Commissioner of Taxation v Financial Synergy Holdings Pty Ltd [2016] HCATrans 232 (7 October 2016)

Last Updated: 11 October 2016

[2016] HCATrans 232

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Melbourne No M46 of 2016

B e t w e e n -

COMMISSIONER OF TAXATION

Applicant

and

FINANCIAL SYNERGY HOLDINGS PTY LTD

Respondent

Application for special leave to appeal

FRENCH CJ
KIEFEL J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON FRIDAY, 7 OCTOBER 2016, AT 10.01 AM

Copyright in the High Court of Australia

MR S.H. STEWARD, QC: If the Court pleases, I appear with my learned friend, MR E.F. WHEELAHAN, for the Commissioner. (instructed by Australian Government Solicitor)

MR B.J. SULLIVAN, SC: If it please the Court, I appear with my learned friend, MS C.A. BURNETT, for the respondent. (instructed by Price Waterhouse Coopers)

FRENCH CJ: Yes, Mr Steward.

MR STEWARD: If the Court pleases. In our submission, this case raises for consideration for the first time in this Court, as best as we can tell, the extent to which the function and meaning of a deeming rule can change by reason of a subsequent amending Act. The issue is of importance to both - - -

FRENCH CJ: Is that a general question or a question which in every case must be answered by reference to particular statutory context?

MR STEWARD: Your Honour - - -

FRENCH CJ: Comber contains a general statement of principle I think at page 96, but plainly that must yield to particular contexts, must it not?

MR STEWARD: It should, your Honour, and your Honour is quite right. The difficulty is that in this case - and what is not clear from the judgment is that we relied expressly below on section 11B and made a submission that the deeming rule here which we conceded had an historical function and meaning and it is correctly described at paragraph 32 of the plurality below, so we can see that that is the correct historical function and meaning.

But the submission that we put based upon this Court’s decision in Telegraph, in the Full Court’s decision in Plaintiff B9 is that the deeming rule’s function and meaning had changed by 2007. I will come back to that in a minute. Moreover, the issues arises in the context where there was an express statutory direction to apply the deeming rule to this case here and, before I get to the two principal errors in the plurality below which appear at paragraphs 34 and 35, could I just dwell very briefly on that statutory direction and invite the Court to look at it. It appears at application book, page 40 at paragraph 19.

The Court will recall that the relevant operative provision, section 110-25(2), uses the word “acquire”. The word “acquire” is defined and that definition appears on the previous page at about point 19:

you acquire a CGT asset . . . in the circumstances and at the time worked out under Division 109 (including under a provision listed in Subdivision 109-B) –

Subdivision 109-B is reproduced on application book 40 at the top of the page where - item 8, that is “a same-asset roll-over”, and we note and emphasise the phrase at the top of the third column:

You acquire the asset at this time:

time being the time under 110-25, and then it says “before 20 September 1985”. Now, we concede immediately that it is unusual to identify a particular time by reference to a period before a specified date but nonetheless there is that manifest direction to identify it at that time.

The approach we say that the trial judge took below is justified because of the words in section 110-25(2) “as at”. The word “at” has previously been construed by the Full Court in a consolidation context as meaning “just before”. The case is Handbury Holdings. Again, we relied upon it below. It does not appear in the judgment.

In Handbury Holdings, the Full Court said that reading the word “at” as meaning “just before” was “strange” – that is the word they used – but they said it was also necessary. We respectfully submit, so too here it is strange but necessary to read the phrase “as at” here as meaning “just before”, so just before 20 September 1985.

The reason why it is necessary is because of that statutory direction, which appears at the top of application book page 40. In contrast, the effect of what the Full Court did below was to set aside that statutory direction entirely and give it no work to do at all.

Can I now address the two principal errors below, and they appear firstly at paragraph 34 and then the second one is at 35. The error at paragraph 34 raises the Comber point. As I have previously observed, the historical function of the deeming rule is correctly set out at paragraph 32. But what the court failed to do below is to consider how the deeming rule was to apply to the Act in the state that it was in in 2007.

To use the language of this Court in Telegraph, they needed to consider the deeming rule in the context of what was revised text. They did not do that. They did not apply section 11B. They did not apply Telegraph. Instead, what they do, as your Honour the Chief Justice has observed, is they say in paragraph 34 that:

The function of the deeming provision does not need to extend beyond that purpose in the context of Div 122 -

With respect, there was a need for the deeming rule to have an extended purpose by 2007 and that is because the context there referred to had changed dramatically. What had happened after 2012 is the consolidation rules were introduced. Before then, there was never any need to consider the cost base of a pre-CGT asset.

