FEDERAL COURT OF AUSTRALIA Dismin Investments Pty Ltd v Commissioner of Taxation [2000] FCA 1703 INCOME TAX – controlled foreign company – disposal of ten per cent interest in partnership between Canadian brewers – whether subject to capital gains tax – whether ascertainment of profit is governed by Pt IIIA of Income Tax Assessment Act 1936 (Cth) or by ordinary concepts – valuation of interest – whether discount for lack of marketability and control appropriate Income Tax Assessment Act 1936 (Cth) ss 160K(5), 160M(1), 160Z(1)(a), 160ZH(13), 160ZO(1)(a), 382, 383, 385(2)(a)(i), 389, 391, 406, 410, 411(1), 412(2)(a)(i)(A), 412(2)(a)(i)(A), 456 Income Tax Regulations regs 152B(1), 152D(1) Boland v Yates Property Corporation Pty Ltd (1999) 167 ALR 575 at par 12 mentioned DISMIN INVESTMENTS PTY LTD v FEDERAL COMMISSIONER OF TAXATION NO. VG 619 OF 1998 DISMIN INVESTMENTS PTY LTD v FEDERAL COMMISSIONER OF TAXATION NO. VG 620 OF 1998 HEEREY J 24 NOVEMBER 2000 MELBOURNE IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VG 619 OF 1998 VG 620 OF 1998 BETWEEN: DISMIN INVESTMENTS PTY LTD APPLICANT AND: FEDERAL COMMISSIONER OF TAXATION RESPONDENT JUDGE: HEEREY J DATE OF ORDER: 24 NOVEMBER 2000 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. The application is adjourned sine die with leave reserved for counsel to bring in minutes of proposed orders. 2. Costs are reserved. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VG 619 OF 1998 VG 620 OF 1998 BETWEEN: DISMIN INVESTMENTS PTY LTD APPLICANT AND: FEDERAL COMMISSIONER OF TAXATION RESPONDENT JUDGE: HEEREY J DATE: 24 NOVEMBER 2000 PLACE: MELBOURNE REASONS FOR JUDGMENT 1 In 1989 two Canadian companies Carling O'Keefe Breweries of Canada Limited ("Carling") and The Molson Companies Limited ("Molson") formed a partnership called The Molson Partnership ("the Partnership") to carry on the business of brewing in North America. In 1993 each of the partners sold for $169,941,035 (all the amounts in these reasons are in Canadian dollars) a ten per cent interest in the Partnership to the United States brewer Miller Brewing Inc ("Miller"). The capital gain, if any, made by Carling on that transaction has been brought within the purview of Australian tax law because the ultimate owner of Carling was the present applicant Dismin Investments Pty Ltd ("Dismin"), an Australian company and a member of the Foster's Brewing Group. 2 Dismin owned Mindis NV, a company incorporated in the Netherlands Antilles. Mindis NV in turn owned Mindis BV ("MBV") a Netherlands company, which owned FBG Canadian Investments Inc ("FBG Canadian"), which owned Carling. MBV was, in relation to Dismin, a controlled foreign company ("CFC") for the purposes of Pt X of the Income Tax Assessment Act 1936 (Cth) ("the Act"). 3 MBV was a resident of a "listed country" within the meaning of s 320(1) and Dismin was an "attributable taxpayer" in relation to MBV (s 361). Dismin's assessable income for the Australian financial year ended 30 June 1993 included its share of MBV's "attributable income" (s 456(1)). The attributable income of MBV is the amount which would be its taxable income if it were assumed (inter alia) to be a taxpayer and a resident (ss 382, 383(a)). The attributable income (if any) of MBV included the "notional assessable income" (if any) of MBV (s 385(2)(a)) referable to the relevant transaction, a term which will be defined more precisely hereafter. 4 The present proceedings are two appeals against the Commissioner's decisions on objections to income tax assessments made in respect of Dismin's assessable income for the year ended 30 June 1993. 5 Counsel submitted, and I agree, that I should answer a set of questions. The answers to those questions will enable the parties to submit appropriate orders for the disposition of the appeals. The questions proposed by counsel (subject to some modifications which I shall mention later) are: 1. Did the relevant transaction give rise to attributable income under Pt X by way of capital gain? (The issue is whether there was in truth any profit or gain at all.) 2. What was the market value in Canadian dollars of a 50 per cent interest in the Partnership at 30 June 1990? 3. Should the amount to be included in the cost base of the relevant asset be determined by (i) apportioning the market value of a 50 per cent interest in the Partnership at 30 June 1990 pro rata (ie by taking one-fifth of it); or (ii) by reference to the market value of a ten per cent interest in the Partnership at 30 June 1990? 4. What was the market value in Canadian dollars of a ten per cent interest in the Partnership at 30 June 1990? 5. Should the relevant conversion of foreign currency to Australian currency be made under s 160K(5) or s 391 of the Act? The Molson Partnership 6 By an agreement dated 17 January 1989 Carling and Molson agreed to form the Partnership to carry on business as partners under the name "Molson Breweries" combining the businesses previously carried on by each of them. Carling agreed to transfer to the Partnership its North American brewing operations, including working capital, fixed assets, trademarks and an interest in an ice hockey team. Carling retained outside the Partnership certain assets including cash reserves, a $20 million promissory note from Courage Ltd and Carling's wholly owned subsidiary Beamish and Crawford plc, an Irish brewer. 