The recent decision of the Federal Court in Orica Limited v FCT  FCA 1399 serves as something of a warning to those company groups that arrange inter-corporate loans in circumstances where the arrangements may seem artificial or contrived and directed primarily at obtaining a tax deduction – even if there may also be an objective of improving the overall economic or net asset position of the corporate group.
In that case, as reported in Thomson Reuters Weekly Tax Bulletin (Issue 52, 11 December 2015), the Federal Court held that Pt IVA applied to deny an Australian corporate taxpayer interest deductions of some $112m on an inter-corporate loan made to it by another subsidiary in the group. In doing so, the Court dismissed the taxpayer’s claim that the dominant purpose of the arrangement was not to obtain a tax benefit in the form of an interest deduction, but to improve the overall economic welfare of the group by allowing the loan to be used by the corporate group to generate other income that could then absorb “unbooked” US tax losses of some A$52.9m that it could not otherwise use.
In arriving at its decision, the Federal Court noted a number of “standard” matters about the operation of Pt IVA. But more importantly it emphasised that the resulting changed financial position of the group was not occasioned by “ordinary business dealings with third parties”, but instead by an inter-corporate loan which had a high degree of “uncommerciality” about it – particularly as the arrangement was entered into at, and extended over, a time when the group had substantial tax losses, and was wound up once those losses were used.
Accordingly, as has been regularly said by the Courts in various Pt IVA cases, if the arrangement (in this case inter-corporate loan) would “make little sense” without the accompanying tax benefits, then it seems that taxpayers need to be very careful.