FEDERAL COURT OF AUSTRALIA Hastie Group Ltd v Commissioner of Taxation [2008] FCAFC 187 TAXATION – appeal against disallowance of objection to private ruling – consolidation regime – imputation system – provisions quarantining franking credits of companies effectively owned by non-residents – interaction of consolidation regime with imputation system as relating to transfer of franking credits upon acquisition of one consolidated tax group by another – whether exempting status of corporate tax entity as a member of one consolidated group is inherited and maintained for the purpose of assessing the status of another consolidated group which it later joins WORDS AND PHRASES – "exempting entity", "former exempting entity", "no-status entity" Income Tax Assessment Act 1936 (Cth) Div 2A, Pt IIIAA Income Tax Assessment Act 1997 (Cth) Pts 3-6, 3-90; Divs 208, 700, 701, 703, 705, 709; ss 208-50, 709-60, 709-150 to 709-165, 995-1 Taxation Administration Act 1953 (Cth) Div 359 of Sch 1 Commonwealth v Genex Corp Pty Ltd (1992) 176 CLR 277 cited Federal Commissioner of Taxation v Comber (1986) 10 FCR 88 cited FCT v McMahon (1997) 79 FCR 127 followed Handbury Holdings Pty Ltd v Commissioner of Taxation [2008] FCA 1787 cited Hastie Group Limited v Commissioner of Taxation [2008] FCA 444 affirmed Lamont v FCT (2005) 144 FCR 312 cited Marshall (Inspector of Taxes) v Kerr [1995] 1 AC 148 cited Wiest v Director of Public Prosecutions (1988) 23 FCR 472 cited HASTIE GROUP LTD, HASTIE HOLDINGS PTY LTD, AUSTRAL REFRIGERATION HOLDINGS PTY LTD and AUSTRAL REFRIGERATION PTY LTD v COMMISSIONER OF TAXATION NSD 585 of 2008 RYAN, GORDON & FOSTER JJ 9 DECEMBER 2008 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NSD 585 of 2008 ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: HASTIE GROUP LTD First Appellant HASTIE HOLDINGS PTY LTD Second Appellant AUSTRAL REFRIGERATION HOLDINGS PTY LTD Third Appellant AUSTRAL REFRIGERATION PTY LTD Fourth Appellant AND: COMMISSIONER OF TAXATION Respondent JUDGES: RYAN, GORDON & FOSTER JJ DATE OF ORDER: 9 DECEMBER 2008 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The appeal be dismissed. 2. The appellants pay the respondent's costs of and incidental to the appeal. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using eSearch on the Court's website. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NSD 585 of 2008 ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: HASTIE GROUP LTD First Appellant HASTIE HOLDINGS PTY LTD Second Appellant AUSTRAL REFRIGERATION HOLDINGS PTY LTD Third Appellant AUSTRAL REFRIGERATION PTY LTD Fourth Appellant AND: COMMISSIONER OF TAXATION Respondent JUDGES: RYAN, GORDON & FOSTER JJ DATE: 9 DECEMBER 2008 PLACE: SYDNEY REASONS FOR JUDGMENT THE COURT: Introduction 1 This appeal concerns the disallowance of the Appellants' objection against a private ruling issued by the Commissioner of Taxation ("the Commissioner") under Div 359 of Sch 1 of the Taxation Administration Act 1953 (Cth) ("the TAA") in respect of the 30 June 2004 and 30 June 2005 years of income. 2 Under Div 359, a taxpayer (or in this case, a group of taxpayers) may make application to the Commissioner for a private ruling "on the way in which the Commissioner considers a relevant provision applies or would apply" to that taxpayer or those taxpayers in relation to a specified "scheme": ss 359-5 and 359-20(2). 3 The private ruling issued by the Commissioner must identify the entity or entities to which it applies and specify the relevant "scheme" and the relevant provision to which it relates: s 359-20 (see also s 995-1 of the Income Tax Assessment Act 1997 (Cth) ("the ITAA97") for the definition of "scheme"). It is the specified "scheme" and only the specified "scheme" which the Court considers on appeal: FCT v McMahon (1997) 79 FCR 127, 144 and Lamont v FCT (2005) 144 FCR 312, 318. As Lockhart J said in McMahon (at 133), When making a private ruling the Commissioner does not make findings of fact. He simply identifies facts and then states his opinion about the way in which the relevant tax laws apply to the applicant in relation to those identified facts. Private ruling the subject of the appeal 4 The Appellants were the applicants for the private ruling. The "relevant tax laws" concern aspects of the consolidation regime in Pt 3-90 of the ITAA97 and its interaction with the imputation system in Pt 3-6 of the ITAA97. It will be necessary to return to consider these provisions in further detail later in these reasons for decision. The "scheme" identified in the private ruling is set out in Schedule "A". 5 Although the whole of the "scheme" is of course relevant, for present purposes it is sufficient to emphasise the following facts: (1) on 10 April 1979, Austral Refrigeration Pty Ltd ("Austral Refrigeration") was incorporated. It was effectively owned by non-residents; (2) from 13 May 1997 until 20 May 2002, Austral Refrigeration was an exempting company: s 160APHBA of the Income Tax Assessment Act 1936 (Cth) ("the ITAA36"); (3) on 24 April 2002, Austral Refrigeration Holdings Pty Ltd ("Austral Holdings") was incorporated. It was not effectively owned by non-residents and was not an exempting company: s 160APHBA of the ITAA36; (4) on 21 May 2002, Austral Holdings acquired all the issued shares of Austral Refrigeration. Austral Refrigeration ceased to be an exempting company and became a former exempting company: s 160APHBE(1) of the ITAA36. Its quarantined franking credits remained quarantined; (5) on 1 July 2002, Divs 207 and 208 of the ITAA97 and the consolidation regime commenced; (6) on 1 November 2002, Austral Holdings and its subsidiaries (including Austral Refrigeration) elected to consolidate with Austral Holdings as the head company. Austral Holdings became a former exempting entity at the joining time: rule in item 1 of s 709-165(2) of the ITAA97; (7) on 9 July 2003, the shareholding of Austral Holdings changed so that it was more than 95% owned by non-residents. Austral Holdings became an exempting entity under s 208-20 of the ITAA97; (8) on 6 February 2004, Hastie Holdings Pty Ltd ("Hastie Holdings") (the head company of a consolidated group and less than 95% owned by non-residents) acquired all of the issued shares in Austral Holdings. As a result, the Austral Holdings consolidated group ceased to exist. Austral Holdings and its subsidiaries became members of the Hastie Holdings consolidated group. 