Commissioner of Taxation v Spotless Services Ltd M32/1996 [1996] HCATrans 403 (4 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 FRIDAY, 4 OCTOBER 1996, AT 10.03 AM

(Continued from 3/10/96)

Copyright in the High Court of Australia

_____________________

BRENNAN CJ: Yes, Dr Emmerson.

MR EMMERSON: If the Court pleases. In answer to a question that your Honour Justice Gummow put to me yesterday about section 14C certificates, the Taxation Administration Act placed certain countries on a restricted list so far as certain transfers of funds were concerned. At the relevant time Hong Kong was on the restricted list and so a section 14C certificate was required. The Cook Islands were not on the list, so no such certificate was required.

GUMMOW J: Thank you.

MR EMMERSON: Your Honour Justice Kirby raised with me a general issue of where the Commissioner's discretion is available to be used in Part IVA cases. A convenient starting point is the decision of the Full Court of this Court in Peabody's Case (1994) 181 CLR 359 at 382. The Court said this at about line 7:

Under s 177F(1), the Commissioner's discretion to cancel a tax benefit extends only to a tax benefit obtained in connexion with a scheme to which Pt IVA applies. The existence of the discretion is not made to depend upon the Commissioner's opinion or satisfaction that there is a tax benefit or that, if there is a tax benefit, it was obtained in connexion with a Pt IVA scheme. Those are posited as objective facts.

The Court then goes on to consider what happens if the Commissioner makes certain errors and says at the bottom of that paragraph:

But the question in every case must be whether a tax benefit which the Commissioner has purported to cancel is in fact a tax benefit obtained in connexion with a Part IVA scheme and so susceptible to cancellation at the discretion of the Commissioner.

So the outcome of this is that so far as sections 177C and 177D are concerned, there is no element of discretion here at all and section 177D does require an objective test to be applied, but an objective conclusion must be reached on the basis of the matters which are set out in that section. The particular matters appear under section 177D(b).

Once those conditions are satisfied, it is at that stage that the Commissioner has a discretion under section 177F. The result of this, in our submission, is that the primary protection to the taxpayer is that given by section 177D. That is the one which we say draws the line between schemes to which Part IVA applies and so in respect of which the Commissioner has a discretion - - -

TOOHEY J: Dr Emmerson, is there any difference between the way that you are putting this matter and the way in which the counsel for the appellant put it?

MR EMMERSON: We would understand not, your Honour, no.

TOOHEY J: No, I would have thought not.

MR EMMERSON: So we say that section 177D is the one that draws the line. The next point, however, is one in which of course we do differ from the appellant because we say it is a line which does not exclude investment in a tax efficient way. The way it works is by looking to see the purpose in entering into a scheme rather than the details of the scheme.

DAWSON J: The trouble with that, Dr Emmerson, is that you.....posit the purpose, the ultimate purpose and, of course, the ultimate purpose is never simply getting a tax benefit, it is making a profit. But there are other purposes which, according to the degree of abstraction, are beneath that purpose and you do not give any indication as to how one should draw the line. I mean, if you took the ultimate purpose in every case, you would never have a tax scheme.

MR EMMERSON: With respect, no, your Honour. If you take the sort of tax scheme of the sort that was around when Part IVA was enacted, what frequently happened was that a taxpayer would go to his accountant, execute a series of documents and claim, as a result of this, a substantial tax deduction, without any other effect on his financial position. Now, in those circumstances, one could easily say that the purpose of entering into that scheme was the avoidance of tax. By contrast, in the present case, if you have an investment which is made in a tax efficient way, then, in our submission, that does not attract, without more, the operation of section 177D, because there - - -

DAWSON J: I do not understand that, because in both situations you are making your investment in a tax efficient way.

MR EMMERSON: Yes.

DAWSON J: It is just in the first case you express that in a pejorative sense, and in the latter you do not. And if you want to take ultimate purpose, the ultimate purpose of both is to eventually make those who engage in it better off.

MR EMMERSON: No doubt the ultimate purpose in all cases is to make the person better off. But where you have an investment which, itself, produces revenue, as in this case, one cannot ignore that as being part of the purpose in making the investment. Indeed, we say - - -

DAWSON J: Well, there the division is between fiscal nullity cases and other cases, but that cannot be so.

