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High Court of Australia Transcripts |
Office of the Registry
Melbourne No M32 of 1996
B e t w e e n -
THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Appellant
and
SPOTLESS SERVICES LTD
Respondent
Office of the Registry
Melbourne No M33 of 1996
B e t w e e n -
THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Appellant
and
SPOTLESS FINANCE PTY LTD
Respondent
BRENNAN CJ
DAWSON
TOOHEY J
GAUDRON J
McHUGH J
GUMMOW J
KIRBY J
TRANSCRIPT OF PROCEEDINGS
AT CANBERRA ON WEDNESDAY, 2 OCTOBER 1996, AT 2.16 PM
Copyright in the High Court of Australia
MR J. McL. EMMERSON, QC: If the Court pleases, in each of the appeals I appear with my learned friend, MR J.W. de WIJN, for the Spotless companies. (instructed by Minter Ellison)
BRENNAN CJ: Mr Shaw.
MR SHAW: If the Court pleases, we have supplied for each member of the Court a bundle of cases and a folder which contains our outline, written submissions, a flow chart, a chronology, a reproduction of Part IVA and section 23(q) and the explanatory memorandum in relation to Part IVA and the second reading speech. Might I ask, your Honour, whether I should assume that the members of the Court have had an opportunity to read the longer written submission.
BRENNAN CJ: Generally, Mr Shaw, you can take it that they have been read, but whether they have been fully digested and the benefit of each line acquired is another matter.
KIRBY J: They were not skimpy. That is not a criticism.
MR SHAW: No, I should hope nothing is skimpy, but nothing too fat, if your Honour pleases. If the Court pleases, the appeal is from a majority decision of the Full Court of the Federal Court and the judgment of Justice Cooper, concurred in by Justice Northrop, and that appears in volume 5 of the appeal book. All members of the court found that there was a scheme within Part IVA and that there was tax benefit, and it was on the question of the application of section 177D that the Commissioner failed. His Honour's examination of that question begins in his judgment in volume 5 of the appeal book at page 1084.
KIRBY J: This case is now recorded in the Australian Law Reports.
MR SHAW: If your Honour pleases.
KIRBY J: We will ultimately have to refer to pages of a report rather than the - - -
As a preliminary matter, may we observe that there does not appear to be much problem in the construction or an understanding of those particular matters except perhaps (i), which may not be material for the present case but we should mention it to the Court. That is the relationship of matter (iv) and matter (v). The Court will see that matter (iv) is the result in relation to the operation of the Assessment Act that would be achieved by the scheme apart from Part IVA, and (v) is:
any change in the financial position of the relevant taxpayer that has resulted, will result or may reasonably be expected to result from the scheme -
The problem is this. When a reference is made to the financial position of the relevant taxpayer, should one understand that in the light of matter (iv) to mean the financial position of the taxpayer absent the Act, or taking into account the Act? Our submission would be that it was absent the Act but it is probably not a matter of much present significance. His Honour then goes on and says at the bottom of page 1085 that:
It is necessary to consider each of the matters -
and he says that he turns to them, and going to the next page, 1086, commencing at line 4, his Honour appears to examine matter (i) going down to line 20. At lines 21 and 22 he appears to examine matter (ii). At line 22 over to the second line on the next page it seems to be the third matter. The fourth matter is the small paragraph at the top of the page. The fifth matter is the paragraph beginning at line 9. Then he refers to (vi), (vii) and (viii) as irrelevant at line 20.
He then sets out some general conclusions on page 1088 and at the bottom of the page says:
On its proper construction, s 177D requires that no person who entered into or carried out the scheme objectively did so for the purpose, or dominant purpose as defined in s 177A(5) where there is more than one purpose, of enabling the taxpayer to obtain a tax benefit in relation to the scheme.
Then, having posed a question in those terms, he answers it by posing another question in different terms. That question appears at line 9 where his Honour says:
Having regard to the above considerations can it objectively be said that the dominant purpose of the taxpayers in making the investment was to obtain a tax benefit?
If that is to be understood simply in the terms in which it is stated, it misstates the question because the question is not a question of what is the dominant purpose in making the investment, but what is the dominant purpose of one of the participants in entering into and carrying out the scheme?
BRENNAN CJ: Well, which participant are we speaking about, and what was the act allegedly done in entering into or carrying out the scheme?
MR SHAW: Your Honour, the scheme involved a series of steps contrived, as we would say, to achieve a source for the interest on the certificate of deposit in the Cook Islands, while maintaining the commercial equivalent of an investment in Australia, except that the interest is not subject to Australian tax. All members of the Court seemed to accept that one could start with the approach by BT, or the delivery of the information memorandum and go through all the steps, ultimately ending up with the provision of the certificate of deposit in the Cook Islands.
TOOHEY J: But is "investment" used there, Mr Shaw, just as a compendious term for the scheme?
MR SHAW: It might be, your Honour.
TOOHEY J: Yes.
MR SHAW: It might be, but that was - it is possible, and that is especially possible, your Honour, in view of the way in which, at page 1076, his Honour formulated what seemed to be the same scheme in two different ways. The first starts at line 8, and the second is at line 11. So that it is possible that that is what his Honour meant, but, at any rate, one can say that there has been a change in the terminology and we would submit that when one examines the rest of this passage, which commences at line 9 on page 1089, and goes through to 1090, that there is probably a change in meaning as well. At any rate, in answer to that second question, his Honour says:
In my view it cannot be said that such was their intention.
So, again, the terminology changes. And then he says:
In coming to this conclusion I accept that but for the operation of s.23(q) the investment would not have been made because of the operation of s.25 and other provisions of the ITAA leading to a liability to pay Australian tax on the interest earned.
And then he says:
However a decision not to invest in the Cook Islands would be made, not for the reason that Australian tax would be payable but rather because the interest rate offered on the investment in the Cook Islands would be insufficient to admit of a rational commercial decision to invest in the Cook Islands in preference to Australia.
And then he goes on to deal with that subject matter. But the matter has been at that point, or the question at that point has been entirely generalised so that it deals generally with investment in the Cook Islands, rather than to the particular facts surrounding the investment in this case. That his Honour did mean that is, in our submission, supported by what appears at page 1090, commencing at line 16, where his Honour says:
Where by the operation of the foreign taxation laws and the existing Australian taxation laws the net return after payment of all applicable tax and other costs of the investment is higher investing offshore than within Australia, it cannot be said that, objectively, the dominant purpose of the investor investing offshore is to get a tax benefit; the purpose is to obtain the maximum return on the money investment after the payment of all applicable costs, including tax.
Now, that seems to be, in our submission, a proposition of an entirely general nature; not asserted particularly in relation to the circumstances of this investment, but a general proposition about the objective result in all cases where that circumstance exists. And, in our submission, that is a strange outcome since it has the consequence in those circumstances, in those general circumstances, in every case of leading to the result that, whatever the facts might be in respect of a particular investment; whatever the facts might be which fall within paragraphs (i), (ii), (iii), (iv) - whatever the facts might be in relation to those paragraphs of section 177D(b).
TOOHEY J: That might be a bit unfair to the judgment, in the sense that, at that point, it is expressed with generality, which one would need to read it in the light of all that has preceded it, in particular his Honour's references to the activities of taxpayers in question, to conclude whether this really was a statement of generality or, in a sense, a summation of what had gone before.
MR SHAW: Your Honour, it is not qualified in any way by reference to the particular circumstances of this case. It is enunciated as, in our submission, a universal truth.
KIRBY J: But his Honour is dealing with this case - - -
MR SHAW: Of course he is.
KIRBY J: - - - and, of course, you are writing a judgment in which you are explaining why you are coming to your orders in this case, so that, I think it is a little risky to assume that his Honour is laying down something carved in stone for everything. But, you say that in order to test the theory that is behind his Honour's decision, you can only go to his words, and his words are expressed in great generality.
MR SHAW: Not only are his words expressed in a very general way there, but his examination of the other factors which he examines, commencing at page 1086 through to 1087, are also of a very general nature. They lack the colour of the particular occurrences which occurred here. In our submission, the particular character of the relevant facts is of paramount significance in reaching or not reaching the conclusion required by section 177D.
If I might refer the Court to what was said in another context. That is in Gulland's Case [1985] HCA 83; 160 CLR 55. It is tab 14 in the bundle of cases that we provided to the Court. That was a case which, of course, concerned section 260, the predecessor of Part IVA, but was decided after Part IVA had been enacted. Your Honour the Chief Justice, at page 81, said in the first paragraph that commences on that page:
In the present cases, the respective arrangements are made, in greater or less degree, for purposes other than tax avoidance. In the case of Dr Pincus, one of the chief purposes of the arrangement was to carry to completion the dissolution of the partnership of which he had been a member. Nevertheless, in every case, the means of implementing the arrangement was artificial as Dawson J has demonstrated. The means are not fairly referable to ordinary business or family dealing, and the proper inference is that each of the arrangements was made for a purpose of avoiding tax.
