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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 WEDNESDAY, 13 DECEMBER 2000, AT 10.17 AM
(Continued from 12/12/00)
Copyright in the High Court of Australia
GLEESON CJ: Yes, Mr Bloom.
MR BLOOM: Thank you, your Honour. Your Honours, with reference to your Honour the Chief Justice's reference to section 13 of the Acts Interpretation Act, we do rely upon that, your Honour. It does say that "The headings of the Parts" of the Act are to be treated as "part of the Act" and that heading does, we say, show that there is a need for the scheme to be one to reduce tax, that is, one intended to reduce tax or, put another way, having that purpose as at least its dominant purpose.
That conclusion was, without reference to section 13, of course, the conclusion of the Full Court in the passage in its judgment at the end of its judgment - I will not take your Honours to it but I will simply give your Honours the reference - at 2295 to 2298. They examined the various indicia that one might get from the cases about dividend-stripping schemes and did infer the absence of dominant purpose from those indicia.
GLEESON CJ: I am not sure that something you told us yesterday was quite accurate, about the determination. My recollection is that you told us that the determination proceeded on the basis that a purpose of tax avoidance was a necessary element of a scheme of dividend stripping.
MR BLOOM: Yes, your Honour.
GLEESON CJ: If you go to the determination at 1193 at line 40, it said:
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 CPIHL(UK) and CPIL(UK).
Is that what you had in mind?
MR BLOOM: Yes, your Honour.
GLEESON CJ: But if you go over to page 1204, when they are considering whether to impose a penalty for tax avoidance, and decide not to impose a penalty for tax avoidance, at line 35 they say section:
177E is a stand alone provision.
This section does not have regard to the circumscribed objective indicia of s.177D (the eight objective tests) to establish.....purpose - - -
MR BLOOM: Yes, your Honour I see that.
GLEESON CJ: Then they go on to say the reason they are not going to impose a penalty is that it would be inconsistent to do so because their view is that you do not have to have a tax avoidance purpose to attract 177E.
MR BLOOM: Yes, I see that, your Honour. Yes, I had overlooked that, I had not gone to that, I had been relying entirely on what was at 1193, your Honour. It helps us only in this, I suppose, your Honour, that they had found that there was not the presence of the dominant purpose in those passages at 1204.
GLEESON CJ: But when they came to the question of penalty, they seem to have declined to impose the penalty on the basis that there was no tax avoidance purpose at all.
MR BLOOM: Yes, yes. So it detracts from what I said to your Honour as an absolute proposition yesterday, but it helps us, we say, in terms of the determinant's own findings that there was not a dominant purpose of tax avoidance here.
Your Honours, the second thing is that I should give your Honours a note of the pages at which the dividend-stripping scheme is particularised. That is pages 31 to 32 and 37 of volume 1. Finally, I should take your Honours to the so-called second limb of section 177E(1) which we deal with in paragraphs 59 and following at page 12 of our submissions. That is the limb concerning schemes having the effect of schemes:
By Way of -
et cetera -
Dividend Stripping.
Your Honours will see from paragraph 63 we have again set out that passage from the Explanatory Memorandum which says that:
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 -
that was what certainly the draftsman had in mind.
The finding that one needs purpose, if it be right, for the first limb would be entirely otiose if it was not also needed for the second limb. In our respectful submission, purpose is the necessary element of both first and second limb and the purpose that one needs to find is dominant purpose and one does it by inferring the existence of that purpose from the presence or absence of the particular features of dividend-stripping schemes, as they have been called, in the various cases.
GLEESON CJ: The Full Court gave an explanation of the aspect of scheme relating to effect, which was rather different from the approach taken by Justice Hill.
MR BLOOM: Yes, it was. Justice Hill said if it has that result, that is its effect and, if it has the same result as a scheme by way of dividend stripping would have, that is enough and one does not go to purpose. We say, with respect, if that is right, there is no need for the first limb. If we are right in saying the purpose is necessary for the first limb, there is no need for the first limb at all. It simply has no role at all.
GLEESON CJ: The Full Court, as I understand it, explained the reference to "effect" by reason of a problem that arose in relation to deemed dividends.
MR BLOOM: Yes, your Honour, and in relation to the sorts of things that were being done at the time: the making of irrecoverable loans or the taking up of collapsible shares or collapsible units. There were all sorts of devices by which the profits were taken out of companies that were being stripped and these were the sorts of things which certainly the author of the explanatory memorandum had in mind in terms of that second limb. He did not, in our respectful submission, intend that the second limb would render the first otiose. The balance of our submissions on that point is contained in paragraphs 59 to 64.
If your Honours please, it might then be convenient to turn to section 79D. May I hand up to your Honours some documents which include something which we have prepared overnight going to the legislative purpose of section 79D.
It might be perhaps convenient if your Honours were to read that document first and put the others aside until I come to them in due course.
GLEESON CJ: It was section 23Q that used to produce the result that if you got a brief in Hong Kong and managed to get paid there you were better off?
MR BLOOM: Yes, your Honour. Also, of course, was the subject of this Court's consideration in the Spotless Case.
GLEESON CJ: Yes.
MR BLOOM: Your Honours, annexed to our submissions there is a diagram - if I could ask your Honours to take that out of Schedule D. It is handy to have reference to that as we go to the facts which are Schedule A to those submissions. Now, your Honours see that they are the steps in the entire transaction whereby moneys were provided to CPI (Singapore) which was the CPH representative in the consortium bidding for BAT.
GLEESON CJ: One thing I am slightly confused about now, is this: because we are dealing with these appeals in a certain sequence and we have dealt with the Commissioner's appeals first, we may not necessarily be coming to the problems in the chronological sequence in which they arose. Am I right in thinking that the issue about the 1989 tax year only arises at this point of the case?
MR BLOOM: Yes, your Honour. Chronologically, that is right, but it ought impose no particular difficulty, with respect, because the two are dissociated matters, except, of course, that there were shares acquired as part of this transaction, which was subsequently the shares that were sold to CPIL(Bahamas), but nothing turns of that connection.
GLEESON CJ: That is where I got into my mind the idea that Mr Shaw, I think, told me it was wrong yesterday, that there was something about the infusion of capital for the proposed BAT takeover that was related to the reorganisation, but I think I was corrected on that yesterday.
MR BLOOM: I think it is only correct to say that part of the capital in issue, that is the capital of CPIL(UK), was capital that was so raised; that is true, but it goes no further than that, your Honour.
Now CPF was the financier in the Consolidated Press Group and the evidence was that it always was the borrower for funds that were needed for the group and it always on lent at a profit, that is at a margin above what it had borrowed it. In fact, even in this case, the evidence showed that the moneys went directly from CPF to CPIL(UK) and that becomes important in due course, as I will endeavour to show your Honours.
GUMMOW J: Just say that again, Mr Bloom.
MR BLOOM: The moneys which CPF borrowed were sent directly from CPF to CPIL(UK) and those moneys were loaned by CPIL(UK) to CPI(Singapore) at interest rates which the evidence shows varied between 15 per cent and 16.25 per cent.
HAYNE J: You say "were sent"; what do you mean by "sent"?
MR BLOOM: Transmitted, your Honour, in $US.
GLEESON CJ: From the bank account of one company to the bank account of the other company?
MR BLOOM: Yes, your Honour, precisely. I will, today, take your Honours to the evidence that goes to that, and the evidence shows quite clearly that if there is a reasonable expectation here, it is that CPF would have loaned the funds directly to either CPI(Singapore) or CPIL(UK) rather than taking up the shares, if it be presumed against us for the moment that this was entered into to avoid the operation of section 79D.
What else is important from this diagram is that the scheme particularised and insisted upon by the Commissioner in the Full Court are the steps in red only. They do not include the borrowing by CPH Property or the lending by CPIL(UK). The steps are solely the taking up of shares by CPH Property in MLG and MLG in CPIL(UK). If I could just then go to the facts in Schedule A, your Honours, and start at number 9. It sets out the directors of CPIL(UK) and if it be relevant for the other matter, at least, CPIHL(UK):
Around December 1986 a decision was made to purchase stock in the Valassis Group in the US which carried on a major coupon insert business in that country.
11. The acquisition of Valassis was completed by Consolidated Press US Inc, [`CPUS'], a wholly owned subsidiary of CPIL(UK).
12. The acquisition was financed by a USD 200,000,000 loan from a syndicate of outside bankers, which loan facility contained a covenant that certain financial ratios would be maintained or achieved and in default the banks would be entitled to terminate the facility.
13 In mid 1998, following a price war in the US coupon inserts market which was adversely affecting profitability of Valassis, a decision was made to refinance the facility in Australian dollars.
14. Mr Bourke, the Financial Controller of the Appellant, had formed the view that the USD Valassis facility should be refinanced and that the borrowing should take place in Australia by reason of a lower cost of funds.
And, he says, because the CPH Group was better known to lenders in Australia.
15. On 25 May 1988 the Treasurer of Australia issued a consultative document proposing a change to the Australian tax system dealing with foreign source income. The proposal was to be delayed until the start of the 1989-1990 tax year.
16. Mr Bourke took advice about how to restructure the finance from Mr Cherry, a consultant to Arthur Young, and Mr Verzi, a partner of the same firm. A letter dated 10 August 1988, which had been prepared under Mr Cherry's supervision, contained the relevant recommendations as follows:
Firstly, and if your Honours go back to the diagram:
(a) That the funds be borrowed by CPF and on-lent to CPH Property at interest.....
(b) That CPH Property use the funds to subscribe for shares in MLG;
(c) That MLG in turn use the funds to subscribe for shares in CPIL(UK); and
(d) CPIL(UK) would then advance the funds to the Valassis companies.
Mr Cherry's evidence was that he:
acted in the belief, having taken counsel's advice, that s 79D of the Act had no application.
That, as your Honours will see in due course, was consistent with the respondent's own contemporaneous view as published in a public ruling in 1990 that investments such as this would not attract section 79D:
His reason -
Mr Cherry's reason, he said -
for suggesting the structure was to preserve foreign tax credits; that purpose did not -
as Justice Hill found -
involve a tax benefit.
The 10 August 1988 letter proposals were not immediately implemented because in around November 1988 News Corporation acquired the coupon insert business of a competitor of Valassis and Valassis returned to profitability. In March/April 1989 Mr Packer had talks with Sir James Goldsmith about a proposal to make a takeover bid for BAT. He charged Mr Bourke with responsibility to have available approximately [sterling]250 million to participate in the bid.
The profits, as your Honours will see from the next paragraph, 20, were expected to be in the vicinity of a billion pounds. It was expected that the participation by the group in the BAT takeover would presume profits, presumably in the form of dividends flowing down from CPIL(UK), in a very substantial amount. Dividends may have been realised within 12 months, although a more conservative estimate may have been longer. The evidence about that is to be found in the appeal book at page 106 line 36 to page 107 line 20.
Mr Bourke again consulted Mr Cherry and Mr Verzi about the structure to be used to participate in the takeover. Mr Cherry repeated his earlier advice concerning the Valassis structure, namely, that instead of the funds borrowed by the group being advanced directly to the takeover vehicle, that is CPI(Sing), CPH Property should subscribe for shares in MLG. That was the finding of both the Full Court and the finding of Justice Hill below, namely, that instead of the funds being advanced directly, they should be provided in this form of capitalisation, again in the context where neither Mr Cherry nor, for that matter, the Commissioner believed that section 79D would apply to a transaction of this kind at that time.
That advice was followed. The shares were obtained, the moneys were loaned. The takeover bid was conditional, your Honours see from paragraph 26, upon the sale of the Farmers Group Inc, a company conducting an insurance business. Regulatory approval to that sale was required in California. It was not obtained and as a result the Hoylake bid was withdrawn and on 5 June Hoylake went into voluntary liquidation. So Sir James' view of the unbundling of BAT and continued dividends thereafter never came to fruition.
If your Honours then turn to our submissions, but keeping the diagram handy, if your Honours would, at page 2 starting at paragraph 6, relevantly here in relation to Part IVA the essential elements are the obtaining by the taxpayer of a tax benefit in connection, we insist, with the scheme as particularised by the Commissioner, which we have called the Commissioner's scheme, and a conclusion having regard to the eight necessary matters, as this Court referred to them in Spotless, that the sole or dominant purpose of a person who entered into or carried out that scheme was to obtain that tax benefit. We say of course that neither was present here. The first of those is tax benefit. If your Honours were to find that there was no tax benefit because section 79D would not have applied, then that is the end to it and we win on that basis.
GLEESON CJ: That is the basis on which Justice Hill decided the case.
MR BLOOM: It is, your Honour. He decided it on one of the arguments we put forward, namely, that relating to nil amount. There is a second argument that even if we are wrong on nil amount, nonetheless the act of holding shares here, which was the act which was productive of the dividends that were expected, was not an activity carried on. If it was an activity carried on, it was not carried on in a foreign country, which is what is required before section 79D can apply.
Your Honours, we have set out section 79D at page 3 and our learned friends were quick to point out that we had an error in it, on the first line, the third last word "during" should, indeed - and we are indebted to them - be "in". So it should say "derived by a taxpayer in a year of income from a foreign source".
GLEESON CJ: I do not have that.
MR BLOOM: "Where the amount of a class of income derived by a taxpayer" - - -
GLEESON CJ: Page 3?
MR BLOOM: Page 3, paragraph 9, section 79D.
GLEESON CJ: Thank you.
MR BLOOM: Now, your Honours will find it easier to read section 79D if for the word "source", which is apt to cause confusion, you insert the word "activity", because "foreign source" is, in fact, defined as "foreign activity". So, really, when one looks at 79D(1), "Where the amount of a class of income derived by a taxpayer in a year of income from a foreign" activity "is exceeded by the sum of", as will be seen, even Justice Hill, who knows a lot about these things, sometimes confused "foreign source" in the defined sense of "foreign activity", and "foreign source" in the section 6A, B sense of common law source.
GAUDRON J: Where do we find the definition of "source", Mr Bloom?
MR BLOOM: In paragraph 10, your Honour, of our submissions.
GAUDRON J: Thank you.
MR BLOOM: For the purposes of this section, first, your Honours see there is a dealing with what is a "class of income". Interest is a "single class", "offshore banking income" is a "single class", and "all other income constitutes a single class", and "foreign source" in relation to a taxpayer" - it is defined in relation to a taxpayer, not in relation to an item of income - means:
a business carried on by the taxpayer at or through one or more permanent establishments in a foreign country -
That is not an issue here.
GAUDRON J: But it is in this section. That definition is in this section. How do you relate it back to section 79D?
MR BLOOM: Section 79D(2), which is set out just above paragraph 10.
GAUDRON J: I see, thank you.
MR BLOOM: It adopts those definitions, your Honour. At (b):
any other business, commercial or investment activity carried on by the taxpayer in a foreign country.
We place significance on the words "other" and "business", "activity carried on" and "in". Now, 79D was, in 1991, amended. It is Schedule B to these submissions and it was amended, relevantly, to this case, in terms of section 79D(1)(b), by now using the words "did not derive any". But I have to say at once, your Honours, that if you look at the bottom of the page, you are directed by the legislation to have no regard to that in interpreting the section in the form in which it is before the Court.
GLEESON CJ: Where is that?
MR BLOOM: At the bottom of that page on which the new section 79D is set out.
GLEESON CJ: The bottom of page 26.
MR BLOOM: Yes, your Honour. Your Honour sees "History"?
GLEESON CJ: Yes.
MR BLOOM:
S. 51(2) of No. 5 of 1991 provides that the substitution is to be disregarded for the purpose of interpreting former s. 79D in relation to any other assessment.
GLEESON CJ: Thank you.
MR BLOOM: Now, Justice Hill held that there had to be an amount of income derived, that is, a positive amount of income derived, before you could have something which was an amount, or the amount, within 79D(1), because of the word "derived", and also, of course, one has to be able to attribute to that which is derived, a class, and it is hard to distribute to a nil amount, a class.
GLEESON CJ: I thought what he said was that it also had to have a source?
MR BLOOM: In the sense of foreign activity, your Honour, I think.
GLEESON CJ: Yes.
MR BLOOM: He does, with respect - it is probably something for which counsel has to take blame - confuse the two in various places. The other thing about it is, if you look at paragraphs (a) and (b), one must be able to say that the deductions that one is talking about can be related exclusively to income of that class derived or the Commissioner is given the power to form an opinion that they may be appropriately related to income of that class derived. No opinion has been formed here, but both of those sections contain within them a mechanism that enables one, having identified the class of something derived, which, of course, means something positive having come in, the ability then to relate deductions to that amount derived. So his Honour held that nil amount was not an amount to which section 79D was capable of applying.
GLEESON CJ: But what, on your argument, happens if you carry on a business activity in a foreign country in a year of income and there are deductions which relate exclusively - let me put it this way at the moment - to that activity, but the activity in the year of income has not started to become income producing?
MR BLOOM: Then you would get the deduction, if there is no income under this section, as it then stood, and there are reasons relative to the wording of other provisions in the statute, including the part which inserted section 160AFD and the predecessor to section 79D, for that conclusion as well.
GLEESON CJ: But if, on the other hand, you had derived $100 of income from the business activity, the quarantining would operate?
MR BLOOM: Yes. It is hard to see that the investment of funds in carrying on a business activity, of the kind which we say was envisaged here, would produce an amount of assessable, that is, gross income, of $100, but the example is right if, for instance, it produced $100,000.
GLEESON CJ: This may not matter and it may be a search for the Holy Grail, but what would be the legislative purpose of making a distinction of that kind?
MR BLOOM: The legislature proceeded, we say, your Honour, upon the assumption that activities funded and carried on in a foreign land would be productive of income and, indeed, they gave a carry forward of the excess, the difference, between the outgoing and the income from that source against further income upon the assumption, we say, that the activity would be productive of income. They simply did not turn their minds to the possibility that an activity would be productive of no income, given the sorts of activities that were comprehended within subparagraph (1).
GLEESON CJ: Your mean this is what is sometimes called an unintended consequence?
MR BLOOM: Yes, but it is the sort of thing that simply the draftsman did not need to turn his mind to.
GLEESON CJ: That is what I want to understand, why?
MR BLOOM: Well, an activity, of the kind that one would fund to carry on a business or similar activity overseas, would be expected, we suggest, to be productive of income, that is, gross or assessable income in each year.
GLEESON CJ: Not necessarily in a particular year; not necessarily in the same year in which the activity is carried on.
MR BLOOM: Your Honour, it is not impossible to envisage situations where there are start-up activities and we would accept that, but we say the draftsman simply has not thought along those lines. All he has done is to assume that income would be derived.
GLEESON CJ: Would this cover the case of a barrister providing legal services in a foreign country?
MR BLOOM: That is complicated by international agreements. But if there were no international agreements, yes, your Honour.
GLEESON CJ: All right, then - - -
MR BLOOM: But barristers earn income, your Honour, when they provide those - - -
GLEESON CJ: Yes, and they return their income on a cash basis, not an accruals basis.
MR BLOOM: They do, yes.
GLEESON CJ: So, it is very common for the activity to occur during one accounting period and their derivation of income to occur during a later accounting period.