MR EMMERSON: In our respectful submission, the line that is drawn is not precisely the line that is drawn under English law in fiscal nullity cases.

DAWSON J: But I am seeking to find out what the line you draw is, and all that I have gained so far is a line which has reference to the ultimate purpose.

MR EMMERSON: No, the line has reference to the purpose in making the investment, and I am distinguishing it from a case in which you do something which is identifiable as a scheme, and you can say the purpose of that scheme is to obtain a tax advantage. That involves there being a set of steps which can be isolated which make sense on their own and you look and you say, "Why has this been done?", and the answer has been, "For the purpose of avoiding tax".

The distinction that is drawn under section 177D is between that sort of case to which the part applies and merely taking into account tax matters so that you invest in a tax-efficient way, and we say that section 177D does not apply. That is where the line is drawn. Indeed, in our respectful submission, it is the only way you can properly draw a line under section 177D because, if you go beyond that and say if there is any tax consideration in the making of an investment the whole thing is struck at in Part IVA, then one is going to apply Part IVA to a vast range of business dealings in which the dealing is an investment but it is carried out in a tax-efficient way. We say that is the distinction that you get.

BRENNAN CJ: Dr Emmerson, is it right to say that the distinction that you seek to draw is this, that 177D is limited to cases in which the scheme seeks to transform a fund or stream of income from a taxable to a non-taxable stream or fund, whereas the present case is one under which or under the scheme in which a non-taxable fund or stream of income is generated?

MR EMMERSON: We agree with the latter proposition. The former proposition puts our case too high. We do not say that it is limited to, as it were, the diversion of a stream because it also covers the case of artificial creation of losses.

BRENNAN CJ: Yes. I am speaking about the paragraph (a) cases.

MR EMMERSON: So there are other matters of this sort, but the proposition that your Honour last put to me correctly states why we say 177D does not apply in this case.

Could I now turn to our learned friends' flow diagrams. I do not invite the Court to look at those because, in our submission, those are irrelevant to the matters that require consideration by the Court. What they show is a variety of actual or possible transfers of funds which it is said took place. In our submission, the only relevant transfers of funds are those to which Spotless itself was a party. The vast majority of the transfers that are shown are ones as to which Spotless was not a party and as to which it knew nothing and, when I say "as to which it knew nothing", I am not suggesting for a moment that it ought to have known anything about it.

The fact is that a banking customer does not ask about the mechanics of a transfer of funds if, as in this case, a customer wants funds made available in the Cook Islands. Then the question that he asks himself is, "Will you make those funds available in the Cook Islands?" If a bank takes responsibility for doing that then the customer is not interested, and should not be required to be interested, in how that was brought about. Equally, if the customer places money on deposit in the Cook Islands, as Spotless did in this case, then, in our submission, it is nothing to do with Spotless how those funds are subsequently invested by the bank. Of course, they are going to be used by the bank to generate revenue. That is the business of the bank, but it is nothing to do with this case. It is no part of the scheme.

In our submission, then, the complexity which, as a matter of just glancing at all these flow diagrams, appears to be present is not a true complexity which is at all relevant to the question which this Court has to decide. It is merely an examination of how funds were transferred to the Cook Islands and what was done with them after they had been placed on deposit there. None of these are matters, in our submission, at all affecting Spotless or which should affect Spotless.

Next, could I deal with our learned friend's chronology. Again, in our submission, much of that chronology is irrelevant because it does not affect Spotless. It is dealing with events to which Spotless was not a party and as to which there is no reason why the taxation position of Spotless should be at all related to those events. We ourselves produced a chronology and that is to be found in volume 4 of the appeal books at pages 835 to 836. Again, I do not propose to take the Court to that now but just draw attention to the fact that that is there and we say that that is a chronology of the events to which Spotless was a party.

Once again then, the reason why we disagree with our learned friends about chronologies is not so much a matter of whether particular facts are rightly or wrongly stated but because we say that the only facts that are relevant are those in which Spotless participated, because ultimately what the Court has got to decide is: what was the dominant purpose of Spotless in entering into the scheme in question?

BRENNAN CJ: Would it be possible to have the page references to the appeal book identified as against that chronology and a revised chronology produced, Dr Emmerson?

