Commissioner of Taxation v Spotless Finance Pty Ltd M33/1996 [1996] HCATrans 400 (3 October 1996)

IN THE HIGH COURT OF AUSTRALIA

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 THURSDAY, 3 OCTOBER 1996, AT 10.21 AM

(Continued from 2/10/96)

Copyright in the High Court of Australia

_____________________

BRENNAN CJ: Yes, Mr Shaw?

MR SHAW: May I first deal with some answers I gave or did not give yesterday? The first was an answer that your Honour the Chief Justice asked. Your Honour asked me whether the funds were invested with BT at interest and I said, "Yes". That was substantially correct but incomplete in this way: what happened was that so much of the 40 million as was sufficient at the agreed rate of interest with BT which was 15 per cent to produce a return sufficient to repay the face value of the certificate of deposit - that is 40 million - the agreed interest on it payable to Spotless and the Cook Islands withholding tax. The balance went partly in fees of which perhaps the largest one was the fee to the security provider, Midland. It was over 100,000. There were other minor fees. The balance was kept by EPBC itself and invested separately. It was something over 200,000.

BRENNAN CJ: Now, can I just pursue that a little. Could you turn to your flow chart under tab 3, Nos 7 and 8. The question I want to ask you is this: there are assumed transfers of funds from MIS to EPBC and from EPBC to the Spotless account

with EPBC. Then, by way of this cheque that was drawn by Spotless in favour of EPBCL on the EPBC account 40 million was thereby supposedly transferred from EPBC to EPBCL. The next two items are a transfer of 40 million from EPBCL to EPBC and from there to the account of EPBC with MIS. Those two items I do not understand.

MR SHAW: Can I answer your Honour generally in relation to the flow charts, particularly in relation to what your Honour has put to me. Can I ask your Honour to look at page 11 of the flow chart which is the last page. It has steps 9 and 10 on it.

BRENNAN CJ: Eleven, did you say?

MR SHAW: Eleven at the bottom right-hand corner and at the top it has 9 and 10.

BRENNAN CJ: Yes.

MR SHAW: Your Honour, what the evidence shows is this, that in actual cash flows the cash flows which occurred were these and they were these in this order: the first one is 8, which is two items, the Court will see. The reason that came first was because disbursal was made of funds which has not yet arrived from Spotless due to the confusion about the settlement date.

The next in time is 1, the handing over of the bank cheque in Melbourne and its transmission to Sydney, so that is an actual cash flow. And then 9 and 10, which are the repayments. In relation to 4, we do know that that cheque was handed over. By that I mean, on the second day somebody actually wrote out the cheque and it was handed over in the Cook Islands by Mr Levy to Mr Kuegler.

All of the other items - and they include the items that your Honour has specifically asked me about - are really a picture of the transaction as it was designed and, in so far as they occurred at all, must have occurred by paper entries, or book entries, rather than cash flows. It is not clear that, in most cases, even that occurred, in the sense that - if you take 4, for example, we know that the cheque was drawn, but there was no account opened, so far as the evidence goes, and those steps represent a picture of the transaction as it was intended to occur.

BRENNAN CJ: Well, that I could understand, if they were all marked by dots, that is assumed transfers.

MR SHAW: Your Honour is perfectly right, they should have been dots.

BRENNAN CJ: Well, does that apply to No 7, where EPBC pays $39,799,030 to MIS?

MR SHAW: No 7, your Honour, is a payment from, as it were, MIS to MIS, the difference being where it is, and the answer is yes, I think.

BRENNAN CJ: I am sorry, I do not understand.

MR SHAW: I was saying two things, your Honour. One was your Honour asked me a question as if the movement of the funds was a movement from EPBC itself.

BRENNAN CJ: Yes.

MR SHAW: All I was saying was that the blue box with "EPBC a/c MIS" is a reference to an account of EPBC with MIS in Singapore. So that, what I was saying to your Honours was that whatever occurred, it was a movement, assuming it to have occurred within MIS itself.

BRENNAN CJ: Was there any crediting of an MIS account with Westpac on the instructions of MIS Singapore which then debited the EPBC account?

MR SHAW: I think the answer, your Honour, is no, to both aspects of it and, as to the second aspect, there could not have been a debiting of the MIS account with Westpac, because the funds had already been disbursed, and the account which was in overdraft had to be put in credit, which it was, when the funds actually arrived, but, as to the rest, I think the answer is no, and your Honour rightly says it should be dots.

GUMMOW J: Do these not have to be reworked, Mr Shaw, so that one knows, without - - -

MR SHAW: Your Honour, we are happy to do that.

GUMMOW J: So that it is clear at one level, as it were, is the actual movement of funds.

MR SHAW: If your Honour pleases, we will do that.

GUMMOW J: So one can perceive that.

MR SHAW: Your Honour, the second matter that I wanted to mention was this: your Honour Justice Gummow did ask yesterday about the relationship between Midland and EPBC, and I said, your Honour, that there was a letter of credit facility and charge agreements. I did not say to your Honour that they are, in fact, exhibited - - -

GUMMOW J: Yes, I see that.

MR SHAW: I was just going to give your Honour the reference.

BRENNAN CJ: Please do.

MR SHAW: It is volume 2 appeal books 371. The last matter was this, that yesterday your Honour Justice Kirby asked for the ALR references which corresponded to the appeal book references to the judgments in the passages that had been referred to, and we have prepared a page setting those out, and we will hand them to your Honours' associates so that it is available to everybody.

KIRBY J: I also asked a question yesterday which you said you would come to this morning, which was prompted by the paragraphs in the skimpy written submission, the shorter one, in paragraphs 8 and 11. Paragraph 8 says:

At the very least Spotless has not established that the section 177D conclusion should not be reached.

And, 11 says:

Accordingly.....the Commissioner was entitled to determine -

Do you remember the questions? You take it in your own time but I would like your assistance on this because from the history of the legislation, no constitutional question arising, it does seem that the Parliament deliberately moved from attaching consequences to facts to attaching consequences to a discretion by the Commissioner.

MR SHAW: Your Honour, it is true that Part IVA only actually operates when the Commissioner in exercise of his discretion under section 177F makes a determination and then an assessment pursuant to that determination but, as I think the Chief Justice put to me yesterday, it is only open to the Commissioner to make such a determination if the facts exist necessary to enliven his discretion to make the determination. Those facts are objective.

KIRBY J: Well, are they? The words "dominant purpose" is an evaluation.

MR SHAW: It is true that one does have to make judgments and - - -

KIRBY J: If the power is given to the donee of statutory power to make the judgment and if it is evaluative and if there is no, as it were, objective - well, there can be different opinions about it. What function does a court have to disturb the evaluation which the donee of statutory power is given by the Parliament?

MR SHAW: There are three things, your Honour, which have to exist before the discretion is available to the Commissioner and I have called them facts, but that may not exactly be the correct description of them for a reason that I will come to in a moment. The first is that there should be a scheme and that is very widely defined in section 177A. The next is that there should be a tax benefit obtained in connection with the scheme and whether or not a tax benefit exists depends on whether or not it is reasonable to predict that relevantly an amount has been or would be reasonably expected to be included in the assessable income of the taxpayer.

In Peabody the Court held that that was to be determined in an objective way. It did not depend on the Commissioner's opinion and the Court would look and see whether there was or was not such a thing and in that case the Court held that there was not. So assessment fell because it was based on the determination and the Commissioner was not entitled to make the determination because something necessary to exist to entitle him to act did not exist as the Court held. The last thing which needs to exist for the determination to be available to the Commissioner is that one can say, having regard to the eight matters set out in section 177D, that it would be concluded that "the purpose" it says, but one has to read that as "dominant purpose", of one of the parties who entered into or carried out the scheme or any part of the scheme did so with the dominant purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme.

Now, there are in that two, maybe more, but at least a number of judgments of a somewhat strange kind, perhaps, to be made. The first of them is the one that your Honour just referred to: assuming there is more than one purpose, what purpose is the dominant purpose? That is a matter of judgment, of course, but depends on the facts and the second thing is whether that purpose exists having regard to the eight particular matters that are referred to in section 177D(b). Now, in forming that judgment, one is not, as we put yesterday, concerned to come to a conclusion of fact in the sense that one says, "Well, this actually was the purpose or the motive", or whatever word one uses, "of whatever it is you are talking about".

The reason that it is not a question of fact is because you are not allowed to look at all of the facts. You are only allowed to look at some of the facts and you are told what they are. They do not just say "look" and "see", it says "have regard to these things" and then say what is the conclusion. So, in one sense it is not a conclusion of fact because it might logically be - I suppose it seldom would be - different from what the actual fact is. One simply has to come to say whether or not that conclusion would or would not be reached and that is, it would seem, a matter of - it is a construct required by the Act because it is not a fact. It is a construct which depends on one's view of the particular things that are referred to.

KIRBY J: I follow all this but why is not the theory of the legislation that because of the difficulty that was experienced under section 260, because of the necessary difficulty of finding the halfway house that was referred to, that Parliament has taken a new course. It has established a system, the donee of statutory power having certain functions. Some of them are factual and if he gets the facts wrong, well, obviously the discretion falls with it but then comes a point where there is an evaluation that has to be made and the evaluation is necessarily one which is problematical and upon which views may differ but it allows the Commissioner to step into a transaction, looking at it all, and saying whether or not the evaluation should come down on one side or the other and it is then for the taxpayer to displace that. Now, is that not the theory of the legislation, the new approach?

MR SHAW: In part, your Honour, and the reason I say "in part" is this. The section does not say that if, in the opinion of the Commissioner, the dominant purpose of the taxpayer is, or if the Commissioner is satisfied that the dominant purpose of whoever it is, whatever it is, is not made to depend on the Commissioner's opinion although, of course, the Commissioner has to form an opinion before he exercises his discretion under section 177F.

So that in that sense the Commissioner has to form an opinion. But, the conclusion required by section 177D is not a Commissioner's conclusion, as it were, but the position is that because the legislation places the onus on the taxpayer of showing that an assessment is excessive, if what one is looking at is section 177D, ignoring the other things, and one has a determination under section 177F, then it is for the taxpayer to demonstrate that it would not be concluded, having regard to those matters, that the dominant purpose of one of the parties was what is required.

Your Honour rightly says to me, and we accept that because, in making a conclusion about dominant purpose that there is some elements of judgment on which people might differ but, more importantly, what would be concluded, having regard to those particular matters which are set out in section 177D(b), is this what I have called a "construct", about which people might reasonably have different views. As your Honour says, people do have different views about things. That makes it more difficult to demonstrate that it would not be concluded and so on. So that, in that sense, we accept what your Honour has put to me but we do not accept that "it would be concluded" means it would be concluded by the Commissioner.

If the Court pleases, the first factual matter to which we wish to draw the Court's attention is the first telex, which is in September 1986. It is at appeal book 2, page 349. The point of the reference is that at that stage the interest rate offered was 4 per cent per annum under the Australian bank bill buying rate, and so on. So that it is perfectly clear that the rates of interest on offer were significantly lower than those available domestically.

KIRBY J: Justice Beaumont said there was not really any dispute about the facts. Are we entitled to take his Honour's statement of facts and that of Justice Cooper as correct, or do you attack any of the findings of fact made by their Honours?

MR SHAW: I do not think there is any major finding of fact about which we seek to differ and the - - -

KIRBY J: Well, you have asserted, and I did not take it to be disputed, that the rate of interest was much lower in this transaction than was available in Australia at the time. What is the value of going to this document?

MR SHAW: Well, it makes clear that when the original telex was offered - when the original telex arrived making the first offer it bore, on its face, a demonstration of its non-commerciality, apart from the relevant tax elements. The next thing - I will not go to this - is that, in fact, EPBCL had a concessional tax rate in the Cook Islands. The standard tax rate was 15 per cent, and there was power in the relevant - I will call it legislation, it might have been ordinances - but in the relevant statutory provisions there was a provision for concessional tax rates, and the tax rate was reduced for non-residents to 5 per cent, from 15 per cent, up to the first 100,000 New Zealand dollars and, thereafter, 2 per cent.

The various negotiations took place, and then there was the telex of 5 December, which is in 1 appeal book, 175, from Mr Cooper to Mr Williams, with the 13.3 per cent rate in it. That was on 5 December. On 8 December, the joint venture agreement was entered into between the two Spotless companies, and that appears in 1 appeal books at 140, and it will be seen - the object at paragraph 2, at line 21 - and the bank account is referred to at line 33, and it will be seen that it is the European Pacific Banking Company Limited, the subsidiary company.

At the same time, there was executed a power of attorney to Mr Levy. That appears at page 149, a few pages over. At page 150, it will be seen that the attorney is Mr Levy, and the place in which the acts are to be performed is the Cook Islands, and it will be seen that the acts to be performed are - this is on page 151:

To draw a cheque on the bank account of the Grantor -

with the Banking Corporation, on this occasion, not the Banking Company Limited -

in the sum of A$(40,000,000)in favour of European Pacific Banking Company Limited ("EPBCL").

and then -

To deposit the cheque -

To receive the Certificate of Deposit -

And the Court will see that the power of attorney is drawn up on the basis that Mr Levy would, in fact, carry out the plan as it was outlined in the information memorandum and leave the certificate of deposit in the Cook Islands and then surrender it there; although, in fact, that did not occur.

The other document of that day is the mandate, which is in volume 2 at page 351, and the Court will see that the mandate is to open an Australian bank account with the European Pacific Banking Company Limited, not the Banking Corporation, and it will be recalled, that Mr Levy exhibited that mandate to Mr Kuegler in the Cook Islands and if any bank account was opened in the Cook Islands, it was simply a consequence of the exhibiting of that mandate.

Mr Levy was then despatched to the Cook Islands and on 9 December a directors' meeting of Spotless took place, that is in volume 2 appeal book 322, and that is - the minutes of the meeting are significant. It will be seen, at line 9 that:

The Chairman noted that at meeting of Directors of Spotless Services Limited and Spotless Group Limited it had been resolved to proceed in implementing an investment proposal in accordance with Step 1 of a report dated 26/11/86 prepared by Mr J.J. Bongiorno.

The following matters and documents were perused and/or considered by the Committee:

There was the:

Offer of Certificate of Deposit -

advice from accountants, advice from solicitors -

Form of Letter of Credit

Non-Negotiable Certificate of Deposit

Company Mandate

Power of Attorney

Joint Venture Agreement

Settlement Procedure.

And then it said:

Some time was taken in considering the Letter of Credit, as this is the document which secures the interest of both Spotless Services Limited and Spotless Group Limited.

Then it said that it was Westpac's responsibility to confirm the bona fides of the letter of credit provided by Midland. It is decided that legal representatives should be asked to attend settlement, to advise on the adequacy of the form of the letter of credit and then it was resolved that the transaction should be recorded by a joint venture agreement, and so on, and, at the top of the next page:

As the documents etc. were found to be in order the Committee authorised settlement to take place at 11.30 a.m. on Wednesday, 10th December, 1986 provided that all security arrangements are in place and to our satisfaction.

And then, on the next page, 324, is Mr Bongiorno's consideration of the matter and on the next page, 325, there is:

Investment proposal for Spotless Services' float proceeds and Spotless Group's surplus funds.

All available funds in the two companies, now amounting to $40 Million, have been invested since mid-September, 1986 in various short-term money market instruments.

During the same period, the Finance and Development Committee has been formulating an investment strategy aimed at achieving the following key objectives:

1. To achieve Spotless Services' stated aim requirement of a minimum 8% after-tax return on funds;

2. To maintain the purchasing power of investment funds in foreign currency terms, given the probability that the next major development will be offshore;

3. To protect the investment funds from any threat posed by the possibility of re-introduction of exchange controls.

Then there is a recommendation of the following course of action, and step 1 - it will be recalled, that the resolution of the committee was by reference to step 1:

Step 1

The full $40 Million.....should be placed in what is called a 23Q investment. As might be expected, the 23Q is a section of the Tax Act.

And so on.

KIRBY J: Why does this not give weight to the Full Court's decision that when you are looking at what was their dominant purpose, their dominant purpose was they had this sudden influx of surplus funds. They were not, as it were, reorganising their income flow generally. They had to put it out to the best advantage and this is what they were doing, and in doing that they obviously had to take into account the tax minimisation.

MR SHAW: They did, your Honour, but we would submit not in the way they did, but may I defer answering your Honour's question till I take the Court to such of the additional facts that it is necessary to take them to. There was then a meeting in Melbourne at which it was discovered that the proposed letter of credit was not in satisfactory terms and the settlement did not proceed. The meeting in Melbourne was to hand over the bank cheque in exchange for the letter of credit. It did not proceed because Spotless was not satisfied. The funds were reinvested overnight on the money market. If you look at page 365 you will see the terms in which the letter of credit was at that time. Going a little over halfway down the page, the amount is 40 million Australian dollars, plus interest of Australian dollars, and the amount set out less withholding tax and it is available at the Midland Bank at Cannon Street, London. It says:

Drafts drawn under this letter of credit must be delivered to the address at which this letter of credit is expressed to be available accompanied by:-

1. A statutory declaration -

and the statutory declaration has to set out the matters which are recorded, amongst other things, in paragraph (D). That is:

That European Pacific Banking Company Limited has failed to deliver to the beneficiary a cheque payable to the beneficiary and drawn on European Pacific Banking Corporation for the face value of the certificate of deposit plus interest.....less withholding tax.....in accordance with the terms thereof after being requested to do so- - -

BRENNAN CJ: Was this not overtaken by a later- - -

MR SHAW: It was, your Honour. The point is the difference. It was overtaken, your Honour, by what appears at page 368 and it will be seen that between lines 5 and 10 the letter of credit was altered - and this was because Spotless required it - to make it available not in London, but in Collins Street, Melbourne and that the events which would give rise to the availability of the letter of credit were also altered and that passage that I was referring the Court to when your Honour the Chief Justice asked me that question were also altered and they were altered - and I shall not read the thing out because it is very convoluted, but they were altered, so that it is perfectly clear that the security secures not only payment by EPBCL, that is, the person who issued the certificate of deposit, but also by EPBC in case the moneys were deposited with EPBC. So that, in effect, repatriation from the Cook Islands was guaranteed by the letter of credit.

