FEDERAL COURT OF AUSTRALIA Commonwealth Bank of Australia v Deputy Commissioner of Taxation [2009] FCAFC 126 TAXATION – Bank Integration Act 1999 (Cth) – application of s 22(3) – partnership between transferring and receiving bank – whether partnership continues after integration – meaning of "continuity of any partnership" – application of s 22(2) – limited meaning of "revenue neutral" PARTNERSHIP – Bank Integration Act 1999 (Cth) – application of s 12 – "successor in law" – Income Tax Assessment Act 1997 (Cth) – s 995-1(1) "partnership" – partnerships have no existence separate from their members – dissolution of partnerships between transferring and receiving bank on succession day – deemed continuance of partnerships with third parties only Bank Integration Act 1991 (Cth) ss 5, 7-11, 9, 12, 13, 14-20, 21, 22, 31 Commonwealth Banks Act 1959 (Cth) Income Tax Assessment Act 1997 (Cth) s 995-1(1), Part 3-90 Income Tax Assessment Act 1936 (Cth) ss 59, 59AA, 90, 92, 166A Partnership Act 1890 (NSW) s 1 Broadcast Australia Pty Ltd v Minister Assisting the Minister for Natural Resources (Lands) (2004) 221 CLR 178 cited CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 cited Woodside Energy Ltd v Federal Commissioner of Taxation (2009) 174 FCR 91 cited Tikva Investments Pty Ltd v Federal Commissioner of Taxation (1972) 128 CLR 158 applied Hadlee v Commissioner of Inland Revenue [1989] 2 NZLR 447 cited Lindley and Banks on Partnership, 3-01 et seq, 24.03 (18th ed, 2003) Second Reading Speech (H of R vol 180 at 2649) COMMONWEALTH BANK OF AUSTRALIA (ACN 123 123 124) v DEPUTY COMMISSIONER OF TAXATION NSD 266 of 2009 FINN, EMMETT AND PERRAM JJ 16 SEPTEMBER 2009 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 266 of 2009 ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: COMMONWEALTH BANK OF AUSTRALIA (ACN 123 123 124) Appellant AND: DEPUTY COMMISSIONER OF TAXATION Respondent JUDGES: FINN, EMMETT AND PERRAM JJ DATE OF ORDER: 16 SEPTEMBER 2009 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The appeal be dismissed. 2. The appellant pay the costs of the respondent. 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 GENERAL DIVISION NSD 266 of 2009 ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: COMMONWEALTH BANK OF AUSTRALIA (ACN 123 123 124) Appellant AND: DEPUTY COMMISSIONER OF TAXATION Respondent JUDGES: FINN, EMMETT AND PERRAM JJ DATE: 16 SEPTEMBER 2009 PLACE: SYDNEY REASONS FOR JUDGMENT FINN AND PERRAM JJ: 1 In 1989 the Commonwealth Parliament enacted the Banking Legislation Amendment Act, one purpose of which was to remove the legislative barriers to the integration of trading banks and savings banks. It was followed in turn by the Bank Integration Act 1991 which included provisions to facilitate the transfer of the assets and liabilities of each savings bank subsidiary to its trading bank parent. As the Second Reading Speech to the Bill for the latter Act indicated: H of R vol 180 at 2649, 7 Nov 1991; that transfer was, in the main, to be achieved through "the principle of universal succession". It was also to be assisted by exemptions from most Commonwealth, State and Territory taxes and fees and "by providing for tax neutrality under income tax law". The present appeal concerns that section of the Integration Act(s 22) which provides for the manner of application of Commonwealth Income Tax legislation as it relates to "the business" of a savings bank transferred to its parent by virtue of the Act. FACTUAL BACKGROUND 2 The proceeding was conducted on an agreed statement of facts. The following is based directly upon her Honour's précis of that statement. 3 The appellant was established in 1953 under the name of the Commonwealth Trading Bank of Australia. Its name was changed to the Commonwealth Bank of Australia in 1984. The Commonwealth Savings Bank of Australia (Savings Bank) was established in 1927 and remained a subsidiary of the Commonwealth Bank until 1 January 1993 (the succession day). On the succession day, by virtue of the Integration Act, the Savings Bank was integrated with the Commonwealth Bank. As a result of that integration the Commonwealth Bank became the successor in law of the Savings Bank, all assets of the Savings Bank were vested in it, all liabilities of the Savings Bank became its liabilities and the Savings Bank ceased to exist. On the same day the provisions of the Commonwealth Banks Act 1959 (Cth) that created and governed the Savings Bank were repealed by s 31 of the Integration Act. 4 At the time of the integration four partnerships existed between the Commonwealth Bank and the Savings Bank, who were the only members of those partnerships. The partnerships are described in more detail below; see [8-9]. Under the general law, those partnerships came to an end on integration as a consequence of the transfer of the Savings Bank's assets and liabilities and it ceasing to exist. The appellant contends, though, that the effect of s 22(3) of the Integration Act is that for taxation purposes the partnership has continued since the succession day. In 1993 s 22(3) provided: Where a succession day is fixed for a receiving bank and the relevant transferring bank, then, for the purposes of the Income Tax Assessment Act 1936 nothing in this Act affects the continuity of any partnership in which a transferring bank was a partner immediately before the succession day. 5 The Commonwealth Bank acted on its understanding of s 22(3) in treating the relevant partnerships as having continued in existence since 1 January 1993. It submitted income-tax returns for the partnerships in which deductions for asset depreciation were claimed as though the partnerships continued in existence and as though the assets continued to be held as partnership assets. This approach continued until 1 July 2002 when a consolidated group, of which the Commonwealth Bank is the head company, was formed pursuant to the provisions of Part 3-90 of the Income Tax Assessment Act 1997 (Cth). 6 The consolidation provisions of Part 3-90 of the 1997 Act provide that where a partnership first becomes part of a consolidated group the value (or "tax cost") of the partnership assets may be reset to market value. The effect may be that the market value of the partnership assets at the date of consolidation is greater than their written-down value, immediately before consolidation. Where this is so, the scope for depreciation deductions after consolidation will be greater than before consolidation. 7 Consistent with its approach to the partnerships since the succession day, the appellant treated the partnerships as being still in existence for income tax purposes on 1 July 2002 and therefore reset the "tax cost" of the underlying assets of the partnerships to the market value of those assets as at 1 July 2002. The effect was to entitle the applicant to a "step-up" in the tax cost of the assets for the purpose of claiming depreciation deductions in the 2003 income year and in future years. Accordingly, the Bank claimed depreciation deductions for the 2003 income year by reference to the market value of the partnership assets upon consolidation. The Commissioner rejected these deductions and issued an amended assessment. The applicant objected to the amended assessment and its objection was disallowed. That objection decision founded the present proceeding. 