7 Operations commenced on 1 August 1989 pursuant to an agreement in writing of that date. Article 3 deals with management of the Partnership. There is to be a Board with equal representation: art 3.1. At all meetings of the Board Molson appointees and Carling appointees shall collectively each have one vote; there is to be no casting vote and all matters coming before the Board are to be decided by unanimous vote: art 3.3. All matters affecting the Partnership or any aspect of the business thereof are to be determined by resolution of the Board: art 3.7 There are to be two Chief Executive Officers designated "CEO-Canada" and "CEO-US" appointed by resolution of the Board: art 3.8. The initial holders of those offices are named in the agreement. It seems reasonable to infer that one was nominated by Carling and the other by Miller. 8 Article 4 deals with income allocation and cash distributions and contributions and in effect provides that income is to be distributed equally between the partners. 9 The Partnership is to commence at the date of the agreement and to continue until dissolved or terminated but no partners can dissolve or terminate the Partnership unless by agreement of the partners or by acquisition by one partner of all of the other's interest: arts 7.1 and 7.2. Upon dissolution or termination the assets are to be distributed to the parties in the same order and on the same basis as provided for cash distributions: art 7.3. 10 Article 8 prohibits a transfer of a partner's "Partnership Interest" (defined as a partner's "interest in the Partnership or its rights under or in respect of this Agreement") without the approval of the other partner. If within five years of the date of the agreement a partner receives an offer from a third party to purchase "its entire Partnership Interest" then the other has a pre-emptive right of purchase, but only at the price that the third party is willing to pay. Sales of 10 per cent interests 11 In early 1993 both Carling and Molson reached separate agreements with Miller to each sell a ten per cent interest in the Partnership. The purchaser in each case was a subsidiary of Miller. Prior to this agreement Miller and its related entities had no equity interest in the Partnership and were not related to Molson or Carling. 12 In the case of the ten per cent interest sold by Carling the agreement for sale was contained in a document called "Stock Purchase Agreement" dated 14 January 1993. The parties were MBV, Carling, Foster's Brewing Group Limited, Miller and two Miller subsidiaries. The agreement recited (i) that prior to the closing (as defined) Carling will have transferred to an Ontario corporation (called in the agreement "Sub") which will be a wholly owned subsidiary of MBV inter alia "the ten per cent Partnership interest in the Partnership" (ii) that MBV wishes to sell and one of the Miller subsidiaries (called "the Purchaser") wishes to buy all of the issued and outstanding shares in the capital stock of Sub and (iii) that the Purchaser has advised MBV that it is its present intention immediately after the closing to cause Sub to be wound up and to distribute to the Purchaser all of Sub's assets "(including the ten per cent Interest in the partnership)". 13 The agreement defines a ten per cent Partnership Interest as "a Partnership interest that represents a ten per cent Equity Share in the Partnership to be acquired indirectly by the Purchaser by reason of its consummation of the transactions contemplated by this Agreement, and having such other rights as are contemplated by the terms of the Amended Partnership Agreement." 14 The lastmentioned agreement is the Amended and Restated Partnership Agreement to be entered into by the Carling companies, the Miller companies and Molson. 15 The Stock Purchase Agreement does not involve any entity from the Molson side of the Partnership as a party. It appears from the evidence that a separate agreement was made for the sale of the Molson ten per cent, although not necessarily using similar mechanisms. 16 In the course of the hearing of the present case counsel for Dismin referred to MBV selling twenty per cent of its fifty per cent in the Partnership. Counsel for the Commissioner did not take issue with that description. Nevertheless the basic contractual arrangement – the Stock Purchase Agreement – refers to a ten per cent Partnership interest. I have therefore used this expression in the formulation of the questions to be answered and generally throughout these reasons because it accords with the contemporaneous language of the parties themselves and also perhaps assists in identifying and characterising what it is that was sold . 17 The steps by which the Stock Purchase Agreement was implemented were as follows: Step 1 (i) On 23 February 1993 a company called 1019387 Ontario Limited ("Ontario Co") was incorporated. This is the Sub foreshadowed in the Stock Purchase Agreement. Its raison d'ętre is to be the conduit for the transfer of the ten per cent interest in the Partnership sold by Carling to Miller. (ii) On 25 February 1993 the one common share in Ontario Co was issued to MBV. Step 2 (i) On 1 April 1993 Carling amalgamated with its parent FBG Canadian under s 177M(1) of the Business Corporations Act of Ontario. The amalgamated corporation continued to have the name Carling O'Keefe Breweries of Canada Limited but it will be convenient to refer to it hereafter as "New Carling". (ii) Upon the amalgamation MBV owned the single common share in New Carling. (iii) The single common share held by MBV in FBG Canadian before amalgamation was the same common share it held in New Carling after the amalgamation. (iv) New Carling owned a 50 per cent interest in the Partnership as well as the other assets already mentioned