Indeed, under the original design of Part 3A, pre-CGT assets were wholly excluded; they were not part of the definition of what an asset was. But by 2002, for the first time, the consolidation rules expressly required one to calculate the cost base of a pre-CGT asset and thus there came, for the first time, a need, by reason of that different context, to consider whether the deeming rule, upon which we rely, was to be given this new function and purpose - it candidly admitted it did not have it originally – of applying to fix the cost base of this pre-CGT asset in this case.

Now, if Comber’s Case inhibits that approach and, with respect, the way we read paragraph 34 is that it does, in the light of the submission that we put to the Full Court about section 11B - if Comber’s Case inhibits that approach and requires deeming rules to be given an historical function and purpose only, then it needs to be revisited and that is particularly important - - -

FRENCH CJ: Well, if Comber’s Case does not inhibit that approach and is always to be read subject to context, then that issue of principle can be put to one side.

MR STEWARD: Not yet, no, not quite, because, your Honour, the 11B point was not dealt with. That is the problem. My client has to administer this Act.

FRENCH CJ: Well, that is a discrete issue.

MR STEWARD: It is a discrete issue but a critically important one for us because that submission was put below expressly - we rely on 11B - and what we got back in return was that final sentence at paragraph 34 and my client, who has the enviable job of administering this Act with its multiple deeming rules, an Act which is persistently amended, needs to know what the principle should be about how he should address deeming rules in the future. So, we respectfully submit that the error at paragraph 34 is one error of public importance.

FRENCH CJ: I am sorry; do you put the principle at that level of generality, do you, how the Commissioner should address deeming rules in the future?

MR STEWARD: Yes, in the light of the fact that a submission was put that deeming rules can have their function and purpose changed and what we got back was the final sentence of paragraph 34. So that is what - - -

KIEFEL J: So, are you saying Comber is wrong?

MR STEWARD: No, not in the context of Comber, no, not at all. Comber, the result is right.

KIEFEL J: So, we know there is no new principle about how one reads a deeming provision. The question in this case is whether or not it should be taken from one context and applied in another and in a way your submissions acknowledge that that is really what you are arguing, that it should be taken from one context and applied in another, whereas the Full Court said that that was inappropriate, given the purpose of the particular deeming provisions.

MR STEWARD: The historical purpose and function.

FRENCH CJ: Well, you say 11B trumps that.

MR STEWARD: It does trump it, your Honour, but - - -

FRENCH CJ: That is the question, is it not?

MR STEWARD: Yes, it is, it is, but it is the way that Comber was deployed against us which is why Comber raises its head and in that respect we do, for what it is worth, suggest that Justice White’s approach to deeming provisions in the Newcastle Case - - -

KIEFEL J: But is it really that Comber was deployed against you or is it that you seek to approach the question of the purpose of the deeming provision in a way different from the way in which the Court here determined its purpose. You say historical purpose. The Court is determining it as a matter of purpose by reference to the construction of the particular provisions in which the deeming provision is contained.

MR STEWARD: But left out of account, the submission we put about revised context and the fact that the consolidation rule required one to calculate the cost base of the pre-CGT asset for the first time. It is just not addressed. It is just not addressed and so in the context when all of that was submitted, the difficulty that we have is the way in which paragraph 34 is expressed and we, with respect, do think it was deployed against us.

KIEFEL J: Parties do not approach the courts for additional rulings where they say that something has not been addressed. It is a very old-fashioned idea. It used to be done but parties do not it any more. They bring appeals instead.

MR STEWARD: And keep appealing, yes.

KIEFEL J: Yes. But there is that path, of course, that one could have gone back to the court and said you had not dealt with this point.

MR STEWARD: Your Honour is quite right; the practice is not to do that any more. I am not aware - - -

KIEFEL J: Perhaps it should be reconsidered.

MR STEWARD: I am not aware of a single tax case where that has happened.

KIEFEL J: It does happen in other areas.

MR STEWARD: I am indebted to your Honour. Anyway, that is the 11B point. Can I then just address briefly the second error, as we see it, of general importance and that is paragraph 35, because here the court deals with the statutory direction, to which I took the Court earlier, in Subdivision 109. In the third sentence, this is how it is addressed:

Subdivision 109-B sets out s 122-70(3) as an acquisition rule . . . but Subdiv 109-B is not an operative part of the 1997 Act . . . Subdivision 109-B does not of its own force have the effect that the time deemed . . . is to govern the time of acquisition . . . The outcome that the pre-CGT assets are taken to have been acquired for the purpose of s 110-25 . . . is not mandated by Div 109 –

Now, the problem there, with respect, is that what is being put as we see it is that 109-B cannot apply because it is in and of itself a guide, and by reason of it being a guide it is to be set aside and ignored. That again creates a difficulty for my client and for taxpayers as well in the context where - the way in which guides are to be used in the Act appears in section 950-150 which appears at application book 40 at paragraph 20.

