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High Court of Australia Transcripts |
Sydney No S127 of 2000
B e t w e e n -
COMMISSIONER OF TAXATION
Appellant
and
CONSOLIDATED PRESS HOLDINGS LIMITED
Respondent
Office of the Registry
Sydney No S128 of 2000
B e t w e e n -
COMMISSIONER OF TAXATION
Appellant
and
MURRAY LEISURE GROUP PTY LIMITED
Respondent
Office of the Registry
Sydney Nos S132 and S133 of 2000
B e t w e e n -
CPH PROPERTY PTY LIMITED
Appellant
and
COMMISSIONER OF TAXATION
Respondent
GLEESON CJ
GAUDRON J
GUMMOW J
HAYNE J
CALLINAN J
TRANSCRIPT OF PROCEEDINGS
AT CANBERRA ON TUESDAY, 12 DECEMBER 2000, AT 10.16 AM
Copyright in the High Court of Australia
MR B.J. SHAW, QC: If it please the Court, I appear with my learned friends, MR G.T. PAGONE, QC, MR G.J. DAVIES, QC and MR M.K. MOSHINSKY, for the Commissioner of Taxation. (instructed by the Australian Government Solicitor)
MR D.H. BLOOM, QC: May it please the Court, with MR R.F. EDMONDS, SC, I appear with my learned friends, MR A.J. PAYNE and MR J.H. MOMSEN, for the respondents in the first matter and the appellant in the second matter. (instructed by Gilbert & Tobin)
GLEESON CJ: Mr Shaw, have you and Mr Bloom worked out an agreed division of time between you?
MR SHAW: No.
GLEESON CJ: Maybe at the luncheon adjournment you can have a talk about that and, if it necessary to deal with the matter by agreement, you can make such an agreement.
MR SHAW: Certainly.
HAYNE J: Just before you begin, Mr Shaw, I understand the parties have been informed that I hold a small parcel of shares in Publishing and Broadcasting Limited. I understand also from the Senior Registrar that, having advised the parties of that fact, neither party has any objection to my participating in the matter.
MR SHAW: That is so, certainly so far as we are concerned, your Honour, and my learned friend says so too.
If the Court pleases, in the Commissioner's appeals, the first and primary question is the meaning of section 177E of the Income Tax Assessment Act 1989 . If I could take the Court to that section.
GLEESON CJ: There is a slip in the first line of the judgment of Justice Hill, is there? He says that the appeals concern the years of income ended 30 June 1990 and 30 June 1991. He should have included 30 June 1989?
MR SHAW: Yes, your Honour. If the Court pleases, the section reads:
(1) Where:
(a) as a result of a scheme that is, in relation to a company:
(i) a scheme by way of or in the nature of dividend stripping; or
(ii) a scheme having substantially the effect of a scheme by way of or in the nature of a dividend stripping;
any property of the company is disposed of;
(b) in the opinion of the Commissioner, the disposal of that property represents, in whole or in part, a distribution.....of profits of the company (whether of the accounting period in which the disposal occurred or of any earlier or later accounting period);
(c) if, immediately before the scheme was entered into, the company had paid a dividend out of profits of an amount equal to the amount determined by the Commissioner to be the amount of profits the distribution of which is, in his opinion, represented by the disposal of the property referred to in paragraph (a), an amount.....would have been included, or might reasonably be expected to have been included, by reason of the payment of that dividend, in the assessable income of a taxpayer of a year of income; and
(d) the scheme has been or is entered into after -
a particular date -
the following provisions have effect:
(e) the scheme shall be taken to be a scheme to which this Part applies;
(f) for the purposes of section 177F, the taxpayer shall be taken to have obtained a tax benefit in connection with the scheme that is referable to the notional amount not being included in the assessable income of the taxpayer of the year of income; and
(g) the amount of that tax benefit shall be taken to be the notional amount.
Section 177F provides that:
(1) Where a tax benefit has been obtained, or would but for this section be obtained, by a taxpayer in connection with a scheme to which this Part applies, the Commissioner may -
make certain determinations. While I am referring to that specific provision which relates to dividend stripping, may I take the Court to the more general provisions of the Part. In section 177A there is a definition of "scheme", and a statement in subsection (5) with a reference to purpose. It means if there was more than one purpose, a dominant purpose. In 177C there is a definition of what obtaining a tax benefit means for the purposes of the Part. In section 177D it is provided that:
This Part applies to any scheme.....whether the scheme has been or is entered into or carried out in Australia or outside Australia or partly in Australia and partly outside Australia, where:
(a) a taxpayer.....has obtained, or would but for section 177F obtain a tax benefit in connection with the scheme; and
(b) having regard to -
the number of matters which are set out there -
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 -
So, I am drawing attention to those provisions in order to point out to the Court that there is, in the Part, a reference to "purpose" and that purpose is the conclusion reached, or to be reached, having regard to a number of specified matters. It is a conclusion about the sole or dominant purpose of somebody who entered into or carried out the scheme, not a reference to the sole or dominant purpose of the scheme.
Now, the Full Court - and if I could go to volume 9 of the appeal book at page 2297at paragraph 174 - comes to the conclusion that that:
the first limb of s 177E(1) embraces only a scheme which can be said objectively to have the dominant (although not necessarily the exclusive) purpose of avoiding tax.
The first limb is the limb which is a reference to a scheme in the nature of dividend stripping. Then, at page 2300 in paragraph 184 the Full Court concludes:
that a scheme is not within the second limb unless the dominant purpose of the scheme is that of a tax avoidance -
and on that basis found against the Commissioner. So, the first question is whether the Full Court was right in saying that 177E does not operate unless the sole or dominant purpose of the scheme of dividend stripping is the purpose of tax avoidance.
At first instance, Justice Hill had not come to those conclusions; he came to a conclusion something rather like it, in relation to the first limb, saying it was a question of what is the "essential character" in the scheme. That is at page 2182 but, in relation to the second scheme he said purpose was irrelevant. What was relevant was effect, and that is at page 2184 and 2186.
GLEESON CJ: Mr Shaw, I would like to understand a little better than I do at the moment by reference to the facts in relation to the two respondents, how the process of assessment proceeded. Once you conclude that there is a scheme of "dividend stripping", to put it shortly, then you have to find that, as a result of that scheme, property of the company is disposed of, and then you have to have the opinion of the Commissioner that the disposal of that property represents a distribution of profits of the company.
MR SHAW: Yes.
GLEESON CJ: How did those provisions relate to the facts of the cases in relation to these two respondents?
MR SHAW: Your Honour, what happened was there were two United Kingdom companies, Consolidated Press International and Consolidated Press International Holdings. Each of them was incorporated in the United Kingdom, but not resident there, and the consequence of that was that they were not taxable in the United Kingdom.
GLEESON CJ: What do you mean by "they"?
MR SHAW: I mean the two United Kingdom incorporated companies which were not resident in the United Kingdom. The Chancellor announced measures which, if introduced, would, in due course, become taxable in the United Kingdom. At about the same time, measures were announced in Australia which related to the taxation of foreign income of subsidiaries of Australian companies, and it looked as it that would have the possible effect that the UK companies might either be taxed twice or, if not taxed twice, would be taxed in a way which would mean that when dividends were declared, franking credits were not available in relation to the dividends, and that gave rise to a question about what might be done in relation to the UK companies.
All the shares in the two UK companies were held by the two companies, Consolidated Press Holdings and Murray Leisure Group. They were incorporated in Australia and taxable in Australia. As I said, they held all the shares in the United Kingdom companies, so that any dividend declared by the United Kingdom companies would fall into their hands and be taxable here and would not get any rebate or franking credits or whatever.
It was then decided that the appropriate course to take was to seek to preserve the position not of the UK companies but of the profits to be derived from the assets of the companies by moving those assets offshore. When I say "offshore", I mean offshore of the UK. It was decided to move them into a Bahamian company called Consolidated Press International, which is apt to have a "(B)" after it in order to distinguish it from the UK companies which have "(UK)" after them.
Steps were taken which are described in our outline. If I could take your Honours to page 2, the announcements that I have referred to are referred to in paragraph 6. In paragraph 9 what is described is the decision to put the UK companies into liquidation and to declare dividends payable on 8 May and the total of the amounts of those dividends, as your Honours will see, is, in the case of CPIL, $US100 million and, in the case of CPIHL, $US53 million.
There were available profits out of which those dividends could be declared. The position of the companies is described in paragraph 16. CPIL had net assets of $550 million and CPIHL had net assets of about $190 million. The shares in the UK companies were agreed to be sold by CPH and MLG to the Bahamian company. That is referred to in paragraph 12. The shares were sold and the dividends were declared before the sale and purported to be paid afterwards, not in cash but by transfer of debts.
GLEESON CJ: Am I not right in thinking that the declaration was that the dividends would be paid to whoever were the members on 8 May?
MR SHAW: Yes, your Honour, and a direction was given after the declaration by CPH and MLG to the liquidators to pay the dividends to CPIL Bahamas.
GLEESON CJ: That was the company that was entitled to the dividends according to the resolution.
MR SHAW: No, it was not that the - - -
GLEESON CJ: It was not the member on 8 May?
MR SHAW: No, your Honour, no. If I might interpose there, your Honour, a question arose about whether or not the directors, in fact, had power to declare the dividend and his Honour Justice Hill thought that did not matter because either way there was an actual declaration or there was a distribution of assets which had the same effect as if there had been a proper declaration. We sought to argue that even if the directors did not have the power, the declaration was sanctioned by the members and was, accordingly, valid, but his Honour did not think it was necessary to decide that, and none of these questions were decided by the Full Court because they decided that it was necessary, in order that section 177E should operate, that the sole or dominant purpose of the scheme should be the obtaining of a tax benefit. The scheme did not have that sole or dominant purpose and, accordingly, the Commissioner could not succeed and so they did not go on to any of the other questions.
GLEESON CJ: Now, applying those facts to the provisions of 177E, first of all, the company referred to in paragraph (a) is each of the two UK companies.
MR SHAW: Yes, your Honour.
GLEESON CJ: And what is the property of the relevant company that is disposed of?
MR SHAW: It is the dividends, your Honour. If your Honour looks in paragraph 177E(2), a disposal of property includes payment of the dividend.
GLEESON CJ: Yes. So, it is the payment of the dividends to the Bahamian company?
MR SHAW: Yes.
GLEESON CJ: Then the Commissioner formed an opinion under paragraph (b).
MR SHAW: Yes.
GLEESON CJ: That that represented a distribution of profits of each company?
MR SHAW: Yes, your Honour, and perhaps if I could interrupt your Honour there?
GLEESON CJ: Yes.
MR SHAW: On that matter, which was not a matter to which the Full Court went, Justice Hill concluded that the formation of that opinion was defective and invalid.
GLEESON CJ: Why was that?
MR SHAW: It was because of the terms of the determination report. His Honour said that the person in the Commissioner's office who formed the opinion had wrongly looked at the net assets of the company and treated them as if they were profits and that was looking at the wrong thing.
GLEESON CJ: There was also a question of combining the assets of the company, was there not?
MR SHAW: Partly that, yes, your Honour.
GLEESON CJ: What did the delegate do in that regard?
MR SHAW: Our submission is, first of all, he clearly formed an opinion in relation to each of the companies before any possible pooling happened and the opinion he formed, in our submission, is an opinion about profits. It is true that the words say "net assets" but it is, in our submission, perfectly clear that the report was referring to that part of the net assets which was profits.
GLEESON CJ: Where do we find this process of opinion formation and determination?
MR SHAW: Your Honour, you will find it in volume 5. If I could take the Court to volume 5, 1191, your Honour will see that that is the first page of the determination report. It commences with a description of the sequence of events and the Court will see that on that page No 5 is the declaration of one of the dividends and on the next page No 10 is the declaration of the other of the dividends. At page 1196 at line 16 it is said:
A vehicle entity [the stripper, CPIL(Bahamas)], acquired shares in the target companies [CPIHL(UK) and CPIL(UK)]. These companies have either accumulated a current year's profits that are represented by cash or other readily realisable assets. This is reflected in their balance sheets dated 10 May 1990 when the dividends of $100M and $53M US are added back.
The vendor shareholders received shares in the stripper, CPIL(Bahamas) in lieu of receiving a payment.....
CPIL(Bahamas) in effect drew off the profits by having paid to it a dividend totalling 153M US from CPIL(UK) and CPIHL(UK). These dividends were not subject to tax in the Bahamas.
Then, going over to the next page, that is 1197, and this is the passage which his Honour said contained the fatal fault:
Paragraph (b) of sec. 177E(1) contains a further requirement that, in the opinion of the Commissioner, the disposal of the relevant property represents, in whole or in part, a distribution to a shareholder or another person of profits of the company. This will occur in the accounting period in which the disposal occurred or any earlier or later accounting period.
The Commissioner contends that there was sufficient profits out of which the dividend could have been paid.
In support of the above, it should be noted that the net assets of the two companies [after adding back the dividends of $153M to CPIL(Bahamas)] from their Balance Sheets dated 10 May 1990 were:
CPIL(UK) 86, 456,205 US$
CPIHL(UK) 103, 282,414 US$
GLEESON CJ: What is the point of that aggregation?
MR SHAW: Your Honour, there is no point.
GLEESON CJ: What was its relevance to the process of determination of the delegate?
MR SHAW: In our submission, it had none, but assuming it did, it is perfectly clear that what is being said is that there were a particular amount of net assets of each of the companies. This is a conclusion reached before the pooling or the addition of the two. The report goes on:
Further, when the dividend is deemed to have been paid out of profits, the Commissioner contends that at the time, it is not necessary for there to be sufficient profits available for the payment of a dividend.....
It is the Commissioner's contention that the above net assets of both companies represents profits available for distribution.
Then the opinion is expressed over on the next page, your Honours, at about line 10:
In summary, it is the Commissioner's opinion that the payment of dividends pursuant to s 177E of $153M US or $201,156,980 AUS in total to CPIL(B) -
the Bahamian company -
represents a distribution of profits of CPIL(UK) and CPIHL(UK).
So, it is clear that the opinion was formed, but if one looks - I have already pointed out to the Court that the net assets of the companies were not the amounts which appear on page 1197, but were - and this is in paragraph 16 of our outline - $550 million and $186 million.
Now, the balance sheets are in volume 7, first of all at 1808, and that is Consolidated Press International as at 10 May and it will be seen that the net assets are $550 million. It will also be seen that there was in the profit and loss account at that time, which is 10 May, $3 million-odd. That is the last line but one of the balance sheet.
The Court will see that there was in the balance sheet an amount due to Group companies of $131 million-odd, and this is after the declaration of the dividend, and accordingly includes the amount of the dividend. If one goes over to CPIHL, which is at 1837, one sees again that the net assets are $186 million-odd, the amount in the profit and loss account is $33 million and there is an amount due to a Group company of $53 million. One sees on the next page, 1838, the last item, that liability is a liability to the Bahamian company and that is the amount of one of the dividends.
GLEESON CJ: If I could go back to pages 1191 and 1192, I thought you said a little earlier that the disposal of property in each case was the declaration of a dividend.
MR SHAW: Yes, I did, your Honour.
GLEESON CJ: On page 1191 at line 36 there is a reference to CPIHL declaring a dividend of 53 million. Is that one of the disposals of property?
MR SHAW: Yes, your Honour.
GLEESON CJ: On page 1192 there is a reference to CPIL declaring a dividend of $US100 million. Is that the other disposal of property?
MR SHAW: Yes, your Honour.
GLEESON CJ: Does that not explain why the pooling is going on? If you relate those two numbers appearing respectively on 1191 and 1192 to the numbers on 1197, you need to pool, do you not?
MR SHAW: Well, your Honour, you do not.
GLEESON CJ: Just take CPIL. CPIL, according to page 1192, line 35, declared a dividend of $US100 million, which I suppose is about $A140 million or whatever.
MR SHAW: Yes.
GLEESON CJ: It did not have what are referred to as net assets of that amount.
MR SHAW: No, your Honour, it had net assets on that calculation of 103. What has happened is that the two have been transposed.
GLEESON CJ: No, of 86, did it not?
MR SHAW: It does say that, yes, your Honour. If I could take your Honour back to the CPIL balance sheet at 1808, your Honour will see that there is $3 million-odd in the profit and loss account. If you add to it $100 million from the amount due to the Group companies in respect of the dividend, you get the figure which appears at page 1197 beside CPIHL(UK). If you do the same in respect of CPIHL, if you look at page 1837, you add to the amount in the profit and loss account of $33 million-odd the dividend of $53 million-odd, you get the figure which appears beside CPIL(UK).
GLEESON CJ: So, on page 1197, between lines 15 and 20, there are two mistakes. The word "assets" should be "profits", and they have transposed CPIL and CPIHL, is that right?
MR SHAW: Yes, that is right, your Honour.
GLEESON CJ: Well, now, let it be assumed that that is right, and just concentrating on CPIL for the moment, it declares a dividend of $US100 million, which is $A140 million, or something.
MR SHAW: Yes.
GLEESON CJ: CPIHL declares a dividend of $53 million.
MR SHAW: Yes, your Honour. So assuming that I am right about the net assets which are referred to there are net assets which represent the available profits in each case, for which there must be some such explanation because, as I have pointed out to the Court, the net assets are in fact vastly in excess of those sums. In one case, it is half a billion dollars or more than half a billion dollars. So, it is obviously not all the net assets that are being referred to. One gets a situation in which a conclusion has been formed about each of the companies that there were sufficient profits to support these dividends.
GLEESON CJ: And the aggregation was just a - - -
MR SHAW: It does not matter, no, because it is clearly a conclusion that there is enough there in each case for the declaration.
GLEESON CJ: Your argument is that what appears between lines 15 and 20 on 1197 is just a distraction.
MR SHAW: No, your Honour, not that it is just a distraction, but that between 15 and 20, there is a formation of a view about the available profits of each of the companies. It is true that the names have been transposed and it is perfectly clear what is meant when one refers to the actual balance sheets. The conclusion that was come to in the case of each was a conclusion which meant that there were available profits sufficient to support the dividends. That shows that the conclusion expressed over on page 1198 is fully supported by the facts. It is perfectly true that there has been the addition of the two on page 1197 but, in our submission, that is neither here nor there. In that sense, that bit of it is a distraction, but not all of it is a distraction.
GAUDRON J: You do not make anything of what appears at lines 20 to 23 inclusive?
MR SHAW: No, your Honour.
GAUDRON J: So that is a distraction.
MR SHAW: That is a distraction. Your Honour, I am not submitting that the formation of the opinion is expressed in perfect terms, but I am submitting that when you look at what is said in the light of what are clearly the facts, it is abundantly clear that an opinion was formed about each of the companies and that, although a slip has been made in that the two companies' names have been transposed, that conclusion was, in the case of each of them, that there were profits available which were sufficient to support the declaration of each of the dividends.
GLEESON CJ: Which is really neither more nor less than what each company was purporting to do; that is, pay a dividend out of profits.
MR SHAW: Yes, quite.
HAYNE J: Well, are we to understand that the relevant Companies Law, applicable to these companies, was of the kind we are familiar with?
MR SHAW: There was not any evidence about UK law, but the evidence was that the directors thought that there were sufficient profits to declare the dividends, and that will be found in volume 1 at page 81 at lines 26 to 30. The position is, your Honour, it is submitted, just exactly what one would expect, that the directors thought there were profits and declared dividends out of them, it is as simple as that.
GUMMOW J: There was then a distribution of assets, was there not?
MR SHAW: There were two distributions of assets, yes.
GUMMOW J: Yes, one in each - - -
MR SHAW: By "two", I mean two in each company: a distribution for the dividends and a distribution on the liquidation, as it were, yes.
GUMMOW J: Yes, it was the second I was - yes.
MR SHAW: Yes, there was.
GUMMOW J: Now it is said against you that that has some significance for a notion of stripping, the fact that there were these two steps.
MR SHAW: Your Honour, it is submitted that - I do not know whether it would have mattered if there was only one step, because of section 47, but there were, in fact, two steps, so that it bears more clearly the stamp of dividend stripping than it would if there were not, but if I could go back to the question which your Honour asked me about the facts and how they relate to this question of dividend stripping, I explained the circumstances out of which the transactions arose.