Going back to the day before, on that day Mr Kuegler and Mr Levy met in the Cook Islands, but a call came from Australia saying that the transaction could not proceed, so an arrangement was made to meet the next day. On the next day there was a meeting in Melbourne and the letter of credit was exchanged for the bank cheque for 40 million, the letter of credit having been then amended in the way that I have pointed out, and Midland was given the letter of authorisation to apply the moneys to an account with EPBCL at Rarotonga in the letter of authorisation to which I referred yesterday, which is at 3 appeal books 463.

There was a call then made to the Cook Islands saying the transaction could go ahead and Mr Levy, having previously exhibited the mandate to Mr Kuegler, he signed the cheque drawn on the Banking Corporation, handed it to Mr Kuegler and Mr Kuegler gave him the certificate of deposit, which appears in appeal book 1 at page 156.

DAWSON J: What is a mandate, Mr Shaw? He handed him the mandate. You referred it to us before. It does not appear to be signed by anyone or anything.

MR SHAW: It was the document, your Honour, that I referred to.

DAWSON J: Yes, you did refer to it, but what is it?

MR SHAW: It is just an authority to open a bank account.

DAWSON J: From whom?

MR SHAW: An authority from Spotless to open a bank account with, I think, EPBCL, not the Banking Corporation.

DAWSON J: Authority from Spotless to Spotless to open a bank account?

MR SHAW: It was to enable Mr Levy to open the bank account.

DAWSON J: I see. It does not appear to be signed by anyone. It does not matter.

MR SHAW: I thought it was, your Honour.

DAWSON J: It is just I have never seen one before.

MR SHAW: Your Honour, it is signed in the sense that the signatories have all signed the specimen signatures. Your Honour, of course the documents are silly. They did not matter. In a sense, that is our point. If the Court pleases, the facts are dealt with by us in long submission at page 33 in paragraph 65 and it will be seen that they are there set out seriatim. Spotless' funds were obtained by it and held and previously invested by it in Australia in Australian dollars. The business of both Spotless companies was essentially Australian. The funds were intended for use in Spotless' business in the next financial year and Spotless was seeking a short term investment in the meanwhile. No long term investment in the Cook Islands was intended. In fact the funds were placed in the period that is set out and it is pointed that that period expired just very shortly before section 23(q) expired and the period is referred to in Stephen Jaques' letter.

Spotless had no connection with the Cook Islands or the EPBC companies other than this transaction. Then it is pointed out that the transaction took place in Australian dollars. It was suggested to Spotless in Australia by BT. It was directed to taking advantage of the concessional tax rates available in the Cook Islands. The information memorandum is dealt with in paragraph (viii) and it simply repeats the matters that I referred the Court to. The telex of September is referred to in (ix). The negotiation up is referred to in (x) and it is pointed out that there were other negotiations that took place, particularly in relation to the terms of the letter of credit which took place in Australia.

The standing of the Cook Islands banks is referred to in the next paragraph compared with the standing of Midland. What took place in relation to the renegotiation of the terms of the letter of credit to make it payable in Australia is pointed out in the next paragraph. The fact that both EPBC and EPBCL were secured pointed out in the next paragraph. The fact that the money was handed over by bank cheque in Melbourne in return for the letter of credit in the next paragraph. Then the confusion about which company the bank account was to be opened with is dealt with in the next paragraph.

BRENNAN CJ: We can read these for ourselves.

MR SHAW: If your Honour pleases. They are set out there and in relation to those facts we take the Court back to what was said by his Honour Justice Cooper and if I might take the Court to part of the judgment which I referred to but did not read, that is at pages 1086 to 1088 where his Honour deals with the matters specified in section 177D(b) and going to page 1086 his Honour says:

As appears from the evidence of Mr Williams which is set out above, the taxpayers, because of the successful public float, had $40m available for investment and sought investment proposals.....One of those was Bankers Trust.....The manner in which the scheme was entered into and carried out was the subject of a number of findings.....Mr Williams negotiated up the interest rate on offer from EPBCL, the taxpayers took legal advice as to the form of the security offered and had the form of the irrevocable banker's letter of credit which was offered varied to provide greater security, the investment chosen was one of a number of alternative proposals, the funds used were real funds and an officer of the taxpayers attended in the Cook Islands to make the contract and obtain the certificate of deposit. The taxpayers took independent legal advice -

They had the information memorandum and so on. We deal with the way in which his Honour dealt with the various matters that are referred to in the section in paragraph 70 of our long submission, commencing at page 41. I will not read out what was there said, but in our submission, it demonstrates that the way in which his Honour dealt with the facts generalised them to such an extent that it deprived them of all the colour which they had because of their particular characteristics.

The next thing we would say is this: his Honour came to the conclusion to which he came because he said that the dominant purpose was to obtain the best after-tax return. If I could refer the Court to the case of Bell 87 CLR 554. It is not on our list and we have had copies made for the Court and for my learned friends. It was in the ultimate decision of the Full Court. What happened was this. Some Australian residents bought some war disposals equipment which was in New Guinea. They took taxation advice and they were told that if they were to sell the equipment at a profit they would be taxed on the profit, and they were advised to set up a New Guinea company which had New Guinea shareholders and New Guinea directors, so that it was New Guinea resident, sell the equipment to that company at cost price more or less and then sell it at its real value to another company which was to be established in Australia, in Sydney, for its full value which was about [sterling]170,000.

So that, the profit was made mostly by the New Guinea company and not by the Australian company, or by the people who had originally bought the equipment, and that was done. Then the nominees, shareholders and directors of the New Guinea company retired, and the matters remained in that state for some time. Then somebody had a good idea, and it was the good idea which gave rise to the question under section 260. That is dealt with by the court, commencing at page 569, in a joint judgment. In the second complete paragraph on the page:

Until some date about August 1947, it remained the intention of the partners to follow out the scheme Mr. Salenger had devised -

And what had been devised was that the profits, having been earned by the New Guinea company, they would be doled out in small bits to the shareholders so that there was not too great a taxation liability in respect of them. But the idea that somebody had was that, if they went through a course of action which is drawn up, as will be seen in that paragraph, in the memorandum of routine, they could sell their shares for, in effect, the profit that was remaining - each of them - receive it as a capital amount and not, for that reason, be liable to tax in respect of it.

So, what they were concerned to do was to go through a complicated series of transactions which changed the nature of what they were to receive from assessable income to capital. I will not read out the complicated details, but they are set out commencing at page 569. It is all very complex. But the result is set out at page 571. In the second complete paragraph on the page, after having described the general result in the first paragraph, the court says:

As regards the present appellant, Bell, the net result of all that happened.....was that instead of receiving [sterling]11,000 from the company. as he might have done either as a dividend in the ordinary sense of the term or as a distribution in a winding-up, he received [sterling]11,000 from the purchaser of his share, Corlett, as the price thereof. Since his original acquisition of the share was not for the purpose of sale at a profit, this meant that the steps taken in accordance with the Routine, if treated as valid, made all the difference between his deriving [sterling]11,000 as assessable income and deriving [sterling]11,000 as a capital receipt not liable to inclusion in assessable income.

So, the net result was that his after-tax position was better, and it is for that reason that I have referred to this case, because we here have a case under section 260 where a transaction was entered into, as I submitted, very many transactions which would fall by reason of the provisions of section 260 and, we would submit, Part IVA, are done with the object of obtaining a better after-tax return. And the Court goes on:

If there had been no more in the case than that Bell, in preference to retaining his share and deriving the dividends which it seemed certain to yield, chose to sell the share for a capital sum equal to the assured dividends, the commissioner would not have been entitled to treat the capital sum as assessable income on the ground of an actual or supposed economic or business equivalence between the two courses.

So, what the Court says is, if you have an ordinary commercial transaction section 260 would not apply. But then they say:

But there was, of course, much more in the case than that. The sale of the share was a part of a complex transaction carefully planned and carried through by Bell and a number of other persons acting in concert, for one -

and we have the very word, or, nearly the very word -

for one predominant purpose, which was to ensure that Bell and his six colleagues should each receive [sterling]11,000 tax-free instead of [sterling]11,000 subject to tax.

So that the one predominant purpose was to secure a better after-tax position.

McHUGH J: I do not see any relevance in this case for the present purposes. The whole object of Bell's Case was to obtain a tax benefit. Bell might have been of some interest if there was a great deal of evidence that it was just an ordinary winding up of the business, and then they started to adopt this particular scheme; then the question might arise as to what was the true purpose of the scheme. Is it simply the liquidation of an asset, or was it to obtain a tax benefit? It is as plain as a pikestaff in Bell's Case that the only object was to have the [sterling]11,000 in your hands as capital and not income, so that you can obtain a tax benefit. It seems a long way removed from this case, Mr Shaw.

MR SHAW: Your Honour, the Court said that the predominant purpose was to achieve a receipt of [sterling]11,000 in the form of capital rather than in the form of income subject to tax.

McHUGH J: Yes, I know but, here in this particular case, one could say that the only purpose of this elaborate transaction was to achieve a better return on their money and that the tax benefit was just one of the means by which they got that greater return.

MR SHAW: Your Honour, we would submit that you could say that in this present case too.

McHUGH J: I am talking about this particular case.

MR SHAW: Your Honour, in this case, as in that case, the tax benefit was vital. Without the tax benefit there is no point in it at all, and it is the same here.

McHUGH J: But Bell is a classic 260 case. You are going to be taxed on a sum of money, so you change the structure. I have great difficulty at the moment in seeing that Part IVA was designed to deal with this sort of case. Cases like Curran, all the other cases - so artificial - only object was to obtain a tax benefit, but this seems to me to be a very different case when one is talking about what the dominant purpose of the transaction was. I would have thought it was almost their sole purpose, was to get the maximum rate of return they could, and it would not matter what they had to do to get that maximum rate, they would have done it, they would have carried any means.

MR SHAW: Your Honour, in our submission, your Honour overlooks one relevance at least, and we would say there are many more, but one relevance at least that this case, Bell's Case, has to the present case. His Honour Justice Cooper said because the dominant purpose was to obtain a better after-tax return Part IVA could not apply. This case is relevant, that is to say Bell's Case is relevant, because it demonstrates that in a section 260 situation, where the Court held that the dominant purpose was to obtain a better after-tax return, section 260 applied and, if the view which your Honour has just put to me is the correct one, it follows that Part IVA does not apply to circumstances to which section 260 does and since the whole purpose of the enactment of Part IVA was to widen the application of the general anti-avoidance provisions of the Act, it is submitted that, if that view were to be taken of Part IVA, it would be precisely contrary to the views expressed in the explanatory memorandum of the object of the enactment of the part. So to that extent at least - - -

McHUGH J: I hear what you say.

BRENNAN CJ: Mr Shaw, does not the problem come down to this, that if the purpose of the taxpayer's exercise is such that one would conclude that the main purpose, if one puts it in global terms, is to maximise a return and the maximising of the return has two elements, one, the acquisition of interest or some other cash benefit and, secondly, the elimination or reduction of a tax liability, can you under Part IVA sever that global purpose into the return of the cash and the saving of the tax benefit and postulate in relation to the tax benefit that that is the dominant purpose and, if so, what is the test for the severance?

MR SHAW: Indeed, your Honour, and what we would submit is this: you have got to look at the various matters that are referred to in section 177D(b) and ask, do they have features which demonstrate a purpose of obtaining a tax benefit or do they not, and if you have circumstances which on their face appear to be simply ordinary commercial transactions or family dealings or whatever it might be, then it has not got the features, but if you find elements amongst the features which are inexplicable, except by reference to - to speak again in the global way - the operation of the Tax Act, then the question arises and the transaction may have - again, speaking globally but by reference to the various matters referred to in section 177D(b) - so many features which demonstrate the non-commerciality of what was being done and, to use Justice Beaumont's term, the tax driven nature of the transactions as they actually occurred, but one says, of course, one can see here that, although it is true that the people who entered into the scheme were doing it for their own financial ends, it is clear that their dominant object in what is done is to make sure that they get the tax benefit.

BRENNAN CJ: To start with it is not their purpose. It is the purpose of the scheme, is it not?

MR SHAW: No.

BRENNAN CJ: Not?

MR SHAW: No. That is one of the changes which occurred from section 260. What the precise significance is, I am not sure, and what is more, it is only their purpose in the artificial abstract construct way that I was referring to before, but one of the specific changes which was made when the Part IVA was enacted was to change the relevant purpose from the purpose of the arrangement to the purpose of one of the persons who entered into or carried out the scheme or any part of the scheme.

BRENNAN CJ: Yes, but the factors to which you are limited under paragraph (b) do not include the subjective intention, purpose, or motivation of the taxpayer.

MR SHAW: Indeed, they do not, and your Honour will recall that I submitted yesterday that that is not either specifically one of the matters, nor is it stated to be the object of the inquiry, but it is conceivable that in some circumstances it might be relevant to one or other of the matters.

BRENNAN CJ: Now, if one - one must therefore predicate of a scheme having regard, and I am using loose terms here, substance, form and effect whether or not the relevant taxpayer had the requisite dominant purpose.

MR SHAW: Your Honour, there are two aspects to it, I suppose. One is that it does not have to be the purpose of the taxpayer. It is the purpose of- - -

BRENNAN CJ: Yes, you are quite right. The person who entered into- - -

MR SHAW: Yes, and so here we might say - I mean, here is not a very good case to say so but I suppose if you had a black box sort of case you might say, "Well, the fact the taxpayer didn't know how it worked and knew it involved- - -

BRENNAN CJ: Yes, it did not matter.

MR SHAW: The fact that the motor - that is enough and then the taxpayer is affected, so that one can look at anybody who - again, speaking loosely in your Honour's way, anybody who was involved in carrying out the scheme, and then you have to ask yourself whether, having regard to all those things, that are listed, it would be concluded that the dominant purpose of one of those persons was the thing stated.

BRENNAN CJ: Now, if one says, as one might say, the dominant purpose was to maximise the return to the relevant taxpayer, and in the context that meant obtaining interest at a taxable rate which was minimised, then, in order to arrive at the requisite test under paragraph (b), one must be able to sever that overall purpose into two and to postulate, in respect of the purpose of minimising tax, the other one to dominance.

MR SHAW: Your Honour, that is one way of looking at it but, it is submitted, not perhaps the most helpful way because one might say that somebody can have immediate and ultimate purposes and one's purpose might be to, at one level, obtain the tax benefit because at the next level that meant you were better off. So, it may not be so much a matter of, as your Honour has put it to me, severance but a matter of levels.

BRENNAN CJ: Whatever way one might approach it, for my part, I would be assisted if you could postulate some test by which that division, whether by way of level or by way of severance does not matter, but how that division is to be effected when one comes to apply Part IVA because there must be some need, one would think, for some criterion to distinguish, for example, to take one of the cases that Justice McHugh put to you, an investment in a company whose dividends will attract one rate of tax as against another and a case such as the present. After all, 177B(4) simply operates by deleting the deduction or reduction affect of the provisions of the Act in places where Part IVA applies.

MR SHAW: Your Honour, the first thing we would say is this, that because of the way in which those matters are listed and your Honour will recall that the fifth of the matters is:

any change in the financial position of the relevant taxpayer that has resulted.....from the scheme.

I have left out some words. One of the matters is changes in financial position and, in our submission, that indicates that it cannot, as a matter of construction, be true that if one has a change in the financial position for the better and one says, "Well, it was perfectly obvious that it was desired to achieve that result", that is the end of the matter, which is what his Honour said and if that were true as a matter of - - -

BRENNAN CJ: I understand that, but that is only dealing with a negative proposition. Does not your argument have to go to the extent of postulating some method by which the Court makes these distinctions?

MR SHAW: Your Honour, ultimately yes, but at the first level no, because what I need to do first is to show that his Honour was wrong in his reasoning, and I have attempted to do that. His Honour, you will recall, relied wholly on the general proposition about investments and returns, and our submission is that cannot possibly be right.

Then your Honour says to me, "All right, that means, as it were, you said that his method of reasoning is wrong, but that does not mean his answer is wrong too". I do have to demonstrate, in order to be successful, that the taxpayer has not demonstrated that it would not be concluded, and so on. If, as it were, there is no satisfactory test that I can enunciate and if my learned friend is in the same difficulty, then he would fail because he has to establish the negative, but we do say we can demonstrate the positive, and that is the question your Honour has asked me.

DAWSON J: That is right. Why would not I, if I purchase fully franked shares for the purpose of obtaining a tax benefit because of imputation, have entered into a scheme which fits within section 177D, and that is my purpose? Maybe you could say I have.

MR SHAW: Your Honour cannot do that to me, and let me explain why. Your Honour has said, "This is my purpose". If what your Honour means is, "This is my subjective purpose"- - -

DAWSON J: Let us assume it objectively was my dominant purpose, the only possible purpose.

MR SHAW: Your Honour, again that question is not a question which the section asks.

GAUDRON J: There may be no scheme.

MR SHAW: I am sorry, your Honour.

GAUDRON J: The short answer may be that there was no scheme in that.

MR SHAW: That may be, your Honour.

DAWSON J: The scheme is very widely - - -

MR SHAW: It is very widely defined. One of the difficulties about the definition of "scheme" is that it is difficult to imagine most things that would not be.

GAUDRON J: But one is looking at something that is in the nature of a scheme that is a little out of the ordinary and involves more than one person, by and large.

DAWSON J: No. Well, no, "scheme" means any course of conduct.

McHUGH J: I do not think your client would be too happy about your narrowing that it - - -

MR SHAW: I am sorry, your Honour?

McHUGH J: I do not think your client would be too happy about your attempting to narrowing the definition of "scheme", when it is high, wide and handsome. It attracts almost any course of conduct, does it not?

TOOHEY J: Well, there is another answer to Justice Dawson, I suppose, and that is that what he has in mind does fall within Part IVA, but it is one of those areas in which the Commissioner may not exercise the discretion available to him.

MR SHAW: That is a possible answer, your Honour, but - - -

DAWSON J: Well, I was wondering whether it was your answer.