KIEFEL J: I see that the respondents do not agree that this section 11B point was squarely raised in the court below.

MR STEWARD: It was squarely raised in oral argument.

KIEFEL J: Not in written argument.

MR STEWARD: Not in written argument but in oral argument and the cases that we referred to were referred to the court. So the difficulty we have about paragraph 35 is that all that is said to dismiss the guide is that it is a guide and, with great respect, in our submission, more would be needed before one went about a process of ignoring the guide. In particular, section 950-150 tells one how a guide can be used and one of the ways in which it can be used is to determine the meaning and scope of application of a provision.

Now, again, that is the basis upon which it was relied upon below but the Full Court do not seem to do this. Indeed, they do not refer anywhere in paragraph 35 to section 950-150. All that is said is that it is a guide, therefore, we can ignore it. That creates a problem for my client in administering an Act which has multiple guides. How should he use those guides in future years? Are they to be ignored because they are a guide or what? How is 950-150 to apply? We simply have no guidance on that.

Moreover, the other problem about paragraph 35 is that 109-B was not being used as a guide in the circumstances of this case. Section 109-B is picked up in the definition of “acquire” and acquire forms part of the operative provision. So that in a real sense, whilst 109-B might more generally be a guide, on this particular occasion because of the selection of the word “acquire” in the operative provision, it forms part of the operative provision in and of itself. So, for those reasons, if the Court pleases, we respectfully submit that special leave should be granted.

FRENCH CJ: Your 11B argument is not really a procedural fairness argument; it is just that you are saying they were wrong because 11B directs a different result. Is that right?

MR STEWARD: Yes, 11B mandates that the deeming rule is to be given - - -

FRENCH CJ: That is really rolled into grounds 2 and 3 as an argumentative point.

MR STEWARD: I would agree with that, your Honour. That is a fair observation.

FRENCH CJ: All right.

MR STEWARD: If your Honours please.

FRENCH CJ: Thank you. Yes, Mr Sullivan.

MR SULLIVAN: Thank you, your Honour. If I can direct your Honours’ attention to page 82 of the application book, there is set out there a letter which was sent to the respondent. This was in response to an application for test case funding. In the third-last paragraph on the page, it is stated that:

While the Panel noted that there may be some contention around the word ‘acquire’, there were only a limited number of taxpayers affected by the issue and therefore a decision was unlikely to affect a substantial section of the public and was unlikely to have wider public interest.

On that basis, test case funding was refused. Now, in those circumstances – one further observation we should make on those matters, your Honours, and that is that the observation that was made was understandable against the background that it is now some 31 years since the capital gains tax provision was introduced - - -

FRENCH CJ: Sorry, just on the question of test case funding, I notice there is a reference at page 66, paragraph 31:

This case is otherwise the subject of test case funding.

This is the applicant’s – it has test case funding?

MR SULLIVAN: Yes; test case funding, I think, from 7 April this year, which was the date upon which the Commissioner filed his special leave application. We have recently been notified, I think, that the Commissioner has agreed to provide test case funding from that date.

FRENCH CJ: All right.

MR SULLIVAN: But the purpose in going to this letter at page 82 is to point out the reason for the refusal of test case funding at that time, and to observe that, indeed, it is unlikely that a matter such as this is one of general importance in circumstances where pre-CGT assets must now go back some 31 years. It has also been 14 years since the consolidations provisions were introduced.

Those are matters which put in context the likelihood of this issue ever being one of any significance, and therefore, whether it is a matter of general importance such as to justify a grant of special leave. In our submission, consistently with that statement which is an accurate reflection, as we would understand it, of the circumstances around this issue, this is not a matter of general importance.

There is another issue that goes to the question of whether or not this case is a suitable vehicle. If I can direct your Honours’ attention in that regard to paragraph 11 of the applicant’s reply submissions, which is at page 88 of the application book. At paragraph 11, it was said:

No issue arises from the fact the shares in the respondent that were transferred –

I think that should say “issued”:

to SSA as consideration for the Units did not exist before 20 September 1985. As the majority noted, the case was conducted by the parties on the basis that the underlying value of the business at 1 July 1985 established the cost base of the units if the applicant’s argument was to be preferred.