6 The questions on which the ruling was requested and made and which are the subject of the appeal are: (a) Did subsection 208-50(2) of the [ITAA97] operate to exclude Austral Holdings as a "former exempting entity" (as defined in s 208-50) at the time of the acquisition by Hastie Holdings of 100% of the issued shares capital of Austral Holdings on 6 February 2004? (b) Did s 709-60 operate to transfer Austral Holdings' Class C franking balance of $8,599,669 (stated on a tax-paid basis at 30%) as Class C franking credits to the franking account of Hastie Holdings (as head company) when Austral Holdings became a member of the Hastie Holdings tax consolidated group on 6 February 2004? 7 The Commissioner answered "No" to each question. The Commissioner disallowed the Appellants' objection. On appeal to the Federal Court, the learned primary judge dismissed the Appellants' appeal. The Appellants now appeal to the Full Court. For the reasons which follow, that appeal should be dismissed with costs. Legislation 8 Before turning to consider the parties' respective submissions on appeal, it is necessary to identify the relevant legislative provisions. As the learned primary judge observed ([2008] FCA 444 at [2]-[4]), this appeal is concerned with the interaction between two complex parts of the tax legislation: the imputation system now found in Pt 3-6 of the ITAA97 and the consolidation regime contained in Pt 3-90 of the ITAA97. Until the decision of the learned primary judge, no court had considered the operation of the imputation system since its initial enactment in Pt IIIA of the ITAA36, no court had relevantly considered the operation of the consolidation regime and no court had considered the interaction of these two Parts of the ITAA97. 9 The history of the two systems was succinctly described by the learned primary judge at [2] and [3] in the following terms: [2] In 1987, Australia introduced an imputation system (Pt IIIAA of the ITAA 36) for the taxation of companies and their shareholders in replacement of the classical system which had hitherto existed. Subsequent changes were made to the provisions of Pt IIIAA of the ITAA 36 prior to their embodiment in Pt 3-6 of the [ITAA97] … One of these changes was the insertion of Div 2A (and 1AA) by Act No 93 of 1999. Relevantly, and in short, this change introduced, effective 13 May 1997, measures designed to curb the unintended usage of franking credits through franking credit trading schemes by, inter alia, quarantining the franking surpluses of companies on their ceasing to be effectively owned by non-residents. This was done through various concepts, including the concept of an exempting company (s 160APHBA) – a company effectively owned (not less than 95%) by prescribed persons (non-residents) (ss 160APHBB and 160APHBF); and the concept of a former exempting company - a company that had ceased to be an exempting company and is not again an exempting company (subs 160APHBE(1)). [3] Effective 1 July 2002, Australia introduced a consolidation regime to allow a wholly owned group of resident entities to consolidate their tax position rather than be treated as separate entities. The consolidation regime is principally contained in Pt 3-90 of the ITAA 97, comprising Divs 700 to 721. … By the time of the introduction of the consolidation regime, the measures quarantining the franking surpluses of a corporate tax entity on it ceasing to be an exempting entity and becoming a former exempting entity were embodied in Div 208 of Pt 3-6 of the ITAA 97. Subdivision 709-B of Pt 3-90 of the ITAA97 modifies the operation of Div 208 in relation to consolidated groups in a number of different ways, depending on the status of the head company and its subsidiary member at the joining time. 10 The starting point is the consolidation regime in Pt 3-90 of the ITAA97. As s 700-1 provides: This Part allows certain groups of entities to be treated as single entities for income tax purposes. Following a choice to consolidate, subsidiary members are treated as part of the head company of the group rather than as separate income tax identities. The head company inherits their income tax history when they become subsidiary members of the group. On ceasing to be subsidiary members, they take with them an income tax history that recognises that they are different from when they became subsidiary members. This is supported by rules that: (a) set the cost for income tax purposes of assets that subsidiary members bring into the group; and (b) determine the income tax history that is taken into account when entities become, or cease to be, subsidiary members of the group; and (c) deal with the transfer of tax attributes such as losses and franking credits to the head company when entities become subsidiary members of the group. It is the rules relating to one of the items listed in sub-par (c) (franking credits) with which this appeal is concerned. 