So that, of course, the question there is not the question here because in respect of section 260 one was looking at the purpose or effect of the arrangement; here one is looking to the purpose, not of the arrangement, but one or other of the parties who entered into or carried out the scheme. Nevertheless, in the case of section 260 and also here, we would submit, it is important and probably essential to look at the means of implementing the arrangement and see whether or not there is that element of artificiality or contrivance which would say, "These arrangements are not to be explained as an ordinary commercial dealing. Rather they are to be explained by the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme". Your Honour Justice Dawson at page 108 cites first of all the well-known passage from Newton's Case, and then your Honour says:
This passage is not without its difficulty. The reference to ordinary business or family dealing is a reference by way of example to transactions capable of reasonable explanation by reference to considerations other than avoidance of tax.
Then going to the next page your Honour refers to Peate's Case and refers to a passage in the opinion of the Privy Council in the middle of the page and then your Honour says this:
This passage emphasizes, I think, the artificial character of the arrangement as being the circumstance which brought it within the ambit of s. 260. Its very complexity pointed to its contrived nature and took it beyond the range of transactions ordinarily encountered in the organization of affairs for business or personal reasons. It was, to use the phraseology of Isaacs J. in Jacques' Case, a situation which was manufactured and did not represent a true business operation or reorganization of the taxpayer's affairs for personal reasons. With it might be contrasted the arrangement in Keighery's Case which, whilst its purpose was no less than in Peate's Case to avoid paying more tax than was necessary, did not need to be contrived but represented the mere exercise of a choice offered by the Act.
KIRBY J: Is not the difficulty presented by the words "a true business operation" given that I think you concede that a true business operation in reality in Australia today necessarily involves some consideration of the tax minimisation of the operation?
MR SHAW: Certainly it does, but in this case we would submit that when one examines what actually occurred, one has the contrivance of a Cook Islands source for the interest on the 40 million by the adoption of a plan laid down in the marketing document, if I can call it that, the information memorandum, the steps in which were dictated, not by commercial considerations, but by the need to obtain the benefit of section 23(q).
Not only is that so, but it can be seen that, in certain respects, the plan as proposed by the marketer was departed from both in respect of the terms of the security which was obtained by the letter of credit and in the way in which the certificate of deposit was obtained in the Cook Islands, which shows that what happened in the Cook Islands was of little or no commercial significance, except in so far as it obtained the protection of section 23(q), and what happened in Melbourne, in relation to the letter of credit which formed the security, was central to the parties concerned and particularly Spotless' concern.
TOOHEY J: Could I just ask you this, Mr Shaw, and I am not asking you at this point of your argument to take us to the matter I am about to raise in any detail, but when you refer to the contrived nature of this transaction, are there findings of fact by the primary judge which bear on that or is this a conclusion that you are asking the Court to draw from the nature of the transaction?
MR SHAW: If you are asking me, did the trial judge say, "This is all contrived", I think the answer is, no, he did not.
TOOHEY J: Well, not in so many words, but did the judge make findings which would show that this was right out of the run of ordinary commercial transactions?
MR SHAW: He made a whole series of findings about the events which occurred and, really, there is no dispute or very little dispute about what actually happened, and the findings he made make, in our submission, the conclusion inevitable that it was contrived as Justice Beaumont found, and the reason we say that - and your Honour said that your Honour does not want a detailed answer, but - - -
TOOHEY J: I do not want to divert you from your argument, but it just occurs to me that in this sort of area all of us are not necessarily familiar with the sort of transactions that are involved here and therefore I was asking you whether we are being invited to draw that conclusion for ourselves, as it were, or to rely upon findings by the primary judge?
MR SHAW: Your Honour, I think it right to say that your Honour is being asked to draw that conclusion for yourself.
DAWSON J: You seem to place significance on the issue of the letter of credit, which you say was in Melbourne.
MR SHAW: Yes, your Honour.
DAWSON J: And it was an issue of a letter of credit by Midland Bank, Singapore branch?
MR SHAW: Yes, your Honour.
McHUGH J: But why do you place emphasis on that, Mr Shaw?
MR SHAW: The reason is this, your Honour: what the information memorandum - and it may be useful, not really diverting, to take your Honour to the information memorandum, since that is, as it were, the beginning of things. That is in the second volume of the appeal books at page 290. This and its annexures was supplied to Spotless in about September 1986 and - - -
KIRBY J: Was this before or after they had the money on the short-term money market? That is the peculiar feature of this case, that, in the sense - - -
MR SHAW: It is not clear whether it was before or afterwards, but they knew that the money was coming, because the money was being raised by a float, and they knew they had no short-term operational use for the money until the next financial year, or any use, and so they were looking around for an investment, and in the meanwhile it was put on the local money market.
KIRBY J: Would you deal in due course with what is a factor that is concerning me, and that is that this was not a case where, in a sense, they were reorganising their income flow, but that this was a one-off windfall provision of capital that was available to them, that they, therefore, have to put out as business people to their best advantage. It seems to me that, at least without the benefit of argument, that tends to favour the view of the majority in the Full Federal Court in the sense that it is a fund and business people seek to get the maximum return on the fund, including by reference to tax minimusation.
MR SHAW: Indeed, so they do, but, in our submission, it all depends on how you do it.
McHUGH J: But why? Supposing this company had said, "We will put this money in a dividend imputation fund so that we won't have to pay any tax on the dividends and that's the only benefit we're going to get out of this investment." Is that caught by Part VIA?
MR SHAW: No, your Honour.
McHUGH J: The whole motivation is simply to get a tax benefit?
MR SHAW: But, your Honour, all that has happened is you have gone down the street and bought some investment. That is not what happened here.
McHUGH J: So it all turns then on how I go about it?
MR SHAW: Well, that might not be true in every case.
McHUGH J: If I send somebody over to the United States and then to a company and get them to send some money back and I put it in a dividend imputation fund, I might be caught by Part VIA.
MR SHAW: Your Honour, it will depend on the particular facts. If you seek to make an ordinary overseas investment and you make the ordinary overseas investment in an ordinary commercial way, and whether you have or you have not will depend on looking at all the facts, that is one thing, but if, when you go about investing your fund, you do a whole series of things which are explicable only on an objective basis by a purpose of obtaining a tax benefit, that is a different thing. What I was about to demonstrate is that this was very far from the first case, it is like the second case.
Page 290 is the first page of the information memorandum. Then the next page, 292, says it is not an offer and so on. Then the issue details are at page 293. The deposit taker is the:
European Pacific Banking Company Limited, a 100% owned subsidiary of the European Pacific Banking Corporation incorporated in the Cook Islands.
Now, if you go over to page 295, you will discover that the:
European Pacific Banking Corporation is the parent company of the deposit taker -
the Banking Company Limited -
EPBC -
that is the parent company -
is a bank formed in the Cook Islands early in 1986 and is jointly owned by Brierley Investments Limited and Capital Markets Limited, both publicly listed companies in New Zealand.
And it refers to Brierley Investments and Capital Markets. Then in the last paragraph, it says:
EPBC has an authorised capital of US$100 million of which US$10 million has been paid up. The bank concentrates principally on wholesale banking transactions -
So that what one is talking about is taking a certificate of deposit for $40 million from a subsidiary of a company which had just been formed - that is to say in 1986 - and its paid-up capital was $10 million. It turns out from other evidence that the Banking Company Limited - that is to say the subsidiary which issued the certificate of deposit - was the largest retail bank in the Cook Islands. It had 40 full-time staff, it had 5,000 saving accounts and several thousand cheque accounts. So one was dealing with a new small foreign bank and not the sort of company one would think was immediately attractive as the place to put $40 million. But of course, if one goes back to page 293, one finds that the certificate of deposit was to be supported by a letter of credit issued by the Midland Bank. Then it says, going down three items, the interest rate:
The rate will be quoted reflecting market conditions at a margin under the Bank Bill Rate for the term of the investment. All interest will be subject to 5.0% Cook Islands withholding tax on the interest amount.
So that one is being offered a rate of interest less than that obtainable in Australia and one is being offered an investment with a small foreign bank but supported by a letter of credit from a large foreign bank, although not one situated in the Cook Islands.
GUMMOW J: Nothing may turn on it, Mr Shaw, but is there anything in the material that indicates a connection between the Midland Bank and these Cook Island operations?
MR SHAW: Only a business connection, your Honour.
GUMMOW J: In relation to this transaction?
MR SHAW: By this transaction - - -
GUMMOW J: Was there any commercial connection within this transaction between Midland Singapore and - - -
MR SHAW: Your Honour, the Midland Bank entered into a series of agreements with the Cook Islands Bank by which it agreed to issue the letters of credit subject to the taking of security in support of the letters of credit, which are hardly surprising, I suppose, and the security was in effect the funds. I have stated the substance of it rather than the legal effect of it, but in the end that is what it is.
McHUGH J: But, Mr Shaw, can I just stop you for a moment. Supposing there had been no use of any intermediaries at all but Spotless had just put the money on deposit over in the Cook Islands at this low rate of interest knowing that the net return would be better than if they invested it in Treasury bills or on the Australian money market. Would Part IVA strike down that transaction?
MR SHAW: If I might answer your Honour in a moment. I did not finish answering Justice - - -
McHUGH J: I am sorry, Mr Shaw.
