Prestige Motors Pty Ltd as Trustees of the Prestige Toyota Trust v Commissioner of Taxation S43/1998 [1998] HCATrans 279 (7 August 1998)

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Sydney No S43 of 1998

B e t w e e n -

PRESTIGE MOTORS PTY LTD AS TRUSTEE OF THE PRESTIGE TOYOTA TRUST

Applicant

and

COMMISSIONER OF TAXATION

Respondent

Application for special leave to appeal

GAUDRON J

McHUGH J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 7 AUGUST 1998, AT 3.50 PM

Copyright in the High Court of Australia

MR D.H. BLOOM QC: May it please the Court, I appear with my learned friend, MR A.J. PAYNE, for the applicant. (instructed by C.R. Fieldhouse)

MR J.W. DURACK SC: May it please the Court, I appear with my learned friend, MR S.J. McMILLAN, for the respondent. (instructed by the Australian Government Solicitor)

GAUDRON J: Yes, Mr Bloom.

MR BLOOM: Your Honours, the special leave question here is whether the loose words of a specific anti-avoidance provision in the Income Tax Assessment Act may be construed by reference to the mischief which the provision was intended to remedy.

GAUDRON J: Well, may be "restricted"?

MR BLOOM: Yes.

GAUDRON J: "Read down"?

MR BLOOM: Yes.

GAUDRON J: And it is not "may be" but "must be" in your submission, is it not?

MR BLOOM: Well, I was using that permissively. Whether there is some rule that applies differently - - -

GAUDRON J: Well, why would there be? Why does not one start with the proposition that they are given their natural and ordinary meaning?

MR BLOOM: Because of the consequences of a drastic kind which flow if that happens and if I might demonstrate those I will. The Commissioner says that although the legislation proceeds upon an assumption that there is some connection between the present entitlement and the defined term "reimbursement agreement", that a present entitlement here of $9.8 million could be taxed at the penal rate, notwithstanding that the amount that goes under the reimbursement agreement is $4.6 million and, indeed, his point is it would not matter if it was .46 million, and he - - -

GAUDRON J: That is a separate point, is it not?

MR BLOOM: No, your Honour. No, that is the point of construction because what he says is that if a taxpayer plays with fire he burns his fingers.

GAUDRON J: Let us go to the words, the precise words of the Act.

MR BLOOM: Page 112 of the application book, if your Honour please.

GAUDRON J: What words does the Commissioner say attracts the whole of the present entitlement, or draws tax to the whole of the present entitlement?

MR BLOOM: There are two aspects in respect of which we say - two essential elements, one of them spoken about in the extrinsic material as "the essential element" of such schemes would require a reading down of the words. The first is in relation to section 100A(1) and we would have it read, as indeed the trial judge did, as applying only to a beneficiary introduced into a trust estate. That is the first - - -

GAUDRON J: Well, those words are not there, are they?

MR BLOOM: They certainly are not. Your Honour, we get all of this from the extrinsic materials, and we have - - -

GAUDRON J: You only have regard to extrinsic material, do you not, if there is some ambiguity or uncertainty?

MR BLOOM: Well, your Honour, this Court has said - Saraswati is an example of that - I think Justice McHugh - that if the result is so drastic that it could not have been intended by the legislature then that is itself a ground for reading differently and if need be, reading words in or words out, and that is all we seek to do. The real question is, is there some special rule that says because this is a section specifically directed against a sort of tax avoidance that you cannot apply that rule. Your Honours should have amongst the materials which we filed, an extract from Jacobs' Law of Trusts. Do your Honours have that at hand?

McHUGH J: Yes.

MR BLOOM: It is the first of the documents that was filed and under the heading, "Reimbursement agreements" in paragraph [2911] the authors say:

Section 100A is designed to recapture revenue lost by so-called "trust stripping" schemes. As first introduced in 1979 -

and that is how your Honours are concerned with it -

it provided, in broad terms, that a beneficiary (otherwise presently entitled and not under a legal disability) was deemed not to be presently entitled to trust income if his entitlement arose from a "reimbursement agreement". That concept was loosely defined as an agreement, arrangement or communing which was entered into otherwise than in the course of ordinary family or commercial dealing and which provide for payment of money to persons other than the beneficiary, or for the transfer of property to or provision of services for such persons. The mischief that provoked the legislation was the introduction of a presently entitled beneficiary (which did not pay tax because.....into arrangements whereby other persons effectively secured enjoyment of the major part -

and that is the second aspect -

the major part of the trust income in tax free form.