which were not taken into the Partnership. Step 3 On 1 April 1993 the single common share held by MBV in New Carling was converted into 1000 common shares and 1000 shares of a newly created class called class X. The class X shares were redeemable for an amount equal to the product of the fair market value of a ten per cent share in the Partnership plus its undivided interest in the promissory note. (The terms of the issue of the class X shares, contained in the amended Articles of Association of New Carling, incorporate the more detailed definition of the amount payable on redemption contained in par 12 of an advance tax ruling issued by Revenue Canada to Price Waterhouse on 22 December 1992.) Step 4 On 2 April 1993 MBV transferred its 1000 class X shares in New Carling to Ontario Co in consideration of the issue by that company to MBV of a further 1000 common shares. Step 5 On 2 April 1993 (i) New Carling transferred a ten per cent interest in the partnership and an undivided interest in the promissory note to Ontario Co. (ii) In consideration of the transfer Ontario Co issued 1000 redeemable class A shares to New Carling. The class A shares were redeemable for an amount equal to the fair market value of the assets transferred. Step 6 On 2 April 1993 (i) New Carling redeemed the class X shares held by Ontario Co and issued a promissory note for the redemption amount. (ii) Ontario Co redeemed the class A shares held by New Carling and issued a promissory note as payment for the redemption amount. (iii) New Carling and Ontario Co each set off the cross-liabilities created on the redemptions, one against the other, and paid out the promissory notes. (iv) For the purposes of this cross-redemption and set-off, the value of the class X shares and the class A shares was equivalent to the fair market value of a ten per cent share in the Partnership plus the undivided interest in the promissory note. (v) Following the mutual redemption of shares, Ontario Co was divested of any shareholding in any other entity. (vi) At the conclusion of step 6, MBV owned all of the issued shares in Ontario Co which in turn owned a ten per cent interest in the Partnership and the undivided interest in the promissory note. The proportionate interest in the promissory note was 5.61 per cent. Step 7 MBV sold its shareholding in Ontario Co (the 1001 common shares) to Miller Brewing of Canada Ltd (a Miller subsidiary) for $169,941,035. 18 The relevant transaction for present purposes is Step 4. The Commissioner says that the disposal by MBV of the class X shares in New Carling to Ontario Co was caught by the operations of the capital gains tax ("CGT") provisions of Pt IIIA of the Act, as modified by Subdivs B and C of Div 7 of Pt X. The Amended and Restated Partnership Agreement 19 On 2 April 1993 Molson, New Carling, Foster's Brewing Group Limited, Ontario Co, Miller and a Canadian Miller subsidiary ("Miller Canada") entered into an "Amended and Restated Partnership Agreement". The recitals refer inter alia to purchases by Miller of a ten per cent Partnership interest from each of MDV and Molson. Molson, New Carling, Ontario and Miller Canada agree to continue the partnership originally constituted by the agreement of 1 August 1989: art 2.1. The Board is now to consist of twelve members, three appointed by each of New Carling, Molson and Miller Canada and the remaining three to be persons "appointed by unanimous agreement of the partners from the Management of the Partnership", referred to as "Management Appointees": art 3.1(a). 20 All matters coming before the Board require unanimous approval, but the Management Appointees shall not be entitled to vote: art 3.3(a). Income is to be distributed pro rata: art 4. There are restrictions on transfer similar to those contained in the 1989 agreement: art 8. Issue 1 – profit or gain 21 As already mentioned, s 456 operates to include in Dismin's assessable income the appropriate percentage of MBV's attributable income. 22 By s 382(1) MBV's attributable income is the amount which would be its taxable income if certain assumptions are made. For the purposes of those assumptions assessable income to be taken into account is referred to as "notional assessable income": s 382(2). By s 383 the assumptions include (i) that MBV is a taxpayer and an Australia resident, (ii) that the Act is modified in accordance with subdivs B to E of Div 7, and (iii) certain of the assumptions referred to in ss 384 and 385. 23 MBV being a resident of a "listed country" (s 385(1)), the amounts of its notional assessable income are only the amounts to which s 385(2) applies. Relevantly for present purposes s 385(2) provides: "… the amounts of notional assessable income are: (a) amounts that would be included in the notional assessable income of the eligible CFC for the eligible period under this Act as modified in accordance with Subdivisions B to E if the only income or other amounts derived during the eligible period, and any earlier statutory accounting period, by the eligible CFC were: (i) where the eligible CFC does not pass the active income test for the eligible period in relation to the eligible taxpayer – adjusted tainted income (within the meaning of section 386) that is eligible designated concession income in relation to the listed country or any other listed country; …" 24 The relevant "adjusted tainted income" here is "passive income" and in particular "amounts derived from the disposal of tainted assets", including shares in a company: ss 317, 386. 