MR SHAW: I had an afterthought, your Honour. I had finished, but I have unfinished.
GUMMOW J: Well, do not deny it, Mr Shaw.
MR SHAW: What I meant to say, your Honour, was that and, of course Midland got fees. And I can even tell your Honour how much if - - -
BRENNAN CJ: $523.46, according to your flow chart, is that right?
MR SHAW: Yes, that was where I was going to look, your Honour. Your Honour, what we would say is that one really could not answer your Honour's question without more facts. If what had happened was, for example, here was a perfectly creditworthy bank in the Cook Islands, the sort of place where one might ordinarily lodge $40 million safely, and if there were some other connection between Spotless and the Cook Islands, or, indeed, if the Cook Islands was a centre of great commercial activity, like Singapore or Hong Kong, and if all that had happened was somebody said, "Well, here, I've got this 40 million, will you take it?" and they said, "Yes", and you said to your local bank, "Kindly send along our 40 million we've got with you. Please send it over to this bank in the Cook Islands", and if that had the consequence that the interest was not taxable in Australia, then the answer very well might be that Part 1VA would not apply.
McHUGH J: But why, because the whole purpose of what the taxpayer is doing is to obtain a tax benefit in connection with a scheme? Send the money out of the country - that is the scheme.
MR SHAW: Your Honour, what Part 1VA contemplates is that parties to transactions may have more than one purpose. I suppose it is very unusual to have only one purpose in relation to what you do. And what it directs you to do is to ask oneself what, in the case of more than one purpose, is the dominant purpose of one of the parties to the scheme, or any part of the scheme. If one can see that the whole thing is not done in a commercial way, but is done simply to obtain the tax benefit, then one will objectively draw the conclusion called for, but otherwise not.
Your Honour has put to me a subjective intention, or purpose. It may be that subjective, intentional purpose is of some relevance to one or other of the various matters that one is directed to in section 177D. But it is not referred to as one of the matters; nor is it the matter in respect of which inquiry is directed. What it is said is, what you have got to ask is, would it be concluded, having regard to these particular matters, that a purpose, or the dominant purpose of one of the parties who entered into the scheme, was of a particular nature.
Now, logically that might mean that you know perfectly well what the subject motive or intention was, and that might be demonstrated by, for example, one of - a factor which is not in the list. So, you are not concerned with fact. It is a terribly artificial thing. You are not told, "You go and look at the facts and say, what is the objective conclusion." He said, "Go and look at these things, and these things only, and then what would be concluded?"
McHUGH J: But, in a commercial context, surely every company is seeking to make a profit and, in this day and age, they structure their transactions so that they attract the minimum amount of tax. In fact, any director of a company that did not do it would be likely to be charged with an offence, would he not?
MR SHAW: Well, that partly means, your Honour, that anything goes.
McHUGH J: It certainly does not mean anything goes but, on the other hand, directors have got duties - - -
MR SHAW: So they do.
McHUGH J: - - - and what would happen to a director who agreed to enter into a transaction whereby he had attracted the maximum rate of tax?
MR SHAW: Your Honour, what the part does is say this; "Is there a scheme?" and it is very generally described. It includes everything, including a course of conduct, or a course of action. It includes arrangements and things like section 260 did, and it is tautologous because it includes a scheme. It is very wide. Then one has to ask oneself: "Is there a tax benefit obtained in connection with the scheme?" And, a tax benefit is, for present purposes, the non-inclusion in the assessable income of an amount which would have been included or which might reasonably have been expected to have been included in the assessable income of the relevant taxpayer.
Now, this Court said in Peabody's Case that, in order to meet that description, what one needs to have is a prediction as to what would have happened, had the scheme not been entered into, and it has to be a prediction that can be called reasonable; not probable but reasonable, and, one simply has to say, "Would it be a reasonable thing to predict that if this scheme had not been entered into, some amount would have been included in the assessable income?" For present purposes one can assume that. So that, in a sense, the parties start off by saying, "What would it be reasonable to predict, had all this not been done?" And then one says, "Well, looking at all these particular things one is directed to look at, in so far as they happen to be relevant - they might not all be, but there are eight things one can look at - there are, indeed, eight things one must look at if they have any relevance - then one has to ask oneself, was the dominant purpose of any party who entered into the scheme, or any part of the scheme, the purpose of obtaining, or of enabling, the relevant taxpayer to obtain a tax benefit in connection with the scheme?
McHUGH J: I would have thought that in most cases the answer would always be yes.
KIRBY J: Perhaps the Commissioner thinks that too.
MR SHAW: Your Honour, that may or may not be so, but his Honour said, in all cases, the answer is no, and, in our submission, that must surely be wrong.
There are two things I have to do, your Honour, on this aspect of the case. One is I have to show that his Honour is wrong, and if that is not enough, what I have to show is that had his Honour been right he would have come to the conclusion which we urge. What I am presently seeking to do is to say that his Honour is wrong. The first thing we are saying is he must be wrong because of the very thing that your Honour just put to me. On his Honour's version, Part IVA is deader than section 260 ever was at any stage.
McHUGH J: It may have an effect in the old clerk-type situation where there is a transaction there and we tend to restructure it.
MR SHAW: What I was seeking to do by referring to this information memorandum was to demonstrate to the Court the artificiality of what was originally proposed.
DAWSON J: You seem to be saying that this was really a Melbourne transaction and somehow or other the Cook Islands aspect of it was, as it were, artificial. I wonder why you said that in view of the fact that the trial judge found that the interest had its source in the Cook Islands and so it is not challenged.
MR SHAW: No, that is not challenged, your Honour. Why we say that is this: if, although by careful contrivance, the source of the interest is in the Cook Islands, the particular things which were done to achieve that result and the particular things that were done in order to meet the ordinary commercial consequences of a foreign investment demonstrate that what was being sought to be done was to have the commercial advantages of an investment in Australia without the fiscal disadvantage of tax in Australia, then I am sufficiently far down the road to establish in conclusion that I need to establish to start to make the case I need to make.
DAWSON J: But again, and you may not disagree with this, all you are really saying is the purpose of taking this outside Australia is a tax advantage.
MR SHAW: Yes, your Honour, and it was taken outside Australia in a contrived and artificial way in a transaction which has all the hallmarks of being constructed with the dominant purpose of obtaining the tax benefit of the non-inclusion of the return from the 40 million in the assessable income of Spotless.
DAWSON J: In other words, absent the tax benefit, there was no purpose in taking this money outside.
MR SHAW: Yes. That is another aspect of what I want to come to, your Honour. In fact, the way - - -
DAWSON J: I do not understand why that makes it a Melbourne transaction. I see what you are saying, but that being its purpose, it nevertheless was a Cook Islands' transaction.
MR SHAW: Certainly it had Cook Islands' elements marginally and carelessly introduced.
DAWSON J: No, I do not understand that.
MR SHAW: Which bit, your Honour?
DAWSON J: The "Cook Islands' elements marginally and carelessly introduced".
MR SHAW: The careless bit, your Honour, is this: the plan was that the money should be transmitted to the parent company, the European Pacific Banking Corporation. Having been transmitted to that body, somebody from Spotless would off to the Cook Islands and draw a cheque on its account with the Banking Corporation and present it to the Banking Company Limited, the subsidiary, in return for the certificate of deposit, the contract all being made in the Cook Islands, and that then the certificate of deposit would be left there and it would ultimately be repaid there and ultimately, having been repaid, it would, I think, probably be deposited in the same account or the old account with the Banking Corporation, the parent company, and then find its way back to Australia.
DAWSON J: Why was all this thought necessary? I mean, what difference would it make if Spotless sent a cheque over to the ultimate recipient of the moneys and received a certificate of deposit which it kept in its safe in Melbourne?
MR SHAW: The difference would have been, your Honour, that the source would not have been in the Cook Islands.
DAWSON J: Why not? The money was there. That was what - - -
MR SHAW: You need the contract made there, your Honour, and what I had been going to explain to your Honour is why it was careless was that - - -
DAWSON J: Just the last point. For the source of the interest to be the Cook Islands it is not enough that the money was sent to Cook Islands, that is, invested there and the interest was paid by a Cook Islands' corporation. The contract would have to be made in the Cook Islands. Is that the point?
MR SHAW: At any rate, your Honour, I cannot give, as it were, a guaranteed answer to that, but certainly everybody thought so.
DAWSON J: Someone thought so.
MR SHAW: Yes
DAWSON J: I do not understand it completely.
MR SHAW: And that seems to accord with the cases, I might say, your Honour, and certainly it was on that basis that the courts below held that the source was in the Cook Islands. If I could go back to the information memorandum, the - - -
BRENNAN CJ: Now that you are there, could I ask you the question or the meaning of the term "bank bill rate"? Bank bill rate of what country?
MR SHAW: Australia, your Honour.
BRENNAN CJ: That is common ground?
MR SHAW: I think so, your Honour.
BRENNAN CJ: Were there any terms in relation to the currency in which the money was to be, first of all, deposited and subsequently repaid with interest?