MR SHAW: Your Honour, that very well might be. But, your Honour, what I have been going to say is this - - -

DAWSON J: In which case, the answer to his Honour the Chief Justice, is, well, all right, you may be attempting to maximise your profit, but if in the pursuit of that purpose you are also seeking a tax benefit, it is scheme, and it falls within 177D.

MR SHAW: Your Honour, this is really by the by to what your Honour's question is intended to mean, I think, but Mr Bloom points out to me there is a very much better escape in the case of your Honour's example. Because of the definition of "tax benefit" which is confined to non-inclusion of amounts in assessable income and the obtaining of deductions which otherwise would not be obtained, it probably would not cover the frank dividend case anyway, because that does not operate by reference to either of those things.

McHUGH J: Well, I do not know about that, because that is one of the things I have been thinking about in this particular case. Your case must be, in the end, that this taxpayer could have got 17 per cent on the market and would have got a net, say, 9 per cent. Here they got 13.3, less whatever the New Zealand tax is. So, the true benefits to them may be 4 or 5 per cent, but that is not necessarily the tax benefit, is it?

MR SHAW: No, the tax benefit is the non-inclusion of an amount in the assessable income and - - -

TOOHEY J: Non-inclusion of what amount, Mr Shaw?

MR SHAW: The amount which would have been received on the 40 million had it been invested in Australia.

TOOHEY J: In what form of investment?

MR SHAW: Your Honour, at interest, I guess.

TOOHEY J: No, I ask you that because under section 177F(1)(a) the amount which the Commissioner may by determination include is, or arises:

in the case of a tax benefit that is referable to an amount not being included in the assessable income - - -

MR SHAW: Yes.

TOOHEY J: I do not want to shift you from the present line of thought, but how does one determine what is the amount that was not included when there is a whole range of investments available?

MR SHAW: Your Honour, that is a question which might cause problems in some circumstances. It does not here. It does not here because what has been included pursuant to the determination is the amount actually earned on the investment in the Cook Islands and we know that that is less than would otherwise have been received, so that there is really no problem about it here.

TOOHEY J: No, I understand that it is not in this particular case, but it just again opens up one area of inquiry as to how Part IVA in truth operates.

MR SHAW: But if I might go back to the question your Honour Justice Dawson asked me. Your Honour said to me what if my dominant purpose is to obtain the best after-tax return and what I wanted to submit to your Honour was this. Even if that is - to speak in a general sort of a way - your actual dominant purpose or only purpose, if you like, one is looking neither at that nor your actual motive. One is looking at this strange construct, we have called it, which one arrives at by reference only to certain particular matters and what our submission is, is that what you do is you look at the various features of what was planned and what actually occurs, so long as they fall within the eight matters, and you say to yourself, "What character do these things have?".

If they bear a wholly commercial character then, of course, one would not come to the conclusion that the dominant benefit was to obtain a tax benefit, but if there are so many features there dictated by or directed to that end then one would. So that our answer to the question your Honour the Chief Justice asks is this - and, your Honour, I might not perhaps be able to give a universal answer because in other cases one might be looking at different things, but at least in this particular case one looks at the non-commercial elements involved in the particular things that were done or planned, sees that they were directed to the obtaining of a tax benefit and says that means - I think Justice Kitto said in Peate's Case - these things on their face bear the brand of tax avoidance.

KIRBY J: But they are steps that were taken after the event. If one looks at the facts of this case, the critical fact is that before the machinery was set in train there was this pot of gold and, therefore, if one is looking at what is the dominant purpose, the dominant purpose was to put to best use the $40 million and the steps that were taken were machinery, incidental and, as you acknowledge, it is appropriate and proper, perhaps compulsory, for directors to take into account tax minimisation, but the purpose that they had to address, at least arguably and as found by the majority, was to so deposit their pot of gold that they would get the best return for the company and the shareholders. Why is that not the dominant purpose or why is it not open to the Full Federal Court to so determine?

MR SHAW: Because, your Honour, the existence of the anti-avoidance provisions demonstrates that for tax purposes there is a limit on what you can do in pursuit of your own financial ends and it is not as if Part IVA were not there. It is there for the specific purpose of addressing circumstances in which, although the individual provisions of the Act do not themselves in the circumstances bring to tax an amount, nevertheless it will be brought to tax for whatever motive or purpose the steps involved in obtaining it may involve if it can be said that looking at the particular matters one is directed to look at the dominant purpose of all this was to obtain a tax benefit.

KIRBY J: But is not the reality the dominant purpose was to get the best return for the company?

MR SHAW: Well, your Honour, one is not concerned with reality. One is concerned with the conclusion you come to in this artificial way, looking at this limited number of things, and say whether or not the conclusion would be reached. Now, nobody ever - - -

DAWSON J: But why do you not simply say in an answer to that, that, sure, if the dominant purpose is to get the best return for the company and that can only be done by achieving a tax benefit, then the purposes are one and the same. You do not have to be complicated about it.

GUMMOW J: Now, in Newton's Case, for example, there was a pot of gold. There were these profits sitting there, and if they were not distributed - something was not done by 31 December, there was going to be undistributed profits tax. So, they said, "We cannot have that; let us have these transactions." But that is all that is different from this case.

MR SHAW: It was never an answer to the application of section 260 that whatever it was you had done and was attacked made you better off. I mean, it was assumed that of course it made you better off, or you would not have done it in the first place.

McHUGH J: But the big difference between here and Newton is this; that if you did not distribute, Division 7 got you, and so you had to do something. Here, they had some money. They could have left it where it was. They could have sent it off overseas.

MR SHAW: Your Honour, had they left it where it was, it was invested in various short-term investments in Australia and the income would have been subject to Australian tax. The court below - all members of it - held that it was reasonable to predict that, had the scheme not been entered into, the moneys would have been invested in Australia. So, there was there a reasonable expectation that, had the scheme not been entered into, there would have been a tax benefit in the inclusion in the assessable income of the interest on the 40 million.

Now, that expectation was defeated, and the question is whether or not it was defeated in such a way that, nevertheless, an amount is brought to tax. We submit that, if the expectation is defeated in a perfectly ordinary, normal commercial way, the amount will not be brought to tax. But if we can show such elements of artificiality that we can sensibly submit that the fact an amount does not come to tax has been contrived for the very purpose of avoiding tax, then - - -

McHUGH J: Well, what about negative gearing? I mean, most negative gearing schemes are totally artificial, from a commercial point of view. Apart from the tax element, they would not be entered into. Are they caught by this? I mean, I do not know why the Commissioner does not go for it and say, "Well, the are all....." You want to have this intermediate position. I use the word "intermediate" because you objected to "halfway house" yesterday.

MR SHAW: I have revised my objection, your Honour.

KIRBY J: I think the question the Chief Justice asked is one that you really have to address because, otherwise, all that is solved is the facts of this case. Is there a stable principle by which one can determine that the case falls within one category or the other?

MR SHAW: Well, your Honour, I have tried to address his Honour's question, and his Honour asked me, as I understood it, what features does one look to of these various matters in order to see how one can determine whether or not there was the requisite dominant purpose, whether what you have got is somebody trying to end up in the best financial situation they can manage.

The answer we give in this case is that you look at all the particular features and, Bell's Case, irrelevant though it may be in respect of everything else, is relevant at least in this, that what the Court did was look at, very particularly, what happened and says, "This demonstrates for section 260 purposes what the purpose of the arrangement there was." Here, of course, one is not concerned with the purpose of the arrangement but with the purpose of one of the parties but, in our submission, you do have to look very particularly at actually what occurred and when one does that one does see here the requisite features.

BRENNAN CJ: The question is, of course, what are the requisite features? I am not sure whether this is what you have been saying, but correct me if I am wrong. Are you saying this? That if, on examination of a scheme, there are steps in it which are explicable only by reference to a purpose of acquiring a tax benefit, and if those steps are sufficiently significant having regard to the whole of the scheme as to justify the conclusion that the dominant purpose of the scheme was to acquire that tax benefit, then Part IVA is attracted?

MR SHAW: Your Honour, we would put it that way, but not quite.

BRENNAN CJ: Well, then, please give us the way in which you would put it so that we can consider it.

MR SHAW: Your Honour, it was only when your Honour said - and your Honour may have been intending this in any case, but your Honour spoke of features of steps which were sufficiently significant in relation to the scheme.

BRENNAN CJ: To the whole scheme?

MR SHAW: And what we would say is sufficiently significant in relation to the whole of the scheme and in relation to the particular matters which are set out in section 177D(b). It is just that section 260, as it were, operated in a general vacuum. Section 177D directs one's attention to particular things and one needs, therefore, to ask the question about the scheme, of course, but in respect of, in so far as they are relevant in a particular case, those particular things.

BRENNAN CJ: Perhaps the problem is in my reference to the use of the word "steps".

MR SHAW: That may be, your Honour.

BRENNAN CJ: Because steps might relate simply to:

(i) the manner in which the scheme was entered into or carried out;

MR SHAW: It might, your Honour, yes.

BRENNAN CJ: But, it seems to me that one might, nonetheless look at the steps in the context of the other matters that are referred to in (b).

MR SHAW: Yes.

McHUGH J: Do you go so far as to submit that Part IVA is attracted when the taxpayer has taken advantage of provisions of the Income Tax Act that would not ordinarily apply to his or her activities?

MR SHAW: Your Honour, I can answer that question on the basis of what your Honour, I know, regards as sound. Your Honour, section 177C specifically deals with it. In section 177C(1) one has the definition of obtaining a tax benefit, and I have been repeating the relevant words of that on a number of occasions. Section 177C(2) says this:

A reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as not including -

So it implies that otherwise it would include:

a reference to -

(a) the assessable income of the taxpayer of a year of income not including an amount that would have been included, or might reasonably be expected to have been included, in the assessable income of the taxpayer of that year of income if the scheme had not been entered into or carried out where-

(i) the non-inclusion of the amount in the assessable income of the taxpayer is attributable to the making of a declaration, election or selection, the giving of a notice or the exercise of an option by any person, being a declaration, election, selection, notice or option expressly provided for by this Act; and

(ii) the scheme was not entered into or carried out by any person for the purpose of creating any circumstance or state of affairs the existence of which is necessary to enable the declaration -

and so on. Then there is a similar provision in relation to deductions.

McHUGH J: Yes, I appreciated that, but it was not quite what I had in mind. the Income Tax Act is not merely a public interest statute but, some might think regrettably, it is also an interest group statute in which there are a lot of provisions there designed to benefit particular interest groups - film producers, authors, farmers, all sorts of people, and the Act encourages people to enter activities by giving them tax concessions. But, supposing somebody enters into a film scheme, for example, which is quite outside their ordinary activities, and let us assume it is a fairly contrived artificial sort of scheme, is it caught by Part IVA if it is outside their ordinary activities?

MR SHAW: Your Honour, the answer to that is not simply for that reason, but one cannot really answer the question, as we would submit, consistently with what I have been so far submitting, without looking at all the particular circumstances.

McHUGH J: It leads me to ask you this question: is the intention of the Act to encourage certain people, or classes of persons, to perform social and economic activities, ever relevant in determining Part IVA, or, do you say that the abolition of the choice principle annihilates that factor as well?

MR SHAW: Your Honour, I do not know that I could make an absolute proposition - - -

McHUGH J: Yes.

MR SHAW: - - - one way or the other. Your Honour will observe a halfway house. Your Honour the Chief Justice, we tried to answer your Honour's question, not that your Honour had then put it, but in paragraph 43 of the written submissions. It is at page 21. Whether it is an answer or not, at least it was directed to that subject matter, your Honour.

BRENNAN CJ: The elements of artificiality or contrivance, sensible though they might be to those who are accustomed to section 260 and its debates, does lead to an evaluative judgment, does it not?

MR SHAW: Your Honour, that seems to be inevitable in the form of the section.

BRENNAN CJ: Yes.

MR SHAW: There seems to be no escape from that really, because one is not asked to inquire about the actual fact. One is directed to a number of particular matters and those only, and say, in respect of that, having regard to those matters, what conclusion would be reached about the dominant purpose. So that, in the very form of - - -

BRENNAN CJ: I just wonder, though, why you need then artificiality or contrivance. Why do you not look - I go back to the question I last asked you, why do you not go back to see what elements are referable solely to tax avoidance - solely or chiefly to tax avoidance? You do not have to worry about artificiality then, do you?

MR SHAW: Your Honour, that is another, and perhaps preferable, way of formulating it but I think - no, take this case for example. Your Honour will recall the events that happened in the Cook Islands and your Honour will recall that our submission is that those events happened in such a way that it was clear that there was no real concern with which bank the money was to be paid into or the account was to be opened in to enable the cheque to be drawn because of confusion about the companies. The relative significance placed by the parties on what was happening in Australia in relation to the letter of credit and the bank cheque and what was happening in the Cook Islands gives a flavour to the relative importance of all the various aspects of the - - -

DAWSON J: That is saying no more than that those steps indicate which elements were referable solely to the tax benefit. It fits with what you are being asked.

MR SHAW: That may be, your Honour, but I was just concerned that - - -

DAWSON J: There is nothing mystical about it. That is the point.

TOOHEY J: But the Act itself really dictates that you consider the artificiality of the transaction because it requires you to look at the form and substance of the scheme.

MR SHAW: They may be really just different ways of formulating the same thing, if your Honour sees what I mean.

TOOHEY J: Yes, but my point is that the form and substance of the scheme must surely require the artificiality, if that is an allegation made against the taxpayer, to be taken into account because it goes to the form and substance of this case.

MR SHAW: It was for that kind of reason that I expressed some hesitancy in accepting your Honour's formulation.

McHUGH J: Is there any evidence in this case concerning that artificiality of these courses? I must say it all seems perfectly straightforward to me why they would do these things and why they had to do them in this particular way, and for the moment I do not really see anything artificial or contrived about it. Obviously they did not want the money to stay in the Cook Islands and they wanted security and various things had to be done. But it is very difficult for judges these days to make judgments about whether commercial transactions are artificial or contrived. Even those that that take an intelligent interest in financial matters are just dazzled by derivatives of all forms of financial instruments and you would want a degree from the Wharton School of Finance to fully understand most of the things that go on these days which are just ordinary commercial dealings.

TOOHEY J: That is why I asked you at the very beginning of the case whether there were findings made by the primary judge or, indeed, by the members of the Full Court which either amounted to a finding of contrivance or from which an inference of contrivance might be drawn. I think your answer really was that it was a question for this Court to determine on the basis of the facts as found.

MR SHAW: Of the facts as found, yes.

TOOHEY J: But then that raises the problem that Justice McHugh has just put to you as to the position in which we are to make that assessment.

MR SHAW: Your Honour Justice McHugh says there is nothing artificial about it, but, in our submission, it is clear that the circumstances which created the Cook Islands source had to be manufactured.

McHUGH J: What had to be manufactured?

MR SHAW: The circumstances which gave the interest a Cook Islands source.

McHUGH J: In the sense that somebody had to be over there.

MR SHAW: You had to do all these things.

McHUGH J: You had telegraphic transfers and so on.

MR SHAW: They did not do that. In our submission, the information memorandum and what occurred shows that the advantage of section 23(q) was sought, but at the same time what was sought to have also was the advantage of an investment in Australia in Australian dollars with no foreign exchange risks, no foreign tax risk. That was all achieved and steps on a little bit of paper, rather than flowing from ordinary commercial practice, had to be followed out. In our submission, that is artificial because it is not doing what your ordinary commercial needs would lead you to do.

KIRBY J: But they did not have an ordinary commercial need. They had a sudden influx of capital which they had to put out to the best possible advantage. This was not an ordinary commercial need. They did, arguably, what was commercially appropriate in the circumstances.

MR SHAW: Your Honour, they did what was appropriate in the case of the short-term investments, but not in respect of this, and one has a cheque being handed over in the Cook Islands - - -

KIRBY J: You seem to attach a lot of significance to the Cook Islands. If it had been San Fransisco or somewhere else - but I again say that in the global capital markets you cannot really attach quite the same significance as you would a decade ago to different venues.

MR SHAW: There was nothing global about this, your Honour. It was a person sitting in a room in a particular place with another person opposite to him and passing pieces of paper between them. That has little connection with the Internet. If the Court pleases.

BRENNAN CJ: Thank you, Mr Shaw.

TOOHEY J: Mr Shaw, just before you sit down can I could just - it is not so much a question but a request for information. I am not seeking to go over the matter of discretion again, but can you tell us at some stage whether anywhere else in the Act there is a situation comparable to what appears to be the situation here, namely, that notwithstanding the existence of facts objectively found it is within the discretion of the Commissioner whether or not to bring a particular sum of money to tax or, conversely, in the case of a deduction.

MR SHAW: Your Honour, I could not answer the question now anyway.

TOOHEY J: No, no.

MR SHAW: I will try to have Mr Bloom answer it.

TOOHEY J: Yes, thank you.

MR SHAW: If the Court pleases.

BRENNAN CJ: Yes, Dr Emmerson?

MR EMMERSON: If the Court pleases, it is convenient to start by making some submissions about the facts in this case. It is our submission that the facts in this case are as the learned trial judge held, basically straightforward, and it is convenient to step back a little bit from my learned friend's argument to look to see what happened here. The Spotless Companies had a very large amount of money and they had decided to invest it in a particular way. An offer had been received from the European Pacific Banking Company Limited. The board had decided to accept that offer, but it was acceptable by the placing of the funds at the premises of the bank. Now, this involved three matters, each of which, in our submission, are perfectly straightforward and ordinary. First, funds had to be made available at the place where they were needed. Secondly, it was necessary for the transaction to take place at the place where it had to take place, and, third, there was a requirement for a letter of credit.

Now, in our submission, much of what our learned friend puts as the complexity of this case really results from over-elaborate and rather minute inquiry into each of these steps. The steps themselves were perfectly straightforward. So far as sending the funds to the Cook Islands, that was done by my clients obtaining a bank cheque, passing that bank cheque to Midland with an authority to place that on deposit with the European Pacific Bank, then, at the same time, now that the funds were available to be drawn, a cheque was, in fact, drawn. It was passed across and, in return, a certificate of deposit was produced.

DAWSON J: The funds never went there.

MR EMMERSON: I am sorry, your Honour?

DAWSON J: The funds never went there, did they?