11 Section 700-5 provides an overview of the regime and provides so far as is relevant: (1) The single entity rule determines how the income tax liability of a consolidated group will be ascertained. The basic principle is contained in the Core Rules in Division 701. (2) Essentially, a consolidated group consists of an Australian resident head company and all of its Australian resident wholly‑owned subsidiaries (which may be companies, trusts or partnerships). … (3) An eligible wholly‑owned group becomes a consolidated group after notice of a choice to consolidate is given to the Commissioner. … (5) Certain tax attributes (such as losses and franking credits) of entities that become subsidiary members of a consolidated group are transferred under this Part to the head company of the group. These tax attributes remain with the group after an entity ceases to be a subsidiary member. (Emphasis added.) As can be seen, a "consolidated group" consists of a "head company" and all its "subsidiary members": see also ss 703-5(3), 703-15 and 703-20 of the ITAA97. A "head company" is a resident company: ss 703-10 and 703-15. The objects of the Part are specified in s 700-10. 12 Next, one must look at the Core Rules in Div 701: ss 701-1 to 701-30. The most important is the "single entity rule": s 701-1. In general terms, subsidiary members of the group are treated as parts of the head company, rather than separate entities. This has important implications. For example, the head company is primarily liable for income tax and capital gains tax, and all intra-group transactions during consolidation are ignored. Divs 703, 705 and 707 prescribe certain rules for some of the matters identified in s 700-1 (see [10] above). 13 Div 709 of the ITAA97 prescribes other rules which apply when entities become subsidiary members of the consolidated group. Sub-div A deals with franking accounts. Only the head company of a consolidated group has an operating franking account and subsidiary members' franking accounts do not operate while they are subsidiary members: ss 709-50 to 709-100. 14 Subdivision 709-B deals with imputation issues. It modifies the way in which Div 208 (dealing with exempting entities and former exempting entities) operates in relation to consolidated groups: s 709-150. To determine whether a consolidated group is an exempting entity or former exempting entity, the tests in Div 208 are applied to the head company of the group: s 709-155(1). However, additional rules in ss 709-160 to 709-165 can alter the way Div 208 applies to a consolidated group: s 709-155(2). Section 709-160 applies where the subsidiary was an exempting entity. Section 709-165 applies where the subsidiary was a former exempting entity. 15 Section 709-155(3) provides that in applying those rules (ie the additional rules in ss 709-160 to 709-165) to an entity that is a member of a consolidated group: (a) Division 208 is to be applied before [the additional] rules; and (b) that Division [ie Div 208] is to be applied just after the entity became a member of the group but, for a subsidiary member, it is to be applied on the assumption that the subsidiary was not a member of the group at that time. 16 One must then turn to look at Div 208. An exempting entity is a corporate tax entity that at a particular time is effectively owned by entities that, either because they are not Australian residents or because they receive distributions as exempt income or non‑assessable non-exempt income, would not be able to fully utilise franking credits on distributions by the corporate tax entity: s 208-5; see also ss 208-20 to 208-45. When an entity ceases to be an exempting entity, it becomes a former exempting entity: s 208-10. 17 Section 208-15 sets out the purpose and effect of the rules: To ensure that franking credits accumulated by an exempting entity are not the target of franking credit trading, these rules: (a) limit the circumstances in which a distribution franked with those credits can give rise to benefits under the imputation system; and (b) quarantine those credits by moving them into a separate account, called the exempting account, when the entity ceases to be an exempting entity; and (c) deny a recipient of a distribution franked with a credit from that account any benefit under the imputation system as a result of that distribution, unless the recipient was a member of the entity immediately before it became a former exempting entity. 18 Section 208-50 deals with former exempting entities: (1) Subject to subsection (2), a *corporate tax entity is a former exempting entity if it has, at any time, ceased to be an *exempting entity and is not again an exempting entity. (2) If an entity that, at any time, becomes effectively owned by prescribed persons ceases to be so effectively owned within 12 months after that time, the entity is not taken, by so ceasing, to become a former exempting entity. 19 Subdivision 208-F deals with exempting accounts and franking accounts of exempting entities and former exempting entities. It creates an exempting account for each former exempting entity (s 208-110), identifies when exempting credits (s 208-115) and debits (s 208-120) arise in those accounts and the amount of those credits and debits, and identifies when franking credits (ss 208-130 to 208-140) and debits (s 208-145) arise in the franking account of an entity because it is an exempting entity or a former exempting entity. Arguments and judgment below 20 The central issue in this proceeding concerns the status of Austral Holdings as at the time of its acquisition by Hastie Holdings on 6 February 2004. The Appellants contended that Austral Holdings was neither an exempting entity nor a former exempting entity. 21 In short, the Appellants submitted to the primary judge that: (1) s 208-50(2) operated to exclude Austral Holdings becoming a former exempting entity at the time of acquisition by Hastie Holdings of 100% of the issued share capital of Austral Holdings on 6 February 2004: see [2008] FCA 444 at [25] and [40]; and (2) although Austral Holdings became a former exempting entity on 1 November 2002 by force of the rule in item 1 of s 709-165(1), it did so only as the head company of the Austral Holdings consolidated group and did not at that time become a former exempting entity for any other purposes because until 9 July 2003 it had never ceased to be an exempting entity. As a result, when it ceased to be exempting entity on 6 February 2004 after having become an exempting entity for the first time on 9 July 2003, ss 208-50(2) precluded it from becoming a former exempting entity: see [2008] FCA 444 at [27]. 