25 The other requirement of s 385(2)(a)(i) is that the amount be "eligible designated concession income". These terms are defined in s 317. "Designated concession income" means income or profits of a kind specified in the regulations. To be "eligible", designated concession income must, broadly speaking, not be subject to tax in the listed country. It is not in dispute that this particular requirement is satisfied. 26 Turning to the regulations, reg 152D(1) provides that for the purposes of the definition of "designated concession income" in s 317 certain "kinds of income or profits" are specified. These include, in relation to each listed country, "capital gains derived by an entity during a relevant period": reg 152D(1)(a). 27 Regulation 152B(1) provides that "capital gains" means "gains or profits of a capital nature that arise from the sale or disposal of all or part of an asset that is sold or disposed of by the CFC". 28 In that setting Dismin contends that after the relevant transaction (Step 4) MBV still owned all the shares in New Carling · indirectly, through its ownership of Ontario Co (which then held the class X shares) and · directly, through the 1000 common shares in New Carling created by the conversion of the single common share into 1000 common shares and 1000 class X shares. 29 It is put that MBV "simply re-organised its asset portfolio" and derived nothing as a consequence of the relevant transaction. 30 The Commissioner contends that the question whether there was a gain or profit of a capital nature within the meaning of reg 152B(1) is to be determined by comparing the value of what was received by MBV with the cost of what it disposed of. By virtue of ss 382 and 383 the CGT provisions of Pt IIIA (as modified by Subdivs B and C of Div 7 of Pt X) apply to the disposal. In the language of Pt IIIA the question is whether and to what extent the disposal consideration exceeds the "cost base" of the asset – in this case the class X shares in New Carling: s 160Z(1)(a). There is no dispute that the disposal consideration MBV received for its X class shares was the market value of the 1000 common shares in Ontario, i.e. $169.73 million. (For reasons which it is not necessary to traverse, this is slightly less than the consideration mentioned at the commencement of these reasons.) 31 The Commissioner points to ss 406,411(1) and 412(2)(a)(i)(A). Those provisions are placed in the Act as follows: Pt X "Attribution of Income in Respect of Controlled Foreign Companies" contains the CFC regime. Division 7 of Pt X – "Calculation of Attributable Income of CFC" contains Subdiv A – "Basic Principles", including ss 381, 382 and 385 already mentioned, Subdiv B – "General Modifications of Australian Tax Law", Subdiv C – "Modifications relating to Australian Capital Gains Tax" and two other subdivisions. 32 In Subdiv C, s 406 provides that for the purposes of calculating the attributable income of a CFC a reference to "a 30 June 1990 non-taxable Australian asset" of the eligible CFC is a reference to an asset "owned by the eligible CFC at the end of 30 June 1990". Such an asset is taken to have been acquired by the CFC on 30 June 1990: s 411(1). For the purposes of Pt IIIA the CFC is taken to have given, as consideration in respect of the acquisition of that asset, an amount equal to "the market value of the asset as at the end of 30 June 1990": s 412(2)(a)(i)(A). 33 The Commissioner contends that the foregoing provisions apply to the present case in the following way. 34 At 30 June 1990 MBV owned the single common share in FBG Canadian. For the purposes of calculating attributable income, that asset is a "30 June 1990 non-taxable Australian asset": s 406. That asset is taken for the purposes of Pt IIIA to have been acquired by MBV on 30 June 1990: s 411(1). 35 MBV is to be taken to have given, as consideration in respect of that acquisition of that asset, an amount equal to the asset's market value as at 30 June 1990: s 412(2)(a)(i)(A). The amount by which the disposal consideration exceeds the cost base (as at 30 June 1990) of the asset disposed of constitutes MBV's gain or profit of a capital nature on the disposal of the asset and is to be included in its assessable income: s 160ZO(1). 36 The change of ownership of the class X shares effected by Step 4 was a disposal of those shares for the purposes of Pt IIIA: s 160M(1). 37 The appropriate cost base of the original common share in New Carling is the fair market value of the underlying partnership interest as at 30 June 1990. Because the single common share was split into 1000 common shares and 1000 class X shares (Step 3), the provisions of s 160ZH(12)-(14) apply to determine the cost base. Those provisions allow for the apportionment of its value between the 1000 common and 1000 class X shares in New Carling. The assets which existed after the relevant transaction (i.e. the 1000 common shares and 1000 class X shares) were derived from or attributable to an asset – the one common share – as it existed immediately before the relevant event. 38 In accordance with s 160ZH(13), the cost base of the one common share is to be determined as if: (i) the share division had not occurred; (ii) the original asset had been disposed of at the time of the relevant event; and (iii) Part IIIA had been in force and applied in relation to the disposal. 39 Accordingly, the determination of the cost base of the class X shares requires: (i) adjustment of the cost base and indexed cost base of the original one common share for any difference between that asset and the new assets (being 1000 class X and 1000 common shares); and (ii) apportionment of the value between the 1000 common shares and the class X shares on a reasonable basis, having regard to the attributes of each class of shares. 