Now, if your Honours go to the extrinsic materials which are at page 110, that second element is spoken about not just as an element but as the essential element. At the bottom of page 110:

The essential element common to the schemes is that, while the income concerned is effectively freed from tax in the hands of the nominal beneficiary, the terms of the underlying arrangement ensure that the beneficiary does not enjoy anything like the full use or benefit of the income. Instead, the arrangement, requires a broadly equivalent capital sum - but reduced by the promoter's fee and a modest reward.....to be directed to persons intended all along as the real beneficiaries of the trust.

At the bottom of page 111 - - -

GAUDRON J: There, of course, he was talking about the schemes that have already come to notice.

MR BLOOM: Yes.

GAUDRON J: And, he was not talking about the purpose of the legislation, as such, but the nature of the matters that had been brought to attention.

MR BLOOM: Well, that is right, but, we are dealing here with a specific anti-avoidance provision in an Act which contains a general anti- avoidance provision. The specific anti-avoidance provisions which are from time to time introduced into the Tax Act are there to deal with specific schemes. Now, if it is desired to catch schemes other than those, then one uses either the general provision or brings in another specific provision.

GAUDRON J: Yes, but, we are talking about schemes which involve a reimbursement agreement.

MR BLOOM: Yes.

GAUDRON J: Or specific schemes that involve a reimbursement agreement?

MR BLOOM: No, schemes which involve a reimbursement agreement.

McHUGH J: And, was not the general anti-avoidance provision practically a dead letter in 1979 and again in 1981?

MR BLOOM: I am sorry, what provision, your Honour?

McHUGH J: The general avoidance provision, 260. It was practically a dead letter when this section was introduced and amended.

MR BLOOM: Well, it had a bit of a resurgence in this Court, your Honour will recall.

McHUGH J: But after 1981?

MR BLOOM: Yes, when Part IVA had been introduced as an even better anti-avoidance provision.

McHUGH J: That is right.

MR BLOOM: But, specific provisions are still being inserted and they are still being inserted with wide and loose wording and the sort of thing that is said about them when complaints are made about the wide words is that, "Well, we, the Commissioner are to be trusted; we will only tax those that are ugly". Your Honours know beauty is in the eye of the holder and if it is the Commissioner of Taxation who, as in this case asserts, the tax avoidance is akin to some sort of treasonable offence that entitles confiscation, as I will show your Honours, then, that is a very good reason for reading down the words of specific anti-avoidance provisions. Your Honours, Professor Parsons said at the time of the section's introductions that in order to avoid unintended and drastic results of the kind that our learned friends contend for the word "reimbursement" should be given some work in that definition "Reimbursement agreement".

McHUGH J: You do not rely on that, do you?

MR BLOOM: I do.

McHUGH J: On reimbursement?

MR BLOOM: Yes. Because of this concept of major part or broadly equivalent.

McHUGH J: It is a bit difficult to give its ordinary meaning because it is defined in subsection (7).

MR BLOOM: But it is defined so widely It is any agreement under which a payment is made.

McHUGH J: I know it is defined widely and that is why, talking about having regard to mischief and so on, it does not get you anywhere. The words are very wide and are obviously intended to be wide in their operation.

MR BLOOM: But there has to be some certainty, your Honour, even in relation to the Tax Act.

McHUGH J: You will not get much certainty by going to explanatory memorandums and trying to work out some principle there.

MR BLOOM: If the Commissioner comes along and says, "I can actually use this section to achieve a drastic result" then that is a reason, just as it was in Saraswati, for reading the section's wide words in a different way.

GAUDRON J: Saraswati was a criminal statute, was it not?

MR BLOOM: This is a penal provision.

GAUDRON J: Yes, but we were actually dealing with a criminal provision in an ordinary criminal act.

McHUGH J: And a specific provision and a general provision.

MR BLOOM: Yes, and it was not necessary to go to explanatory memoranda to help there. Here it is. And, here, in my respectful submission, it is legitimate to do so.

GAUDRON J: Well, you ask this Court to read down a definition, do you?

MR BLOOM: Yes, the wide words - - -

McHUGH J: That is a real novelty.

MR BLOOM: Yes, because of the consequences. Because of the consequence here. The Commissioner can say that as long as connected with the present entitlement there is an agreement to pay or pay or transfer $1 to somebody, the whole of that present entitlement can be taxed at penal rates. That is his case.