MR EMMERSON: But, indeed, they did. There is no finding at all that the funds never went there. The findings are quite to the contrary. The transaction was a perfectly straightforward one.

DAWSON J: But I thought, and I may be wrong, the funds were paid out in anticipation by Midland before they had arrived and then, when they arrived, it merely covered what had already been done.

MR EMMERSON: Well, with respect, no, your Honour. My learned friend is asking the Court to draw a particular inference which, in our submission, is just not a proper inference in the circumstances. So far as the position of my client was concerned, the funds were made available to it in te Cook Islands, it drew a cheque and it paid across those funds. But until that had happened, as was held at both levels of the court below, my clients were in no way bound to that. So, the fact that somebody who anticipated receiving a large sum of money paid it out in anticipation and was disappointed in no way touches any part of arrangements to which my clients were party.

In fact, all that happened was that the European Pacific Bank found itself, because of jumping the gun, as it were, overdrawn with the Midland Bank, and had to pay a day's interest. But that is no part of any arrangement into which my clients entered. It was simply somebody who anticipated receiving funds not actually receiving them.

BRENNAN CJ: Let me understand this correctly. $40 million was paid by way of a Westpac Bank cheque to Midland?

MR EMMERSON: Yes.

BRENNAN CJ: On the day after Midland had disbursed - - -

MR EMMERSON: Could I perhaps interrupt your Honour? When your Honour says, "paid to", it did not, of course, become beneficially the property of the Midland Bank.

BRENNAN CJ: As between - - -?

MR EMMERSON: Well, at all.

BRENNAN CJ: Did it not as between the Corporation and Midland become entitled to it?

MR EMMERSON: The paying of that bank cheque did not make Midland entitled to do anything, other than to do what it was instructed to do on the authority of my clients. Those instructions are set in a letter of authorisation, which is found at volume 2 of the appeal book, at page 355.

BRENNAN CJ: And did Midland do that?

MR EMMERSON: Yes it did.

BRENNAN CJ: It paid EPBC?

MR EMMERSON: Your Honour will recall that these transactions occurred essentially simultaneously. That is to say, in Australia my clients handed a bank cheque to Midland Bank, together with an authorisation, which was to place it on our account with the European Pacific Bank. When it was confirmed that that had happened - - -

BRENNAN CJ: That what had happened?

MR EMMERSON: That the funds had been placed on our account or, as it was put in evidence, the funds were available.

GUMMOW J: That is a different thing. It may not be the same thing.

MR EMMERSON: In our respectful submission, it is the same thing. It does not affect my clients' position, how the mechanics of banking operations work but, what does affect its position is its relations, contractual and otherwise, with the various parties concerned.

GUMMOW J: Oh yes, you may be right about that.

MR EMMERSON: Its relationship with the Midland Bank was that it gave Midland Bank authority to do one thing and one thing only. If my learned friend wants to assert that the Midland did not do that, then Midland Bank was engaged in a very serious breach of authorisation.

DAWSON J: The authorisation was to apply the $40 million to the account of Spotless with the European Pacific Banking Company Limited.

MR EMMERSON: Yes.

DAWSON J: In fact, the bank cheque drawn in Rarotonga was drawn on the Corporation. I do not understand it. The authorisation seems to eliminate a step of the scheme.

MR EMMERSON: The authorisation did not eliminate a step, your Honour, but admittedly the form that the authorisation took names the wrong bank. Your Honour will recall that they are a parent company and subsidiary. The critical point though, is that - - -

DAWSON J: There was no money placed to any account to allow a cheque to be drawn in Rarotonga against that account. That was the form of activity that was engaged in in Rarotonga.

MR EMMERSON: The European Pacific Bank was informed by telephone that, in the language of the witnesses, the funds were available.

DAWSON J: Which bank? The Corporation or the Company Limited Bank?

MR EMMERSON: It was Mr Kuegler.

DAWSON J: Yes.

MR EMMERSON: He was an employee of those two companies. I think the evidence was that he spent most of his time working with the Banking Company Limited. Unless and until the European Pacific Bank knew that those funds were available, then there was, of course, no way that it would allow a cheque to be drawn or the funds to be placed on deposit. That was why the - - -

DAWSON J: All I am trying to suggest to you, that the cheque drawing and handing over procedure in Rarotonga was a complete farce.

MR EMMERSON: Absolutely not, your Honour.

DAWSON J: There were no funds against which the cheque was drawn. The authorisation was to pay the funds to the cheque to the Banking Company in favour of whom the cheque was to be drawn. Why would you need a cheque?

MR EMMERSON: Your Honour, could I say, with the greatest respect, that if it is to be alleged against us that everything that happened in Rarotonga was a complete farce, then that is something which was considered by the learned trial judge under section 23(q), rejected by him, rejected unanimously in the Full Court and from which there is no appeal.

DAWSON J: The artificiality is not put to you on the basis that it is a sham, it is put to show the predominant purpose. It is on that basis, I understand, it is put against you, but I simply cannot understand, to put it bluntly, why a cheque was necessary when the authorisation was to pay the $40 million to the bank that was to be put in funds by the cheque, or was supposed to be.

MR EMMERSON: For this very reason, unless and until that cheque was drawn and presented, the European Pacific Bank did not itself have ownership of the funds. No deposit was made up to that stage. The banks collectively were simply holding the funds on account of my client. My client could at any stage have said, "No, I will not proceed" and they did not have the funds.

DAWSON J: They were not. Midland Bank was holding the money with an authorisation to pay it to the European Pacific Banking Company Limited in Rarotonga.

MR EMMERSON: Yes.

DAWSON J: Why was a cheque necessary?

MR EMMERSON: The cheque was necessary because if it had been paid to the European Pacific Banking Company Limited, it was simply to the account of Spotless Services Limited. That is what the authorisation says. Now, that means that the bank would still be holding that money as my clients' money. It would not be free to deal with it on its own.

DAWSON J: Not if your client had agreed to the contrary and it had.

MR EMMERSON: My client did not agree to the contrary until it drew and presented a cheque for $40 million in Rarotonga.

BRENNAN CJ: Bankers are entitled to treat money deposited with them as their own. It is only a question of a debtor and creditor relationship - - -

MR EMMERSON: But the debtor and creditor relationship, with respect to your Honour, changed completely at the time when the cheque was handed over.

BRENNAN CJ: Tell me this, Dr Emmerson - - -

MR EMMERSON: Up until that time, my clients could have called for the money at any time. After that it was on deposit for a fixed term at a fixed rate and my clients' rights in respect of that money were limited to what was set out in the certificate of deposit.

BRENNAN CJ: Yes, I understand that. Now, can you tell me whether or not EPBC met the cheque on presentation?

MR EMMERSON: Yes, it did.

BRENNAN CJ: How?

MR EMMERSON: So far as meeting on presentation was concerned, that was done because the cheque was handed to EPBCL, the certificate of deposit was issued and there was never any dishonour of that cheque.

BRENNAN CJ: It is not a question of no dishonour of the cheque. Did EPBCL present it to the Bank on which it was drawn and did that Bank pay EPBCL?

MR EMMERSON: There is no evidence because that is concerned with the procedures within those two companies which had a common premises.

BRENNAN CJ: When you say there is no evidence, is it not clear enough that the money that was paid was made available, as you say, to EPBC, was in fact invested with BT, so that EPBC just did not have the funds to meet the cheque?

MR EMMERSON: But it depends, with respect, on what your Honour means "did not have the funds". As between the Bank and my client, the critical stage occurs when my clients draw a cheque and the question is then what happens. My clients draw - - -

GUMMOW J: Draw a cheque on what account?

MR EMMERSON: EPBC. We draw a cheque and tender that in payment for a certificate of deposit. Mr Kuegler confirms that this transaction can go ahead and it does go ahead. Now, in our submission, it is quite irrelevant to ask what were the mechanics of what was done by the Bank. The legal relations - and they were real legal relations and have been so held by both courts below - were that until the presentation of that cheque my clients could call on those funds at any time.

BRENNAN CJ: From whom?

MR EMMERSON: They could have called on Midland up until the time that this happened, then they could have called on EPBC. In a sense, there is only, as it were, an instant of time between these two because what had always been intended was that the funds would be transferred to EPBC, a cheque drawn, and the cheque paid over to the Banking Company Limited. In our respectful submission, it is quite wrong to treat these matters as governed by internal banking procedures. Of course it is true that when you are dealing with large sums of money and where banks know, or think they know in advance what is going to happen, then plans will be made accordingly, but the reality of it all was, in our submission, to be determined by the actual legal defect of these documents, viz-a-viz, my clients.

BRENNAN CJ: So your argument is this, simply, that as between yourself and the parties with whom your client was dealing this was simply a transaction by which $40 million was invested with EPBCL in the Cook Islands upon the terms that EPBCL should either pay or procure the payment of the corpus and the interest on maturity?

MR EMMERSON: Yes.

BRENNAN CJ: Yes.

MR EMMERSON: One slight qualification, less the Cook Islands tax.

BRENNAN CJ: Less the Cook Islands tax?

MR EMMERSON: Yes.

BRENNAN CJ: Yes. And what happened in relation to the charges and other matters relating to the banks is a matter for them and it has nothing to do with your client?

MR EMMERSON: Absolutely nothing.

BRENNAN CJ: Yes, all right.

MR EMMERSON: It in no way touches our knowledge, our intention, or, indeed, what was going on.

DAWSON J: But you have got to add one factor. You had to have that letter of credit.

MR EMMERSON: Yes. I did not think that his Honour the Chief Justice was intending to play down the letter of credit. Of course we had to have the letter of credit and, in our respectful submission, it is because the transaction was a commercial one that we had to have the letter of credit, because we were in the position of lending a very large sum of money to a relatively small organisation. So, in the position of lender, one of the things that you have to consider is the question of security, and the effect of the letter of credit was, as it were, to increase the creditworthiness of the European Pacific Bank and to give my clients security that it would perform the various functions that it had to.

DAWSON J: And the bank giving the security was the one who was really on lending the money and getting the profit from it, apart from the bit that the Cook Islands banks got. In other words, the diversion to the Cook Islands was merely for one purpose.

MR EMMERSON: Not as far as my clients were concerned.

DAWSON J: Well, no, but otherwise one could have lent directly to the Midland Bank, who could have lent directly to Bankers Trust, and there one would have had, in reality, the same transaction.

MR EMMERSON: Well, with respect, no, it would not be.

DAWSON J: Except that the interest would have been taxable.

MR EMMERSON: No, it would not be, in reality, the same transaction at all. We would be dealing with different parties. It would be a matter of renegotiating.

DAWSON J: Yes. Well, legal relations would not have been the same but, in practical terms, it would have.

MR EMMERSON: Well, with the greatest respect, your Honour, I would not accept at all that the position of guarantor for performance of a contractual obligation is the same as the position of the person who has that obligation.

DAWSON J: Of course not, no.

MR EMMERSON: The Midland Bank's obligations arose only after the certificate of deposit was issued, and then only in respect of the performance required under the certificate of deposit. So, it was in a position there akin to that of guarantor.

DAWSON J: Of course it was. But the fact is, you were relying on Midland Bank in this transaction, nowhere relying on the Cook Islands banks, and there was only one purpose in their being there.

MR EMMERSON: We were relying on Midland Bank as far as creditworthiness was concerned. We were looking to the Cook Islands bank for improved rate of return.

DAWSON J: For a tax benefit.

MR EMMERSON: We say no, and that is of course something that I will be elaborating at considerable length later on in the submissions.

BRENNAN CJ: Can I just delay you for one moment longer so that I can identify what, in your submission, is the limits of the relevant scheme, if any. That is an investment of $40 million by your clients with EPBCL in the Cook Islands, EPBCL to procure the letter of credit by way of guarantee, is that right?

MR EMMERSON: Yes, your Honour.

BRENNAN CJ: Then the payment made to you of the 40 million plus interest less withholding tax on behalf of the EPBCL?

MR EMMERSON: Yes.

BRENNAN CJ: The rest is a matter of immateriality, in your submission?

MR EMMERSON: The rest is a matter of immateriality. It was not the concern of my clients. My clients were in a position of lenders. They wanted security, they obtained security; they wanted the best possible return and they satisfied themselves that that was what they were getting.

BRENNAN CJ: Then the question becomes on that approach whether a scheme, if one does not use that tendentiously, which was to return 41/4 or 41/2 per cent below the Australian bank bill rate but attended with a lesser tax rate, and a scheme which secures an Australian enforceable letter of credit by way of guarantee, is a scheme which attracts Part IVA.

MR EMMERSON: Yes, your Honour.

DAWSON J: One has to add that when one is looking at the purpose of the people concerned, one can include the purpose of the Midland Bank. The only purpose of its going through these steps may have been to secure a tax advantage for your client. Whatever your client may have had in mind. That may be the only explanation.

MR EMMERSON: No, the explanation is perfectly clear: it was there to make a profit as carrying out his ordinary banking - - -

DAWSON J: But it could bank the profit without going through the Cook Islands. It was not getting sny - - -

GUMMOW J: And without requiring a guarantee, too.

MR EMMERSON: That is simply to say that it could have made a profit in some other way.

DAWSON J: I mean, the funds coming to it through the Cook Islands made no different to it at all.

MR EMMERSON: The funds that my client invested - - -

DAWSON J: But you have got to take Midland Bank's - your clients' purpose is not the only purpose that is relevant.

MR EMMERSON: No.

DAWSON J: Midland Bank has put in funds to the tune of something like $40 million and it wants those funds because it is going to lend them, in one way or another, to Bankers Trust.

MR EMMERSON: Yes.

DAWSON J: There is no purpose in all that going through the Cook Islands other than that it obtains a tax advantage for your client, and from Midland's point of view, and Midland's purpose is relevant.

MR EMMERSON: From Midland's point of view it is only going to get access to those funds that it wants for its business purposes if it participates in the arrangement. My clients were not concerned with negotiating schemes of Gothic complexity with facts.

DAWSON J: True. Its purpose in participating in the arrangement must be, for it is to get the funds that way, but the reason why it had to do it that way, to get the funds, was to give your client a tax advantage.

MR EMMERSON: Your Honour, I think this raises, again, the question that I want to deal with in greater detail as the issue of principle that arises in this case - - -

DAWSON J: Do not answer it now

MR EMMERSON: But can I say that it does appear on the face of it to be on all fours with the way that I have been putting the case on behalf of my clients. That is to say, the position of Midland Bank was not that it suddenly became benevolently inclined to my client and wanted to obtain for it a tax advantage out of the goodness of its heart. It wanted to engage in a commercial transaction and, bound up with that commercial transaction, was the tax effect on my client, but the critical issue that arises in the position of the Midland Bank, as in the position of my client, is whether you can chop those up into two bits and, indeed, whether that is the appropriate way to proceed.

DAWSON J: Do not answer it now, come to it when it is convenient, but, the purpose of Midland Bank was to obtain money which it was to invest on, but the only purpose in doing what it did, in the way in which it did it, was for tax advantage to your client. That is the proposition I am putting to you.

MR EMMERSON: I am indebted to your Honour for saying do not answer that immediately because this is, of course, one of the issues which needs to be debated in this case. My learned junior reminds me that on the banking side of these things what happened was that EPBCL lent, in fact, to Bankers Trust but there was just a charge in favour of Midland. It may not affect the analysis, but that is, in fact, what occurred.

GUMMOW J: Well, the moneys went from Singapore to Bankers Trust.

MR EMMERSON: I am sorry, your Honour.

GUMMOW J: The moneys came from Australia to Singapore to Hong Kong. That is what happened.

MR EMMERSON: Yes.

GUMMOW J: But that leg which involves going from Singapore to Hong Kong involved Midland acting at the direction of the Cook Islands. It was their investment in Hong Kong.

MR EMMERSON: I am sorry, your Honour, I might have said yes too quickly to your earlier proposition. I had not understood that your earlier proposition was intended to give every step, as it were, that the funds took. The step that the funds took geographically was it went from Australia to the Cook Islands, then from the Cook Islands to Hong Kong. Can I refer the Court to what we say are the critical findings of fact in the present case.

The first is a passage in the judgment of Justice Lockhart at first instance at page 957 in the appeal book. This particular passage was quoted apparently with approval by the majority in the Full Court at page 1062 to 3. First, his Honour commencing at line 11 says that:

Although the events with which these appeals are concerned have been recited in detail, they are basically straightforward.

That is important because our learned friends tend to suggest a complexity which, in our submission, is simply not there. His Honour deals with the original circumstances in which we came to have this large sum of money, successful public company flotation. We had been approached by Bankers Trust and, indeed, had talked, as the evidence shows, to a number of other bankers. We had received a letter of offer from EPBCL. The directors decided to place $40 million on deposit.

Mr Levy was authorised to travel to the Cook Islands to attend the investment. He travelled to the Cook Islands. Now, then comes the hiccup which, in our submission, does not affect one way or the other, the intention of my clients but the hiccup was simply this that when the time came for handing over the bank cheque in Australia, my clients were dissatisfied with the form of the letter of credit and, as a result, they declined to proceed on that day, and everything went ahead the next day.

That, in our submission, does not affect the position of the transaction or the purposes of either my clients or any other people. Mr Justice Lockhart at page 960 in the appeal book considered the question that he had to ask himself in deciding the part of the case that arises under section 23(q). Now, of course, that was decided against the Commissioner at first instance and against the Commissioner unanimously on appeal, but it is of some relevance because a number of the submissions which our learned friend raised tend to be the submissions which were raised but rejected by both courts below in considering the section 23(q) issue. Now, it is important to note that the 23(q) issue was not decided on a matter of mere form; it was decided expressly on a matter of substance.

At 960 his Honour quoted a well-known passage from Nathan's Case:

"The legislature in using the word `source' meant, not a legal concept, but something which a practical man would regard as a real source of income.

Now, it is the practical question that his Honour is dealing with. He returns to the practicality, and the search for the real source, at page 961, where, at line 11, he says:

What emerges from the authorities is plainly enough that the test to be applied in determining the source of income for the purposes of the Act is to search for "the real source" and to judge the question in a practical way:

So, his Honour is not going to be put off with matters of mere paper; he is looking at the matter practically. If we go, then, to a lengthy passage beginning at page 964, at line 11, his Honour sets out a number of his findings concerned with the practicality of what was done.

