BRITISH American Tobacco has lost an appeal in the full Federal Court in a dispute over an $89 million capital gains tax bill. Three appeal judges unanimously upheld Justice Arthur Emmett’s 2009 ruling that the tobacco company had engaged in a scheme whose ”dominant purpose” was to avoid tax rather than to pursue a genuine commercial strategy.
The scheme, which Justices John Dowsett, Christopher Jessup and Michelle Gordon agreed contravened part IVA of the Income Tax Assessment Act, was part of the 1999 worldwide merger of British American Tobacco plc and Rothmans International BV.
Advertisement: Story continues below
To receive approval for the local part of the merger from the Australian Competition and Consumer Commission, nine brands owned by British American Tobacco’s Australian subsidiary, WD & HO Wills Holdings, were sold to Imperial Tobacco Group for $182 million.
During the appeal British American Tobacco acknowledged that tax considerations were ”important” but argued unsuccessfully that the prevailing purpose of the scheme was achieving the global merger by disposing of the nine Wills brands as required by the ACCC.
The Australian Taxation Office argued that the manner of disposal – which involved British American Tobacco selling the nine brands to Rothmans, which immediately onsold them at the same price to Imperial – was structured so that British American Tobacco claimed rollover relief for the capital gain it made on the sale and Rothmans offset its capital gain by using tax losses. A central element was that the sale did not take place until after the merger had been completed, which the merged group used to claim rollover relief because it was transferring assets between group companies.
The Tax Office argued that if British American Tobacco had sold the brands directly to Imperial, it would have been liable for the tax on a capital gain of $118 million.
It has issued an assessment for primary tax of $42 million (36 per cent of the capital gain), penalties of $11 million and interest, as at December 2009, of $36 million.