McHUGH J: Now, what are the words that you say have to be read into the section now?

MR BLOOM: Well, if your Honours go to subsection (7) on page 113, we would add the words at the end of that subsection - that is the definition of reimbursement agreement - "effectively, as a reimbursement or quid pro quo for the present entitlement".

McHUGH J: That does not sound like an exercise of judicial power, that sounds like an exercise of legislative power.

MR BLOOM: It is no part, as your Honour has said, himself, of the Court's function to legislate and I do not ask the Court to do that but what I do ask is that a construction of the statute be adopted which is consistent with the mischief - with the evil which was intended to be attacked and it is only by, in this instance - - -

GAUDRON J: I have some difficulty with the argument. Why does not one assume that a definition says what it means and means what it says and particularly in a definition that the legislative intent is for the word to mean exactly the way in which it defines it?

MR BLOOM: Because, your Honour, if satisfied that the consequence of doing so is harsh and Draconian - - -

GAUDRON J: I might have that view at a subjective level about a variety of legislative enactments but the real question is, what did the legislature - well, I think the real question - I do not think it serves any purpose to ask what did the legislature intends when you are talking about definitions. You have really got to ask what do the words mean.

MR BLOOM: Yes, but in the context of the whole of section 100A, what was the mischief, what was the evil and how do you read the section to avoid Draconian and unreasonable results but to achieve the purpose. That is an exercise which has been undertaken by the court in other contexts.

GAUDRON J: When there is uncertainty. Now, in Saraswati there was uncertainty as to which provision operated. It is very difficult to say there is uncertainty in terms of a definition which happens to be broader than you would like it to be.

McHUGH J: Yes. If subsection (7) had not been in the Act at all then the argument that you want to put would be very important. One would be construing subsection (5), for example, against the background of what the Minister had said and you might use that to give content to the term "Reimbursement agreement" but here the legislature has gone out of its way and it has told you what it means by "reimbursement agreement".

MR BLOOM: But, your Honour, both in Cooper Brooks and in Saraswati, improbability of result has been said to be, of itself, a basis for not reading the words of the legislation literally, and that is all I am asking to be done here, improbability of result. And one judges improbability of result by two things. First of all, the Draconian nature of the result contended for and, secondly, comparing that to the intention.

McHUGH J: It would not matter how Draconian something might appear under this legislation, it would not strike me as not being intended by the legislature.

GAUDRON J: Particularly in the area of trusts.

MR BLOOM: And particularly in the area of tax avoidance which is regarded as some sort of treason, I appreciate that, your Honour, and therefore entitling, perhaps, a thought, at least on the part of some, of confiscation. But, your Honours, these pieces of legislation go into being with discussion always taking place around them and it is in those circumstances that those who are responsible for having them there, the Commissioner, say to people, "Don't worry, the wide words will not be applied. It is a particular thing that we are trying to get." Now, if we do not come to the court and have the court keep them honest in that respect - - -

McHUGH J: You can only call "wolf" once and if the Commissioner makes these statements and then acts contrary to them, well, next time he is not going to get away with it.

MR BLOOM: Well, we cannot confine him administratively, your Honour, in relation to those sorts of statements, and in this case that does not help my client.

GAUDRON J: The statements do not help.

MR BLOOM: Your Honour, the extrinsic statements do but can I just say one thing of importance here? Firstly, the trial judge was prepared to read the section down by reference to the first element, that is the introduced beneficiary, because that did not happen here. The Full Court, it would seem, was very concerned about the second element because they only at the end of the day proceeded to find the section applied because based on a finding of fact not open to them, namely that the figure was $7 million instead of $4.6 million.

McHUGH J: Well, you say that. Your opponent says that you did not dispute what was in the folder.

MR BLOOM: Your Honours, what happened in that regard is that the $7 million figure is a total of interest paid on a number of loans. The $4.6 million was the figure agreed to have been paid in respect of the assigned loan and the assigned loan only is that which is subject of the reimbursement agreement as particularised, reparticularised in an infinitesimal number of times. But, what has happened is that the court has not appreciated that. I mean, the few agreed facts were neither exhaustive nor intended to deal with how much of the interest related to the reimbursement agreement. That figure was agreed and your Honours have seen from the exchange between myself and Justice Hill, which is in the application book, that when the Commissioner was permitted, on his feet, on the appeal, to amend his particulars, it was upon the clear understanding that the figure was 4.6 and that was a very important thing because had he said it was 7 million we would have opposed even more strenuously any change to his particularisation and the court would either have had to send it back to have that matter dealt with or refused him leave to do so.

