Decision Impact Statement
Peter Cumins v Commissioner of Taxation
 FCAFC 21
2007 ATC 4303
66 ATR 57
Venue: Full Federal Court
Venue Reference No: WAD 53 of 2006
Judge Name: Ryan, Tamberlin and Middleton JJ
Judgment date: 2 March 2007
Appeals on foot:
Administrative Treatment (Implication on current Public Rulings and Determinations)
PS LA 2005/24 - Application of General Anti-avoidance Rules
applicability of Part IVA of the Income Tax Assessment Act 1936
whether Tribunal failed to properly exercise its discretion under s 177F
whether Tribunal found a 'tax benefit' without proper consideration of the alternative transactions
This document is not a public ruling, but provides a statement of the Commissioner's position in relation to the decision and how the law will be administered as a consequence of the decision. Any proposals for changes in the law are matters for government and it is not appropriate for the Commissioner to comment.
Outlines the Tax Office's response to this case which concerned the sale of listed shares by the taxpayer as trustee of one trust to himself as trustee of another trust to crystallise a loss and to entirely offset a capital gain made the previous day.
Brief Summary of Facts
1. On 11 June 1998 the appellant, in his capacity as trustee of a family discretionary trust ('Trust 1'), disposed of shares and made a capital gain of $787,375. On 12 June 1998 the appellant also became the trustee of a separate family discretionary trust ('Trust 2'). Trust 2 had only been settled that day. While not identical the 'objects' of the two trusts were substantially the same. The appellant had the sole control of both trusts.
2. On 12 June 1998 the appellant as trustee of Trust 1 sold 8 million shares to the appellant as trustee of Trust 2. The shares were at all relevant times mortgaged by Trust 1 to secure a bank loan and were registered in the bank's name. The bank was not informed of the sale and the purchase price was not paid. This share sale resulted in the appellant as trustee for Trust 1 making a capital loss of $800,000 which completely offset the capital gain made the previous day.
3. The Commissioner increased the net capital gain included in the trust's assessable income by $800,000. The Commissioner relied upon a number of grounds including a Part IVA determination.
4. The Tribunal found that the appellant had obtained a tax benefit connected to the scheme identified by the respondent and that a reasonable person would conclude that the sole purpose of the appellant in carrying out the scheme was to obtain the tax benefit and affirmed the respondent's Part IVA determination.
5. On appeal from the Tribunal to the Federal Court, Justice Nicholson held that the Tribunal had properly exercised its discretion under Pt IVA as it found that the capital loss was a tax benefit associated with the scheme and had regard to the eight matters in paragraph 177D(b) in concluding that the appellant carried out the scheme to obtain a tax benefit. His Honour held that Part IVA may apply even where a scheme is 'genuine or directed at crystallising a loss'; although he noted that in this case no economic loss was suffered and the beneficial ownership of the shares did not change. His Honour also rejected the appellant's contention that the Tribunal erred by not taking into account two rulings relating to 'wash sales' as they were not relevant and also rejected the contention that the Tribunal had not adequately considered alternative transactions open to the appellant.
6. The appellant appealed to the Full Federal Court.
Issues decided by the Court or Tribunal
The Full Federal Court delivered a joint judgment dismissing the appeal.
The Court considered that the Tribunal had properly exercised its power under subsection 177F(1). The court held that once the conclusion under section 177D was reached there was no 'super-imposed obligation' to take into account other matters when deciding whether to cancel a tax benefit.
The Court observed that Pt IVA applies to 'genuine' transactions and that, in any event, the genuineness of the transaction is not an issue to be considered under Part IVA. (The transaction was a 'genuine' transaction in the sense that it was not a sham, and the shares had depreciated in value. In making this observation the Court did not mean 'genuine' in the sense of an un-contrived, commercial dealing.) The Court also agreed that the two rulings relating to 'wash sales' were not relevant to the issues at hand.
The Court held that the Tribunal was entitled to conclude that the suggested alternative arrangements could not have been expected to take place as it was not satisfied on the evidence that the Bank would have consented to these alternative arrangements. The Court noted that because the statutory onus lay on the appellant the Tribunal was entitled to reach the conclusion it did.
It also held that the Tribunal had properly considered the issues relating to remission of additional tax imposed under subsection 227(3). The Tribunal's conclusion that it was not reasonably arguable that Part IVA did not apply to the scheme was in accordance with settled principle and open to the Tribunal.
Tax Office view of Decision
The Court's decision confirms that under subsection 177F(1) the Commissioner is empowered or entitled to cancel a tax benefit if the requirements in section 177D are satisfied.
The Court observed at  that the term 'may' in subsection 177F(1) is used in the sense of a power of the Commissioner that arises when the requirements in section 177D are satisfied. There is no further "over-arching" or final discretion to be exercised by the Commissioner independently under subsection 177F(1).
Thus, the decision to cancel a tax benefit under subsection 177F(1) does not involve two stages. Once the Commissioner is empowered to cancel a tax benefit because the requirements in section 177D are satisfied, there is no further opinion he has to form. It follows that the power to cancel a tax benefit under subsection 177F(1) may be discretionary in the sense that it is not compulsory for the Commissioner to exercise the power, but it is not discretionary in the sense of being dependent on his forming an opinion, or state of satisfaction which could be subject to judicial review.
The conclusion reached by the Court in this respect is consistent with Hill J's reasoning (with whom Carr and Hely JJ agreed in this respect) in FC of T v Sleight  FCAFC 94 that subsection 177F(1) permits the Commissioner in his discretion to determine that part only of a tax benefit be cancelled.
The Court's reasoning regarding the nature of the Commissioner's power under subsection 177F(1) is considered equally applicable to the power of the Commissioner to negate a GST benefit under section 165-40 in Division 165 of the A New Tax System (Goods and Services Tax) Act 1999.
Implications on current Public Rulings & Determinations
None directly affected by the decision.
Implications on Law Administration Practice Statements
The Commissioner's Law Administration Practice Statement PS LA 2005/24: Application of General Anti-avoidance Rules will be revised to include the Court's comments on the nature of the Commissioner's discretion under subsection 177F(1) which in turn will impact on the application of Division 165 of the A New Tax System (Goods and Services Tax) Act 1999.
We invite you to advise us if you feel this decision has consequences we have not identified, or if a precedential decision such as a Public Ruling or an ATO ID requires reconsideration or amendment. Please forward your comments to the contact officer.
| Date Issued:
|| 28 May 2007
| Due Date:
|| 23 July 2007
| Contact officer:
|| Deborah Vegar
| Email address:
|| (02) 9374 2872
|| (02) 9374 2137
|| Australian Taxation Office, GPO Box 9990, Sydney NSW 2001
Income Tax Assessment Act 1936
Pt IVA, ss 177C
Income Tax Assessment Act 1997
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