AusNet Services Limited v Commissioner of Taxation: statutory interpretation, and ’nothing else’?

The recent Full Federal Court decision, AusNet Services Limited v Commissioner of Taxation [2025] FCAFC 21, provides a useful roadmap to statutory interpretation, particularly in the context of tax legislation. We share some observations and key takeaways.

Background to AusNet Services Limited v Commissioner of Taxation

This case concerned a series of transactions under which AusNet Services Limited (AusNet) was interposed as owner of three entities: AusNet Services (Transmission) Limited (Transmission), AusNet Services Finance Trust (Finance) and AusNet Services (Distribution) Limited (Distribution). These had been a stapled group prior to those transactions. Relevantly, the transactions involved three schemes of arrangement that were sequenced so that AusNet acquired the shares in Transmission, then the units in Finance and finally the shares in Distribution. AusNet obtained a class ruling in 2015 confirming that a rollover was available under Division 615 of the Income Tax Assessment Act 1997 (Cth) (ITAA97) in respect of each of the transactions. One consequence of the rollover was that there was no step-up in the tax value of the underlying assets of Distribution when it joined a tax consolidated group of which AusNet was the head company. AusNet subsequently took the view that the rollover requirements were not satisfied in respect of the shares in Distribution and objected to assessments made by the Commissioner of Taxation. The objections were disallowed and a subsequent appeal by AusNet to the Federal Court was decided in favour of the Commissioner of Taxation.

Grounds of appeal

AusNet’s appeal to the Full Federal Court was based on three main arguments:

• There was not a scheme for reorganising the affairs of Distribution for the purpose of section 615-5(1)(c) of the ITAA97;
  
  
• The Distribution scheme was not one in which the exchanging shareholders received shares in an interposed company ‘and nothing else’ under section 615-5(1)(c) of the ITAA97. This is because one effect of the scheme was to increase the value of the existing shares in AusNet as a result of the scheme to acquire the shares in Distribution; and
  
  
• The specified ratios in section 615-20(2) of the ITAA97 concerning the interests of shareholders were not equal, because the individual shareholder’s interests at the completion time included shares already issued to the shareholder in exchange for Transmission shares and Finance units.

Also of note, the matter had proceeded before the primary judge based on an agreed statement of facts pursuant to section 191 of the Evidence Act 1995 (Cth) (referred to as the JSAF in the judgment).

By majority of the Full Federal Court (Kennett and Thawley JJ, Logan J dissenting), the appeal was disallowed.

Scheme for reorganising affairs

AusNet argued there was no scheme for reorganising the affairs of Distribution as the transaction was more akin to an amalgamation or merger. This was because Distribution did not carry on the same business after the scheme and the scheme did not affect Distribution’s affairs alone (i.e. it involved a significant reorganisation of AusNet’s affairs too). Kennett J found the wording of section 615-5(1)(c) of the ITAA97 took its ordinary meaning and could apply to a scheme under which all that was changed was the identity of shareholders. The majority also considered that Division 615 would have no work to do if schemes that also affected the affairs of an interposed company (i.e. by it acquiring the original entity – in this case Distribution – and issuing new shares to the exchanging shareholders) were not covered. On that basis, AusNet’s argument was to be rejected.

The ‘nothing else’ requirement

Section 615-5(1)(c) of the ITAA97 requires the exchanging members to dispose of all their shares or units in exchange for shares in the interposed company ‘and nothing else’. AusNet argued the ‘nothing else’ requirement was not met because the shareholders in Distribution received an uplift (or ‘boost’) in the value of the shares they held in AusNet as a consequence of each step of the reorganisation, namely the previous acquisitions of Transmission and Finance. Kennett J found:

• the critical issue was what the shareholder received in exchange for its shares in the original entity in the traditional contractual sense, and not a more general enquiry into the consequences of the transaction (including as to value). This was consistent with legislative history of the provision (previously section 160ZZPA(1)(b) of the Income Tax Assessment Act 1936 (Cth) (ITAA36) and section 124-360(1)(c) of the ITAA97).
  
  
• Any ‘boost’ was irrelevant to the criterion in section 615-5(1)(c) being satisfied and any increase in value of the pre-existing AusNet shares was a consequence of the Distribution shareholders disposing of their shares in it to AusNet.