22 The first argument was described as the "get out of jail free" argument which was not pursued on appeal. On appeal, the Appellants conceded that, if Austral Holdings, as a separate tax entity, had previously been a former exempting entity, or an exempting entity, immediately before becoming an exempting entity on 9 July 2003, then s 208-50(2) does not convert Austral Holdings to a no-status entity. Instead, the Appellants pursued the second argument: that they were never "in jail" in the first place because Austral Holdings was neither an exempting entity nor a former exempting entity - it was a no-status entity. 23 On the other hand, before both the primary judge and on appeal the Commissioner submitted that Austral Holdings did again become a former exempting entity on 6 February 2004: see [28] of the judgment below. 24 The primary judge found that each side's preferred reading was "reasonably tenable" on a purely textual basis and expressed a "marginal preference" for the Appellants' contention: at [30]. Nevertheless, the primary judge adopted the Commissioner's contention on the basis that this reading was more in keeping with the purposive approach to statutory construction. The judge considered that there was no "rational reason" that ownership by non-residents lasting less than 12 months should free franking credits from the consolidation regime's restrictions and that the intent of the legislature was to prevent entities "which have been subject to the statutory scheme for seven years (like the Austral entities) [from exiting] the scheme": at [44]-[45]. Analysis on appeal 25 It is necessary to start with the legislation: see [8] to [19] above. The consolidation regime in Pt 3-90 of the ITAA97 permits certain groups of entities to be treated as a single entity for income tax purposes: see s 700-1. Two of the more significant consequences of consolidation are stipulated in the Act: see s 700-1. First, subsidiary members are treated as part of the head company of the group rather than separate income tax entities. Secondly, the head company "inherits [the] income tax history" of the group's subsidiary members: s 700‑1; see also s 701-5; Handbury Holdings Pty Ltd v Commissioner of Taxation [2008] FCA 1787 at [15]-[16]. As s 700-1 goes on to provide, the consolidation regime is "supported by rules" that (1) "determine the income tax history that is taken into account" and (2) "deal with the transfer of tax attributes such as … franking credits to the head company" when entities become subsidiary members of the group: see s 700-1. 26 In general terms, the question posed by the legislation is what income tax history of Austral Holdings did Hastie inherit when Austral Holdings became part of the consolidated group? The manner in which that question is to be determined in relation to imputation issues and franking accounts is, so far as is relevant, set out in sub-div 709-B. As noted earlier, that subdivision modifies the way Div 208 (dealing with the imputation system in relation to exempting entities and former exempting entities)operates in relation to consolidated groups: s 709-150. 27 Section 709-155, entitled "Testing consolidated groups", provides that to determine whether the consolidated group is an exempting entity or a former exempting entity, the tests in Div 208 are applied to the head company of the group. That is not surprising. That section does no more than preserve the "single entity rule" in s 701-1. It is not in dispute that applying Div 208 to Hastie, as the head company of the Hastie consolidated group, it is neither an exempting entity nor a former exempting entity. 28 However, s 709-155(2) goes on to provide that there are additional rules that can alter the way Div 208 applies to the consolidated group, being the rules set out in ss 709-160 and 709-165. The language of each of those rules is clear. Before the additional rules can apply, three factual premises must exist. First, the head company of the consolidated group must be neither an exempting entity nor a former exempting entity: ss 709-160(1)(a) and 709‑165(1)(a). That is the present case: see [27] above. (As a result, none of the other sections in the division is engaged: eg ss 709-170 and 709-175.) 29 Secondly, an entity becomes a subsidiary member of the group at "the joining time": ss 709-160(1)(b) and 709-165(1)(b). Here, Austral Holdings is the "entity" and the "joining time" is 6 February 2004. Thirdly, that entity (ie Austral Holdings) must be an exempting entity (in which case the rules set out in the table under s 709-160 apply), a former exempting entity (in which case the rules set out in the table under s 709-165 apply) or a no-status entity (in which case, none of the provisions of the division is engaged). 30 In determining the status of Austral Holdings, ss 709-155(3) provides that in applying the rules in ss 709-160 and 709-165 to Austral Holdings: (a) Div 208 is to be applied before the rules in ss 709-160 to 709-165: s 709-155(3)(a); and (b) Div 208 is to be applied just after Austral Holdings became a member of the Hastie group but on the assumption that Austral Holdings was not a member of the Hastie Group at that time: s 709-155(3)(b). 