restructure of a stapled group, it is not a lacuna that is present here. Whilst s 615-30(2) was not satisfied in the present case, section 615-30(1) applied.”
Justice Hespe said a theoretical lacuna in the interaction of different complex divisions of the income tax legislative landscape enacted at different points in time was “not a sound basis for rejecting what otherwise seems to be the correct construction of the legislative text of Div 615”.