So, the court, in order to get to this concept of major part or the bulk, as they said, which are the terms both used in the explanatory memorandum, they found a fact wrongly. Had they found the fact to be 4.6 then the likelihood is that they, too, would have read the section as inapplicable, just as the trial judge had, but on the basis of the second element, not the first. So, your Honours, what the Commissioner says when it comes to the question of, say, a very small amount being paid under the reimbursement agreement but an entitlement to tax, the full $9.8 million, his answer to that appears at page 171. Your Honours see there paragraph 9.

In opening the case before his Honour the primary Judge, Senior Counsel for the Applicant -

that is myself -

said after describing the arrangements the subject of the appeal that: "Your Honour, those events involve unquestionably the acquisition of control of a loss company and the utilisation of the loss company's losses.

Can I interpolate there, your Honours, that was $2.4 million; not $9.8 million, $2.4 million.

That was what was intended from the outset."

Now, he then says:

In relation to a taxpayer in pursuit of such an objective -

this is using losses of a loss company -

Lord Greene MR, delivering the judgment of the King's Bench Division in Lord Howard de Walden v IRC [1942] 1 KB 389, said at p397 "it scarcely lies in the mouth of the taxpayer who plays with fire to complain of burnt fingers."

GAUDRON J: So be it. Let us deal with the legal issues involved.

MR BLOOM: This is the harsh and Draconian consequence. In England itself that decision has been described by the Court of Appeal as extremely harsh.

GAUDRON J: And do you say that there is some particular construction that bears on this difference between the $4.6 million and $7 million?

MR BLOOM: What we say is that if you read it by reference to the extrinsic materials that is requiring the major part or a broadly equivalent sum to go out under the reimbursement agreement you do not have the Draconian results for which the Commissioner contends.

GAUDRON J: And where do you read that in? At what point do you read that?

MR BLOOM: In explanatory memorandum?

GAUDRON J: No, in the legislation.

MR BLOOM: Into the definition in 100A(7).

GAUDRON J: So, that is covered by your "except" et cetera?

MR BLOOM: Yes. "Effectively as a reimbursement or quid pro quo for the present entitlement" and there is an alternative way of reading the section which is the way the trial judge did it which is to read into 100A(1) a limitation that applies only to an introduced beneficiary.

GAUDRON J: Yes, well, that would not deal with the differential.

MR BLOOM: It would not but it would most certainly not deal with this sort of case, so - - -

McHUGH J: Yes, but you see, when you are talking about Draconian consequences, you cannot overlook section 100A(8) or (13).

MR BLOOM: Certainly.

McHUGH J: Under subsection (8) it does not apply to agreements not entered into for tax avoidance purposes and subsection (13) protects agreements entered into in the ordinary course of family arrangements, does it not? It is not set out there.

MR BLOOM: Yes, your Honour.

McHUGH J: Yes, or commercial dealings. Well, does not that tell against your arguments?

MR BLOOM: Well, no, your Honour, because - - -

McHUGH J: The legislature obviously wanted to throw the net as widely as it could and it specifically excluded the matters in (8) and (13).

MR BLOOM: But here there is a situation where tax is imposed of penal rates on an amount which is entirely disproportionate. It is the disproportion that we really focus on and one might say in circumstances where the amount of alleged reimbursement has itself been the subject of tax.

McHUGH J: Yes, I know.

MR BLOOM: So, double taxation, penal rates of taxation, the Act already provides for penalties of its own in other sections, late payment penalties, other sorts of penalties - 223 - punishment penalties. I see my time is up, your Honour, but if I may just simply encapsulate it in one sentence: the explanatory memorandum provides sufficient ground in this case, in our respectful submission, for reading down the section and in circumstances in which the dictum in Saraswati would authorise it to be done. If your Honours please.

GAUDRON J: Thank you, Mr Bloom. We need not trouble you, Mr Durack.

We are of the view that there is no error involved in the Full Court's construction of section 100A of the Income Tax Assessment Act. Accordingly, special leave is refused.

You cannot resist an order for costs, can you?

MR BLOOM: No, your Honour.

GAUDRON J: It is refused with costs.

AT 4.12 PM THE MATTER WAS CONCLUDED