MR BLOOM: Well, yes, but all I can say, your Honour, is the draftsman probably did not turn his mind to that particular situation, if he thought of it as a commercial activity to be carried on in the first place.
GUMMOW J: Now, the nub of the Full Court's reasoning is at paragraph 67 of the Full Court judgment.
MR BLOOM: Of the judgment, yes, your Honour.
GUMMOW J: They, in effect, I think, raise some of the matters that the Chief Justice is putting to you. What is the answer to paragraph 67?
MR BLOOM: Yes.
GUMMOW J: Paragraph 66 excludes the possibility that there is only one construction open.
MR BLOOM: Yes. Well, your Honour, we say, with respect, that their Honours left out of account three things. One is that when one looks at this concept of activity carried on, that we say it is fair to infer that the draftsman anticipated there would be income and by giving a carry forward of the differential, if any, he also anticipated there would be a continuing income in the future. The second thing is that there are two constructional aids: one is a section which came in 1987 in the same Act which says that nil amount is an amount; and the other is that in section 160AFD, where it was anticipated there might be no deductions, the words "(if any)" were used after the word "deductions", whereas the words "if any" were not used in section 51(6) at the time that it and section 160AFD were put into the Act. Section 51(6), of course, was in the precise same terms as section 79D.
GLEESON CJ: It is a bit difficult to use later amendments of the kind that newspapers would call clarifications to construe earlier provisions of this Act, is it not?
MR BLOOM: Yes. Is your Honour talking about an amendment to the exact section itself, or to some other provision of the Act?
GLEESON CJ: Either.
MR BLOOM: There is some authority in relation to the former in Dunmunkle in the judgment of Sir Owen Dixon and in the judgment Lord Justice Rowlatt in Cape Brandy Syndicate, both of which are referred to by Justice McHugh in Hepples' Case.
GLEESON CJ: But it is the nature of extremely complex legislation of this kind that people notice things about it that they want to clear up as they go along.
MR BLOOM: Yes, yes, and because we are not allowed in this case, anyway, to look at the amendment because we have been directed by the legislature not to do so, I could not rely upon those cases anyway. Those cases do not cover the situation of an amendment to another part of the Act, so all we can do in relation to the 1987 amendment to section 160ARY is to point out that there the legislature focused on nil income and said that nil amount is an amount.
But in relation to section 160AFD, when they wanted to anticipate that there might be no deductions, they said "the deductions (if any)". That was in the same piece of legislation that inserted section 51(6) in the same form as section 79D.
HAYNE J: If we focus upon the last three lines of 79D(1), that is the lines appearing after paragraph (b), do you point to any difficulty in giving effect to those words if the Full Court's construction of the earlier words is adopted?
MR BLOOM: No. It is really earlier than that that we say the problem arises because you have to attribute a class to the non-income. The non-amount has to have a class and you have to be able to relate to that class and every time the word "class" is referred to "income of a class" it is referred to as "income of class derived", so the activity of relating must be done by reference to income of a class derived and that - - -
HAYNE J: But the effect of 79D(1), that is the operative effect of it, lies in part, perhaps in large part, in the reduction that is directed in those last three lines, is it not?
MR BLOOM: That is the operative part but may I say this to your Honour, with respect, our submission is that there are essential preconditions before that part operates and if the essential preconditions are not met then, in our submission, that operative part does not operate.
HAYNE J: Yes.
GAUDRON J: I would have thought you did take some comfort from the notion of proportionate reductions because if it is nil the notional of proportion of reductions does not actually - does it?
MR BLOOM: Yes, thank you, your Honour. Perhaps I was too quick.
HAYNE J: It is proportionate to the deductions, is it not?
MR BLOOM: Yes.
HAYNE J: You can do that, can you not, whether or not the income is nil? You can apportion - if you have three deductions, $100 for interest, $50 for stationery and $10 for pens or something, you can reduce those proportionately, can you not, as between themselves in the ratio 100:50:10? Is not that the - - -
MR BLOOM: It is where it is zero. I suppose that if you have zero as a denominator.
HAYNE J: But do you ever have zero in that proportionate calculation is the question that we are directing attention to.
MR BLOOM: As the numerator you must, your Honour, in the case here. The numerator must be zero because it is the amount of income.
HAYNE J: I do not follow that. I am sorry, you will have to explain that more elaborately.
MR BLOOM: You reduce the deductions which are - let us say the deduction is $50,000 and the income is nil. You reduce the deduction of $50,000 by an amount proportionate to those deductions. It is the second of them, is it not, your Honour, and equal in total to the amount of the excess that probably makes what I said wrong.
HAYNE J: At least at the moment, I cannot see how there is a zero element at all in the proportionate exercise.
MR BLOOM: In those three.
HAYNE J: There is a zero that would be taken into account if the construction urged against you were adopted in determining the excess. The excess of deductions would be the whole of the deductions but that is the only - - -
MR BLOOM: Yes. One can certainly determine the excess, there is no question about that. The difficulty, of course, is that the deductions referred to are those to which paragraphs (a) and (b) apply and (a) and (b), again, require a relation to income of a class derived. So, the deductions to which paragraphs (a) and (b) apply are deductions that relate exclusively to "income of that class" and are derived. We say it is hard to talk of a nil figure as having been derived and as having a class.
HAYNE J: Just to follow that point out a bit further to see if I understand it. Let it be assumed that the deduction in question is a borrowing expense. Is the point you just made a point how do you say that that borrowing expense relates exclusively to income of that class derived from that activity, there being no income?
MR BLOOM: None derived. None derived, so, how do you give it a class? And "derived" means, as this Court said in Read's Case - that was not a tax case - that the word derived means something positive coming in. I am not sure they used the word positive, but that was certainly the inference from the passage.
HAYNE J: I am surprised you put the weight there rather than the weight on the word "relate".
MR BLOOM: Yes.
HAYNE J: The difficulty that I thought you were pointing to was a difficulty in identifying relation.
MR BLOOM: It is a difficulty in performing the task of relating something to something if one of those somethings is a nothing.
HAYNE J: Sir Humphrey, thank you.
MR BLOOM: Your Honours, we have given you a reference to Read's Case on page 5 in paragraph 18(b) of our submissions and the relevant passage is at page 67 - I will not take your Honours to it - and then the three points that we make about the interpretation of the section, which is both nil amount and then this question of foreign activity, whether there is a business-like activity carried on and in a foreign country, are made in 19 and 20.
I have said what I want to say about nil amount, if your Honours please, and if I might then turn to the question of whether there was here a "foreign source" as defined. That involves that double question of, was there a business investment, et cetera, activity carried on by - the presumption here is, of course, CPH Property - in holding shares in CPIL(UK), a non-resident UK company, which was carried on in a foreign country.
GLEESON CJ: What is the relevant foreign country?
MR BLOOM: Hong Kong, your Honour. Your Honours refer to it from time to time, as do our learned friends in their submissions, as England, but it appears that the central management control of CPIL(UK) was Hong Kong. It is to there that the application for shares was sent by Murray Leisure Group and the assumption is here for the moment, and only for the moment, that we are treating CPH Property as having done what Murray Leisure Group did and acquired the shares in CPIL(UK) that it did not acquire, but that Murray Leisure did. That is the hypothesis which the Federal Court said we should work upon for the purposes of Part IVA. I will come to that when I deal with Part IVA.
GLEESON CJ: Where is the share register?
MR BLOOM: Of CPIL(UK)?
GLEESON CJ: Yes.
MR BLOOM: In Hong Kong, your Honour. Now, there were two activities identified in argument before the Full Court or two things which might - there is a better way of saying it - qualifies activities. One was the acquisition of the shares and the other was the holding of the shares. It is the latter that, in our submission, entitles the putative holder of the shares, CPH Property, to dividends. You do not become entitled to dividends by acquiring shares, rather by holding them and being a holder at the point of time at which the dividends are properly declared.
Now, the Full Court and Justice Hill treated acquisition as the relevant activity. We say, with respect, that is wrong. The relevant activity, if there is an activity, was holding. But even if the relevant activity was acquisition, we are concerned with the act of the Australian taxpayer in subscribing for shares. We are not concerned with the act of the company in which the shares are issued in allotting those shares. The act is one of subscription and the question is, "Was that an activity carried on by the taxpayer in the foreign land?". The answer to that we say is, no.
We only have one of the applications, your Honours, but it is at page 229 of the appeal book in volume 7. I simply give you a reference to it. The moneys, of course, were sent directly, as I have told your Honours, from CPF up to CPIL(UK) and that act of sealing - - -
GLEESON CJ: What was the page of volume 7?
MR BLOOM: Page 229, your Honour.
HAYNE J: It is volume 1, I think, Mr Bloom.
MR BLOOM: I am sorry, your Honour is right. Yes, it is volume 1. I am sorry, your Honour. That was the application under seal of Murray Leisure Group, and we are presuming that CPH Property did exactly what Murray Leisure Group did. Your Honours will see at the top of it, the address of the company, the seal is fixed by two directors.
HAYNE J: Why is it that you locate that activity as occurring in Australia?
MR BLOOM: It is an Australian company, your Honour.
HAYNE J: Yes, I understand that. Why do you locate this act as occurring in Australia?
MR BLOOM: By inference from that document, and certainly his Honour Justice Hill seemed to accept that the central management control of Murray Leisure Group was in Australia. There really could be no dispute about that.
HAYNE J: Thus it is the decision to apply, is it?
MR BLOOM: Yes, and the affixing of the seal perhaps to the application and the forwarding of the application.
GLEESON CJ: Why is it not the communication of the application?
MR BLOOM: The activity by the taxpayer in making that communication, your Honour, is putting it in the mail or on the fax machine or however it is done.
HAYNE J: We seem to be getting down to a postal acceptance rule almost, Mr Bloom, analysing it in this way, do we not?
MR BLOOM: We only do because the focus of the section is on an activity carried on by the taxpayer. The acceptance of the taxpayer's offer is not an activity carried on by the taxpayer, albeit that may take place overseas.
GLEESON CJ: Suppose there were a law of Hong Kong that made it an offence to subscribe for shares in a company in certain circumstances and this came within those circumstances. You would construe the Hong Kong law as applying to activity occurring in Hong Kong. Why would this not be a contravention of that law on the assumption I have made?
MR BLOOM: I am not sure that in order to get the territoriality there, your Honour needs more than having the Hong Kong company. That would be - - -
GLEESON CJ: A company with a share register in Hong Kong.
MR BLOOM: Yes. That would be the sufficient nexus with Hong Kong to provide the territorial connection for that sort of legislation. One suggests it still would not answer the question of whether the subscription took place in Hong Kong.
HAYNE J: Let us test it against Murray Leisure Group deciding in Australia at a board meeting it held in Australia to buy shares on the London exchange. Where does that investment activity occur?
MR BLOOM: If one defines it as the activity of subscribing, we say that takes place in Australia, your Honour.
HAYNE J: That was not my example, Mr Bloom, was it? It was to buy shares on the London exchange.
MR BLOOM: I am sorry, yes, your Honour, it was. It depends on whether the broker overseas is acting as an agent for the company here or whether it is doing it directly or whether he is acting as an independent agent. Indeed, those are the sorts of differences that the Commissioner himself makes in his ruling. It may be as well to go to that now. It is Schedule C to our submissions. Your Honours will see the second-last paragraph of what I might conveniently refer to as the digest. Where section 160AFD(7)(a) does not apply, that is the company does not have a branch it will be a question of fact as to whether the business, commercial or investment activity of a taxpayer is carried on in a foreign country for the purposes of (7)(b).
The key test, therefore, against which all the circumstances of each such activity are to be measured is whether those circumstances lead to the conclusion that the activity is essentially managed, controlled, organised and conducted by the taxpayer in Australia or in the foreign country.
Over at paragraph 17, that is repeated. At the top of page 12,897, the first full sentence:
Support for this view is to be found in the ordinary dictionary meaning of "carried on" in relation to a trade or business, being to conduct, undertake or prosecute that activity. The consideration that the business activity results, or may result, in the derivation of income that would be foreign income.....will not be the sole determinant of the matter.....
18. In that regard, one of the relevant considerations would be whether there is some active involvement in the foreign country of the taxpayer, the taxpayer's employees or appointed representatives (not being independent agents, or dependent agents of the type that would constitute a permanent establishment) in the business activity giving rise to foreign income. Where, for example, the business activity of the taxpayer is essentially managed, controlled, organised and conducted by the taxpayer in Australia, and foreign income is derived from sales arranged in a foreign country (or countries) through independent agents of goods manufactured by the taxpayer in Australia, or of industrial property rights or know-how developed by the taxpayer in Australia, it would normally be accepted that relevant deductible expenditure is not incurred in respect of the derivation of income from a "foreign source" for the purposes of para (b) of the definition.
19. The expenditure would not in those circumstances be subject to foreign loss quarantining. It would therefore be available for set off against Australian source and other foreign income of the taxpayer for the year of income.
Then, in paragraph 21:
The variety of commercial or investment activities that may fall for consideration under para. (b) of the definition are too numerous for the position of each to be specifically addressed in this Ruling. It is considered that the terms of para. (b) and established principles of statutory interpretation require that the basic guidelines set out in para. 17 of this Ruling, for determining when any other business activity should be regarded as carried on by a taxpayer in a foreign country, should generally apply equally with respect to commercial or investment activities. The key test, therefore, against which all the circumstances of each such activity are to be measured is whether those circumstances lead to the conclusion that the activity is essentially managed, controlled, organised and conducted by the taxpayer in Australia or in the foreign country.
22. As a general rule, it is considered that the activity of renting out real property -
now, they do not talk there about acquiring the real property but, rather, the income earning activity of renting it out -
situated in a foreign country would fall under that test to be treated as a commercial or investment activity carried on in a foreign country for the purposes of para. (b) -
and then, very importantly, paragraph 23:
Conversely, a "passive" investment undertaken from Australia, for example by an Australian resident investor who acquires shares in a foreign company listed on a foreign stock exchange by means of instructions placed from Australia with an independent stockbroker, located either in Australia or in the other country, could normally be expected to be not regarded under that test as a commercial or investment activity carried on by the taxpayer in a foreign country.
GLEESON CJ: What does that expression "passive investment" mean?
MR BLOOM: Well, they go on at 24, your Honour, to, I think, give an idea about it and it would cover the sort of situation here:
an Australian resident investment company or other taxpayer investing in foreign shares and/or securities may appoint or engage a manager or investment adviser in a foreign country or countries to facilitate and transact those investments. Providing the significant decisions with respect to the management, control, organisation and conduct of those investments remain with the resident taxpayer in Australia, the dividends and interest income derived from the foreign shares and/or securities, and related expenses, could normally also be expected to be treated as attributable to an activity carried on by the taxpayer in Australia. The would not, therefore, be subject to the foreign loss quarantining provisions of the Assessment Act.
25. However, the dividends and interest -
and 25 sets out what he regards as active as opposed to passive -
would be treated as related to an activity carried on in a foreign country or countries - and thus be subject to the foreign loss quarantining provisions - if the investment power accorded to the overseas manager or investment adviser is so wide as to effectively delegate to that person the essential management, control, organisation and conduct of the foreign investment - - -
GLEESON CJ: Where was the central management at control of CPIL(UK)?
MR BLOOM: Hong Kong, we understand, your Honour, but of Murray Leisure Group and, therefore, on the hypothesis that the Federal Court adopted, CPH Property, Australia, and if it matters, CPH Property, Australia, as well. So your Honour Justice Hayne sees that my answer to your question comes really from what I have discerned as a distinct differentiation by the Commissioner himself in his public ruling published in 1990.
HAYNE J: What is the significance that we are to attach to the public ruling?
MR BLOOM: It is not a binding public ruling, your Honour. Its significance lies more, in relation to Part IVA, when given the twin facts of the Commissioner's ruling, which is contemporaneous, relevantly, and Mr Cherry's own evidence that he believed, through counsel's advice, that section 79D - in another matter - that section 79D did not apply, whether one would objectively form the view that there was a reasonable expectation that this scheme was entered into to avoid section 79D.
GLEESON CJ: Where do we find the ruling referring to 79D and its
non-application? I see, it is for a reason different from the one that Justice Hill adopted.
MR BLOOM: Yes. The reference is section 160AFD.
GLEESON CJ: Did the evidence about Mr Cherry's understanding of the application or non-application of 79D indicate the basis of that understanding? I mean, was it Justice Hill's point or was it your second point, or did not the evidence show it?
MR BLOOM: It does not show the basis of it, simply that he had taken advice in other matters, as Justice Hill noted, that led him to the conclusion in his evidence that 79D had no application. He simply had not thought it necessary to do something to avoid section 79D because he did not believe it applied.
GLEESON CJ: What is the relevance of individual's beliefs about the operation of certain provisions of the Act when you come to apply section 177D?
MR BLOOM: That is not clear, your Honour. There are two cases which have recently gone on appeal to the Full Federal Court concerning the same issue of sales and lease back where one single judge has held that subjective purpose is a relevant matter to be taken into in relation to section 177D(b)(i), that is, "manner" of "the scheme" and the other judge of the Federal Court has held that it is not a relevant matter. It is not clear to what extent it is relevant. It seems to us, with respect, that it may only be a point of advocacy, somewhat unusual, but if neither the Commissioner nor the taxpayers thought 79D would apply one could assume that they entered into this transaction to avoid it.
GLEESON CJ: That is what I am not clear about. I mean, suppose you had an argument about whether Part IVA operated in a situation where the tax benefit in mind at the time of applying 177D is one that flows under a particular provision of the Act and it can be demonstrated objectively that the scheme produced that tax benefit but it also appears conclusively from the evidence that it never occurred to anybody connected with the scheme at the time that that tax benefit would result, perhaps, for example, because you had actual evidence that they honestly misunderstood the effect of the legislation. What, if any, relevance would that have?
MR BLOOM: Either none at all, or, if it comes in, it comes in under subparagraph (i), but here, of course, Justice Hill found that there were two tax benefits that flowed from the scheme. Potentially, one was not a defined tax benefit and that related to foreign tax credits. The other was the section 79D benefit. Now, if one is looking, as his Honour did, for dominance amongst those two purposes, which is the task his Honour performed, one would have thought that at least it was relevant to destroy the dominance of section 79D as the purpose, given both the Commissioner's ruling and Mr Cherry's evidence.
GLEESON CJ: I had in the back of my mind, and my memory might be playing tricks with me, an idea that one of the reasons why the courts in section 260 insisted on what they called "an objective purpose" was to avoid having to psychoanalyse people.
MR BLOOM: Yes, it is intended to be, as we understand it, subjective purpose objectively ascertained, and if that is strictly confined to the eight matters in section 177D, something we said the Full Court did not do here, then it is hard to see where actual subjective purpose of anybody comes in because - the other example I suppose is if a taxpayer objectively would be taken to have the view but vehemently denies that he had it, can that take it out. There are difficulties with trying to import actual subjective purpose, your Honour. We see that.
Your Honour, in that ruling, the reference to 79D and 51(6) is in paragraph 3 on page 28 of the supplementary materials. But we say, in any case, your Honours, that the relevant activity was not subscription, any more than acquiring real estate entitles one to income from it. What entitles one to income from real estate is renting it out and income from shares is being the holder of those shares at the relevant time. So, it is the holding of shares which, if anything qualifies as an activity, has to qualify as the activity. That activity, holding the shares, did not take place in the foreign country.