MR SHAW: Indeed, there were, your Honour. The money was drawn from the Cook Islands. That is an assumption which I perhaps should not have made. The certificate of deposit was received in return for a cheque drawn on the parent company, the Banking Corporation, in Australian dollars. The certificate of deposit was expressed in Australian dollars. The interest was expressed in Australian dollars and either the letter of credit or the certificate of deposit, I cannot quite recall at the moment, but I think the certificate of deposit, the interest was expressed to be net of Cook Islands' tax, so that one ended up with a foreign investment which had no foreign exchange risk and no foreign tax risk.
DAWSON J: And the certificate of deposit resided in a safe in the Cook Islands until the money was due?
MR SHAW: No, your Honour, there was not anybody to leave it with so it was brought back to Australia and it was repaid in Brisbane.
BRENNAN CJ: And in fact the amount was paid by Bankers Trust Hong Kong with maturity, is that right?
MR SHAW: Yes, that is right, your Honour.
BRENNAN CJ: Do I take it then that Bankers Trust Hong Kong deducted the amount of 5 per cent withholding tax for the Cook Islands?
MR SHAW: Your Honour, I cannot remember exactly, but I will find out what the answer is, but certainly the Cook Islands tax was paid by deduction - the answer, I am told, is yes - and there is a receipt for it.
BRENNAN CJ: And then the net amount of interest and the principal was made by Bankers Trust Hong Kong - - -
MR SHAW: At the direction of VPBC in Brisbane.
BRENNAN CJ: Yes, to Spotless - - -
MR SHAW: In Brisbane.
BRENNAN CJ: - - - in Brisbane.
MR SHAW: I will come to this in a minute, your Honour, but what happened was - I will come back to this in a minute, but the way settlement took place was this: there were transactions in Australia and transactions in the Cook Islands. On the first day that settlement was set up the Melbourne people had a look at the letter of credit and they were advised that the terms of the letter of credit did not give them sufficient protection, for a number of reasons. One of the reasons was that it was payable in London.
So they said, "We won't go ahead until the letter of credit was amended in that respect to make it payable in Melbourne" and also to provide protection in a way which meant that not only did the letter of credit secure the obligations of the issuer of the certificate of deposit, that is to say, the Banking Company Limited, the subsidiary, it also secured payment by the parent company, the Banking Corporation, because - - -
BRENNAN CJ: I am sorry, I am not following that. What was the liability of the Banking Corporation?
MR SHAW: Your Honour, I will take you to the terms of the letter of credit, but your Honour will recall that the plan originally was that the money would go into the Banking Corporation and be withdrawn with a cheque to pay to the Banking Company Limited and you get the certificate of deposit in return, and it was apparently contemplated that one of the things which might happen was when it was repaid, assuming it to be repaid in the Cook Islands, which is what the certificate of deposit provided for, it would be paid to Spotless by a cheque from the Banking Company Limited, the subsidiary, payable to Spotless drawn on the parent company, the Banking Corporation, and deposited into, in effect, the place where it had originally come from.
What I was saying was that one of the amendments made to the letter of credit was to secure not just payment by the Banking Company Limited, the company which had issued the certificate of deposit, but also payment by the Banking Corporation. What I was really saying, your Honour, is that shows it was not just a transaction with the Banking Company Limited.
BRENNAN CJ: One other question. In relation to the money that was paid to the Banking Corporation, it was there, I take it, for a time before the cheque drawn in favour of the EPBCL was presented for payment?
MR SHAW: I was just about to tell your Honour that. If I might go back because I will answer your Honour's question, I think.
BRENNAN CJ: Yes.
MR SHAW: What I was saying to your Honour was that a settlement had been arranged and on the first day, the terms of the letter of credit were thought to be inadequate. So Spotless in Melbourne declined to hand over the money.
BRENNAN CJ: To?
MR SHAW: It would have been Midland, your Honour, and - - -
DAWSON J: I am sorry, handed over the money to Midland?
MR SHAW: Yes.
DAWSON J: Why Midland?
MR SHAW: Because Midland was meant to transmit it to the Cook Islands.
TOOHEY J: That was Midland, Singapore?
MR SHAW: That is Midland, your Honour. It is just the Midland PLC Singapore Branch.
TOOHEY J: Is not there a parent office of Midland. not necessarily involved in this case?
MR SHAW: Your Honour, my understanding - I might not have this right but I think I am right - I think one is talking about the UK company, its branch in Singapore.
TOOHEY J: Simply a branch.
MR SHAW: I thought.
GUMMOW J: That would seem to be so from page 365.
MR SHAW: That was what I thought, your Honour.
TOOHEY J: Thank you.
MR SHAW: But at any rate, and I will come to this in a minute, it will be remembered that, speaking in a general way, Midland of course was going to want the money because it was not going to issue a letter of credit without its security, and its security was, in effect, the deposit which was ultimately to be made back by the Cook Island companies with an approved deposit taker which, in this case, turned out to be one of the BT companies.
But the point I was trying to make, your Honour, was that here they were; they rejected the letter of credit on the first day. The consequence of that was that somebody in Australia rang up the people in the Cook Islands - - -
DAWSON J: Mr Levy was sitting over there, was he not?
MR SHAW: He was sitting there and Mr Kuegler.
DAWSON J: What was he meant to do?
MR SHAW: Who, your Honour?
DAWSON J: Mr Levy.
MR SHAW: Mr Levy was meant to sign the cheque and hand it over and get the certificate of deposit.
DAWSON J: A cheque drawn on?
MR SHAW: The Banking Corporation. But there he was ready to do that and he had - no account had been opened but he had exhibited - - -
DAWSON J: But where was the money in the Banking Corporation from against which the cheque could be drawn?
MR SHAW: It did not have any.
DAWSON J: That was in Midland Bank.
MR SHAW: No, they did not hand it over yet.
DAWSON J: Well, it was to be anyway.
MR SHAW: It was eventually, but what I am saying is on the first day there they were, Mr Levy and Mr Kuegler, sitting in the offices in Rarotonga in the Cook Islands waiting to pass the cheque over and get the certificate of deposit but, lo and behold, they get a telephone call from Melbourne saying, "No, you can't go ahead". The reason for that was of course that Spotless would not provide the money because it would not accept the letter of credit, so it had to be put off.
KIRBY J: You make it sound all so suspicious, but business people have to be a little careful passing $40 million around.
MR SHAW: Of course they do, your Honour, and of course the significant thing here was getting the letter of credit because you had the security of Midland for repatriation of the funds and payment of the interest. Of course they were being terribly careful about the letter of credit.
KIRBY J: Very proper of them.
MR SHAW: Of course, but what happened in the Cook Islands, which company it is, who cares?
DAWSON J: The letter of credit is put in order.
MR SHAW: The letter of credit is then put in order.
DAWSON J: How did it happen?
MR SHAW: Tingle, tingle: "You can go ahead".
DAWSON J: So Spotless pays money to Midland?
MR SHAW: Spotless in Melbourne has a bank cheque, no less, for 40 million.
DAWSON J: Gives it to Midland?
MR SHAW: Gives it to Midland.
BRENNAN CJ: I wish that had been reproduced in your flow chart.
DAWSON J: Then Midland - how does the money get into the account of the Banking Corporation against which the cheque is drawn in Mr Levy's - - -
MR SHAW: Your Honour, the answer is, depending on what you mean, it does not. The reason I say - - -
DAWSON J: Mr Levy draws a cheque on a bank account which has no money in it?
MR SHAW: There is not even a bank account, but the thing was that, once Midland, which had the agreement with EPBC and EPBCL to issue the letter of credit to provide the security, Midland also had an authority which was handed over at the time to - - -
DAWSON J: At what time?
MR SHAW: The time when the 40 million was handed over - a letter which authorised them to apply the funds to the account of Spotless with the European Banking Company Limited in Rarotonga - not the European Banking Corporation but the Banking Company Limited. But, once they heard over the telephone that real non-take backable money in the sense of a bank cheque had been put in the hands of Midland, immediately the cheque was handed over in the Cook Islands.
BRENNAN CJ: Mr Shaw, at the risk of interrupting your narration, was it handed over to Midland at the direction of EPBC? In other words, was the relationship between Spotless and EPBC that of banker and customer, the banker giving a direction to the customer to pay the amount deposited to Midland?
MR SHAW: Your Honour, I think the answer is probably technically no. If I might explain to your Honour why. In fact, what had happened was that, because people do not like 40 million lying around for even a day not earning interest, instructions had been given by EPBCL, or EPBC I think, that immediately on receipt of the moneys - - -
BRENNAN CJ: By?
MR SHAW: By Midland, they were to be disbursed to the person who was taking the deposit from them, which was one of the BT companies. And that instruction was obeyed before the 40 million was handed over in Melbourne, because there was a day's delay. In other words, it had been expected that the money was going to be handed over on the Thursday, but it was not. But nevertheless, the expected receipt was disbursed before it arrived, leading into the fact that there was an overdraft of EPBC with Midland.