40 The competing contentions can be reduced to the following. Does the expression "gains or profits of a capital nature that arise from the sale or disposal of all or part of an asset" in reg 152B(1) refer, as the Commissioner says, to capital gains within the meaning of Pt IIIA? Or, as Dismin argues, does it mean simply capital gains or profits according to "ordinary concepts"? If the latter view is correct, presumably the calculation provisions of Div 7 of Part X, and in particular Subdivs A and C, only operate when a capital gain or profit according to "ordinary concepts" has been identified. 41 I do not accept Dismin's contention. In contrast to the provisions of the Act relating to tax on income, Pt IIIA does not assume any "ordinary concepts" of capital gain or profit, external to the Act, as a platform to which features are added or subtracted by the statute. A glance at Subdiv A of Div 1 of Pt IIIA shows just how subtle, complex and factitious is the taxation of capital gains in this country. 42 The structure of Pt X reveals a basic and understandable policy, albeit subject to complex refinements, that Australian residents gaining income through a CFC should be taxed as though the income were derived in Australia. A construction which would involve embarking on the uncharted seas of capital gains according to "ordinary concepts", whatever that may mean, is not lightly to be attributed to Parliament or the delegated legislator. 43 Dismin's case did not involve an attack on the details of the Commissioner's application of the provision of Pt IIIA, if it is to apply at all. Therefore I find for the Commissioner on Issue 1. Comfort can perhaps be taken from the observation that the contrary conclusion would mean that Carling went to all the trouble and expense of the complex 1993 transaction for a result which yielded no profit whatsoever. Issue 2 – Market value of a 50 per cent interest in the Partnership at 30 June 1990 44 On valuation issues Dismin produced a valuation by Mr Wayne Lonergan of PriceWaterhouseCoopers in Sydney and a joint valuation by Mr Stephen Scudamore of KPMG in Perth and Mr Gerard Dalbosco of Ernst & Young in Melbourne. The Commissioner produced a valuation by Mr Glenn Bowman of the Toronto firm Houlihan Lokey Howard & Zukin. 45 For the purposes of discussion I set out the following table based on one prepared by Mr Bowman as a summary of the different views of values as at 30 June 1990 (figures are in C$ millions). The answer to Issue 2 corresponds to line J in the Table. Bowman Bowman Scudamore/Dalbosco Lonergan Based on MKT Based on DCF Bowman Dec.99 Dec. 99 Sept.99 Sept.99 Summary A 100% Interest 2,483 2,669 2,015 2,462 2,450 B Less: Debt 796 793 793 793 793 C Equity Value of 100% 1,687 1,876 1,222 1,669 1,657 Control Premium Inc'l in multiple Inc'l in multiple 34% Inc'l in multiple D Control Equity Value of 100% 1,687 1,876 1,644 1,669 1,657 E Carling's Share (50%) 844 938 822 834 828 F Discount for holding 50% 4% 10% 0% 0% 0% G Adjusted Value of Carling's Interest 811 844 822 834 828 H Discount for Lack of Marketability (20) - I Add: Excess Equity 10 10 10 10 10 J Total Value of Carling's Interest 801 854 832 844 838 K Value of 10% 160 171 166 169 168 L Less: Minority Interest Discount 0% 0% 15% 15% 15% M Adjusted Value of 10% 160 171 141 144 143 46 All valuers treated the exercise as the valuation of a financial asset and thus an ascertainment of the present value of future cash. Although all valuers were of considerable eminence, and impressive as witnesses, the valuation of financial assets is, as Gleeson CJ recently observed in relation to land valuation, not an exact science: Boland v Yates Property Corporation Pty Ltd (1999) 167 ALR 575 at par 12. 47 All valuers commenced with the same basic data, namely the Partnership's operating performance in the period to 30 June 1990 and its forecasts (then in existence) for trading up to 1 April 1993. 48 Both Lonergan and Scudamore/Dalbosco adopted a discounted cash flow method utilising forecast cash flows after tax but before interest, taking a terminal value as at 1 April 1993 and then applying an appropriate discount rate to establish the net present values of the forecast net cash flows and the terminal value. The terminal value itself was the capitalised value as at 1 April 1993 of future maintainable earnings. 49 Bowman used both a market capitalisation approach (ie of earnings as at the commencement of the forecast period) and, as a check, a discounted cash flow like the other valuers. 50 There was vigorous debate among the valuers as to a number of issues. One example was the calculation of taxation liabilities in the assessment of future cash flows. In Canada income tax is imposed by both Federal and Provincial governments but rates for the latter vary between Provinces. Mr Bowman took a simple average of 39 per cent. Mr Lonergan took a weighted average of 37.12 per cent. The Scudamore/Dalbosco report also used a weighted average, in their case 36 per cent. Dismin's valuers argued that their approach was more accurate and resulted in a significantly lower figure for tax allowance and thus a higher ultimate value. Mr Bowman countered by asserting that he had used the tax figures contained in the Partnership's own documents; it was unlikely that a hypothetical purchaser would introduce into negotiations a factor which led to a higher price. I find it difficult to say that one side of this debate is right and the other wrong. But in any event, there would be little point in a resolution of this issue unless it assisted in a practical way my arriving at a soundly based conclusion on the ultimate question of the Partnership's value. 