GLEESON CJ: That is what I just do not understand at the moment.
MR BLOOM: The holding of the shares?
GLEESON CJ: Why does not the holding of shares occur where the share register is?
MR BLOOM: Well, your Honours, we have a bit of assistance from some judgments of Sir Garfield Barwick and Sir Ninian Stephen in Esquire Nominees. We have handed to your Honours this morning a diagram in an attempt to set out clearly the facts of that case and the question involved - - -
GUMMOW J: They were concerned with common law source, were they not?
MR BLOOM: They were, but as we have endeavoured to show on that piece of paper we have handed up, a question arose in the course of answering that question, where did the company in question make its investment income, that is, dividends from the holding of the shares? And the answer given by both Sir Garfield and Sir Ninian was, where it had its central management and control.
GLEESON CJ: But the question is slightly different here, is it not? It is a question of where the activity was carried on and you have identified the activity as the holding of shares.
MR BLOOM: Yes, we say first of all it was not carried on, but if it was it was carried on in Australia, because that is where the central management control was and that finds support in those two passages in the judgments of Sir Garfield and Sir Ninian; Sir Garfield at page 212 of [1973] HCA 67; 129 CLR 177 and at the second full paragraph, his Honour said:
Further a company may make profits without trading in goods or commodities or for that matter in securities. It may make profits simply by investment and may do so though its investment portfolio consists only of shares in one other company or even of all the shares in one other company. In such a case its net income from its investments will be its profits. Further, in my opinion, the place where the company makes its investment income will be the place where it has its central management and control. It will, of course, be different in the case of a company conducting manufacturing or trading activities. In the case of such companies the place where these activities are carried on can be seen in fact to be the geographical source of the profits these activities yield.
Now, yes, he is talking about source, but we do seek to get out of that a suggestion, with respect, that central management control identifies, in the case of an investment company, the place where it carries on its activity of holding, if that is an activity and it is carried on within the section.
We do say, of course, your Honours, that "carrying on" imports a need for repetition in the context of a section that has the word "business" in it: "other business, investment and commercial activity, carried on", and although the High Court in Thiel's Case said that, in the context of the international treaty with Switzerland, an activity or an enterprise could be carried on by a singular act, that was in the context of the treaty and their Honours relied, as we understand it, upon the absence there, of the word "business" in the same part of the section that dealt with the words "carried on".
GLEESON CJ: But you make the point that the relevant activity here is the holding of shares, which is, from one point of view, a state of affairs.
MR BLOOM: It is a state of affairs which continued, but it is wrong, with respect, to call it "carried on". One might say of it, at the end of the day, that it carried on for some time, but to say that the taxpayer carried on the activity of holding shares, is a different thing, in our submission.
GUMMOW J: Well, what follows from that? Are you saying the section can have no application?
MR BLOOM: To a passive investment, yes, as the Commissioner thought.
GLEESON CJ: Can we come back again to this concept of a passive investment, I am just not 100 per cent sure I understand that?
MR BLOOM: A mere investment of this kind, of shares in a company, where there is no active management involved, where there is no constant buying and selling of shares - - -
GLEESON CJ: Well, I can understand that if I own shares in BHP, I have a passive investment in the manufacture of steel, but suppose I am in the business of manufacturing steel and I form company A in which I own all the shares and company A finds it convenient to form company B in which company A owns all the shares and company B carries on the business of manufacturing steel. From my point of view, is that a passive investment?
MR BLOOM: If it is part of your business of manufacturing steel and your Honour is doing so simply by holding shares in a company which does it in that particular instance, then it would be part of that business activity, your Honour, part of the steel activity, we would say. But if your Honour takes up shares for an investment in an English company and does so in the sort of circumstances contemplated by the ruling, where there is no active management of it involved in the foreign place, then that is the sort of thing which is managed from Australia.
The difference would be, say, a London-Australia investment-type company which carried on a business of buying and selling shares and switching investments, that sort of thing. That would be an activity carried on and dividends from that activity would be caught. But the mere acquisition of shares in another company, or even all of the shares in another company, would not, in our respectful submission, be an activity; still less would the holding of shares in it be an activity carried on; and still less, if we are wrong on that, in the foreign country, because we are focussing on the acts of the taxpayer.
Your Honours, I see I have limited time to deal with Part IVA. It may be appropriate, then, to turn to that and there are three things, really, I need to mention. The first is the impermissible attribution of purpose by the Full Court. The second is that the Full Court needed, in order to construe the purpose of the scheme, that is the Commissioner's scheme, that is, the scheme in red, as the necessary purpose for section 177D to go outside of that scheme and to say, "Oh, it is true that the Commissioner has isolated two steps from a broader scheme which is in its entirety commercial, but the purpose of those two steps is to be judged not by reference to those two steps put under the microscope of section 177D, but by reference to their context in the whole scheme".
GLEESON CJ: Or was the conclusion that the purpose of those two steps or a sufficient purpose of those two steps was to avoid the effect of the quarantining under section 79D?
MR BLOOM: You could only conclude that about those two steps if you leave out of account the lending and the borrowing by going back to the lending and the borrowing. That is our point, your Honour.
GLEESON CJ: But is that conclusion the conclusion on which the assessment is based?
MR BLOOM: The Commissioner has been given the ability, after the decision of this Court in Peabody, to use a scheme different to that he has relied upon for the purposes of his assessment. When he comes to Court, he can, as he did in Peabody and as he did, as we understand it, here at first instance, and he has steadfastly retained that scheme since then, selected these two steps, two steps which, if one just looks at those in isolation, are inherently commercial. CPH Property acquires shares in MLG equivalent to what it has paid for them, MLG shares in CPIL(UK) equivalent to what it has paid for them and, in each case, substantial dividends of up to [sterling]1 billion are expected to flow through.
So they are both very commercial steps, and the Full Court left out of account altogether the commerciality of those two steps. What it says is, we can judge the tax purpose of them by calling them the interposition. Now, that changes the scheme immediately because once you say interposition, interposed between what? The act of interposition was never particularised by the Commissioner as a part of the scheme and yet, when the Full Court talks, as it does, about looking at the scheme in context and seeing then that it involves interposition, it is doing what we say the High Court said you cannot do in Peabody when it said that, relying upon the decision of the House of Lords in Brebner, you cannot narrow the scheme for Part IVA purposes if to do so would rob it of all practicality. Now, what does that mean? It means, in our submission, in the context, to divorce it from the other steps, to consider its purpose, but having to go back to the other steps in order to do that, that robs the narrowing of all practicality in the context in which it has been done.
Now, your Honours, the third matter is as to reasonable expectation. The Full Court seemed to think that the Court in Spotless authorised less of a predictive approach than they had specified in Peabody and that when the High Court said in Peabody that a reasonable expectation was required and seemingly meant that, they had somehow in Spotless narrowed that test and that reasonable hypothesis would suffice, hypothesis in the sense of possibility, your Honours.
It is, indeed, in that fashion, and that fashion only, that the Full Court management to get to the point where they found that the dominant purpose of the particularised scheme was to produce that tax benefit. If I might say to your Honours that, as a matter of fact, the reasonable expectation, having regard to the evidence, was only that absent the Commissioner's particularised scheme, the moneys would have been lent and lent at interest to either CPIL(UK) or CPI (Singapore). The Full Court, firstly, in volume 9, at page 2236 - - -
GUMMOW J: Paragraph?
MR BLOOM: Paragraph 5, bottom of the page:
Central to that repeated advice, of which no record was kept -
that is of the repeat of it -
was the proposition that instead of funds borrowed by the Group being advanced directly -
Justice Hill dealt with it at 2151, line 20:
Obviously -
he uses no lesser word than that to commence -
Obviously, if income tax were no consideration, there would then be a borrowing from the Australian borrower -
he says CPH but it was CPF, that is an error -
or ACP.....directly to the companies which were to use the funds borrowed.
Now, there is some evidence in volume 1 at, firstly, 96 to 97. At the bottom of 96, about line 38, Mr Bourke, in cross-examination, is saying that they were going to borrow in Australia. Then, at page 103, line 8, the question is:
What were those factors?---Well, the first is that we - the borrowings for Australia were always carried out through Consolidated Press Finance and it was a finance company and one of the things we had to do is we borrowed from that - that was the borrowing vehicle for Australian operations. We lent throughout the group at a commercial interest rate plus - which included a margin for the borrowing.
Then, if you go to 114, line 30, my learned friend, Mr Pagone, was endeavouring to have admitted into evidence certain documentary evidence to show that the transfer of funds went directly to CPIL(UK), and if you go over to page 116, your Honours will see that after an adjournment we were able to agree with that, starting at line 26, to the end of that page, which his Honour treated as admissions through counsel over to page 117.
Now, that, your Honours, is the reasonable expectation. Absent the scheme, CPF would have lent that money to either CPIL(UK) or CPI(Sing), and at interest. We know that CPI(Singapore) indeed paid 15 to 16.25 interest to CPIL(UK), which was the company from which it got the money. Now, based on that reasonable expectation, not hypothesis, not a possibility that something else might have happened, there could be no tax benefit, with respect. Justice Hill returned to this at page 2172 in volume 9, and at line 24, says:
It is reasonable to expect that had the scheme as defined not been entered into or carried out ACP would either have subscribed for shares in CPIL(UK) or made loans to that company. Neither alternative matters -
I will pause there and come back to what he says at the end of that paragraph in a moment, but that was the case put by the Commissioner against us below. The case put against us was that ACP would have either prescribed or made loans and it did not matter which. We said on that basis and given that loans would always have been made at interest and 79D would therefore have not even had application, there is no tax benefit. That was certainly the case conducted below and certainly the case that we had to meet. Then Justice Hill goes on and, thinking aloud, says this:
although I should think it more likely than not that the investment would have been by way of shares, since that was the way the actual investment by MLG into CPIL(UK) was structured.
With respect, that is contrary to the evidence, contrary to his own earlier finding and contrary to the way the Commissioner conducted his case, which his Honour has just set out. The Full Court could then only support that thought aloud by adopting this doctrine of hypothesis which they said they had authority for from Spotless's amelioration of the test in Peabody and that that hypothesis in the sense of a possibility was sufficient. That is in their judgment at 2269 paragraph 89.
GLEESON CJ: Just before you go further, I would like to understand exactly what you say is the significance of this for the application of Part IVA. Why is it important that, although Justice Hill thought neither alternative mattered, he thought it more likely than not that the investment would have been by way of shares?
MR BLOOM: That is what the Commissioner relies upon to say that that founds the reasonable hypothesis that there would have been an investment by shares. If the investment would have been by shares, there were no dividends, we know that, and therefore 79D could have had application, hence it might reasonably be expected if hypothesis is the test that, but for the scheme, the taxpayer would have got the tax benefit from the scheme as his - - -
GLEESON CJ: This is what I want to understand. What is the wider significance, if any, of this issue? I understand the significance of this case, but what is the wider significance of it?
MR BLOOM: If one goes to Part IVA - you say the wider significance beyond this case?
GLEESON CJ: Yes.
MR BLOOM: Reasonable expectation is at the essence of the definition of "the obtaining of a tax benefit" in section 177C:
(1) Subject to this section, a reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to:
(a) an amount not being included in the assessable income.....where that amount would have been included, or might reasonably be expected to have been included -
That is in paragraph (a). Your Honour asked me about wider implications though, so it applies to both. This is a deduction case, which is paragraph (b):
a deduction being allowable to the taxpayer.....where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable -
so the reasonable expectation comes in there. The Court in Peabody said you need some sort of predictive approach to that; it is not a mere hypothesis. The Full Court said that thought aloud, as I have called it, of Justice Hill, which we say is contrary to his earlier clear finding of fact in the "obviously" statement, is such that might, if one was permitted to hypothesise a result, be sufficient.
GLEESON CJ: What happened in this case, as I understand it, was that there was a claim for a deduction being an interest expense in circumstances where there was no foreign income.
MR BLOOM: Correct.
GLEESON CJ: That is the money problem, as it were, that the Commissioner addressed in applying Part IVA.
MR BLOOM: Yes. He says that if the taxpayer, CPH Property, had not acquired shares in MLG, it might at least be hypothesised that it would have directly acquired the shares in CPIL(UK) and that 79D was the reason it did not do that.
GLEESON CJ: But all that happened in this case, from one point of view, was that money was borrowed to be used for a takeover that did not proceed, with the result that there was no income derived from the application of the money and there was an expense in the form of interest.
MR BLOOM: But, your Honour, on the basis of Steele's Case, of course, if there is the reasonable expectation that the assets you acquire will be income productive, that is sufficient.
GLEESON CJ: I understand that. So that if the takeover had been purely local and it failed, there would have been, in the result, no assessable income and allowable deduction.
MR BLOOM: But deductions. Quite, your Honour, yes.
GLEESON CJ: What difference does it make to the Australian revenue authorities that this involved a foreign element.
MR BLOOM: On that basis, none at all, your Honour, and given those findings of fact by the Full Court that the moneys would have been directly advanced, by Justice Hill that obviously the moneys would have been borrowed - and we know that that would have been at interest - that that is the reasonable expectation. The steps that presumably would not have taken place are CPF lending to CPH Property at all. The money would have gone straight as it, in fact, flowed from CPF either to CPIL(UK) or to CPI (Singapore) and at interest, given that CPF's - - -
GLEESON CJ: I perhaps have not understood the effect of the application of Part IVA to the present case. Assuming the Commissioner is correct, is the consequence of the application of Part IVA to deny the deduction for the interest expense?
MR BLOOM: Yes, your Honour, in its entirety. We say that he is really applying the doctrine of fiscal nullity. The passage in the judgment of this Court in Johns' Case from Furniss v Dawson sets it out best, but that talks about steps being inserted into a transaction that have no commercial explanation but only fiscal explanation. We say that is not right about these steps at all and they were neither inserted, nor can it be said of them they have no commercial explanation, but the consequences of that, because the consequences of the application of that doctrine under the guise of Part IVA or otherwise would be to take out those two steps and to have CPF lending the money directly to CPI (Singapore).
GLEESON CJ: Is there a determination in this case comparable to the one you showed us yesterday in relation to the dividend stripping in the papers?
MR BLOOM: There will be a section 177F determination, that is, determining to cancel the tax benefits, your Honour, but not comparable to the ones that we showed your Honours yesterday. It will simply record the determination to cancel it. There was possibly a position paper or an objection report that - I am not sure it is in the papers, your Honour. We will look for it. Page 1390 Mr Pagone tells me.
GLEESON CJ: The tax benefit being the escape from quarantine?
MR BLOOM: Yes, and it is curious because what the Commissioner has to do is, if you go back to the diagram, he has to treat MLG as not having acquired shares in CPIL(UK) but treat CPH Property as doing something it did not do, namely, acquiring the shares in CPIL(UK), and it is only by acquiring shares expected to be productive of substantial income that it gets the deduction under 51(1) in the first place. But what he says is, "I can use Part IVA to treat you as doing something you need to do in order to get your 51(1) deduction", and then denying you that deduction because of section 79D.
Now, it is interesting to note in Schedule E we have given your Honours the relevant provisions in the Goods and Services Tax legislation and we do make a point that in that legislation there is an equivalent to Part IVA in section 165.15. That is the first thing that your Honours have at page 35. That has the eight matters to which section 177D refers and, in addition, says - two additional paragraphs - that the court is to have regard to:
(k) the circumstances surrounding the scheme;
(l) any other relevant circumstances.
Then in 165.55, which appears at page 37 of the supplementary materials:
For the purposes of making a declaration under this Subdivision, the Commissioner may:
(a) treat a particular event that actually happened as not having happened - - -
GLEESON CJ: There is something I have not understood; I just want to interrupt you for a moment.
MR BLOOM: Yes, certainly, your Honour.
GLEESON CJ: If the commercial proposal of which the scheme formed a part, had gone ahead to fruition, it would have produced, according to Goldsmith's expectations or projections, a flow of dividends of a billion pounds.
MR BLOOM: Initially and continuing.
GLEESON CJ: Right. If that had happened, how would any question of quarantining have arisen, in relation to the interest expense?
MR BLOOM: More importantly, as Justice Hill found, there was the expectation that that flow would begin within the 12 months.
GLEESON CJ: If this smaller scheme was only a part of a wider plan, intended or expected to operate in a way that would render quarantining irrelevant, how can the dominant purpose of part of the scheme be to avoid quarantining? Is that one of the arguments that was agitated?
MR BLOOM: Yes, your Honour, it is one of the arguments in our submissions.
GUMMOW J: Where do we see that?
MR BLOOM: 69 to 75, your Honour, deals with the reasonable hypothesis test rather than the statutory test. If you look at 73, that, I think, suggests something along the lines that your Honour was just putting to me.
GLEESON CJ: But in a sense the problem I was intending to raise with you arises out of the selection as the scheme of what is part of a wider scheme.
MR BLOOM: Your Honour, the scheme was never suggested as anything less that the whole, that is the other problem. The whole thing had been suggested for the purposes of a different problem with Valassis and it was then suggested that the whole be adopted here. It was not as though there was an existing scheme into which something was stuck in. The whole was suggested, the whole was found by Justice Hill, to have a dominant commercial purpose, namely the takeover, and there were other tax considerations, namely the preservation of foreign tax credits, which were not benefits.
GLEESON CJ: Just at the moment I do not have a problem with the idea that the Commissioner can select part of a wider commercial scheme to identify a Part IVA scheme; just at the moment that seems all right to me. My problem at the moment is with the idea that you can find a dominant purpose of the selected part, which is inconsistent with the objective of the wider scheme.
MR BLOOM: Yes, your Honour.
GLEESON CJ: I do not have at the moment a problem with the idea that you can find a dominant purpose that is not the purpose of the wider scheme; it is the extra step of the inconsistency that I am talking about.
MR BLOOM: Yes, your Honour, we would, with respect, adopt that, but also say this, that if you select out the narrow scheme, you then have to apply 177D when it asks you questions about "the scheme", to that narrower scheme. You cannot say, we can go out, as the Full Court did in every instance, to have regard to the wider scheme in order to determine the purpose of the narrower one.
GLEESON CJ: But where does the Full Court deal with the proposition that if the wider scheme had come to fruition, quarantining would have been irrelevant?
MR BLOOM: They do not. But, time and time again we pointed to the expectation of substantial dividends within the 12-month period.
GUMMOW J: Is there a finding about that?
MR BLOOM: Yes, Justice Hill. Your Honours, we will find the page and notify your Honour about that. There is certainly no question and in support in the evidence of Mr Bourke I may be able to more readily give your Honour the reference to his evidence quickly. Page 2236 in the Full Court, line 15.
GUMMOW J: Paragraph?
MR BLOOM: Paragraph 2. Justice Hill at 2153. At the bottom of 106 to 107 in answer to a question by his Honour at line 36 on 106 to line 20 on 107 is the evidence, the reference to the unbundling, to coin Sir James' term:
we were hopeful of getting dividends back within a 12 months period but in reality these things can take longer -
Obviously, the minimum was one year.