MR EMMERSON: I am sorry, your Honour, our chronology is in the appeal book.

BRENNAN CJ: It is in the appeal book with reference to transcript pages but not to appeal book pages.

MR EMMERSON: I am sorry, your Honour, I misunderstood your Honour's question. Yes, of course it would be possible and we would do so. Next, if the Court pleases, there are various matters which have been dealt with in general terms in my oral submissions but which arise out of specific passages in the appellant's submissions, and we would propose to hand to the Court a written response which we have prepared over the adjournment as being the most convenient way to deal with those matters.

BRENNAN CJ: Thank you.

MR EMMERSON: I was not proposing to take the Court through it seriatim because of constraints of time. I did, however, want to say something about some of the statements which are made in the appellant's written submissions about the facts of this case which are said to bear on the conclusion which is the subject matter of section 177D. In our submission, a great many of these matters have no value in the context of this case because they deal with matters which do not go to the purpose of Spotless in making its investment in the Cook Islands. Once it is known that Spotless had the purpose of making a substantial investment for a limited period in a tax-efficient way, then the details that are given do nothing more than show that that purpose was carried out.

For instance, looking at paragraph 64 of our learned friend's submissions, at page 32 of their document, we are told that:

The AUD$40m represented funds obtained by -

Spotless -

and previously held and invested by it in Australia.

Well, it had been recently obtained in a fund raising, and it had been put on short term deposit in Australia, but that has nothing to do with the purpose of Spotless in investing the money.

McHUGH J: Well, can I just interrupt you and get your submission on this because, I must say, it concerns me. If you lose the argument on tax benefit, then the only purpose that you have to have is the purpose of obtaining an amount that might reasonable have been expected to have been included in your assessable income.

MR EMMERSON: That is correct, your Honour.

McHUGH J: Well, once you substitute the word "amount" for "tax benefit" in that section - that is, in 177D - this seems a plain case of dominant purpose, does it not? You have got to have the dominant purpose of obtaining the amount, as in this particular case, the notional amount that might reasonably have been expected to have been included in the assessable income of the taxpayer.

MR EMMERSON: Not so, in our submission, your Honour. The dominant purpose is to obtain a tax benefit. The tax benefit, however, is not the amount, but it is the fact that the amount is not included in the assessable income. Can one try it this way? If you have got, say, an existing revenue stream - - -

McHUGH J: I know what you say about that, but that is what I put to you. Justice Cooper took the view, as I understand his judgment, that the tax benefit here was, in effect, an equivalent amount to the amount that you would have got if you had invested your money in the money market.

MR EMMERSON: Yes.

McHUGH J: Now, if it is that hypothetical amount that one - well, I have this difficulty about the tax benefit in this particular scheme, but assuming for the moment against yourself, that you sort of make this translation between actual amount and hypothetical amount, surely your sole purpose almost was to earn an amount equivalent to interest. It was at least to earn the interest.

MR EMMERSON: Undoubtedly our purpose was to earn the interest, yes, but that, we would say, is not earning the tax benefit because the tax benefit is what occurs to an amount which ordinarily have been expected to be included. I should say, your Honour, as the Court will be aware, this is the one point at which we part company with Justice Cooper because we say there was no tax benefits in this case and that the language of section 177C is simply not apt to describe what occurred here.

McHUGH J: Yes, I know.

MR EMMERSON: Returning to the appellant's written submissions, we would simply invite the Court to look at paragraphs 64, 65, 66 and 70 and to consider this submission, that the great majority of the matters there listed are simply referable to the making of an investment in the Cook Islands. They are not referable to a purpose of obtaining a tax advantage.

Indeed, a good many of them are matters which were raised by the Commissioner in the courts below in order to found an argument that the true source of the interest that was earned was not in the Cook Islands and that is, of course, a matter which was considered by the courts below and rejected and from which there is no appeal to this Court. There is another matter of a general naature which I wish to make about the appellant's written submissions. There are many suggestions throughout those submissions that the transaction that occurred in the Cook Islands was, if not a sham, at least a transaction that did not mean anything, that was not meant to mean anything, it was a mere exchange of paper and so on.