BRENNAN CJ: This is where I am finding difficulty in following it, when you are using terms such as "instruction". What I should like to know, if it is possible, perhaps by way of reconstruction of the flow chart, is to identify the payer and payee of the funds at each step, so as to indicate the relationship between those two parties. In other words, there was $40 million-odd produced by way of bank cheque. That was the property of Spotless. It became the property of somebody else. Whose property, I know not at the moment, because it was paid physically to Midland, but yet, in some way, EPBC seems to have been capable of giving an instruction.
MR SHAW: Your Honour, it was because everything was orchestrated.
BRENNAN CJ: No doubt it was orchestrated, but that does not mean that the relationship does not exist between the parties.
MR SHAW: No, no, of course it does not, your Honour. But what I had been going to say to your Honour was that if your Honour will look in volume 3, at page 463 - - -
GUMMOW J: Well, that is a letter from Spotless to Midland Bank of Singapore, supplying an authority - - -
MR SHAW: And it was handed over with the 40 million. Or it might have actually been handed over the day before. I am not quite sure which day, but one or other of those days. It provided Midland with authority to apply the 40 million to the account of Spotless, with EPBCL, that is the subsidiary and the issuer of the certificate of deposit, in Rarotonga in the Cook Islands. So that, in that sense, your Honour, one part of the answer to your Honour's question is that the idea was that Midland would get the funds in Australia and cause them to be transmitted to the Cook Islands so that a cheque could be drawn.
GUMMOW J: Was that cheque requisition separately reproduced at page 469?
MR SHAW: Your Honour, that is just the transmission thing. I do not think it is a cheque requisition, your Honour.
GUMMOW J: No, it is an application to transfer from Spotless' account with the branch of Westpac in Victoria, is it, to go up to Singapore. Is that what is going on?
MR SHAW: To the account of Midland with Westpac.
GUMMOW J: In Singapore.
MR SHAW: In Sydney.
GUMMOW J: In Sydney.
MR SHAW: What I have been going to say, your Honour, is this: although there is that aspect of the matter, and in that sense Midland was acting on behalf of Spotless in transmitting the funds to the Cook Islands.
DAWSON J: What really happened was that it bypassed what is a matter of carrying out the thing according to the letter, bypassed what was to happen in the Cook Islands. In other words, instead of the money going from Midland to the Banking Corporation in the Cook Islands and the Banking Corporation paying the Banking Company Limited, and then that going back to Midland to be disbursed to whoever was going to receive the moneys, it just went straight from Midland to those who were to receive it. So that when Mr Levy gave his cheque it was all just putting in entries into the books.
MR SHAW: Exactly so, your Honour, and what is more there was not much alternative because the money had already been disbursed to the ultimate taker of the moneys. BT already got it.
DAWSON J: There was no reason to go through all this trail pending - - -
MR SHAW: What is more, Midland had handed over its letter of credit which gave security. It was not going to let the actual funds escape into circumstances where it would no longer have the security. So that, the fact of the matter was, that as a commercial matter, of course the funds remained here, but because Midland had got a bank cheque and this authorisation everybody was prepared to act on the basis that the funds had actually got to the Cook Islands, and to ignore the fact that the authorisation was to transfer it to the Banking Company Limited and not the Banking Corporation.
BRENNAN CJ: Well, again, does that mean that the money was paid by Spotless to Midland?
MR SHAW: Yes. The bank cheque was handed over, yes.
BRENNAN CJ: Yes. So that the relationship of debtor and creditor arose between them?
MR SHAW: Yes.
BRENNAN CJ: And the authorisation which appears at page 463 was never intended to result in the application of the money in accordance with its terms.
MR SHAW: What it was intended to do, your Honour, was this: produce a circumstance that would lead to the cheque which was to be drawn by Spotless on the Banking Corporation would be honoured and the certificate of deposit would be delivered in exchange for it.
BRENNAN CJ: Honoured by whom?
MR SHAW: It would be accepted by the Banking Company Limited as consideration for the certificate of deposit.
BRENNAN CJ: Yes, even though there is no money ever involved between them.
MR SHAW: Yes, absolutely.
BRENNAN CJ: So that, at the moment, we have not got EBC, or EBCL, involved in anything except exchanges of pieces of paper, with no commercial relationship of any kind that would entitle any of the parties to it to any relief - could not sue on the cheque; could not sue for specific performance; could not sue for damages, because the understanding always was that the money was to go to Midland and Midland was to hold it.
DAWSON J: Thanks to Bankers Trust.
MR SHAW: Well, your Honour, certainly the understanding was that once the cheque was - the cheque was to be handed over and that was to be handed over in exchange for the letter of credit, which was - - -
BRENNAN CJ: When you say "the cheque", you mean the piece of paper purporting to be a cheque?
MR SHAW: Oh no, it is a real cheque, this one; this is the $40 million bank cheque.
McHUGH J: This is a bank cheque.
BRENNAN CJ: I am sorry, yes.
MR SHAW: What one has, your Honour, is, there are two - I do not know whether parallel is the right word, but two complementary, if you like, sets of things being done. One set of them is being done in Australia, and another set is being done in the Cook Islands. In Australia, what is being done is that a bank cheque for $40 million is handed over in exchange for a letter of credit. In the Cook Islands what is being done is that a cheque for $40 million, drawn by Spotless on the Banking Corporation, the parent company, is being handed over by Mr Levy to Mr Kuegler, in exchange for the certificate of deposit - - -
DAWSON J: And the money that went to Midland went to BT?
MR SHAW: Yes, and - - -
DAWSON J: And who did BT owe the repayment of that money to?
MR SHAW: It owed it to the EPBC, but Midland had security over it.
GUMMOW J: That appears from the account of the events at page 193 lines 36 and following, is that right, Mr Shaw?
MR SHAW: Yes, that is right, your Honour. If your Honour considers the commercial realities - - -
GUMMOW J: Page 6 of the flow chart has a red arrow with dots and it suddenly averts the eye, I suppose, and it says, "$40 million assumed transfer of funds". That is what we are talking about, is it?
MR SHAW: Your Honour, how we understand it to have happened - - -
GUMMOW J: I know it is not your - - -
MR SHAW: - - - is, and we have tried to construct this, but, if I could take your Honour to our written submissions, and at page 32, in paragraph 64, and this is, I believe, accurate, it says, A cheque for $40 million, drawn by Spotless on EPBC, was handed over to EPBCL in the Cook Islands. The interest has a source in the Cook Islands. But, the $40 million represented funds obtained by it - that is Spotless - and previously held and invested by it in Australia - substantially the whole of that sum, if it ever left Australia, immediately returned to Australia by being lodged by the EPBC with Bankers Trust Australia in Sydney in an account of Bankers Trust Hong Kong, and, of course, Midland had security over it. And then we go on to say, probably the funds never left Australia. There was no telegraphic transfer of the lodged funds to the Cook Islands and the scheme was not designed so as to provide for any actual transfer of funds to the Cook Islands, and I will show the Court that in a minute.
The funds were provided by Spotless by way of bank cheque which was handed by Spotless in Melbourne to a representative of Midland in exchange for Midland's Letter of Credit, which gave security to Spotless, and Midland in turn required and was entitled to security over the funds against its obligations under the Letter of Credit and at the time when Midland received the bank cheque it had already, prematurely, but on EPBC's instructions, disbursed the funds intended to represented by the cheque to BT. What seems to have occurred is this, that once the funds were made available in Melbourne, by way of bank cheque which was handed by Mr Williams - Mr Williams is the Spotless man - to Midland together with Spotless' authority to apply the funds to its account with EPBCL in the Cook Islands - and that is the authority that I have just referred to - EPBC EPBCL were prepared to treat the funds as immediately available to them without anything more occurring and immediately to hand over the Certificate of Deposit to Mr Levy in the Cook Islands against a cheque drawn by Spotless on EPBC.
DAWSON J: The step you leave out was that you suspect the money went straight from Midland to BT.
MR SHAW: Yes. Now, if I might go back to the information memorandum. I was - - -
GUMMOW J: But for whom did Bankers Trust Hong Kong hold this money?
MR SHAW: It was a deposit by EPBC.
GUMMOW J: Yes, I see, with a charge in favour of Midland.
MR SHAW: Midland, yes. If I can go back to - - -
GUMMOW J: So, in other words, the Cook Islands bank was itself deriving some income, I suppose, from its deposit in Hong Kong.
MR SHAW: Yes, and it, of course, wanted the interest rate which it was paying to Australian participants to be as low as possible.
GUMMOW J: Yes, whereas it might be getting a better rate in Hong Kong.
MR SHAW: Yes, quite. If I could go back to page 293. I had been dealing with the issue details and then on the next page you find a heading "NATURE OF INVESTMENT" and what it says is:
The interest on this investment is subject to withholding tax at its source in the Cook Islands and as no international tax treaty exists between the Cook Islands and Australia, the interest derived from the deposit should be exempt income for tax purposes in accordance with Section 23(q) of the Income Tax Assessment Act.
So it expressly says that the nature of the investment is an investment, the income from which is exempt under section 23(q). Then going over to the annexures. They commence on page 297. The first of them is a legal opinion from Stephen Jaques Stone James on the tax effect of the proposed transactions and that appears in the first paragraph on page 298 and it says:
We understand that it is intended that an Australian resident corporation should arrange for funds to be placed on deposit with European Pacific Banking Company Limited ("EPBCL") in the Cook Islands, a subsidiary of EPBC.