31 Section 709-155(3) has two purposes. First, it identifies the order in which the respective divisions or parts of the divisions are to be applied. Division 208 is to be applied before the rules in ss 709-160 to 709-165. Secondly, it identifies the terms on which Div 208 is to be applied to Austral Holdings. Div 208 is to be applied just after Austral Holdings became a member of the Hastie Group. As noted earlier (see [5(8)]), that occurred on 6 February 2004 when Hastie Holdings acquired all of the issued shares in Austral Holdings. However, Div 208 is to be applied to Austral Holdings on the "assumption that [Austral Holdings] was not a member of the [Hastie Group] at that time". In other words, the next step is to apply Div 208 to Austral Holdings as at 6 February 2004 on the basis that it is not part of a consolidated group but a single entity. 32 During the course of oral argument, the Court raised the question whether this assumption implicitly includes the additional assumption that the fact of change in ownership should also be excluded from consideration. The Commissioner submitted, and we accept, that nothing in the text or purpose of the provision requires this additional assumption because its purpose is only to preserve the single entity rule. In any event, we note that the same result would obtain whether Austral Holdings was considered for purposes of subsection 3(b) to still be an exempting entity (ie on the assumption both that it was not a member of the Hastie Group and that it had not been acquired by Hastie) or to have ceased to be an exempting entity (ie only on the assumption that it was not a member of the Hastie Group but accepting that it had been acquired by Hastie). According to ss 709-160 and 709‑165, Hastie Holdings as head company would become a former exempting entity regardless of whether Austral Holdings was a former exempting entity or exempting entity; only if Austral Holdings were a no-status entity would Hastie Holdings remain a no-status entity. 33 As a result, as at 6 February 2004, Austral Holdings ceased to be an exempting entity under s 208-20 because it was less than 95% "effectively owned by prescribed persons" (being then owned by Hastie Holdings): sub-div 208-A. The question which then arises is whether Austral Holdings was a former exempting entity or a no-status entity? 34 That question is addressed by s 208-50: see [18] above. Subject to a set of circumstances which we will address next, an entity is a former exempting entity if it has at any time ceased to be an exempting entity and is not again an exempting entity: s 208-50(a). In other words, the section provides that if an entity was at any time an exempting entity and ceases to be so, it is a former exempting entity. (That is not surprising. Division 208 contains "specialist liability rules" which identify consistently with the objectives set out in s 208-15: (see [17] above), the manner in which and in what amount such an entity can deal with its franking accounts and exempting credits.) 35 However, s 208-50(a) is subject to subsection (b). Subsection (b) provides if an entity that, at any time, becomes effectively owned by prescribed persons ceases to be so effectively owned within 12 months after that time, the entity is not taken by so ceasing to become a former exempting entity. In other words, periods of being effectively owned by prescribed persons for less than 12 months are to be ignored when determining whether an entity is a former exempting entity. That the Act should choose to ignore changes in shareholding which last for less than 12 months, no doubt, reflects a pragmatic balance between the need to prevent trading in franking credits and administrative convenience. 36 How then do those sections apply to Austral Holdings? Its corporate history was not in dispute. 1. On 24 April 2002, when Austral Holdings was incorporated it was not an exempting company; it was a no-status company. 2. On 21 May 2002, Austral Holdings acquired all the issued shares of Austral Refrigeration. Austral Refrigeration ceased to be an exempting company and became a former exempting company: ss 160APHBE(1) of the ITAA36. Austral Refrigeration's quarantined franking credits remained quarantined; 3. On 1 November 2002, Austral Holdings and its subsidiaries (including Austral Refrigeration) elected to consolidate with Austral Holdings as the head company of the group (the Austral Group). Austral Holdings became a former exempting entity at the joining time: rule in item 1 of s 709-165(2) of the ITAA97. The rules set out in the table in s 709-165 are: Rules applying to * consolidated group Item Rule 1 The *head company becomes a *former exempting entity at the joining time 2 The *head company has both a *franking account and an *exempting account 3 If the *subsidiary member's *exempting account has an *exempting surplus at the joining time: (a) a debit equal to that surplus arises in that account at the joining time; and (b) a credit equal to that surplus arises in the exempting account of the *head company at the joining time 4 If the *subsidiary member's *exempting account has an *exempting deficit at the joining time: (a) a credit equal to that deficit arises in that account at the joining time; and (b) a debit equal to that deficit arises in the subsidiary's *franking account just before the joining time 5 The *subsidiary member's *exempting account does not operate during the period: (a) starting just after the joining time; and (b) ending when the entity ceases to be a subsidiary member of the group 6 Item 1 of the table in section 208‑115 does not apply to the *head company 7 Item 1 of the table in section 208‑120 does not apply to the *head company 8 Item 1 of the table in section 208‑130 does not apply to the *head company 9 Item 1 of the table in section 208‑145 does not apply to the *head company Note 1:Any surplus in the subsidiary's franking account will be transferred to the head company's franking account: see subsection 709‑60(2). Note 2:If the subsidiary's franking account is in deficit, it will be liable for franking deficit tax: see subsection 709‑60(3). This deficit may be increased by item 4 in the table in subsection (2). Note 3:The subsidiary's franking account does not operate while it is a member of the group: see section 709‑65. 