GLEESON CJ: There is one other aspect of the facts, is there not? Am I not right in thinking that one of these companies, I think it was CPIL, was substantially overcapitalised as a result of the fact that the takeover bid for BAT did not go ahead?
MR SHAW: Well, your Honour, there is another fact which I have not mentioned, but it is not that one, and it is a fact which his Honour Justice Hill thought was relevant, was that one of the companies - I cannot remember which - CPIL, had a deficiency in shareholder's funds, and although it had sufficient current year profits to support the declarations of dividend, there were deficiencies in shareholder's funds, and his Honour thought that, in those circumstances, you could not have a dividend strip.
GLEESON CJ: Was not one of the concerns, however, that a large amount had been injected into CPIL to enable it to provide funds to a Singapore company, which was to be used as the vehicle for a takeover which ultimately did not proceed, and I presume part of the purpose of the exercise was to get the money back?
MR SHAW: No, because the money did not come back and, indeed, had dividends been declared on the shares which CPH and MLG owned in the UK company, some of the money would have come back, but it did not. All the monies went to the Bahamian company and our submission is that the fact that you have a company reorganisation taking place really does not conclude the question of whether or not there is involved in the reorganisation a dividend strip - - -
GLEESON CJ: Actually, a scheme by way of dividend strip.
MR SHAW: A scheme by way of dividend strip - because what is perfectly clear is that what was desired was to preserve all the assets for the purpose of earning future profits and if dividends had been declared, there would have been a large amount of tax payable on the amount of those dividends, and the assets, to that extent, would not have been available any more to earn future profits.
GLEESON CJ: What, in your submission, is either, (a), necessary, or (b), sufficient, to constitute a scheme by way of dividend stripping.
MR SHAW: Your Honour, it is, in our submission, not possible to give a final description of what is and what is not a dividend strip because the form of it keeps on changing. But if I could take the Court - if I could hand up to the Court copies of an article that was referred to both in the Full Court and by Justice Hill by Mr Vincent. It is an article which was written in 1989 and if I could just explain to the Court the structure of the article. On page 82, he commences to go through the English cases and he concludes that examination on page 86, and draws a conclusion about what the English authorities show.
Then, on page 87, he commences to examine the Australian cases about it and he does that for the next four or so pages, and at page 92, in the first column, about two-thirds of the way down, he draws conclusions about what they show about what a dividend strip is. Then, at page 92, in the second column, about a third of the way down, there is a heading "Consolidated Conclusion from the Anglo-Australian Authorities", and this is set out by the Full Court in their judgment. The author says:
A condensation of all the foregoing cases reveals, that the Imperial and Antipodean Courts have only attributed the expression dividend stripping to an arrangement, which exhibited all of the following features:-
1. The acquisition of shares in a ("target") company by a party: whether by a sale from the existing members, or via an allotment thereto from the target company.
2. The payment of a dividend, or a liquidator's distribution, to the purchaser out of target company profits: whether pre or post acquisition; and whether distributed immediately, or over a period of time.
3. The purchaser claiming not to be taxable upon the distribution received thereby. This claim may have ensued from -
then there are all sorts of various reasons which are given -
4. The vendor shareholders, or the target company, obtaining a capital sum not substantially less in monetary terms than the quantum of profits distributed to the purchaser.
GLEESON CJ: Just applying 3 to the present case, the purchaser is the Bahamian company, is that right?
MR SHAW: Yes, not taxable. Then, omitting the next 10 or so lines, right at the bottom of the page the author says:
However, I submit that for there to be a dividend stripping scheme, then the factors denoted in clauses 1 and 2 must be present; and the condition designated in clause 4 must also be applicable - at least to the extent of obtaining consideration.
Upon this point there is, in my view, no necessity that the consideration received -
to -
be either capital in their hands, or approximately equate with the quantum of profits -
and then he discusses why that is so and he gives an example about two-thirds of the way down. Then he says a little bit further down:
I am also strongly of the view that the fiscal implications for the stripper.....are not of consequence insofar as identifying a dividend stripping operation is concerned.
Then he goes on and discusses various sections in which dividend stripping is used in the Act. There is not only 177E, but also a significant number of other sections dealing especially with the position of the stripper, but he makes clear what his position is in relation to "purpose" on page 96. In the first column, at about point 4 on the page he says:
Whilst the parties may be at arm's length -
and he is referring to an example he has given -
and a tax avoidance purpose plays no part in the transaction, those factors are not - as previously indicated - relevant to the application of section 177E.
So his conclusion is that the tax avoidance purpose is not relevant and that the cases show the position which he spells out at page 92 in the second column. After discussing what the cases show, he comes to the conclusion which I read out from the bottom of page 92, the second column over on the top of page 3.
What we submit, your Honours, is that we satisfy either of those series of tests. It is true that there is not a capital sum, but there is the capital shares; the vendors received the shares. So that, in our submission, however one looks at it, the tests which the authors suggest are satisfied here and we would submit, if the Court pleases, that if you have a scheme, a significant element of which involves the acquisition of shares in a company with a view to obtaining the profits of that company, either accumulated or anticipated, and then those profits are obtained, it is highly likely there will be a dividend stripping-scheme.
GUMMOW J: What is the force of the word "stripping"? It has a pejorative ring to it.
MR SHAW: Not in all circumstances, your Honour. I think it is this, your Honour, that what one has in mind is that here is this company with a sum of accumulated profits or anticipated profits, whatever they might be, and the stripper is going to denude the company of those, to a substantial extent. I mean, one can have, of course, partial undress as well as complete nudity and stripping would include both.
CALLINAN J: Not to use the profits for an orthodox business purpose and to pay them, perhaps without regard to any future utility that they might have for the company in an ordinary business pursuit.
MR SHAW: Well, your Honour, the presence of that element may be an element which will assist one to the conclusion but, in our submission, is not necessary. I mean, there are so many thing which - - -
CALLINAN J: No, but that might answer the description of "dividend stripping", that is all I am suggesting.
MR SHAW: Yes.
GUMMOW J: There is no suggestion that there is any violation of any company law principles in any of this?
MR SHAW: No. If I could go back to where I was, or more or less to where I was. I had submitted to the Court that the first significant thing in looking at this question of sole or dominant purpose of the scheme is that it seemed strange that one has in 177D a reference to "purpose". There is none in 177E, and yet, a more substantial purpose is required by judicial interpretation of dividend stripping scheme in 177E than there is in 177D.
If I might take the Court to the accompanying material to my learned friend's outline of submissions, there is included in that at the back the explanatory memorandum and second reading speech relating to the introduction of Part IVA and if I could go first to the first page of the explanatory memorandum. The reason I do that is to remind the Court of the provisions of the previous general provisions relating to anti-avoidance, section 260. My friend has put numbers on the pages and it is page 29. It will be seen that section 260 provided:
Every contract, agreement or arrangement.....shall so far as it has or purports to have the purpose or effect of in any way, directly or indirectly -
and then, if you look at (c):
defeating, evading, or avoiding any duty or liability imposed on any person by this Act -
So that section 260 was draw in terms of, amongst other things, avoiding tax or tax avoidance. The avoidance which was provided by section 260 was an avoidance of an arrangement so far as it has "the purpose or effect" of tax avoidance. It is not a requirement that the arrangement have the sole or dominant purpose of tax avoidance. So, again, one has the preceding section which was thought to be unsatisfactory providing for purpose but in terms much less onerous than those which the Full Court has found appropriate in relation to a dividend-stripping scheme.
If I could then take the Court to the second reading speech, the page I want to go to is at page 54. In the second column at the top of the page, the first full paragraph, Mr Howard says:
What is it that general anti-avoidance provisions should aim to achieve? Few people have faced up squarely to that question.....We are acutely aware that the term `tax avoidance' means different things to different people. Reasonable men and women are bound to differ on this crucial question and on the subsidiary matter of the appropriate tests for determining what behaviour a general anti-avoidance provision ought to proscribe.
Then going to page 55 - - -
GLEESON CJ: Do you say the next paragraph has any significance, the one beginning with the words "The proposed provisions"?
MR SHAW: Your Honour, the whole of what the Treasurer said is a matter of significance, it is submitted, because what it makes perfectly clear is that the terms of section 260 were found to be unsatisfactory in their operation and what was being sought to be done was avoid any test of tax avoidance because that had been found to be unsatisfactory, and yet the Full Court has reintroduced it in a more extreme form. It would be wearisome if I read it all out. I was going to go to page 55 where reference is made to the definitions of "tax benefit" and at about point 6 on the page in the middle of the paragraph that begins "The other form of tax benefit covered by the Bill" and so on, the Treasurer says:
This approach - of specifying in the new provisions what constitutes a tax benefit and that the relevant purpose for application of the provisions is one of obtaining such a benefit - should help to eliminate some of the uncertainties associated with the use in section 260 of less precise expressions.
That section uses phrases that speak of `altering the incidence of any income tax' and `defeating, evading or avoiding any duty or liability imposed on any person by this Act'. These very wide, but uncertain, expressions appear to have been at the root of the development by the courts of the so-called `choice principle', a rule of interpretation which, together with other established defects, has greatly limited the scope of section 260.
There are two other significant limitations on the effectiveness of section 260 which the new Part can be expected to remove. The present section does not permit the purposes of the persons entering into an arrangement to be inquired into, except by reference to the effect of the arrangement itself.
Then it refers to some other defect. In the next column at about point 3 on the page the Treasurer says:
I draw to the attention of honourable members that Part IVA contains a supplementary code applicable to schemes that are commonly called dividend stripping - and to similar schemes - under which shareholders in effect receive company profits in a tax free form, in substitution for taxable dividends. The reason for such specially tailored provisions within the new general measures is to be found in particular features of such schemes when viewed in the context of the structure it has been necessary to give to the basic provisions of Part IVA. It is this: When profits have been accumulating in a company, possibly for extended periods, there will be no clear answer to the question whether those profits might reasonably be expected to have been distributed as dividends if the scheme had not been entered into. As often as not, that expectation could not be established to exist. Where this is so - and despite the fact that the company had been stripped of profits - the result under the basic provisions would be that there is technically no `tax benefit' -
and so on.
So, what was being said is, it is submitted, that here we have these general provisions which do not use the test of tax avoidance, but even those general provisions are not, in the form they are enacted, adequate to deal with the problem of dividend stripping, so we have to have a wider provisions to deal with that. The effect of what the Full Court has done is to make the test of purpose in relation to dividend stripping much more difficult to meet than it was under section 260.
If I might then go back to page 41 in the explanatory memorandum, at that page, the explanation of section 177E is commenced. At page 42, the first complete paragraph:
Schemes of the kind to which section 177E is directed could on occasions come within the general ambit of section 177D, but section 177E is needed for situations where, for example, although profits are in fact stripped from a company -
and then he deals with that question I referred to, the matter that I read about in the second reading speech. But in the next paragraph the explanation goes on:
Also, without section 177E Part IVA may not operate to counter a dividend strip carried out in relation to current-year profits of a company, where tax purposes other than those of avoiding tax on dividends may also be present.
So, it seems to be expressly said, it is submitted, that 177E is being enacted, amongst other things, to catch circumstances in which it cannot be said that there is a sole or dominant purpose of a tax avoiding kind. Yet, the Full Court has found that to be necessary.
If I might then draw the Court's attention to Newton's Case (1958) 98 CLR 2. That is a case which, although it was not described as a dividend-stripping case at the time, has subsequently been described in that way. I shall not read the description of the facts because it is very complicated, but if I could take the Court to page 9, at about point 5 on the page, Lord Denning, delivering the opinion of the Privy Council, says:
Next, what was the purpose of the arrangement? It can clearly be seen to be three-fold: (i) To increase the capital of the motor companies - and to do it by ploughing back over [sterling]1,000,000 of the profits into the businesses - and to do it in a way which would attract as little tax as possible. (ii) To enable the original shareholders to receive a large sum - nearly [sterling]500,000 in cash - without paying tax on it. (iii) To enable the Pactolus company -
that was the stripper -
to make a handsome profit in return for its part in the affairs.
At page 10 at point 1 on the page, his Lordship says:
It is clear from this analysis the avoidance of tax was not the sole purpose or effect of the arrangement. The raising of new capital was an associated purpose. But nevertheless the section can still work if one of the purposes or effects was to avoid liability for tax. The section distinctly says "so far as it has" the purpose or effect.
And that view of the section was adopted by this Court in Gulland [1985] HCA 83; 160 CLR 55, and the relevant passages are in the judgment of Chief Justice Gibbs at page 67, where he refers to what he said in Hollyocks' Case in 1971. The reason I have referred to that is that Gulland is 1985, which is after the enactment of Part IVA, and the other relevant judgment is the judgment of Justice Dawson at page 105, where his Honour says the same. So it is clear that section 260 does not require a sole or dominant purpose and it is submitted further that when one looks at other dividend-stripping cases one finds dividend stripping in circumstances where there was no purpose of tax avoidance.
If I could take the Court first of all to the twin cases of Hancock [1961] HCA 90; 108 CLR 258 and Rowdell [1963] HCA 61; 111 CLR 106. The reason I call them twin cases is that Rowdell was the stripper, which was involved in the Hancock Case, although other cases as well as the Hancock Case were involved in the Rowdell Case, but the Hancock Case was also involved in it. The target company, if that is the right word, in the Hancock case, was a company called Mulga Downs and that was a company in which the Hancocks held shares and so did a family called the Lefroys. The Lefroys held the majority of the shares, something over 11,000 out of almost 19,000. The Hancocks held something like 7,000/7,500, something like that. So the majority of the shareholders were not the Hancocks, but the Lefroys.
A transaction took place, which is described in the headnote of the Hancock Case, which resulted in all the shares, both the Lefroys and the Hancocks, being purchased by Rowdell, the company being stripped of profits, that is Mulga Downs being stripped of profits, and all of the shares were sold back to the Hancocks, so that it ended up with the Hancocks owning the whole of Mulga Downs.
It was held that section 260 applied to the Hancocks but it did not apply to the Lefroys. It did not apply to the Lefroys because all the Lefroys had done was to sell their shares for a capital sum. So we had a transaction which involves some people who had a purpose of tax avoidance - that is the Hancocks - and other people, the Lefroys, who did not. In the case of the Hancocks, their dominant purpose was not to avoid tax, it was to attain all the shares in Mulga Downs. But, nevertheless, the transaction with the Hancocks was struck down by section 260. If one looks at page 272, 108 CLR, in the judgment of Justice Fullagar, at the bottom of the page, the fact that the Lefroy transactions were not affected by 260 is referred to by his Honour at the bottom of that page and the top of the next page, and what his Honour says there is confirmed by what is said by Justice Menzies, on appeal.
GLEESON CJ: What does Justice Fullagar mean by it "is no more than a genuine unconditional sale of a capital asset"? The word "genuine" is intended by way of contrast with what?
MR SHAW: I think what is meant, your Honour, is this, that if all you do is have something and sell it, and that is all there is to it, and there are not any strings attached, like you get something back, or whatever, as the Hancocks did because they sold their shares and got them back again, if you simply have a sale of an asset, you will not be able to find that 260 applies. But where you have the extra elements that were in relation to the Hancocks, you might or, in fact, did.
GLEESON CJ: That is what I am interested to understand. What precisely was the difference between the Hancocks and the Lefroys?
MR SHAW: Well, the difference is, your Honour, that in the case of the Lefroys, all they did was sell the shares which they had for [sterling]40,000 and that was the only transaction there was.
GLEESON CJ: Just like a person selling shares cum dividend.
MR SHAW: In some circumstances it might be. But in the case of the Hancocks, there was a sale of the shares under an arrangement which involved the sale of the shares, the agreement that there should be the stripping off of the dividends and the sale back.
GLEESON CJ: Yes.
MR SHAW: At pages 291 to 292, his Honour Justice Kitto says, on the third-last line of page 291:
One may accept without hesitation their stoutly-maintained assertion that in their minds the arrangement was predominantly a means for getting in the Lefroy shares. That was, no doubt, their longstanding ambition. It was that which drew them into the arrangement when it was proposed to them. But the stubborn fact remains that, for whatever else the arrangement was a means, it was a means for the avoidance of tax.
I am referring to that to demonstrate that in this dividend-stripping case the sole or dominant purpose of the Hancocks was not the avoidance of tax.
GLEESON CJ: No, but it is also interesting to understand why there was no tax-avoidance purpose on the part of the Lefroys.
MR SHAW: Yes.
GLEESON CJ: It would not have made a difference if part of the attraction of the deal to the Lefroys was that they did not have to receive dividends and pay tax on the dividends.
MR SHAW: No.
GLEESON CJ: That is often part of the attraction to a person who sells shares cum dividend.
MR SHAW: If the Court would excuse me a minute? The other side of the transaction is the Rowdell's side and that is dealt with in 117 CLR. There were 10 or so transactions involved in the case, one of which was the transactions which involved the Lefroys and the Hancocks and at page 125 his Honour is discussing the effect of section 260 and he says, commencing at the third top line on page 125:
The section cannot be treated as having an operation extending beyond its expressly delineated function of defeating the purpose of tax-avoidance by the shareholders which it was the overtly manifested nature of the arrangement to achieve; (see the language of Lord Denning in Newton's Case. To grasp that s 260 defeats as against the Commissioner the tax-avoiding efficacy of an arrangement, and not any part of the arrangement itself or anything done under it, is to see at once that it cannot support an assessment made against Rowdell on the footing that any of the transfers of shares to it were void - unless, of course, the arrangement was a means of tax-avoidance by Rowdell itself.
Anticipating this conclusion, counsel for the Commissioner submitted that the section applies to each of the relevant transactions not only as being a means for avoiding a tax liability on the part of the vendor-shareholders but also as being a means for avoiding a tax liability on the part of Rowdell. As to this, no more need be said than the tax-avoidance on the part of Rowdell was clearly not within either the purpose or effect of the transactions. No doubt among the considerations which led Rowdell to enter into the transactions was the consideration that its tax liability resulting from the transactions would be reduced by the application of ss 44(2), 46 and 107.......but it is impossible to point to any tax liability which Rowdell would have incurred if the arrangement had never been made and for the avoidance of which the arrangement was a concerted means.
I might say that Justice Kitto dissented, in one respect, in relation to this case but not in that respect and indeed Chief Justice Dixon agreed with his Honour. But, what that demonstrates, it is submitted, is that in the Hancock/Lefroy/Rowdell dividend strip one has an example, taking Lefroy as an example, where there was no tax avoidance purpose under section 260, so far as the Lefroys were concerned and none so far as the stripper was concerned - Rowdell - and, yet, the Full Court says, "You cannot have a dividend strip unless there is a sole or dominant purpose of dividend stripping.
GLEESON CJ: Now, if you applied the facts of that to section 177E, where would the current provision leave the Lefroys?
MR SHAW: The Lefroys would be like Mr Slutzkin. They would be caught and the reason they would be caught, your Honour, is this. If I could take your Honour back to section 177E:
(1) Where:
(a) as a result of a scheme -
that is a dividend strip, I will not read that -
(b) in the opinion of the Commissioner, the disposal of that property represents, in whole or in part, a distribution.....of profits.....
(c) if, immediately before the scheme was entered into, the company had paid a dividend out of profits of an amount equal to the amount determined by the Commissioner to be the amount of profits.....an amount (in this subsection referred to as the "notional amount") would have been included, or might reasonably be expected to have been included, by reason of the payment of that dividend, in the assessable income of a taxpayer -
So that it operates in a dividend-stripping scheme, but the point one looks at is the point immediately before the scheme was entered into.
GLEESON CJ: Right, so applying this section to what the Lefroys did in relation to Mulga Downs, first of all, Mulga Downs, I presume, would be the company in paragraph (a)?
MR SHAW: The target, yes.
GLEESON CJ: What would be the disposal of the property of the company?
MR SHAW: The declaration of dividends to Rowdell.
GLEESON CJ: Right. The Commissioner would have the opinion that that disposal represented a distribution of profits of Mulga Downs?
MR SHAW: Yes.
GLEESON CJ: Then you would say if, immediately before the scheme - and I will come back to that - was entered into, Mulga Downs had paid a dividend out of profits, that amount would have been assessable income of the Lefroys.
MR SHAW: Yes.