The ultimate strategy was to sell all of the businesses in BAT except the tobacco business which is a major cash flow profit business and that was to be retained so you would've had a dividend stream coming through from the breakup - - -
GUMMOW J: Yes, but there is no discussion, either at first instance or in the Full Court, is there, as to the inapplicability of the mischief that requires quarantining, if the transaction had gone ahead?
MR BLOOM: I think Justice Hill accepted that had the takeover proceeded it would have produced - - -
GUMMOW J: I am not interested in what was going through his mind. Where does he say it? There are four of you down there.
MR BLOOM: I am conscious of two things, one is that I have 10 minutes, according to your Honours' timetable and I have not yet got to attribution of purpose, that being a matter upon which special leave was granted.
GUMMOW J: Well, give me the reference later. You have a number of little helpers down there.
MR BLOOM: And some not so little, your Honour. I will endeavour to get you an answer. Your Honour, finally on that, too, the test cannot be mere hypothesis, that allows unlimited reconstruction. The reconstruction envisaged by the legislature is the reasonable expectation. The evidence establishes the reasonable expectation here would have been a loan.
Now, in paragraphs 34 and following we deal with the attribution of purpose. The parties who entered into and carried out the scheme, as particularised, were the three companies shown in red on the diagram. Each was alleged by the Commissioner to have the necessary purpose. It was not suggested that any accounting or taxation adviser was a person who entered into or carried out that scheme, nor was it ever suggested that the purpose of such a person was relevant in the case that was conducted before Justice Hill. We conducted our case, of course, on the basis of the Commissioner's case.
Then, no finding was made by Justice Hill that any of the three companies particularised had the relevant purpose. Rather, his Honour made a finding which was a rather tentative one. It is set out in paragraph 36 about a:
non-participant (whom he - erroneously - describes as a participant). His Honour said:
"With some doubt I am of the view that a conclusion would be drawn that the dominant purpose of some person who participated in the scheme, and in particular those (perhaps not Mr Cherry, but there were others) who advised the group at Arthur Young and later Ernst & Young, was to bring about the result that deduction would be allowed to the Applicants which, but for the scheme, would have been disallowed to them because of the application of s 79D":
Now, in the Full Court my learned friend, Mr Shaw, never wanted to miss such an opportunity. He said true it was that he did not find purpose of a party but he found purpose of a non-party, and we can get the one link over there by a process of attribution. We say, put in one of two different ways, either that is a matter which is outside the eight matters in section 117D or it is simply not correct to attribute purpose when 177D says you must go to those eight matters and those matters only in order to objectively find subjective purpose. You cannot find the actual subjective purpose of a non-party and attribute that to a party.
We say that cases on attribution like Meridian, which is the latest case, at least in England, on that point, make it clear that in relation to a company you get the primary rules of attribution relating to its organs or you get the general rules of attribution which relate to everybody, which is agency and that sort of thing. All that can be shown is that the unidentified advisers, whoever they might be - and we were never told who they might be - were not acting on behalf of the appellant, they provided advice. They were acting on behalf of themselves in doing that. They had no management, no control, no decision-making power, they were not agents and they had no discretions for any of the purposes of what was involved in the giving of advice.
So it is impossible to use a doctrine of attribution and take the purpose of that unidentified non-participant and attribute it to a participant. I mean, how is a taxpayer, in any case, to conduct a case which is fully particularised in accordance with the decision of this Court in Bailey's Case and, at the end of the day, has to discount the possibility that there is, in some unidentified person, the necessary purpose which does not exist in any of the parties, but which might be taken by some process called attribution to be that of the parties.
Your Honours, we say that that is simply outside the scope of Part IVA and it is something which was necessary for the Commissioner to do here, given Justice Hill's finding, if he was to rely upon it, but that he was not entitled to rely upon it, either in relation to the case that we had to meet or in relation to the facts. At 2174, in Justice Hill's judgment - your Honour Justice Gummow?
GUMMOW J: Yes. Line?
MR BLOOM: The whole of the page.
GUMMOW J: Thank you.
MR BLOOM: When he gets to the bottom of that page, at line 45, he says:
It might perhaps be said that one of the problems in the present case lies in artificially dissecting part of a scheme.....The arrangement as a whole was directed to a commercial end much more significant than tax. Part of the structure was devised because of tax, but the separating out of the tax and non tax benefits leaves outside the structure both the borrowing of ACP and the subscription of monies for shares by CPIL(UK). That, however, is a consequence of the decision of the High Court in Spotless.
With respect to his Honour, it is not. Nothing said in Spotless or, indeed, in Peabody, authorises the artificial dissection of part of a scheme. Your Honours, there is one more thing - I see I have five minutes so I will use it. This goes to the Full Court's use of hypothesis. At 2269, paragraph 89 - first at 2268 they refer to Spotless and then talk about, at about line 15:
The language suggests less of a predictive and more of a reasonable hypothesis approach -
and then, at paragraph 89:
In the event the hypothesis is probably -
"hypothesis", "probably" -
justified that, absent the scheme, the outgoing by way of interest to CPF would have existed and would not have been allowable.
Now, that leaves out of account that had the scheme been successful, as was expected, substantial dividends were expected to flow. It leaves out of account the fact that both courts have made findings of fact that but for the scheme the moneys would have been loaned, in the context where they would have been loaned at interest, and on that basis 79D would not have had a look in.
GLEESON CJ: That is not necessarily so. It may be that they took the view that you do not have to treat success of the takeover as part of the scheme. In other words, when you make a takeover for a company, it might succeed or it might not succeed, and they are looking at the event that occurred, it did not succeed, and saying, rightly or wrongly, a tax benefit, in the event that it did not succeed, resulted from what happened, that is to say quarantining was avoided.
MR BLOOM: Inherent in that, though, your Honour, contrary to the Commissioner's own view, contrary to Mr Cherry's view, is that the structure was adopted to achieve that tax benefit. So that contrary to the expectation that 79D would not apply, contrary to the expectation of both the Commissioner and the taxpayer that he did not, somehow or other, this was done to avoid 79D. It just, with respect, is not right. The other thing I did mean to mention is that you cannot say, unlike in Spotless' Case, that the two steps here did not make sense. Without any tax benefit, the two steps, the acquisition of shares expected to be productive of substantial dividends in each company made commercial sense, and that is the difference from Spotless' Case.
GLEESON CJ: Yes, thank you, Mr Bloom. Yes, Mr Pagone.
MR PAGONE: If your Honours please, we thought that we might deal with the response to the Part IVA part of the case first and then for Mr Shaw to reply to the dividend-stripping part in the afternoon, leaving him as little time as may be available.
GLEESON CJ: Yes.
MR PAGONE: If the Court pleases, might I perhaps deal with the question of reasonable expectation first, but before doing so and since my learned friend has just taken the Court to page 2269, note, by way of observation that I would not otherwise get back to, the next sentence.
GUMMOW J: I am sorry, 2?
MR PAGONE: Page 2269. My learned friend referred to the first sentence at paragraph 89, lines 40 on thereabouts:
In the event the hypothesis is probably justified -
What my learned friend did not read out was the next sentence:
The hypothesis is certainly justified that absent the scheme that deduction might reasonably be expected to have existed and not to have been allowable.
GLEESON CJ: That is "absent the scheme" in the event of the failure of the takeover?
MR PAGONE: Well, it is "absent the scheme" and perhaps I will come back to the question of the failure of the takeover somewhat differently. Might I deal, first of all, with this question of reasonable expectation that my learned friend has made so much about because we respectfully say that our learned friends have been a little bit too selective with the facts they have referred the Court to and that, indeed, the facts show that the reasonable expectation, indeed, was a share subscription of this kind.
Your Honours, the first thing that I should draw attention to was the significance of CPH Property as the company that was going to be doing the investing. Indeed, there was never any doubt about that question. It was never going to be CPF lending directly to CPIL(UK) or the Singapore company. It was always going to be - and there was evidence about that and the evidence was both in the affidavits that were filed and also in cross-examination.
What was significant about ACP Property was that it had the money, the cash flow, to generate the payments. That was regarded at all times as being a fundamental feature in the transaction from an overall point of view. So one begins, as it were, with an imperative. The imperative was to get money from Australia to, somehow or other, the takeover attempt in the UK. In that context, not only was CPH Property going to be the company and, therefore, the first element in the reasonable expectation, but it was also important that it be by way of subscription of shares and, indeed, that there be interest deductible in Australia.
May I just take the Court to some of that evidence. First of all, in the cross-examination of Mr Mackenzie at volume 1 of the appeal book, 87 to 88 - indeed, perhaps if I begin at 86. At the very bottom of page 86 Mr Shaw asks Mr Mackenzie:
Yes and it was not necessary for the group to have those funds available to it in the form of subscribed capital, subscribed shares?---At that time it was not necessary.
Well, that being so, can you tell us why the funds as they passed to CPIL, were in the form of subscribed shares?---The companies in Australia invested in shares in the international group and did not make loans to the international group as the application of interest payable by the borrower. There was a complication and it wasn't necessary. It was more appropriate for the international group to be capitalised.
At this point his Honour asks:
There was a complication, what do you mean by that, I'm sorry?---The question of payment of interest, your Honour. It was easier to invest in redeemable preference shares.
Why?---Flexibility, your Honour, if the funds were called back.
His Honour was a bit perplexed by this:
It's a lot easier to repay a loan, isn't it, than repay preferred capital?---We didn't wish for there to be - we didn't wish interest to be out of the international group as well.
MR SHAW: The position was, wasn't it, that the funds passed through ACP -
that is the other name for CPH Property; it changed its name, if the Court pleases. The answer:
I have no general - I have no detailed knowledge of that. I've been made aware that - - -
Then over the page and after some objections, his Honour asked:
Mr Mackenzie, I take it you've seen enough of the evidence to know that which company has borrowed moneys and which company subscribed for shares on the way through to - - -?---I certainly know about the investment from Murray Leisure Group Ltd to CPIL and I'm aware that there were finances below MLG to make funds available for the investment in general terms.
MLG, itself, got capital, do you know that?---I beg your pardon?
MLG, itself, got share capital, did it not? Are you aware of that?---No, I'm not.
So all you are able to say is that when the funds went from MLG to CPIL in the form of subscribed capital that was because of some flexibility which I find hard to understand but anyhow, and a desire not to have interest payable out of the international group. That's the way I understand your evidence. I have to say, really, one would have thought the most flexible possible way if flexibility was all one was concerned with would be loan funds because then one is in a position to convert or not convert into capital. Is flexibility the issue?---Well, my understand was that your Honour about the flexibility obviously the decision to, in the form of the investment rested with the Australian companies. That was my understanding.
Then Mr Bloom thought he should re-examine about this, and at page 92 at about line 6 Mr Bloom said:
Do you recall you gave some evidence concerning flexibility - - -Yes.
- - - of a redeemable preference shares subscription as opposed to a loan?---Yes.
Now, you have qualifications as a company secretary - is that correct?---Yes.
Is there a difference in effect on the balance-sheet of a company of a loan as opposed to share capital?---Yes.
What is that difference?---Well, essentially it - the net equity of the shareholders is less with a loan than with - clearly - than with capital.
Presumably my learned friend at that stage was seeking to show how sensible it was for there to be share subscription rather than loans.
Mr Cherry was asked about the matter at page 120. Your Honours will observe that Mr Shaw had been cross-examining at the top of the page and then his Honour says at about line 6:
That's not the question. The question was why between ACP -
that is the other name for Australian Consolidated Press Property -
and Murray Leisure Group and so on there was no borrowing but an investment in share capital?---Investment in share capital in what, your Honour?
Well, investment share capital in Murray Leisure Group, for example, take the funds going first by way of loan to Consolidated Press Finance and then ACP but then by way of capitalising, to use your last paragraph, for example on the first page, capitalise the funds by way of subscription in Murray Leisure Group Limited, take that one first?---This is to the tax neutral situation in relation to Murray Leisure?
Q. No, I think the question's just being asked why shares not loan capital, that's all?
A. Because Murray Leisure Group did not have the capacity to meet the interest cost of a borrowing.
Mr Shaw then asks about that:
Q. But it would have presumably if it lent the money to somebody else who could pay, is that not right?
A. If it lent the money to somebody else who had the sufficient funding to meet the interests costs, just a chain borrowing?
Q. Yes?
A. Yes.
GLEESON CJ: Well presumably these same questions would have applied to the advice in relation to Valassis?
MR PAGONE: The answer is yes, of course, your Honour.
GLEESON CJ: Valassis was the genesis of this structure of ideas, as I understand it.
MR PAGONE: For this company, yes, your Honour. All I am seeking to do at this stage, your Honour, is to meet my learned friend's suggestion that the reasonable expectation could not have been that there would have been some form of subscription from ACP to CPIL or CPIL (Singapore). My learned friend says that the evidence was that it would have been by way of loan and he relies upon, oddly enough, a concession that was made about the form in which the transaction took place, namely, that the money actually went directly from CPF to CPIL(UK). The structure was a matter that, so far as the money travelling across the world was concerned, did not matter, but, although he relies upon it for that purpose, the simple fact of the matter is that all the evidence pointed to the reasonable hypothesis being precisely the reasonable hypothesis that his Honour Justice Hill and the Full Court accepted as share subscription.
GLEESON CJ: I am looking at page 2151 line 20.
MR PAGONE: Yes, your Honour.
GLEESON CJ: Are you supporting that finding or contradicting it?
MR PAGONE: Supporting it, your Honour; absolutely supporting it, your Honour. Your Honour can see why that is so, I think in the evidence of Mr Bourke, beginning at about 102 of the appeal book. He had given evidence, your Honour, in the affidavit about the structure having been based largely on the advice that had been given, and I will come to that when dealing with the so-called attribution point. He was being asked about the use of the word "largely" in that context; "largely based" upon the advice. At line 18 he is asked:
I just want to ask you about the use of the word largely. What do you mean by largely based?
Well, there is a decision being made to actually invest in BAT which was on the face of the analysis that had been done by our partners going to show substantial, and I'm talking about 4 and a half to 6 billion pounds of profit and that was some of the consideration that went into the process. It wasn't only the fact of a previous tax advice because we made commercial decisions associated with trying to solve business issues and then we made sure that they were tax effective but we didn't make decisions solely on tax. So, in using the word largely in that context, it was the whole range of business decisions - issues surrounding the funding of that investment and tax is not the only consideration. It's where you're going to get your money from to start off with.
His Honour then asked:
But, Mr Bourke, the business decision is to borrow some money and have it available to participate in the takeover?---Correct.
That's the business decision. What your paragraph 17 talks about is a somewhat different question, namely, to go through the route of taking up redeemable preference shares and you say that was largely based on the advice. Did that have anything to do with a commercial question that you were saying other than the decision initially to buy or to invest in that?---Well, it suited us to bring these - remit these profits that we expected out of the business back to Australia where we expected that we would pay tax on.
Yes, but the decision to adopt the structure of taking funds borrowed by CPF into redeemable preference share capital in MLG and in turn CPIL(UK) was not a decision that - or was it a decision based on commercial factors?---Absolutely.
Then we have the passage that my learned friend Mr Bloom took the Court to, where he is asked about the factors. It is worth reading that and the next answer:
What were those factors?---Well, the first is that we - the borrowings for Australia were always carried out through Consolidated Press Finance and it was a finance company and one of the things we had to do is we borrowed from that - that was the borrowing vehicle for Australian operations. We lent throughout the group at a commercial interest rate plus - which included a margin for the borrowing. So the structure - one of the things we had to consider is we would want to borrow through a vehicle where to the extent that money was being borrowed from Consolidated Press Finance that that company was going to be able to repay - service interest within Australia. That's an Australian tax issue.
His Honour then asks:
Yes, Mr Bourke, but the question, and there's nothing sinister about it, I'm not suggesting there is, but the suggestion to adopt a structure involving redeemable preference share financing rather than interest financing is a decision that is neutral from a purely commercial point of view, is it not?
Then comes the answer:
It depends where you send the money from in terms of interest payment I would suggest.
GLEESON CJ: I am not sure I understand that.
MR PAGONE: Well, your Honour, we would say, with respect, that what he is saying there is that the reason for the structure is to ensure that the interest payments were incurred domestically, in Australia, because he is being asked - - -
GLEESON CJ: Which interest payments?
MR PAGONE: The interest payments being made by the company that incurs the obligation to pay them.
GLEESON CJ: That is the taxpayer.
MR PAGONE: The taxpayer.
GLEESON CJ: But I thought they always were going to be in Australia because that is the company that has the best borrowing capacity, the best strength, that is the one that is known to the financiers.
MR PAGONE: All of the borrowings for the group, external borrowings for the group, your Honour, was through CPF.
GLEESON CJ: Yes, but it was done - it suited the corporate structure to have CPF as the borrowing company, but I thought I saw somewhere a finding that because the group was better known in Australia than elsewhere, it was commercially desirable to raise the loans in Australia.
MR PAGONE: That may be so, your Honour. There was certainly some evidence about that, so far as Valassis was concerned, because, at that stage, Valassis was a business in the United States. There were some problems about the gearings that had occurred and whether they had or had not gone below the relevant gearing provisions, and anyway, the long and short of it was that borrowing within the US had to be refinanced, and there were questions there about, "Where do you get the money from?". Australia was the source for that reason.
GLEESON CJ: I had the impression, from the finding that I am referring to, that the Consolidated Press group were in a position to drive a better bargain with Australian lenders than they were with foreigners.
MR PAGONE: That, for this purpose, may be assumed, your Honour. The question still becomes, "Why, through this route?", given that the group will get the money, "Why through this route?". That is what he was being asked about, and at the end of the day, the answer that is given is that it suited the group because of the location of the interest.
GLEESON CJ: But what, on your submission, does that have to do with quarantining?
MR PAGONE: I have not come to that yet, your Honour. I was dealing, at this stage, solely with the assertion that my learned friend made that it was not reasonable to expect that there would have been a subscription of funds and that there would have been a direct borrowing.
Before, perhaps dealing with the question of quarantine, because I can see that it is exercising the Court's mind, may I just finish by reference to the appeal book at 163 where - although this does add a great deal to the point - at paragraph 16 it shows that there was indeed a final capitalisation of a loan which MLG had made to CPIL(UK) so that it is not unreasonable to assume that subscribing for shares was the preferred method of dealing with these matters.
Your Honours, I am happy to deal with the 79D point, although I may need to back, then, to the Part IVA question, but in short compass we say that it is a little bit too shorthand to say that 79D would not have operated if there had been great profits that had been derived. First of all, I think my learned friend has taken the Court to what Justice Hill said at 2174 at the top of the page where his Honour in the very first sentence says:
The s 79D advantage would be of no particular consequence unless no immediate foreign source income was anticipated to flow by way of dividend from the United Kingdom companies -
The Full Court, in so far as it dealt with the proposition, seems to have dealt with it at 2273, line 11:
the scheme being only of benefit in the short term while there was no foreign income flow against which to offset the interest payments.