4. On 9 July 2003, the shareholding of Austral Holdings changed so that it was more than 95% owned by non-residents. As s 709-155(1) provides, the tests in Div 208 were applied to it as the head company of the Austral Group. Austral Holdings thus became an exempting entity under s 208-20 of the ITAA97. 5. On 6 February 2004, Austral Holdings ceased to be an exempting entity under s 208‑20 because it was less than 95% "effectively owned by prescribed persons" (being then owned by Hastie Holdings): sub-div 208-A. 37 As noted earlier, the question is then whether Austral Holdings became a former exempting entity? Again, the answer to that question concerns the proper construction of s 208-50 and the interaction between ss 208-50(1) and (2). 38 Section 208-50(2) provides that the period of effective ownership of Austral Holdings by prescribed persons (ie as an exempting entity) immediately preceding 6 February 2004 is to be ignored in determining whether Austral Holdings was a former exempting entity because it was a period of effective ownership of less than 12 months. As the express words of the section make clear, if an entity has been an exempt entity for less than 12 months that entity is not taken to be a former exempting entity by "so ceasing" to be, for a period of less than 12 months, an exempt entity. 39 However, that is not the end of the enquiry. The express words of s 208-50(1) provide that if at any time an exempting entity ceases to be an exempting entity it becomes a former exempting entity unless it again becomes an exempting entity. If one ignores the seven-month period from 9 July 2003 to 6 February 2004 as directed by s 208-50(2), s 208‑50(1) then requires one to ask, what was Austral Holdings status before that period? There was no dispute that Austral Holdings was a former exempting entity until 9 July 2003 by virtue of s 709-165(2), item 1. Therefore, applying the express words of s 208-50(1), it would appear that Austral Holdings on 6 February 2004 reverted to its former exempting entity status. 40 However, the Appellants attempted to avoid this result by contending that Austral Holdings' status as the head company of the Austral Group is to be ignored in determining the status of Austral Holdings as a single entity as at 6 February 2004. Taken as a single entity as at 6 February 2004, the Appellants contend that Austral Holdings was a no-status entity, having not previously been an exempting entity or a former exempting entity in its own right under Div 208. In other words, the Appellants contend that the fact that Austral Holdings was a former exempting entity as the head company of the Austral Group is to be ignored because that was not its status as a single entity. The problem with the Appellants' construction is that it would require the Court to ignore the express words of the Act and the "tax history" that Austral Holdings inherited when it became head of the Austral Group. We reject that contention. 41 First, the mere fact that on 9 July 2003 Austral Holdings became an exempting entity does not preclude it subsequently becoming a former exempting entity under s 208-50(1), because ss (1) is "subject to subsection (2)": see [38] above. Any other construction of the legislation is contrary to the express words of s 208-50. 42 Secondly, although s 709-155(3)(b) provides that Div 208 is to be applied just after Austral Holdings became a member of the Hastie Group and on the assumption that Austral Holdings was not a member of that group, that does not either expressly or impliedly strip away the "tax history" that Austral Holdings inherited when it became the head company of the Austral Group. 43 Contrary to the contentions of the Appellants, the rules in s 709-165 in fact provide for the way in which the tax history of the subsidiary members is to be inherited by the head company. Under item 1, the head company takes on a particular status at the joining time, namely as a former exempting entity. Its status is expressly altered from a no-status company (see ss (1)(a)). That result is consistent with the purposes of both the imputation regime and the consolidation regime. Consistently with the imputation regime, to ensure that franking credits accumulated by, in this case, a former exempting entity are not the object of franking credit trading (s 208-15), Items 3, 4 and 5 of the Rules transfer subsidiary members' exempting accounts (whether in surplus or deficit) to an exempting account of the head company during the period "starting just after the joining time" and "ending when the entity ceases to be a subsidiary member of the group". That is consistent with ss 709-60 and 709-65 which provide for a nil balance in the franking account of an entity that becomes a subsidiary member of a consolidated group and also stipulate that the franking account of that entity does not operate during the period beginning just after the entity becomes the subsidiary member and ending when the entity ceases to be a subsidiary member. 44 Perhaps most importantly, this understanding of those provisions (both expressly and in terms of outcome) is consistent with the express words of s 700-1 that subsidiary members are treated as part of the head company of the consolidated group rather than as separate income tax identities and that, when that occurs, the head company inherits their income tax history. It would be an odd construction of the express provisions of the ITAA97 which led to the interaction between the consolidation regime and the imputation provisions achieving a result which was directly contrary to the stated objective of s 700-1 - that is, if the head company were to retain the franking credits of the subsidiaries but not their tax history as the Appellants contend. If that were the case, then an acquiring company would be able to take the tax benefits of consolidation (ie the franking credits accumulated by the head company of the acquired group from its subsidiaries) without the burden (ie the tax history inherited by the head company of the acquired group from its subsidiaries). In effect, it would present the "get out of jail free" situation described earlier. 