GLEESON CJ: That then makes it critical, does it not, to identify the scheme?
MR SHAW: Yes.
GLEESON CJ: What is the scheme in which the Lefroys are involved that is a scheme by way of dividend stripping?
MR SHAW: The acquisition of shares by Rowdell from them with a view to stripping the profits of the company. I am using shorthand, but -
GLEESON CJ: The shorthand may be important. Your submission, as I understand it, is that if the facts of Hancock were repeated under the legislation we are presently concerned with, the Lefroys would be parties to a scheme by way of dividend stripping?
MR SHAW: No.
GLEESON CJ: How do you get the Lefroys - - -
MR SHAW: Your Honour, I suppose that is right, in one sense.
GLEESON CJ: The scheme has to involve them. Otherwise, they are not caught up in paragraph (c), are they?
MR SHAW: The scheme does involve them because they sell the shares to Rowdell.
GLEESON CJ: Yes.
MR SHAW: If I can illustrate that, perhaps more dramatically, by reference to Slutzkin 140 CLR 314. The headnote reads:
All the shareholders in a company which had accumulated profits sold their shares for cash. The price was equivalent to the value of the company's assets. The buyer stipulated that the company's assets should have been converted to cash by the date of settlement of the transaction and that it should have no liabilities. The buyer subsequently caused a dividend to be declared on the shares. The Commissioner of Taxation issued assessments of the former shareholders' income tax upon the footing that s.260 -
applied. It was held that it did not. This is on the same basis as the Lefroys, but if one goes to 318, his Honour Chief Justice Barwick cites from the decision of Justice Rath below and he says:
"According to the evidence Mr Slutzkin and Mr Hapgood then left"....."the part of the banking chamber where the meeting of directors was being held for the purpose of banking the payment cheques. Mr Rosenblum and Mr Wallace proceeded with the further business of the directors' meeting. By this stage the transactions culminating in the sale of the shares had come to an end, and the subsequent activities of the company and Cadiz Corporation were no part of any arrangement to which the appellants as trustees were parties, or of the implementation of any such arrangement. What did in fact occur is what was described in evidence as a dividend stripping operation.
Then he goes on and again at the end of the paragraph describes what happens as a dividend-stripping operation. That view of the matter is accepted by Justice Stephen at page 322 and by Justice Aickin at 324 where he cites from some of the evidence and the evidence describes the transactions which took place as dividend-stripping transactions. So that here one has - - -
GUMMOW J: This is the high-water mark of the so-called choice principle, is it not?
MR SHAW: Yes. What I am putting, your Honour, is this: if it is necessary to have a dominant purpose of tax avoidance, the sole or dominant purpose is to have a dividend-stripping scheme, it is perfectly clear from Slutzkin that the Court held that he did not. It seems to be being suggested that the provision which is clearly enacted to catch these dividend-stripping schemes does not catch them because there is no dominant or sole purpose in the scheme of tax avoidance, at least in the sense in which those terms are used in section 260. In our submission, that is to turn Part IVA on its head.
The next thing to which I should refer is the fact that section 177E was not the first section in which the term "dividend-stripping scheme" in some form or other occurred in the Act. There had been earlier provisions in the Act from as early as 1971/1972. There are provisions in section 46A, for example, which deal with dividend stripping. Provisions relating to dividend stripping have continued to be enacted since that time of various kinds, the most recent enactments being enactments at the time when imputation and franking credits were introduced. There were provisions enacted which stopped the availability of franking credits in the case of dividend-stripping schemes.
The reason I have mentioned that is that the Full Court seemed to think that it was of some significance that capital gains were made on the disposal of the shares by MLG and CPH but it is perfectly clear, it is submitted, that the presence of dividend-stripping schemes is accepted as continuing or possibly continuing after the introduction of capital gains tax. However that may be, there is a whole series of provisions in the Act dealing with the stripper, as opposed to the vendor shareholder. If one looks at Rowdell, it would seem that on the test enunciated by the Full Court, a significant number of what one might reasonably think were dividend-stripping schemes would not be dividend-stripping schemes and not be caught by these sections which are directed to the stripper, as opposed to the vendor shareholder, because the stripper does not have this purpose of tax avoidance, according to Rowdell.
So it is submitted that the Full Court, in coming to the conclusion that a sole or dominant purpose of tax avoidance is necessary in order for there to be a dividend-stripping scheme, or a scheme with substantially the effect of a dividend-stripping scheme, has not listened to the history which preceded the enactment of these provisions, which were directed to overcoming the very problem caused by a test like the test the Full Court has imposed on dividend-stripping schemes. It is submitted that they must be wrong in that.
We go on to say that, in our submission, it is not necessary to have a tax avoidance purpose at all for there to be a dividend-stripping scheme but, if it is necessary, it was present here as a substantial purpose because what was being sought to be being done was to avoid tax on dividends had they flowed to MLG and CPH, and the amount of those dividends is very substantial indeed.
GLEESON CJ: Could you say that again? What was sought?
MR SHAW: It was sought, amongst other things, in what was done to preserve the assets of the UK companies, untouched by tax, with no tax being paid on the amounts of the dividends which were declared, or purportedly declared, to MLG and CPH, and on which they would have had to pay tax had they, in fact, received them.
GLEESON CJ: What was the scheme exactly?
MR SHAW: Well, your Honour, the scheme was - there is, if you like, a large scheme and a small scheme and, in our submission, it does not matter which one one takes. In either case, there is a purpose of tax avoidance. The large scheme is all the steps involved in the declaration of dividends and the wind up of the UK companies and the transfer of the assets to the Bahamian company. The smaller scheme is simply the scheme which involves the declaration of dividends and the acquisition of the shares by the Bahamian company.
GLEESON CJ: Was the Commissioner not asked to particularise the scheme at some stage of this litigation?
MR SHAW: I am not sure what the answer to that is, your Honour.
GLEESON CJ: Why is it significant that you say there is a purpose of tax avoidance? Why does it matter whether there is a purpose of tax avoidance?
MR SHAW: Your Honour, we say it does not.
GLEESON CJ: I thought a moment ago you said - - -
MR SHAW: What I said was, your Honour, we say you do not have to have a purpose of tax avoidance, but we say, if you do, then it is not a sole and dominant purpose, but simply a substantial purpose.
GLEESON CJ: It may be interesting for us to know whether the Commissioner says or does not say that there has to be a purpose of tax avoidance for the operation of section 177E.
MR SHAW: Your Honour, he says that you do not, but, if you do, there is.
GLEESON CJ: So the Commissioner makes two alternative submissions?
MR SHAW: Yes, your Honour.
GLEESON CJ: One is that no purpose of tax avoidance is necessary and the alternative submission is that if a purpose of tax avoidance is necessary, it is sufficient that such a purpose exists and it is not necessary that it be dominant.
MR SHAW: Yes.
GLEESON CJ: And upon which of those two alternative bases did the Commissioner proceed in making this assessment?
GAUDRON J: He did not have to form an opinion about it, did he?
MR SHAW: Your Honour, I do not know what the answer to that question is.
GLEESON CJ: Thank you.
MR SHAW: I really do not know.
GAUDRON J: He did not form an opinion about it?
MR SHAW: He probably did not, your Honour.
GAUDRON J: And you say he did not have to?
MR SHAW: No. There are a number of incidental matters to which I should refer. If I could take the Court to 293 to 294 - - -
GLEESON CJ: Just before you pass from that last submission, one of your alternative submissions is that there has to be a purpose of tax avoidance, but it is not necessary that it be a dominant purpose?
MR SHAW: Yes.
GLEESON CJ: For that submission, what do you mean by the expression "purpose of tax avoidance"?
MR SHAW: Your Honour, if I could put it this way: whatever the Full Court meant. The trouble with the phrase is that nobody knows what it means, but the Full Court thought they did know; they did not tell us, but whatever it was, was there. It is too hard a question, your Honour.
HAYNE J: Thank you so much.
MR SHAW: But all I am saying, your Honour, is this, if it be true that it is nigh impossible to assign a meaning to the phrase "tax avoidance", which will provide any sound path to decision making about what a dividend-stripping scheme is, then it cannot be the right test. On the other hand, if I am wrong and, in my submission, it is very difficult to know, and the Full Court actually did know and was able to assign a meaning to it, which was difficult to understand how they could, in the light of the cases, but never mind, assume they did, then, whatever it is, it must be here.
GLEESON CJ: Well, let me ask you this: if a public company in which I hold shares declares a dividend tomorrow and I decide to sell the shares the day after tomorrow and one of the reasons I want to sell the shares the day after tomorrow is that I do not want to pay tax on the dividend when it is paid to me, is that dividend stripping?
MR SHAW: No.
GLEESON CJ: Why not?
MR SHAW: Because it does not involve stripping.
GLEESON CJ: Well, suppose the purchaser of the shares is a taxpayer who does not mind receiving taxable income in the form of a dividend because it has carried forward losses.
MR SHAW: Or whatever, yes.
GLEESON CJ: Yes. Does that make a difference?
MR SHAW: No. I am assuming, your Honour, perhaps wrongly, that this public company in which your Honour has shares, your Honour only has a few shares, but if your Honour - - -
GLEESON CJ: Well, does it matter?
MR SHAW: Yes, because it might make a very big difference. I mean, if you acquire all the shares in the company, then you can get all the company's profits, if your Honour sees what I mean. But if you are one out of five trillion other shareholders, it cannot be regarded as stripping.
HAYNE J: Does stripping then, on your submission, carry with it a connotation or an element of a transaction involving the passing of control of the company?
MR SHAW: No, and it does not, your Honour, because there are some forms of dividend stripping which do not involve the passing of control but you issue special shares to the stripper and they carry special dividend rights. They get their dividend on these special shares and, indeed, that is what happened in Newton. So there are various different ways of achieving the same result.
HAYNE J: Then does it involve passing control over what loosely I would describe as the accumulated fund for payment of dividends?
MR SHAW: Well, the relevant part of the accumulated fund, yes, and by that I mean, your Honour, this. Say I am a company and I have accumulated profits of $100 million, and I arrange with somebody that I will issue them special shares which carry special dividend rights, and those dividend rights are not to 100 million, but to 50 million, because for some reason I want to keep the other 50 million for myself, whatever it is. It would still be dividend stripping in relation to the 50, although maybe one would say that control over the fund, in the sense that your Honour used it, did not pass.
HAYNE J: What is it that distinguishes, or lies behind or in, the distinction between a transaction involving stripping and a transaction of sale cum dividend?
MR SHAW: Well, there is not, your Honour, an absolute distinction between the two and, indeed, the sale here might be called a sale cum dividend. But when one talks about a sale cum dividend, one is generally thinking of the sort of example which his Honour the Chief Justice gave me about buying 1,000 BHP shares on the stock exchange, or something, when there are a huge number of other shares, and one is thinking generally of ordinary everyday transactions in which, yes, the dividend plays a part, but so far as the relevant company is concerned, the shares are of no particular individual significance in relation to the dividend.
GLEESON CJ: Once you start talking about ordinary everyday transactions, you are right into this area like genuine - - -
HAYNE J: Choice.
GLEESON CJ: What is an ordinary everyday transaction? For me, it might be very different from what is an ordinary everyday transaction for Mr Packer.
MR SHAW: Well, your Honour, so it might, but the - - -
GLEESON CJ: Which might mean nothing more than that his business affairs are more complex than mine.
GAUDRON J: At least in this case you have whatever happened dissociated with the transfer of the entire enterprise of the company.
MR SHAW: Yes.
GAUDRON J: You say that is not necessary in every case but at least it is present here.
MR SHAW: Your Honour will recall that I disown being able to give a complete definitive knockdown definition which will answer ever case, and I cannot.
GLEESON CJ: I do not now remember, but do any of those accounts you have shown us of attempts to spell out the elements of a dividend-stripping scheme or operation include a reference to transferring the entire enterprise?
MR SHAW: Your Honour, it sort of depends. If one regards the description of the arrangements in Hancock, for example, as a description of a scheme which is a dividend-stripping scheme there was a transfer of control of - - -
GLEESON CJ: I thought one of the arguments that was being putting against you was that the very fact that this was a corporate reorganisation was a reason why it is not a scheme of dividend stripping.
MR SHAW: But that is because it is said that you cannot have, coincidentally, a desire to carry out a company reorganisation and a dividend strip and all we say to that is company reorganisations are multifaceted, they can carry it out in all sorts of different ways and one of the ways you can do it is using a dividend strip. They are not mutually exclusive at all.
HAYNE J: But, do you accept that 177E, by its use of the expression "in the nature of dividend stripping" precedes from the unstated premise that some core meaning can be identified in the expression "dividend stripping" for if that is not so it is a very odd provision, is it not?
MR SHAW: There is some central idea to it and if I could perhaps take your Honour to what was said by Justice Jacobs in the Patcorp Case. My learned friends cite this in their outline. Patcorp is - - -
GUMMOW J: - - - in the same volume as Slutzkin.
MR SHAW: Yes, 140. At page 310, at the top of the page, his Honour says:
Each of these dealings and transactions has been described in detail by Mason J. There can be no doubt that all were conceived and carried out as what are commonly called dividend-stripping operations. The motive of the taxpayer was to reduce its liability to income tax on profits which, apart from these operations, had otherwise accrued during the fiscal years in which the operations were conceived and carried into effect. In order to reduce its liability to tax in respect of its other profitable activities in the manner adopted certain circumstances need to exist. First, the taxpayer had to be a trader in shares so that a loss on the subject transactions could be set off against profits on other transactions.
Then, going down about five or six lines:
Secondly, the shares must have been purchased in the course of the taxpayer's trading in shares, that is to say, in the course of that business the profit of which (if any) was assessable income.
Thirdly, the dividends declared, the so-called "dividend-stripping", must have been rebatable in the taxpayer's assessment -
and so on -
Fourthly, the operation of purchase.....falls within s. 260.
But his Honour clearly looks on the dividend stripping being the bit he calls dividend stripping.
HAYNE J: But does stripping then carry with it the notion of retention, that is, that the taxpayer retains the core of - to speak in the loosest possible terms, perhaps very unhelpfully - the enterprise, the core of the economic venture?
MR SHAW: No, your Honour.
HAYNE J: No?
MR SHAW: That was not so in the Lefroy Case and there are many cases in which - - -
HAYNE J: But it was with the Hancocks?
MR SHAW: It was with the Hancocks. In many cases, what happens is there is a distribution, the stripper gets the company, there is a distribution of the assets and the company is just wound up.
GLEESON CJ: It all goes to the bottom of the harbour.
MR SHAW: Yes.
CALLINAN J: Mr Shaw, if you take the Chief Justice's example, and instead of the Chief Justice owning the shares, the shares are owned by a company in which he is the sole shareholder, and, indeed, the company owns shares in six public companies, all of which declare their dividend, so that there is going to be a dividend on 1 November, and all of the shares in that company are sold, that is, in the potentially recipient company, does that involve dividend stripping?
MR SHAW: The answer is it might, your Honour, yes.
CALLINAN J: What is the distinction? What is the basis upon which, in those circumstances, there is dividend stripping but not in the example which the Chief Justice put to you?
MR SHAW: Well, first of all your Honour has altered the example by having the Chief Justice own all the shares - - -
CALLINAN J: All the shares in the company that in turn own shares in a number of public companies.
MR SHAW: Yes. When I said it might, I mean one would need to look at what the situation of the company was. I mean, assume it had not declared any dividends for 20 years and there was a huge amount of accumulated profits there, it might.
CALLINAN J: What are the indicia then? Why do you say that is dividend stripping but not the Chief Justice's example? What is the distinction?
MR SHAW: I can only say, your Honour, that some things are stripping and some things are not.
CALLINAN J: Obviously not very helpful.
HAYNE J: The Commissioner's desire to have room to manoeuvre in future cases is, no doubt, understandable, whether commendable I leave for others and other occasions, but at some point there has to be some nailing of colours to some mast by the Commissioner in this case.
MR SHAW: So there does, your Honour, and I have done it. I have - - -
HAYNE J: Well, point the mast out to me and tell me the colours, Mr Shaw, because, alas, they escape me for the moment.
MR SHAW: What I have submitted, your Honour, is this: it is not necessary for the purpose of the case to define ultimately, completely and finally what a dividend-stripping scheme is. All I have to do is show that here there is one. I have endeavoured to do that. I have either failed or succeeded, but if I am sinking, there are those colours at the mast.
GLEESON CJ: Unfortunately, when you say you have demonstrated that here there is one, we need to know one what?
MR SHAW: You do, your Honour, but what I was submitting was that if you look at the tests that Vincent sets out, either of them is satisfied. Then we go on to say that if we are wrong about purpose and if there is not a significant purpose of tax avoidance here, one still has the second limb of section 177E, a scheme having substantially the effect of "a scheme by way of or in the nature of dividend stripping". Into that the High Court has introduced an idea of purpose. In our submission, it is very difficult to do that.
GLEESON CJ: What do you say is the difference between a scheme having the nature of dividend stripping and a scheme having the effect of dividend stripping?
MR SHAW: The difference is, it is submitted, that one simply has to look at what the scheme effects, which is not necessarily true about a scheme in the nature of dividend stripping.
GLEESON CJ: But it cannot be sufficient, can it, that what the scheme effects is a capital sum in the hand of the vendor partly in replacement of an income amount that would have been received if the vendor had waited until a dividend had been paid?
MR SHAW: No, of course it could not, your Honour.
GLEESON CJ: Otherwise every sale of shares cum dividend is a scheme having the effect of a dividend-stripping scheme.
MR SHAW: We certainly do not say that, your Honour, but we do say that there is a point at which one can identify something as amounting to stripping. For example, in the case I gave to his Honour Justice Hayne with the shares carrying a special dividend, you can see that there might be a stripping there. If the whole control of the company passes and a large amount of dividends are declared, you can see a stripping there.
GLEESON CJ: The Full Court of the Federal Court said, as I understand them, with all its imprecision, the point at which you get out of one area into the other is the point at which there is a tax avoidance purpose shown or predominating.
MR SHAW: It has to be sole or dominant.
GLEESON CJ: Yes. As I recollect it, you will find said over and over again in the cases on section 260 a sale of shares cum dividend, if there is nothing more to it, can never indicate tax avoidance.
MR SHAW: Yes.
GLEESON CJ: So what more does there have to be to it?
MR SHAW: The only thing I can say to your Honour is that there must be something that one can describe as stripping, then your Honour says to me, "What's stripping, as opposed to simply a sale cum dividend?", and all I can say to your Honour is that what is involved is taking a company with substantial amounts of accumulated profits, or profits in prospect, because the future stripping is covered too, and then a transaction taking place which involves the removal of some significant part of those profits.
GLEESON CJ: A possible point of view is that what is involved here is a question of characterisation. Another possible point of view is that the wider you describe the scheme, the more difficult it is to characterise it as a scheme by way of dividend stripping, the argument against you being that it is a scheme by way of company reorganisation for clearly explained commercial purposes.
GAUDRON J: Would you say that "or clearly explain tax purposes".
GLEESON CJ: Australian tax purposes?
MR SHAW: Now, there is a question. Are all those English cases about dividend stripping not, from our point of view, dividend strips at all because Australian tax is not avoided? That cannot be right.
GAUDRON J: Is it not sufficient for your purpose to say there is a scheme if, at the end of the day, that which could have been paid as dividends turns up in the hands of somebody tax free, when it would not have turned up tax free in the hands of the people who had it before?
MR SHAW: Your Honour reminds me I should deal with that matter and that was actually one of the matters I was going to. At page 2293 in volume 9, the Full Court refers to the first of two matters which it says:
are not easy to reconcile with the central characteristics of a dividend stripping scheme.
at paragraph 16:
The first is that the assets of the UK companies did not consist wholly or even primarily of accumulated or current year profits.
In our submission, we say that is not necessary and we refer to the case of Argosam [1965] 1 Ch and the relevant page is page 420. If I might give an example. If, for example, you have a company with assets worth a billion, accumulated profits of $100 million, all the shares are sold to a stripper for a billion or slightly less than a billion, a dividend is declared of $100 million and the shares are then sold back to the original owner for $900,000, then it has to be a dividend strip.
GLEESON CJ: Are you still on Argosam?