8 The partnerships were entered into between the appellant and the Savings Bank in the period from 1985 to 1990 and were known as: · The Camooweal Participation; · the Allco Participation; · the ANL Charterparty Participation; and · the TAA (Comm) Leveraged Lease Participation. 9 The participation interests in the above partnerships were held as follows: for Camooweal and Allco, 99% by the Bank and 1% by the Savings Bank; for ANL Charterparty and TAA (Comm) Leveraged Lease, 1% by the Commonwealth Bank and 99% by the Savings Bank. The agreed statement of facts gives the closing written down value of the assets of each of the partnerships as at 30 June 2002 and their market value as at 1 July 2002. The figures are set out in the following table. Partnership Closing written down value at 30 June 2002 Market value at 1 July 2002 Camooweal $4,142,828 $89,594,356 Allco $0 $17,109,347 ANL Charterparty $0 $13,227,513 TAA (Comm) Leveraged Lease $0 $19,929,453 The disputed assessment 10 In its income-tax return for the year ending 30 June 2003, lodged on 5 May 2004, the Commonwealth Bank claimed capital allowance (depreciation) deductions only in respect of the Camooweal assets, the amount claimed being $1,118,563. By virtue of s 166A of the Income Tax Assessment Act 1936 (Cth) the respondent is deemed to have served a notice of assessment on the applicant on 5 May 2004. On 3 December 2007, the appellant objected against that assessment claiming that it was entitled to additional capital allowance deductions. It claimed that the tax cost of those assets should have been reset to the market value of those assets as at 1 July 2002. The agreed statement of facts lists the amount of additional deductions in respect of each partnership as: (a) $16,022,162 in respect of the Camooweal Assets; (b) $1,710,934 in respect of the Allco Assets; (c) $826,720 in respect of the ANL Assets; and (d) $1,992,945 in respect of the TAA Assets. 11 The Commissioner disallowed the Bank's claim to the additional capital allowance deductions. In financial terms, what is at stake in this proceeding is set out clearly in paragraphs 68 and 69 of the agreed statement of facts as follows: If the Applicant is correct in its contention that the tax cost of the Camooweal Assets should have been reset as at 1 July 2002 to the market value of those assets, the amount by which the capital allowance deductions should be increased is $15,680,379 calculated as follows: (a) the effective life of the assets is 8 years; (b) applying the diminishing value method of depreciation, the capital allowance deductions in the year ended 30 June 2003 are 18.75% of the market value of the assets as at 1 July 2002 ($89,594,356), being $16,798,942; (c) as capital allowance deductions of $1,118,563 have already been allowed, the balance of deductions that should be allowed to the Applicant is $15,680,379. If the Applicant is correct in its contention that the tax cost of the Allco Assets, ANL Assets and TAA Assets should have been reset as at 1 July 2002 to the market value of those assets, the amounts by which capital allowance deductions should be increased are the amounts set out in [the table in [8] above] respectively, calculated as follows: (a) the effective life of the Allco Assets and the TAA Assets is 10 years and the effective life of the ANL Assets is 16 years; (b) applying the prime cost method of depreciation, the capital allowance deductions in the year ended 30 June 2003 are 10% of the market value of the partnership's respective assets (6.25% in the case of the ANL Assets) as at 1 July 2002. THE INTEGRATION ACT 12 We have referred already to the generally stated purpose of the Act as foreshadowed in the Second Reading Speech. The three operative Parts of the Act for present purposes are Parts 2, 3 and 4. Part 2 deals with the steps leading to bank reorganisations. For present purposes, all that need be noted of it is that it provides a procedure which empowers the Treasurer to specify the succession day for a proposed bank integration, ie the "day on which the business of the relevant transferring bank is to vest in the receiving bank": s 9. 13 Part 3 provides for the effectuation of a bank reorganisation "on the succession day": the receiving bank becomes the successor in law of the transferring bank: s 12; all the assets and liabilities of the transferring bank become the assets and liabilities of the receiving bank: s 13; and there are further, more particular, provisions that deal with the process and deemed consequences of integration: s 14–s 20. Importantly, in light of the respondent's submissions, the Act defined "transferred assets", "transferred business" and "transferred liability" to mean, respectively an asset, the business and a liability that "has become, under this Act", an "asset, the business and a liability" of the receiving bank: s 5. 14 Part 4, which is of present moment, deals with "Taxation Matters". On 1 January 1993, s 21 of the Act provided (inter alia): 21.(1) Tax is not payable under a law of the Commonwealth or of a State or Territory in respect of: (a) the operation or effect of this Act or of any complementary legislation in its application to the vesting of the business of a transferring bank in the relevant receiving bank; or (b) anything done for a purpose connected with, or arising out of, that operation or effect. … (3) In subsection (1): … "tax" does not include: (a) any tax imposed under the Income Tax Assessment Act 1936. For its part, s 22, insofar as presently relevant, provides: 22.(1) Where a succession day is fixed for a receiving bank and the relevant transferring bank, this section applies to the business of that transferring bank that becomes, on that day, the transferred business of the receiving bank. (2) It is the intention of the Parliament: (a) that, on and after the succession day for a receiving bank and the relevant transferring bank, the receiving bank should, for all purposes of the Income Tax Assessment Act 1936, be placed in the same position in relation to the business to which this section applies as the transferring bank would have been apart from the operation or effect of this Act and of any complementary legislation and from anything done for a purpose connected with, or arising out of, that operation or effect; and (b) that the operation or effect of this Act and of any complementary legislation and anything done for a purpose connected with, or arising out of, that operation or effect in relation to the business to which this section applies should, for all purposes of the Income Tax Assessment Act 1936, be revenue neutral, that is to say that no assessable income, deduction, capital gain or capital loss should be derived, or incurred, or should accrue, by or to the transferring bank or the receiving bank in relation to that business merely because of the operation or effect of this Act and of any complementary legislation or of anything done for a purpose connected with, or arising out of, that operation or effect. (3) Where a succession day is fixed for a receiving bank and the relevant transferring bank, then, for the purposes of the Income Tax Assessment Act 1936, nothing in this Act affects the continuity of any partnership in which a transferring bank was a partner immediately before the succession day. (4) Where a succession day is fixed for a receiving bank and the relevant transferring bank, then, for the purposes of the Income Tax Assessment Act 1936: (a) all assessable income derived or taken to be derived by the transferring bank; and (b) all allowable deductions and capital losses incurred or taken to be incurred by the transferring bank; and (c) all other consequences (including the balances of losses that are carried forward, foreign tax credits and dividend rebates under section 46 of that Act) for the transferring bank; are taken to have been derived or incurred by, or to have occurred in relation to, the receiving bank and not the transferring bank. … (6) Subsections (3), (4) and (5) do not limit the generality of subsection (2). (7) If, in any respect, the operation of subsection (2) requires further clarification, regulations may be made modifying or adapting the application of particular provisions of the Income Tax Assessment Act 1936 for that purpose. 