The JSAF included agreed market values of the three entities. However, those values were considered ‘somewhat academic’ by Kennett J as shares and units were not separately tradeable and any value boost was not relevant to section 615-5(1)(c). Kennett J noted AusNet had not raised the ‘boost’ argument at the time the JSAF was agreed (i.e. it was only raised in oral argument before the primary judge) and if anything, this was potentially disadvantageous to the Commissioner. As the additional ‘boost’ submissions were not framed in terms of an amendment or addition to the JSAF, the majority found the Commissioner should not be constrained in making arguments on this particular issue outside of the JSAF and there was no breach of procedural fairness.

The market value ratios

In relation to the position before the scheme, each of subsections 615-20(2)(b)(i) and (ii) direct attention to the market value of all shares in the original entity that were disposed of under the scheme. However, in relation to the position immediately after completion of the scheme, subsection 615-20(2)(a)(i) directed attention to shares in the interposed company (without reference to the scheme) and subsection 615-20(2)(a)(ii) directed attention to shares in the interposed entity disposed of under the scheme. That is, subsection 615-20(2)(a)(i) directed attention to all shares held by each exchanging member in the interposed company whenever and however acquired. This meant the value ratios in subsections 615-20(2)(a) and 615-20(2)(b) could not be equal if any of the exchanging members had shares in the interposed company other than those issued as part of the scheme.

AusNet contended this was consistent with an intention that section 615-20(2) required the interposed company to be a shelf company (AusNet not being such a company).

The Commissioner contended that the shares in sub-paragraph (i) of section 615-20(2)(a) should be read as a subset of the shares mentioned in sub-paragraph (ii) and this could allow the scheme to pass the ratio test.

The majority considered that AusNet’s argument risked error by introducing a requirement not evident from the text of the legislation. Kennett J noted that “if the intention was to limit the coverage of Division 615 to schemes in which the interposed company was a shelf company, that could have been done in a much clearer and more direct way.” Kennett J accepted that, upon established principles of statutory interpretation, section 615-20(2)(a)(i) should be understood to include a qualification that limited “each exchanging member’s shares in the interposed company” to shares issued to that member pursuant to the scheme. Kennett J found contextual support for this position in section 615-20(1)(b), which was directed at numbers of shares rather than market values, and was concerned only with shares or units the subject of the scheme. Further, the legislative history of section 615-20(2)(a) (including predecessor sections to section 615-20, being sections 124-365(3) of the ITAA97 and 160ZZPA(1) of the ITAA36) and extrinsic materials (the explanatory memoranda) established that the ratio in section 615-20(2)(a) differed to that in section 160ZZPA(1)(m) without a discernible reason. That is, section 160ZZPA(1)(m) had made clear that the values to be compared were the values of the interests in the scheme accruing to the exchanging members. Understood in this context, there was no need to insert additional words into the text to discern the operation of section 615-20(2)(a).

Takeaways

• The majority judgment provides a useful roadmap to statutory interpretation, particularly in the context of tax legislation.
  
  
• The judgment seems consistent with the Commissioner’s views on section 615-5(1)(c) prior to the decision. However, the decision is nonetheless helpful given the history of amendments to that sub-section.
  
  
• It will be interesting to see whether the reasoning in relation to the ‘nothing else’ requirement in this case may also be leaned upon when considering the demerger rules in Division 125 of the ITAA97, specifically section 125-70(1)(c). In this regard, it is worth again noting Kennett J’s comments regarding the requirement considered in this case not involving a more general enquiry into the consequences of the transaction.
  
  
• The majority cautioned that legislation drafted in an abbreviated style that omits qualifying phrases in ‘a quest for brevity’ may lack precision traditionally found in Australian law and is likely to involve searching for legislative intention in aspects of statutory context and history. The obvious question is whether this will encourage a change in the drafting approach to new legislation, particular in respect of tax.
  
  
• As noted by Logan J in the minority judgment, it can be desirable in taxation litigation to confine issues of fact and law by way of a joint statement of facts. However, there can be issues of procedural fairness that arise where parties wish to raise new arguments after the joint statement of facts has been agreed.

We now wait to see if the decision of the Full Federal Court is appealed.