51 On Mr Lonergan's calculations, the use of a 39 per cent tax rate reduces the cash flow by about $12.4 million. But the introduction of this figure (or a similar but different figure based on the Scudamore/Dalbosco weighted average) would impact on other calculations which would need to be reworked. 52 Mr Lonergan identified five other issues (ie in addition to the tax rate issue) on which he took a different view to Mr Bowman. Messrs Scudamore and Dalbosco had similar, although not identical criticisms. For me to work through each of these contested issues, make a finding on each, assign a dollar figure to that conclusion and somehow integrate that figure into an overall internally consistent calculation would be fraught with potential for error. Such an exercise would give an illusory air of mathematical precision to an exercise which, as Gleeson CJ's observation reminds us, is inherently a matter of estimate and value judgment. (Issue 3 stands on a different footing and is a discrete question of principle, as indeed the parties recognised by putting it forward as a separate issue.) So counsel on both sides in the end argued for an approach in which I should treat each valuation as an integrated whole and not, as it were, construct my own valuation step by step. 53 I have come to the conclusion that in answering this particular question I should accept the Scudamore/Dalbosco valuation. They start with the advantage of bringing two independent minds to the task. While, as I have already said, all the valuers were impressive and obviously highly expert in their field, Messrs Scudamore and Dalbosco did leave me with a particular degree of confidence. I would accept their figure of $801 million but subject to the following qualifications. 54 As appears from their original report of 8 December 1999 (pp 28-30) and their supplementary report of 11 August 2000 (pp 3-4) Scudamore/Dalbosco when adjusting from 100 per cent to 50 per cent apply a discount to allow for a lack of control and a further discount for lack of marketability (see lines F and H of the Table). Bowman makes no allowance at either of those levels but contrary to Scudamore/Dalbosco (and Lonergan) makes a 15 per cent discount for the minority interest of ten per cent (line L). For the reasons that appear hereafter (Issue 3) I agree with the Bowman approach. But if I were to allow the Scudamore/Dalbosco discounts at lines F and H as well as the Bowman discount at line L there would be a double counting (or double discounting) since all discounts depend to a large degree on the same factors, namely lack of marketability and control. Therefore I add back the discounts at lines F and H of Scudamore/Dalbosco and arrive at $844 million. Issue 3 –Pro rata apportionment or market value 55 On Dismin's case once the value of the Carling 50 per cent interest in the Partnership 30 June 1990 is arrived at, the value as at the same date of a ten per cent interest is a matter of simple arithmetic; the latter figure will be one-fifth of the former. The Commissioner argues that it is necessary to ascertain the market value of the interest and that a proper valuation requires an appropriate discount to take account of the inhibitions, disadvantages and uncertainties which attach to a ten per cent interest. As already mentioned, Mr Bowman assesses that discount at 15 per cent. 56 A basic difficulty with Dismin's case is that it transports back to 30 June 1990 events and circumstances which were not in existence until three years later. As at 30 June 1990 the holder of a ten per cent interest could not treat as certain, or even reasonably likely, the circumstances that its interest would then be bought · by a major North American brewer · which would also buy a corresponding ten per cent from Molson · and enter into a new partnership on a 20/40/40 basis. 57 A holder of a ten per cent interest at 30 June 1990 seeking a willing but not anxious purchaser would, for a start, not have recourse to a stock exchange or similar market in which buyers stand ready to buy and a market price has been set by recent and current trading. Thus, as Mr Bowman says, the willing but not anxious seller is faced with transactional factors which have a depressing effect on price expectation. These include · an uncertain time frame for completion · the cost of preparing for and executing the sale · the risk as to eventual price · the prospect that some of the sale consideration may only be obtainable in non-cash form 58 In 1993 it took two and a half months (14 January to 2 April) between the agreement for sale and its implementation in the amended partnership agreement. There must also have been an earlier period of negotiation, the length of which does not emerge from the evidence. It can reasonably be assumed that a sale of a ten per cent interest in 1990 would be similarly protracted. The necessity of a delay between the making of a decision to realise an asset and the receipt of the consideration for its disposal is a factor which depreciates what would otherwise be the value of the asset. Moreover delay is not only a drawback in itself, but it bespeaks negotiation and attendant uncertainty. 