Now, this again was approved and quoted verbatim by the majority on appeal, beginning at page 1063, and his Honour considers and rejects a number of arguments placed on behalf of the Commissioner, which have echoes in what our learned friend was putting to this Court yesterday. One was the suggestion that, what happened in Melbourne was the critical step, and that what Mr Levy did in the Cook Islands was simply carrying out what had already been concluded. Now, his Honour deals with that and rejects it and concludes, at 965, lines 11 and 12, that:

The contract was made in the Cook Islands.

His Honour then goes on to deal with the position of the letter of credit, at line 13 and following on 965, and he deals with the importance of that letter of credit as security, but emphasising that it did not determine the existence of the contract of loan involving my clients. He says, at line 20, having said it:

cannot play a determinative role in ascertaining the source of income -

he says:

It is true that the letter of credit was the security to the taxpayers for the loan, but it only took effect upon the issue of the certificate of deposit in the Cook Islands. Until the cheque was handed over by Spotless Services in the Cook Islands the taxpayers were not bound by any contract. Similarly, the taxpayers were not protected by the letter of credit until they themselves became bound to make the loan.

So the events in the Cook Islands were absolutely critical as regards that. His Honour returns to this at line 7 on 966 when he says:

Spotless Services did not acquire any rights under the letter of credit until it received the certificate of deposit. The letter of credit was provided as collateral security to the taxpayers.

The event which concluded the contract and bound the parties was the delivery of the cheque in the Cook Islands on behalf of the Spotless companies to EPBCL and the receipt of the certificate of deposit by them through their agent, Mr Levy. The certificate of deposit is the critical document for the purposes of the contract between the parties.

His Honour then reiterates that only in default would Spotless Services be entitled to call on the letter of credit.

BRENNAN CJ: Would this be a convenient time, Dr Emmerson?

MR EMMERSON: If the Court pleases.

BRENNAN CJ: How long do you expect your argument to take?

MR EMMERSON: I would suspect, having observed the course of the appeal so far, that it would take the afternoon, your Honour.

BRENNAN CJ: Yes, but not beyond?

MR EMMERSON: I would not expect it to go far beyond, no.

BRENNAN CJ: The Court will adjourn until 2 o'clock.

AT 12.47 PM LUNCHEON ADJOURNMENT

UPON RESUMING AT 2.03 PM

BRENNAN CJ: Yes, Dr Emmerson.

MR EMMERSON: If the Court pleases. I had been taking the Court to the findings of his Honour Justice Lockhart at page 967. At that page, on line 12, his Honour deals with the function of Midland, and he says:

Midland was acting as a conduit for the transmission of funds to the Cook Islands where hey would be held on account of the taxpayers.

GUMMOW J: It was an unsuccessful conduit to that effect.

MR EMMERSON: We say, no, it was not an unsuccessful conduit. The use of the term "conduit" is, perhaps, only slightly misleading in that it suggests the flow of some physical substance from point A to point B.

GUMMOW J: Yes.

MR EMMERSON: But, that is, of course, not what happens in banking transactions. It is not what happens with money. When you say that - - -

GUMMOW J: I think one can grasp that, Dr Emmerson.

MR EMMERSON: - - - someone's money has gone from a particular point to a particular other point, what you mean is that at the later point that person is entitled, as against some party, to deal with them. That is, of course, just what happened in this case. Mr Levy was entitled, on behalf of Spotless, in the Cook Islands, to deal with the $40 million, and that he did. It was through the actions of Midland that this occurred.

TOOHEY J: But when you say that, Dr Emmerson, are you having full regard to the information memorandum that we were taken to in volume 2? That discloses a considerable cast, does it not?

MR EMMERSON: The original information - - -

TOOHEY J: I just say that in relation to the transaction as you described it this morning and the relative simplicity of the transaction in the way that you depicted it, but the information memorandum itself indicates that there are a number of participants in this arrangement.

MR EMMERSON: Well, what it does at page 295 is set out a list of people or corporations being the Cook Islands banks concerned and the controlling companies of the Cook Islands banks and matters of that sort.

TOOHEY J: Plus Midland which appears on page 293.

MR EMMERSON: Yes.

TOOHEY J: Plus Bankers Trust which was in the picture at that stage.

MR EMMERSON: Midland is undoubtedly in the picture so far as my client is concerned because it is Midland that issues the letter of credit and that is, of course, important. Bankers Trust was in the picture in that Bankers Trust, as broker for the Cook Islands company, was, in fact, the bank that first approached my clients and so they are in the picture at least in that sense although not in a contractual relationship with the Spotless companies.

TOOHEY J: I understand that but my point simply is that that document would indicate to the respondents that whatever took place and however it took place it would involve several companies, in particular those named - - -

MR EMMERSON: It would undoubtedly involve at least EPBCL and the Midland Bank. No doubt about that. I do not think the document actually suggests that a deposit maker would be in any direct, contractual or other, relevant relationship with any other companies.

KIRBY J: Does anything turn on the fact that you know or you were put on notice of these arrangements whereas, say, on the short term money market, if you simply put it on there you would not have any knowledge at all of all the deposits that banks would find in Dresden and in Budapest and all the other places where they are planting their moneys at the best possible rates.

MR EMMERSON: We were not put on notice or at any stage informed about exactly how funds were going to be dealt with by the banks as amongst themselves.

KIRBY J: You had this memorandum that Justice Toohey was just referring to?

TOOHEY J: Could I just add to that that the memorandum for completeness has to take in the opinion from Stephen Jaques which details at some length the steps that will be taken by the various participants.

MR EMMERSON: I should say something about the opinion from Stephen Jaques. The opinion from Stephen Jaques is dealing with something which at that stage had been proposed but which, of course, did not affect the Spotless companies, and the letter takes the form of a solicitor's letter setting out at pages 298 and 299 a hypothetical or, if real, an irrelevant set of facts. That is to say, it says assuming these facts these are the taxation consequences of those facts.

TOOHEY J: Is it fair to describe the letter as hypothetical, when they say, "We understand that the following series of transactions will take place."?

MR EMMERSON: It is hypothetical so far as my clients are concerned, yes, because, if the transactions took place, they took place with some other party than my client.

DAWSON J: That is not quite right because EPBC was a party to the transaction which did involve your client.

MR EMMERSON: Yes, but with another customer. I am conscious that maybe what I have said has been less than clear, so perhaps I should say so again. This is a letter which came into existence before my client entered into any of these transactions and before it was proposed that it should enter into any of these transactions.

DAWSON J: But it came into existence in the form of advice to one of the parties to the scheme, if there was a scheme, to which your client was a party.

MR EMMERSON: Yes, to one party, but not to my client, and - - -

DAWSON J: No, but, it is for the purpose of any one of the parties to the scheme which may give the answer.

MR EMMERSON: Your Honour, that was what I was attempting to state when I talked about a thing being hypothetical. What it says is, to EPBC, "We understand that you intend to enter into an agreement with X to the following - - -

TOOHEY J: No, that is not what it says, is it? If you look at steps 1 and 2, for instance, at the foot of page 298, they relate directly to the "Australian resident investor", and then it goes on over the page.

MR EMMERSON: But not Spotless. The Australian resident is not Spotless.

KIRBY J: Is the history of this revealed anywhere in the evidence or in the findings of either courts below as to how this came about? Was it another taxpayer who was putting up this and you just rode on the back of the scheme that was devised?

MR EMMERSON: It was another taxpayer, yes, and the letter was given to my clients as part of the information memorandum to give my clients some comfort that the tax consequences of what it was proposing to do were as alleged.

KIRBY J: Is not the inference that somebody at European Pacific Banking Corporation, in order to attract funds to that corporation, dreamed up a scheme and then sought advice from their solicitors, Stephen Jaques, got this reassurance and then put it around Melbourne and everywhere else that they could to raise funds for the scheme?

MR EMMERSON: Yes, and on that view the state of facts set out is hypothetical, but people are being invited to enter into this arrangement. The alternative possibility is that there was actually a customer in the mind of the Bank at the time and this was a letter which was secured for the purpose of reassuring that customer and the Bank - - -

KIRBY J: You would have to be a little naive to believe that, would you not? We live in the real world.

MR EMMERSON: But it exhausts the possibilities and it does not matter which. The point I was simply making is, in essence, a preliminary point to an answer I wanted to give to his Honour Justice Toohey. This is not a letter which was brought into existence because there was a proposal involving my client on foot.

TOOHEY J: That was not quite the basis upon which I put the question to you. It really arose out of what you had been saying before lunch in which you identified a relatively simple transaction to which the taxpayers were party which did not involve internal arrangements between banks and the like. All I was really suggesting to you is that perhaps, in the light of this documentation, your clients would have appreciated that any such transaction into which they entered would have these glosses, if you like.

MR EMMERSON: With respect, absolutely not, your Honour. That was the point of saying, "This letter doesn't relate to our transaction". The facts that are set out here are not our facts. If one goes through them, beginning at page 298, paragraph 2:

The investor will open an account with Midland Bank plc in Singapore and another account with EPBC in the Cook Islands.

We never opened an account with Midland in Singapore. Then at the top of the next page, paragraph 3:

The investor will appoint an attorney in the Cook Islands with power to draw funds -

et cetera. We did not appoint an attorney in the Cook Islands. We had an officer of the company, Mr Levy, though he was of course appointed our attorney.

4. The investor will place his account with Midland Bank plc in Singapore in funds.

That of course did not happen.

5. The investor will then instruct that a transfer of funds from the Singapore account to the Cook Islands account -

That did not happen.

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.

The letter of credit was issued, though it was of course negotiated and changed, so again that was not a pro forma act.

7. The attorney in the Cook Islands -

if, for that, you read "Mr Levy, the Spotless officer", he did draw a cheque on EPBC in favour of EPBCL. No 8 is the certificate of deposit which happened. It was not, however, followed in detail. The attorney did not hold the certificate of deposit in the Cook Islands because the proposal had assumed that there would be a Cook Islands attorney rather than an officer of the company, and so on.

Now, the reason for that excursus is simply to say that it is wrong to treat the set of facts which is postulated in that letter as if it were somehow the scheme with which this case is concerned.

TOOHEY J: But is it wrong to approach the matter on the footing that, while the precise steps outlined in that letter may not have been followed, some such arrangement would be required to give effect to the investment, if your clients took that step?

MR EMMERSON: Well, not as complex an arrangement in terms of numbers of parties and numbers of transactions as, in fact, occurred. We would say, with respect, that the way to approach it is to say that what you could assume was going to happen was what did happen. At the stage when that document was given to my client, it was one of many proposals put by various financial institutions to my client saying, "Well, this is a way you can deal with your money."

TOOHEY J: Is there evidence of that?

MR EMMERSON: Of there being several proposals?

TOOHEY J: Yes.

MR EMMERSON: Yes. That is set out in Mr Justice Lockhart - - -

TOOHEY J: Well, he refers to Mr Williams speaking to Bankers Trust.

MR EMMERSON: No, it, in fact, says that, as was the fact, that my clients spoke to a number of different banks. The Bankers Trust were the Bank that suggested the proposal which ultimately happened. If your Honour pleases, could I take that question on notice?

TOOHEY J: Yes.

MR EMMERSON: It is undoubtedly the fact, and it is in the appeal books, that several banks were spoken to. Eventually a short list was prepared, there were three on the short list and one was eliminated on the ground that the security was considered less good. The choice between the last two was made after tax return on funds.

GUMMOW J: Yes, thank you.

MR EMMERSON: Returning now to page 967, line 12, the role of Midland, one thing we say which emerges very clearly from this is that it is simply not true to say that the letter of credit was exchanged for a bank cheque. It is true that the events in Melbourne involved my clients passing a bank cheque to the Midland Bank, and it also involved the Midland Bank passing a letter of credit to my clients. But, the word "exchanged", which our learned friend used, I think, more than once here, tends to suggest that one was, as it were, consideration for the other. That is simply not right. Midland was not able to deal with the funds from the bank cheque on its own account. It simply had instructions from us to place them on deposit with EPBC. Equally, the letter of credit did not have any effect for the benefit of the Spotless companies unless, and until, a certificate of deposit was issued in the Cook Islands. So, neither of these documents were documents which, in the one case were of immediate benefit to the party, or in the other case, really a benefit to the recipient at all.

One might, in fact, observe that my learned friend referred to exchanging of pieces of paper. While these documents could hardly be described as mere pieces of paper, so far as the recipients were concerned, they were not documents which had immediate effect in either case. That is in sharp contrast with what happened shortly thereafter in the Cook Islands where a cheque was handed and a certificate of deposit was given, each of which was effective in its terms from the point of view of the recipient. His Honour continues at line 14:

What happened in Melbourne simply put the taxpayers in a position to conclude an agreement in the Cook Islands. The events in Melbourne on 11 December indicated that the taxpayers fully intended to go ahead with the making of the loan; but there was no contract that bound them to EPBCL until a cheque was drawn against the funds lodged in Melbourne and a cheque given by Mr Levy on their behalf to EPBCL in the Cook Islands and for which they received in return a certificate of deposit.

So, at that stage then there was a contract. By that stage my clients had lodged funds in Melbourne and they were in a position to deal with those funds in the Cook Islands. They did deal with those funds in the Cook Islands and a cheque was drawn against them and that led to the issue of a certificate of deposit which in turn was the document which gave my clients rights. His Honour continues at line 22:

Until those events occurred there was no binding contract of loan between the taxpayers and EPBCL. The contract was entered into in the Cook Islands -

and -

not in Melbourne.

Now, that passage is taken up and quoted by Justice Cooper who gave the majority judgment in the Full Court. It is unnecessary to take the Court right through his Honour's reasoning but it begins at page 1062 when his Honour quotes the first passage that I have mentioned from Justice Lockhart's judgment. Then his Honour, at 1063, line 6, says:

On the hearing of the applications, and on the appeals, the Commissioner contended that the relevant investment contract was made in Australia when the taxpayers handed over to a representative of the Midland Bank PLC a bank cheque in the sum of $40,000,000.00 in exchange for an irrevocable banker's letter of credit -

He then deals with that contention by first quoting what Justice Lockhart had said at first instance in a passage that I have taken the Court to. Then, at 1065 he says that there is no reason to disturb those findings.

On this question that what happened in the Cook Islands was mere paper swapping, his Honour deals with that directly at 1065, line 23, where he says:

It was put to Mr Kuegler, an officer of both EPBC and EPBCL at the relevant time, that all that occurred in the Cook Islands was that he and Mr Levy "swapped papers", a suggestion rejected by Mr Kuegler. In his findings, Lockhart J has inferentially rejected the suggestion of a sham and in so doing cannot be said to be clearly erroneous. The basis upon which the appellant contends that the conduct of Mr Levy and Mr Kuegler was of no practical or legal consequence is to be found in an apparent inconsistency in the documentation and the movement of funds.

And his Honour deals with that over the next few pages. At page 1067 he deals with the crucial significance of the cheque which Mr Levy of Spotless handed to Mr Kuegler at EPBCL in return for the certificate of deposit and that, in our submission, completes the trail of funds going to the Cook Islands because at that stage my clients had a bank cheque for $40 million. They had handed it to Midland with instructions to put it on deposit for us with EPBC. The cheque that was drawn in the Cook Islands operated as a mandate to EPBC to pay those funds to EPBCL and then test of all of that was the issue of the certificate of deposit, which was the document which gave my clients rights, and all of that happened.

So, in our submission, in the sense in which one uses the term when talking about funds, which are, of course, invariably dealt with by book entries, debits and credits and matters of that sort, the funds were transferred to the Cook Islands and there disbursed by Mr Levy on behalf of Spotless companies in making the investment in the certificate of deposit. Justice Cooper at 1069 line 5 says:

Once the contention that the contract was in reality made in Australia and that what occurred in the Cook Islands was a mere "formal step designed to screen the reality" is rejected and the banker's letter of credit issued by Midland is seen for what it was, a security to secure performance by EPBCL of repayment of the loan with interest, and not as an investment in itself, the matters contended for by the Commissioner as matters of practical substance sourcing the interest in Australia are either not factually correct or not sufficient to outweigh the Cook Islands elements.

Now, that is the position reached in each of the courts below and we would add one thing to that, if the Court pleases. Our position is that the transaction that took place in the Cook Islands was a real transaction. The courts below on the 23(q) issue have each found, with no dissentients, that that is the case. There has never been any suggestion put forward on behalf of the Commissioner as to why my clients would not want the transaction to take place in the Cook Islands.

It is a case where it was a transaction which completely accorded with what my clients intended to take place, so that this is simply not a case in which there is some conflict between form and substance. Form and substance both go in the same direction. It follows from that, in our submission, that this Court should approach the case on the footing that the Spotless companies made a real investment in the certificate of deposit in the Cook Islands, and the question then, for this Court, is as to whether that has become something to which Part IVA applies by reason of the fact that, of course, this investment was made in a lower tax regime, with the result that the rate of tax paid was lower than the rate that would have been paid in Australia, and that my clients took into account the taxation regime in determining whether to enter into the arrangement.

KIRBY J: I think that misstates the Commissioner's submission. It is that you look at all the facts that are permissible, not simply the fact that there was an attractive and a lower tax regime.

MR EMMERSON: It was not my intention - - -

KIRBY J: I am sure it was not.

MR EMMERSON: - - - to restate the Commissioner's position. It was my intention to say that, having invited the Court to reject the Commissioner's position which, in substance, amounts to raising a sham argument again, what one is left with is the point of principle that I stated. The Commissioner, of course, relies heavily on a whole lot of other things, and some of those I will deal with later on in my submissions but, our position is that the transaction was, as Justice Lockhart held, basically straightforward. If we are right in that, then the issue is as I stated it.

Yesterday I handed to the Court officer our outline of argument, and our outline of argument, it must be said, was prepared on the footing that the issue in this appeal was the point that we have just reached in my submissions.

It is convenient to take the outline of argument as being a skeleton form of the matters that I next want to put. Just before I go onto the next point, in answer to a question put by your Honour Justice Gummow- - -

GUMMOW J: Page 847, I think.