Now, what that amounts to, your Honours, is a revelation that the basis of the conduct of the case below means that a decision of this Court can be of no precedential value and therefore the case is not a suitable vehicle for the grant of special leave. The position is that the shares which were issued on 29 June 1987 – sorry, 2007 – those shares were deemed to have been – or they are deemed to be a pre-CGT asset in the hands of the vendor and it is the value of those shares that determines the cost base. If the Commissioner is correct, you have to value at a point, he says, immediately prior to June 1985. You have to value shares issued in 2007 at a point in time prior to 20 September 1985.

FRENCH CJ: Maybe you can just take us straight to the 11B point that was made by the - - -

MR SULLIVAN: Thank you, your Honour. The 11B point and the Comber point in our view are essentially something of a red herring. What really matters in this case is what was the legislative purpose of section 122-70(3). Comber’s Case and 11B are tools to be used in statutory construction. Statutory construction is concerned with the identification of legislative purpose and, in our submission, the legislative purpose was correctly identified by the Full Court taking into account the legislative text and context.

KIEFEL J: Do you say that given the findings of the Full Court, the 11B point could not have succeeded?

MR SULLIVAN: Precisely, your Honour, that once the legislative purpose was correctly identified by the court that 11B could not indicate any different operation for the provision. That is 122-70(3).

KIEFEL J: I think you say there are indications in the Full Court’s judgment, in particular other indications. I think you identify three paragraphs in your written outline.

MR SULLIVAN: Yes, the principal reasons given by the Full Court are at application book page 45 and 46, paragraphs 32 through to 36, and my learned friend has already addressed paragraphs 34 and 35 but he has not really said anything about 36, and 36 is the paragraph at the end of which the Full Court said that the – the point that I made there was telling against the Commissioner’s construction and, in our submission, that is perfectly correct.

The position is that, if I can summarise it quickly, this was a rollover pursuant to Subdivision 122-B and the Commissioner says, “No express provision was made in relation to cost base. I have to get to my cost base result by implying things into other provisions where the issue was not specifically dealt with”.

What is addressed in paragraph 36 by the Full Court is another rollover provision under Subdivision 126-B and in that rollover provision the issue of cost base was specifically dealt with and the provision which specifically dealt with it is section 716-855, which is referred to there and which the Full Court I think set out at page 38 at the top of the page in the application book.

What the applicant, in our submission, does not show is that there was any necessity to change the time of acquisition of this asset. When one looks at the comparison between Subdivision 122-B and 126-B, what one finds is that in the latter provision the legislature recognised that there was a need to address the cost base issue in the consolidation context and they specifically did so.

What the Full Court has said, in our submission quite correctly, is that in circumstances where the legislature takes that course in relation to one rollover provision, then you cannot in respect of the other rollover provision assume that there is some unexpressed purpose and therefore to go about reading Subdivision 122-B as achieving a similar result but without any express language and to do so by reading in extra words. You do not take that step where, in a cognate provision, as the Full Court described it, express provision has been made dealing with that issue.

There is another rollover provision. A point that my learned friend makes in his reply submissions about 716-855 is that under Subdivision 126-B the consideration for the acquisition of the asset may be cash. In our submission, that is not a relevant distinction and the issue is rather one of what is the fundamental legislative object of the rollover provision or, perhaps more accurately, what the rollover provision does is ignore any consideration provided and instead, in the case of 126-B provide for inheritance of the transferor’s cost base. In those circumstances, the form of the consideration does not matter and my learned friend’s attempted basis of distinction is, in our submission, not relevant.

Subdivision 124-N is another rollover provision which relates to – as in the case of 122-B, it relates to the transfer of assets by a trust to a company, or by a number of trusts to a company. In the case of that rollover provision, again, the consideration has to be in the issue of shares by the company, so it is like our case – 122-B. Again, in the case of 124-N, what one finds is that cost base is specifically dealt with and it is cost based inheritance that the Act provides for.

So there we have two other rollover provisions where the cost base issue is expressly dealt with, specifically dealt with, and in those circumstances, in our submission, it is impossible to find by implication the necessity to change the cost base in respect of a Subdivision 122-B rollover simply because the Commissioner says that on his reading of the Act that should not happen.

He does not point to any particular provisions that suggest that result. He says “I just think the Act works that way” and essentially it is a matter of assumption, and if I can just remind your Honours briefly, I think your Honour the Chief Justice and Justice Hayne in Certain Lloyd’s Underwriters v Cross observed at [2012] HCA 56; 248 CLR 378 - and the paragraph is paragraph 26, your Honour said:

A second and not unrelated danger that must be avoided in identifying a statute’s purpose is the making of some a priori assumption about its purpose. The purpose of legislation must be derived from what the legislation says, and not from any assumption about the desired or desirable reach or operation of the relevant provisions.