So that on any view there was always the potential for some application and effect of the application of section 79D because the non-application of 79D would always - that is to say, the negating of the effect of 79D would always require that more income had been derived than deductions had been claimed, but at all times when there is income from a foreign source and deductions referable to it 79D will, at least in form, apply. There is a question about whether it has a consequence, that is to say, it may have no consequence because the income exceeds the deduction from the class but it is not accurate to say that it would not apply. His Honour Justice Hill correctly said the consequence may be limited but it was there.
GLEESON CJ: You might prefer to come back to this question after lunch, and it may be the answer to the question is nothing - a nil return - but is there a wider significance that the question in the present case about the interrelationship between 79D and Part IVA has gone beyond its application to these particular facts?
MR PAGONE: It depends, I suppose, your Honour, precisely what your Honour means by that. If your Honour means does it matter whether section 79 would, or would not, have operated - - -
GLEESON CJ: I am trying to understand the significance of this issue for other cases.
MR PAGONE: Your Honour, I do not mean to be difficult, I am just not sure what "this issue" means?
GLEESON CJ: All right. Raising borrowings locally for the purpose of off-shore investment can produce the consequence of substantial allowable deductions here in circumstances where there is no, or little, foreign income.
MR PAGONE: Well, it may be convenient if I attempt an answer to that now and say that there is significance, although its significance does not now arise, at least predominantly, through 79D. Its significance now probably arises through the attribution provisions of the Controlled Foreign Corporations provisions in Part X of the Act. Perhaps it might be convenient if I would give the Court a potted summary of three steps in the legislative history to which reference has been made by my learned friend and which may put a different context to them.
GLEESON CJ: I do not want to waste your time dealing with this if you do not think it is significant to the argument. It is a matter about which - - -
MR PAGONE: Regrettably, your Honour, it has some relevance to the argument.
GLEESON CJ: Yes.
MR PAGONE: Your Honours, in 1986 or thereabouts, section 51 of the Act was amended by the introduction of 51(6) and 51(7). That was introduced also with an amendment to section 80, particularly the introduction of section 80(8) and also the provisions of section 160AFD. In broad terms, what they attempted to do was to quarantine the deductions that were incurred in respect of matters where the incurrence was by reference to the production of income off-shore.
There were two aspects, really, to the quarantining. The first aspect was to the quarantining itself that limited the amount of the deduction of income coming in, in respect of a policy that I will have to come back to in a moment. But the second aspect, and it is quite important, your Honours, is that there was a provision enacted through amendments to section 80 and 160AFD which ensured that the losses that were inevitably going to be generated by the quarantining provision, that those losses would be carried forward and available as carry-forward losses, but only in respect of future income from that source. That was the effect of 160AFD in allowing the carry-forward foreign loss, if I can call it that, to be offset against the future foreign income, if I may call it that.
The principal problem, however - and your Honours will appreciate that section 80 was amended so that you could not get the deduction as a carry-forward loss, other than through section 160AFD, you could not get through section 80 what you could not get through section 51. What then happened was that section 51(6) was thought to be deficient because it only quarantined deductions allowable under section 51. So, the next step was to broaden the quarantining and loss allowability effects to the way that we have in section 79D for present purposes, and that fact and that history is relevant to the question of construction.
My learned friend then makes some reference to the next step, the amendment in 1990, for the purposes of his argument about foreign source, so I should say something about the next step. What occurred in 1990, by way of amendment, was that there was a very significant change to the way that offshore companies were being taxed. By the introduction of the CFC provisions, the Controlled Foreign Corporation provisions, there was a broad scheme enacted by reason of which foreign companies, that is to say, non-Australian companies, which were controlled however by Australians - and I am being very general I know - but, nonetheless, that the income of those foreign companies would be attributed to the domestic Australian ultimate controller or controller.
That attribution of, in effect, foreign income, to an Australian company had the effect that there needed to be some amendment to section 79D, 80 and 160AFD, because otherwise there would have been bringing into account assessable income an amount which by definition was foreign, and yet they would have been taxed on that, but not allowed some compensation for the deductible amount that had been incurred in respect of the notional derivation of it. So that it was a different scheme that was introduced and the conclusions to be drawn from the amendments, we would say, are unsafely drawn by our learned friend.
Now, can I come back, your Honours, to one perhaps simple proposition that we would say in respect of our learned friend's insistence as they still seek to agitate on this nil amount point. We, naturally enough, adopt as being correct the conclusions of the Full Court about the operation of section 79D and that its operation does not depend upon there being any numerical amount derived, the numerical amount, as it were, can include zero. But we would say that one of the problems with the constructions urged upon the Court by our learned friends is that they do not seem to be able to deal with the following example, which would seem to make some path of the carry forward loss provisions pointless.
Let us assume that a company borrows some money for five years and let us assume that the company applies the money by its own direct commercial activity offshore and let us assume that that commercial activity be a takeover battle where what is intended to happen is that the assets of the company taken over will be unbundled and that the massive income that is going to be derived will be by the sale of the unbundlely bits.
Let us assume that there is a condition precedent to the takeover so that it requires there to be agreement to the sale of a particular bit. Let us also assume that this gets done very quickly so that you have got income in the first year. So, let us assume, for arguments sake, we have got deductions, interest deductions, $100, and for arguments sake, let us assume we have got income of 2 in the first year. In that circumstance, section 79D would operate, even on my learned friend's hypothesis. You would get your deduction for the $2 and you get a carry forward loss for 98.
Year two, let us assume they have been unsuccessful in deriving any income because they have not sold any more of their bits of the unbundled bits, however, they still incurred $100 worth of interest. In that circumstance, our learned friend's construction produced the rather surprising result that they get the whole of the deduction for the next $100 and still carry forward the loss from the previous 98 to the third year. That, we would say, would be a very surprising result and one that the legislature could not possibly have intended.
GLEESON CJ: Why is that surprising?
MR PAGONE: Why is it surprising, your Honour?
GLEESON CJ: Yes.
MR PAGONE: Because it would - - -
GLEESON CJ: There is a certain lack of symmetry about it, I understand.
MR PAGONE: Well, your Honour, our learned friend's best point about this seems to be that Parliament did not turn its mind to the possibility of no amount being derived and we would say if that be so, then it is not surprising because Parliament would not have thought that it was likely that the activity that produces nothing would not have been taken into account in the computation of 79D, a section which can operate on the basis that $1 will trigger it, presumably, even 50 cents can trigger it - - -
GLEESON CJ: What was the legislature purpose behind quarantining? Why did Parliament wish, in the first place, to quarantine deductions attributable to off-shore activities?
MR PAGONE: There are a couple of answers to that, your Honour, or at least an answer with a couple of parts to it. The first is that the legislature thought it desirable to prevent what might colloquially be referred to as leakage. That is to say - - -
GLEESON CJ: Incurring an allowable deduction at the cost of the Australian revenue and getting income somewhere else for the benefit of the foreign revenue.
MR PAGONE: That is correct, your Honour. That has two bits to it, as it were, because that would apply, whether there is, as it were, tax structuring or tax avoidance or not, so that one can discern from the legislature that it decided as a matter of its own fiscal policy at the time it wanted to prevent the leakage, irrespective of tax avoidance, and more importantly - perhaps not more importantly but in addition to that, the tax leakage could occur by way of avoidance arrangements, where it might be desirable to incur the deduction here, reduce your tax payable here and then produce the situation where you have got income derived in some place where you are not subjected to the same level of tax deduction. So that there is a net loss not only to Australia, as it were, but in effect to anybody else.
But plainly 79D is not predicated upon tax avoidance; it is predicated upon the general notion that, as a matter of fiscal policy, it is not going to allow the revenue to lose out but that in fairness to the taxpayers you can carry forward the loss and if, in due course, the income exceeds the deductions you have claimed, you will have recouped the whole of the investment in an offshore activity. One of the arguments that our learned friends make about why it is not surprising that - indeed, one of the arguments that his Honour Justice Hill seemed to have accepted in support of his view - is that you have circumstances where you might have expenses incurred and deductions allowable on them where you have no income derived ever, and therefore you might never get it recouped.
That is absolutely true about the foreign carry forward loss provisions that were introduced. So that it can safely be assumed that the carry forward loss provisions were contemplated on the basis that you might never actually get to recoup them. The seven years might be up, is one example, but a more powerful example, we would say, is that even if one takes out of consideration the seven year equation, it is contemplated that there would be something sitting there that might not ever be recouped. Whether you recoup them or not would always depend upon whether the income was there to recoup them from.
Your Honours, we should say something about, on this construction question, the foreign source argument of my learned friends.
GUMMOW J: What do you say about the force to be given to the concluding words of section 79D(1), the notion of "proportionate to those deductions", as perhaps presupposing there to be an amount?
MR PAGONE: Your Honour, there is no doubt that an amount is needed. The question is whether nothing, no income, is relevantly the amount. It is true that if one engages in a mathematical calculation, so that you divide something by zero, you are going to get up - mathematically, it cannot cope. But that then requires some intervention of a less mathematical mind to produce what would be the obvious answer in those circumstances.
HAYNE J: How do you read the first part of that last two or three lines? What is the proportionate calculation that is being made? Can you exemplify it?
MR PAGONE: Your Honour, we would accept the example that your Honour put in debate with my learned friends, the proportion would be that if there were three classes of income, that you can work out what the proportions are as between those three classes, and you then set off those as against the different classes of deductions.
GLEESON CJ: But if there is no income?
MR PAGONE: In that case, your Honour, one cannot do it by way of mathematics but one has to do it by way of human assessment which would be to say that if there is no income but the deductions relate to something which, if there were income, an amount - if the amount expected to be from the source is zero, then none of it is allowable.
HAYNE J: I would be assisted if later you were to put on paper one or two examples that would demonstrate how you contend this section is to operate in the case of there being an amount of income and in the case where there is no income.
MR PAGONE: If your Honour pleases. May I then come to this question of a foreign source. I have partly dealt with that in reference to the argument about the supposed change. I will not read out from the decision in Esquire Nominees but, although it in form in fact deals with the question of foreign source at common law as a general concept, one can plainly enough derive some assistance from it. Their Honours said that each case depends upon its own facts and plainly its statutory construction provision has to be determined by reference to the objective that the relevant statute is seeking to deal with. So far as the source of a dividend was concerned, their Honours were minded to the view that the source of a dividend would be the place where the fund from which the dividend is paid is made.
Your Honours can see that in the passages that have been quoted, both by Justice Hill and by the Full Court and we would refer specifically to Chief Justice Barwick at 211 to 212, Justice Menzies at 221 and Justice Stephen at 229. His Honour Justice Hill at page 2169 of the appeal book would appear to make a finding that the fund out of which the dividend would in time be paid was the United Kingdom and it is true, but it is a hypothetical finding in the sense that it is not the fact that actually happened, it is an assessment of what is likely to be identified.
The Full Court at 2262 says the source of the business would have been what generated the payment, and they conclude that it would have been the activities in the UK. Our learned friend would seek to limit the operation of section 79D. In these circumstances of what he calls a passive investment, if it be fair to characterise these activities as a passive investment, by a mere subsidiary of a larger company doing something dramatically different, but, putting that to one side, even as narrow as our learned friends would wish to put it, they would need to satisfy the Court that the words in the section ought to be construed in that way and, we would respectfully submit, that that cannot be done, because, if one turns to - - -
GUMMOW J: It comes down to the words "activity carried on", does it not, in (b)?
MR PAGONE: It does, and in that context, your Honour will note that it is not just "business carried on".
GUMMOW J: Yes.
MR PAGONE: So that, it is, on any view, wider than "business" and it is carried on, but it is not used in juxtaposition with the words "carried on" or "carried out". What this Court held in Thiel's Case was not quite what my learned friend said. What was decided in Thiel's Case was the meaning of the words "carried on", when used in juxtaposition with the words "carried out", appeared to have the connotation of repetition. But no such juxtaposition here, and such colour as one gets from the context is a colour that shows breadth of application because, not only is it business, but it is also commercial activity. Not only is it commercial activity, but it is also investment activity. So that, one is left at a loss to see why it would be that the kind of activity that our learned friend would rely upon, should be excluded from its operation.
GLEESON CJ: Is that a convenient time, Mr Pagone?
MR PAGONE: It is, your Honour.
GLEESON CJ: We will adjourn until 2.15 pm.
AT 12.45 PM LUNCHEON ADJOURNMENT
UPON RESUMING AT 2.15 PM:
GLEESON CJ: Yes, Mr Pagone.
MR PAGONE: If your Honours please, we are having typed up a little example of the operation of 79D, so that it might be convenient if I come back to that as a topic and deal with something else whilst the copying is done.
If I may turn then to this question of dominant purpose for the purpose of the application of Part IVA. In that context I will deal also with this so-called attribution point that our learned friends seek to agitate. It is our submission that the court, both at first instance and on appeal, were correct in the conclusion about the dominant purpose. The test which emerges from the decision in Spotless about the dominant purpose requires the decision maker at first instance, or the court thereafter, to look to the objective facts and from those, in effect, to infer what the purpose of one of the relevant participants was. We say that there was abundant evidence for the conclusion that the dominant purpose of the scheme was to obtain the advantage of rendering inapplicable section 79D of the Tax Act.
We begin by saying that the structure adopted produces that effect. CPH Property was chosen because it had the cash - that is true - but it was also important that there be a tax deduction for the interest. That, with respect, is the evidence. I have taken the Court to appeal book volume 1, pages 102 and 103. At the bottom of page 103, Mr Bourke was asked about the Valassis proposal. Then over the page at 104, where he is asked about the features of it, at lines 12 and 13, he was asked:
It was important, wasn't it, that there be a tax deduction for the whole of that borrowing, wasn't it?
Mr Bourke says, without qualification:
The answer to that would be "yes".
The structure needed to be tax effective and - - -
GLEESON CJ: Was it actually put to anybody that there was a purpose of rendering section 79D inapplicable?
MR PAGONE: Not in those terms, your Honour. There were some questions put to people about having taken into account section 79D and Mr Cherry was asked about something like that. I will come to Mr Cherry in a moment because it was he that came up with the explanation about the foreign tax credits, which then becomes the way in which his Honour Justice Hill begins to analyse the choice between the two, but if I may deal with that in a moment. I do need to come to that and, of course, I will deal with it.
The structure needed to be tax effective - your Honours know that from the passages I have referred to already - and the advisers were relied upon to tell the taxpayer how to structure things properly. I think I have taken the Court to some of the passages from the appeal book. May I just add a couple more. At 97 at line 6:
These are the factors behind considering the borrowing were they, Mr Bourke?---Considering the borrowing in Australia and then the structure is what came out of the work that was done by Ernst & Young because they were the experts in that area and Cherry.
Mr Bourke, I understand that there might have been considerations behind considering the borrowing, I was asking about the structure?---The structure was the advice that was given to me from John Cherry and Ernst & Young.
Then at line 25 he says, in answer to a question:
But I mean one of the things is that we made decisions on commercial issues and then we had experts tell us how they should be properly structured. We didn't go off and look at how we structure things for the sake of tax alone.
At 100 at line 35 he is asked about some bit of a structure that he had given evidence about in paragraph 16 of his affidavit and he is asked:
That was a decision you made, was it?---Correct. I sought further advice from Cherry and Ernst & Young and they confirmed that the structure that they recommended in August for Valassis was appropriate for this transaction.
Then at 101, his Honour may have been getting a bit - hurrying me along with the questions, getting to the heart of it, this is in line 5, his Honour says:
Is the situation that when you get tax advice on matters of this kind you rely upon what the advisers say to you as far as appropriate structures are concerned?---Exactly, your Honour.
Then there are some supplementary questions about whose advice they were relying upon, and we were told it was:
Tony Verzi of Ernst & Young. I think they were Arthur Young in those days and John Cherry who gave the original advice.
It is plain that the advisers knew about the operation of section 79D at the time and Mr Cherry gives evidence about that, appeal book 121, for example. At the bottom of the page, Mr Shaw asks:
At that time, that's to say in August 1988, you were I take it aware of the provisions of section 79D of the Income Tax Assessment Act?---I was aware the section existed, these things change.
Then over the page:
It has since changed, that's true, but you were aware that the section existed?---Yes.
And you were aware that it's provision and indeed the provisions of its predecessor I think in section 51(6) could be of significance in respect of deductions which were claimed in respect of foreign sourced income. Are you aware of those sections?---Very, very broadly, it's a long time ago.
His Honour, cutting to the chase:
You've got no reason to doubt you would have been at the time?---No.
The group involving the taxpayer knew of the Commissioner's policy about section 79D.
GLEESON CJ: I am sorry, what about line 15? Is that the evidence that may have been mentioned already, that he did not believe that section 79D did operate to quarantine the deductions?
MR PAGONE: That is, presumably, the reference. Indeed, it goes on, your Honour, that he was asked:
Why weren't they applicable?
And answer:
On the advice I received I mean.
On the advice you received. From whom did you receive this advice?---Counsel.
So they have counsel's advice about it:
I take it from what you say that you had sought advice about whether or not the section was applicable?---It would have been embraced by counsel as opposed to specifically.
Then he is asked about the information paper that was released in 1989. Now, that is, undoubtedly, the evidence about that, your Honour. But the fact is that the group, whatever their belief may have been, knew of the Commissioner's approach to section 79D and that - - -
GLEESON CJ: What was the Commissioner's approach to section 79D at that time?
MR PAGONE: That it did operate in circumstances where there was no income, and your Honour can see that from volume 7 of the appeal book at page 1758. I should, just so that your Honours know what I am looking at, begin by 1753. Your Honours will see that that is the income tax return for Murray Leisure Group to the end of June 1989, which your Honours will see from the stamp, was dealt with on 15 May 1990 and, at 1758, your Honours will see that there is there set out a statement under the heading "Section 79D notice", where the group is informing the Commissioner that:
This company incurred expenditure of 131,795 in borrowing money to finance the purchase of shares in non resident corporations. As such the deduction for such expenditure will be limited by the operation of section 79D. As no foreign sourced income was derived the whole amount is quarantined.
GLEESON CJ: Justice Hill remarked on that, as I recollect it, in his judgment. He referred to the evidence of Mr Cherry and then he said, "Strangely enough, a different view is reflected in the tax return" and then he passed on to something else.
MR PAGONE: Your Honour, that may also explain his Honour's reference to Mr Cherry not having a view but there were others - one does not know - but certainly it is clear from this return - and one can take your Honours to the relevant pages if need be - that there was no other income from a foreign source and the whole of the interest expense was $131,000-odd and they certainly knew of the policy at roughly a contemporaneous time.
I have taken, I think, your Honours to page 103 of the appeal book where Mr Bourke gives evidence about the location of interest being of significance.
GUMMOW J: And Mr Bourke at 97, line 37 may be important, too, going over to 98.
MR PAGONE: Yes, your Honour. That was the way the case had been conducted. It is not as though it came as any surprise. It was a case where the evidence plainly was and the affidavits plainly showed that the company simply said to its advisers, "Well, what should we do?".
GLEESON CJ: I am afraid I do not understand what, if any, relevance the Valassis structure has to the desire to ensure that the result referred to by Mr Bourke at the top of 98 followed. I know what he is talking about when he refers to the "appetite for franked dividends", but was the Valassis structure something that was designed to achieve that result?