Now, in our submission, that is utterly inconsistent with the findings of the learned trial judge and of the majority in the Full Court and inconsistent with the commonsense of the circumstance that we have here. The Spotless Companies made a major investment. This was an investment with real money. It was a large part of a major capital raising for the companies.

BRENNAN CJ: Now, I think we have really been through that part, have we not, Dr Emmerson? I notice the time.

MR EMMERSON: So do I, your Honour. I will only be another couple of minutes.

KIRBY J: You make these points in the written submissions you have just handed up.

MR EMMERSON: In the written submission, no, we are dealing with the thing by reference to the appellant's written submission. We say, "As to this we say so and so." I just wanted to pull the threads together.

We say we made a major investment, that interest was derived in the Cook Islands, as has been held below, and this is not subject to appeal. Because it was derived in the Cook Islands it attracted the consequences of section 23(q). In our submission, interest and tax regime are not severable. Further, where a taxpayer, as in this case, is looking for the best possible commercial return, the purpose is not severable under section 177D, nor does Part IVA require or permit a case in which what is in truth a single purpose to be treated as if it was a multiplicity of purposes and then the relative importance of those purposes assessed. If the Court pleases.

BRENNAN CJ: Thank you, Dr Emmerson. Yes, Mr Bloom.

MR BLOOM: Your Honours, yesterday your Honour Justice Toohey asked whether there was anywhere else in the Act a situation comparable to the Part IVA situation where there are facts objectively found, and then it is dependent upon a discretion. There are some examples which have bits and pieces of Part IVA but not necessarily all of them. Perhaps the closest example is Division 13 in Part III of the Act. That is an anti-avoidance division relating to international transactions. In section 136AD a similar regime operates with the commissioner empowered to make a determination based on some objective facts, and also on one matter as to which he forms a state of satisfaction, unlike section 177D.

TOOHEY J: Is there any case law on any of these comparable provisions, Mr Bloom?

MR BLOOM: No, your Honour. There is nothing that would assist the Court.

TOOHEY J: Thank you.

MR BLOOM: Your Honour Justice Kirby asked yesterday about the position in other countries.

KIRBY J: I noticed after that, your item 30 which gives some background on the New Zealand situation.

MR BLOOM: Yes, well the position, as your Honour will know, is there have always been general anti-avoidance provisions in Australia and New Zealand. More recently, Canada adopted a general anti-avoidance provision. That was in 1988 in section 245 of their Income Tax Act which also talks about tax benefits and the like. In the United Kingdom there have been some general provisions but in relation to particular sorts of taxes, like excess profits tax during war time and that sort of thing, but generally in the United Kingdom it has been left to the judiciary to deal with matters of tax avoidance in the manner in which the statute is interpreted and, of course, the example at the moment that one can give is the Ramsay doctrine of fiscal nullity which is judge made, not legislation made. The position likewise in the United States - - -

McHUGH J: I thought the Finance Act 1960 in the UK had an anti-avoidance provision in it.

MR BLOOM: No, one gets it only in relation to specific sorts of taxes, not in relation to income tax generally or taxes generally. There is no equivalent to a section 260 or Part IVA or section 99 of the New Zealand Act. In the United States there is no general anti-avoidance provision but it is not necessary, again, having regard to the role of the courts because since the Supreme Court's decision in Gregory v Helvering [1935] USSC 5; (1935) 293 US 465, the courts have formulated various principles such as a business purpose test and they have long preferred substance over form. Indeed, in 1935 the Supreme Court said in that case that one does not exalt artifice above reality because to do so would be to deprive the statutory provision in question there of all serious purpose. So, they have done what the legislature hoped to have done here with Part IVA.

If I might turn to our learned friend's submissions. Our learned friend submitted that our submissions in relation to artificiality were really submissions as to sham. That, of course, is not the case. The submissions as to artificiality go to the matters to be taken into account, in our respectful submission, under section 177D(b), the transaction being otherwise effective. Indeed, if the transaction was a sham there would be no need to invoke the anti-avoidance provisions as this Court made clear in Jaques' Case [1923] HCA 70; (1924) 34 CLR 328, the relevant passage being at 358 to 6.