MR SHAW: What I was doing was give an illustration of another case in which - - -
GLEESON CJ: I was only going to point out that at the page you referred us to, at page 420, Lord Denning gives his understanding of dividend stripping.
MR SHAW: So he does, but it will be seen that the shares were worth [sterling]1.7 million, the dividend was over [sterling]200,000. All I am saying, your Honour, is this suggested difficulty of the Full Court's really is not a true difficulty at all.
The second difficulty which the Full Court refers to is at page 2294 in paragraph 162, and it is because of this paragraph that I said to your Honour Justice Gaudron that your Honour had reminded me of something.
The vendors CPH and MLG made a capital gain on the sale of some of the shares. They did not make a capital gain on all of them; they made a capital loss on the sale of some of them, but they did make a capital gain on some of them. Our submissions are written on the basis - and this appears at paragraphs 76 and 77 - that substantial tax was paid on the capital gains which were made. If I could refer the Court to, first of all, volume 5 at page 1179, that is the Consolidated Press Holding assessment, and it will be seen at page 1180 that the adjustment adds to the assessment the full amount of the dividends. Three dividends are referred to on page 1180. The middle one of those is in relation to Asiamet and it is not presently relevant, but it is the other two that are presently relevant. If one looks at the next page, where there are some notes, at paragraph 4 it says:
Section 160ZP losses increased from $22,169,228 to $33,680,633 as a result of the exclusion of $12,737,013 capital gain on the sale of shares in CPIHL (UK) and $1,225,608 capital loss on the sale of shares in CPIL (UK).
So that it appears from that, in fact, that that capital gain was wholly sheltered from tax. If I then take the Court to page 1270, that is the return of MLG, and if one looks at the return, which was a nil return, one sees at page 1271 the information statement. One sees that there are said to be gross income of $67,286,391, but that amount is removed again, and completely, at about point 7 on the page, under the heading "Adjustments" at the letter D, so one can ignore that, and what one has is, besides that, interest expenses at about point 3 on the page of $636,981. One has got net capital gains, at about point 6 on the page, of $40,132,953; one has got prior year losses recouped of $131,795 and losses transferred in of $39,364,177, so that again the capital gain was wholly sheltered in the return from tax. But, of course, that does not mean there was not any cost to the taxpayer, because sheltering involves using up losses of various kinds of one sort or another, but the Full Court does not seem to be correct that substantial tax was paid, but it is perfectly true, and our assumption that we made when we wrote our - - -
GLEESON CJ: Where do they say substantial tax was paid? They express some surprise that they were not given any information about this.
MR SHAW: It is at 162.
GLEESON CJ: What they say there is right, is it not?
MR SHAW: Yes, if one reads it - taking it no further, it says, yes. But, in our submission, the fact that - - -
GLEESON CJ: What about the first sentence in paragraph 163? I am just not sure I follow that. Is it simply the case that there is no evidence about that?
MR SHAW: I think that is true, your Honour. What is perfectly plain, it is submitted, is that the transaction in question, even if tax had been paid on the whole of it, would have effected a substantial reduction in tax so far as MLG and CPH were concerned, that is, capital gain, as opposed to the dividends. The other matter that I should refer to is a matter which was referred to by Justice Hill at 2185. At line 10 his Honour says:
As at the same date -
that is, 30 June 89 -
CPIL(UK) had accumulated losses of US$69,449,000. Even more losses were to be found in the consolidated accounts as at the same date. In the period from 1 July 1989 to 31 December 1989 CPIL(UK) derived an operating profit after tax in the sum of US$65,147,000 which, while available to be used as the source of a company law dividend could, if not paid out as a dividend, be used to replace lost share capital. Since, ultimately, the directors of CPIL(UK) purported to pay a dividend of $US100,000,000 it may be assumed that to that extent, at least, a fund of profits was available, albeit for the current year, out of which a dividend could have been paid.
Then going over to the next page, 2186, the first line on the page:
In the case of CPIL(UK) it is difficult having regard to the fact that it had a negative balance in its accumulated profits account, although a current year profit, to see that the effect of any scheme was one of dividend stripping. By the time the scheme was undertaken no further profits were to be earned, and the current year's profit could be offset by prior years' losses.
Then he goes on to deal with CPIHL in a different manner. In our submission, the matter to which his Honour refers there is of no significance. The fact is that these were profits available for dividend and, in fact, they were used.
GLEESON CJ: Why do you say it is of no significance to whether or not you have a scheme of dividend stripping where the current year profits that would be, or might be, the source of the dividend could simply have been used to offset losses?
MR SHAW: Yes, but they were not.
GLEESON CJ: This raises a question that perhaps might arise more acutely in connection with the other aspect of the case that we have not even come to, but does this process of characterising something as a scheme of dividend stripping involve an assumption about what would have happened if the scheme had not been entered into?
MR SHAW: No. That might be too absolute an answer, but what I meant by saying no, your Honour, is it is not to be assumed that if the scheme had not been entered into a dividend would have been declared to, what I might call, the vendor shareholders. That problem was, in fact, one of the reasons that are spelt out in the explanatory memorandum in the second reading speech as to why there has to be a special provision about dividend stripping. It is because you might not be able to find a tax benefit because the vendor shareholders might have said, "Well, if I had not done this, I would have done nothing". The accumulated profits could have, and would have, sat there forever. The explanatory memorandum in the second reading speech seeks to make it clear that, even so, such a scheme will be caught. That is one of the explanation of why these special provisions are there.
GLEESON CJ: That might be right where you have accumulated profits, but what about where you have accumulated losses?
MR SHAW: Well, there is nothing in the explanatory material which helps about that, your Honour, but it seems clear enough that there were current year profits available for declaration of dividend. They could have been used in some other way, but they were not. They were used for the declaration of the dividends and if one actually strips the dividends out of a company, how can it fail to be a dividend strip because you might not have stripped them or declared them, you might have used them for something else?
GLEESON CJ: Am I right in thinking that it would not have made any difference to the Bermuda company whether these profits had been applied to offset prior years' losses, or distributed by way of dividend?
MR SHAW: Your Honour, no, I think that might not be right.
GLEESON CJ: You might like to check this up and come back to it. I will tell you why I am asking the question. If it would have made no difference to the Bermuda company, and no difference to the respondents whether they had distributed these profits by way of dividend or used them to offset prior years' losses, a possible point of view is that that might have a bearing on whether you could characterise this as a scheme of dividend stripping.
MR SHAW: I am not sure, but I thought the declaration of dividend had something to do with the amount of the capital gains on the sale of the shares. But I am not sure that is right.
GLEESON CJ: You can come back to it in due course if you think it matters.
MR SHAW: I had, at this point, been going to go to really the matter your Honour the Chief Justice took me to right at the beginning of what I was saying about the formation of the opinion. I do not want to simply repeat myself, but I do not want to stop if I have not explained the way in which we put the - - -
GLEESON CJ: I thought you did explain the way you put it.
MR SHAW: If the Court pleases, it is submitted that the Full Court was wrong in coming to the conclusion that section 177E can only apply if you have a scheme, the sole or dominant purpose of which is tax avoidance. It is further submitted that whatever the right test be, you do have a scheme of dividend stripping here on the facts and it is submitted that, although the Full Court did not deal with the difficulty which Justice Hill felt about the formation of the opinion, if it had, it would have come to the conclusion that there was no defect in that.
GLEESON CJ: You have addressed most of your submissions to the reasoning of the Full Court.
MR SHAW: Yes.
GLEESON CJ: Does that also cover what you want to say about the reasoning of Justice Hill?
MR SHAW: Yes, it does. In relation to purpose, if I could use that phrase, his Honour did not use a purpose test, in terms, he used essential character and he said that effect - that is the second limb - is different from the first limb. You do not need purpose in the second limb, although you do in the first, or you do need that essential character in the first. Really, what I have said deals with that as well as with the Full Court. The Full Court simply did not address this opinion matter, and I have dealt with that.
GUMMOW J: Now, apart from the opinion matter, are there any other matters left undealt with by the Full Court which we would have to deal with? Your opponents seem to think there are.
MR SHAW: Your Honour, they do. I think on all of those matters they failed before his Honour Justice Hill, so that I think that I have dealt with everything by reason of which we failed, if I could put it that way. My learned friends do have a number of other points, I know, but I think they have - of course, they may persuade your Honours differently. If they do not, they in fact have been disposed of by his Honour.
GAUDRON J: If you are successful on points 1 and 2, I take it, the matter must go back to the Full Federal Court in any event.
MR SHAW: On points 1 and 2, your Honour?
GAUDRON J: That is to say, that you do not need a purpose or essential opinion for the first limb and you do not need purpose for the second limb and that this was a dividend-stripping-scheme or otherwise within one of the legs.
MR SHAW: Your Honour, there are two possible ways that the Court could deal with it. The Court could deal with these large number of subsidiary points, if I can call them that, and deal with the matter finally or it could send the matter back to the Full Court, as your Honour suggests. If it only wanted to deal with the two points that your Honour has mentioned, it would have to go back to the Full Court, but the Court could deal with them all.
GAUDRON J: If one dealt with 1, 2 and 3, that is, the opinion, would it still go back to the Full Federal Court?
MR SHAW: It might, your Honour. It would depend on what the Court thought about all these other points which my learned friend has.
GAUDRON J: Is there a notice of contention? I suppose there is.
MR SHAW: There was in the Full Court, my learned friend says.
GAUDRON J: And here?
MR SHAW: My learned friend says, and rightly, that they are simply matters the Full Court did not deal with. So far as the Full Court is concerned, there is no decision against them - or for us, for that matter. If the Court pleases.
GLEESON CJ: Thank you, Mr Shaw. Yes, Mr Bloom.
MR BLOOM: If I could just ask your Honours to go back to section 177E, I will endeavour briefly to indicate to your Honours what the other matters are that are in issue. The first question which arises is in relation to paragraph (a), whether the property of the company, if there was a disposal, was disposed of "as a result of a scheme" that was "a scheme by way of or in the nature of dividend stripping".
Those words "as a result of" are used, as your Honours will see, in contradistinction to words used in the other, if I may call them, dividend-stripping provisions in the Act that talk about "in the course of" or "part of" and words to that effect. That is the first question. The second question is one with which my learned friend has dealt - although if your Honours have seen the colours or the mast, I have still seen neither of them with respect to him - what is "a scheme by way of or in the nature of dividend stripping"?
The third question is whether property of the company was disposed of. The disposal now relied upon, which is different to that upon which the Commissioner's delegate formed his view, is the disposal post-liquidation. The companies being English incorporated companies, the law relating to those companies is such that their property ceased to be their property upon and by virtue of the appointment of liquidators. Hence that which was disposed of was not property of the company at the time of the disposal now relied upon.
HAYNE J: Whose was it?
MR BLOOM: It is that difference in view, as your Honour will recall, and your Honour Justice Gummow will particularly recall, between Ayerst in the United Kingdom and Justice Menzies' decision in Franklin's Selfserve here. The decision in the United Kingdom is it falls into some sort of Livingston situation, the beneficial ownership passes from the company and is held, effectively, for the purposes of the administration of the company, but it ceases to be, according to the English law, as Ayerst lays it down, property of the company. As we have attempted to show, and I will come to it in due course, English law is the relevant law for this purpose, not the law as stated by Justice Menzies.
GUMMOW J: Anyhow, that would have to be decided by the Full Court.
MR BLOOM: Yes, your Honour.
GUMMOW J: That has not yet been decided.
MR BLOOM: It has not yet been decided, nor has, as a result of - - -
HAYNE J: Would it be a question for evidence, if it is English law?
MR BLOOM: No, your Honour.
HAYNE J: Why not?
MR BLOOM: The Evidence Act, I think it is 175, now permits us to have regard to reported cases and we have given your Honours a reference to both Ayerst and to a case in 1997 saying that Ayerst still applied. The Evidence Act does do some very good things in this regard, if your Honour pleases.
HAYNE J: Including, apparently, avoiding reference to such pesky things as statutes which might be thought to have something to say on the field of Corporations Law, Mr Bloom, but, there we are, counsel love going to the cases rather than the statutes.
MR BLOOM: If they are of assistance, yes, your Honour. Then there is paragraph (b):
in the opinion of the Commissioner, the disposal of that property -
and there are two problems. First of all, as his Honour Justice Hill held, the Commissioner did not look at each of the disposing companies and form an opinion about each of them.
GUMMOW J: Just go back to the last matter you were dealing with.
MR BLOOM: Yes, your Honour.
GUMMOW J: Are you saying that whatever was paid, it could not have been a dividend?
MR BLOOM: We do say that as well. We say, in reliance upon this Court's decision in Brookton - - -
GUMMOW J: Because it was post-liquidation.
MR BLOOM: It was post-liquidation, yes. That is one aspect of it. We also say, and it is a different point, that, as in Brookton, the directors had no power to declare an interim dividend. They purported to do so. They obviously thought, and laboured under the same common mistake that existed in Brookton, that they had that power. But the did not have the power and, hence, the declaration of the dividend on 22 March, which is relied upon by the decision maker, as the payment of a dividend on 8 May - not only is the date different, but the event is different - was not a declaration or a payment for the dividend. In particular, there was never a payment of a dividend at any point in time.
GUMMOW J: And there was no dividend declared, anyway.
MR BLOOM: We say that, too.
GUMMOW J: Even as a first step.
MR BLOOM: Yes. Then one gets to the opinion and, as Justice Hill held, that opinion was not properly formed. One of the reasons, which I will take your Honours to immediately after lunch, was that on the same day, the same delegate, in relation to Consolidated Press International United Kingdom Company, formed the view that there had been a distribution by that company of some $US33 million of its profit on 10 April. That is preceding the payment of the dividend upon which the second opinion, the ones you have been taken to, fastens.
Now, the case below, before Justice Hill, concerned both the alleged Asiamet dividend strip and the dividend strips alleged to which your Honours have been taken this morning. The Commissioner made certain concessions below, as he had to, that the pooling was necessary in order to enable those companies, on any view, to have sufficient profits to pay both the Asiamet distribution and the two distributions of 53 million and 100 million which your Honours are concerned specifically this morning.
That concession having been made, that being the case that was presented below, the Commissioner cannot, in our respectful submission, say, "Well, I give up on Asiamet, I therefore am not bound by the concession I made about what the delegate did any more than I am bound by the delegate's act, which took place on the same day". Both determination reports, your Honours will see, were dated 21 December 1994. In each one there is a repeat of the net assets equation and the amalgamation of the two sets of "net assets", as they are called, and that is absolutely essential if one is to get the right amount of profits to support all three distributions which the decision maker decided on the same day were made.
GLEESON CJ: Well, you may want to come back after lunch to show us what you want to say about the factual matters that Mr Shaw took us to early on.
MR BLOOM: Certainly, your Honour, I will.
GLEESON CJ: We will adjourn until 2.15 pm.
AT 12.45 PM LUNCHEON ADJOURNMENT
UPON RESUMING AT 2.16 PM:
GLEESON CJ: Yes, Mr Bloom.
MR BLOOM: Thank you, your Honours. If I might just return to section 177E to make one more important point about the opinion of the Commissioner before taking your Honours to the evidence, in paragraph (b):
in the opinion of the Commissioner, the disposal of that property -
being the property referred to in subparagraph (a). Now, the Commissioner here formed the opinion that the disposal of property was the payment of a dividend to CPIL (Bahamas) on 8 May 1990. On any view of it, that never happened.
GAUDRON J: I wish to ask you why we go into this?
MR BLOOM: Well, if the opinion miscarries, your Honour, then because it is a section which depends upon - - -
GLEESON CJ: Yes, but why would it not go back to the Full Federal Court?
MR BLOOM: On opinion?
GAUDRON J: Yes, they did not deal with that.
MR BLOOM: Well, for this reason. If your Honours are against us on dividend-stripping scheme - - -
GAUDRON J: On a dividend scheme, yes.
MR BLOOM: On a scheme, yes, your Honour - but for us on the opinion, the matter would go back to the Commissioner and not to the Full Court.
GAUDRON J: Yes, but the Full Federal Court has not dealt with it and you have not filed a notice of contention.
MR BLOOM: I filed a notice of contention in the Full Court and I did, at the special leave application, your Honour will recall, mention that these points were live and your Honour said that only made the case more interesting.
GAUDRON J: Yes, but you have not filed a notice of contention in this Court.
MR BLOOM: With respect, do I have to, your Honour?
GAUDRON J: I think so.
MR BLOOM: It would seem to us the Full Court, not having dealt with the matters, not having found it necessary to deal with the matters, we are still, as it were, on the basis of our finding before Justice Hill. We are supporting Justice Hill's - - -
GAUDRON J: But you do not say that this issue is one that needs to be determined, to determine whether or not there was a dividend-stripping scheme.
MR BLOOM: Whether the scheme was one having those attributes?
GAUDRON J: Yes.
MR BLOOM: No.
GAUDRON J: No.
MR BLOOM: No, we do not. It is a separate point. But it, nonetheless, is a point which was decided in our favour by the trial judge. It was the Commissioner who appealed that point to the Full Court, and the Full Court simply found it unnecessary to deal with it.
GLEESON CJ: But may it be that some of the facts relevant to the opinion point are also relevant to the question of whether it is a scheme by way of dividend stripping?
MR BLOOM: Yes, your Honour. But if the Commissioner has simply failed to properly form the opinion, then the matter goes back to the Commissioner for the formation, if it be appropriate, of a new opinion. None of the other issues arise on that basis either.
GLEESON CJ: It would go back, presumably, on the basis that we came to the conclusion that it was open to the Commissioner to form that opinion.
MR BLOOM: Yes, your Honours would have to do that, given that your Honours first found that there was a scheme by way of dividend stripping, yes, and you would have to make that finding first.
GAUDRON J: You may be right in so far as Justice Callinan has just shown me the Rules, which say if a matter has been erroneously decided then you - - -
MR BLOOM: Yes.
GAUDRON J: - - - but even so, this Court is not obliged to deal with this point, is it? It can remit to the Federal Court for it to be dealt with.
MR BLOOM: Your Honour, as we see it, the matter having been removed here, it is one of the things which is before the Court, with respect. That is the consequence of the special leave having been granted.
GUMMOW J: No, what is before the Court is the correctness of the orders of the Full Court.
MR BLOOM: Yes, your Honour, and if the Full Court were right on the scheme by way of dividend stripping, then your Honours would say those orders were correct. If the Full Court were wrong on that, but right on the opinion, the orders your Honours would make in its place, as we understand it, are to send the matter to the Commissioner. If, on the other hand, there are these other issues, namely whether there was a disposal as a result of and of property of the company, those matters the Full Court never dealt with should go back to the Full Court to be dealt with by it. But in those matters, we do not have the finding that we have on opinion of Justice Hill that the opinion was vitiated.
HAYNE J: Are you in the position, then, where as one alternative argument, you seek an order different from the order made by the Full Court? You seek to support the order made by the Full Court as your primary position, but - - -
MR BLOOM: No, that is the order that my learned friend, Mr Shaw, would ask your Honours to do.
HAYNE J: I thought you said that there was one circumstance where you would have it remitted to the Commissioner.
MR BLOOM: Where that would be the consequence. But the order we would seek is that if dividend stripping is decided in our favour, then the order would be that the Full Court was correct and no further order is necessary. If dividend stripping is decided against us but we are right on opinion, and Justice Hill was right, then his order would be reinstated, namely, to send it back to the Commissioner.
GAUDRON J: Well, then you need to file a cross-appeal, do you not?
HAYNE J: On one branch of your argument contending that some order other than that made by the Full Court should be made.
MR BLOOM: The Commissioner's appeal would still be dismissed. That would be the consequence of our succeeding on either point.
GAUDRON J: Yes.
MR BLOOM: I was taking your Honours to section 177E(1)(b):
in the opinion of the Commissioner, the disposal of that property -
refers back to property of the company disposed of. It is now put that the property disposed of was the post-liquidation property, post-liquidation distribution. That is not the distribution of property or disposal of property about which the delegate of the Commissioner formed his opinion.
GLEESON CJ: I would just like to understand that a little better than I do at the moment.
MR BLOOM: Yes, your Honour.
GLEESON CJ: Just take one example: part of this process, as I understand it, involved assigning a debt to the Bermudan company, is that right?