BACKGROUND
We understand that the following series of transactions will take place.
Then is set out a series of steps which are proposed to be taken and it says:
1. An Australian resident investor will be approach by EPBCL from the Cook Islands to suggest the placement of a deposit with EPBCL.
2. The investor will open an account with Midland Bank plc in Singapore and another account with EPBC in the Cook Islands.
3. The investor will appoint an attorney in the Cook Islands with power to draw funds or cheques upon the investor's account with EPBC in the Cook Islands.
4. The investor will place his account with Midland Bank plc in Singapore in funds.
5. The investor will then instruct that a transfer of funds from the Singapore account to the Cook Islands account take place.
6. EPBC will instruct Midland Bank plc to issue to the investor a letter of credit both with respect to the account with EPBC and any subsequent deposit with EPBCL.
7. The attorney in the Cook Islands will draw a cheque on the EPBC account in favour of EPBCL.
8. EPBCL will issue a certificate of deposit to the attorney and will in turn draw a cheque on its account with EPBC -
that is a prepayment of interest. That did not happen. There is a deduction of the Cook Islands tax:
The attorney will hold the certificate of deposit in the Cook Islands.
9. The attorney will advise the investor of receipt of the certificate of deposit and receipt of the cheque for interest. The cheque for interest will be deposited with the investors account with EPBC with instructions that a transfer be made to the investor's account in Singapore with Midlands Bank plc.
10. EPBC as parent of the subsidiary will undertake to ensure the payment of withholding tax to the Cook Islands Government.....
11. On maturity the Cook Islands attorney will surrender the certificate of deposit and receive back its face value. Proceeds will be banked in the EPBC account of the investor, with instructions to transfer to investor's Singapore account with Midland Bank plc.
So that Stephen Jaques was asked to advise on a whole series of transactions obviously designed to ensure, so far as possible, that the source of the interest was in the Cook Islands, but which has no other commercial justification. And then off they go, they talk about it all, and they come to a conclusion that the source will be in the Cook Islands, and they - - -
DAWSON J: Which we now accept it was.
MR SHAW: Yes indeed; not that precisely what was said to happen, did happen. Then they go over and they deal with Part IVA at page 304 and that is their advice. You then have a sample certificate of deposit at page 307, you have a sample letter of credit which at page 310 you will see is available at Midland in Singapore, in the middle of the page:
Available at: Midland Bank PLC, Singapore Branch
The terms on which it is payable are set out on page 311(d) and the Court will recall that as the step 6 on page 299 indicates that the letter of credit was, with respect, both to the account with EPBC and with EPBCL, and then you have at page 313 a set of settlement procedures and you will see it has got in paragraph 1:
Investor opens bank account with Midland Bank PLC, Singapore branch and European Pacific Banking Corporation ("EPBC") in the Cook Islands.
The funds going into Midland, Singapore:
one business day prior to settlement to facilitate prompt funds flow on settlement day.
appoints an attorney with power to draw funds upon Investor's account with EPBC.
And then you have got transactions on settlement day in paragraph 4, in the Cook Islands, and in paragraph 5 in Sydney. In the Cook Islands you have got the drawing of the cheque, the issuing of the certificate of deposit, the dealing with the interest paid in advance and communication with Sydney and the holding of the certificate of deposit in the Cook Islands until maturity, and in Sydney you have got Midland presenting the investor with a letter of credit in support of the certificate of deposit issued in the Cook Islands:
Investor shall give irrevocable instructions to Midland Australia to transfer funds from Investor's account maintained with Midland Bank PLC, Singapore branch to Investor's account maintained with EPBC in the Cook Islands.
And then it deals with the interest and then it deals with maturity.
DAWSON J: The trouble with all of this is that you say, well this shows that there was a scheme and the dominant purpose was to avoid tax, but really all this artificiality was merely to ensure that the source of the interest was in the Cook Islands and we must accept that as a fact.
MR SHAW: Indeed, your Honour, but - - -
DAWSON J: So that whilst you might rely on the fact that the artificiality goes to demonstrate a scheme, in fact it may not assist you here.
MR SHAW: Your Honour, the question is, what does the artificiality go to, as your Honour says.
DAWSON J: It goes to establishing a position where one can take advantage of 23(q).
MR SHAW: Yes, indeed, and it not only goes to that, but it also goes to - there are two things. It is perfectly clear from looking at both those recitations of what happens was that it was never actually intended that the funds would go to the Cook Islands at all.
DAWSON J: That does not matter. What was intended is you got yourself within 23(q), and they did.
MR SHAW: The first point is, the funds were not intended to go to the Cook Islands anyway, although people felt themselves entitled to act as if they had. The second is that security was to be given in a form which secured repayment not only by the giver of the certificate of deposit but also by the Banking Corporation. Now, your Honour says that only goes to show that all that artificiality was being directed - - -
DAWSON J: I can tell what your answer is going to be, that you could go about getting the benefit of 23(q) in a straightforward and legitimate commercial manner, or you can do it in such a way as to indicate that there is a scheme of which 23(q) is a part, admittedly.
MR SHAW: Your Honour, we would say that it demonstrates that there is a scheme, and what is more, here what was sought was the advantage of section 23(q), as your Honour says, and when his Honour says at page 1089 and 1090 that the dominant purpose of making the investment was not to obtain a tax benefit but to obtain the maximum return on the moneys invested after payment of all applicable costs, including tax, what that means is that what they wanted to ensure was that the return which they obtained on the funds from the Cook Islands did have the advantage of section 23(q).
Now, the effect of obtaining the advantage of section 23(q) is that the return is not included in the assessable income. Now, your Honour will recall that the definition of a tax benefit is the non-inclusion in the assessable income of an amount which otherwise would have been expected to have been included in the assessable income. Because of the inter-relationship of the definition of "tax benefit" to which I have referred and the purpose of this scheme, the obtaining of the advantage of section 23(q) is simply the other face, the reverse side of the coin of the non-inclusion in the assessable income of Spotless of the return which Spotless would have obtained on the funds had they been invested in Australia.
So that his Honour seems to speak as if there is some kind of radical distinction and difference in this case between the dominant purpose of obtaining a tax benefit and the dominant purpose of obtaining the maximum return on the funds. But, because of the kind of advantage which was here being sought, they are inseparable. The commercial advantage of this scheme is the obtaining of a tax advantage.
KIRBY J: But will that not always, or generally be so - that they are inseparable - given the prime importance of gaining the best from the commercial point of view and the directors' obligations, the best taxation position for the shareholders?
MR SHAW: No, your Honour.
KIRBY J: You say that if incidentally to a transaction which is natural, normal, part of the business, then so be it?
MR SHAW: So be it.
KIRBY J: But if you set upon a course which is artificial and has no extraneous explicable commercial purpose, then that it is that attracts the part, and gives the Commissioner the discretion - - -
MR SHAW: To apply section 177F, yes.
KIRBY J: You lay a lot of emphasis in your written submissions upon the history of the legislation; section 260 of the decisions, some rather nasty statements of the Commissioner's submissions about the decisions of the court, then the new part.
MR SHAW: Quotations from somebody else, your Honour.
KIRBY J: Yes, but they are still in there. And the new part provided for the discretion of the Commissioner. How did Justice Lockhart feel himself entitled to - - -
MR SHAW: Justice Lockhart was in a situation a little different from the situation of the Full Court.
GUMMOW J: He was before Peabody.
MR SHAW: Yes. His Honour Justice Lockhart decided this case at first instance.
KIRBY J: Before Peabody.
MR SHAW: After the Full Court of the Federal Court had made its decision in Peabody and before this Court had said that the Full Court of the Federal Court was wrong in saying that it was fatal that the Commissioner had wrongly identified the scheme. He said the Commissioner wrongly identified the scheme, that is the end of it, which is what the Full Court of the Federal Court said, but this Court said no, that is not so. So that his Honour's consideration of the question stopped - - -
KIRBY J: Is flawed by that.
MR SHAW: Yes, so that when one got to the Full Federal Court in this case, their Honours were considering the matter on quite a different basis from the one on which he considered it because, by that time, this Court's decision in Peabody had been given. So that is why, as it were, the consideration on this point is quite different.
GUMMOW J: Mr Shaw, in that respect do you rely on what Justice Beaumont said at page 1059 and 1960 of the appeal book, commencing at 1059 about line 20?
MR SHAW: Yes, we do, your Honour. What we say is here you have - and that was why I mentioned the question about how one was to read matter (v), the financial position. What his Honour said is, "Well, why did they do all this? What commercial basis for it is there?". The answer seems to be "None".
McHUGH J: I would have thought the answer was that they are going to make more profit. I mean, you want to have a halfway house here. It does not seem to me at the moment at this stage of your argument that - you certainly have not convinced me that there is a halfway house here. It seems to me either there is always a tax benefit in any sort of situation where a person takes advantage of some exemption or other provision of the Act or in a commercial setting there is never a tax benefit, that it is done for profit, to increase the profit, and that is it.