Your Honours, in our submission, the aspects of artificiality and non-commerciality are relevant to a consideration of the matters to which 177D(b) refers. Now, his Honour Justice Lockhart never got to that, because his Honour, in effect, was hamstrung by the decision of the Full Court of the Federal Court in Peabody's Case and so did not get around to the questions on Part IVA, having regard to the fact that the scheme was different to that which had been identified by the Commissioner. And on the position of the law, as it then applied, he did not need to get to that.

But in this case, your Honours, before the impugned scheme, the $40 million was invested in Australia, with Australian banks, earning interest in Australian dollars - admittedly on the short-term money market - but it was so invested for about four months - three to four months. The investment with the Cook Islands, your Honours will recall, was no more than six months, because the Cook Islands benefit, the 23(q) benefit, was due to run out on 1 July 1987, and the moneys were invested in December.

Now, in that earlier investment in the short-term money market in Australia, there was a price for the security of borrower and exchange, and that price was Australian tax. Now, the scheme with which we are concerned involves yet again moneys being paid over by the respondents in Australia, a deposit in Australian dollars, interest in Australian dollars, security from a reputable bank which is enforceable in Australia, and the deposit is repaid locally. Now, only two things have changed; the interest rate is lower, but the price that was previously being paid, namely, Australian tax, is not being paid.

The sole question is whether, having regard to the provisions of Part IVA that is the terms, in this case, of 177D, the attempts by this scheme to get out of the operation of Australian tax is the price for all these things, has been successful. There is no dispute, your Honours, about the existence of a scheme. We have dealt with that in our written submissions. Nor is there a dispute, as all the members of the Appeal C

ourt below found, about tax benefit. The reasonable expectation is that the moneys would have continued to be invested in Australia in the short-term money market, and the taxpayers would have derived appropriate interest.

Now, section 177C, which deals with tax benefit in terms of reasonable expectation, is there to permit what section 260 did not allow, that is, hypothetical reconstruction. That is the very purpose of it, is to address that which was so much of a problem in the law concerning section 260, namely, that if you did not have an antecedent situation or transaction you could not make section 260 work because, if you set something aside, there was nothing there that gave rise to a liability.

DAWSON J: In a sense that is so here. What is the amount that would have been included here?

MR BLOOM: The interest that would have been obtained on the short-term money market if they had continued to invest in Australia on the short-term money market as they had before. That is the tax benefit.

DAWSON J: Not the interest they actually earned?

MR BLOOM: No.

GAUDRON J: Less the interest they actually earned?

MR BLOOM: No. What the Commissioner has done, in fact - because you will see, your Honours, under section 177F that in the exercise of his discretion the Commissioner can include all or any part of that tax benefit - he has actually gone for the lower amount. He has not sought to include the higher amount, but the tax benefit is the higher amount, in our submission, and what the Commissioner has included is a part of that higher amount.

McHUGH J: This is where I have a serious problem because I understand how you construe 177C, but if the tax benefit is the hypothetical amount, how does 177D then work, because you have got to say that he entered into the scheme for the purpose of obtaining the hypothetical amount? Well, that is not what he did.

MR BLOOM: No, your Honour, and in this respect I am able to agree, with respect, with my learned friend, Dr Emmerson. It is to avoid the non-inclusion of that amount - I am sorry, to achieve the non-inclusion, to avoid the inclusion, because if one looks at 177C(1)(a), which is the one we are here concerned with, the reference to tax benefit is not just an amount, it is "an amount not being included in".

McHUGH J: I know, but the amount for the purpose of this case must be a hypothetical amount.

MR BLOOM: Yes, your Honour.

McHUGH J: For practical purposes we say it is the amount that would have been earned in Treasury bills.

MR BLOOM: Yes.

McHUGH J: Well, now, how do you translate that into the words "to obtain a tax benefit", unless you do some surgery? He did not enter into the scheme to obtain the amount that he would have earned in treasury bills.

MR BLOOM: He sought to obtain the non-inclusion of that amount in his assessable income.

McHUGH J: Where do you get this word "non-inclusion" from?

MR BLOOM: Out of the words of the statute, with respect, your Honour, 177C(1)(a), "an amount not being included". I mean, I said "non-inclusion". Your Honour is right. The words are "not being included". It is the non-inclusion, with respect, if I may use that term, that is the benefit.