MR BLOOM: Yes, your Honour.
GLEESON CJ: That was a debt owed to one of the English companies by some other company?
MR BLOOM: Yes, it was an asset of the English company, your Honour. That happened post-liquidation.
GLEESON CJ: In satisfaction of certain rights of the Bermudan company at that stage?
MR BLOOM: It had no rights. It had never become a shareholder. It was by direction of the existing shareholders, CPH and MLG.
GLEESON CJ: To the liquidator?
MR BLOOM: Yes.
GLEESON CJ: Is that one of the disposals of property?
MR BLOOM: Not which the Commissioner's delegate formed his opinion about. The only disposal about which he formed his opinion was the payment of a dividend on 8 May, but that never happened.
GLEESON CJ: Where do we see - it is page 1197, I think.
MR BLOOM: The determination reports are in volume 5.
GAUDRON J: Do you have a finding that no dividend was ever paid? That is not a matter that has been dealt with either, has it?
MR BLOOM: Your Honour, on no view could it be said that a dividend was ever paid and it has not been proceeded with by our learned friends on that basis. They have proceeded on the basis that the distribution of property was a different one. Certainly Justice Hill found that there was doubt as to whether a dividend had been validly declared and that there was no payment, so our learned friend switched horses from the dividend to the distribution post-liquidation. But the difficulty, in this context, that we point to is that that was not what the decision maker formed the opinion about.
HAYNE J: There is bound up in that proposition a series of propositions of company law that are not self-evidently demonstrated to me at least at the moment, so you should make no assumption that I follow any of the premises from which those assertions proceed.
MR BLOOM: Your Honour only needs to know this, that it is not even put against us that there was a dividend paid on 8 May, because there is no foundation for that to be put and indeed what was put in the Full Court, and indeed before Mr Justice Hill, was that there had been a switch of case to the post-liquidation distribution and not the dividend.
GLEESON CJ: But I am looking at page 2186 in volume 9 at line 50, where Justice Hill says:
It may be correct to say, as the Applicants do, that there was no payment of dividends in the company law sense.....But there were, if no dividends paid, distributions of assets in the liquidation in specie - - -
MR BLOOM: Yes, your Honour.
GLEESON CJ: That is what I had in mind when I referred to the assignment of the debt. Then, on the following page, there is a section of the judgment headed "Was a Valid Dividend Paid?".
MR BLOOM: Yes, and he rejects an argument based on the doctrine of informal assent to hold that Brookton supports the argument that no valid dividend was paid. Well, no dividend was validly declared on 22 March, payable.
GLEESON CJ: But then he says on page 2188 that it is not necessary to reach a conclusion on the point.
MR BLOOM: Yes. That is because he has found that the scheme is not, at least in the first instance, one by way of dividend stripping and he has also found that the opinion has miscarried, for other reasons. Perhaps if I can take you to the reasons why his Honour found that the opinion miscarried.
HAYNE J: Well, just before you do, Mr Bloom, apropos of what you have just said, can I understand what you say his Honour is saying at line 9 on page 2188 and following? Did I understand you to say that Justice Hill formed no view on the issue of payment of dividend?
MR BLOOM: Yes, your Honour.
HAYNE J: Yes. What is his Honour saying, in the second sentence?
MR BLOOM: If the resolution was valid?
HAYNE J: Yes.
MR BLOOM: Then the actions which occurred subsequently involved a payment of a dividend, but the only actions that occurred subsequently were post-liquidation and could not have involved the payment of a dividend. Nothing occurred before liquidation which could have involved payment and if, on the other hand, the resolution invalid, then the distribution of the assets were distributions by the company in liquidation; they must always have been that.
HAYNE J: In either case, the result of the scheme was dividend stripping.
MR BLOOM: In respect of one company. His Honour is there referring to the second limb and he is bringing back in his conclusion that if you have the effect, you need not have the purpose, for the second limb of section 177E.
GLEESON CJ: Why did he reach that conclusion only in respect of one of the companies and not in respect of the other?
MR BLOOM: Because, your Honour, he found that CPIL did not have sufficient profits to pay the relevant dividend in that it had large accumulated losses and, for instance, if that company had been liquidated, then section 47, which deems distributions by a liquidator to be dividends in certain circumstances, envisages that that does not apply to so much of the profits as are used to pay up capital - a loss of paid up capital, which is the case. His Honour was essentially going to that and also the concept of the impermissibility of the nimble dividend, which your Honours would recall is the impermissibility of paying a dividend out of current year profits where you have accumulated losses.
Part of the difficulty, your Honours, with respect, comes from the fact that I have not yet got to these aspects of the case. My learned friend Mr Shaw, chose and preferred not to take you to them. So it may be that if I can come to them in order, I will, but what I should now do is demonstrate to your Honours what we said about the pooling of profits and the problems with the determination report, which I hope your Honours will be clear on the face of it, without the need to interpret his Honour's statements below, although I will have to go to one of them and that is his Honour's finding about this. At page 1215 in volume 5 is the "Asiamet Dividend Stripping Scheme", "Part IVA Determination Report".
GLEESON CJ: Do not assume that I understand where Asiamet fits into this at all.
MR BLOOM: Well, it was a related corporation. That is all your Honours need to know for the purposes of this exercise and it would really be adding facts that you do not need to know if I go into it any further at the moment. Now, if your Honours go firstly to page 1232, you will see that that was prepared by Mr Magro on 21 December 1994 and approved by Mr Perry on 21 December 1994. That is the same date as your Honours will find at page 1207 for the Reorganisation Dividend Stripping Scheme Determination Report which commences at page 1191. They are both on the same date; same decision maker. If you go back to page 1215, step 7 in that alleged scheme or sequence of events is a loan from CPIL(UK) to Asiamet - ARL - of $US33 million. Then if your Honours go to page 1221, at line 35:
It is the Commissioner's contention that the loan from CPIL(UK) to ARL(HK) of US$33, 698,507 on 10 April 1990 falls within the definition of a disposal of property under subsection 177E(2)(b) -
and then, your Honours, passing over 1222, where your Honours will note the same page, virtually, as the one your Honours have been taken to in the reorganisation report amalgamating the two sets of assets. At 1223, line 19:
In summary, it is the Commissioner's opinion that the loan to Asiamet Resources Ltd and/or the transfer of the debt, (US433,698,507) owned by ARL(HK) from CPIL(UK) to CPIL(B) represents a distribution of profits -
Now, there is a bit of confusion in there, but what is being said there is that at least one alternative is that the loan on 10 April 1990 represented a distribution of CPIL's profits to the extent of $33 million. Then you go back to 1191, which is the reorganisation dividend-stripping scheme, and step 5 on that page is 8 May 1990, that is after the $33 million has, according to the decision maker, been distributed and been, in his opinion, deemed to be a distribution of profits of CPIL.
On 8 May CPIHL declared a dividend of 53 million and, of course, we know the declaration was on 22 March - it was said to be payable on 8 May, but the dividend was never paid and CPIL(B) never became a shareholder or entitled to be a shareholder.
HAYNE J: Does anything turn on the fact that the transaction of 10 April 1990 is said to be a loan and the transaction on 8 May 1990 is of a different quality?
MR BLOOM: Nothing turns on it, your Honour. In relation to each of them, each is mentioned as a species of disposal of property for the purpose of section 177E.
HAYNE J: Within the meaning of 177E(2) which is an extended meaning going well beyond what would ordinarily be connoted by the word "disposal".
MR BLOOM: Quite, your Honour. But the effect of the decision is to convert it into a deemed dividend, a disposition of property of the company which, in the opinion of the Commissioner, or by virtue of the formation of that opinion, becomes a deemed dividend. He has to form the view, your Honour recalls, that it represents - - -
GLEESON CJ: This is because, is it, underlying the idea of 177E is a reconstruction procedure?
MR BLOOM: Yes, your Honour.
GLEESON CJ: Which is related to the problem that Mr Shaw told us about as to treating a dividend-stripping operation as a scheme of tax avoidance. It was always open to say, "If we had not done it this way, we would not have done it at all". So that to bring an amount to tax, you need to have an element of reconstruction involved.
MR BLOOM: I am not sure I would agree entirely with what your Honour rephrased as the submission of my learned friend, Mr Shaw, and I will come to that shortly. But, yes, there is a reconstruction to the extent, because under subparagraph (b), the opinion which the Commissioner must form is that the disposal - in this case, the loan on 10 April - represents a distribution of profits. Once he has formed the view that that represents a distribution of profits, that is what it is for tax purposes.
GLEESON CJ: Yes, he has to bring it to tax, he has to form these opinions.
MR BLOOM: Yes. Now, he has formed the view that $US33 million went out of CPIL on 10 April and he then forms the view that a further - if one goes to page 1192 - $100 million came out of CPIL on 8 May. The only difficulty is that once that $33 million has gone out, there are not enough profits left in CPIL(UK) to make up a dividend of 100. It becomes clear that what he did, and indeed a concession to this effect - - -
HAYNE J: Why is that so when one is a loan? One is a loan, one is a payment, out and out.
MR BLOOM: Each is a disposition of property about which the Commissioner forms the opinion it represents a distribution of profits.
HAYNE J: Yes.
MR BLOOM: It, therefore, for the purposes of the Tax Act, which is now applying differently to the real facts, treats that disposition of property as a distribution of profits. That is the opinion he has formed. He has formed the view that $33 million has gone out as a distribution of profits.
HAYNE J: The premise for this argument is that there can be but one distribution of one sum of money, though it is distributed in one case by way of loan and in another case by way of dividend.
MR BLOOM: No, your Honour. If one goes back - - -
HAYNE J: But is that the premise of the argument?
MR BLOOM: No.
HAYNE J: No?
MR BLOOM: No. There is a rather more simple premise I hope, your Honour, if I am not oversimplifying it, that if you have $100 million to spend and you spend $33 million of it, you do not have 100 left to spend.
HAYNE J: I thought that was the premise I just put to you. If it was not, it was intended to be, Mr Bloom. It is the premise, is it not, that once it has gone out, that is it, it is gone?
MR BLOOM: Yes, your Honour.
GAUDRON J: But it is only notionally gone. It did not go in real life. It only went on the Commissioner's separate determination.
MR BLOOM: Well, then you go to (c):
if, immediately before the scheme was entered into, the company had paid a dividend out of profits of an amount equal to the amount determined by the Commissioner to be the amount of profits the distribution of which is, in his opinion, represented by the disposal of the property -
So, no, you cannot tax it twice, your Honour. You can tax it once in the hands of Asiamet - - -
HAYNE J: I did not ask whether you could tax it twice. What I am concerned to identify is the factual premise for your construction of the Act. I just want to understand it. I am not saying it is right or wrong, but I do want to know what you are putting. As far as I can understand what you are putting, it is that once it has gone out, no matter whether by way of loan or payment of dividend, it has gone out and cannot happen again. Is that the premise?
MR BLOOM: For tax purposes, yes, it is.
GLEESON CJ: It is a question of the Commissioner looking for available profits for distribution, is it not?
MR BLOOM: Yes, your Honour, yes.
GLEESON CJ: What we are doing at the moment is examining the process of reasoning that the Commissioner engaged in because it is only his effective opinion forming and determinations that bring about the necessary reconstruction to enable section 177E to result in tax.
MR BLOOM: That is precisely right because, your Honour - - -
HAYNE J: Thus, if the company puts its money on deposit with a bank, otherwise known as a debtor-creditor relationship, what has it done? Disposed of it, has it? On one view, it has made a loan of the money to the bank. It cannot be, can it?
MR BLOOM: Your Honour, if the Commissioner forms the opinion about that, yes, it can be, with respect, because this is an example of that sort of section where one has the ordinary facts and then the Tax Act intervenes, the Commissioner forms an opinion and treats black as white, and from then on, for the purposes of the Tax Act, black is white. So we are not now looking at a loan, we are looking at a disposition of property which, by the formation of the Commissioner's opinion, has been treated as "a distribution of profits of the company", and that is relevant to both paragraph (b) and (c) of 177E(1). I hope that does answer your Honour's question.
GLEESON CJ: But what we are trying to understand at the moment, amongst other things, is what you say was the Commissioner's process of reasoning because it was that that Justice Hill said involved error.
MR BLOOM: Yes. Justice Hill said it on two levels: one was equating net assets with profits; and the other was - - -
GLEESON CJ: Mr Shaw says that is just a slip.
MR BLOOM: Well, one of many in this determination report, your Honour, but if it be treated as just a slip and we take the benevolent eye to it that we should take to administrative matters, then, nonetheless, the pooling point is still there.
Let me go, your Honours, to 1197 and there your Honours have the amalgamation. Now, there is a reference which my learned friend told, I think it was, your Honour Justice Gaudron was unnecessary, or a word to that effect, to future profits. The reference was not unnecessary because, although there would be no future profits, it was a deliberate reference because the decision maker knew that having taken $33 million out by way of the exercise of his discretion from CPIL, there was not enough in CPIL to pay the further dividend of $100 million.
GLEESON CJ: Just before you go any further, do you accept Mr Shaw's proposition that another slip on lines 16 and 17 was to transpose CPIL and CPIHL?
MR BLOOM: Yes, your Honour.
GLEESON CJ: So we can assume that that is just a - - -
MR BLOOM: That is a true slip.
GLEESON CJ: Right, thank you.
MR BLOOM: But the amalgamation takes place and:
Further -
says the decision maker -
when the dividend is deemed to have been paid out of profits, the Commissioner contends that at the time, it is not necessary for there to be sufficient profits available for the payment of a dividend -
that is because the section refers to future dividends. So he is having a bit each way. Even if there are not sufficient profits available for the payment of dividends, then there can be future profits. But, of course, these companies go into liquidation and there cannot be, and this decision is made after the liquidation.
HAYNE J: Can I just come back to this point which, as you will observe, worries me.
MR BLOOM: Yes, your Honour.
HAYNE J: Let us add to the facts as you have described them. There is a loan on 10 April in connection with the Asiamet transaction. Let us assume that that loan is repaid on 17 April. Do you say that, notwithstanding the repayment of that which was taken from available profits, the loan and repayment disqualifies it from then being considered again in connection with the later transaction on 8 May, or is it the Commissioner's formation of opinion which disqualifies it from consideration?
MR BLOOM: Yes.
HAYNE J: Why does the Commissioner's formation of opinion disqualify it from consideration?
MR BLOOM: Because, your Honour, it is that which converts black to white. It is that which makes a loan a distribution of profits of the company for the purposes of the Act. It makes it something different. This is living in the unreal tax world, your Honour, rather than in the real world of the actual facts and construction concerning the disposition of property. There are many cases in the Tax Act where that happens, where a conveyance is deemed not to be a conveyance but something else.
CPIL had on the Commissioner's figures $US103 million, if one ignores the slip. It had paid out $US33 million. It had, therefore, slightly under $US70 million left. It could not, it follows, have paid a dividend out of that of $100 million. The Commissioner could not have formed the opinion that the distribution, or the payment of the dividend or whatever it might have been, could represent a distribution of profits to the extent of more than $70 million. So what he did is that he went to CPIHL. CPIHL had 86 million, was said to have only paid out 53 million. It had another 33 and that was sufficient to accommodate the additional dividend from CPIL if you treated the two together.
If one goes through this document having regard to that and to his Honour's finding, one sees that right throughout, for instance, at 1193 where, interestingly, the decision maker seems to think that purpose is essential to the scheme, at about line 36:
These definitions convey the sense that a plan is a proposed ordering of conduct designed to achieve a preconceived objective. Consequently, it is the Commissioner's contention that the above series of events were conducted in order to obtain a tax-free liberation of the profits of both -
Right throughout, there is a reference to the payment of a dividend from the profits of both companies. Whereas one might take a benevolent view to it if one did not know about the Asiamet report, when one puts those two together, one sees that this is exactly what the decision maker was saying. He was treating there as being one dividend of $153 million to CPIL (Bahamas) out of the amalgamated profits of both companies. So conceded Mr Shaw. At page 2142 in volume 8, there one sees the reference to the amalgamation that your Honour the Chief Justice referred to earlier this morning, which of course is in both of the determination reports.
CALLINAN J: Which page, Mr Bloom?
MR BLOOM: Page 2142 in volume 8, your Honour.
GUMMOW J: What is this document?
MR BLOOM: This is the Commissioner's concession. This was handed up by the Commissioner to Justice Hill below.
CALLINAN J: My last page in volume 8 is 2141.
MR BLOOM: I am sure that we did not prepare that appeal book.
GLEESON CJ: You are not suggesting Mr Shaw has had a go at us, are you?
MR BLOOM: Not Mr Shaw, your Honour, but there are others.
HAYNE J: If he did, he did not do it very well because I have it.
CALLINAN J: Whoever did it, I am disarmed from reading the page.
MR BLOOM: Mr Momsen can do without his for the moment, your Honour. Your Honours see at 2142 that reference to what appears in both of the determination reports, then at paragraph 2 is the submission that my learned friend made to your Honours this morning about look at the balance sheets and add net assets back that way and, therefore, the decision maker did not mean net assets, he meant something else. Then at page 2144, paragraph 6:
It is submitted that the companies' names on pp 19 and 44 have obviously been transposed, and their profits (dividends plus remaining profits) then pooled.
At paragraph 9:
the debt was actually assigned by CPIL(UK) and the profits necessary to support a further dividend in the sum of $33,648,507.
Now, that word "further" is a little misleading. In fact, as we see, the decision maker was of the view that that happened first on 10 April, the $33,000,000, almost wholly in CPIHL, not CPIL, which is the company that is said to have paid it.
There was plainly enough in the pooled profits of the two companies ($189,738,619) both to pay the dividends in the amounts which were purported to be paid ($153,000,000) and also to pay a further dividend of $33,698,507. These two amounts total only $186,698,507.
So, in other words, if you add the two together you can cover the two, even though you have got to take some of the profits for the payment of the dividend by a company alleged to have paid it from another company. Now, it was that that Justice Hill was referring to when he dealt with the matter at page 2188 in volume 9. There under the heading, "The Commissioner's Opinion" at line 22 he refers to the necessity to form the opinion. At 2189, line 45, he says:
Neither case on any view of the matter permits a conclusion to be reached that the word "profits" equates to net assets. One thing that is not capable of being a profit is paid up capital.
Apart from it being conceded that the Commissioner had the names of the United Kingdom companies reversed.....it is now also conceded that CPIL(UK) did not on any view of the matter have profits sufficient to support treating any disposal of assets as representing a distribution of profits. The Commissioner was only able to get to the result he did by pooling the assets of the two companies, when clearly he had to consider each separately for the purposes of s 177E(1)(b).
Now, in our respectful submission, the Commissioner cannot come along, as he did in the Full Court and as he seeks to do here, and say, "Well, I am not pushing the Asiamet matter any more, therefore, you can disregard what the decision maker did on 21 December. The decision maker made those decisions contemporaneously and those decisions were such that on 10 May there had been a disposal of profits of the company to the extent of $33,000,000 and pooling was necessary".
GAUDRON J: Except that, as we know, there was a loan.
MR BLOOM: Yes.
GAUDRON J: Do you now tell us that the Asiamet scheme was not persisted with by the Commissioner?
MR BLOOM: Yes, the Commissioner lost that one below and he did not persist in it.
GAUDRON J: So, what you are saying, in effect, a determination which was made and of no effect for the purposes of taxation in relation to Asiamet has now got to be taken into account in such a way that it somehow, although it is of no effect for any purpose, undermines everything in the Bahamas cases.
MR BLOOM: What I say is this, that we are concerned with the correctness of Justice Hill's view on the formation of the opinion.
GAUDRON J: Yes, but that view can only be correct, can it not - it may not only be correct - but at the moment the assumption is that Justice Hill's view is correct because of another determination?
MR BLOOM: Because the Commissioner put it that both determinations were made - - -
GAUDRON J: Yes, but it is because of another determination, it is not because of this determination.
MR BLOOM: It is because of both.
GLEESON CJ: This determination involved pooling.
MR BLOOM: Yes.
GLEESON CJ: If the Commissioner had another go at it, in the light of, amongst other things, the ultimate fate of the Asiamet matter, the Commissioner might do it differently.
MR BLOOM: He might get it right.