15 Sections 21 and 22 were amended in 1997 so as to include the reference to "and the Income Tax Assessment Act 1997" in addition to that of "the Income Tax Assessment Act 1936" wherever the latter occurred. It is common ground between the parties that both the 1936 and the 1997 Act are relevant to the Commonwealth Bank integration in the manner specified in s 21 and s 22. 16 While s 22(3) – the "continuity provision" as we will call it – loomed large before her Honour, as it did before us, there are several other features of s 22 which require emphasis. First, while s 22(2) is, in form a statement of parliamentary intent, it is nonetheless a statement intended to have legislative force and effect. This is made clear from both s 22(6) and s 22(7). Secondly, s 22(6) equally makes plain that ss 22(3)-(5) are particular exemplifications of the legislative intent stated in s 22(2). Thirdly, as s 22(1) the focus of the section for income tax Act purposes is upon the "business of [the] transferring bank that becomes … the transferred business of the receiving bank". "Business" we would note is defined to include "the assets and liabilities" of the bank: s 5. Fourthly, importantly, on and after the succession day, s 22(2)(a) places the receiving bank for all income tax Act purposes "in the same position in relation to the business … as the transferring bank would have been apart from the operation or effect of this Act": emphasis added. We would note in passing that the appellant has submitted that the words we have highlighted have the effect of quarantining for taxation purposes the Savings Bank interests in its partnerships with Commonwealth Bank, that are transferred to the Commonwealth Bank. Fifthly, the revenue neutrality principle stated in s 22(2)(b) requires some unpackaging. Put shortly, in its first formulation it states (for present purposes) that the operation or effect of the Act in relation to the business transferred, should for all income tax Act purposes be revenue neutral. In the succeeding "explanatory" formulation it states that no assessable income, deduction, capital gain or capital loss should be derived, or incurred, or should accrue, by or to the transferring bank or the receiving bank in relation to the business transferred, merely because of the operation or effect of this Act. This would on its face appear to apply to assessable income and deductions derived by the transferring bank but which are transferred to the receiving bank in consequence of the transfer of assets and liabilities effected by s 13(1) of the Integration Act. However, s 22(4) obviates this particular consequence by deeming for the purposes of the income tax Acts that all assessable income derived or taken to be derived, all allowable deductions and capital losses incurred or taken to be incurred by the transferring bank and "all other consequences" for that bank – … are taken to have been derived or incurred by, or to have occurred in relation to, the receiving bank and not the transferring bank. What is left as the residual area of operation of this explanatory formulation is by no means clear but it would seem to refer only to such assessable income etc, that is derived etc by the receiving bank (i) in relation to the business bank transferred; (ii) merely because of the operation or effect of the Act; but (iii) which is not deemed to be income etc, derived etc by it pursuant to s 22(4). Sixthly, while the Explanatory Memorandum for the Bank Integration Bill and the Second Reading Speech both refer, without enlargement, to tax "neutrality under Income Tax law", when describing in general terms how the Act's provisions would facilitate the transfer of a savings bank's business to its parent, the "revenue-neutral" principle of s 22(2)(b), as explained, is as noted above, specific and limited. 17 The final provision of the Integration Act to which reference needs be made is s 31. It provided for the repeal of Part V of the Commonwealth Banks Act 1959 (Cth) on the succession day for the Commonwealth Bank and the Savings Bank. The Savings Bank being the creature of that part, it ceased to exist on the succession day. THE CONSOLIDATION REGIME: PART 3-90 18 This Part allows certain groups of "entities" to be treated as single entities for income tax purposes. Having chosen to consolidate as a group, subsidiary members are treated as part of the head company of the group rather than as separate income tax identities. A partnership can be a subsidiary member of a group if, for present purposes, it is a wholly-owned subsidiary of the head company: s 703-15 and s 703-30. 19 "Partnership" is defined in s 995-1(1) of the 1997 Act to mean: (a) an association of persons (other than a company or a limited partnership) carrying on business as partners or in receipt of ordinary income or statutory income jointly; or (b) a limited partnership. 20 It is unnecessary for present purposes to outline how the consolidation regimes operates in relation to partnerships. THE ISSUES AT TRIAL AND THE PRIMARY JUDGE'S DECISION 21 The two issues her Honour identified as arising in the proceeding were – (i) whether s 22(3) of the Integration Act had the effect that the four partnerships were (even if only for tax purposes) deemed to be continued in existence after integration; and (ii) if so, whether the consolidation provisions in Part 3-90 of the Income Tax Assessment Act 1997 applied to those deemed partnerships and to their assets. 