MR PAGONE: It was, your Honour, and it was a matter of some cross-examination. The letter itself setting out the advice is at page 186 of the appeal book and the letter of advice on the next page, at 187, sets out in the second, third, fourth and fifth paragraphs what was thought to be a problem at the time because there had been an announcement of a consultative document in 1988, the effect of which would have been to prevent some franking credits from being available in certain circumstances. That would have been because franking credits would have been consumed as against losses. The net effect would have been that domestic losses would have disappeared.
What had happened was that between the Valassis advice and the advice in relation to the BAT takeover, the Australian government had issued an information paper in 1989 and as a result of that this problem disappeared. They were cross-examined about that and it was accepted that this problem would have been known to have no longer been operative, so that that was the end of that point, leaving only a structure, the effect of which is preventing the operation of 79D.
GLEESON CJ: How does the structure prevent the operation of 79D?
MR PAGONE: It prevents it because it attempts to say that the amount of money borrowed by the onshore company is borrowed for the purpose of investing in an onshore company in the hope of receiving onshore dividends, so that the income from the dividends is not foreign source. I am putting that rather compendiously, your Honours, but if I may in the time available do that. That is more or less how it works.
GLEESON CJ: Does your argument come to this, that the Valassis structure might well have been explicable by reference to a tax consideration that had nothing to do with section 79D, that by the time the advice was given to adopt the Valassis structure in relation to the BAT takeover proposal, that consideration had disappeared?
MR PAGONE: Yes, your Honour.
GLEESON CJ: And there is no other tax consideration except section 79D that could explain the advice in relation to BAT?
MR PAGONE: It is, your Honour, with this qualification: Mr Cherry gave in evidence another hypothesis, which I will deal with in a minute. But, save for that, the answer to your Honour's question is yes. I will now turn to Mr Cherry. Mr Cherry, in cross-examination, came up with another hypothesis. It is an hypothesis that had not been mentioned before - - -
GUMMOW J: Yes, I was going to ask that. He made an affidavit?
MR PAGONE: Yes, your Honour. And, not only was it not suggested, but the evidence seems to be that he did not communicate the point to Mr Bourke, so that one still has the problem of what effect it has. But, so far as Mr Cherry is concerned, his evidence about that arises at 123. Now, Mr Cherry had been asked about the advice that had been given from a Mr Young, as your Honours will recall from the previous page. At line 21, Mr Shaw says:
By that time, in fact, in April 1989, if the position was that by the time the problem which you had referred to in your Valassis' letter had been cured by reason of a government announcement about a change in policy on that matter, what reason was there for adopting the Valassis' structure rather than simply providing necessary funds by way of loan?---I would say foreign tax credits.
I am sorry, foreign tax credits what?---You asked me, I said foreign tax credits would be the reason.
And you have to explain why it's the reason because I am afraid I don't understand?---If I receive dividends into a corporation that had foreign tax credits annexed and that corporation had other activities which produced a loss, I would lose the foreign tax credits.
And was that the reason why you recommended the same structure as the one previously suggested?---Yes.
I just pause there, with one other bit of evidence, that is basically it about the foreign tax credits.
GLEESON CJ: Was that evidence accepted or rejected?
MR PAGONE: It was accepted, your Honour, and that explains why his Honour Justice Hill then weighs up which of the two reasons was the dominant explanation to be given for the structure.
GLEESON CJ: When you use the word "reason", one is a reason and one is not a reason.
MR PAGONE: Purposes, your Honour.
GLEESON CJ: Yes.
MR PAGONE: But your Honours should note the next line. Mr Shaw says:
But you didn't tell Mr Bourke that there was a different reason for adopting it?---No.
And you didn't tell Mr Bourke that the reason given for adopting the previous structure was no longer applicable?---No.
GLEESON CJ: Now what do you take to be the relevance of that?
MR PAGONE: That the significance of the reason that Mr Cherry came up with, so far as the company, the taxpayer is concerned, if it be relevant, is rather poorly based.
GLEESON CJ: Well, presumably Mr Bourke did whatever Mr Cherry advised or did otherwise at his own peril.
MR PAGONE: That is so, your Honour, and, again, that explains why his Honour Justice Hill had to go through the process of weighing up the two possible explanations.
Your Honours, about the foreign tax credits, I should just say something again, if I may, globally, although one says there is some risk because it is quite complicated, but the issue about foreign tax credits could only arise as an issue at the time where dividends get paid from a non-resident company which has paid tax, and the position in respect of the plausibility of this ground depends a little bit upon when it is expected that the dividends from a non-resident company, having paid tax, might be making the dividend, because the position differs somewhat pre- and post-July 1990.
So far as the position pre-1 July 1990, there was no evidence led of an expectation of dividends with foreign credits being attached. There was some incidental evidence in evaluation that had been produced about two companies, the Valassis company and Kopcke, about which Mr Edmonds may inform the Court in due course. So that if one digs into the valuation, a valuation that was relevant to the question of the cost of the shares in CPIL, one could find a valuation of companies where a couple of the companies appeared to have some - they being offshore companies - tax having been paid so that it was conceivable, but it is, I think, undisputed that there was no direct evidence led on that point nor had it been a case that had been advanced until then.
Post-1 July 1990, the issue could only arise in issue, if the dividends would be from an unlisted country, unlisted for the purpose of the Part X, the CFC provisions, and if the dividend had not otherwise been or if that income had not otherwise been subject to accruals tax legislation under Part X. This issue had not been explored at all in the evidence.
GLEESON CJ: Where do you find Justice Hill dealing with this?
MR PAGONE: So that when his Honour comes to deal with the matter, at page 2173, his Honour has a heading "The Section 177D Conclusion" and it is quite significant what he says:
As the High Court pointed out in Federal Commissioner of Taxation v Spotless Services [1996] HCA 34; (1996) 186 CLR 404 the conclusion which is to be drawn under s 177D depends entirely upon objective facts.
It is not a quote, your Honours; that is his own words.
Subjective motivation will be irrelevant to the conclusion. Hence whether or not Mr Cherry or others had a purpose of ensuring tax deductibility to ACP of the interest deductions to which it was otherwise entitled would not be relevant in arriving at the conclusion. Likewise the conclusion to be drawn must be a conclusion that a reasonable person would draw.
The next paragraph:
The conclusion to be reached must relate to the dominant purpose of a person who either entered into or carried out the scheme or a part of it.
GLEESON CJ: So there is distinguishing between purpose and motive.
MR PAGONE: Indeed, your Honour, and it is perfectly plain that his Honour was aware of the correct test to be applied because, unlike what you might have if you simply quoted from something and, perhaps, inadvertently overlooked something, this is his Honour's own words:
A purpose will be dominant if it is the ruling, prevailing or most influential purpose: Spotless. Thus where there are two or more purposes objectively evident then the one which is most influential will be the dominant purpose. The fact that the transaction was commercial does not require the conclusion that the dominant purpose would fall outside the part, for there is no true dichotomy between schemes which are commercial and those which are tax driven: Spotless. I do not think that the important comment of McHugh J, with which, with respect, I agree, is necessarily at odds with the majority view.
Then his Honour says:
When one comes to apply the tests in s 177D(1)(b) it is clear that there are two purposes which can be seen to have driven the scheme as identified by the Commissioner. The use of various tax haven companies would, if one looked at the overall scheme, suggest tax avoidance in the generally accepted meaning of that term. But it is not the wider scheme upon which the Commissioner chooses to fasten.
The two purposes which caused the structure to be adopted on the assumption, contrary to my view, that s 79D operated to disallow a deduction in a year of income where no foreign assessable income was derived, were the obtaining of the deduction under s 79D and the adoption of a structure which would not detract from the tax credit relief. Having regard to the definition of "tax benefit" in s 177C the latter was not, at the relevant time, a "tax benefit". The question is therefore which of these two benefits should be seen to be dominant in the relevant sense.
The s 79D advantage - - -
GLEESON CJ: Sorry, could you just remind us why the latter was not a tax benefit because - a legislative choice?
MR PAGONE: It was not in the definition of "tax benefit", your Honour.
GLEESON CJ: Right.
MR PAGONE: Which, I suppose, is an expression of legislative choice. I only resist in embracing your Honour's description because it may not have been something contemplated at the time that Part IVA was being enacted, so to say it is a choice might be putting it a bit highly:
The s 79D advantage would be of no particular consequence unless no immediate foreign source income was anticipated to flow by way of dividend from the United Kingdom companies, for once an adequate stream of foreign income flowed, the interest deduction would be available to offset it. Until that time, on the Commissioner's interpretation of s 79D, the interest deduction would not be available to offset anything on the assumption that it could reasonably have been expected that ACP would have invested by way of share subscription in the United Kingdom. Because the structure adopted involved no foreign income being derived, the interest income would be able to be deducted without regard needing to be had to s 79D, and as against Australian source income.
Likewise, the tax credit advantage would arise only where foreign income was included directly or indirectly in assessable income of a resident taxpayer. That too could reasonably have been expected to arise in the future. It was, however, not an immediate problem. While it is clear on the facts that a substantial income stream was expected and that there was substantial foreign tax payable on foreign income in subsidiaries of the United Kingdom companies, it was more likely than not that any question of tax credit availability would arise in a year of income subsequent to the year in which the investment was made.
And, if your Honours please, that is consistent with the evidence to which I have taken the Court today.
GLEESON CJ: Now, it is the next paragraph where he reaches his conclusion.
MR PAGONE: He does, your Honour.
With some doubt I am of the view that a conclusion would be drawn that the dominant purpose of some person who participated in the scheme, and in particular those (perhaps not Mr Cherry, but there were others) who advised the group at Arthur Young and later Ernst & Young, was to bring about the result that a deduction would be allowed to the Applicants which, but for the scheme, would have been disallowed to them because of the application of s 79D. I reach this conclusion because it seems to me that the interest deduction was more immediate than the adoption of a neutral structure for non interference with tax credits.
GLEESON CJ: I am not sure - we had an argument from Mr Bloom criticising that last sentence, but if you were trying to determine which of two possible purposes is dominant, why is the one that has the more immediate consequences the one that you would select?
MR PAGONE: On the facts of this case, your Honour, because whatever else was going to be the case there were going to be interest deductions. That is to say, there was going to be interest paid, deductions were important to them and that was a given one.
GLEESON CJ: It is a bit difficult to imagine they would borrow money without getting a deduction for the interest.
MR PAGONE: But it was important that they should get a deduction for the whole.
GLEESON CJ: Why?
MR PAGONE: That is because - what they said, your Honour. That was the evidence. I think it is page 104, or thereabouts, where Mr Bourke said it was important to get a deduction for the whole of the amount, and that was inescapable. The credits were something which might arise in the future, it was conditional, it depended upon things happening which might not have happened. As things turned out it did not happen. So, on the one hand you have got a certainty, the interest, and all of the fruits of the deductibility of the interest as against something which would only arise in the future upon events, if they occur.
GLEESON CJ: If you are looking for the subjective purpose of a person, and one possible person is Mr Cherry, then you have him saying he did not think section 79 was a problem, and that evidence is apparently accepted, and him saying that tax credits were the problem, and that evidence is accepted. So that eliminates Mr Cherry, presumably.
MR PAGONE: Your Honour, it is not Mr Cherry that was the relevant person, it had to be a person who, to use his Honour's words, "entered into or carried out the scheme or part of the scheme".
GLEESON CJ: That brings us to what has been called "the attribution point".
MR PAGONE: Yes.
GLEESON CJ: We can eliminate Mr Cherry, can we not?
MR PAGONE: His subjective purpose does not matter, no, your Honour. That is correct, your Honour.
GLEESON CJ: When you say his subjective purpose does not matter, his subjective motive does not matter.
MR PAGONE: His subjective motive does not matter, your Honour, yes.
GLEESON CJ: But we are looking for somebody's subjective purpose.
MR PAGONE: It has to be one of the people who participated in - who entered into or carried out the scheme or a part of it.
GLEESON CJ: Now, who do you say are the people who have participated in the scheme?
MR PAGONE: For these purpose we have particularised it on the basis of it being either CPHL, MLG or ACP.
GLEESON CJ: All right. So, you are attributing to a body corporate a purpose?
MR PAGONE: Yes, your Honour.
GLEESON CJ: The principal adviser does not hold that purpose?
MR PAGONE: An adviser does not hold that purpose objectively, no, your Honour.
GUMMOW J: Mr Cherry's advice just appears at 232, his evidence-in-chief, at any rate. Is that all there is, 232 and his affidavit, paragraph 9, on this point?
MR PAGONE: Your Honour, I stand to be corrected, but I think that is all there is.
GUMMOW J: Is there nothing in writing?
MR PAGONE: No, your Honour.
GLEESON CJ: I thought the evidence of the taxpayers was, "We did this because we had earlier been advised by Mr Cherry to do it in relation to Valassis, and then when we came to enter into this transaction, we said to Mr Cherry, `What should we do?' and he said, `Do the same as I told you to do in Valassis'".
MR PAGONE: That is correct, your Honour.
GUMMOW J: That is based on paragraph 9, so it seems.
MR PAGONE: Well, your Honour, if I look at it again, the answer is yes, your Honour.
GLEESON CJ: Now, that evidence was accepted?
MR PAGONE: Yes, your Honour.
CALLINAN J: There was evidence that there was written advice for the Valassis transaction, was there not?
MR PAGONE: That is right, your Honour.
CALLINAN J: But was that evidence, the written advice?
MR PAGONE: The written advice was, I took your Honour to that a moment ago. I think it is 168 - 186, your Honour. We also know from the cross-examination of, I think it is, Mr Bourke to which I took the Court a moment ago, that they had obtained advice from counsel, but that is not in evidence otherwise. So that, although there is a question put in terms of attribution, it is really a question about attribution by adoption, in circumstances where a taxpayer simply says to the advisers, "You tell me what to do" and they do it. It is not really a question about seeing a subjective motive in an individual adviser and then sheeting it home to the taxpayer. It is a question of saying, "Well, you have asked your advisers to devise a structure. You have adopted the structure. The structure produces a particular effect, and it has whatever other features one points to. The question then becomes, what conclusion should be drawn about that?"
GLEESON CJ: The structure actually produces two effects.
MR PAGONE: One has to in that case determine which is dominant.
GLEESON CJ: So, the judge says, "With some doubt, I will go for the one that is more immediate".
MR PAGONE: "Some doubt", your Honour, but that is his decision about - - -
GLEESON CJ: Now, why would you go for the one that is more immediate?
MR PAGONE: Because, your Honour, it is certain.
HAYNE J: Is it right to say the structure produced, in the events that happened, two consequences?
MR PAGONE: No, your Honour.
HAYNE J: The structure was capable of producing two kinds of consequence.
MR PAGONE: That is right, your Honour.
HAYNE J: But, therefore, what is the nature of the inquiry that you say we are making? For what are we searching and how are we going about that search?
MR PAGONE: Well, your Honour, for the purposes of 177D, one is required to look at those facts that fall within each of the eight factors and by looking at those matters, seeing what inference one can draw about, as it were, a hypothetical conclusion. It is not a factual inquiry. I have to say it is not an inquiry into the actual dominant purpose of anybody.
GLEESON CJ: But it is an inquiry about why something was done.
MR PAGONE: No, your Honour, it is an inquiry about a conclusion that somebody would make or draw or reach by reference to those factors.
GLEESON CJ: A conclusion about what; about why something was done?
MR PAGONE: A conclusion about why something was done but not an inquiry into why something was done. It is not a question of asking the Court to embark upon an inquiry to find out why this was done. It is an inquiry about what, as it were, a reasonable person would conclude was the dominant purpose for the doing of the thing.
CALLINAN J: Is commercial rationale the same as saying what the purpose was? I ask that because at page 187 there is the advice in relation to the Valassis transaction. The second paragraph talks about "The commercial rationale behind structuring the flow of funds" and the second-last paragraph refers to a "further commercial rationale".
MR PAGONE: Yes, your Honour. In certain circumstances one might treat the words "commercial rationale" as being a shorthand description of the same exercise that 177D requires you to undertake. So far as the first of the commercial rationales are concerned on that page, it had disappeared wholly by the time of the relevant transactions. So far as the second is concerned, there is no evidence about it.
CALLINAN J: Except perhaps an inference can be drawn that the second commercial rationale referred to for the Valassis transaction would be the same commercial rationale as for the one that we are concerned with, particularly in light of the advice that was given and which is referred to in the affidavit.
MR PAGONE: Your Honour will note that in the last sentence of that paragraph the author notes that something should be done as a matter of prudence. There is no evidence that that was done. It is not a point that has been relied upon, so that it disappears. Amongst the factors that one points to to justify the conclusion is the concession that was made by our learned friends about the way in which the money got to the company at page 116. This is more like a concession than what was said we had done in the other case but, after some toing-and-froing about some documents that had been produced on discovery, Mr Bloom at lines 26 and following says words which his Honour on the next page describes as "an admission through counsel", the effect of which was that in fact the money was transmitted directly from CPF to CPIL(UK) without regard to the forms. Your Honours will see at line 26:
Firstly, document 69 we accept shows a credit of $US240 million to -
CPF -
then document 67 we accept shows that $US240 million was debited on that day to the same US Dollar Account and deposited with Westpac London on behalf of CPIL(UK).
Mr Bloom then adds his description so that the 240 million in effect paid on behalf of MLG to UK was paid directly from an account to CPF to an account of CPIL(UK). Then the next paragraph deals with the second flow of funds subsequently.
HAYNE J: Can I just get back to the nature of the inquiry? Do I understand your submission to come to this, that based on the factors specified in 177D, the inquiry becomes, "What conclusion would you draw from those factors about why the person, or one of the persons, who entered into or carried out the scheme did as they did?" and that the conclusion thus formed is not gainsaid by demonstrating that the participant did not think that, or did not form that view? Is that the nub of what you are submitting?
MR PAGONE: Yes, your Honour. I need, perhaps, now to move on to some other topics, even if briefly. Your Honour, I think that also partly addresses the concern that your Honour the Chief Justice raised with my learned friend about the inconsistency matter. We say there is no inconsistency between the overall commercial objective and the way in which this was done to achieve a negativing of 79D, because, of course, 79D does not get, as it were, negatived, even if there is more income coming in than deductions. Section 79D operates, it is just that the consequences are that you get the whole of the deduction.
GLEESON CJ: I thought there was a sentence in Justice Hill's judgment at the top of one of those pages where he - yes, on page 2174 in the first sentence on the page, he is there dealing with a question that is similar to what I had in mind in relation to the inconsistency. That is to say that, having regard to the way the entire scheme was set up and intended to operate, section 79D would not have touched it.
MR PAGONE: Well, it would have touched it, your Honour. It is just that over a period of time it would have had no practical effect.
GAUDRON J: Does not your argument proceed on the basis that this was really a contingency plan in case the takeover did not go ahead?
MR PAGONE: Something like that, your Honour, yes.
GAUDRON J: But that does not seem to have been spelt out anywhere in the arguments before, or to have been explored in evidence in any way, does it?