MR EMMERSON: The two that I have just been handed are 841, 849, 1012 and 1086.

GUMMOW J: Thank you.

MR EMMERSON: In considering the question of whether, in making a commercial investment, the fact that a taxpayer has had regard to the relevant taxation regime is going to bring the matter within section 177D is to be tested by looking at the language of 177D(b). This is dealing with schemes to which the Part applies. As has been pointed out in argument by the Court and by my learned friend, Part IVA, of course, proceeds on a quite different footing from section 260. Part IVA depends on identifying a scheme to which the Part applies and then providing certain consequences, but unless and until you find that there is in the particular case a scheme to which the Part applies, then, of course, Part IVA has no application.

One is told to have regard to a number of things and then the question is whether it would be concluded that the person or one of the persons who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme or of enabling the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme. Now, the purpose test is, of course, required by section 177A(5) to be a test of the dominant purpose. But the question that arises is whether this is satisfied on the facts of the present case.

Now, putting aside various matters which our learned friend raised which, he said, took this out of the ordinary, the question that ultimately has to be dealt with is the question formulated by your Honour the Chief Justice, and which I will attempt, perhaps unsuccessfully, to paraphrase.

One has to take into account that what occurred was that a taxpayer that had very substantial funds for investment invested those in a certificate of deposit which had two effects which were inextricably interlinked. One was that the taxpayer derived substantial income from this investment. The other one was that that income arose from an area in which, under the then section 23(q), the Act provided for a relatively low tax rate to be paid. In deciding to enter into that arrangement, the taxpayer considered - and, it is fair to say, seems to have treated as being very important - the after-tax return that would be obtained from the investment.

The after-tax return of course can only be calculated as the difference between two quantities. One is the interest earned and second is the taxation and other expenses incurred. We say that in those circumstances, if nothing more emerges, you cannot say simply looking at that type of investment, namely an investment for value in a low tax regime, that it would be concluded that Spotless entered into or carried out that arrangement for the purpose of obtaining a tax benefit. Plainly enough, we would say, its purpose was to obtain a return on the investment and it is only when you get to calculating how that return on investment is made up that you have to take into account tax regimes and hence the alleged tax benefit.

We say that the question whether on those facts Part IVA applies is to be determined primarily by looking at the language of that part and in so doing it emerges, as I shall attempt to show, that our learned friends have tried various approaches but they do involve, we would say, a departure from what emerges if you simply read the terms of Part IVA.

Now, as to the matter of dominant purpose, the question that is asked by 177D is whether, having regard to various matters, it would be concluded that - in the present case Spotless - entered into or carried out the scheme with the dominant purpose of enabling it to obtain a tax benefit in connection with the scheme. Now, the Act does deal also with the possibility that there may be several purposes in entering into the scheme, and that is where one gets from the language of "purpose" in 177D to the language of "dominant purpose" as I have defined the matter.

Now, in our submission, it is a mistake to say that that test is satisfied if you can say, looking at the circumstances, "Well, but for the taxation consequences, the taxpayer would not have entered into the particular scheme," because a "but for" test is not, in our submission, the same as a "dominant purpose" test. Here one can look at the way in which the after-tax return, which was the taxpayer's primary consideration, is calculated and you find that one of the figures that comes into the calculation is the taxation regime. You also find that the taxation regime was a relatively low tax rate regime provided for by section 23(q) of the Income Tax Assessment Act.

But we say that that does not show that the Spotless companies entered into the arrangement for the dominant purpose of working in a low tax regime. The purpose was to get a return on funds. That was the duty of those who were on the board of directors of the company at the time, and their duty was to obtain the maximum possible return on funds. In so doing, they took into account, amongst other things, the relevant tax regime. But, in this particular case, we would say that the tax regime is absolutely inseparable from the source of the income which is being taxed, and it simply does not make any sense to say, "Well, the dominant purpose in entering into this arrangement was that particular component in the calculation, rather than some other component in the calculation." The question of - - -

DAWSON J: If it was the only advantage which that scheme gave, then it would be the dominant purpose.

MR EMMERSON: If it was literally the only advantage, but then it would not have been an investment at all. If you make an investment intending to get income in return for your investment, then the advantages that you get must necessarily include at least the derivation of income.

DAWSON J: Of course, but all things being equal with other schemes that might have been devised, the only advantage which this scheme gave is a tax advantage; and we are talking about this particular scheme.

MR EMMERSON: We are undoubtedly talking about this particular scheme, and with the greatest respect, your Honour, we are not asking the question of comparison with other schemes, what we are asking - - -

DAWSON J: Why can you not ask that? Why can you not make a comparison with other schemes if you are seeking to derive the purpose in entering this particular scheme?

MR EMMERSON: That is perhaps more readily dealt with under a slightly later heading in my outline. At the moment I want to deal with, as it were, the "but for" argument. I was intending, in any event, to deal with - - -

DAWSON J: This is a "but for" argument. They would not have entered into this particular scheme "but for" the tax benefit.

MR EMMERSON: Yes. That is right. We say that that is not enough. We say that the way you can test it is by saying, if you consider many proposals of a commercial nature there may be a number of different conditions as to each of which you can say, "But for that I would not have entertained the proposal". To take the most simple example: if you buy a motor car, your dominant purpose in so doing may be, I suppose, any one of a number of things - obtaining a good transport, impressing your neighbours, or whatever it might be. But, with any purchase of a motor car there would be a number of requirements but for which you would not enter into an agreement to purchase that car. If the car turned out to have no engine you would not purchase it. If it was insufficiently powerful you might decide not to purchase it. If it was the wrong colour you might decide not to purchase it. But, it would be wrong to go from that list of reasons but for which you would not have purchased, to say each of these is the dominant purpose in buying the car.

DAWSON J: That simply is just playing with words. The only advantage that this scheme offered was a tax benefit. You get a lower rate of interest and the only reason why it offered a return that was acceptable was because of the tax benefit.

MR EMMERSON: Your Honour, that is actually dealing with a point that I was coming to later.

DAWSON J: All right, well come to it in due course but it seems to me to dominate everything else.

MR EMMERSON: It did not, with all respect, dominate my learned friend's written submissions. There are a number of submissions which seem to proceed on the footing that because it can be said but for this advantage, then we would not have entered into the transaction and we say that is simply wrong. Justice Beaumont himself, we would say, makes a good deal of his reasoning depend on that. When he deals with the arrangement and describes it as "tax driven", what he means is that the Spotless companies would not have entered into the arrangement but for the tax advantage.

GUMMOW J: Now, just on that, Dr Emmerson, can I interrupt you for a minute and take you to page 850, about line 33? There is a reference to another proposal which your clients had before them and it was one - it seems to have come from Rothschild. It seemed to involve an investment in Hong Kong but it carried with what is called by Mr Williams a section 14C tax clearance.

MR EMMERSON: Yes.

GUMMOW J: Now, is that a reference, as you understand it, to the Taxation Administration Act?

MR EMMERSON: Yes.

GUMMOW J: To 14C of that?

MR EMMERSON: Yes.

GUMMOW J: Was there any 14C certificate issued in relation to this proposal, the one that actually went ahead?

MR EMMERSON: No, your Honour. I am informed by my learned junior, who is more familiar with this aspect than I am, that it was not necessary in this case.

GUMMOW J: Why would it not be necessary? There is no need to answer now but it is all part of this matrix.

MR EMMERSON: Yes. I will answer that question in due course, your Honour.

BRENNAN CJ: Is it right to say, Dr Emmerson, that if the "but for" test is satisfied then the obtaining of the tax advantage is a purpose and we are then concerned with the question simply whether that purpose is the dominant one or not?

MR EMMERSON: No, we would say that is wrong, with respect. Our analysis would be that it is not a purpose at all. There is a purpose to obtain the best commercial return, but we would say that that is a purpose which cannot be dissected treating each of the figures which go into working out the commercial return as if they were individually to be treated as purposes.

BRENNAN CJ: Why not when that is precisely what goes into the calculation of the return?

MR EMMERSON: It is what goes into the calculation of the return, but it does not go into the question of purpose. That is to say, there is no suggestion that the taxpayers thought of anything other than the after-tax return, so that they would have been perfectly happy if the interest rate was sufficiently high to derive at the income from their investment in a higher tax regime. It is only the difference which was part of their purpose, not the individual components so to speak.

BRENNAN CJ: One can put it that way, if one likes. You can elide the components and just go straight to the end figure.

MR EMMERSON: If the end figure is the purpose, we say yes.

BRENNAN CJ: Yes, I can understand that, but I just do not understand what the logic is which globalises purpose in that way and denies the capacity for dissection when the elements which must go into the making of a decision with respect to a scheme have to address both the return from the creditor with whom the funds are deposited and the tax regime that is applicable.

MR EMMERSON: We would say this for a number of reasons. One is that the purpose we would say is indissectible unless it happens that the components that go into determining the after-tax return are taken individually of importance.

McHUGH J: But it may be that you have to distinguish between reasons and purpose and that factors like the security of the company, the rate of interest and various other factors are reasons why you invest there. Your purpose in investing there is to get the higher return having regard to all those reasons.

MR EMMERSON: We would say that there is a distinction between reasons and purpose. The word "reasons" is capable of taking on the wider connotation of including conditions such as, "I would not have entered into this investment if it did not have a particular advantage."

McHUGH J: The bottom line was a return of at least about 81/2 per cent or 9 per cent.

MR EMMERSON: Exactly, yes. The bottom line was that. In determining the taxpayer's purpose it was the bottom line that was important and it does not, in our submission, make sense to treat that as if each of the other lines were to be treated independently as a purpose.

DAWSON J: Dr Emmerson, that just does not make sense to me. The whole purpose of this scheme was to get the advantage of 23(q) in order to maximise the profit.

MR EMMERSON: But one is not going to maximise the profit unless in a section 23(q) tax regime one gets a sufficiently high rate of return so that the - - -

DAWSON J: True, but the whole purpose of this scheme, this particular scheme, was to utilise section 23(q). Either that is so, or it is not so. Was it so?

MR EMMERSON: It is not so. To return, perhaps, to an example that your Honour was putting - - -

DAWSON J: I mean, the whole elaborate machinery was to invoke section 23(q).

MR EMMERSON: With the greatest respect, it is not found that it is a "whole elaborate machinery", and we would deny this - - -

DAWSON J: Or the whole elaborate legitimate machinery was to invoke section 23(q), it was found.

MR EMMERSON: With respect, we say that his Honour the trial judge was right in saying the facts are basically simple. It is not a case of a whole elaborate machinery, and, as far as it all being to invoke - - -

DAWSON J: Well, then the whole non-elaborate machinery; it does not matter. But the whole purpose of the agreement was to invoke section 23(q).

MR EMMERSON: No, the whole purpose of the agreement was to obtain a return on investments - - -

DAWSON J: By invoking 23(q), the particular - - -

MR EMMERSON: No. 23(q), in itself, would produce no return on investment. What one has to have is - - -

DAWSON J: That is nonsense. It does produce a return. The application of 23(q) eliminates the income tax component and therefore you get a greater return.

MR EMMERSON: With respect, your Honour, the income tax component of what? One must have an income scheme - - -

DAWSON J: Income tax component of the investment.

MR EMMERSON: One must have an income stream from your investment - - -

DAWSON J: Yes.

MR EMMERSON: - - - and it is simply not - - -

DAWSON J: And the purpose was to have an income stream which was not subjected to Australian tax.

MR EMMERSON: No, the purpose was to have an income stream which gave the best after-tax return.

DAWSON J: Well, look, we are just going over the same ground. I mean, we are not getting anywhere.

MR EMMERSON: But the two, with the greatest respect, your Honour, are absolutely inseparable.

DAWSON J: Well, I think they are absolutely inseparable.

MR EMMERSON: Inseparable, yes.

DAWSON J: Yes.

BRENNAN CJ: You are in furious agreement.

DAWSON J: I am sorry. As pointed out, we cannot be at one on that. The 23(q) part of the exercise was inseparable from that part of the exercise which was designed to gain income.

MR EMMERSON: Yes.

DAWSON J: And, the purpose of 23(q) was to maximise the income, net income.

MR EMMERSON: No. No, 23(q) specified the tax regime. The rate of return specified the gross revenue. Expenses specified those expenses, and it is only when one looks at the bottom line that you have the matter which was the purpose - - -

DAWSON J: Well, we are going over the same ground but if you were to ask any bystander, anyone who had any glimmering of understanding of all of this, and you asked why did they invest in the Cook Islands, the answer would be: "To get the advantage of section 23(q)".

MR EMMERSON: One has to formulate the question asking why did they make this investment and the answer, we would say, must be, to start off with, because it produces a return.

KIRBY J: You start a step earlier. You say, "We had this fund and our purpose was to get as much as we could on it".

MR EMMERSON: To get as much as we could.

KIRBY J: And the Tax Act was merely part of the machinery and the way in which it was done, but the purpose was to get the maximum return on the fund.

MR EMMERSON: Precisely, your Honour.

KIRBY J: The problem with this is that it takes on images. At one moment it looks as if the purpose is this; another moment it looks as though the purpose is what the Commission says. Is it not the scheme of the Act now, moving from section 260, to say, "These are evaluations. They're difficult. They can be different things in different peoples' eyes and, therefore, we will accept a system whereby the Commissioner, in the first place, makes a determination and then you can, if you can, set it aside." I do not ask you to deal with that now, but I hope before you finish you will deal with the matter that is worrying me.

MR EMMERSON: I am conscious that your Honour was putting matters of that sort to my learned friend.

KIRBY J: The prominent purpose is inherently unstable. It is inherently unstable. It is an evaluation.

MR EMMERSON: Yes. Could I perhaps accept your Honour's invitation to deal with that later?

KIRBY J: Yes, by all means. Please do not forget it.

DAWSON J: What you are attempting to do, Dr Emmerson, is to talk in generalities without coming to this particular scheme. The purpose of any investment, generally speaking, is to obtain the best return possible. But we are not talking about any investment; we are talking about this particular investment. The purpose of this investment was specific. Sure, it had the same general aim as any investment of moneys does, but it had a specific aim, this one, which is to obtain a tax benefit. You cannot say, "Well, I will refuse to descend from the generality to the particular," because what we are talking about here is a particular scheme.

MR EMMERSON: Your Honour, Spotless would not have invested in this particular scheme if the before-tax return had been substantially lower. So, it does not make any more sense, in our respectful submission, to say that the dominant purpose was the tax regime than it is to say that the dominant purpose was the primary tax rate. What you have to do is to take all these things into account. It is rather like your Honour's example put to my learned friend of considering buying shares in various companies where those shares produce dividends but the dividends have different tax consequences.

What you look at is the after-tax return and in deciding, for example, between buying shares which do not carry dividend imputation and shares which do, you might find that you were prepared to buy shares which had a high rate of return but without dividend imputation in preference to shares with a lower rate of return with dividend imputation, or it might go round the other way.

But, if it did go round the other way, it would be wrong to say that your dominant purpose in investing in the latter class of shares was to obtain dividend imputation. Your dominant purpose would be to obtain a return on your investment.

DAWSON J: That would be so where there are a number of opportunities to purchase shares where you have the advantage of dividend imputation, but there was here only one source of income which had this consideration suggesting that it was the appropriate place for investment.

MR EMMERSON: That is, with respect, not so. In fact, Spotless considered a number of different proposals and several of them did involve derivation of income in parts of the world to which section 23(q) applied.

McHUGH J: Including the Harcourt Scheme in the Cook Islands.

MR EMMERSON: Yes. So it was not simply a one possibility case. There were other possibilities.

BRENNAN CJ: Dr Emmerson, forgetting, as it were, anything extrinsic to the scheme in which your client was involved itself or the activities in which your client was involved itself, it required a maximum return on its investment payable in Australian dollars with bank security, is that right?

MR EMMERSON: Perhaps if I deal with those points in turn. Maximum rate of return arose because of the circumstances of the raising of the $40 million. Spotless was not in the business of dealing on the money market - it was a cleaning company. It had a public flotation, it raised a little over $40 million. It did not have an immediate use for it and so the commercial circumstances constrained it to make an investment for a limited period but clearly, since this was not in a continuing business, the issue was the return it would get from that investment.

BRENNAN CJ: Yes.

MR EMMERSON: So that was one set of circumstances. Your Honour mentioned Australian dollars. It was one of the considerations of the company that it did not want to be in peril of moving of the exchange rate during this period.

GUMMOW J: Does that have any connection with the operation of 14C, the need to write this facility purely in Australian dollars?

MR EMMERSON: Could I perhaps again take that question on notice, your Honour?

GUMMOW J: Yes.

MR EMMERSON: The third point that your Honour the Chief Justice put to me was the issue of security.

BRENNAN CJ: That they were looking for bank security.

MR EMMERSON: Yes.

BRENNAN CJ: Now, if you look at the terms of the offer that was made to them, one finds that there is an offer which is made at 41/2 per cent under the Australian bank bill buying rate. So, looking at the form and substance of the arrangements into which your client entered, compare the prospect of buying Australian bank bills, which, of course, would be in Australian dollars with bank security, at 41/2 per cent above the broad interest rate which was on offer, is there any distinction between that and what was acquired, other than the tax differential?

MR EMMERSON: Could I perhaps, just by way of preliminary, to put one thing to one side. The document that I think your Honour was quoting from was not the actual offer that my clients accepted, but I think was an earlier proposal.

BRENNAN CJ: I am sorry, page 349 I was looking at.

MR EMMERSON: Yes. I think that was a proposal - - -

BRENNAN CJ: It is certainly a proposal of some time before 10 September.

MR EMMERSON: Yes, that was an earlier offer, and was not one which was ultimately accepted. The offer that was accepted is the one that appears at page 316. I am not saying that this answers the question your Honour put to me, but if your Honour wished to put a question on the footing of what was the actual offer that we accepted, then that is it.

BRENNAN CJ: Yes. Well, I suppose in order to put the question in terms of what is on 316 I should have to ask whether or not 13.3 per cent per annum was 41/2 per cent below the bank rate at the time.

MR EMMERSON: It was not as much as that, but I think, for the purposes of your Honour's question, it is sufficient to say that it was below the bank rate at the time.