22 Her Honour concluded that s 22(3) applied only to partnerships between the transferring bank and third parties, ie partnerships of which there could be continuity when the receiving bank became the successor of the transferring bank. She rejected the proposed construction of s 22(3) which would countenance for income tax Act purposes, a continuity of the partnerships between the Commonwealth Bank and itself as successor to the Savings Bank. 23 For present purposes, it is sufficient if we refer only to her Honour's characterisation of the intent and purpose of s 22(3) (Reasons [20]-[21]): 20 Section 22(3) is concerned with the continuity of partnerships in which the transferring bank was a partner immediately before succession day. The concern is justified because the effect of the Bank Integration Act is to replace partnerships with the transferring bank by new partnerships with the receiving bank. There are two elements to the process. Assume, for example that there is a partnership between the transferring bank and X co. Divesting the transferring bank of its assets and liabilities dissolves the partnership between the transferring bank and X co; vesting the assets and liabilities in the receiving bank creates a new partnership between the receiving bank and X co. Although the Act clearly intends that these two events will occur virtually simultaneously, nonetheless, it could be argued that there is an instant of discontinuity of partnership carrying with it the potential for adverse taxation consequences. Section 22(3) anticipates this problem and provides for it by deeming there to have been no discontinuity. The section does not purport to deal with any issue other than discontinuity. It does not purport to create a new partnership; it is predicated on there being a reconstituted partnership. This much is clear from the following statement at paragraph 26 of the explanatory memorandum for the Bank Integration Bill 1991: Subclause (3) will preserve the continuity of the partnerships of which the transferring bank was a member. Without this provision the acquisition by the receiving bank of the interest in any partnership previously held by the transferring bank would dissolve that partnership and a new partnership with the receiving bank would arise. That could mean that other members of the partnership would suffer detriment due to the loss of tax concessions that could not be carried forward into the reconstituted partnership. [Emphasis added by primary judge.] 21 Section 22(3) was intended to ensure that there were no adverse tax consequences as a result of the Commonwealth Bank replacing the Savings Bank in a partnership. THE APPEAL 24 The appellant seeks orders that (i) the appeal be allowed with costs; (ii) the application below be allowed with costs; and (iii) the various objections made by the appellant on 3 December 2007 in relation to the Notice of Assessment issue to it by the Commissioner on 5 May 2004 be allowed to the extent specified in the Notice of Appeal. 25 The context which informs the issues of construction raised by CBA is said to be the "stated parliamentary intention that integration be "revenue neutral". Repeated reference is made in CBA's submissions to this formula and to the Explanatory Memorandum to the Integration Act (at p 1) and to the Second Reading Speech (H of R vol 180 at 2649). 26 The central propositions advanced by CBA can be stated shortly. First, s 22(2)(a) of the Act preserves the pre-integration tax treatment of the business of the transferring bank after it has been transferred to the receiving bank on integration. Insofar as CSBA's partnership interests were concerned, it preserved their status as such in the hands of CBA and prevented the merger, for income tax purposes, of those interests with the partnership interests held by CBA in its own right. The tax treatment so afforded CBA is only in relation to the transferred business of CSBA. 27 Secondly, on dissolution of the CBA-CSBA partnership itself in consequence of their integration, CBA (like any third party partner) would be deemed to have disposed of its interest in the partnership for the market value of that interests immediately prior to dissolution: see s 59AA of the 1936 ITA Act. Where the market value of the partnership interest exceeded its tax written-down value, CBA (like any third party partner) would have been liable to make an assessable balancing charge, and a final income tax return would need to have been filed in relation the dissolved partnership: see ss 59(2), 90, 92, 1936 Act. However, s 22(2)(b) of the Integration Act would not protect CBA from the liability to make a balancing charge because that section only applies to the assets and liabilities of CSBA, not CBA. As a consequence, unless CBA is entitled to the benefit of the partnership continuity provided for in s 22(3), it would be exposed to adverse tax consequences from the dissolution of its partnership, but from which exposure third party partners alone are protected on her Honour's construction of the subsection. 28 Thirdly, the mischief to which s 22(3) is directed applies as equally to a partnership between CBA and CSBA as it does to a partnership between CSBA and a third party. The ordinary meaning of the words of s 22(3) is consistent with this construction. Section 22(2)(a) and 22(3) have, in consequence, a complementary operation. The former relevantly preserves CSBA's partnership interests for income tax purposes. The latter ensures that the interests of each other partner (whether they be CBA or a third party) are similarly unaffected by integration. The combined effect of the provisions is that the income tax laws apply as though integration had not occurred and the possibility that a different tax treatment could be given to CBA's and CSBA's respective pre-integration interests in the partnerships is avoided. That is the way in which Parliament fulfilled the policy objective of encouraging banks to integrate, an important element of which was ensuring revenue neutrality. 29 Fourthly, CBA does not contend that a "new entity" was 'created' by s 22(3). Rather, due effect must be given to the terms of s 22, as set out in subsections (2)(a) and (3) of that provision. Those sections establish a state of affairs – namely, the deemed continuation of partnerships and the holding by CBA of the assets of CSBA separately from its own assets – that pertains solely for the purposes of the 1936 and 1997 Acts. However, as it sought to emphasise in its Reply Submissions (at [18]-[19]) CBA does not contend that its construction of s 22(3) entails that the non-existent CSBA continues as a partner of each partnership. Section 22(3) must be read consistently with the balance of the Act under which CSBA's assets were assigned to CBA and CSBA's legal existence was terminated. Accordingly, in relation to the CBA-CSBA partnerships, these were continued for income tax purposes, but with CBA holding the partnership interests of itself and CSBA. We would interpolate that it has not been suggested that CSBA's legal personality has been resurrected in some fashion so as to give the continued "partnership" the appearance of "an association of persons": see s 995-1(1) "partnership"; or so as to justify the continuing characterisation of the partnership interests transferred to CBA as being CSBA's interests. 