GLEESON CJ: Could he, if you are wrong on the scheme of dividend-stripping argument?
MR BLOOM: Could he? Could he form the opinion?
GLEESON CJ: Yes.
MR BLOOM: Well, presumably yes, your Honour. He would not form the opinion about Asiamet. He would simply form the opinion about the - well, I do not know what he would form the opinion about. There was no payment of a dividend, that is the problem.
GLEESON CJ: I am just looking back at section 177E.
MR BLOOM: Yes, your Honour.
GLEESON CJ: I presume from what you have said that it was argued in front of Justice Hill and in the Full Court that there was something in section 177E that permitted pooling. If it was not, presumably the argument would have come to a very early halt.
MR BLOOM: Well, it came to a pretty early halt, your Honour.
GLEESON CJ: Did the Commissioner seek to support pooling, by reference to section 177E?
MR BLOOM: Yes. He sought to say, just on the words of the section, that it was permissible. He had to.
GLEESON CJ: Well, assuming the matter went back - - -
HAYNE J: "He had to" and "did" is very different, Mr Bloom.
MR BLOOM: Well, your Honour, I will not pretend that I can remember precisely how he put it, but that was his submission that I have just read to your Honours to Justice Hill, and he says, quite clearly, about the decision maker, that it is clear that the person pooled them, and he then attempted to support the CPIL(B) dividend-stripping transaction on the basis that that pooling was something that was authorised. So, yes, your Honour, he did.
GLEESON CJ: Well now, if it went back to the Commissioner now and the Commissioner said, "I do not wish to argue about Asiamet any more and, in particular, I do not wish to treat that loan as a distribution of profits and I do not profess to be able to pool under section 177E either", is there anything to stop the Commissioner dealing with CPIL and CPIHL separately, forming the opinion under paragraph (b) and making the determination under paragraph (c) that would sustain the assessments in issue in these appeals?
MR BLOOM: There has to be a disposal of property of the company. He has to fasten on something that answers that description, which yet he has not done. He has to then form the opinion about that disposal of property. So there must be a disposal of property and it must be of the company. Now, there was not a payment of a dividend, that which he has currently formed the view about. If we are right, your Honour, on no payment of dividend and on Ayerst then, no, there is no disposal of property about which he can form that view.
GLEESON CJ: And the distributions in the liquidation are, you say, not disposals of property about which he has yet formed the view?
MR BLOOM: Correct.
GUMMOW J: But could he? You say he could not.
MR BLOOM: We say he could not if Ayerst is the governing law, because they would not be disposals of property, your Honour, of the company. The company would have ceased as a result of liquidation supervening to beneficially own it.
GAUDRON J: I want to ask why you assume that for the purposes of deciding whether there is, in fact, a dividend-stripping scheme, or use that comprehensively to explain (i) and (ii), you would look to English law?
MR BLOOM: Yes, your Honour. You would not look to English law for that purpose.
GAUDRON J: No, but why would you look to English law to see if any property of the company is disposed of?
MR BLOOM: Because they are English companies and the relevant statute - the name of which I - - -
GAUDRON J: Yes, but - - -
MR BLOOM: The Foreign Corporations (Application of Laws) Act says we look to English law.
GUMMOW J: For what? There is an assumption bound up in that.
MR BLOOM: Yes, your Honour. Well, we think it comes within matters relating to the status of the foreign corporation and its legal capacity, and the rights and liabilities of members.
GUMMOW J: But you have already said we are in "tax twilight land", we are in 177E, which is an Australian twilight land.
GLEESON CJ: What was the statutory provision to which you were just making reference?
MR BLOOM: Your Honour, it is the Foreign Corporations (Application of Laws) Act. That is an Australian statute, your Honour. It is that which says that one has regard to the - section 7.
GUMMOW J: In conflicts of law terms, there is a question about connecting factor for this legislation.
MR BLOOM: Of course, if we are wrong and English law does not apply, then we have - - -
GUMMOW J: What do you mean by "apply", you see?
MR BLOOM: Apply to determine what is property of an English company in liquidation.
GUMMOW J: For the purposes of 177E.
MR BLOOM: Yes, as a result of the Foreign Corporations Act.
GLEESON CJ: But we are not only in a twilight area, we are in a twilight area upon which the Commissioner has not yet entered.
MR BLOOM: Absolutely, your Honour. Your Honours will have seen our written submissions invited your Honours not to go into those points, notwithstanding that Justice Gaudron had described them as interesting. They are interesting - - -
GAUDRON J: I do not want to go into any of them.
MR BLOOM: That is what I tried to terrorise your Honour with at the special leave application, but unsuccessfully. It is hard though - - -
GAUDRON J: I think it is unnecessary to do more in these proceedings than determine whether or not it is a dividend-stripping scheme - - -
MR BLOOM: And then send them all back to the Full Court - - -
GAUDRON J: Or capable of being a dividend-stripping scheme. Perhaps that is the correct question. Is it capable of being a dividend - - -
MR BLOOM: Because of the presence or absence of purpose, and the significance of it.
GAUDRON J: Yes.
MR BLOOM: Of course, on that score, our learned friends, for the very first time in their written reply in this Court have suggested that purpose is an irrelevance altogether. So that any sale of shares in a company which has accumulated profits, or current year profits, to a purchaser who subsequently five or six years down the line pays a dividend, will be a dividend-stripping scheme. Then there was the fall-back position which said, "Oh, well, you have to have the purpose but it need not be a dominant or sole purpose". That is said, of course, in the absence of any finding to support that there was any purpose.
GAUDRON J: Well, in due course, I would be interested to hear your argument that they do need - - -
MR BLOOM: I think your Honour is steering me in that direction very quickly.
GAUDRON J: That you need purpose for a scheme having substantially the effect of a scheme.
MR BLOOM: I shall be pleased to do that, your Honour.
GAUDRON J: But does that mean you have finished with the determination, because I am not entirely sure what you are saying? You are saying it was not open to the Commissioner to make that determination once he had determined in the manner he did with respect to Asiamet. Is that what you are saying?
MR BLOOM: We are seeking to uphold what Justice Hill held in relation to the determination report.
GAUDRON J: Yes, but - - -
MR BLOOM: Vitiation of the opinion.
GAUDRON J: But do I correctly put your argument, or do I oversimplify it?
MR BLOOM: Your Honour put it much more shortly and, with respect, probably not as fully as it needs to be put. We have the benefit of the concession. Even without it, it is obvious that the decision maker decided on the same day, 21 December 1994 - - -
GAUDRON J: With a different determination - - -
MR BLOOM: Concerning the same company, made at the same time, that $33 million went out as a distribution of profits and that, none the less, the $33 million remained to go out as a distribution of profits a month later. That is all I need to say, with respect, your Honour, about that.
GUMMOW J: It may be all you want to say about it; I am not sure I understand it.
MR BLOOM: I am sorry, your Honour?
GUMMOW J: I am not sure I understand it.
GAUDRON J: Do you say the opinion was one that nobody could form, reasonably?
MR BLOOM: Yes. Nobody could reasonably form - - -
GUMMOW J: You seem to have some complaint of an administrative law nature about this which I do not quite understand, because they are two powers.
MR BLOOM: Well, in relation to the same company - - -
GUMMOW J: Put more precisely, there is the exercise of the power, twice, in respect of each determination.
MR BLOOM: Yes, your Honour.
GUMMOW J: Well?
MR BLOOM: When your Honour says "twice", there is the exercise of the power on the same day in relation to a disposal - - -
GUMMOW J: What does it matter if it is on the same day? What about if it was one minute before midnight and one minute after midnight?
MR BLOOM: Well, there is nothing to suggest that they were separated out in any way. In fact, the documents are so similar, the suggestion is that they were prepared all at the same time. I mean, your Honours, these were prepared on 21 December so that they could be served before Christmas, and they were, on Christmas Eve 1994.
GUMMOW J: Yes, well, so what?
MR BLOOM: They were hurried documents.
GUMMOW J: So what?
GLEESON CJ: If you look at the document at 1197, which is the determination relevant to these appeals, on page 1197, at line 15 to 20, it looks as though the determiner is doing some arithmetic, and the arithmetic that it looks as though he is doing is a pooling exercise. Now, does the concession and the reference to the Asiamet determination do anything more than confirm that what it looks as though there is going on there is, in fact, going on?
MR BLOOM: Thank you, your Honour, that is exactly what it is doing. The inference is clearly available from the document itself and the concession does no more than confirm it, and the Asiamet report does no more than confirm it.
GAUDRON J: So, then your argument is based, is it, on the use of the definite article in 177E(1)(b), "of profits of the company"?
MR BLOOM: Yes.
HAYNE J: Do I find anywhere, in the determination at 1191, explicit reference to Asiamet or the adoption of any figure which nets off the amount dealt with by the Asiamet distribution?
MR BLOOM: No. But you will find, at 1198, for instance, the Commissioner's summary, line 10, that his opinion is:
that the payment of dividends pursuant to s 177E of $153M US.....in total to CPIL(B) represents a distribution of profits of -
both. That is one of several such references following the amalgamation which is clear from the document itself. Might I turn then - - -
GAUDRON J: Can I take you back to "in whole or in part"?
MR BLOOM: In the Act?
GAUDRON J: In 177E(1)(b).
MR BLOOM: Yes, your Honour. Well, he has formed the view, on Asiamet, that it was a part distribution.
GAUDRON J: Why could the Commissioner not form the view that there was a disposal of property which represented, in part, a distribution of profits - - -
MR BLOOM: And, in part, what else, your Honour? That is meant to - - -
GAUDRON J: Well, what brings in the other part? Where does that come in?
MR BLOOM: Suppose, to take Justice Hayne's example, that you had profits of $1 million and you had a loan of two. The Commissioner might form the view that that loan represented in part a disposal of the 1 million.
GAUDRON J: But I am just asking you why the Commissioner's opinion or determination for the purposes of 177E is not satisfied if in part there are profits from which the distribution is made, or the disposition is made.
MR BLOOM: But that is not what he did, your Honour, on any view of it.
GAUDRON J: I did not ask you what he did.
MR BLOOM: As I understand it, that subsection is there to deal with the situation where the disposal exceeds the profits so that he can take - - -
GAUDRON J: Yes, but what is there in 177E to stop the notional amount being calculated by reference to the whole of the property disposed of, notwithstanding that the opinion is that it is only partially comes from profits?
MR BLOOM: Because the profits are the central fulcrum of (b) and (c).
GAUDRON J: Yes, but anything in the relevant sections that stops that?
MR BLOOM: The section itself, with respect, your Honour, is only open to the interpretation that he may form a view about profits.
GLEESON CJ: It would have another bearing, would it not? There is also a question of whether there is a scheme of dividend stripping.
MR BLOOM: Absolutely.
GLEESON CJ: Presumably part of the concept of a scheme of dividend stripping, whatever else it involves, involves releasing profits?
MR BLOOM: Yes, and then he must go to (c) and he must be able to say that:
if, immediately before the scheme was entered into, the company had paid a dividend out of profits of an amount equal to the amount determined by the Commissioner to be the amount -
so it must have had those profits to do it - of an amount that he has determined "to be the amount of profits". So it has to have enough profits to cover it for the sake of (b) and (c).
GLEESON CJ: On the bottom of page 2189 and the top of 2190 there is reference to what is said to be a concession. I am not sure I understand that, although I know you have taken us to it already. It is said:
it is now also conceded that CPIL(UK) did not on any view of the matter have profits sufficient to support treating any disposal of assets as representing a distribution of profits.
Is that an accurate recording of what was conceded? I am just trying to relate that to the question as to whether, if this went back to the Commissioner now, even allowing for the problems in the original determination, there could now be made a determination that would sustain the assessment.
MR BLOOM: It may have picked up what is also at the top of 2186, which is the existence of the accumulated losses, but the concession that was made is the one to which I took your Honours at the end of volume 8. That concession was that you needed to pool the profits and to use profits of CPIHL to have CPIL paying dividends in excess of $100 million.
GLEESON CJ: In line 20 on page 2190, Justice Hill finds:
that the Commissioner never turned his mind to the question of what amount of profits existed in each company - - -
MR BLOOM: In each company, yes.
GAUDRON J: But why does he have to? He only has to form an opinion.
MR BLOOM: About the company, not about the profits in some other company, your Honour. He has to form an opinion about the company. If there are two or three or a hundred companies, he has to form a separate opinion about each company. Surely that must be right, your Honour.
GAUDRON J: To an extent - well, certainly he has done that at 1197. He has then added them together. He has formed an opinion about the profits of each company.
MR BLOOM: If you go to his opinion, he says, the payments of $153 million in total represents a distribution of the profits of both, that is his opinion so expressed, and that is why, a distribution of the profits of both. Now, he is meant to be looking to see, in relation to each company, whether there is a distribution of the profits of that company. He cannot blend the two together, with respect, and that just illustrates the error.
GLEESON CJ: But is it a correctable error?
MR BLOOM: Only if he can find a disposition of property, your Honour.
GUMMOW J: Yes, then we are back to that connecting factor.
MR BLOOM: Yes, your Honour, he has to find a disposition of property first, and everything that I have said, your Honours, is premised on the fact that the company never paid a dividend on 8 May to CPIL (Bahamas) or anybody else. If he is able to use the post-liquidation distribution as a distribution of property, then, yes, he could go back and presumably form the opinion, because he will exclude the concept of Asiamet and the need to amalgamate. But that might itself involve, if we have to get into it, which I had hoped to avoid - from the Court's perspective, not from my own - the question of whether Ayerst or Franklin's Selfserve is correct and whether what is said about that in Meagher Gummow and Lehane is correct.
GAUDRON J: There is an anterior question and, again, I do not think it arises, and that is whether, for the purposes of this Act, you would be looking at English law to determine whether property is disposed of.
MR BLOOM: If the answer to that is no, and you would be looking at Australian law, then we have that tension between Ayerst in England and Franklin's Selfserve in Australia which was left open by the High Court in St Hubert's Island. The tension was noted, it was left open.
HAYNE J: Just state shortly for me where you say property resides once the company has gone into liquidation.
MR BLOOM: Your Honour, as best I understand it, beneficial ownership goes into some limbo in the Livingston sense. It is held then for the purpose of administration for the ultimate benefit of those who are entitled to share on distribution on liquidation. They may be creditors, shareholders. The beneficial property passes from the company, to whom, it is not precisely clear, it passes.
HAYNE J: Does legal title remain in the company?
MR BLOOM: It does, and if legal title was the only thing disposed of, it would be difficult to form the view that the legal title represented a distribution of the whole profits, having regard to the value of legal versus beneficial ownership.
HAYNE J: But the shareholder would have a chose in action. In a voluntary winding up where, by hypothesis there is - - -
MR BLOOM: To compel administration, your Honour, compel proper administration by the liquidator or - until liquidation was finished, as I understand it, your Honour, he would not have anything more than the right to ensure that - - -
HAYNE J: Due administration.
MR BLOOM: Yes, your Honour.
GLEESON CJ: Does that cover what you wanted to say about the opinion?
MR BLOOM: It does, more than amply, your Honour.
GLEESON CJ: The bottom line, as I understand it, is that you support the reasoning of Justice Hill?
MR BLOOM: Yes, your Honour, quite. Could I turn then to what is a scheme by way of or in the nature of dividend stripping. I should say to your Honours we have not been able to agree on time in any definite sense, except that we will be as economical as we can, each of us. I do not know what the Court's position is, although I know, of course, that there is another case starting on Thursday. It may be necessary for the Court to sit late or commence early today or tomorrow.
GUMMOW J: Or for you to speed up.
HAYNE J: It is very easy for you to say, Mr Bloom.
MR BLOOM: Your Honour, I say it with respect, of course, but your Honours have been - - -
HAYNE J: I speak only for myself, Mr Bloom, when I say I regard it as unsatisfactory.
MR BLOOM: I am not sure what your Honour regards as unsatisfactory.
GLEESON CJ: If you and Mr Shaw do not make an agreement then we will make one for you.
MR BLOOM: Your Honour, we will abide by it. I will get on as quickly as I can and as the Court, with respect, permits.
If I might then turn to what is a scheme by way of or in the nature of dividend stripping. If your Honours go to our written submissions at page 2 your Honours will see that there is no definition of the term "dividend stripping" in a statute and that it is helpful, in our submission, to go to the explanatory memoranda. Those extrinsic materials concerning 177E refer back to the terms that appeared in section 46A and 46B, the former of which was introduced in 1972.
If I could take your Honours to the materials which are amongst those we have given to the Court at, firstly, page 29. There is the first of the references to which your Honour the Chief Justice referred to. I think it is a reference to a judgment of Sir Samuel Griffith in 1921 and I think it may have been Purcell's Case.
GUMMOW J: Samuel Griffith was dead by 1921.
MR BLOOM: Thank you, your Honour, yes. Then it could not have been him, your Honour, but whoever - it is said to have been a Chief Justice of the High Court by the Treasurer.
GUMMOW J: It was Chief Justice Knox, I think.
MR BLOOM: Justice Knox, yes. Well, it was either Purcell's Case or it may have even been a Land Tax Case, but the last sentence of that paragraph quoted:
It does not extend to the case of a bona fide disposition by virtue of which the right to receive income arising from a source which theretofore belonged to the taxpayer is transferred to and vested in some other person.".
GLEESON CJ: Once you start slipping in words like "bona fide" and "genuine" and "ordinary" you are on the slippery slope. After all, it did not need section 260 to entitle the Commissioner to ignore sham transaction.
MR BLOOM: No, your Honour.
GLEESON CJ: So, by hypothesis, we are only dealing with genuine transactions.
MR BLOOM: Yes, your Honour. One then goes to what Lord Denning said in Newton's Case at a page earlier than my learned friend took your Honours to and I will not go to it, but the famous predication test, "that no one by looking at a sale of shares, cum dividend, could predicate that it was done to avoid the tax on the dividend". That predication test, of course, is referred to right throughout this explanatory material, and Newton's Case, likewise, as the basis upon which what the legislature were trying to do in relation to the tax avoidance provision. At page 32, the second paragraph:
Part IVA will have within it, in section 177E, a supplementary code to deal with dividend-stripping schemes of tax avoidance and certain variations on such schemes, the effect of which is to place company profits in the hands of shareholders in a tax-free form, in substitution for taxable dividends.
At page 55 of the second reading speech in the right-hand column there is the second paragraph to which your Honour the Chief Justice referred:
I draw to the attention of honourable members that Part IVA contains a supplementary code applicable to schemes that are commonly called dividend stripping - and to similar schemes - under which shareholders in effect receive company profits in a tax free form, in substitution for taxable dividends. The reason for such specially tailored provisions within the new general measures is to be found in particular features of such schemes -
et cetera.
GLEESON CJ: It is that, as I understand it, that required the power of reconstruction that you find in paragraphs (b) and (c).
MR BLOOM: Yes, and then back on 54, of course, there is the reference to the provisions seeking:
to give effect to a policy that such measures ought to strike down blatant, artificial or contrived arrangements, but not cast unnecessary inhibitions on normal commercial transactions by which taxpayers legitimately take advantage of opportunities available for the arrangement of their affairs.
That is relevant because no where in this explanatory memorandum or second reading speech is there a reference to Slutzkin's Case, though decided four years earlier, and that, with respect, is in answer to the submission of our learned friends that section 177E is there to deal with Slutzkin, as opposed to cases which really abused what had been decided in Slutzkin, a case your Honour the Chief Justice will remember, for instance, Gregrhon and that sort of case. I will come to that in due course.
If we go back to paragraph 15, there is there set out what the Treasurer said concerning 177E:
"sets out the initial and key test that there be a scheme that in fact is either one by way of or in the nature of dividend stripping or one having substantially the effect of such a scheme. Schemes within the category of being, or being in the nature of, dividend stripping schemes would be ones where a company (the "stripper") purchases the shares in a target company that has accumulated profits that are represented by cash or other readily-realisable assets, pays the former shareholders a capital sum that reflects those profits and then draws off the profits by having paid to it a dividend (or a liquidation distribution) from the target company.