BRENNAN CJ: Below, yes. Well, now, looking at the form and substance of the agreement, comparing it with the bank bill rate in Australian dollars at the time, what explanation is there for this transaction, as against that which would give the same security, the same currency and a higher rate of return - broad rate of return?

MR EMMERSON: Higher broad rate of return - the answer is a better after-tax return.

BRENNAN CJ: Then, is it open to draw from that fact - that, is that differential, and that alone - the inference that the dominant purpose, looking at the form and substance, is to get the tax benefit?

MR EMMERSON: No, it is not. It is open to draw the inference that as between two proposals, each of which had a lot of things in common, that was the deciding factor. But that is not the test which is set down by section 177D. The question is, what is the dominant purpose of entering into or carrying out the scheme? And the the dominant purpose, in our submission, must look at the whole scheme, not simply to some feature by which it differs from some rival schemes.

BRENNAN CJ: No, but is it right to look at the only difference by which it departs from what would otherwise be the foundation of the investment or at least the criteria of the investment?

MR EMMERSON: The answer is it cannot be, in this case, the only difference from other competing investment proposals. The evidence was, for example, that there was another proposal which was seriously considered but was rejected on a difference in the security of it.

BRENNAN CJ: Certainly, but, I mean, the security that was taken in this instance was a bank matter of stand-by, a letter of credit. If you had a bank bill at a rate of 41/2 or what ever percent, 5, you would have exactly the same security, would you not?

MR EMMERSON: In the particular example I was giving, the rival proposal had a less satisfactory security and that why it was rejected.

BRENNAN CJ: I understand that, but that was not the comparison I was inviting you to make. I was inviting you to make a comparison with that which, at least in September 1986, was taken, as it were, as the benchmark against which this transaction was being devised.

MR EMMERSON: The benchmark that my clients had set up was a return of, I think it was at least 8 or at least 9 per cent after tax return.

BRENNAN CJ: Yes.

MR EMMERSON: That was the benchmark that had been set up. In our submission, it is not really a question of benchmarking to say, "Well, I had an alternative proposal but I chose this one" because it may well be that each of the two proposals that you are talking about carried with them your dominant purpose in entering into the agreement. To return to my motor car analogy, it may well be that at the end of the day you would say, "Well, there is another car which I have always regard as being absolutely the standard type of car I wanted. This one is better because its price is lower or because it has got better brakes or because it has got higher power" but that does not answer the test of dominant purpose.

DAWSON J: No, but the Act does in that respect. If you look at section 177D(4) it tells you what you are to have regard to in looking for purpose.

MR EMMERSON: Yes.

DAWSON J: And it says, in effect, you look at what section 23(q) would do in deciding what the dominant purpose was.

MR EMMERSON: I am sorry, your Honour. Have I got the correct reference? Section 177D(b)(iv)?

DAWSON J:

the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme.

And the only operation that this Act would have in relation to the scheme would be through section 23(q).

MR EMMERSON: Section 177D(b)(iv) is not limited to section 23(q).

DAWSON J: No, but that is the practical effect of it.

MR EMMERSON: What it is saying is that one of the things that you can take into account is - - -

DAWSON J: Not can, must.

MR EMMERSON: One of the things that you must take into account is, look at this Act but leave out Part IVA and find out what would be the tax consequences.

DAWSON J: Yes, and there would be section 23(q) advantage.

MR EMMERSON: Yes. You take into account in - - -

DAWSON J: That is what you take into account, not the ultimate purpose. That is what you take into account with making a profit,..... for the purposes of this section.

MR EMMERSON: With the greatest respect, no, your Honour. Not at all. The eight matters that are set out in section 177B are matters that you take into account in deciding a particular question. That is to say they tell you these are matters which must be considered, but, having considered them, they are used as an aid to answer a question, "What was the purpose or the dominant purpose of the taxpayer in entering the scheme?".

DAWSON J: Why I drew it to your attention was, you were saying that you must only consider the ultimate purpose. It is not legitimate to take into account anything that may lead to the achievement of that ultimate purpose. The Act says the opposite.

MR EMMERSON: No, it does not, your Honour. What section 177D(b)(iv) tells you to do is something which, in my analysis, I had already been doing. It enables you to look at the tax consequences of carrying out a particular scheme. Of course you can look at the tax consequences - as you can look into all sorts of other things - but, the question you have still got to ask yourself at the end of the day is what is the purpose in entering into the scheme. There are many cases, no doubt, in which the tax consequences would be the only ones relevant. But, here we have a case in which we have an income stream which, of its very nature comes from a particular source, and so that both the income stream and the tax consequences of that income stream come together. It is in that context that we say you simply cannot dissect them out and say the dominant purpose is one rather than another.

BRENNAN CJ: I think you have made the point. It is a concept which is indivisible, the purpose is indivisible.

MR EMMERSON: The purpose, where it is concerned with after-tax return, is indivisible, save in special circumstances, yes.

It is our submission that Part IVA does not require one, as it were, artificially, to take a dominant purpose and treat it as if it were made up of several subsidiary purposes.

In our written outline the language that we have used to distinguish these two is to refer to some things as conditions, that is to say, conditions which had to be satisfied before one would agree to enter into an arrangement, and purpose, which gives you the real reason that you enter into the arrangement. So although I have used the language of "dominant purpose" throughout these submissions, that is not to say that there must necessarily be a multiplicity of purposes. Often there would be only a single purpose. Now, if the Court pleases, the point of principle which I am seeking to raise here is, in our respectful submission, one which is of very great importance because if we are wrong in what we say then, in effect, it is going to be very dangerous for taxpayers in the future to evaluate tax consequences as part of their decision making.

McHUGH J: Could I ask you this. It is a question that I really should and I will ask Mr Shaw to comment on later, but it seems to me at the moment there are real difficulties translating the definition of "tax benefit" into 177D to deal with a scheme like this.

MR EMMERSON: Yes.

McHUGH J: I assume it is paragraph (a) of the definition in 177C is the paragraph that is relied upon. Is that so? Is that your understanding?

MR EMMERSON: Yes.

McHUGH J: Then if you take that definition in (a) and transfer it across or into 177D, it reads, it would be concluded that the person entered into the scheme for the dominant purpose of enabling the taxpayer to obtain a tax benefit, that is to say an amount that would have been included in or might reasonably have been expected to be included in the assessable income. Now, how do you get that out of 23(q)?

MR EMMERSON: With respect, we say you do not, because we say that Part IVA is not, in its terms, intended to apply to cases such as the present, where you have an investment, and the return on the investment has certain tax consequences and you take those tax consequences into account in deciding whether to make the investment.

McHUGH J: But, the point I am interested in is, what is the amount that would have been included, or might be reasonably expected to have been included, in the assessable income?

MR EMMERSON: We say in the present case there is no such amount and, in fact, that was the point which we were seeking to raise in our notice of contention, and which is referred to in paragraph 10 of our outline, but - - -

McHUGH J: I do not think I have seen your notice of contention. Is it in the book?

MR EMMERSON: Yes, but it is probably sufficient to look at paragraph 10 of our outline, where - - -

McHUGH J: I am sorry. If you are going to come to it, you come to it in your own time.

MR EMMERSON: If your Honour pleases. I was saying that there are, as we would see, real difficulties if one construes Part IVA so that it will affect this particular case in which a taxpayer makes a new investment; gains a new income stream in a particular tax environment. If the fact that he takes into account the tax consequences, or is treated by section 177D as taking into account the tax consequences, is of significance, and can, in fact, enable the whole scheme to have its tax consequences removed, then this is a matter of very serious consequence.

Suppose that a company wants to build a new plant, or is considering embarking on a new project, it would be absolutely standard, in our submission, for feasibility studies to be carried out, including studies of the tax regime, and often the thing which might tip the scales as between one alternative and another is the more favourable tax regime. Now, we say that section 177D simply is not intended to cover this sort of case at all, and the difficulties to which I have adverted are not because there is some inelegancy of language in 177D, but simply that this is not what it is about.

It is concerned with cases in which one can identify a scheme, and one can look at that scheme and, looking at it, can conclude that the sole purpose, or the dominant purpose of the taxpayer in entering into the scheme was to obtain a tax benefit, and tax benefit is defined as "certain amounts not being included in its assessable income which would otherwise have been there", or, "obtaining deductions which would not have been otherwise obtainable".

Now, that language, in our submission, covers the sort of tax avoidance arrangements which one can reasonably expect the draftsman would have had in mind when Part IVA was drafted. They were the type which were sometimes described of various pejorative epithets, as contrived, and so on, but the effect that they had was that either a taxpayer would find that some money came to him in capital form rather than in taxable income form or that he obtained a deduction for tax purposes which was larger than any amount that he put at risk or he spent. Those were the sort of schemes which section 177D had in mind. Now, it works perfectly well for those because there you can isolate a scheme, you can look at it, you can see what it does, and you can say, "Well, the purpose here must be to obtain a tax benefit." That is either the sole purpose or it is the dominant purpose, but here where the income and its source are necessarily and inextricably linked, we are outside the realm of discourse of section 177D.

It is simply not a scheme to which Part IV applies, and the difficulties are not, in our submission, ones of a conceptual nature or of a linguistic nature, but simply that 177D does not apply to this type of transaction. Now, our submission is that, in fact, the line that is drawn by 177D is a correct line between the sort of schemes at which this part was aimed, which were the ones done for the purpose of obtaining a tax benefit, and the present case where you have commercial arrangements in which the taxpayer has taken into account taxation consequences as one of the considerations to be borne in mind when evaluating investment proposals.

I next wanted to say a little bit about the comparison with section 260. We say that Part IVA is drafted on a quite different basis from section 260. The Court will recall that the history of section 260 is that here was a general section which, taken literally, was drafted in very wide terms and so the course of curial construction of that section necessarily involved some reading down of the language of that section. Now, out of that exercise in reading down, there came various of the statements that the courts have made and which are quoted in the written submissions of our learned friends, the ordinary business and family dealing, matters of that sort; also some of the adjectives that are quoted by our learned friends, such as "artificial" or "contrived" or "elaborate".

But they are the result of section 260 being drafted in a very wide way. Now, what happened when Part IVA was being drawn was that, of course, the draughtsman had the option of trying to codify various matters which had been established by the courts in cases under section 260. What he did was decline to codify them, and to proceed in a different way, so that instead of simply looking at the scheme, but asking very generally whether it had an effect of altering the incidence of taxation and then having to read down that notion, instead the draughtsman built the matter up from a different direction, first giving a definition of "scheme" which, although wide, is important for the Act; then a definition of "tax benefit", which is also important; and then 177D, specifying to what schemes the Act applies.

Now, if I could deal with those in turn. The reason why the definition of "scheme" is important is not that it is widely drawn so you say, "Oh, well, there is a scheme and we need not bother whether what we are talking about is or is not, because almost any arrangement can be a scheme." The importance is quite different. The importance is that it focuses attention on a particular series of transactions, or agreements, or whatever it might be, and enables one to say, "Well, look, this is the scheme we are talking about. We now have to ask ourselves various other things about it."

One is the issue of tax benefit under 177C, the other is whether it is a scheme to which this part applies, but it is important to note that the focus remains, nevertheless, on the scheme. One is not invited to look at large as to whether, say, taxation considerations were in the mind of a taxpayer. What one has to ask is what was his purpose in entering the scheme or in carrying out the scheme and that, in our submission, is quite different because that means that instead of requiring the sort of reading down which you got in section 260, it draws the line. It attacks schemes where there is a tax benefit and you postulate that that is the purpose in entering the scheme but it does not attack the cases such as the present where you take into account tax considerations in deciding whether to make an investment.

Now, in our submission, it is, therefore, not helpful to seek to read into Part IVA various epithets or formulae which are derived from section 260 law. For instance, our learned friends consider the question of whether one can that the arrangement in the present case was artificial or contrived or elaborate and so on. We say none of those epithets apply but even if they did, they are not a substitute for the terms of Part IVA. It is no good, therefore, as our learned friends do in some places in their written submission, in treating the test that is set out in 177D as if it had these elements drawn from section 260 still in it.

TOOHEY J: The elements may not be drawn from section 260 but are they not capable of becoming relevant because of 177D(b)(ii), the form and substance of the scheme?

MR EMMERSON: Section 177D(b)(ii), "the form and substance of the scheme". Could I, before I answer that, say that while your Honour was speaking, I realised that I had expressed myself slightly carelessly in an observation I made just before your Honour asked me that question. When I said that these epithets were drawn from section 260, what I meant was drawn from cases which were decided under section 260.

TOOHEY J: Yes, I understood that, Dr Emmerson. All I was asking of you was whether those expressions might have some part to play simply having regard to the words "the form and substance of the scheme".

MR EMMERSON: One can undoubtedly consider the form and substance of the scheme, yes.

TOOHEY J: All right. Next question: in considering the form and substance, is it relevant to ask whether the scheme is artificial or contrived or elaborate, not as pejorative epithets but simply as a means of perhaps contrasting form and substance?

MR EMMERSON: It is one of the things which may be relevant, yes. I was not intending to deny that. What I was saying was that one does not answer the ultimate question under 177D by saying, "Is this elaborate or is it contrived?".

TOOHEY J: Yes, I follow that, thank you.

MR EMMERSON: In the present case his Honour Justice Lockhart, in our submission, found that the substance of the arrangement that was entered into was in fact the same as its form, so there is no distinction or artificiality in that respect in the present case.

McHUGH J: Could I ask you a question about purpose, having regard to what I asked you earlier about the definition of 177C. The argument has tended to distinguish between the return on an investment and 23(q) itself but, if you apply the definition in 177C literally, why is not the relevant tax benefit the amount, namely the 13.3 per cent? That is the amount that might reasonably have been expected to have been included in the assessable income of the taxpayer if you had not entered into the scheme.

MR EMMERSON: The difficulty that we have with applying that is simply that the 13.3 per cent was simply, as it were, the gross return in the Cook Islands.

McHUGH J: I know, but normally you might have got that. That 13.3 per cent might reasonably have been expected to have been included in your assessable income because it would have been a return that you would have got on the market. But, as a result of this scheme, it is no longer assessable income.

MR EMMERSON: What we say is that the connection between the postulated amount and circumstances apart from the scheme are simply too vague for one to work out, really, any amount.

TOOHEY J: That may be so in a whole run of cases, but is it so in the present case, when the only barrier to the interest being part of the taxpayer's assessable income was the operation of section 23(q)?

MR EMMERSON: If we had not entered into the scheme then we would not have lent the money to this bank in this place.

McHUGH J: Yes, but, you are confining your submission to the specific amount, but it may be that amount is used in a more general sense so that it covers, in effect, a hypothetical amount, because, after all, one is talking about "might reasonably expected to have been included".

MR EMMERSON: It is undoubtedly a hypothetical amount, but we would say that this is easy enough to understand if you have, say, a scheme which artificially creates a deduction against one's ordinary income, for example. There you could reasonably say there was a tax benefit because remove that deduction and an amount would be included. It is probably not a good example because that is section 177C(1)(b), but it is the same principle. If you have an existing state of affairs and you enter into a scheme which changes those, then you can make a pretty good prediction of what would have happened but for the scheme. In the present case we would say that the whole matter is really entirely at large.

TOOHEY J: But is it? I mean, why does it not fall quite squarely within section 177F(1)(a):

a tax benefit that is referable to an amount not being included in the assessable income -

MR EMMERSON: Yes, where that amount would have been included or might reasonably be expected to be included. In the present case one just does not know what would have happened. It was not, here, an amount that we got in, say, tax-free term for which amount we would have got anyway.

TOOHEY J: But the tax benefit that you got - I should not put it that way - perhaps I can. In the case the tax benefit that arose is referable to an amount not being included in the assessable income. If that amount is brought into the assessable income, is not the tax payable readily determined?

MR EMMERSON: If it was that amount, yes.

TOOHEY J: Is that what the Commissioner did in this case?

MR EMMERSON: The Commissioner chose a sum of money which was the same, yes. The distinction that - - -

TOOHEY J: But that was not by happenstance.

MR EMMERSON: No, of course it was not.

TOOHEY J: You appear to be suggesting it might have been. I take it the Commissioner said, "Well, this was the tax that you did not pay because 23(q) was available, but by the operation of Part IVA it is part of your assessment."

MR EMMERSON: Yes, and we say that that was an amount which we derived because of entering into the scheme, not an amount which we would have derived had we not entered into the scheme. It is the same problem again you see because the amount and the scheme come together or the amount and the deduction come together.

TOOHEY J: But you are speaking of the amount that you would have derived. I am trying to focus on the words "a tax benefit has been obtained", which is what section 177F is concerned with, but I can see in a whole range of other cases it might be very difficult indeed to identify what the tax benefit would have been had the scheme not been entered into, but this perhaps is not one of those cases.

MR EMMERSON: We would say, with respect, the other way round, that in the majority of cases it probably is fairly easy. Certainly it would be for the sort of paper schemes which were around in the 70s and 80s because they were designed to be superimposed on an existing state of affairs and you could work out what would have happened if the taxpayer had not entered into the scheme, but here, where all that happens is that the taxpayer makes an investment which leads to an income stream which comes in tax advantaged form, it is much less easy to see how section 177C applies to it.

TOOHEY J: Yes.

MR EMMERSON: Could I next deal with the matter which we refer to in paragraph 7 of our written outline dealing with alternatives and choice. We say that asking the question, "What is the dominant purpose of the Spotless companies in making the investment?" is not the same thing as saying, "Why does one choose one form of investment rather than another?" and the difficulty as a matter of analysis with asking why one chooses one form of investment rather than another is that if a company is working on an investment proposal, is considering a whole range of things, then various proposals may well be suggested. Variations in those proposals may be suggested. The ultimate decision may come down as between two things which are pretty similar, but the matter that tips the scale between one investment and another is not, in our submission, to be equated with the dominant purpose of the taxpayer in entering the particular scheme.

It is a balance tipping or it is a consideration which was borne in mind, but it does not tell you the dominant purpose, and, again, we would say that that is in line with section 177D which is looking to why one goes into the scheme, not to the fine structure of possible variations. Another way of putting this is we say it is no assistance in determining dominant purpose to ask why a transaction occurred in the way it did. Now, asking the question, why did a transaction occur in the particular way that it did is, of course, to use the language drawn from section 260 cases going back, I think, to Newton's Case. That is part of the exercise being carried out by the courts in trying to set some reasonable practical limits for the operation of section 260. This language has not been adopted in the Part IVA.