At the moment I just cannot see how you can use these words of this Act to get in this halfway house that you want to get in, that you got in now. I mean, you talk about contrived scheme, and I do not say this disrespectfully, but they are points of prejudice. You are talking about artificial, contrived and all of that, but ultimately you have to come to the purpose of the scheme and the words, on one view, say that for the purpose of obtaining a tax benefit - and in a sense that is what they did in this case. On another way of looking at it, they did it solely for the purpose of obtaining a greater return on their funds.
MR SHAW: Your Honour, first of all the words which are used, at least one of them - two of them - were not words of mere prejudice.
McHUGH J: Some of them are in the Treasurer's second reading speech.
MR SHAW: Some of them are in the judgments of members of this Court in Gulland. With respect, they are not words of mere prejudice as long as they accurately describe the transaction. In our submission, it is true to say that there is not a commercial explanation for the course of conduct proposed or the course of conduct actually followed through and that the only explanation of the actual things that were done is that they were directed to ensuring, as your Honour Justice Dawson said, that section 23(q) applied.
That seems to be the sense in which his Honour the Chief Justice and Justice Dawson used "artificial" and "contrived", not in relation to that particular section of course but the sense in which they used them in that case.
DAWSON J: What you are really saying is, you cannot set out to get a tax benefit. If, in the natural course of events, the tax benefit of this sort occurs, that is one thing but to set out to do it, is another.
MR SHAW: Is quite another, yes, your Honour, yes, exactly.
McHUGH J: That creates some difficulties from your point of view from a halfway house, does it not, because - - -
MR SHAW: But, your Honour, if I might say, is using in respect of my argument words of prejudice and we do not accept them.
McHUGH J: You say that if a taxpayer switches out of the money market, as this taxpayer did, and into a, say, dividend imputation scheme or some other scheme which enables them to get the benefit of tax advantages, then that is not done for the purpose of obtaining a tax benefit unless there are other circumstances involved?
MR SHAW: Your Honour, one must always look at all the surrounding facts, so that it is very difficult to answer general questions which ignore the particularities of events as they must occur in actual dealings.
KIRBY J: My understanding is that that is precisely why Parliament moved from the old scheme of section 260 to a new scheme which provided certain criteria and a discretion, and courts intervene in that discretion only on the orthodox basis for interfering with an administrative discretion.
MR SHAW: Not precisely, your Honour. Here, one has the situation that the provisions of the Taxation Administration Act say that if a taxpayer disagrees with an assessment, he is entitled to object, but he has the onus of establishing that the assessment is excessive. So that if one makes the particular assumptions that I have so far been making here, what the taxpayer has to do here is show that it would not be concluded that the dominant purpose of one of the parties to the scheme was to enable Spotless to obtain a tax benefit in connection with the scheme. On that basis, the Court can interfere.
KIRBY J: That is just an ordinary principle of administrative law, is it not? The decision maker has taken into account a matter which is irrelevant or inaccurate as the foundation for the exercise of the power conferred by the law.
MR SHAW: Your Honour, it is not, as it were, the full range of powers which are available under the Judicial Administrative Review Act are not available here. It is a more restricted - - -
KIRBY J: But does the discretion mean nothing? Does the movement of Parliament - - -
MR SHAW: Of course it does. The discretion has been exercised, it has produced an assessment. The question is, is the assessment excessive, and one can show all sorts of things, of course, but relevantly here, one is asking oneself, "Have the taxpayers shown that it would not be concluded and so on?".
McHUGH J: Are you arguing that there is a discretion here in the sense of whether or not one would conclude that a person did say for the purpose - - -
MR SHAW: No. I thought that Justice Kirby was asking me about the discretion in section 177F.
KIRBY J: Yes. I think that is the section that - - -
MR SHAW: That gives him power to make a determination, and it is expressed in terms of "may". It is on the determination that the assessment rests. But he has only got power to make the determination if there is a scheme, if there is a tax benefit, and if it would be concluded, and so on. Assuming for the moment a scheme is a tax benefit then you come down to this question of whether it has been shown that it would not be concluded, and so on. But, if I might go on to answer the rest of your Honour's question: there are, it is submitted, a number of things that may be said which would lead to non-acceptance of what your Honour said about the outcome.
The first of them is this: if your Honour goes to the terms of section 177D which is set out in a number of places, but one of them is at page 1084, I might direct your Honour's attention to section 177D(b)(v). As I understand what your Honour has put to me, your Honour has put to me what Justice Cooper says. If you are better off then that is what your dominant purpose is, to be better off, and that is that. If that be the proper construction of this then the purpose which is served by the other matters is difficult to discern.
McHUGH J: Not necessarily. I mean, you can have - I forget the case - but, Clarke 40 CLR - those cases where they tend to be close to evasion-type cases, but when money is coming in and one cuts it off and does something else and sets up an arrangement, that class of case, has still got plenty of scope under this part as they probably still have under section 260.
MR SHAW: But, with respect, your Honour, no, not if what your Honour says is accepted because what your Honour put to me, as I understood what your Honour said, was this: if you can say that you did this so that you would be better off, then your dominant purpose is to be better off, even if that dominant purpose is obtained by obtaining a tax benefit.
McHUGH J: But you introduced the word "dominant", you see, and the section talks about the word "the purpose". So you put - - -
MR SHAW: No. I did not take your Honour to the part, but if I could show your Honour - it is in that folder somewhere or other.
BRENNAN CJ: 177A, is it not?
MR SHAW: It is behind tab 5, your Honour.
McHUGH J: Yes.
MR SHAW: And it is 177A(5) and I was merely - I had some support for that at least.
McHUGH J: A much better foundation than something you earlier said.
MR SHAW: I do not know. I think I have referred to a couple of other things that are moderately respectable.
DAWSON J: Mr Shaw, you said that the Commissioner does not have a discretion as when something actually falls within 177D as to whether to treat it as so being or not, but really the breadth of it is such that he must, must he not?
MR SHAW: Your Honour, it is expressed in terms of "may".
DAWSON J: That is what I want to know. Do you say he has a discretion?
MR SHAW: Yes, your Honour.
DAWSON J: Because otherwise every agreement between a plumber and his wife to enter into a partnership would fall fairly and squarely within the - not every agreement, but a lot of agreements of that sort are fairly and squarely within 177D, but obviously the Commissioner takes no steps in relation to such things as that.
MR SHAW: We would not accept what your Honour has said, namely, that a simple entering into a partnership between - - -
DAWSON J: No, I qualified it, but a lot of them would.
MR SHAW: I will not quarrel with your Honour about proportions, but, your Honour, section 177F, which is the operative provision, as it were - what you have got to do is you have got to have a scheme, which is 177A; you have got to have a tax benefit, which is 177C; you have got to have a conclusion reached under section 177D, and if you have got all those things then, as your Honour will see:
Where a tax benefit has been obtained, or would but for this section be obtained, by a taxpayer in connection with a scheme to which this Part applies, the Commissioner may.....determine -
and so there is a discretion there we would say because it says "may".
KIRBY J: Would you help me, just following that question up, if I have got this wrong. My understanding of your written submissions and of the course of the legislation was that because of the precise problem of finding the halfway house that Justice McHugh was referring to under the old doctrine under section 260, Parliament deliberately moved to a provision that provided a discretion that did so by reference to a number of criteria and that empowered the Commissioner, as it were, to characterise - because that is what we are dealing with here - characterise all the facts in order to see whether or not the provision would apply. Now, if that is incorrect, I would be grateful if you would correct me on it.
MR SHAW: Your Honour, it is certainly true that, because of perceived, and a whole series of defects in the operation of section 260, it was decided to move to other provisions and it was consciously decided, apparently, not to use either the test expressed in Newton's Case or the words "blatant", "artificial" or "contrived", but to set up a series of things which had to be established and of which the final and most difficult one, from the point of view of the Commissioner, is the establishment of the conclusion in section 177D. But if the taxpayer can show that it would not be concluded that the dominant purpose of one of the persons who entered into the scheme or whatever, then the Commissioner has no discretion to apply the part, because he can only apply the part if the necessary conditions for the application of the part exist and one of them is that. So the question obviously only arises when the Commissioner has sought to apply Part IVA, because unless the Commissioner seeks to apply Part IVA the question will never arise.
KIRBY J: So you say the fact that he has the discretion, does not really matter in every case. You go back to the objective question of whether or not the circumstances of the Act are made out. You do not seek to get a leg in by the fact that the legislation changed, the characterisation of what is the dominant purpose is necessarily any valuative matter and that it is given by the statute to the Commissioner and the Commissioner exercises it and the taxpayer has to, as it were, displace the exercise of the administrative discretion by the Commission? That is orthodox administrative law to me.
MR SHAW: We do seek to get a leg in, your Honour, but not in your Honour's way. We do not say it is simply a matter for the Commissioner to decide whether or not the conclusion would be reached and he having reached it, as long as it was the sort of thing that he could possibly reach, that is that.