30 Fifthly, in relation to whether CBA could avail of the consolidation provisions of Part 3-90 by virtue of being a "partnership" for Integration Act purposes, the definition of "partnership" in s 995-1(1) of the 1997 Act, that definition must be read subject to s 22(3) of the Integration Act. The latter section makes specific provision for a particular group of partnerships (those in which a transferring bank was a member immediately prior to integration) and provides that such partnerships continue for income tax purposes notwithstanding integration. Where, as here, integration results in one of the requirements for a partnership under the general definition in s 995-1 not being satisfied, s 22(3) abrogates that result by deeming the partnership to continue. It follows that s 22(3) extends the meaning, for income tax purposes, of the word "partnership" to circumstances not covered by the s 995-1 definition. That result is not surprising given the willingness of Parliament in s 22 of the Integration Act to impose an income tax treatment on the assets of a transferring bank that differs markedly from the position that would otherwise apply. In addition, this construction of "partnership" is necessary in order to give effect to the principle of revenue neutrality underlying the Integration Act. 31 Without disrespect to counsel for the respondent, we consider it unnecessary to outline the Commissioner's submissions. They clearly inform aspects of our reasoning. CONSIDERATION 32 We preface what we have to say with the observation that the parties have not addressed the legal signification and practical effect of CBA becoming "the successor in law" of CSBA by virtue of s 12 of the Integration Act: cf Broadcast Australia Pty Ltd v Minister Assisting the Minister for Natural Resources (Lands) (2004) 221 CLR 178 esp at [15]. It has been assumed that integration effected a dissolution of the four partnerships under the general law. We return to the supposed consequences of this below. 33 There is little in the appellant's contentions with which we agree. In particular, they overstate the contextual significance: cf CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 at 408; that properly can be attributed to unelaborated comments in the Explanatory Memorandum (at p 1) and in the Second Reading Speech relating to integrating with "neutrality under Income Tax law". We have already indicated both that s 22(1) applies s 22 to the business of the transferring bank, but not to that of the receiving bank, and that the revenue neutrality principle as elaborated in s 22(2)(b) is limited accordingly for all purposes of the income tax Acts, to assessable income derived, etc in relation to that business. This might be a more straightened application of tax neutrality than the generalised formula of the Explanatory Memorandum, for example, might be thought to have heralded. However, in the face of the clearly stated, but circumscribed, legislative intent in s 22(2) – which opens with the unequivocal declaration: "It is the intention of the Parliament" – it is not open to this Court to make assumptions as to whether and if so how, the legislature would wish as well to extend what is the presently confined scope of what is meant by "revenue neutral" in s 22(2)(b): cf Woodside Energy Ltd v Federal Commissioner of Taxation (2009) 174 FCR 91 at [51]. Nor, for reasons we enlarge upon below, do we think some unelaborated broader conception of tax neutrality can properly be used to contrive the construction of s 22(3). 34 The two pillars of CBA's contentions are s 22(2)(a) and s 22(3) – subsections which it is said have a complementary operation. We do not consider that such is the case. The provisions of Part 3 of the Integration Act, and the statutory definitions of the terms "asset" and "transferred asset", "business" and "transferred business" and "liability" and "transferred liability" make it clear beyond question that the assets, business and liabilities of CSBA, on integration, became the assets etc of CBA and did so without qualification or reservation. It was upon that state of affairs that s 22(2)(a) was intended to operate. 35 The sub-clause's concern was with the taxation treatment of CBA in relation to the business which was vested in it by virtue of the Integration Act. In addressing this, it did not qualify the transfer itself in any way or for any purpose. It did not quarantine the partnership interests from the operation or effect of the transfer. It did not preserve those interests for income tax purposes. Rather, for all income tax Act purposes, it gave CBA the same tax treatment in relation to those interests that CSBA would have continued to enjoy but for the integration. CBA was to be treated for tax purposes as was CSBA. And this was the advantage it exploited in its partnership returns until it sought to avail of the greater scope for depreciation deductions under the consolidation regime of Part 3-90 of the 1997 ITAA. There was no partnership asset "quarantined" with its status preserved for tax purposes. There was no implicit recognition of a continuing partnership for tax purposes. 36 Before turning to s 22(3) directly, it is appropriate to refer to CBA's contention that unless s 22(3) has the construction it proposes, it would be exposed to adverse tax consequences resulting from the bank integration and this because of the operation of s 59AA of the 1936 ITAA. The premise of this is that the integration effected a dissolution of the partnership for the purposes of that section. We noted earlier that the parties have not addressed and have not put in issue the legal effect of succession. In consequence we refrain from entering upon the question whether s 59AA and the general partnership law principles said to inform it can appropriately be applied at all to integration under the Integration Act. For present purposes we accept that, if CBA is correct in the view it takes of the operation of s 59AA (a view strongly disputed by the Commissioner), the revenue neutrality principle of s 22(2)(b) can offer it no succour. It applies only to assessable income derived, etc, in relation to the business transferred. If CBA was required to make an assessable balancing charge in consequence of s 59AA, this would have been in relation to its own partnership interest. That adverse consequence, though, cannot be avoided by the manipulation of s 22(3) – unless the subsection properly construed in its context has the effect for which CBA contends. In our view it does not. 37 Section 22(3) gives effect to the succession principle but has to be construed against the background of elementary principles of Australian partnership law: a partnership has no existence separate from its members; it requires two or more members: see 1997 ITAA, s 995-1(1) "partnership"; and cf Partnership Act 1890 (NSW) s 1; and a change in the composition of a partnership results in a dissolution of the existing firm and the creation of a new firm: Tikva Investments Pty Ltd v Federal Commissioner of Taxation (1972) 128 CLR 158 at 167-168; Hadlee v Commissioner of Inland Revenue [1989] 2 NZLR 447 at 455; Lindley and Banks on Partnership, 3-01 et seq, 24.03 (18th ed, 2003). So considered it is in our view quite clear that the continuity of a partnership envisaged by s 22(3) is that of an actual partnership to which the receiving bank accedes by succession but which continues as if the pre-existing partnership for income tax Act purposes. Necessarily, the ongoing relationship which is so continued must itself be one of partnership. 38 The consequence of this is that if CBA, CSBA and a third party (ABC) were in partnership at the succession day, the subsection would for income tax Act purposes deem that partnership to be the continuing one notwithstanding that a new partnership, ie CBA and ABC, was the ongoing partnership. In contrast, if CBA and CSBS alone were the pre-existing partnership, on succession there would be no partnership to continue as only one of the former partners continued to exist and that was CBA in which the entirety of the partnership property vested. 