45 One question which arises is whether the analysis changes if the acquisition in question is by one consolidated group (here, the Hastie Holdings Group) of another (here, the Austral Group). This differs from the acquisition by one entity (not part of a consolidated tax group) of some or all of the members of a pre-existing consolidated group leading to the creation of a new consolidated group. For at least two reasons, the answer to that question is that the analysis does not change. First, when an entity ceases to be a subsidiary member of a consolidated group, the subsidiary member's franking account becomes operative again, starting with a nil balance: ss 709-60 and 709-165. Moreover, it is important to remember that while a head company inherits the exempting status of its subsidiary members, the reverse is not true: ss 709-150 to 709-175. 46 Secondly, the drafters of the tax legislation considered the acquisition by one consolidated group of another consolidated group in sub-div 705-C of the ITAA97. Section 705-175 provides that: (1) This Subdivision applies if all of the *members of a * consolidated group (the acquired group) become members of another consolidated group (the acquiring group) at a particular time (the acquisition time) as a result of the *acquisition of *membership interests in the *head company of the acquired group. Object (2) The object of this Subdivision is: (a) to modify the rules in Division 701 (the core rules) to complement the treatment of the acquired group as a single entity that applied before the acquisition time; and (b) to modify Subdivision 705‑A (which basically determines the tax cost settling amount for assets of an entity joining a consolidated group) to ensure that the *tax cost setting amount for assets of the acquired group that become those of the acquiring group reflects the cost to the latter group of acquiring the former. 47 Neither the Appellants nor the Respondent referred to sub-div 705-C of the ITAA97. The "scheme" (as set out in pars 27 and 28 of Schedule "A") provides that on 6 February 2004, Hastie Holdings acquired 100% of the ordinary shares of Austral Holdings with the result that each member of the Austral Holdings tax consolidated group became a member of the already existing Hastie Holdings tax consolidated group. On its face, the subdivision applies: see s 705-175(1). As is apparent, the object of the subdivision is, in part, "to modify the rules in Division 701 (the core rules) to complement the treatment of the acquired group as a single entity that applied before the acquisition time": s 705-175(2)(a). Notably, subdivision 705-C does not purport to modify the rules in Division 709. The construction of provisions in the consolidation regime and the interaction between those provisions and Div 208 as being unaffected by sub-div 705-C is consistent with the principle expressed in sub-div 705-C - that is, sub-div 705-C does not apply in place of (ie modify) any rules unless so specified; rather it applies in addition to (ie complements) those other rules. 48 There are two further points we should address before concluding. First, although the authorities referred to by the Appellants (Federal Commissioner of Taxation v Comber (1986) 10 FCR 88; Wiest v Director of Public Prosecutions (1988) 23 FCR 472 at 502; Commonwealth v Genex Corp Pty Ltd (1992) 176 CLR 277 at 291-292 and Marshall (Inspector of Taxes) v Kerr [1995] 1 AC 148) provide some authority for the proposition that a deeming provision is to be construed strictly and only for the purpose which it is to be resorted to, they do not alter the proper construction of Pt 3-90 and, in particular, s 709-165 and the interaction between the consolidation provisions and Div 208. Even if s 709-165 should be considered as a "deeming provision," we consider that it has been applied according to its terms and for the purpose for which it was intended. 49 Secondly, both the Appellants and the primary judge devoted considerable attention to the extent to which the purposive approach to statutory construction requires or allows deviation from the plain statutory language. The premise of this question is of course that the purpose and text of the statute are at odds with each other. As can be seen from these reasons, however, we do not consider that premise to be valid in the current context because the plain language of the relevant provisions unambiguously bears the construction we have adopted and that construction is consistent with the purpose and objectives expressed by the statute itself. Accordingly, it is not necessary in the circumstances to consider this point further. 50 As a result, we agree that the answer to question (a) in the private ruling is "No". It was common ground that the answer to question (b) followed the answer to question (a). Conclusion 51 For those reasons, we would dismiss the appeal and order the Appellants to pay the Respondent's costs of and incidental to the appeal. I certify that the preceding fifty-one (51) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Ryan, Gordon & Foster. Associate: Dated: 9 December 2008 Counsel for the Appellants: Mr M Robertson Solicitor for the Appellants: KPMG Tax Lawyers Pty Ltd Counsel for the Respondent: Mr B Sullivan SC and Mr M Richmond Solicitor for the Respondent: Australian Government Solicitor Date of Hearing: 19 November 2008 Date of Judgment: 9 December 2008 SCHEDULE "A" From incorporation to 20 May 2002 – Austral Refrigeration Pty Ltd ("Austral Refrigeration") – 100% foreign owned 1. Austral Refrigeration was incorporated in NSW on 10 April 1979 and from this time to 20 May 2002 was not less than 95% foreign owned. 