But we do say that an assessment having issued, the onus lies on the taxpayer of showing that the assessment is excessive and, if you have an assessment which is made pursuant to a section 177F determination, then one of the things he has to show - I mean, Peabody showed that there was not a tax benefit. But those things have been held to exist here; a scheme and the tax benefit. Where the Commissioner failed was that he failed to show that it would not be concluded that the dominant purpose, and so on, and it is for the taxpayer to establish that, we would say.
KIRBY J: Is there something in the Act that, as it were, divorces this from the normal principles of administrative law? Perhaps that could be just checked later on, because otherwise I feel inclined to approach the matter just as another statute of Federal Parliament conferring a discretion on an administrative officer holder to be exercised in accordance with the Act.
MR SHAW: If I could deal with that in the morning, your Honour. But your Honour Justice McHugh - - -
GUMMOW J: Well, these provisions were drawn with Giris' Case in mind, were they not, Mr Shaw, amongst other things?
MR SHAW: There was a whole series of things they were drawn with in mind.
GUMMOW J: Yes. On this question of discretion - - -
MR SHAW: I think your Honour is correct.
GUMMOW J: - - - that must be right.
MR SHAW: But your Honour Justice McHugh, amongst your Honour's other erroneous remarks, said this; that it seemed to you that it was merely a matter of choice. Either you could pay the.....tax or you could not and, if you chose one thing, well, there you are. Now, your Honour, the one thing that Part IVA was designed to do - and whether it has done it or not is another question - and one thing which I think it is right to say that it was accepted in the Full Court it had achieved, was that the choice principle, as it was called, was no longer applicable.
McHUGH J: I did not refer to - not the context you are talking about, but it seems to me that your strongest point running for you is the onus of proof, that, where there are a number of possibilities about purpose, the onus is on the taxpayer to show that the person who entered into it did so for the purpose of not obtaining a tax benefit. So he has got to negative it and - - -
MR SHAW: He has got to show a negative, yes.
McHUGH J: - - - and, in that sense, that seems to me to be a strong point in your favour. But, when all the facts are in, there is no question of discretion, it seems to me.
MR SHAW: No.
McHUGH J: There is an onus of proof, but once the facts are in, what the Commissioner has decided is irrelevant, apart from the fact that a taxpayer has the onus of displacing the assessment.
KIRBY J: Does that not make it relevant? I mean, there is a decision made by law which has to be displaced.
MR SHAW: That is true.
KIRBY J: Why do we forget about that - and against a background that the legislation which deliberately introduced the discretion to overcome some of the problems that had arisen in respect of characterisation of transactions?
MR SHAW: We would say, your Honour, that, once all the facts are in, it is still for the taxpayer to show that those facts, whatever they are, lead to the fact that he has shown that it would not be concluded - and all the other words - I do not want to say them all because it takes a month of Sundays.
McHUGH J: Yes, but there is no question of any discretion. You have to show that the Commissioner acted on wrong ground and - - -
MR SHAW: No, no, no, true.
McHUGH J: No.
MR SHAW: I accept that, your Honour.
McHUGH J: Yes.
MR SHAW: But your Honour did say, and it is obviously something which troubled your Honour, so I do not want to depart from it without given it a good shake as it were, that it seemed to your Honour that one might say, "Well, it is true that the advantage was obtained because of a tax benefit, if you like, but nevertheless, the mere obtaining of the tax benefit was not the dominant purpose, it was simply being in a better financial position, if you like, and that - - -
McHUGH J: It was the reason, motivation.
MR SHAW: But, your Honour, one is directed to look at the purpose.
McHUGH J: But you go along to a stockbroker and, some people go along to stockbrokers who will say, "Don't invest in this particular company, because it hasn't got a dividend imputation scheme. You get a better return from such-and-such a company". Well now, surely that is not caught by Part IVA, even though the whole purpose of making that particular investment is to get the tax benefit which you get from the dividend imputation scheme.
MR SHAW: Your Honour, it may well be that if one has an ordinary commercial transaction within it no element of non-commerciality but simply an ordinary commercial transaction entered into in an ordinary commercial way, such as is entered into every day, then Part VIA would not apply, but - - -
KIRBY J: But it is not every day that you have got a $40 million windfall to invest. What is so uncommercial about them looking around for the best possible return?
MR SHAW: But it is not every day that you say, "Well, I'll make an investment in the Cook Islands with a company of this kind and, in the course of making it, I will have the funds transferred and dealt with in a way which has got no commercial explanation at all".
McHUGH J: I would have thought there is a real commercial explanation in the sense of why they went this route because of security. At all steps they were ensuring that there was no chance of losing their money by - this is perhaps a point of prejudice in your favour - investing in a company which is only going to pay that capital of $10 million giving $40 million to it.
KIRBY J: You are living in the past of local transactions. We live now in a global economy of the movement of funds by computer all around the world. I mean, it could be the Cook Islands, it could be somewhere else.
MR SHAW: So they could, your Honour. What your Honour has said has just demonstrated, in our submission, that it was a very odd thing and something which cannot be explained in an ordinary commercial way, that Mr Levy should have been sent off to this strange place in order to do this strange thing, and to do it not just when he felt like but when he got a little telephone call, or Mr Kuegler got a little telephone call, saying, "It's okay, chaps, go ahead, pass the pieces of paper around", and around they passed them. Your Honour, in our submission, that would in the terms that were used by Justice Brennan and Justice Dawson in Gulland's Case be called artificial and contrived and point to a dominant purpose of obtaining a tax benefit. It is submitted that if your Honour's view which your Honour has expressed is a tentative one, of course, but if your Honour's view - - -
McHUGH J: All my views are tentative.
MR SHAW: Sometimes, but if it is right, then Part VIA, instead of providing a wider protection to the revenue than section 260 did, it provides a lesser one. I mean, your Honour is, it is submitted, suggesting a view of the provisions which really cut the heart out of them.
McHUGH J: No, but I want to test this. I mean, the opposite view is it goes further than you are wanting to put it.
KIRBY J: That is why I do not understand why you have thrown the discretion out the window. I thought that was the whole purpose of the amendment. I have noted the submission.
MR SHAW: The argument seems to be being criticised all the time, either for being unreasonable in that direction or unreasonable in this direction, and perhaps I was wrong there; perhaps I should have accepted your Honour's description as a halfway house.
BRENNAN CJ: Is it right to say that the discretion arises only when the elements of 177A to 177E have already been satisfied?
MR SHAW: Well leave out E, your Honour, for the minute, because that is a sort of separate bit; D yes.
KIRBY J: But that is orthodox administrative law. If in fact you exercise a discretion without the preconditions, then you have not got the basis for the discretion.
MR SHAW: That is true.
KIRBY J: So there is nothing - I just hesitate to put this in a special realm, it is simply another statutory discretion - - -
MR SHAW: What his Honour the Chief Justice put to me, we accept; if the taxpayer can show that one or other of the preconditions does not exist, the exercise of the discretion falls.
TOOHEY J: Well, the scope for exercise in the discretion has not arisen.
MR SHAW: Yes.
BRENNAN CJ: That is right.
DAWSON J: But what is being put to you is, at least by me, that the sort of discretion that is being spoken of is a practical discretion, like a prosecutor's discretion whether to prosecute or not.
MR SHAW: Well, your Honour, there is clearly a discretion in section 177F.
TOOHEY J: But are you suggesting, or is there any suggestion, that there is an area of discretion in regard to section 177D?
MR SHAW: No.
MR SHAW: No.
TOOHEY J: I would not have thought so.
MR SHAW: No. I thought that what his Honour Justice Dawson was suggesting to me was that even if - - -
TOOHEY J: Yes, I was not suggesting that that was Justice Dawson's approach, but in view of the discussion that has been going on I take it you are not suggesting an area of discretion, except in relation to 177F.
DAWSON J: Which is to make a determination.
MR SHAW: Yes.
DAWSON J: But he does not have to make a determination, even though the elements are satisfied.
MR SHAW: Yes, your Honour. I accept that.
BRENNAN CJ: Mr Shaw, how much longer do you expect to be? I suppose that is a very hard question to ask in light of the exchanges.
MR SHAW: It is, your Honour, but I had expected to have finished already and the fact that that prediction has not been fulfilled is not entirely to be laid at my door I think, but if the matter proceeds tomorrow as it has so far then I would expect to be somewhere between an hour and a half and two hours.
BRENNAN CJ: Yes, thank you. Dr Emmerson, do you have notes of argument prepared?
MR EMMERSON: We have a three-page outline. We do not have written arguments on the generous scale of my friend's longer document.
BRENNAN CJ: No. May we have the benefit of those three pages overnight?
MR EMMERSON: Yes, of course, your Honour.
BRENNAN CJ: Yes, thank you. You could perhaps give them to the Court Clerk when we adjourn.
MR EMMERSON: If the Court pleases.
BRENNAN CJ: The Court will adjourn until 10.15 tomorrow morning.
AT 4.22 PM THE MATTER WAS ADJOURNED
UNTIL THURSDAY, 3 OCTOBER 1996
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URL: http://www.austlii.edu.au/au/cases/cth/HCATrans/1996/394.html