39 Section 22(3) was designed to overcome for tax purposes the ordinary rule of partnership law noted above that a change in the membership of a partnership dissolved the existing partnership and created a new one. Its presupposition was that there would be an ongoing partnership to which it gave a particular attribute, ie "continuity", for tax purposes. The consequence of this was that, on succeeding to the transferring bank's interest in the partnership, the receiving bank was to be treated for income taxation Act purposes as if a continuing, not a new, partner in a continuing partnership. So were averted adverse tax consequences for the original partnership from dissolution arising from a change in membership: see Explanatory Memorandum, para 26. What s 22(3) did not do was to deem a partnership to continue after succession when no actual partnership at all continued after that date. 40 The conclusion we have reached on the proper construction of s 22(3), which mirrors that of the primary judge, reflects the ordinary meaning of the language used in the subsection in its setting. Part 3 of the Integration Act was clearly intended to make the receiving bank the successor in law of the transferring bank; the latter's business was to become the business of the former; and the transferring bank moreover was to cease to exist: see Integration Act, s 31. The comprehensive character of the integration so effected was quite inconsistent with a notional or fictional continuing separation of interests of the transferring and receiving bank after the succession date, even if only for tax purposes. It would require a quite a-contextual construction of s 22(3) to say that Parliament manifested an intention, for taxation purposes, to segregate in any way the businesses it had so unequivocally conjoined. 41 We accept that Parliament can, and often enough does, ordain a counterfactual situation to exist. Nonetheless, it would in our view be highly anomalous given the purpose of the Integration Act for the Parliament to ordain that, for tax purposes, (i) a "partnership" continued but only with one partner, or possibly, on the appellant's submission, a partnership between the receiving bank and itself as successor to the transferring bank: see [29] above; and (ii) that the property of a partner in a partnership which existed prior to integration, continued for tax purposes to be partnership property notwithstanding that property had been legislatively declared to "become" the property of the receiving bank: cf s 13 and s 22(2)(a). 42 We earlier indicated that the principle of "tax neutral integration" has no bearing upon the construction of s 22(3). The provisions of Part 4 are focussed upon the business of the transferring bank that becomes the transferred business of the receiving bank. This is clear on the face of s 21 and is stated in s 22(1) to be so for the purposes of that section. Whatever tax neutrality might otherwise mean in other contexts it has a limited meaning here. That focus is most apparent in s 22(2) – which obviously was intended to embody the Parliament's principal statement of its intent in relation to the application of the income tax acts: see s 22(6) – and in particular in s 22(2)(b) which provides its own meaning of "revenue neutral". We have already indicated that (i) s 22(2)(a) does not preserve the status of CSBA's partnership interests for tax purposes; and (ii) s 22(2)(b)'s revenue neutrality would not protect CBA from adverse tax consequences relating to its own partnership interests occasioned by the operation or effect of the Integration Act. Sections 22(3), (4) and (5) deal with quite particular aspects of the integration of the transferred business and so contrive the taxation consequences for the receiving bank. These provisions do not limit the generality of s 22(2): see s 22(6). 43 Against this background it is difficult to discern from, or beyond, s 22(2) a more general Parliamentary intent that integration be revenue (or tax) neutral. The several unelaborated statements concerning integration with "neutrality under income tax laws" in the Explanatory Memorandum and the Second Reading Speech do not assist the appellant. Those statements were made in relation to a Bill which dealt quite explicitly with "Taxation matters" and which itself gave clear indications of its legislative intention as to revenue neutrality in relation to the transferred business. They provide no firm indication of what more generally tax neutrality might signify let alone how it might properly be deployed in interpreting the Act. 44 The appellant has acknowledged that unless s 22(3) is found to provide a gateway to the consolidation regime of Part 3-90 of the 1997 ITAA, its appeal must fail. That consequence necessarily follows from our conclusion. 45 As with the primary judge, we consider it unnecessary in these circumstances to consider the rival submissions advanced on the applicability, and the actual manner of application, of the Part 3-90 consolidation regime to CBA, assuming its "one person partnership" has been continued under s 22(3). 46 While the regime of Part 3-90 works harmoniously with the s 995-1(1) definition of a partnership, the particular "continuing partnership" propounded by CBA does not. Neither does it accommodate itself to the scheme of Part 3-90 without a further compounding of fictions. 47 It is unnecessary that we enlarge further on this. CONCLUSION 48 We will order that the appeal be dismissed with costs. I certify that the preceding forty-eight (48) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Finn and Perram. Associate: Dated: 14 September 2009 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 266 of 2009 ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: COMMONWEALTH BANK OF AUSTRALIA Appellant AND: DEPUTY COMMISSIONER OF TAXATION Respondent JUDGES: FINN, EMMETT & PERRAM JJ DATE: 16 SEPTEMBER 2009 PLACE: SYDNEY REASONS FOR JUDGMENT EMMETT J: 49 This appeal concerns the effect of the Bank Integration Act 1991 (Cth) (Integration Act). I have read the reasons of Finn and Perram JJ in draft form and I agree with their Honours' conclusions for the reasons stated by them. However, I wish to add some observations of my own. 50 The Integration Act was enacted to facilitate the absorption of each of eight savings banks into its related trading bank. Clearly enough, the Integration Act was enacted to overcome the complexities that would be involved in melding each of the two related banks into a single legal entity. The banks in question are described in Schedule 1 to the Integration Act. Two of the banks described are the appellant, Commonwealth Bank of Australia (the Trading Bank), and its former related savings bank, Commonwealth Savings Bank of Australia (the Savings Bank). 