McHUGH J: Then you are introducing another concept of non-inclusion. You are not introducing a concept of a hypothetical amount.

MR BLOOM: No, no. The hypothesis, if one likes, is the reasonable expectation. What this Court said about it in Peabody is that it is what was reasonably expected.

McHUGH J: No, not "what was reasonably expected". You have got to tie yourself down to the words "an amount". Everything else in paragraph (a) is adjectival.

DAWSON J: Yes, but it describes the amount.

MR BLOOM: Yes.

DAWSON J: The amount is a hypothetical amount under (a) because it is not only an amount which would have been included, but one which might reasonably be expected to be included.

MR BLOOM: I think one has to read the whole of (a). That is right, with respect, your Honour.

TOOHEY J: It need not be hypothetical.

MR BLOOM: It could be.

McHUGH J: No, it could be an actual amount, but for the purpose of this case you have to bring yourselves within the "might reasonably be expected" limb, and, therefore, we are dealing with a hypothetical amount. How do you make D work then?

MR BLOOM: Your Honour, it works because if, when one goes through the tests in relation to the eight matters in 177D, the conclusion is that the dominant purpose was to secure the non-inclusion of that actual hypothetical amount.

McHUGH J: Now, you have changed the concepts. You have changed "non-inclusion" from the word "amount" which uses words such as "inclusion" in an adjectival sense.

DAWSON J: You see, D talks about obtaining a tax benefit.

MR BLOOM: Yes.

DAWSON J: Well, it would hardly obtain an amount which would have been included, or might reasonably be expected to be included.

MR BLOOM: No, what one obtains is the situation that that amount is not included. That is what one obtains. I mean, if one steps back and looks at what we are looking at.

McHUGH J: That is why you have got to do some surgery on this section, I think.

MR BLOOM: Your Honour, we say with respect that those words "an amount not being included"- - -

McHUGH J: "An amount" is the core, is the key concept; the rest of the paragraph (a) is adjectival.

BRENNAN CJ: Do you say "amount" is anything different from a figure?

MR BLOOM: No, your Honour; a figure or an amount of income. Another way of looking at it and the way we have tried to approach it in our written submissions, your Honours, is to say, looking at the idea of section 177C being to permit reconstruction to permit the situation that was not permitted with section 260, you really look at the derivation of that which you might reasonably be expected to have derived as, in this case, the hypothetical antecedent transaction and you look at what was done as being to side-step out of that which would have happened, that hypothetical antecedent transaction and, if you look at it that way, the question then is, were these steps, as taken, when put through the sieve, if one likes, of section 177D, such as to lead to the conclusion that the dominant purpose was to get out of that situation and into this. That is really what we see Part IVA is intended to do.

Like our learned friends, we do seek to get something from the cases concerned with section 260, because if one looks at the extrinsic materials at the time that Part IVA was being introduced, the treasurer of the time made it abundantly clear that what was trying to be done was to fix up all the defects in interpretation of section 260. Inability to reconstruct was one of them and that is, as we say, is addressed by section 177C.

DAWSON J: But you do have to read, "to obtain a tax benefit" in the last part of D as saying, "to include or exclude an amount which otherwise would have been included" and you read it that way and then F makes sense, because you put it back in.

MR BLOOM: Yes, I accept that one cannot take, as his Honour Justice McHugh has pointed out - - -

DAWSON J: Obtain is not a suitable way, having regard to the definition of "tax benefit".

MR BLOOM: It is difficult to describe, of course, the sorts of things which one is trying to get to in an anti-avoidance provision like this, but a strict interpretation of these words, of course, is not going to assist in giving them force and effect. Words in such an anti-avoidance provision are intended to operative with respect to every sort of matter and in that respect, of course, we say that they are not limited as section 260 was, to a case where you have an existing stream of income, an existing real antecedent transaction - the hypothetical reconstruction is permitted here - nor are they limited to the 1970's paper schemes, Curran and the like. They will catch those of course, but the intention is that this group of sections will be sufficient to deal with modern-day schemes to avoid tax, and they cannot be - - -

McHUGH J: Yes, but it is not up there in the sky somewhere or other; it is there on a bit of paper, and you have to apply it to the facts and the Commissioner is seeking to apply it to the section 23(q) situation.