MR PAGONE: No. It is true that it has not been explored in terms of there being a factual inquiry about what the subjective motives were, other than the bit about franking credits really, but what one was left with was the objective facts that 177D required consideration of. Then the question becomes, if you look at those factors, what conclusion would you draw?
GAUDRON J: Yes, but it all has to be done on the basis, whether hypothetical or otherwise, of a contingency plan if the takeover did not go ahead.
MR PAGONE: No, your Honour, on the basis that a bird in the hand is always better than two in the bush. You do know that you are going to incur interest deductions. Whatever else happens, you have to send the money offshore, otherwise there is no point. The way in which they sent it offshore was a way that guaranteed the certainty of the deductions being available in Australia, in effect, the revenue partly funding the activity.
GAUDRON J: But I am looking at 177D(b)(iv), which is one of the matters that has to be taken into account, plus (v).
MR PAGONE: Your Honour, can I perhaps say, in respect of each of the factors themselves, conscious as I am of the time, that the Full Court dealt with each of the factors one by one, including (iv) and (v). May I take the Court to that? The criticism made before this Court by our learned friends was also made in the Full Court and rejected by the Full Court. They begin their analysis of this matter at 2270. Your Honours will see the heading "Part IVA - Purpose of enabling the taxpayer to obtain a tax benefit". They set out his Honour's observations, then at 2272 they deal with each of the eight factors seriatim. The first of them begins at line 41 on page 2272; (iv) is dealt with at 2273; (v) at the bottom of 2273 over the page.
GLEESON CJ: Well, they dealt with this particular problem on 2273, line 12, did they not?
MR PAGONE: The immediacy point?
GLEESON CJ: Yes.
MR PAGONE: Yes, your Honour.
GLEESON CJ: They did not seem to have answered it by saying, "This was against the contingency that there would be no income". They seem to deal with it by saying, "This would have a short term benefit if there were no foreign income flow during a particular year of income".
MR PAGONE: Your Honour, the point about the immediacy is that the tax deduction for the interest is immediate. It is not as if to say, "I have two problems, one will happen tomorrow, the other one a little while later".
GLEESON CJ: But they are talking about the benefit of the scheme. Now, what you have done is to identify as the scheme a part of a much wider course of conduct or plan. There is a possible problem that the part that you have identified to which you are seeking to attribute a purpose in the manner you have described, fits into a much wider scheme which looks as though it was a scheme intended or designed to produce a consequence that negatives the purpose you are attributing to part of it, unless, for example, you say it is a contingency plan of some kind.
MR PAGONE: But, your Honour, it does not negative it because section 79D operates whenever there is domestic deduction and offshore income. It is just the computation of it will either have the effect of quarantining or not. So that, it is not as though you have a wider scheme where the wider scheme, the commercial objective, is such that it is fundamentally inconsistent with the operation of 79D.
GLEESON CJ: No, you have a wider scheme, the commercial objective of which is such that quarantining does not matter.
MR PAGONE: Your Honour, 79D would still matter, because it would still give you a timing advantage; you would still get the benefit of the deductions now, even though over time, as income begins to come in and exceeds the deductions, it will use up even the losses that have been carried forward from one year to the next.
GLEESON CJ: That is what I thought was being suggested to as a possibility, that is to say that this was a contingency against the possibility that in some particular year of income quarantining might be a problem.
MR PAGONE: If your Honour pleases, so understood, I accept that. May I just say something very briefly, because I am conscious of the fact that I must stop in five minutes, about a couple of things. The so-called tension between Spotless and Peabody that our learned friends assert is plainly not there. Your Honours need only look at what the Court said at page 2268, because their Honours at 2268 set out from what the Full Court in Peabody had said, and your Honours will see the last line of the quote:
"the hypothesised outcome is a reasonable probability..."
Their Honours then say:
The appeal from the Full Court was dismissed by the High Court, whose judgment contained no criticisms of that observation.
Our learned friends sought to say that, indeed Mr Bloom did say, hypothesis in the sense of possibility. That is not so, and the Full Court plainly enough knew that it was not adopting such a test; they simply set out what had been said in the two decisions and sought to apply a test of probability.
Your Honours, may I hand up two examples. The first of them is an example of deductions with foreign income, and, if the Court pleases, it is an example that comes from the explanatory memorandum itself, and can I hand that up as well, and your Honours will see this example at pages 31 to 32, more particularly at the top of page 32. In that example, your Honours will see there is a foreign income of $1000 and three deductions from different provisions of the Act; one of them $200, another one $400 and the other one $600. So the total of the deductions is $1,200, the amount of the excess is $200. The words in 79D, the deductions to which paragraphs (a) and (b) apply shall be "reduced respectively" "by amounts proportionate to those deductions and equal in total to the amount of the excess" requires that there be a computation so that one has to work out what proportion of each of the deductions it is of the total deduction and you then apportion that to the total income.
Your Honours will see that in that example you divide 200 by 1200, multiply it by 200 and produce a reduction of $33 allowing the first class of deduction, 167 of it. The proportion is 33, so you allow, of the 200, 167. Now, I was wrong in what I said before lunch about what happens if you have got a nil amount. We have done the same calculation, if the Court pleases, in respect of a nil amount and your Honours will see that where the foreign income is zero the proportion calculated by the same kind of calculus produces a greater reduction, the effect of which is that the reduction is the whole of the amount that would otherwise be claimed, producing a deductible amount of zero. If the Court pleases.
GLEESON CJ: Thank you, Mr Pagone. Yes, Mr Shaw.
MR SHAW: If the Court pleases, if I might deal with what my learned friend, Mr Bloom, said, mainly yesterday, about the dividend-stripping matter. First, if I might deal with what he said about the determination. In our submission, the Asiamet determination is irrelevant in determining the validity of the determination in relation to the dividends. We say that, firstly, because on reading the determination report in relation to the dividends it is perfectly apparent, it is submitted, that it is entirely independent of and has no internal relationship with the Asiamet determination, and, secondly, because, in any case, in view of what has happened, the Asiamet determination is invalid and of no effect.
Might I then go to the concession which Justice Hill refers to at page 2189 to 90. In our submission, his Honour is wrong about that. The terms of the concession will be found at 2144. That is the concession that was made. There it appears in paragraphs 9 and 10 and it will be noted that in paragraph 9 what is referred to is:
a further dividend in the sum of $33,698,507 -
To the best of my recollection, we did not submit at any stage below that pooling was permissible and - - -
GLEESON CJ: What was the point of paragraph 10 on the bottom of 2144?
MR SHAW: Or simply to describe what the fact was.
GLEESON CJ: But what was the relevance of "pooled profits"?
MR SHAW: It was just that his Honour was asking a question about the pooling, and we were saying the only way one could get an extra $33 million out of it is to pool it, saying he was quite right about that.
The next thing, we would say, is that this is not the first time we have submitted that purpose was not relevant to deciding whether or not there was a dividend-stripping scheme. We submitted that below.
The next thing we would say is this: a further answer, really, to a question asked by your Honour the Chief Justice of my learned friend. It relates to the formation of a further opinion and if I could take the Court to pages 1179 and 1297, one is enough, they are both relevantly the same. One is the assessment of CPH, the other is the assessment of MLG. The relevance is the date on which the tax is due and payable. The Court will see it is 23 January 1995. The six-year-limitation period will accordingly expire on 23 January 2001 and, assuming all other things in favour of the possibility of making a further determination after that date, it may not be possible, at any rate, to give effect to a further determination by further assessment. All I am saying is, your Honour, it may be a matter, as it were, of permanent significance, what the answer to the question about the determination is, and I thought that was what, really, your Honour was sort of asking, that sort of a question.
Might I next refer to the disposal argument put by my learned friend and refer to St Hubert's Island 138 CLR at page 210. At pages 231 to 233 in a passage that I am not going to read, his Honour Justice Mason refers to section 36 of the Act which deals with situations in which:
"(a) a taxpayer disposes.....of property being trading stock" -
that consists of -
"part of the assets of a business which is or was carried on by the taxpayer; and (c) the disposal was not in the ordinary course of carrying on that business" -
and he considers there whether or not it matters who is right, Justice Menzies, in Franklin's Selfserve or the English Courts in Ayerst, and he says it does not matter tuppence, the disposal is caught anyway. That seems to be the sort of question which arises here.
Might I then refer to what my learned friends said about what the former Commissioner, Mr Boucher, had said. I will give your Honours the page of the relevant passage. What we draw the Court's attention to, in case it matters, is that Mr Boucher gives two examples, not one, and my learned friends only set out one in the passage they quote in their outline. In our submission, as I say, if it matters, the second example is more relevant than the first. I will get those pages. It is - - -
GLEESON CJ: It is the bottom of 830, I think, that he was referring to.
MR SHAW: Yes, your Honour, it is, and over on the next page.
GLEESON CJ: That does nothing more, does it, than reflect the fact that the provisions of section 177E are not just there in the Act; they are there in Part IVA of the Act?
MR SHAW: Yes.
GLEESON CJ: The explanation that was given as to why they are necessary is that there was a problem about applying section 177D to this particular kind of case.
MR SHAW: Yes, that is so, your Honour.
GLEESON CJ: So a possible point of view is that they are fairly to be regarded as an elaboration of section 177D.
MR SHAW: I am not sure about "elaboration" in the sense that what was said was that it was not - first of all, section 260 was not satisfactory. Then you say, "Well, I'll try something more satisfactory", and you draw up - - -
GLEESON CJ: What happens is that section 260 is unsatisfactory. A technique of endeavouring to deal with the problem is found in section 177D but somebody says this is going to miss dividend stripping because nobody is going to be able to predicate that if it had not been for the dividend-stripping operation, the dividends would have been paid.
MR SHAW: Or there might be further tax purposes, as is said.
GLEESON CJ: So we will deal with it in a special section.
MR SHAW: That is true, your Honour, yes. The next thing we wanted to say was that we accept what my learned friend said when he said that he agreed with what your Honour the Chief Justice had suggested, that the heading was part of the Act, but tax reduction is a concept as vague as tax avoidance.
GLEESON CJ: Yes, but schemes to reduce tax do not necessarily mean the same thing as tax reduction.
MR SHAW: That is true, your Honour, but there are still grave difficulties in seeing what it means. The next thing we would say is this, that my learned friend says that if purposes are necessary for the second limb of section 177E(1)(a), the first limb is otiose. As to that, we say it is a perfectly natural way of expressing oneself if you say to somebody, "Don't do X or anything like that".
GLEESON CJ: Is that quite an answer to his point? I understood him to say that if subparagraph (ii) has the meaning Justice Hill gave it, which is rather different from the meaning the Full Court gave it, subparagraph (i) has no work to do.
MR SHAW: Yes, it does because it starts off with the immediate cause of concern, as it were, so "Don't do X", and then you say "Or anything with that effect".
GLEESON CJ: What do you say as to the Full Court's explanation of subparagraph (ii)?
MR SHAW: In our submission, it is much too narrow an explanation. Might I then deal with what my learned friend said about the commercial character of what was carried out. One had here the two UK companies as holding companies of the Consolidated Press International Group. They had been established in the mid-eighties and that is referred to in Mr Mackenzie's affidavit in volume 1 of the appeal book at pages 148 to 149.
They were incorporated in the United Kingdom but not resident there. The consequence of that was that no tax was payable on their income, either in the United Kingdom or in Australia or elsewhere. Then the announcements that have been referred to were made, and it was decided that there was a problem because there might be double taxation, one of the taxes feared being Australian tax, or it might be that even if credit was given in Australia for the UK tax, when the monies were received there would not be franking credits available. So what was one to do?
One could, of course, find some purchaser for the shares and sell them off, but doing that raises the question of whether one really wants to get rid of the international group, and obviously that was not desired, so that was not a possible course. One could then, instead of doing that, wind them up and repatriate - if that is the right word - bring, at any rate, all the assets to Australia. What was the commercial obstacle to that? If I might take the Court to volume 1. First of all I draw attention to page 80. There is a reference there to the valuations being valuations of the shares cum dividend. The valuations will, in fact, be found in volume 3 at 667, 687 and 734. Then going from page 80 to page 82, if I could take the Court to the whole of this page. A question is asked at the top of the page:
I don't quite know what to call them, but the directors' papers that were prepared for that meeting included a number of papers recommending the reconstruction and they speak of the possibility of locating the new holding company for the international group outside the United Kingdom and the choice seems to have been when it was at its widest, Bahamas, Bermuda, Guernsey or Jersey. Why those places?---Our aim with the reconstruction was to ensure that there was only one tax jurisdiction which would have authority over the corporations, namely Australia, and that we wished to ensure that there was no other taxation from another jurisdiction on the corporations.
That does suggest, Mr Mackenzie, the possibility of somewhere else that the holding company might've been situated, namely Australia. Why not there?---These were the international operations of the Consolidated Press Group and the decision was that locating the companies in, as it turned out, the Bahamas was the most appropriate for those companies.
GLEESON CJ: Just before you pass from that, the answer to the first question, from lines 6 to 10, describes the situation that applied while the United Kingdom law remained unchanged, did it not? Was there not some proposed change in the way the United Kingdom was going to deal with these companies that was the cause of this reorganisation?
MR SHAW: There was, your Honour, but this was the proposal to meet the problem caused by, amongst other things, the Chancellor's announcement.
GLEESON CJ: I understand it. Now, before the Chancellor's announcement took effect, the situation was that the only jurisdiction that had authority over the corporations for tax purposes was Australia.
MR SHAW: No, well, they were managed from Hong Kong. They were not taxed in Australia because they were foreign companies, and there was no imputation or anything of that kind, they were not taxed in the United Kingdom.
GLEESON CJ: So this was effecting no relevant change? It was avoiding the change that would have occurred if the United Kingdom legislation had gone ahead.
MR SHAW: Well, it was seeking to avoid the United Kingdom legislation and also the effect of the Australian legislation if the things had remained there and the British changes took place. It is avoiding both, your Honour. Then, the questions go on:
Why was the Bahamas appropriate?---The corporations were managed and controlled outside Australia; they dealt with the international assets of the group, that is why.
You, yourself, played a part in that management, didn't you?---I did.
And I think largely from a base in Hong Kong, is that right?---Correct.
The instruments of management included modern means of communication - faxes and all sorts of things of that nature. Couldn't that have just as easily been done from Australia?---Could what, with respect, have been done from Australia?
Couldn't the international group have been managed just as easily from Australia as from Hong Kong, for example, in view of their own ability of modern means of communication?---It could've been.
I take it that although the new holding companies were to be, as it ultimately turned out, incorporated in the Bahamas, it was not intended to manage them from there?---That's correct.
I take it that the people doing the management stayed wherever they were?---There were no discussions about moving the management.
And you stayed where you were?---Yes.
Now, it is submitted that, in those circumstances, perfectly plain, that there was no commercial, in the sense of business, reason for going to the Bahamas rather than Australia. If one asks oneself what is the difference between the two courses that were possible, or the various courses that were possible, going to the Bahamas or going to Australia, the only difference which is apparent is that if the UK corporations were wound up and all the assets were transferred to the Bahamian company, the whole of the assets could be transferred tax-free.
If the companies were wound up and their assets were transferred to Australia, there would - I said tax-free; there was capital gains tax. If they were transferred to Australia, there would be tax on the accumulated profits. So that the difference between the two courses was that you maintained the assets of the international group, largely untouched by the transfer, if you went to the Bahamas, if you came to Australia you were taxed on the amount of the accumulated profits. So they went to the Bahamas.
GLEESON CJ: But you are not suggesting going to the Bahamas is a scheme?
MR SHAW: Well, your Honour, it is certainly a scheme to decide to wind up the companies, set up a Bahamian company, sell the shares in the UK company to the Bahamian company, declare dividends, all those things. So, if you ask yourself what was the effect of what happened, it is submitted that the accumulated profits were not taxed when they went to the Bahamas. CPH and MLG sold the shares and received their value as in shares in the Bahamian company, and CPH and MLG still had control of the international group. In our submission, that sounds very like a dividend strip. If the Court pleases.
GLEESON CJ: Yes, Mr Edmonds.
MR EDMONDS: Your Honours, my learned friend, Mr Pagone, took the Court to some of the evidence in this case in relation to the issue of reasonable expectation. In response to a question that was put to him by his Honour the Chief Justice as to whether he supported the finding of Justice Hill, which appears at page 2151 of the appeal book, commencing at line 20, where his Honour said:
Obviously, if income tax were no consideration, there would then be a borrowing from the Australian borrower CPH or ACP.....directly to the companies which were to use the funds borrowed.
I understood him to respond that he supported that finding.
Now, we would say that there was no alternative but to support that finding in the light of the following, in particular that CPI (Singapore), which was the company through which the funds passed by way of loan to capitalise the bid vehicle, clearly, it itself had the capacity to pay interest on the loan because it did in fact pay interest on the loan it received from CPIL(UK). In other words, had the loan been made direct, as his Honour said it would have been, from either the borrower from the banks, Consolidated Press Finance, or, alternatively, by Australian Consolidated Press, and his Honour also found that that company had the capacity to pay interest.
If it had been lent direct from either of those companies to CPIL (Singapore) then the fact is, as his Honour found, and as the Full Court found at page 2238, that CPIL (Singapore) indeed paid interest on its loan, initially, of something of the order of about 15.5 per cent and subsequently at the rate of 16 per cent.
Secondly, your Honour the Chief Justice asked my learned friend whether the issue in this case had any wider significance. In our respectful submission it has far less, if any, significance today than it had at that particular time. There are two principal reasons for this. The first is that, as my learned friend explained to the Court, today dividends coming back from overseas foreign companies are principally, apart from the exception to which he referred, exempt dividends. In other words, they are exempt income. So, that interest on a borrowing used to finance the acquisition of such shares would not be deducible, in any event. That is the first thing.
GUMMOW J: That is a result of?
MR EDMONDS: That is a result of the adoption of the accrual measures that were adopted in 1990, your Honour. The one exception to which my learned friend referred, and it is an exception, is where the dividend comes out from a company in an unlisted country where there has been no prior retribution of the income. That remains taxable income in a situation where it is paid out of profits which have had the benefit of the active business exemption. In that isolated case they still remain taxable and 79D would still have a role to play as to whether the amount of the foreign income coming in exceeded the amount of the interest deduction.
The second reason why it has less significance today is because, in 1990, 79D was amended along with section 160AFD. The amendment that was made was significant in two respects. Firstly, it is quite clear now that the 79D that exists in the Act can quarantine a situation where there is a nil amount of "a class of assessable foreign income". That is clear.
The second change that was made to both those provisions was this. The basis upon which the quarantining was to take place, namely, by reference to the income, the class of income from a particular foreign activity, that was changed and it was changed so that the quarantining ceased to be applicable to a foreign activity and the nexus chosen was the class of assessable foreign income.
What the legislator did was abandon the foreign activity concept and revert to the general law concept of source. The result was that a much wider class of income could come in to be set off against the allowable deduction.