51 The trading banks are described in the Integration Act, as receiving banks and their related savings banks are described as transferring banks. Part 2 of the Integration Act, which consists of ss 7 to 11, deals with the steps leading to a bank reorganisation. Under s 7, where a receiving bank and its related transferring bank agree to seek the statutory vesting of the business of the transferring bank in the receiving bank, the receiving bank may give notice of that agreement to the Reserve Bank and to the Treasurer. Provision is made for the Reserve Bank to certify to the Treasurer that the interests of the depositors of both the receiving bank and its transferring bank would be adequately protected if the vesting proceeds. Section 9 then authorises the Treasurer to fix a day on which the business of the transferring bank is to vest in the receiving bank. That day is to be called the succession day for the two banks. Section 5 defines business as including, in relation to a bank, the assets and liabilities of that bank. That definition appears to contemplate that the business might include something other than assets and liabilities, although it is difficult to conceive what. 52 Part 3 of the Integration Act contains the pivotal provisions for bank reorganisations. Under s 12, on the succession day for two related banks, the receiving bank becomes the successor in law of the transferring bank. Specifically, for present purposes, the Trading Bank became the successor in law of the Savings Bank on 1 January 1993, pursuant to Part 3 of the Integration Act. By the operation of s 13, all assets of the Savings Bank, wherever located, vested in, or became otherwise available for use of, the Trading Bank and all liabilities of the Savings Bank, wherever located, became liabilities of the Trading Bank. 53 Part 3 of the Integration Act contains other provisions designed to facilitate the succession of each receiving bank to the undertaking of its relevant transferring bank. Thus: · Each instrument subsisting immediately before the succession day to which the transferring bank was a party, that was given to, by or in favour of the transferring bank, that refers to the transferring bank or under which money is, or may become payable, or other property is, or may become liable to be transferred, to or by the transferring bank, is to continue to have effect as if the reference in the instrument to the transferring bank were a reference to the receiving bank. · Places of business of the transferring bank became places of business for the receiving bank. · Where proceedings to which the transferring bank was a party were pending or existing in any court or tribunal, the receiving bank was substituted for the transferring bank as a party to the proceeding and has the same rights in the proceeding as the transferring bank had. 54 Part 4 of the Integration Act, which consists of ss 21 and 22, deals with taxation matters. Part 5 deals with miscellaneous matters. Part 6 makes consequential amendments to the Commonwealth Banks Act 1959 (Cth), under which the Savings Bank exists. Part V of that Act, which continues the Savings Bank in existence, was repealed with effect from 1 January 1993, thereby dissolving or extinguishing the Savings Bank at the moment when the Trading Bank becoming its successor in law. 55 This appeal is concerned with the effect of Part 4 of the Integration Act. Section 21(1) provides that tax was not to be payable under any law of the Commonwealth or of a State or Territory in respect of the operation or effect of the Integration Act or anything done for a purpose connected with, or arising out of, its operation or effect. However, under s 21(3), tax referred to in s 21(1) does not include any tax assessed under the Income Tax Assessment Act 1936 (Cth) (the 1936 Act) or the Income Tax Assessment Act 1997 (Cth) (the 1997 Act). 56 Section 22 of the Integration Act deals with the application of the 1936 Act and the 1997 Act. Where a succession day is fixed for a receiving bank and its related transferring bank, s 22 applies to the business of the transferring bank that becomes the transferred business of the receiving bank on that day. 57 The scheme of s 22 is unusual. Section 22(2) begins by a statement of the intention of the Parliament. It is not expressed, in terms, to be an operative provision. Rather, it is expressed to be a statement by the Parliament of the way in which the subsequent operative or dispositive provisions of s 22 are to be construed. Sections 22(3), 22(4) and 22(5) are clearly operative provisions. Both parties accept that s 22 should also be treated as not merely a statement of intention. Sections 22(6), (7), (8), (9) and (10) are also concerned with the construction of the operative provisions. 58 Sections 22(3), 22(4) and 22(5) address three specific taxation matters that might arise following the fixing of a succession day in relation to a receiving bank and its related transferring bank. Section 22(3) deals with the continuity of a partnership in which a transferring bank was a partner. Section 22(4) deals with assessable income of the transferring bank, allowable deductions and capital losses of a transferring bank and all other consequences for the transferring bank. Section 22(5) deals with any franking surplus or franking deficit of the relevant transferring bank. 59 The critical question for present purposes is the effect of s 22(3), in the light of the intention of the Parliament stated in s 22(2). Section 22(2) expresses two intentions of the Parliament. First, s 22(2)(a) says that, following the succession day, the receiving bank is for all purposes of the 1936 Act and the 1997 Act to be placed in the same position, in relation to the business that becomes the business of that receiving bank under the Integration Act, as its related transferring bank would have been, apart from the operation or effect of the Integration Act. 60 Secondly, s 22(2)(b) says that the operation or effect of the Integration Act in relation to that business should be revenue neutral. That is stated to mean that no assessable income, deduction, capital gain or capital loss is to be derived or incurred, or should accrue, by or to the receiving bank or the transferring bank in relation to that business, merely because of the operation or effect of the Integration Act. Thus, s 22(2)(b) is concerned with the derivation, incurring or accrual of: · assessable income · deductions · capital gains · capital losses merely because of the operation or effect of the Integration Act or of anything done for a purpose connected with or arising out of that operation or effect. 61 Section 22(4) relevantly provides that, where a succession day is fixed: · all assessable income derived or taken to be derived by the transferring bank, · all allowable deductions and capital losses incurred or taken to be incurred by the transferring bank, and · all other consequences for the transferring bank, are taken to be have been derived or incurred by or to have occurred in relation to the receiving bank and not the transferring bank. 62 Thus, while s 22(2)(b) and s 22(4) address similar matters, they are concerned with different aspects of the integration. Section 22(2)(b) is concerned with derivation, incurring or accrual by or to either the transferring bank the receiving bank because of the operation or effect of the Integration Act. On the other hand, s 22(4) is concerned to ensure that the derivations, incurrings and occurrences in relation to the transferring bank are to be taken to be in relation to the receiving bank. 63 On that analysis, the presently critical provision, s 22(3), is not affected by s 22(2)(b). The relevant intention is that expressed in s 22(2)(a), namely, that the receiving bank should stand in the shoes of the transferring bank in relation to the business that becomes its business under the Integration Act. Under s 22(3), nothing in the Integration Act is to affect the continuity of any partnership in which a transferring bank was a partner immediately before the succession day. 