59 The existing partnership agreement was a two partner 50/50 agreement specific to brewers Molson and Carling. A purchaser of ten per cent would have to be acceptable to Molson. If not – and Molson would have an unfettered discretion as to this – the purchase would not proceed at all. (Whatever the disadvantages suffered by minority shareholders in a listed company, at least they do not need the approval of the majority, or any other shareholder, before disposing of their shares.) If the purchaser was acceptable, an amended partnership agreement would have to be negotiated. 60 As a matter of law – and it was not suggested the common law of Ontario differed from that of Australia in this basic respect – the admission of an additional partner constitutes a new partnership: Lindley & Banks on Partnership (17th edition, 1995) p 389; see also pp 32 and 47. 61 While it is convenient to speak of the sale of a ten per cent interest in the Partnership, as a matter of legal analysis what has to happen is the termination of one partnership and the creation of another on terms which are acceptable to the new partner and the continuing partners. A share in a listed company is a bundle of rights which a seller conveys to a buyer without the possibility of renegotiation by buyer, seller, or other shareholders. By contrast, the terms of a new partnership following on the sale of an interest must be created anew by negotiation. 62 In the present case it seems inherently unlikely that a ten per cent partner would obtain the right of veto that the fifty per cent partners previously enjoyed, or the right to appoint a joint CEO. And it is not to be assumed that the new purchaser would, together with Carling, exercise the control attributable to a 50 per cent share. On the contrary, the purchaser would be at arm's length from Carling. The reasonable expectation would be that their interests might diverge from time to time. 63 It is true that a partner, even a ten per cent partner, enjoys access to the full cashflows of the business in a way a shareholder in a company does not, being dependant on dividends declared by the directors. However the availability of cash is going to be determined by, inter alia, decisions as to whether revenues are to be ploughed back into the business. As a matter of accounting and economic theory it may be that the existence of non-distributed cash should be reflected in the assets acquired. But that may be small consolation to an out-voted minority partner who needs the cash and thinks the re-investment decision is a terrible one anyway. 64 Moreover, the prospective purchaser of the ten per cent interest knows that if in time it wishes to resell, the same doubts and uncertainties will apply to it. In particular, it may not be able to sell at all because the other partners do not consent, and it cannot wind up the Partnership unless they agree. For a purchaser who is an investor rather than a brewer, and thus obtains no compensating synergy benefits, this would be an unattractive prospect. And of course the purchaser, unlike a shareholder, incurs liability for the debts of the partnership. 65 Because the other valuers did not consider a discount appropriate at all, Mr Bowman is the only one who addressed the question of the appropriate quantum. He looked at American studies which supported a discount for lack of marketability of minority shareholdings in corporations. Of course minority shareholdings differ from minority partnership interests in terms of access to cash, but for this and other reasons Mr Bowman adopted a lesser discount figure than the studies indicated. (And, as already noted, in some respects minority shareholders are in a better position than minority partners.) He also considered various qualitative factors with respect to the Partnership. His figure of fifteen per cent is based on a rational methodology and strikes me as reasonable, indeed modest. Issue 4 – Value of a ten per cent interest at 30 June 1990 66 It follows from the foregoing that the value is $143.48 million. Issue 5 – Foreign currency conversion 67 The Commissioner has applied s 160K(5) in Pt IIIA. That provision is as follows: "Where an amount of money, or the value of any property, that is to be taken into account for the purposes of this Part as, or as part of – (a) the cost base to a taxpayer in respect of an asset; or (b) the consideration in respect of the disposal of an asset, would, but for this subsection, be an amount in the currency of a foreign country, the amount to be so taken into account is the equivalent amount in Australian currency at the time when the costs were incurred or the time of disposal of the asset, as the case may be." 68 Dismin contends that the applicable provision is s 391 which is contained in Subdiv B "General Modifications of Australian Tax Law" in Div 7 "Calculation of Attributable Income of CFC" in Pt X. That provision is as follows: "(1) For the purpose of applying this Act in calculating the attributable income of the eligible CFC, any amount (in this section called an "eligible amount") of income wherever derived or of expenditure wherever incurred is to be expressed in Australian currency. (2) Where, according to the amounts of the eligible CFC for the eligible period, some or all of the eligible amounts of the eligible CFC are not expressed in Australian currency, then any such eligible amount is to be converted: (a) if there is a single or predominant foreign currency in which eligible amounts of the eligible CFC are expressed in the accounts and paragraphs (b) does not apply: (i) where the eligible amount is expressed in that currency – to Australian currency at a rate