In the category of schemes having substantially the same effect would fall schemes in which the profits of the target company are not stripped from it by a formal dividend payment but by way of such transactions as the making of irrecoverable loans to entities that are associates of the stripper -
So schemes having substantially the same effect, your Honour Justice Gaudron asked me about, that is what the government had in mind was covered by those. He then goes on:
It is of note that sections 46A and 46B of the Principal Act, which deal with dividend stripping from the angle of the stripping company -
that is, as your Honours know, by denying it the rebate upon which the schemes depended for their financial success -
apply to schemes that the Commissioner of Taxation is satisfied were of a dividend stripping kind".
And then in 1972, for the Bill which inserted section 46A, the then Treasurer Mr Snedden said:
"As foreshadowed by my announcement of 31st August 1971, the Bill also proposes amendments to deal with dividend-stripping arrangements which take advantage of the way in which the law at present requires the tax rebate on inter-company dividends to be calculated. It is proposed that the amendments will operate in relation to dividends arising out of an arrangement which the Commissioner of Taxation is satisfied is by way of dividend-stripping. The term `dividend stripping' has been employed in the courts here and in the United Kingdom and has come to have a widely understood connotation in professional and financial circles."
So the 1981 explanatory memorandum refers back to section 46A; this was the explanatory memorandum for section 46A. In neither case is a definition inserted, it being a term which is understood to have, by reference to English and Australian cases, a widely understood connotation.
GUMMOW J: Connotation.
MR BLOOM: Connotation; did I say something else, your Honour.
GUMMOW J: No.
MR BLOOM: Yes, I am sorry, your Honour is emphasising that?
GUMMOW J: Yes.
MR BLOOM: Yes, your Honour.
GUMMOW J: Now your definition - I mean, sooner or later someone has to tell us what they say the expression means in the statute and your attempt is at paragraph 27 of your written submissions?
MR BLOOM: It is, by reference to the cases which - - -
GUMMOW J: Yes, I follow that.
MR BLOOM: Now there are two categories of case, your Honour: the first category is what might be described as traditional dividend-stripping cases, where the concurrence of the three important elements thought to be necessary to each one, were present.
GUMMOW J: The three being?
MR BLOOM: The three being: vendors who faced a liability to tax, either Division 7 or the company; a purchaser who was a trader in shares, who could draw off the dividend tax free because of the existence of the rebate and could then sell the shares at a loss equal to the decrease in value of the shares caused by the payment of the dividend. Stripping was so called, your Honour, because it involved stripping the value out of the shares so that the person who was a dealer in those shares could then sell them for the loss, and that is why it was called stripping.
Now, the sole purpose of each of those schemes, in each of those three cases, Patcorp, IMFC and Rowdell, was avoidance of tax for the vendor on the dividend. My learned friend said, your Honours, this morning, "Well, section 260 did not apply to Rowdell". That is true, but section 260 required an interpretation that said Rowdell had to have the purpose of avoiding tax for itself. Of course, Rowdell, which was to make a profit on this transaction by use of the provisions of the Tax Act, was not going to avoid any liability to tax itself.
It was creating a dividend for itself, which would be assessable but rebatable, and it would have a loss because it was a trader in shares. Hence, 260 did not apply. But the tax avoidance purpose was there in Rowdell to obtain for the Hancocks the access to the profits of Mulga Downs so that they could use those to get back into the company without having to pay tax on the dividends. If anything makes that - - -
GUMMOW J: Is it the consequence of your three elements that the company is left as a shell?
MR BLOOM: That is more an indicia, or one of the common indicia. There are a number of such things that we could not claim, fairly, to say were essential, so that if the absence of one of them is found, you could not have dividend stripping.
GUMMOW J: What about your paragraph 27(e)? Is that not essential?
MR BLOOM: It was essential to those cases, strictly dividend stripping.
GUMMOW J: I know, because it is essential for this Act.
MR BLOOM: Well, I am dealing only, your Honour, at the moment, with the first category.
GUMMOW J: The first category being what, the product of the cases?
MR BLOOM: The cases have actually said, in the cases, "What we are dealing with here is dividend stripping". There is a second category of cases where judges have said you might call some cases in the past dividend stripping, and another, John's Case, where the High Court said dividend stripping is illustrated by Rowdell, IMF and Curran's Case. Of course, the essence of the trick in Curran's Case was, by paying out the bonus share dividend, you reduce the value of the original shares.
So whenever the Court has said, as it did in John's Case, and as it did in Rowdell, Patcorp and IMFC, that what we have here is a milking or dividend-stripping operation, it has had a concurrence of all of these events. But Justice Gibb in Patcorp did say, on this second category, that one might call Bell, Newton and Ellers Motors - and I am referring now to paragraph 38 of our submissions - he said they might be described as dividend-stripping schemes.
GUMMOW J: Well, Bell involves some New Guinea connection, did it not?
MR BLOOM: Yes. Again, a Division 7 scheme. They were all Division 7 schemes. In Ellers Motors it is true that apparently counsel, in argument, used the term "dividend stripping" and Justice Walsh refers to it in quotes, but he does not describe what is going on before him as dividend stripping.
GLEESON CJ: Well, presumably, it was the pressure of undistributed profits tax and the absence of capital gains tax that built up the attraction of what was called "dividend stripping".
MR BLOOM: Yes. Even after the rebate went, it was still open for the stripper to do a commercial deal on an arbitrage basis. He could purchase the shares for such an amount that would give him the necessary loss even after the rebate was reduced by section 46A or 46B. There are schemes - 46B deals with them - to get around the denial of the rebate in 46A, and it is true, as our learned friends say, that, subsequently, 46A and 46B were amended to take account of the fact that you would have to set off a capital gains tax loss if you were a stripper. But those things say nothing about capital gains tax and the vendor. We rely here, of course, upon the fact that capital gains tax was payable after 1985 by the vendor. I mean, if there was anything that overcame Slutzkin's Case, it was the insertion in 1985 of capital gains tax.
The passage in Justice Gibbs' judgment - I will simply refer your Honours to it - is at 300 in Patcorp, and the reference is set out there in the submissions. In John's Case 166 CLR, there is a reference in your Honour the Chief Justice's argument at page 419 to transactions by way of dividend stripping being entered into for fiscal motives. Then at page 439, the Court says:
The overruling of Curran would have no consequential effect on the authority of other dividend-stripping cases such as Rowdell.....and Investment and Merchant Finance.
So, the second category is only brought in by what Justice Gibbs says in Patcorp might be described as dividend-stripping cases. That is, Bell, Newton and Ellers Motors. What we say about those is that it was a feature of each one of them that tax avoidance purpose so far as the vendor shareholders were concerned, was the sole - I think always the sole, if not the dominant, purpose.
GUMMOW J: Where do you get that from?
MR BLOOM: If I take your Honours to Bell's Case - - -
GUMMOW J: Or to put it precisely, was it necessary for the legislation that was being applied in any of those cases to fix on the words "sole purpose", or is it just some conclusion now to be drawn from the findings of fact in those cases?
MR BLOOM: Well, it is a conclusion fairly, I think, to be drawn from the conclusions in those cases, your Honour. Bell is at [1952] HCA 34; 87 CLR 548. At 571, last paragraph:
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. 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 predominant purpose, which was to ensure that Bell and his six colleagues should each received [sterling]11,000 tax-free instead of [sterling]11,000 subject to tax.
GLEESON CJ: Is the word "scheme" used in other provisions of the Act?
MR BLOOM: Section 26A was one, your Honour, "profit making undertaking or scheme".
HAYNE J: Section 46A(3) used it:
transaction, operation, undertaking, scheme or arrangement by way of dividend stripping - - -
MR BLOOM: Yes. And so the other sections, your Honour, dealing with dividend stripping, likewise section 160APH(a), those sorts of sections.
GLEESON CJ: There seemed to be two potentially dis-logistic words in the expression, one being "scheme" and the other being "stripping".
MR BLOOM: Yes, your Honour. The word "scheme" was said in Investment and Merchant Finance by, I think it was Justice Windeyer - I will give your Honours simply the reference[1970] HCA 1; , (1970) 120 CLR 177 at 189 - that a scheme, of necessity, envisages a program or plan of action and presupposes activities which are coordinated by plan and purpose.
GUMMOW J: Yes, though is that not what the determining officer had in mind at 1193?
MR BLOOM: It is, your Honour, yes, he adopted the same - - -
GUMMOW J: .....Justice Windeyer's judgment, is it not?
MR BLOOM: It must be, yes. Interestingly enough, it is very similar to what Mr Boucher himself, then the Commissioner, had in mind. We have set that out in paragraph 50 of our written submissions. Two years after Part IVA was introduced, and section 177E was causing consternation in terms of its interpretation, as it still is. Mr Boucher said:
Section 177E contains its own set of rules for determination of whether Part IVA applies - that is, the tests in section 177E are formally independent of the tests in the main provision, section 177D.
Yet, we think that some flavour or colour provided by section 177D is appropriately to be imported into section 177E. In particular, the broad notion of dominant tax purpose in section 177D does seem to help in coming to a conclusion whether, under section 177E, a scheme is by way of or in the nature of a dividend stripping scheme or has substantially the effect of such a scheme.
We have looked at a couple of cases where profits of subsidiary companies are, through liquidation distributions, to be moved to other companies in a public company group following a sale of shares from one to another member of the group. The companies whose funds are to be so distributed are ones that have ceased trading and their continued usefulness in the group gone.
The situations being ones where the profits concerned would still be in the group and available for distribution as profits to shareholders, when, one way or another, they would bear tax in their hands, we concluded that Part IVA would not be applicable.
The situation he is talking about there is very similar to the situation here. Indeed, your Honours, substantial dividends were paid the very next year to both of the respondents in this case, in the amounts of, if your Honours go to paragraph 37 of our written submissions, $US36 million, in the next year. The profits were kept within the Group and paid down to those same shareholders who had sold their shares to CPIL(B) but remained the shareholders in the Group as a result of the reconstruction or reorganisation.
GAUDRON J: So these dividends came from the Bahamas company?
MR BLOOM: Yes, your Honour. The purpose of the Bahamas, if I might just add this because my learned friend I think did not go into it sufficiently fully, at least for our purposes, and probably for good reason, is that it was necessary to have a country where there was the imposition of no tax to guarantee that the whole of the profits of the company would be taxed in Australia under the accruals legislation. By having a company in another country where it would be taxed, you ran into the difficulties of foreign tax credits and also the difficulty of being able to pay franked dividends. It was necessary for the profits to be taxed in Australia by accruals in order for franked dividends to be able to be paid. So it was necessary to have a company in a place where there would be no tax and then under the controlled foreign corporation or accruals legislation, the entirety of the profits of that company would be attributed to and taxed in Australia.
GLEESON CJ: Mr Bloom, is the heading of Part IVA part of the Act?
MR BLOOM: I think it an Acts Interpretation Act question, your Honour. I do not think there is anything in the Tax Act itself.
GLEESON CJ: You might care to look it up overnight but, according to what I am reading at the top of 2244, it is entitled "Schemes to Reduce Income Tax".
MR BLOOM: Yes, your Honour.
GLEESON CJ: That is an expression that might be thought to have a flavour of purpose. The word "scheme" that appears in section 177E has a defined meaning in the Part and, although the origin of part of that definition may be found, for example, in the passage in Investment and Merchant Finance Corporation to which you have referred, as I understand it, the definition of "scheme" in Part IVA, which is in turn headed "Schemes to Reduce Income Tax", applies to the use of the expression "scheme" in section 177E.
MR BLOOM: Yes, your Honour, that is so. I will look at the Acts Interpretation Act overnight and give your Honour a clear answer to that.
If I can just quickly go back to page 7 of our written submissions and go through what is on that so that I do not miss anything out, it has been put against us that Argosam, one of the English cases where Lord Denning again defined "dividend stripping", was a case where there were large assets and small profits. We do not know anything about that case because of the way it came to the court. It was a summons in the opinion of the court seeking an answer to a hypothetical question in the knowledge that the same question was before the House of Lords for determination, having been argued in another case. Lord Denning was of no short mind in terms of what to do with a case that came up seeking to do that and it was disposed of on the basis that no answer was to be given to the question that was sought. It was just in passing that his Honour dealt with the issue of dividend stripping.
GLEESON CJ: Section 13 of the Acts Interpretation Act deals with it.
MR BLOOM: Thank you, your Honour. Also, our learned friends rely upon the article by Mr Vincent. The reason for the reliance upon it is clear. It goes far further than any of the cases go. His very lengthy distillation of the cases and an attempt to find a common denominator to them does not, with respect, sit easily with the cases themselves. For instance, he determines that one of the English cases, Collco, did not have the additional feature existing in the traditional dividend strips of a benefit to the dealer from the sale of the shares, but what we have endeavoured to demonstrate in paragraphs 33 to 35 is that it was entitled to the benefit of the loss under Irish law at the time. It was an Irish incorporated company. With respect, one needs to be careful about the article because it really does represent quite a departure from what the cases say, and there is very good reason why our learned friends rely upon it rather than the cases themselves.
I have taken your Honours in the second category to Bell. To the same effect are the findings in Newton, the tax driven purpose, Lord Denning's famous predication test that is referred to in the explanatory memorandum is at the bottom of page 9:
what was the purpose of the arrangement?.....three-fold -
I am sorry, it is at the bottom of page 8:
In order to bring the arrangement within the section you must be able to predicate - by looking at the overt acts by which it was implemented - that it was implemented in that particular way so as to avoid tax. If you cannot so predicate, but have to acknowledge that the transactions are capable of explanation by reference to ordinary business or family dealing, without necessarily being labelled as a means to avoid tax, then the arrangement does not come within the section. Thus, no one, by looking at a transfer of shares cum dividend, can predicate that the transfer was made to avoid tax.
He refers to Keighery and Jaques' Case. Then he comes to the passage my learned friend referred to at the middle of the page:
Next, what was the purpose of the arrangement? It can clearly be seen to be three-fold: (i) To increase the capital.....(ii) To enable the original shareholders to receive a large sum.....(iii) To enable the Pactolus company to make a handsome profit in return for its part in the affair.
Now, Pactolus was the stripper. Then over the page, on page 10:
It is clear from this analysis the avoidance of tax was not the sole purpose or effect of the arrangement. The raising of new capital was an associated purpose. But nevertheless the section -
they are talking about section 260 -
can still work if one of the purposes or effects was to avoid liability for tax.
That is 260.
The section distinctly says "so far as -
and this seems not to require for section 260 purposes -
the sole purpose.
Looking at the whole of this arrangement, their Lordships have no doubt that it was an arrangement which is caught by s. 260. The whole of the transactions show that there was concerted action to an end - and that one of the ends sought to be achieved was the avoidance of liability for tax.
Now, there was no finding of fact in this case.
GUMMOW J: What you seem to be doing, Mr Bloom, I have been looking at your paragraph 27, is to say, "Oh, well, I cannot tell you which of the integers in paragraph 27 (a) to (e) is absolutely essential; I cannot tell you what the core meaning is; but I do not need to do that because I can talk about sole purpose". That is not present here.
MR BLOOM: No, we have gone on to say that none of these things are present from paragraph 27.
GUMMOW J: Are you saying they all have to be?
MR BLOOM: No.
GUMMOW J: That is my problem.
MR BLOOM: No. Your Honour, by reference to the two categories, one, that are the traditional dividend stripping schemes, and, one, that are the second category where Justice Gibbs said you might describe Bell and Newton, et cetera, as dividend stripping schemes, you might so describe them.
GUMMOW J: You criticise Mr Shaw, but I cannot quite see why - - -
MR BLOOM: Well, your Honour, with good reason yes, but - - -
GUMMOW J: It does not cut both ways.
MR BLOOM: The thing which is common to each category is this purpose of tax avoidance, namely, avoiding the tax for the vendors of the shares. My learned friend took your Honours to Hancock's Case - - -
GUMMOW J: This phrase, "sole purpose", is just an appalling expression, really. Only tax lawyers could ever explain what a "sole purpose" was.
MR BLOOM: We have to do it daily, your Honour, not with great success always.
GUMMOW J: You do not have to deal with this section, it seems to me, unless some section tells you you have to do it.
MR BLOOM: Yes, well, your Honour, the interesting thing is that my learned friend says that in Part IVA they were trying to overcome the deficiencies in section 260 that relates somehow to purpose.
GUMMOW J: Why would they do that by introducing a sole purpose?
MR BLOOM: They did. In 177D, in express terms, that is the main tax avoidance area, they said, it must be so all done on purpose.
GAUDRON J: No, does that not say, "it would be concluded that"?
MR BLOOM: Yes, your Honour.
GUMMOW J: Exactly.
GAUDRON J: So, one is hypothesising, one is not looking, in a sense, or it is - - -
MR BLOOM: I do not know about hypothesising, your Honour. You will hear from me on that tomorrow. Expecting, perhaps - reasonably expecting, if one may, with respect, prefer that term.
GAUDRON J: Can I ask you this while you are interrupted? What is wrong with saying, "Dividend stripping is the process whereby moneys which might have been used to pay dividends goes to somebody, any person, in circumstances in which that person does not pay tax on it"?
MR BLOOM: Well, your Honour, we have endeavoured to deal with that in paragraph 49. That, of course, is the lesser of my learned friend's extremes. It is still, with respect, an extreme, in our respectful submission.
GAUDRON J: An extreme of what?
MR BLOOM: An extreme view of what might constitute a scheme by way of dividend stripping.
GAUDRON J: No, I did not ask you what is a scheme?
MR BLOOM: What is a scheme?
GAUDRON J: No, I said, what is dividend stripping?
MR BLOOM: Well, your Honour, we are concerned, of course, with the term "a scheme by way of or in the nature of dividend stripping".
GAUDRON J: I know that, but it need only be a course of action, having a result - - -
MR BLOOM: Your Honour, a dividend-stripping scheme, properly so called, is that which the courts dealt with in Rowdell, and in IMFC, and Patcorp.
GAUDRON J: But if you look at it in its component parts, and just look at dividend stripping - forget about the scheme - is there anything wrong with what I have put to you?
MR BLOOM: Yes. Stripping was thought to reduce the value of the share. You stripped value from the share by taking out the dividend - that is what Justice Gibbs deals with in Patcorp 140 CLR at 299; Justice Jacobs at page 313 - I merely give your Honours the reference. It is the taking of the value from shares. That is what stripping was all about. That is what dividend-stripping schemes are all about. In Slutzkin, the vendors sold their shares to a purchaser who went on to strip the values from the shares by paying the dividend to himself and then being able to get a benefit by re-selling the shares, but the vendor was not a party to that scheme.
Now, if your Honour assumes that every sale of shares, in a company which has profits, to a person who may pay a dividend to himself or herself, without paying tax on that dividend, is dividend stripping, then every sale of shares by a resident of Australia to a non-resident, every sale of shares by a resident of Australia or a non-resident of Australia to an exempt institution, would be a dividend-stripping scheme.
GLEESON CJ: In the context of schemes to reduce income tax, are we talking about schemes to reduce income tax payable under the Income Tax Assessment Act of the Commonwealth?
MR BLOOM: Yes, your Honour, and by the vendor. It is quite obvious - the one thing common to both categories of dividend stripping that we say would convert a scheme which is not one by way of dividend stripping into one which is, is the existence of what the Full Court said was necessary, namely, this sole, driving, if you like, dominant purpose, of avoiding tax for the vendor on the dividend.
GUMMOW J: Do you accept "dominant" rather than "sole"?
MR BLOOM: Yes, your Honour. I am content with that, given the findings of fact I have here and, indeed, the findings of fact here permit no other purpose to be found. There is no finding that would support a non-dominant but substantive purpose of avoiding tax for the vendors. The reason why the dividend was declared, and bear in mind CPIL which had all these losses would never have had to declare a dividend. It had section 47 available to it on liquidation. It could have paid up its losses, no question. The reason it was paid, and the evidence was clear on this, was to do with indexation and capital gains tax.
Now, without trying to be too detailed about it, when indexation existed, and it did at this time - your Honours remember that every year your cost base went up by the consumer price index. Now, if you sold an asset but did not do so for more than your indexed cost base, you did not get the benefit of indexation. You had to sell it for more than the indexed cost base to get the benefit of indexation.
Now, the evidence was that the dividend was paid, effectively, to distribute value here between CPH's ordinary and redeemable preference shares so that the latter would not lose the benefit of indexation that had accrued to them. The dividend increased the value of those shares to a point above the indexation so that they could be sold and the indexation captured rather than being lost.