MR BLOOM: Yes, and a section 25 situation, if I may say so, because the hypothetical reconstruction is derivation of assessable income under section 25, and that is reasonably expected.

McHUGH J: He could use his powers under section 177F(2) - put it in.

MR BLOOM: Yes, and that is what he has done here.

McHUGH J: Yes.

MR BLOOM: Looking at it in those terms, that is exactly what is happening. That was what one expects would have gone into the assessable income. If the scheme is one whose dominant purpose answers the description in section 177D, the Commissioner is entitled to exercise his discretion under - - -

McHUGH J: I know. I like to start with the text and see what is implied in the text.

MR BLOOM: I appreciate that and your Honour is absolutely right. The words are infelicitous, but nonetheless the meaning, in our respectful submission, is clear.

GUMMOW J: Why is not the phrase "an amount not being included" a composite phrase....., is it not?

MR BLOOM: Yes, your Honour.

GUMMOW J: .....

MR BLOOM: Yes, Mr Shaw says your Honour is absolutely right, with respect. I use the term "non-inclusion", however, and it is true that precise word is not there.

Your Honours, it is in looking at the eight matters under section 177D that, in our submission, these questions of artificiality and commerciality arise. The badges of tax avoidance, in our submission, are no less relevant to a Part IVA case than they were to section 260. The cases on section 260, so far as they deal with those sorts of matters and not the matters where Part IVA has corrected the law, if one likes, are still relevant. In particular, the predication test of Lord Denning in Newton's Case; that, according to the extrinsic materials is the position that was sought to be regained by Part IVA - it being the view of the time that that position had been attained at one stage and then subsequently lost. Assistance is also obtained from the judgment of your Honours the Chief Justice and Justice Dawson in the Gulland, Watson & Pincus trilogy.

Again, if i might just remind your Honours that at 160 CLR 81 your Honour the Chief Justice notes the presence, to use your words, "in greater or less degree" of a whole lot of other purposes. Yet, your Honour, in determining there the section 260 applied, the matter which was relied upon was the artificiality of the means of implementing the arrangement. That artificiality in relation to any one or more of the specific things mentioned in section 177D is, of course, relevant. It has nothing to do with where the source is. The source is accepted to be in the Cook Islands. The question now is whether the steps taken to achieve that are artificial and non-commercial so that that may be taken into account in relation to section 177D(b)(i) and (ii) in particular, in looking to see what was the dominant purpose for the purposes of that section.

Your Honours, if I might turn to some matters of fact, and very briefly, the evidence that there was no telegraphic transfer to the Cook Islands is referred to in our written submissions at paragraph 64 at page 32 and in that regard the significance that we place - - -

DAWSON J: Is it that there was no evidence of telegraphic transfer or - - -

MR BLOOM: No evidence of telegraphic transfer.

DAWSON J: - - - or evidence of no telegraphic transfer?

MR BLOOM: There was no evidence of it, and when, I think, Mr Kuegler was asked, "Were the moneys telegraphically transferred?" I think he said he did not know and he could not - he said no.

BRENNAN CJ: But does that matter? I mean, if the relationship of debtor and creditor was created, does it matter?

MR BLOOM: Well, what matters is this, your Honour. The offer, on page 316 of the appeal book, was capable of being accepted by the handing over of a cheque in the Cook Islands; not a cheque that would be met, not a cheque based upon an account with funds, but the handing over of a cheque. Now, the courts below found that the offer was accepted by that act - that conduct in the Cook Islands and, therefore, there was a source in the Cook Islands. But what we point to is that not only was no account opened, in particular, no account was opened in the name of the bank upon whom the cheque was drawn, but there were no funds in any account to meet that cheque.

BRENNAN CJ: But that is not right, is it?

MR BLOOM: Yes, your Honour, with respect.

BRENNAN CJ: $40 million was paid to MIS, with authority to pay it to EPBC.

MR BLOOM: Yes, EPBCL.

BRENNAN CJ: Quite, yes. And, in fact, as between the taxpayers and EPBC and EPBCL it was treated as though the money stood to the credit of Spotless with EPBC. And, as against that credit, the cheque that was handed over in the Cook Islands was drawn.