equal to: (A) if sub-subparagraph (B) does not apply – the average of the exchange rates applicable from time to time during the eligible period; or (B) if the eligible taxpayer elects in accordance with subsection (3) – the exchange rate applicable on the last day of the eligible period; or (ii) in any other case – first to the single or predominant currency using any reasonable method and then to Australian currency in accordance with whichever of sub-subparagraph (i)(A) or (B) applies; or (b) if the eligible amount is an amount of foreign tax paid by the eligible CFC: (i) if the foreign tax was paid by deduction from another amount – to Australian currency, or to another currency and then to Australian currency, according to the method applicable under paragraph (a) or (c) for the conversion of the amount from which it was deducted; or (ii) in any other case – to Australian currency at the rate of exchange applicable at the time when the foreign tax was paid; or (3) The eligible taxpayer may, in the eligible taxpayer's first return of income in which an amount is required to be included in the assessable income of the eligible taxpayer under section 456 in relation to the attributable income of the eligible CFC for a statutory accounting period, or within such further period after the lodgment of the return as the Commissioner allows, elect that sub-subparagraph (2)(a)(i)(B) is to apply in relation to the eligible CFC. (4) Where the taxpayer does so, that sub-subparagraph applies instead of sub-subparagraph (2)(a)(i)(A) in calculating the attributable income of the eligible CFC in relation to the eligible taxpayer for the statutory accounting period and for all subsequent statutory accounting periods." 69 The Commissioner's argument commences with Subdiv C of Div 7 of Pt X which is entitled "Modifications Relating to Australian Capital Gains Tax". In that subdivision s 407 provides that for the purposes of the application of Pt IIIA in calculating attributable income of the eligible CFC where the expression "provision of this part" is used in Pt IIIA that is to be taken to include a reference to any of the provisions of Subdiv C of Div 7 of Pt X. Section 410 provides that for the purpose of applying the Act and calculating the attributable income of the eligible CFC Pt IIIA applies as if certain provisions were disregarded. A number of provisions are then set out but not including s 160K(5). In s 389 (part of Subdiv B of Div 7 of Pt X "General Modifications of Australian Tax Law"), it is provided that for the purpose of applying the Act in calculating the attributable income of the eligible CFC certain provisions are to be disregarded. None of the provisions of Pt IIIA are mentioned. So, the Commissioner argues, since s 160K(5) is not affected by either Subdiv B (General Modifications) or Subdiv C (CGT Modifications) it follows that s 160K(5) does apply. 70 Against this Dismin argues that s 391 is appropriate. It is said that its operation "produces results and outcomes which are consistent with the objects of Pt X and only brings to tax amounts which truly represent profits of the CFC". But it seems to me that s 160K(5) is directed precisely at a capital gains transaction. It speaks of nothing else. The cost base is to be transferred into Australian dollars and the disposal consideration into Australian dollars at the time the costs were incurred or the asset disposed of, which is exactly what would happen if the capital gain were made by a transaction in Australian currency. To the extent that there are unexpected outcomes, this is but a function of the uncertainty involved in currency fluctuations. 71 The Commissioner's argument is supported by the application of the maxim generalia specialibus non derogant: see Pearce and Geddes "Statutory Interpretation in Australia" (14th ed, 1996) pp 109-111. Section 160K(5) is expressly directed at computation of capital gains whereas s 363(1) is directed to items of income and expenditure in general. This approach enables the two provisions to stand together. Conclusion 72 I answer the questions as follows: 1. Did the relevant transaction give rise to attributable incomeunder Pt X by way of capital gain? Answer: Yes. 2. What was the market value in Canadian dollars of a 50 per cent interest in the Partnership on 30 June 1990? Answer: $844 million. 3. Should the amount to be included in the cost base of the relevant asset be determined by (i) apportioning the market value of a 50 per cent interest in the Partnership at 30 June 1990 pro rata (ie by taking one fifth of it), or (ii) by reference to the market value of a ten per cent interest in the Partnership at 30 June 1990? Answer: (i) No. (ii) Yes. 4. What was the market value of a ten per cent interest in the Partnership at 30 June 1990? Answer: $143.48 million. 5. Should the relevant conversion of foreign currency to Australian currency be made under s 160K(5) or s 391 of the Act? Answer: s 160K(5). 73 The formal order will be that the application is adjourned sine die with leave reserved for counsel to bring in minutes of proposed orders. Costs are reserved. I certify that the preceding seventy-three (73) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Heerey. Associate: Dated: 24 November 2000 Counsel for the Applicant: B J Shaw QC with H M Symon Solicitor for the Applicant: Corrs Chambers Westgarth Counsel for the Respondent: C M Maxwell QC with I B Stewart Solicitor for the Respondent: Australian Government Solicitor Date of Hearing: 23, 24, 25, 26 October 2000 Date of Judgment: 24 November 2000