2. At 20 May 2002, Austral Refrigeration had on issue 40,993 ordinary shares that were "effectively owned" by: · Refrigeration Investment (MBO) Limited, a company incorporated overseas with its refrigeration office in the USA, owned 8,572 shares. · Kysor Industrial Corporation, a company incorporated overseas with its registered office in the USA, owned 32,421 shares. 1. Both these shareholders were ultimately owned by the Anodis Plc group of companies, a UK resident listed company. 2. At 20 May 2002, Austral Refrigeration and its 100% owned subsidiaries had total franking credits of $26,890,984. 21 May 2002 – Austral Refrigeration Holdings Pty Ltd ("Austral Holdings") – acquires Austral Refrigeration 1. Austral Holdings was incorporated in NSW on 24 April 2002, initially as a shelf company and later for the specific purpose of acquiring Austral Refrigeration. 2. On 21 May 2002, Austral Holdings acquired all the ordinary shares of Austral Refrigeration from the previous two non-resident shareholders. 3. At this date Austral Holdings was less than 95% owned, by RMB International, a foreign resident company, and by RMB Australia Holdings, an Australian resident company 100% owned by foreign residents. 4. All its other shareholders were Australian residents. 5. On 21 May 2002, the franking account balances of Austral Refrigeration and its 100% subsidiaries, of $26,890,984, converted to exempting credits. 1 July 2002 – Franking credits converted to tax paid basis 1. The group did not pay any tax in the interim period from 21 May 2002 to 30 June 2002, so the group did not generate any additional franking credits in this period. 2. On 1 July 2002 the franking and exempting account balances were converted from an "adjusted amount" basis of $26,890,984, to a "tax-paid" basis of $11,524,708 (corporate tax rate of 30%). 1 November 2002 – Austral Holdings – tax group consolidation 1. Each 100% Australian resident company owned by Austral Holdings elected to form a tax consolidated group effective from 1 November 2002. 2. Austral Holdings, as the head company of the tax consolidated group, commenced to maintain a single franking account and exempting account on behalf of the group. 3. Accordingly, Austral Refrigeration's exempting account balance of $2,058,616 was transferred to Austral Holdings. 4. Austral Refrigeration's wholly owned subsidiaries also transferred their exempting account balances, totalling $9,466,092, to Austral Holdings. 5. Accordingly, the Austral Holdings tax consolidated group had an exempting account balance of $11,524,708 as at 1 November 2002. 6. As at 8 July 2003 Austral Holdings exempting account balance was $8,812,180 and the franking account balance was $1,206,167. 29 May 2003 – Queensland Refrigeration Pty Ltd ("Qld Refrigeration") 1. Prior to 29 May 2003, Austral Refrigeration owned 51% of an Australian resident company, Qld Refrigeration. The remaining 49% was owned by an unrelated Australian resident company, Fandrich Investments Pty Limited ("Fandrich"). 2. Austral Refrigeration acquired the remaining 49% ownership from Fandrich on 29 May 2003. 3. Qld Refrigeration therefore joined the Austral Holdings tax consolidated group at this time and transferred its franking credits of $1,094,651 to Austral Holdings. 9 July 2003 – Austral Holdings – Change of ownership 1. On 9 July 2003, following the exit of certain Australian resident individual shareholders and acquisition of further shares by RMB, Austral Holdings became not less than 95% effectively owned by non-resident persons. 2. The tax consolidated group's exempting account surplus balance converted to a franking account credit balance of $$8,812.180 on this date. 3. In addition, the group franking balance already had pre-existing franking credits due to taxes paid and dividends received on or after 1 November 2002 (and including franking credits transferred from Qld Refrigeration) of $1,206,167. 4. Therefore, the total franking account balance on 9 July 2003 was $10,018,347. 5. From 9 July 2003 to 5 February 2004 there were no new franking credits, but a debit of $1,418,678 for a dividend, leaving a balance of $8,599,669 as at 5 February 2004. The amount of $7,393,502 of the franking surplus is that part of the remaining franking surplus of Austral Refrigeration as at 20 May 2002 and an amount of $1,206,167 is that part remaining of the franking credits accumulated since 21 May 2002. 6 February 2004 – Hastie Holdings Pty Ltd ("Hastie Holdings") acquires Austral Holdings 1. Hastie Holdings was incorporated in Australia on 11 May 1966 and has always been an Australian resident company and less than 95% effectively owned by non-resident persons. 2. On 6 February 2004, Hastie Holdings acquired 100% of the ordinary shares of Austral Holdings. 3. As a result of the acquisition, each member of the Austral Holdings tax consolidated group, became a member of the already existing Hastie Holdings tax consolidated group and became less than 95% foreign owned. Hastie Group Limited (Hastie Group) – acquired Hastie Holdings 1 April 2005 1. Hastie Group is, and has been since incorporation on 4 February 2005, an Australian incorporated and resident company. 2. Hastie Group Limited commenced listing on the Australian Stock Exchange on 29 March 2005. 3. Hastie Group Limited acquired Hastie Holdings and its subsidiaries on 1 April 2005. 4. Hastie Group Limited and its 100% Australian resident subsidiaries elected to form a tax consolidated group commencing from 1 April 2005. 5. At all times from incorporation to the present time, Hastie Group has been less than 95% effectively owned by non-residents.