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PepsiCo, Inc v FCT [2024] FCAFC 86 – Full Federal Court holds that neither diverted profits or royalty withholding tax applied to bottling arrangements
A majority of the Full Federal Court has allowed the taxpayers’ appeals against the first instance decision of Justice Moshinsky reported at [2023] FCA 1490 (and discussed in the Birchstone Brief for the week ended 8 December 2023). In that case, his Honour had ruled that:
- royalty withholding tax was payable in respect of payments made by Schweppes Australia Pty Ltd (Schweppes Australia) pursuant to exclusive bottling arrangements (EBAs) with the taxpayers, on the basis that a component of those payments was for the use of the taxapyers’ intellectual property; and
- in the alternative, the diverted profits tax provisions applied to the scheme consisting of the taxpayers’ entering into the EBA, on the basis that one of the principal purposes of the taxpayers in entering into those agreements was to obtain a tax benefit (namely not being liable to pay Australian royalty withholding tax) and to reduce US tax on their income.
In allowing the appeal, a majority of the Full Federal Court found that neither royalty withholding tax or the diverted profits tax applied. This was because the majority considered that:
- under the terms of the EBAs, the payments made to the taxpayers by Schweppes Australia were clearly for concentrate alone and did not include any component for the use of intellectual property that could be considered to be a ‘royalty’; and
- on the evidence, it was clear that the commercial and economic substance of the scheme was that the payments agreed to be made by Schweppes Australia for concentrate under the terms of the EBAs were, in fact, for concentrate – which was quite different from the alternative postulates put forward by the Commissioner, such that neither of those alternative postulates were considered to be a reasonable alternative to the scheme for the purposes of section 177CB(3).
Kilgour v FCT [2024] FCA 687 – Federal Court confirms market value substitution rule did not apply to share sale
The Federal Court has:
- rejected the taxpayers’ argument that they had not been dealing with News Corp Investments Australia Pty Ltd (News Corp Investments) at arm’s length in relation to the sale of shares in their company, Punters Paradise Pty Ltd (Punters), such that it could be said that News Corp Investments had paid a price higher than market value for those shares; and
- as such, held that the market value substitution rule for capital proceeds in section 116-30 of the ITAA 1997 did not apply to the share sale (with the result that the taxpayers’ capital proceeds relating to their disposal of shares in Punters for the purposes of the CGT regime was the actual price paid by News Corp Investments for those shares).
This decision was reached due to the conclusions drawn by the Court in light of the relevant evidence, including that:
- there was no formal relationship (in terms of shareholding, directorships or control) between Punters and News Corp Investments and any other News Corp related entities;
- the ultimate decision approving the purchase of Punters by News Corp Investments was made by a head office in New York that was removed from News Corp’s Australian operations, following significant analysis by News Corp regarding the value of Punters’ shares (i.e. the head office decision was not a mere rubber-stamping of a decision effectively made by an operational level subordinate within News Corp’s Australian operations); and
- there was nothing to suggest that there was any collusion between any of the individuals involved in making the head office decision and any of the shareholders of Punters or their appointed agent.
Quy v FCT [2024] FCA 726 – Federal Court holds AAT conflated the ‘resides’ and ‘domicile’ tests and remits residency matter for redetermination
The Federal Court has allowed the taxpayer’s appeal against the AAT’s decision reported at [2024] AATA 245 (first covered in the Birchstone Brief for the week ended 1 March 2024). In that case, the Tribunal had found that the taxpayer remained a resident of Australia for income tax purposes under both the ‘ordinary concepts’/’resides’ and ‘domicile’ tests due to his numerous continued family and financial ties to Australia throughout the 2016 to 2020 income years while he was living and working in Dubai on international assignment for his Australian employer.
In allowing the appeal, the Federal Court held that:
- the Tribunal had erred by incorporating a reference to intention for the purposes of determining a person’s domicile in its application of the ‘ordinary concepts’/’resides’ test, particularly by stating that a person’s intention to remain in a particular place ‘permanently or indefinitely’ was a ‘relevant’ but not ‘sufficient or decisive’ factor to conclude that they ‘resided’ in that place;
- the Tribunal had misunderstood the meaning of the word ‘permanent’ as used in the phrase ‘permanent place of abode’ in the context of the ‘domicile’ test;
- the errors as described above had ‘infected’ the Tribunal’s conclusions; and
- as it was not the Court’s role to make particular findings of fact in relation to the controversial parts of the residence test, the matter should be remitted to the Tribunal to be determined according to law.
Robson as trustee for the bankrupt estate of Lanning v FCT [2024] FCA 720 – Trustee in bankruptcy liable to pay CGT on sale of bankrupt’s properties
The Federal Court has dismissed an appeal brought by a trustee in bankruptcy against an objection decision which had ruled that the trustee was liable to pay CGT on gains made from the trustee’s sale of two properties that had been owned by the relevant bankrupt.
In dismissing the appeal and affirming the Commissioner’s objection decision, the Court held that:
- section 254 of the ITAA 1936 applies to trustees in bankruptcy as it is stated to apply to every ‘trustee’ (and the term ‘trustee’ as defined in section 6 of the ITAA 1936 includes a trustee in bankruptcy);
- the concept of a capital gain being derived by a trustee in their ‘representative capacity’ in section 254(1) is intended to capture capital gains made by trustees acting in their role as a ‘trustee’ (as opposed to in their personal capacities), and as such extends to capital gains incurred upon a trustee in bankruptcy disposing of a bankrupt’s property;
- neither section 106-30 of the ITAA 1997 nor the fact that the primary tax liability fell on the bankrupt was sufficient to prevent section 254 from imposing an ancillary taxation liability on the trustee in bankruptcy; and
- it is proper that section 254 operates in this way to protect the revenue, as any taxation liabilities arising post the date of bankruptcy are not provable by the Commissioner and therefore cannot be recovered from a bankrupt.
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