My learned friend gave the example of the $100 of interest and $2 of income, a deduction of $2, carried forward loss of $98 and then interest in the second year, in which there was no income, a deduction of $100, a carried forward loss of still $98. I do not know that these examples really take us very far; they tend to conceal more than that they hide. If one was to go to what his Honour Justice Hill had to say at page 2167 of the appeal book, where his Honour points out, again possibly the unintended and harsh consequences if 79D is to be given the operation that was contended for by the Commissioner below and in this Court. At line 21 his Honour said:
The legislative history provides no clear answer to the present dilemma, nor do either resort to extrinsic materials nor the legislative context in which s 79D is to be found. There is nothing intrinsically absurd about quarantining a deduction against foreign income when foreign income is derived, but not quarantining a deduction where no foreign income is derived.
And his Honour then goes on to give examples of the sort of cases where you would get the odd results which have come before this Court and the Full Federal Court. Your Honours, this is not the first time that a provision of this kind, a quarantining provision, has been in the Income Tax Assessment Act, which is operated in the manner in which his Honour Justice Hill found that it did. In other words, that it quarantined deductions when there was a relevant class of income but did not quarantine those deductions when there was no income of that class.
We have given in the material which my learned friend, Mr Bloom, handed up this morning, your Honours, a copy of section 46(7), at page 3 of the legislation hand-up, as it appeared in the Assessment Act prior to its repeal in 1987. When one looks at the repealed section 46(7), which is in a lower case underneath the existing 46(7), one is taken immediately by the similarity of subparagraphs (1) and (2) of that section, to paragraphs (a) and (b) of section 79D, as it stood in the Assessment Act in the relevant year of income. It speaks of deductions allowable to the shareholder under this Act being deductions that relate directly to the private company dividends, on the one hand, and then deductions from income, from dividends, as in the opinion the Commissioner may appropriately be related to the private company dividends.
What this provision did, your Honours, is that it effectively required allowable deductions that either related directly to private company dividends or, in the opinion of the Commissioner, may appropriately be related to private company dividends, to be set off against such dividends for the purposes of determining any rebate entitlement.
The greater the allowable deduction, the greater the quarantining or set off of those deductions against private company dividends. But if there was no private company dividends in a given year a la here, there could be no quarantining in that year. So that the whole of the allowable deductions went against the non-rebatable income. I merely give that as an example which really exemplifies what Justice Hill said at page 2167:
There is nothing intrinsically absurd about quarantining a deduction against foreign income when foreign income is derived, but not quarantining a deduction where no foreign income is derived.
His Honour Justice Gummow put to my learned friend that the crucial issue here in the context of the operation of 79D as it stood in the Assessment Act in the relevant year turned on the words "activity carried on" in paragraph (b) of the definition of "foreign source" in 160AFD(7). We would agree with that. That is the kernel of the issue. Those words "activity carried on" are preceded by the words "other business, commercial or investment activity" and it lies at the heart of our submission that those words require repetitive acts, that the word "business" gives a context to the words which follow, requiring repetition. That was a submission which neither Justice Hill nor the Full Court accepted below.
GLEESON CJ: Where do we find Justice Hill dealing with that - 2168?
MR EDMONDS: The passage which we are really concerned with probably commences down the bottom of 2169 where his Honour there is dealing with Thiel's Case on which his Honour relied for the conclusion to which he came.
GUMMOW J: Page 2170 line 20.
MR EDMONDS: Yes, your Honour:
The context in s 79D is whether an Australian resident derives income from an investment activity which it carried on in a foreign country. It would seem highly unlikely that the legislature intended to quarantine deductions against foreign income -
and it is apparent that there is error in that immediately because the question is not whether it is quarantined against foreign income. Foreign income is a common law source concept defined in section 6AB(1) of the Act. The relevant question for quarantining was whether it was income from a foreign activity, but relevantly for present purposes, for the present issue:
where there was no repetition of the activity but not to do so where the activity was done once and once only. In my view s 79D should be construed, consistent with the general law of source -
again, his Honour is going back to general law concepts of source -
in any case, to bring about the result that a dividend from an overseas company in which the taxpayer has invested is to be treated as having a foreign source for the purposes of the section.
GLEESON CJ: But there is no error, is there, in what Justice Hill says there, if you understand "foreign income" to mean income from a foreign activity?
MR EDMONDS: What we would say as to that, your Honour, is this: the question is, as his Honour Justice Gummow put to my learned friend, is there an activity carried on? Does the act of subscription constitute an activity carried on when those words are understood in the context of the words which precede them, other "business, commercial or investment activity". The Full Court in considering that matter, and also his Honour higher up the page, relied heavily on what was said in the joint judgment in Thiel to say that the words "carrying on" did not require any repetition.
If I could take your Honours quickly to Thiel [1990] HCA 37; 171 CLR 338, the issue in that particular question was the meaning of the expression "carried on" in Article 3(1)(f) of the Australia-Swiss Double Tax Agreement. The relevant passage in the joint judgment - and I will not read it - commences at about point 5 of page 343 and goes over to about point 3 of page 344. In that case the Court held that the words "carrying on" did not require any repetitive activity in the context of carrying on an enterprise, that they could encompass an activity which was either repetitive or a single act, but they made the point in the joint judgment of Chief Justice Mason and Justices Brennan and Gaudron, at about point 2 of the page, where they said:
In any case, the use of the term "business" distinguishes such phrases from that presently under consideration.
In other words, the absence of the word "business" meant that one could say that "carried on" extended beyond a business context, and probably as well expressed is that in the judgment of his Honour Justice Dawson which appears at the foot of page 347 where his Honour considers the phrase "carrying on" in the context of carrying on a business and refers to the jurisprudence which has considered that issue in the context of income tax. Towards the latter part of the page, he says:
Whilst that phrase does not refer to the carrying on of business, the juxtaposition of "carrying on" with "carrying out" led Dixon J to conclude that "carrying on", by way of contradistinction, involved a degree of repetition. He said of those words: "The alternative `carrying on or carrying out' appears to cover, on the one hand, the habitual pursuit of a course of conduct, and, on the other, the carrying into execution of a plan or venture which does not involve repetition or system." In Smith v Capewell Gibbs J referred to these cases and said: "The expression `carry on business', in its ordinary meaning, signifies a course of conduct involving the performance of a succession of acts, and not simply the effecting of one solitary transaction." In these cases, the expression "carrying on" takes its colour from its context which is that of a business or its equivalent.
We say, as here.
GLEESON CJ: But here the relevant context is investment.
MR EDMONDS: Well, "activity" qualifies not only investment, your Honour, but also the words that precede them, "business commercial".
GLEESON CJ: But this is a case of investment, is it not?
MR EDMONDS: It is a case of investment, your Honour, yes. If the words "activity carried on" apply to a single act such as a subscription for shares in a foreign company, it has some very curious results. Take, for example, an Australian company which subscribes for shares in a United States company on an unleveraged basis. In other words, it applies its own funds and takes up one million shares in the United States company. Some nine months later, albeit during the relevant period with which we are concerned, it goes to its bankers and it borrows money to subscribe for another parcel of shares of the same amount.
It incurs in the year of income ended, say, 30 June 1990, some $85,000 of interest on the borrowing to make the second subscription. In that same year it receives a dividend of $85,000. One would expect the Act to operate such that the interest offset the dividend, so that the net foreign income was nil. But if each act of subscription is a separate activity, then the interest deduction has to be taken against the activity to which it relates. So that one would have, in that situation, a dividend on the second parcel of shares of $42,500, against which one would have $85,000 of interest, with the result that $42,500 of the interest would be carried forward as an overall foreign loss under section 160AFD, and the $42,500 of the dividend which related to the first subscription would be taxed to the shareholder in Australia.
Now, as I say, examples have a tendency to conceal more than they disclose, but that is an example, we would say, of a situation that these provisions as they stood in the Act at the relevant time were not intended to cover. My learned friend spoke about dominant purpose. As I understood his submission, he spoke of dominant purpose of a scheme and, of course, while that was relevant to the issue of section 260, it is not relevant in relation to the application of Part IVA.
Next he took the court to the income tax return for Murray Leisure which appears in volume 7 of the appeal book at page 1758. If I could just ask your Honours to go to that page.
GUMMOW J: How do you overcome this embarrassment?
MR EDMONDS: Well, we do not consider it to be an embarrassment at all, your Honour. At page 53 of our friends' submissions, it is suggested that this disclosure - I do not want to misquote them - but it said that:
Mr Bourke, as a director of MLG, clearly accepted that s.79D did apply to its investment in CPIL(UK) for in its 1989 Income Tax Return MLG notified the Commissioner that s.79D applied to quarantine expenditure incurred in borrowing money to finance its purchase of shares in non-resident corporations, presumably CPIL(UK).
Now, really, that reference in that return cannot possibly be a reference to CPIL(UK) because MLG had no borrowings in relation to its investment in CPIL(UK).
GLEESON CJ: But that does not matter, does it? What this says, it is the last sentence:
As no foreign sourced income was derived the whole amount is quarantined.
That is the point that is made against you, as I understand it.
MR EDMONDS: Well, the point is Mr Bourke gave evidence in these proceedings, your Honour. He was not cross-examined on that particular issue nor was Mr Cherry.
GLEESON CJ: And Justice Hill noted it as a curiosity, as I understand it.
MR EDMONDS: He did.
GLEESON CJ: He did not make any finding about it.
MR EDMONDS: He did not make any findings about it. The relevant passage appears at page 2152 in Justice Hill's judgment just after line 15, where he said:
Mr Cherry said in evidence that in supervising the writing of the letter he gave no thought, nor was there any discussion about, the provisions of s 79D of the Act, the terms of which are set out later in these reasons. This was because he had, whether on behalf of the Consolidated Press Group or some other client was not made clear, taken counsel's advice..... It would seem that Mr Cherry concurred with that advice. Whether the advice was correct is a matter which arises in the present case. It is perhaps interesting to note, however, that the 1989 income tax return of MLG prepared by Mr Cherry's firm and on which his name appears in the postal address proceeds on the basis that that section did have application. The discrepancy was not put to Mr Cherry.
Nor was it put, your Honours, to Mr Bourke, and the suggestion is made in the submissions that Mr Bourke, in some way, shape or form, was, to use the correct words, accepted that 79D did apply. Indeed, if one goes back to the evidence, and my recollection - I think this is at page 98 - at about line 21, your Honours, my learned friend put to Mr Bourke, he said:
Was section 79D a consideration as well, Mr Bourke?---I do not know what section 79D is.
So, the submission that is made at paragraph 53 of our friend's submissions we say cannot stand. There is no evidence whatsoever as to the circumstances of the transaction or transactions to which the statement in the return refers and it cannot therefore be suggested that its existence supports a conclusion that Mr Bourke accepted that 79D applied to MLG's investment in CPIL(UK).
Your Honour the Chief Justice raised with my learned friend the matter of Justice Hill's conclusion at 2174 in relation to the matter of the two competing purposes. If one goes to 2174 the conclusion which his Honour draws - he refers to:
The s79D advantage -
and:
the tax credit advantage -
and then at the third paragraph on the page he says:
With some doubt I am of the view that a conclusion would be drawn that the dominant purpose of some person who participated in the scheme, and in particular those (perhaps not Mr Cherry, but there were others) who advised the group at Arthur Young and later Ernst & Young, was to bring about the result that a deduction would be allowed to the Applicants which, but for the scheme, would have been disallowed to them because of the application of section 79D. I reach this conclusion because it seems to me that the interest deduction was more immediate than the adoption of a neutral structure for non interference with tax credits.
GAUDRON J: Does that not strictly have to be "which, but for the scheme, might have been disallowed to them", when you consider how section 79 operates?
MR EDMONDS: Absolutely, your Honour, certainly, we would agree with you on that entirely.
GAUDRON J: And how does that then relate to the conclusion that has to be drawn?
MR EDMONDS: Your Honour, can I just say this. It would cast, in my respectful submission to his Honour, further doubt on that conclusion. The point I was really seeking to take up was the one which I understood his Honour the Chief Justice to put to my learned friend, that the immediacy of a tax benefit can lead to the conclusion, having regard to the matters which one is mandated to have regard to under 177D, that that immediacy creates a more dominant purpose or would enable you to conclude that the alleged 79D benefit was the dominant purpose.
We have dealt with that, your Honours - and if I could take your Honours to the relevant passage in our written submissions, page 15, paragraph 58, where we say this. In any case it is respectfully submitted that Justice Hill erred in reaching the conclusion he did that the "interest deduction was more immediate than the adoption of a neutral structure for non-interference with [foreign] tax credits". The suggested "immediacy" of the interest deduction over the need for a neutral structure to preserve foreign tax credits, does not withstand scrutiny.
First, there were losses elsewhere in the group capable of being applied against the appellant's assessable income even if 79D applied to quarantine an allowable deduction for the interest in the year of income - and there is a reference to the evidence.
Second, section 79D only quarantined the interest deduction to a later year of income when there was foreign income of the relevant class against which the interest could be claimed. In other words, you did not lose the deduction forever; it was merely quarantined and passed back to a later year.
Thirdly, on the other hand, because of our system for giving credit for foreign tax, which is based on the lesser of the Australian tax and the foreign tax in respect of the foreign income - so you might have income coming in from the United States which has been subject to tax at 30 per cent and it is taxed here at the rate of 25 per cent - the foreign tax credit is confined to the lesser, that is, the lesser of the Australian tax. In a situation where, for example, the company had domestic losses, those losses would have the effect that the foreign income would be subject to no Australian tax with the result that the foreign tax credit would be abandoned forever.
Your Honours will see, when you read the explanatory memorandum that has been handed up by our learned friends, that when our foreign tax credit system was initially designed and adopted to begin from 1 July 1987, there was no provision for either carry back or carry forward of any excess foreign tax credit. So, while his Honour found that the interest deduction was perhaps more immediate, in terms of the permanency of the benefit, the advantage that was secured by adopting a neutral company so that we could take advantage in the future of the foreign tax credit was a far more permanent advantage and one which, if that neutrality was not observed, would be lost forever.
GUMMOW J: Mr Edmonds, am I right in thinking that section 190 applies in these proceedings, the ordinary onus of proof provisions?
MR EDMONDS: Yes, your Honour.
GUMMOW J: It does.
GLEESON CJ: What is the status of a finding such as that that appears on page 2174 at lines 35 to 40? Is that a finding of fact? The reason I ask that question is because a possible point of view is that you would then have concurrent findings of fact against you.
GAUDRON J: That is the finding required by 177D, is it not, which seems to be not so much a finding of fact as the conclusion that would be drawn by some person, a hypothetical person, having regard to all those matters.
MR EDMONDS: The paragraph has a number of inherent difficulties, not the least of which is the fact that the purpose that his Honour has concluded one would come to.
GLEESON CJ: But from the point of view of our position, of course this is a gross oversimplification of the issues in the present appeals, but suppose you had a case in which considering Part IVA a judge at first instance said, "Well, I have got some doubt about it but I have come to the conclusion that a person would conclude this" and then the Full Court of the Federal Court says, "Well, we have looked at it and we have come to the same conclusion". Leave aside any possibility of misdirection in law on the part of either the judge at first instance or the Full Court of the Federal Court, when that issue is ventilated in this Court are we inhibited in our consideration of it by the kind of consideration that applies where you have concurrent findings of fact or do we just have the capacity and the obligation to make up our own minds on the very same issue?
MR EDMONDS: I think the latter, your Honour, we would say.
HAYNE J: There is a whole raft of unstated assumptions in that assertion, unstated assumptions about the nature of the process which 177D requires the primary decision maker and the courts to engage in, considerations that I think have attracted perhaps five minutes of argument in the space of the last two days.
MR EDMONDS: As to the latter, I cannot say anything. What we would say in response to the question that your Honour the Chief Justice has raised is that it is open to this Court on the material before it, having regard to those matters in 177D, to approach the matter afresh. When I say that, there are obviously certain findings made below which are what might be called underlying fundamental findings which your Honours would rely on for the purposes of reaching that conclusion. But we do not say that it sets up some sort of impediment or bar to the Court coming to a different conclusion to the conclusion come to by his Honour Justice Hill.
GUMMOW J: When you say we approach it afresh, we approach it afresh bearing 190 in mind, do we? It could not be right at this level
MR EDMONDS: When you say that bearing 190 or the fact that we carry the onus, your Honour?
GUMMOW J: Yes.
MR EDMONDS: Yes.
GUMMOW J: That could not be right at this level or, putting it more precisely, it could not be as simple as that.
MR EDMONDS: Your Honour, the difficulty here is the case that was put and that we had to meet below - the case that we had to meet below basically was one which said that, but for what occurred, ACP, or, as it is now known, CPH Property, would have invested directly by way of shares or loan, and in our learned friends' submissions, it did not matter which was done, and that we would have invested directly into CPIL(UK). Now, it was on the basis of that case that we met, or sought to meet, that the case was conducted.
Now, in the course of both the trial before Justice Hill and in the Full Court findings were made by both that, but for what was done, but for the tax considerations involved, the course of action that would have been pursued would have been a loan directly to the overseas structure established for the purposes of the BAT bid. What we say is that, faced with those findings, both his Honour Justice Hill and the Full Court, should have, by reference to the indicia of matters in 177D(b), come to the conclusion that, but for what was done, the transaction which would have been entered into would be a direct loan and there would be no tax benefit.
GAUDRON J: Well, now, while we are on that passage, and perhaps this might affect Mr Pagone more than you, but I would appreciate some help on it at some stage, perhaps in writing if the Chief Justice so directs - - -
HAYNE J: Could I just pose a question, not inviting you to answer at once. Section 177D is engaged by these integers: scheme, taxpayer has obtained tax benefit, perhaps deductibility in the tax year concerned, "having regard to" eight matters "it would be concluded that", what is the nature of the conclusion that is reached? Is it of the same quality, though of different kind obviously, as a finding by a court, for example, of the defendant departed from the standard of reasonable care of the reasonable accountant?
MR EDMONDS: Yes, I understand what you are putting to me.
HAYNE J: That kind of conclusion.
GLEESON CJ: Yes, both sides will have seven days from today to put in further submissions on that issue.
MR EDMONDS: If your Honour pleases.
GAUDRON J: The matter I wish to raise is this, the finding, or whatever it is, at page 2174 about which there has been so much discussion, seems to me to blend together whatever is required by 177D, that is, enabling the relevant taxpayer and 177C(2) to obtain a deduction, that being the tax benefit, which would not have been allowable, or might reasonably be expected not to have been allowable, if the scheme had not been entered into. But it seems to me, or one argument is, that the reason it is not allowable - or might not have been allowable has got more to do with the failure of the takeover bid than the scheme. Now, how does that relate? What is this "might reasonably be expected" to do, and how do we make a finding that there is, in fact, a tax benefit in this situation? By that I mean to say, it is if the scheme had not been entered into. There seems to be posited a causal connection between the scheme and the deduction.
MR EDMONDS: Well, your Honour, all I can say is that I think some of what your Honour has just said was lying behind some of the comments that fell from his Honour the Chief Justice's lips earlier today.
GLEESON CJ: You might like to take that on board too, and both sides can put in written submissions about that.
MR EDMONDS: Yes, if your Honour pleases.
GLEESON CJ: Very well. Then, subject to those written submissions, we will reserve our decision in this matter and we will adjourn until 10.15 tomorrow morning.
AT 4.20 PM THE MATTER WAS ADJOURNED
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