64 The relevance of the operation and effect of s 22(3) is the Trading Bank's claim to be entitled to reset the value on the basis of which former partnership property may be depreciated. Section 59AA(1) of the 1936 Act, as then in force, relevantly provides that, if, for any reason, a change has occurred in the ownership of, or in the interests of persons in, property in respect of which depreciation has been allowed and one or more of the persons who owned the property before the change has or have an interest in the property after the change, the provisions of the 1936 Act relating to depreciation apply as if the persons who owned the property before the change (the Transferor) had, on the day on which the change occurred, disposed of the whole of the property to the person by whom the property is owned after the change (the Transferee). Section 59AA(2) provides that the provisions of the 1936 Act relating to depreciation apply as if the consideration for the disposal was equal to the market value of the property immediately before the time when the change occurred. However, there is an exception for rollover relief to which reference will be made below. 65 Section 59(1) of the 1936 Act provides that, where any property of a taxpayer, in respect of which depreciation has been allowed, is disposed of, the depreciated value of the property at that time, less the amount of any consideration receivable in respect of the disposal, is an allowable deduction. Under s 59(2), if that consideration exceeds the depreciated value, the excess, to the extent of the sum of the amounts allowed in assessments for income tax, is to be included in the assessable income of the taxpayer. The applicant, the Trading Bank, says that s 59AA and s 59 constitute one of the vices to which s 22(3) of the Integration Act is directed. 66 The issue between the Trading Bank and the respondent, the Commissioner of Taxation (the Commissioner), concerns the operation of Part 3-90 of the 1997 Act in the light of s 22 of the Integration Act. Part 3-90 allows certain groups of entities, as defined, 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 a separate income tax identity. The head company inherits the income tax history of a subsidiary member when the subsidiary member becomes a subsidiary member of the group. That is supported by rules that, inter alia, set the cost, for income tax purposes, of assets that subsidiary members bring into the group. 67 Section 700-5(1) provides that the single entity rule determines how the income tax liability of a consolidated group is to be ascertained. The basic principle is contained in the core rules in Division 701. Section 700-5(2) provides that, 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. Under s 700-5(3), an eligible wholly owned group becomes a consolidated group after notice of a choice to consolidate is given to the Commissioner. 68 Section 701-1(1) provides that, if an entity is a subsidiary member of a consolidated group for any period, it and any other subsidiary members of the group are taken, for the purposes covered by ss 701-1(2) and 701-1(3), to be parts of the head company of the group rather than separate entities, during that period. The purposes covered by ss 701-1(2) and 701-1(3) are: · Working out the amount of the liability of the head company and the entity that is a subsidiary member for income tax. · Working out the loss, if any, of a particular sort of the head company or the subsidiary member entity. 69 Section 703-30(1) provides that an entity, which, under s 960-100(1)(d), includes a partnership, is a wholly owned subsidiary of another entity if all the membership interests in the first entity (the Subsidiary Entity) are beneficially owned by the second entity (the Holding Entity). 70 The Trading Bank contends that continuity, when referred to in s 22(3) of the Integration Act, is concerned with continuity for tax purposes. It says that there would be no reason to preserve continuity for any purpose other than for tax purposes: the operation of s 22(2)(a), in protecting the interest of the Savings Bank, is complementary of s 22(3), which protects the interests of third parties, including the Trading Bank. 71 However, both s 22(2)(a) and s 22(2)(b) are relevantly qualified by reference to the business that becomes the business of the receiving bank under the Integration Act. It is only in relation to that business that the receiving bank is to be placed in the same position as the transferring bank would have been, apart from the operation and effect of the Integration Act. Further, it is only in relation to that business that the operation or effect of the Integration Act is to be revenue neutral, in the sense referred to in s 22(2)(b). There is no intention stated in s 22(2) designed to protect a receiving bank in relation to assets or liabilities that do not become assets or liabilities of the receiving bank under the Integration Act. 72 The present dispute concerns the operation of Part 3-90 of the 1997 Act in relation to partnerships between the Savings Bank and the Trading Bank that were in force on 1 January 1993 (the Bank Partnerships). That depends upon one entity, being the Partnerships, being treated as part of the Trading Bank in accordance with s 701-1(1) of the 1997 Act. The effect of s 22(3) was that, for the purposes of the 1936 Act and the 1997 Act, nothing in the Integration Act affected the continuity of a partnership in which a transferring bank was a partner. That is to say, so long as there were legal entities capable of being partners in a partnership, the partnership was taken not to be dissolved by reason of the operation of Part III of the Integration Act. 73 However, that says nothing about the deemed continuation in existence of a legal entity that was extinguished and ceased to exist by the operation and effect of the Integration Act. That was the effect of Part 6 in relation to the Savings Bank. The word "continuity" is concerned with the principle that a partnership comes to an end on the dissolution or death of a partner. It is not concerned with the deemed continuation in existence of an entity that is extinguished by the effect and operation of the Integration Act. 74 As from 1 January 1993, there was no longer any partnership between the Savings Bank and the Trading Bank because the Bank Partnerships were dissolved on that day when the Savings Bank ceased to exist. The Trading Bank succeeded to the assets and liabilities of the Savings Bank in relation to the Bank Partnerships. However, the language of s 22(3) is not apt or appropriate to treat the single entity, the Trading Bank, as being in a partnership with itself by reason of having succeeded to the assets and liabilities of the Savings Bank under the Bank Partnerships. 75 That is the conclusion reached by the primary judge. Her Honour was correct in that conclusion. The appeal should be dismissed. I certify that the preceding twenty-seven (27) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett. Associate: Dated: 15 September 2009 Counsel for the Appellant: Mr T Bathurst QC with Mr D Thomas Solicitor for the Appellant: Freehills Counsel for the Respondent: Mr A Robertson SC with Mr J Hmelnitsky Solicitor for the Respondent: ATO Legal Services Branch Date of Hearing: 6 August 2009 Date of Judgment: 16 September 2009