MR BLOOM: Well, except on an account that had not been opened.

BRENNAN CJ: Well, it may be that the account was not opened, but the relationship of debtor and creditor existed.

MR BLOOM: That Spotless had handed over its bank cheque for 40 million is not doubted. But if one had gone to a bank account to meet this cheque - and assume it was drawn on the right bank, which it was not - there were no funds there in the bank to meet that cheque, and none were ever put there.

BRENNAN CJ: Well, either that cheque was effective to make the deposit with EPBCL or it was not.

MR BLOOM: Your Honour, the point we make is the handing over of it was the effective act. That was the conduct.

BRENNAN CJ: Be it so, it was the conduct.

MR BLOOM: Yes.

BRENNAN CJ: Was it effective to achieve the purpose for which it was intended?

MR BLOOM: Yes, your Honour.

BRENNAN CJ: Well, then, what does it matter, except as part of what you might regard as the artificiality.

MR BLOOM: That is the only purpose for which we use it.

BRENNAN CJ: That is on the only purpose.

MR BLOOM: That is the only purpose.

GUMMOW J: I think it goes to 177D(b)(i), that is it.

MR BLOOM: Yes, your Honour, and (ii), form and substance.

GUMMOW J: And (ii), yes.

MR BLOOM: Yes, and that is all, your Honour. I am sorry, that is all we seek to get from it.

BRENNAN CJ: I see, yes, I am sorry. I did not understand.

MR BLOOM: And absolutely no more. Now, the significance, your Honours, that we place on the information memorandum is that nowhere in it was it contemplated that there would be an actual transfer of funds and, in our submission, the information memorandum does not lose its overall relevance - it was found, indeed, by Justice Lockhart to be part of the scheme - merely because the respondents sought in certain respects to improve the security of their position by having a stronger letter of credit payable in Australia and by appointing their own officer as attorney to go to the Cook Islands instead of appointing a resident of the Cook Islands, otherwise it was exactly what the information memorandum talked about. It was just that these taxpayers, being sensibly obsessed for a time with the security aspects, improved upon it, but its relevance is not lost.

Your Honours, the evidence that there was no bank account in the Cook Islands properly opened is dealt with in our written submissions at page 36 paragraph (xv) and (xvi), and at page 34, paragraph 64(b). Your Honours, our learned friend took your Honours to Justice Lockhart's judgment at page 957 and referred to what is set out there in a few pages as constituting his Honour's findings of fact. Indeed, that is not the case. They were what they purported to be, namely, a summary of the facts. The actual findings of fact by his Honour occupy nearly 30 pages commencing at appeal book 930.

Your Honours, our learned friend also suggested a certain ignorance on the part of the respondents to the banking transactions. Now, save as to what was disclosed in the information memorandum and the annexures to it, including the Stephen Jaques letter as to the participation of others, that may be the case and we do not query it, but Spotless undoubtedly knew that there was no time for a telegraphic transfer of funds at the point where Mr Levy in the Cook Islands handed over the cheque. Now, the trigger for the handing over in the Cook Islands of the cheque was the handing over of the cheque in Melbourne, which the evidence discloses was followed by an immediate telephone call to say, "We have got the cheque in Melbourne and you can now hand over the cheque in the Cook Islands."

So there was no time for a telegraphic transfer and that was clear from the way the events proceeded and that emerges from passages in the appeal book at 844 - it is the transcript - 866 to 867 and 905. I should also add, your Honours, that the appellant submitted below and we submit here that the respondents must show that under section 177D one would not reach the conclusion as to dominant purpose of any party to the scheme, that includes the Cook Islands banks, and our submissions in that regard are in our written submissions and they are at the top of page 45 of those written submissions.

Your Honours, finally, we have redone those flow charts so as to attempt a clear distinction between that which we know happened, that is actual movement of funds, and that about which we have just made assumptions. Might I hand those to your Honours? All that has really happened, your Honours, is that solid lines in some cases have become dotted lines so that it is made clear the distinction that we seek to draw. If your Honours please, those are our submissions.

BRENNAN CJ: Yes, thank you, Mr Bloom. The Court will consider its decision in this matter.

AT 10.59 AM THE MATTER WAS ADJOURNED