In our submission, that warning is very pertinent here. The applicant’s submissions are based essentially upon his assumptions about the desired or desirable reach of the operation of the consolidations provisions in circumstances where there are express provisions dealing with the same issue.

FRENCH CJ: You do not offer a different purpose; you simply say as a matter of construction that is how it operates.

MR SULLIVAN: We say that to find the legislative purpose upon which the Commissioner bases this interpretation, you have to find a purpose of achieving by implication through - - -

FRENCH CJ: What is otherwise done expressly, I understand.

MR SULLIVAN: Yes, and, in our submission, you just cannot find it, and the Commissioner can only find it by saying “I think that is the scheme of the Act and the scheme of the rollover provisions” which, in our submission, is not good enough. That was the observation that your Honour the Chief Justice and Justice Hayne made in the Lloyd’s Underwriters Case.

The other matter to note about the approach suggested by the Commissioner is that the result that he would arrive at is a different result from when the legislature has done it expressly. In relation to those two subdivisions that I referred to, 126-B and 124-N, when the legislature has addressed that issue it has provided for cost-based inheritance, for the transferee to inherent the cost base to the transferor.

But the course that the Commissioner would propose to follow does not achieve that result. The Commissioner says “We will set cost base by going back to a deemed acquisition date,” which in our submission just cannot be found, “immediately prior to 20 September 1985.

So far as our investigations have been able to reveal, there is no cost-base provision which operates in the manner contended for by the Commissioner. So the problem with the Commissioner’s approach is that not only is it doubtful in the extreme as to whether it should be done having regard to instances of expressly doing it, but the result that would be arrived at is a different result, a different methodology.

In our submission, if there had been a legislative intention that the cost base following a Subdivision 122-B rollover should be different from that found by the Full Court, then the legislature would have followed the same course as it followed in Subdivision 126-B and Subdivision124-N in respect of those rollovers. It is inappropriate to infer a legislative purpose in relation to section 122-70(3) where the legislature has both expressed decisions in other cases to do something about it and to do it by a different method.

FRENCH CJ: I think your time is up, Mr Sullivan.

MR SULLIVAN: If it please the Court.

FRENCH CJ: Yes, Mr Steward.

MR STEWARD: Could I just make three short points. Firstly, we have not appealed today in any way on any a priori results-based method of statutory construction. Indeed, it is the exact opposite. What we have submitted is that the statutory direction in Subdivision 109-B to fix the time of acquisition before 20 September 1985 must be given effect to and must be given meaning.

It is my learned friends who invite the Court to disregard that entirely and the means by which they seek to disregard it is not by reference to reliance upon particular words in the operative provision. Indeed, it is rather strange to try and divine why it is they precisely say the statutory direction should be ignored.

Below, what was put against the statutory direction was that it had to be ignored because the deeming provision had an historical function and purpose and one could not go beyond that, and that is why we relied upon 11B in answer to that. Section 11B, in a sense, was used by us below to persuade the court to give meaning and effect to the clear statutory direction in Subdivision 109-B - so, no a priori reliance; instead, reliance upon the language of the Act.

Secondly, in relation to the point about 716-855, it is said to be telling but it would be less telling if our 11B argument had been addressed. Indeed, below, at trial, the very same provision was relied upon by the trial judge for the opposite purpose. The learned trial judge said the presence of 716-855 told him very clearly that Parliament did not want taxpayers to get a step up in cost base in circumstances where they had invoked and chosen to undertake a rollover.

What would have been more telling, if the 11B argument had been addressed, is not 716-855, with respect, but the anomaly that is described at paragraph 37 of the plurality below, the anomaly being that on the one hand the taxpayer embraces rollover and seeks to have the exigible event wholly disregarded and on the other hand wants to embrace the fact that there was a disposition of shares in 2007.

The third thing I wish to say in reply is that in relation to the issue of costs, by reason of the agreement reached for test case funding, the parties agree that if leave is refused, there is to be no order as to costs.

FRENCH CJ: Yes, thank you very much.

MR STEWARD: If the Court pleases.

FRENCH CJ: In our opinion the special leave application concerns a matter of statutory construction applied to a particular set of facts. It does not raise a matter of sufficient public importance to warrant the grant of special leave. Special leave will be refused.

The Court will now adjourn.

AT 10.39 AM THE MATTER WAS CONCLUDED