Judgment summary
This proceeding concerned a separate question ordered to be heard under r 30.01 of the Federal Court Rules 2011 (Cth). The question was whether the choice made in Part B of the losses schedule to Evolution Mining Limited's 2014 income tax return, lodged on or about 13 March 2015, was effective under s 707-145 of the Income Tax Assessment Act 1997 (Cth) to cancel the transfer of the Updated Conquest Tax Losses [1], [5].
The Updated Conquest Tax Losses were losses reported by Conquest Mining Limited in its tax returns for the income years ending 30 June 2007 to 30 June 2010, totalling $31,292,880 [2]. Evolution, as head company of the consolidated group, sought to use some of those losses in the income year ending 30 June 2017, which the Commissioner opposed [2].
Jackman J held that the purported choice made in the 2014 tax return was too late and therefore ineffective, because a choice to cancel a transfer of losses under s 707-145 must be made in relation to the income year in which the joining entity became a member of the consolidated group (the joining year), which in this case was the 2012 income year [97].
Background
On 2 November 2011, Evolution acquired all the shares in Conquest, and Conquest became a subsidiary member of the consolidated group of which Evolution is the head company [3].
On 25 June 2014, Evolution lodged its 2012 tax return, in which it did not exercise any choice under s 707-145 to cancel the transfer of the Updated Conquest Tax Losses. Evolution took the same approach in its 2013 tax return, lodged on 22 August 2014 [3].
On 13 March 2015, Evolution lodged its 2014 tax return, in which it recorded the cancellation of the transfer of losses that included the Updated Conquest Tax Losses [3].
Evolution contended that this purported cancellation, made in relation to the 2014 income year rather than the 2012 joining year, was too late and of no effect. The Commissioner contended that the choice was effective [4].
Core dispute
The dispute concerned the proper construction of s 707-145(1) of the ITAA 1997, which allows a head company of a consolidated group to choose to cancel the automatic transfer of a joining entity's losses that otherwise occurs under s 707-120(1) at the joining time [6], [15].
Evolution contended that any choice to cancel the transfer must be made in relation to the joining year, being the income year in which the joining entity became a member of the consolidated group, typically (but not necessarily) in the tax return for that year [35], [36], [84(a)].
The Commissioner contended that the choice to cancel the transfer could be made at any time, provided it was made before the head company had utilised any of the transferred losses [70], [84(b)].
A preliminary question also arose as to whether the choice purportedly made in the 2014 tax return was, as a matter of fact, made in relation to the 2014 income year or the 2012 income year [85].
Court findings
Jackman J first found, as a preliminary matter, that the purported choice was made in relation to the 2014 income year, not the 2012 income year, because Evolution had expressly stated in its 2012 and 2013 tax returns that no choice had been made to cancel the transfer [85].
On the construction question, the Court accepted Evolution's submissions. The judgment noted that, unlike its historical predecessors, the transfer of a loss under s 707-120(1) occurs automatically at the joining time, and s 707-145 provides for cancellation of "the transfer of the loss" (not cancellation of the losses themselves, in contrast to s 719-325) [86].
The Court found it significant that there is no statutory mechanism in Part 3-90 to recalculate the allocable cost amount or available fraction, and no exception in s 170 of the ITAA 1936 for amendments to assessments, to deal with a choice under s 707-145 made in relation to an income year after the joining year [88], [89].
The Court rejected the Commissioner's submissions that the transfer becomes "spent" once losses are utilised, or that a head company "waives" its right to cancel the transfer upon utilising losses, finding neither notion supported by the legislation [91], [92]. The Court described the Commissioner's attempts to accommodate the difficulties raised by Evolution's worked examples as "more pragmatic than principled" and inconsistent with accepted principles of statutory construction [93].
The Court also distinguished s 707-145 from provisions such as s 703-50, s 705-27 and s 705-62, and from the historical loss transfer provisions in s 80G of the ITAA 1936 and s 170-50 of the ITAA 1997, which required written notices or agreements and expressly stipulated timeframes [95], [96].
Jackman J concluded that Evolution's construction did not require reading words into s 707-145, but rather identified the meaning implicit in the statutory language read in its context [90].
Outcome
The Court held that Evolution's purported choice to cancel the transfer of the Updated Conquest Tax Losses, made in its 2014 income tax return, was ineffective because no such choice had been made in relation to the 2012 joining year [97].
The separate question was answered "No" [97], and this was reflected in the Court's orders [Orders, 1].
Costs in relation to the hearing of the separate question and the proceedings to date were reserved, and the proceedings were listed for case management on 14 August 2026 [Orders, 2-3], [98].
Major issues / areas of contention
- Whether a choice under s 707-145 of the ITAA 1997 to cancel the transfer of a joining entity's losses must be made in relation to the joining year, being the income year in which the entity became a member of the consolidated group.
- Whether the purported choice made in Evolution's 2014 tax return could be construed as relating to the 2012 joining year, given that Evolution had expressly declined to make such a choice in its 2012 and 2013 returns.
- Whether the absence of an express time limitation in s 707-145, when contrasted with provisions such as s 703-50, s 705-27, s 705-62 and the historical loss transfer provisions in s 80G of the ITAA 1936 and s 170-50 of the ITAA 1997, indicated a deliberate legislative choice to permit cancellation at any time.
- Whether the absence of any statutory mechanism to recalculate the allocable cost amount or available fraction, or to permit late amendment of assessments, following a late choice to cancel a transfer, told against a construction permitting the choice to be made after the joining year.
- Whether the Commissioner's proposed constructions, based on the transfer becoming 'spent' upon utilisation of losses or on a notion of 'waiver', were supported by the statutory language of ss 707-140 and 707-145.