Ausnet Services Ltd V Commissioner of Taxation [2024] FCA 90

This case has been cited by some recently to be about the ‘nothing else’ provision under s 615-5(1) of the Income Tax Assessment Act 1997 (Cth) (ITAA97). This case has so much more to give than just that.

It is a tale of reality versus assertion, purposive interpretation, the limits of amalgamation, shelf companies, and the ability for a quick and efficient resolution in the Federal Court.

BACKGROUND

The Ausnet Group was a triple-stapled structure, made up of two companies, AusNet Services (Transmission) Ltd (Transmission) and AusNet Services (Distribution) Ltd (Distribution), both with their own consolidated groups and a trust called AusNet Services Finance Trust (Finance).

The Ausnet Group and its shareholders decided to un-staple and rollover each of the entities into a shelf company, Ausnet Services Ltd (AusNet), which would become the new head of the consolidated group.

They affected this by rolling-over each of the entities, first Transmission, then Finance and then finally Distribution. AusNet made an irrevocable declaration for each entity that Div 615 should apply. 

AUSNET'S CONTENTIONS

AusNet objected and then appealed to the Federal Court for the application of Div 615 to Distribution only and not about the first two rollovers.

AusNet’s position was that Div 615 did not apply (and further that no rollover should apply) on the following three (simplified) bases: 

THE DECISION

Reorganisation

Different Business

Her Honour found that there was limited weight to be given to the assertion made by AusNet that the Distribution business had significantly changed due to the rollover. While in a vacuum such a contention could be asserted, in reality, Distribution was not a standalone business before rollover, it was intertwined with the business of Transmission and Finance and was so after the rollover.

When looking to determine the business structure, her Honour looked to the economic substance of the stapled entities and determined that Distribution had been managed and operated as though it were part of a single economic entity, that included Transmission and Finance.

Her Honour went on to say that ‘there is an air of unreality in positing a moment in time in which Distribution is hypothesised as carrying on a business that had an existence and value independent of Transmission and Finance’.1

Amalgamation Point

Her Honour found that there is no basis for construing the term ‘reorganisation’ in s 615-5 by reference to or as a contrast from the company law concepts of amalgamation or merger or reconstruction as the word ‘reorganising’ has a history divorced from the company law context.

When the rollover provisions were expanded to deal with the affairs of a company by the introduction of s 160ZZPC, the language of ‘reorganising’ was retained and was intended to bear the same meaning it had in s 160ZZPA (where it related only to matters of trusts).

Further, amalgamation and reconstruction, as determined in Re Opes Prime Stockbroking Ltd 2, requires transfer or dealing by the company with the assets or undertaking of that company, rather than its membership interest.

In this case, AusNet was not ‘dealing’ or ‘transferring’ its assets or undertaking.

'Nothing Else' Requirement

AusNet’s case was premised on the fact that Distribution was required to be viewed in isolation and the shareholders of Distribution gained something more than just the shares, they received ‘a boost’ after the rollover as a consequence of the acquisition of Transmission and Finance.

Her Honour agreed with the Commissioner of Taxation’s submissions that Distribution did not and could not trade separately from the shares in Transmission and Finance and they were intrinsically interrelated.

The whole arrangement was undertaken in line with the Implementation Deed, which detailed the rollover of all three entities. As a consequence, immediately after the Finance exchange the market value of the shares in AusNet could not be calculated without considering the impending Distribution exchange.

Her Honour found that because of the inter-conditional nature of the Distribution scheme, there was no instant in time when shares in the applicant held by a security holder had a value that was independent of the value of Distribution.

In such circumstances, it would be artificial to value the shares after the Transfer and Finance rollovers, without having regard to the Distribution transfer. Further, it would be artificial to regard the Distribution exchange as giving rise to ‘something else’. 

Ratio Requirements and Shelf companies

The findings of the ratio requirements are, in my humble opinion, the most interesting part of this decision.

AusNet took the view that such a ratio could not work without the requirement of a shelf company and that by the time that Distribution had rolled-over, AusNet was no longer a shelf company as it contained both Transmission and Finance.

Her Honour undertook a historical analysis to determine how the ratio in s 615-20(2) should be interpreted.

This historical process is lengthy, and I recommend the reader work through paragraphs 113 to 135 of the judgement.

However, in essence, s 615-20(2) was worded slightly differently than its predecessors, which on one interpretation could have changed how the ratio was calculated, to refer to two different subsets of shares.

Her Honour reviewed how the predecessors of Div 615 were intended to work. Then she had reference to s 1-3 of the ITAA 1997 which provides that if the ITAA97 includes a provision that uses different words from its predecessor/s in a former provision of the Income Tax Assessment Act 1936 (Cth), then it is to have the same effect, even if different words are used.

As such the ratio comparison required by s 615-20(2) of the ITAA97 is whether ‘at the completion of the scheme, the proportionate interest of each exchanging member in the market value of the interposed entity is the same as the proportionate interest that exchanging member held in the market value of the original entity, before the scheme’.3

Further, and importantly, a shelf company is not technically required to meet the requirements of Div 615, as long as the ratio requirements are met.

Her Honour in concluding noted that even though the drafters did not contemplate the re-organisation of a triple stapled entity, nonetheless, ‘when legislative “intention” is to be ascertained, “what is involved is the ‘intention’ manifested by the legislation”.4 Statements as to legislative intention made in explanatory memoranda or by Ministers or in this case by the Commissioner in a taxation ruling, cannot overcome the need to carefully consider the words of the statute to ascertain its meaning’5 and based on the statutory language, Div 615 is capable of applying to such a restructure.

THE PROCEEDINGS

The final thing I wanted to highlight in these proceedings is the efficiency of them. This issue is highly complex; however, the parties were able to agree on most of the facts and issues of the case, with only the key issues in dispute being before the Federal Court.

As such, while this application for review in the Federal Court was filed in mid-2022, the matter went to a hearing by May 2023. This is impressive given the usual length of complex tax dispute in the Federal Court, being many years. While it is not possible in every case, it shows the efficiency that can be achieved when both sides work together to get to the real issues.

Teigen Kershaw, Senior Associate at McInnes Wilson Lawyers, acted for the Commissioner of Taxation in the proceedings in her previous role as a solicitor with the Australian Taxation Office and has written the above article using only publicly available information.

1 AusNet Services Ltd v Commissioner of Taxation [2024] FCA 90, [79] (‘AusNet’).
2 (2009) 179 FCR 20.
3 AusNet  [128].
4 Ibid [140], quoting Wik Peoples v Queensland (1996) 187 CLR 1, 169 (Gummow J).
5 Ibid [140], citing Saeed v Minister for Immigration and Citizenship (2010) 241 CLR 252, [31]; Mitsui & Co (Australia) Ltd v Commissioner of Taxation [2011] FCA 1423, [132].