BRENNAN CJ: What about subparagraph (i) of paragraph (b) of 177D?

MR EMMERSON: Yes. Again, your Honour, it is one of the things you consider in making the decision. It is not the determinate. The thing that determines where you go is what is the dominant purpose, and the distinction that I am drawing is between finding out what is the dominant purpose in entering into a particular scheme, and that is the 177D question, and sidestepping 177D and saying, "Well, it is sufficient to find that the transaction took the particular form it did because of tax considerations," because that is going from a dominant purpose test to a test in which you, as it were, dissect the transaction and if you find any element of taxation considerations in it, then it is struck down.

So that to ask the question why it took the form it did, is absolutely fine if you are looking at it as one of the surrounding circumstances but considering the end question which is, "Why would one conclude that the taxpayer entered into or carried out the scheme?", but it is quite wrong to take from section 260 cases which are concerned with looking at the scheme itself and say, "Well, it is sufficient to strike down a scheme or to bring a case within section 177D if you find that there was a way of carrying it out which did not have these particular tax consequences".

It is, again, like asking, you know, "Why did you do something", is not the same thing - or, "What was your purpose in doing something?", it is not the same thing as saying, "Well, granted, I see that your main purpose is to build a factory" or whatever it might be but, "Why did you put this particular piece of machinery there?" The particular piece of machinery might have been put there for a reason but that reason is not your dominant purpose in building the factory. I next wanted to say something about the so-called choice principle.

Clearly enough, from the history of Part IVA, it was the draughtsman's intention to eliminate a choice principle, at least in the broad form in which it developed, where schemes could be constructed and made valid because they made use of an element of choice, albeit that the scheme itself was simply something grafted onto an existing state of affairs. But, in our submission, it is dangerous for the Court to move in the opposite direction of saying, "Well, the effect of Part IVA is to require a taxpayer to close his eyes to the prevailing tax regime when either making a choice between investments or deciding whether or not to make a particular investment." There is nothing in the terms of Part IVA which compels one to go in that particular direction.

In paragraph 10, I had set out the matter of tax benefit. I do not really need to add very much on that. Our submission is simply that section 177C applies readily in its terms for what I have called the ordinary tax-avoidance arrangement where, in effect, an existing income stream is diverted, or is taken in capital form, or a deduction which was not there before is created.

But 177C, in our submission, simply does not apply in cases such as the present where the income stream and its tax-advantaged source necessarily arise together and at the same time. Next, going to some authorities, of course, Part IVA occurs in our Act and there is no comparable provision in other Acts. However, in our submission, it is instructive to look at some cases in other jurisdictions in which similar problems have arisen, and the sort of distinction that I have been concerned with in my submissions and which we say arise out of the language of 177D also turns up. Could I take the Court just quickly to one or two of these cases - - -

KIRBY J: Is there a short essay that explains how different jurisdictions, say the United States, Canada and Australia, have approach tax avoidance, which gives a sort of overview of the legislative scheme?

MR EMMERSON: I am sure there is such - - -

KIRBY J: You are not aware of it?

MR EMMERSON: - - - an essay. What I had in mind was a very much more limited task of taking certain distinctions which have been drawn in overseas jurisdictions, and to use them - not to say, of course, that the language of the legislation is the same as the language of legislation here, but to say that the approach that has been adopted by the courts is of some use. So I was really proposing to look at the cases rather than the statutory background because, if one looks at the statutory background as well, it becomes really a very elaborate exercise.

Could I refer the Court to the Challenge Corporation Case (1987) AC 155. That was a case which arose under the tax laws of New Zealand, but it is of use because it draws a distinction between the concept of tax avoidance and tax mitigation. It appears here in a Privy Council decision on appeal from the Court of Appeal in New Zealand but the distinction which is drawn also then became part of English law. The speech is the speech of Lord Templeman and the relevant passage occurs beginning at page 167D. His Lordship says:

The frequent argument by the tax avoider that he seeks to protect the interests of a taxpayer who does not indulge in tax avoidance requires serious but sceptical consideration. There are, however, discernible distinctions between a transaction which is a sham, a transaction which effects the evasion of tax, a transaction which mitigates tax and a transaction which avoids tax.

In the present case Barker J pointed out that the transaction was not a sham. It was not so constructed as to create a false impression in the eyes of the tax authority. The appearance created by the documentation was precisely the reality. In other words, the taxpayer purchased the shares -

et cetera. Now, in the present case it is not, as we understand it, put on behalf of the Commissioner that the transaction is a sham. Our learned friend went fairly close to the line, as we saw it, in some of his submissions on this point.

BRENNAN CJ: You do not have to take us to problems of sham, do you? There is no question of that.

MR EMMERSON: No, your Honour. Could we go then to the next paragraph:

Tax evasion can also be dismissed. Evasion occurs when the commissioner is not informed of all the facts relevant to an assessment of tax.

Again, that does not apply here.

GUMMOW J: This section 99 in New Zealand, that replaced their former 108, did it? Section 108 being their equivalent of our old section 260. Is that how it works?

MR EMMERSON: Section 108 was their old, general tax avoidance which is very similar to section 260.

KIRBY J: That, apparently, was traced back to section 62 of the Land Tax Act which is the very grandfather of it all.

MR EMMERSON: Right, yes. I am indebted to your Honour.

KIRBY J: This is in item 30 in the appellant's documents.

MR EMMERSON: Yes. His Lordship says this in the paragraph opposite letter G:

The material distinction in the present case is between tax mitigation and tax avoidance. A taxpayer has always been free to mitigate his liability to tax.

Then he quotes the words of the Duke of Westminster's Case, though he adds:

In that case, however, the distinction between tax mitigation and tax avoidance was neither considered nor applied.

He goes on then to make this distinction.

GUMMOW J: Where is the distinction rooted in any legislative language?

MR EMMERSON: A lot of these distinctions - - -

GUMMOW J: We have heard about the Duke of Westminster's Case for a long time now, where is it rooted in some language which is applicable here?

MR EMMERSON: The way it is put, your Honour, is that the language of - - -

GUMMOW J: It just seems to come out of the air. It is about time tax law got back into the words.

MR EMMERSON: We for our part are perfectly happy for that and it is our contention that the submissions that I have been putting are firmly rooted in the language of Part IVA as a piece of legislative enactment and I have been contending at various times in these submissions against reading into section 177D a variety of things which are not there and I have no intention of now changing course and seeking to read things into section 177D. We say that properly - - -

GUMMOW J: Just phrases like "choice principle". It is just not in Part IVA.

MR EMMERSON: Absolutely not, and we say Part IVA means what it says, but nevertheless the way in which Part IVA operates on our submission has some similarities with a distinction which is judge made between tax litigation and tax avoidance and which arises, not under Part IVA, but under broad anti-avoidance provisions where the courts have simply got to read them down to make them work. Now, I put these references to tax litigation simply to show that in other jurisdictions like New Zealand and England similar problems have arisen and, albeit by a totally different route and on a different jurisprudential basis, you nevertheless find that you get the same sort of distinction coming up. His Lordship at letter H says:

Income tax is mitigated by a taxpayer who reduces his income or incurs expenditure in circumstances which reduce his assessable income or entitle him to reduction in his tax liability. Section 99 does not apply to tax mitigation because the taxpayer's tax advantage is not derived from an "arrangement" but from the reduction of income which he accepts or the expenditure which he incurs.

And His Lordship gives a number of examples and says, between letters D and E on 168:

Section 99 does not apply to tax mitigation where the taxpayer obtains a tax advantage by reducing his income or by incurring expenditure in circumstances in which the taxing statute affords a reduction in tax liability.

TOOHEY J: The whole point here surely is that Part IVA nods in the direction of the Inland Revenue Commissioners v Duke of Westminster and says, "Yes, you can order your affairs in any way you like, but if you fall foul of Part IVA, the Commissioner may set aside that transaction so far as it is relevant for the purpose of determining the tax to be paid".

MR EMMERSON: I would, perhaps, take issue with treating that as saying you can order your affairs in any way you like.

TOOHEY J: I am really probably saying no more, Dr Emmerson, than Justice Gummow was saying a moment ago, that we are driven to the language of Part IVA, are we not?

MR EMMERSON: Yes, we are, but Part IVA, we say, involves a test of dominant purpose but it does not allow an artificial dissection of purpose to, as it were, expose tax related elements.

TOOHEY J: That may well be but if that is so it is because of the language of the statute rather than broad statements from other jurisdictions as to what a taxpayer may or may not do.

MR EMMERSON: Yes, your Honour, I accept that. I was not seeking to put forward these cases as a matter of authority because the statutory background is just too different. They are simply examples of a similar result being reached from a very different basis.

KIRBY J: Perhaps these judicial opinions are the very problem that Parliament was addressing in the new approach to Part IVA examples. It was a deliberate attempt to cut away from the whole history of 260, with its long lineage in other jurisdictions and in Australia.

MR EMMERSON: Yes, this would appear to be clear, your Honour.

KIRBY J: Well, what help is there in going to the foregoing law when our Parliament has taken a deliberate and distinct course?

MR EMMERSON: Yes, indeed it is. I do not dissent from that for a moment. The question is: what is the effect of taking that course? Could I take the Court to Brebner's Case (1967) AC 18. Now, it is convenient to look at the section that was there being considered. Again, it is by no means in the same terms as section 177D, but it raises similar matters:

"Where . . . (b) in consequence of a transaction in securities or of the combined effect of two or more such transactions, a person is in a position to obtain, or has obtained, a tax advantage, then unless he shows that the transaction or transactions were carried out either for bona fide commercial reasons or in the ordinary course of making or managing investments, and that none of them had as their main object, or one of their main objects, to enable tax advantages to be obtained, this section shall apply -

In fact, in that particular case, the special commissioners has held that the notice should be discharged because the transactions were entered into for bona fide commercial reasons. Now, Lord Pearce, at page 27, deals with the fact that the broad scheme also achieves a tax advantage and what he says, at letter F, is this:

Admittedly, an object of the carrying out of the broad scheme by way of the resolutions was a tax advantage. But that which had to be ascertained was the object (not the effect) of each inter-related transaction in its actual context and not the isolated object of each part regardless of the others. The subsection would be robbed of all practical meaning if one had to isolate one part of the carrying out of the arrangement, namely, the actual resolutions which resulted in the tax advantage, and divorce it from the object of the whole arrangement.

Now, again, the context is different but we say you cannot isolate, in this case, the tax advantage from the object of the entire arrangement. Lord Upjohn - I am sorry, if the Court pleases, I am conscious that time has been passing and - - -

BRENNAN CJ: We propose to sit until half past four, Dr Emmerson. Is that likely to give you sufficient time to conclude your argument?

MR EMMERSON: I did want to go to some of the matters raised in our learned friend's written submissions. I hope only by, as it were, summary and recapitulation, but it may take us a little bit beyond that.

BRENNAN CJ: Let us see how we go.

MR EMMERSON: If the Court pleases. Lord Upjohn, at page 30 in the paragraph opposite letters E and G, says:

My Lords, I would only conclude my speech by saying, when the question of carrying out a genuine commercial transaction, as this was, is reviewed, the fact that there are two ways of carrying it out - one by paying the maximum amount of tax, the other by paying no, or much less, tax - it would be quite wrong, as a necessary consequence, to draw the inference that, in adopting the latter course, one of the main objects is, for the purposes of the section, avoidance of tax. No commercial man in his senses is going to carry out a commercial transaction except upon the footing of paying the smallest amount of tax that he can.

Now, in our submission, that is pertinent to the present case, where one has a board of directors of a public company, who have got to make an investment with certain time constraints; they need the best possible return and, in our submission, the mere fact that they make the investment in a tax advantaged country, and would not have made an investment on identical terms in a less favourable tax regime, is not itself enough to found a conclusion that the tax advantages are the dominant purpose of the taxpayer in entering the scheme.

BRENNAN CJ: With respect to Lord Upjohn, why is it not logically imperative to draw the inference that, in adopting the latter course, one of the main objects is avoidance, at least, of the maximum amount of tax?

MR EMMERSON: Because what he is dealing with there is the object in entering into the transaction.

BRENNAN CJ: Yes.

MR EMMERSON: He is drawing a distinction between an object in a particular feature of the transaction and an object of entering into the transaction. He says:

No commercial man in his senses is going to carry out a commercial transaction except upon the footing of payment the smallest amount of tax that he can.

BRENNAN CJ: There may be other commercial objects, of course, which would give that validity.

MR EMMERSON: Yes.

BRENNAN CJ: But if there were these two transactions being compared, one of which attracted a maximum amount and the other of which attracted the lesser amount and they chose the lesser amount for the good commercial reasons that he states, I would have thought that it was very obvious that the reason why they chose it was to avoid the maximum amount of tax.

MR EMMERSON: It probably depends, your Honour, on what question you are asking yourself. If you are asking yourself the question, "What was his main object in entering the transaction?", the answer may be, as his Lordship put, but if you ask the question, "Why did he prefer transaction A to transaction B?", then I would, with respect, agree with your Honour. In 177D, of course, the test is not why you choose one transaction than another, but what is your main object in entering into the scheme.

If the Court pleases, the appellant through his counsel has put before the Court a very lengthy written argument. It reached us too late for us to respond in kind, but perhaps I could just refer to some matters in it which will attempt to highlight where we differ from our learned friends in this regard.

KIRBY J: Is this to do with the factual statements or the propositions of law, may I ask?

MR EMMERSON: I thought that in view of the time constraints it might be most convenient if I just went through the thing seriatim picking up points. I agree it is not the most convenient way of organising it.

KIRBY J: It would be helpful at some stage to know whether you contest their statements of fact as distinct from interpretation of a fact and legal character of it.

MR EMMERSON: We certainly contest a number of statements of facts so far as there is a suggestion of artificiality or unreality or sham or whatever it might be. There are two long paragraphs in which our learned friends set out a lot of propositions of fact and I was intending to go to those.

GUMMOW J: And there is a chronology too, a rather lengthy and useful, it seems, chronology of 16 pages. Is that agreed?

MR EMMERSON: No, your Honour.

BRENNAN CJ: What a pity. Would it be satisfactory for you to prepare the variations, at least so far as issues of fact are concerned, identifying the variations by reference either to the chronology or to the paragraphs of the written submissions?

MR EMMERSON: Yes, I could - - -

BRENNAN CJ: And, perhaps, referring us to the page references in the appeal books from which your contentions are drawn.

MR EMMERSON: Yes.

BRENNAN CJ: That may be the most efficient way of dealing with the - - -

MR EMMERSON: I think it probably would. I do not think it is useful for me to, as it were, try to go through the chronology now.

BRENNAN CJ: No.

MR EMMERSON: If it is convenient to the Court I could say something about the outline, or the written submissions, but I think it is pretty clear that I would not be able to deal with all that I would need to say by 4.30.

BRENNAN CJ: I am thinking only in terms of the factual matters of the - - -

MR EMMERSON: Yes. I think the factual matters actually could be picked up reasonably easily. The position between the parties as to the facts is really this, that there is no major issue about credibility of witnesses, and there is no issue as far as I know about the primary findings of fact made by the learned trial judge. The problem is that the learned trial judge and the Full Court both concluded, as the Court is aware, that the transactions that took place in the Cook Islands were real in every sense, that there was no element which allowed one to conclude that they were somehow unimportant. They were, in fact, the principal events that occurred, and the immediately antecedent events in Melbourne were simply facilitating. A lot of our learned friend's submissions are inconsistent with that.

That does not, as we would understand it, involve a real dispute about the underlying facts. It is more a difference of emphasis. That is something which maybe one could deal with compendiously in a paragraph or two.

BRENNAN CJ: If that should be the way in which you seek to deal with it, then let it be so.

MR EMMERSON: If your Honour pleases. Under the heading of the "Predication Test" we would just observe at paragraph 6 that that is where our learned friend starts putting forward the test of whether things have been implemented in a particular way so as to avoid tax. Now that, as will be clear from my earlier submissions, is a point on which we are in major disagreement. We say that the language of 177D is clear. It asks why a scheme was entered into or carried out. It does not ask why it was constructed in a particular way and this is where we say that Part IVA draws a critical distinction between schemes to which the Part applies and commercial transactions in which tax considerations have played a part but they do not provide one with the dominant purpose of entering into, or affecting the incidence of tax.

Our learned friends review a number of the cases, and we do not differ on those. On the matter of the purposes for which Part IVA were introduced, we say simply, on our construction of that part, it achieves the purposes which are set out. In paragraph 21 and following, our learned friends set out what is to be achieved by Part IVA in paragraph 22, quoting from the explanatory memorandum, and then goes on to say:

The Explanatory Memorandum specifically explained that the proposed new Part IVA was "designed to overcome these difficulties and provide - with paramount force in the income tax law - an effective general measure against those tax avoidance arrangements that - inexact though the words may in legal terms be - are blatant, artificial or contrived"

Now, this is an explanatory memorandum and the words used are, by concession, inexact as legal tests. Now, we say that the test in the present case is simply not whether something is blatant, artificial or contrived. I am conscious, your Honour, that the clock is - - -

BRENNAN CJ: I think the time is probably where we might adjourn, Dr Emmerson. The Court has, of course, another matter listed tomorrow. How long would you expect your submissions to take?

MR EMMERSON: Not more than half an hour, your Honour.

BRENNAN CJ: Now, I think perhaps that should be the maximum, and it will be a matter of limiting the time for further oral advocacy to half an hour for you tomorrow morning, and half an hour for you, Mr Shaw.

MR SHAW: I have asked my learned friend, Mr Bloom, to make the reply, if your Honour pleases.

BRENNAN CJ: Yes, well then, for Mr Bloom.

MR SHAW: He is famously short, in any case.

BRENNAN CJ: Very well. The Court will adjourn then until 10 o'clock tomorrow morning.

AT 4.31 PM THE MATTER WAS ADJOURNED

UNTIL FRIDAY, 4 OCTOBER 1996