GLEESON CJ: Is that the answer to the question that I asked Mr Shaw this morning as to why they did not just, in one of these companies, use the current year profits to offset earlier losses?
MR BLOOM: Yes, your Honour, which they would have been perfectly entitled to do. That is a matter, too, which is relevant when one comes to see whether it is a scheme by way of dividend stripping. There would have been no need for CPIL, with all these accrued losses, to pay a dividend out to anybody. If CPH and MLG had wanted, they could have put the company in liquidation, used those profits to pay out the loss in paid-up capital and there would have been no dividend. The dividend was there for the reason that was given and we have referred to that in our submissions.
GUMMOW J: Is not all this another way of saying that if have (a) to (e) it is a fair inference to draw there was a dominant purpose?
MR BLOOM: Yes, your Honour. Yes, that is a good way of putting it, with respect, your Honour. If you have the absence of a lot of these things, then it is a fair inference to draw the contrary, and that is what the Full Court did. That is exactly the process the Full Court carried out. They said, "Well, we will look at capital gains tax and we will look at the huge assets compared to the relatively insignificant profits, relatively speaking, and we say that things like that are indicative of the absence of the purpose". I will come to that before I sit down, your Honours.
We have seen Mr Boucher, himself, making public statements. Immediately after 177E came in, he, himself, saw the need for dominant purpose as the means of distinguishing those ordinary sales of shares that would not be dividend-stripping schemes from sales that would be. That is the distinguishing factor. Your Honours also recall in paragraph 53 of our submissions, Justice Hill's finding that if it were not for the need to avoid the risk of double taxation and hence the need for the reorganisation, the accumulated profits of both companies could have sat there forever.
Now, if you compare that to cases like Hancock where the Division 7 liability was imminent, either undistributed profits tax or tax on distributions. There was no way round it. They were schemes to get the vendors of the shares out of that liability that was about to befall them. Your Honours, we say, with respect, that if the Lefroys sold their shares today, they would be engaging in an ordinary business or family dealing that would not be caught by section 177E because nobody had the purpose in relation to them of avoiding tax for them on the dividends. For them it was nothing but a sale of their capital asset, namely, their shares.
MR BLOOM: The case which is put, in so far as it suggested the Lefroys would be taxable or that 177E is there to overcome Slutzkin's Case, is a case that says that every sale of shares, in a company, where the purchaser subsequently pays off a dividend regardless, your Honours, of whether or not the purchaser is taxable, is a dividend-stripping scheme. It is the fall-back position that suggested it is somehow relevant to look at the position of the purchaser but, as we have said, if the National Australia Bank were, on that basis, to sell the shares in the Bank of Michigan to an American company and the American company was subsequently to pay itself a dividend out of profits accumulated or current at the date of the sale, on our friend's half-way case, that would be a dividend-stripping scheme.
Your Honours, an illustration of the sorts of transactions that happen daily, where purchasers buy shares in companies in order to get at the underlying assets, is given by the decision of Hooker Rex 79 ALR 181 - your Honours do not need to go to it - and it was a case where Hooker Rex was a dealer in land - I think your Honour Justice Gummow sat on it and your Honour the Chief Justice appeared in it - the purchaser, a trader in land, often ended up buying the shares in companies that owned land and taking the land out immediately by a liquidation distribution, so that that purchaser could get to the land, which is what it was designed to do. Now in that instance, and, of course, there were stamp duty reasons for years between 1981 and following, as to why one might have purchased the shares in a company rather than the land itself, but if one was to subsequently liquidate, and if there were profits in the company, our learned friends say that is a dividend-stripping scheme, notwithstanding that there is no evidence of any purpose on the part of the vendors to escape the liability to tax on those dividends and notwithstanding that the transaction is one or ordinary business dealing.
Gregrhon 76 ALR 586 is a case which provides a very good contrast. Your Honours see from the headnote, which is accurate:
Taxpayers owned all the shares in a company (the target company) which had substantial projected tax liabilities.....The taxpayers sold their shares in the target company. Shortly before the share sale, the target company's undertaking and assets were sold to a newly incorporated company controlled by the -
vendors, and -
The sale price for the target company's business approximated both the share sale price and the amount of the target company's undistributed profits from the current and previous financial years, plus the small amount of paid up capital.
I think it was $100 paid up capital and $700,000 odd in - - -
GLEESON CJ: This case was the resurgence of section 260; it made a great comeback.
MR BLOOM: Yes, your Honour, it was; this and Gulland and Watson, your Honour.
GLEESON CJ: Years too late.
MR BLOOM: Yes, but I am sure it was appreciated nonetheless, your Honour:
The end result of the series of transactions was that the two taxpayers who were natural persons retained control of the business which previously had been operated by the target company and received, as payment for their shares in the target company, an amount approximating the target company's undistributed profits.....That amount was indirectly provided by disbursing the target company's resources, leaving it no liquid assets with which to meet the projected current year tax liabilities.
Then if your Honours go to 589 at the bottom of the page:
Mr Clough who was the person in charge of the operations of Detail, acknowledged in cross-examination that he had a "tax problem" in February 1980. Detail was liable to primary tax at the rate of 46 cents in the dollar on its net profit, and Div 7 undistributed profits tax to the extent that it failed to make a sufficient distribution of its after tax profits.
Then if one goes to Justice Fisher at 594 at about line 12:
The crucial end result had, notwithstanding this oversight, been achieved. Mr and Mrs Clough retained control of the furniture manufacturing and sales businesses and had received as proceeds of sale of their shares in Detail the entire net operating profit and reserves of that company less Mr Goldspink's fee. Detail for its part was left without resources from which to pay its current year primary tax and any Div 7 undistributed profits tax.
Then in the full paragraph from the bottom:
On the hearing of the appeal counsel for the Commissioner disputed the applicability of Slutzkin's Case, contending that there was a great deal more to the transactions in this matter than a mere realisation by the taxpayers of their shares. He referred to particular aspects of the matter in which the taxpayers were themselves or through their agents knowingly concerned. In these circumstances he said Slutzkin's Case and Hennessey v FCT (1974) 5 ALR 168 were clearly distinguishable upon their facts. Viewed objectively the transactions in this matter were not capable of explanation as comprising "an ordinary business dealing" but were necessarily labelled as a means of avoiding tax.
What was relevant was Newton, Hancock, Mayfield, Ellers Motor Sales and Gulland.
There are a number of grounds upon which I accept the submissions of the Commissioner. In arranging for the "restructuring of their affairs" and the sale of shares in Detail, the taxpayers and their advisers placed crucial reliance upon the reasoning in Slutzkin's Case.....However in my view, the facts, both in Slutzkin and in Hennessey, are very significantly different and neither case is conclusive or even persuasive authority in support of the taxpayers' contentions.
In Slutzkin's Case.....(the target company) was at the relevant time not carrying on a business and had become redundant. It had no "tax problem", whether primary or undistributed profits tax, and no necessity to make any distribution of its profits. The taxpayers wanted to dispose of their shares and realise the assets of the company in a manner which would not attract the tax which would be payable if the accumulated profits were distributed by way of dividend or on a liquidation. At the time of sale all the assets of the target company remained within its control in a bank account. The sale by the taxpayers of their shares in these circumstances, the High Court found, did not defeat or frustrate the provisions of the Act and was capable of explanation as an ordinary business dealing. It was nothing more than a mere realisation by the taxpayers of their shares.
Again, absence of purpose. Likewise, he goes on to say, Hennessey and Malone.
To the same extent is Justice Lockhart at 611 line 25 over to 612 at the top of the page, and Justice Spender at 616 and 617, relying upon the fact that there was "no commercial, professional or family purpose to be served". But of course, in this case there was. In the case before your Honours there was a commercial purpose to be served, namely, that of reorganisation. The Act itself - - -
GAUDRON J: You are using "commercial" very loosely though, are you not? It did not have to reorganised.
MR BLOOM: It did not have to be?
GAUDRON J: No, and there did not have to be a holding company outside Australia.
MR BLOOM: Yes, there did, your Honour.
GAUDRON J: To achieve what you wanted to achieve, but there did not have to be.
MR BLOOM: Your Honour, the whole purpose of this was to avoid double taxation. With respect, it would not - - -
GAUDRON J: Well, exactly.
MR BLOOM: I mean, the directors of these companies were people like Mr Wolfensohn and Mr Vernon Jordan and the head of Daimler Benz. These are not people who could consider the interests of their incorporators upon the basis that double tax was a good thing for them.
GAUDRON J: That may be so, but there was no necessity for there to be a holding company, for this company to be a holding company, was there?
MR BLOOM: Yes, there was. This was the international group. It operated businesses in America. It did not operate in Australia. It operated businesses in America, in the Netherlands and elsewhere around the world. This was the International Consolidated Press group, not the Australian group. The whole purpose of this was to ensure that the income of the holding company would become taxed in Australia because up to that point there was no tax by accrual. It was to ensure that it would become taxed in Australia without the detriment of double taxation. With respect, your Honour, to suggest that there is no necessity, that is contrary anyway to the findings of fact of the court, findings of fact, with respect, by which even my learned friend is bound.
GAUDRON J: I can understand that there were advantages in a reorganisation. I do not see what is commercial about it other than that there were advantages in the reorganisation in terms of the overall tax liability of the members of the group.
MR BLOOM: There were advantages in ensuring, as there always are, as this Court pointed out in Spotless.
GUMMOW J: Exactly.
MR BLOOM: The point is, those tax benefits, that is, the benefit of being taxed in Australia and not being taxed twice, are not tax benefits relevant to 177D or E here.
GAUDRON J: I just do not understand your use of the adjective "commercial".
MR BLOOM: Your Honour, perhaps it comes from the area in which I practise, but, with respect - - -
GUMMOW J: Spotless was designed to discourage it as setting up some false dichotomy.
GLEESON CJ: You have used the word "tax benefit", perhaps also in a way that needs clarification. That is an expression that is defined in Part IVA, and it is defined by reference to Australian income taxes.
MR BLOOM: Yes, your Honour, quite so.
GLEESON CJ: "Tax benefit", as defined in Part IVA, has nothing to do with the cost of doing business in other countries - - -
MR BLOOM: Absolutely not.
GLEESON CJ: - - - which includes salaries and wages, and interest on borrowed funds, and the exemptions by the revenue authorities in those countries.
MR BLOOM: Quite so, your Honour.
GAUDRON J: My point is, I really do not see what difference it makes. I do not think that the description "commercial" is accurate, in the ordinary sense of that word, and I do not see what difference it makes if it is.
MR BLOOM: Well, may I answer each of those - - -
GAUDRON J: Yes.
MR BLOOM: - - - simply by saying this, that it may not be persuasive to your Honour, but I will try anyway. It is commercial to take into account the possible incidence of double taxation in jurisdictions outside Australia. That is a commercial thing to do and it is a proper thing for the directors of a company to do. Secondly, it does make a difference, because unless you have this purpose, you do not have any distinguishing factor - - -
GAUDRON J: Unless you have which purpose, the commercial purpose?
MR BLOOM: No, unless you have the tax avoidance purpose, which has not been found to be present here.
GAUDRON J: But you are using it, as I understood, to say, "If there is a commercial purpose, there is no tax avoidance purpose".
GUMMOW J: That is the problem, Mr Bloom.
HAYNE J: One is a word of approbation and the other is a word of disapprobation.
GUMMOW J: Exactly, and you seek to make yourself holy, and it does not seem to me it matters whether you are holy or whether you are not holy. The only question is whether you have to be taxed.
MR BLOOM: I should be careful about that at any time, your Honour.
GAUDRON J: It just does not seem to be the relevant question to me, or the relevant way to approach it.
MR BLOOM: Your Honour, with respect, let me say why I am drawn into this area. My learned friend's submissions in reply, at least in writing and as far as we understood them today, was that 177E was meant to overcome Slutzkin. Gregrhon illustrates what is the difference between a case like Gregrhon, where the tax avoidance purpose drives what has happened, and a case like Slutzkin, where it does not. Now, it is in that context, in answer to what is put against us, that I am seeking to draw the age old distinction, which has been there since Lord Denning talked about it, and I think, earlier, in Purcell's Case, between ordinary family commercial business dealings and those of which you could predicate that they were done in a particular way to avoid tax.
HAYNE J: If you begin from the premise that a duty, some may say the primary duty, of company directors is lawfully to maximise their profits, then that has inexorable consequences about so ordering the affairs of the company as lawfully will minimise the exactions taken from those companies by governments anywhere. That is perfectly laudable, lawful activity.
MR BLOOM: And maximising Australian tax at the same time, in this case.
HAYNE J: At least for the moment it is not self-evident to me that it is part of a company director's duty to maximise the amount of tax that the corporation pays, but I pass that by. But non constat that it is laudable and lawful to maximise profits, that that may not lead to adoption of arrangements which pay less tax than the adoption of other arrangements. The solution to the problem which is contemplated by the Act is not to be found in the attribution of tags intended to convey approbation or dis-approbation.
MR BLOOM: My bottom line for this point, before answering the difficult question which has me in this trouble - - -
GUMMOW J: You are not in trouble.
MR BLOOM: I am in something, your Honour - was simply to endeavour to show that, yes, 177E would catch Gregrhon because of the existence of the naughty purpose, but a case like Slutzkin, which if one finds it involves no more than the sale of a capital asset, would not be within 177E. What is the distinguishing factor, what is the thing that makes one within 177E a scheme by way of dividend stripping and the other not, is the existence of the purpose.
CALLINAN J: Mr Bloom, in Gregrhon, it is the company financing the acquisition of its own shares.
MR BLOOM: It most certainly was, your Honour, and that is - - -
CALLINAN J: So it was in breach of the Companies Code as well.
MR BLOOM: Yes, well, it was disgraceful behaviour. They handed over all of the company's assets to the purchaser and enabled him to purchase - - -
CALLINAN J: In my quick look at it, there does not seem to be any reference to that breach, although it is apparent from the facts that that is what happened, is it not?
MR BLOOM: No, the Court contented itself to rely upon the fact that that was done without looking at the - - -
CALLINAN J: There is no reference to the statutory breach of the Code.
MR BLOOM: No.
CALLINAN J: But it is apparent that that occurred.
MR BLOOM: And so here, the Chief Justice asked this morning whether the payment of a dividend made any difference to the Bahamian holding company. The answer is it did not because it did not need a dividend in order to finance the purchase. What often happened, what always happened in these dividend-stripping cases, was that the funds came out of the company to assist the purchaser one way or another, either by repaying his bank or by coming into his hands as in Gregrhon, to make the purchase. Here, of course, the purchaser issued shares in itself.
That is put against us as being equivalent to money, but shares in a private company are not equivalent to money and Sir Owen Dixon said so in Hancock's Case at page 280. He said that you needed either money or readily realisable assets and that shares in a private company may well not fall into that category. Here, of course, Bahamas issued shares in itself so that you ended up with the same shareholders owning shares in Bahamas, owning the assets that the two UK companies had owned immediately prior.
GLEESON CJ: Is it Bahamas or Bermuda?
MR BLOOM: It is Bahamas. There was a choice; Mr Wolfensohn's strong preference, you will see in the documents, was for Bermuda, from a stability point of view. It just was not able to be achieved.
GUMMOW J: That is still a British colony.
MR BLOOM: I am sorry, your Honour?
GUMMOW J: Because Bermuda is still a British colony.
MR BLOOM: Does that go to its stability - - -
GUMMOW J: I think so.
MR BLOOM: - - - or to Mr Wolfensohn's preference, your Honour?
GLEESON CJ: But Part IVA is presumably a provision in aid of the Australian revenue.
MR BLOOM: Quite so, your Honour.
GLEESON CJ: Not any other revenue.
MR BLOOM: No, your Honour. And sections 160 - I will simply give your Honours references to them - 160ZZPA and ZZPC, are sections then in the capital gains tax provisions, which specifically talk about corporate reorganisations. Now, on the basis of our learned friend's case, reorganisations carried out pursuant to either of those sections, which involved either the liquidation of a company or the payment of a dividend, would be dividend-stripping schemes, notwithstanding that they were carried out precisely as the sections of the Act contemplated.
Your Honours, what Justice Hill said about it is at volume 9, page 2182, at the bottom of the page, line 45:
Obviously not all sales of shares, even if cum dividend, are in the nature of dividend stripping. Nor is the sale of 100% of shares in a company necessarily dividend stripping, even if the company has accumulated profits. What is missing in the first case and may be missing in the second is the conclusion that an objective observer would reach as to why the scheme has taken place. For a scheme will only be a dividend stripping scheme if it would be predicated of it that it would only have taken place to avoid the shareholders in the target company becoming liable to pay tax on dividends out of the accumulated profits of the target company. It is that matter which distinguishes a dividend stripping from a mere reorganisation.
In my view an objective examination of what took place here would not lead to the conclusion that there was a dividend stripping scheme, or for that matter a scheme in the nature of it, if that is a significantly different thing.
GLEESON CJ: His Honour was not addressing the point but would it make any difference to the proposition involved in the first line on page 2183 if after the word "pay" and before the word "tax" you inserted the words "Australian income"?
MR BLOOM: No, your Honour. No.
In my view, an objective examination of what took place here would not lead to the conclusion that there was a dividend stripping scheme, or for that a scheme in the nature of dividend stripping, if that is a significantly different -
So, that is his finding:
At least one of the United Kingdom companies did have substantial accumulated profits - that much is clear. Both, also, had substantial investments in overseas companies from which dividends could be derived. The United Kingdom companies had no need to distribute accumulated profits. Any accumulated profits could have sat there forever. The sale of shares and subsequent liquidations were brought about not to enable the shareholders to receive capital instead of dividend distributions, although that was one consequence of what happened, but as part of a reorganisation of the United Kingdom companies for reasons which had to do with United Kingdom and Australian tax other than in respect of dividends which might be derived from the accumulated profits by way of dividend.
GAUDRON J: Now, what if you took out "only" at the bottom of page 2182, then that conclusion does not follow, does it, and, "it would only have taken place". If you changed that to "predicated of it", that one purpose was to, then you get a quite different - - -
MR BLOOM: Not on the facts of this case, your Honour.
GAUDRON J: Well, I think you need to have a different analysis, "one purpose" or "it would be concluded that a purpose of it was". The questions are two-fold: what is the justification for requiring a sole purpose and what is the justification for requiring subjective actual purpose rather than imputed purpose of the kind referred to in 177D?
MR BLOOM: Well, your Honour, I am not sure about subjective purpose. I think it was the Full Court who turned to sole or dominant purpose. That is not the test Justice Hill is coming to. I will take you to the Full Court in a moment. Justice Hill is using the predication test and he is saying, you have to be able to look at this and say, it only took place - - -
GAUDRON J: You have to predicate a sole purpose, all right.
MR BLOOM: He did not express himself in terms of purpose unlike the Full Court. The Full Court expressed themselves in terms of sole or dominant purpose.
GAUDRON J: It would only have taken place to - that seems to employ purpose.
MR BLOOM: Yes.
GLEESON CJ: Mr Bloom, we will adjourn in a moment until 10.15 tomorrow morning. You and Mr Shaw have an opportunity overnight to make any agreement you wish to make to vary what I am about to say, but subject to any agreement that you and Mr Shaw make, we will resume at 10.15 tomorrow. You will have until 12 noon to say whatever you want to say on both cases.
MR BLOOM: On both cases?
GLEESON CJ: Yes. Mr Shaw will then have until 3.45 and then you will have until 4.15 to reply on your appeal.
MR BLOOM: Yes, I understand, your Honour.
GLEESON CJ: Now, in relation to the next case, that is, your appeal, when you come to deal with that there is one matter that I would like some assistance on, because my thinking is not clear on it at the moment, but in relation to section 79D, I would like to understand better than I do at the moment what the purpose of that quarantining was. I understand that I believe what the effect of it was, but I would like to understand what the legislative purpose of it was.
MR BLOOM: Yes, your Honour.
GLEESON CJ: We will adjourn until 10.15 am.
AT 4.18 PM THE MATTER WAS ADJOURNED
UNTIL WEDNESDAY, 13 DECEMBER 2000
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