Raftland Pty Ltd as Trustee for the Raftland Trust v Commissioner of Taxation [2008] HCATrans 10 (31 January 2008)

Last Updated: 31 January 2008

[2008] HCATrans 010

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Brisbane No B39 of 2007

B e t w e e n -

RAFTLAND PTY LTD AS TRUSTEE FOR THE RAFTLAND TRUST

Appellant

and

COMMISSIONER OF TAXATION

Respondent

GLEESON CJ
GUMMOW J
KIRBY J
HEYDON J
CRENNAN J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON THURSDAY, 31 JANUARY 2008, AT 10.19 AM

(Continued from 30/1/08)

Copyright in the High Court of Australia

GLEESON CJ: Mr Robertson, just before you continue can I ask you for two references?

MR ROBERTSON: Yes, of course.

GLEESON CJ: On page 3041 at the bottom of the page there is a reference to a letter in which Mr Tobin said to the accountants for the Adelaide people, “We would expect your clients to co-operate”. Where is that letter?

MR ROBERTSON: There is one place where it appears, I think 2803, your Honour.

KIRBY J: Poor old taxpayer has come up with a page immediately in the vast resources of the - - -

GLEESON CJ: Page 2803, thank you.

MR ROBERTSON: Page 945, I was going to say, your Honour. It is probably another copy of the same - - -

GLEESON CJ: What page?

MR ROBERTSON: Page 945 in volume 4.

GLEESON CJ: On page 3052 in paragraph 39 there is a reference to the fact that senior counsel in a written advice said that:

the E&M Unit Trust would not be calling upon the balance funds to which it was entitled -

Where is that advice?

MR ROBERTSON: The advice is in volume 9, your Honour, and that is the advice that is reproduced commencing volume 9 2845.

GLEESON CJ: Thank you.

MR ROBERTSON: The specific reference to that proposition is at page 2851 at line 40. I hope I have regained some ground on your Honour Justice Kirby.

GLEESON CJ: Was counsel’s brief to advise in writing?

MR ROBERTSON: There was no evidence whatever of his brief to advise.

GLEESON CJ: I was just wondering how he knew that.

MR ROBERTSON: We are left to speculate or infer.

GLEESON CJ: Justice Kiefel decided what has been called the sham aspect of the case by reference to a factual issue as to whether there were distributions to the E & M Trust.

MR ROBERTSON: Yes.

GLEESON CJ: Do you recollect that?

MR ROBERTSON: Were, and intended to be.

GLEESON CJ: Were distributions.

MR ROBERTSON: Were, yes.

GLEESON CJ: Having decided that there were no distributions to the E & M Trust, she then said that the question was whether Raftland Pty Ltd was caught by section 103A(1) and that in turn depended on the application of 103A(3) on the basis that it was what I will call the earlier beneficiaries who were entitled – in other words, not the tertiary beneficiary.

MR ROBERTSON: Yes.

GLEESON CJ: Is there an issue in this appeal about whether that aspect of her reasoning was correct on the assumption that the first part of her reasoning was correct – namely that you can leave the tertiary beneficiaries out of the picture?

MR ROBERTSON: That is that one then looked at the position under the Act of the primary beneficiaries?

GLEESON CJ: Yes, in other words to sustain the assessment against Raftland you still have to decide that there was nobody presently entitled, do you not?

MR ROBERTSON: Yes. There is no issue so far as my understanding.

GLEESON CJ: I did not think there was, but I wanted to check on it. Now, what is the statutory provision by reference to which Justice Kiefel concluded that the first issue she had to decide was whether there were, in fact, distributions to the E & M Trust?

MR ROBERTSON: I do not think her Honour regarded it as a statutory question or an immediate statutory question.

GLEESON CJ: If you look at her reasons for judgment at page 3059 she is outlining the argument for the Commissioner.

MR ROBERTSON: Yes.

GLEESON CJ: She refers to “purported distribution to the E & M Unit Trust”, paragraph 59. Then under the general heading on page 3064, “WHETHER THE DISTRIBUTIONS TO THE E&M UNIT TRUST WERE A ‘SHAM’”, her Honour says that the only transaction between the Adelaide interests and the Brisbane interests that was intended to be real was the payment of the $250,000 that she refers to on 3066 and 3067, and we have been yesterday through what her Honour said about that.

MR ROBERTSON: Yes.

GLEESON CJ: She then says as to the rest of the money, it went to Navygate. None of it - - -

MR ROBERTSON: Well, maybe not the money, but - - -

GLEESON CJ: None of it went to E & M. On page 3068 in paragraph 89 she says:

Raftland is required to prove that there were distributions of trust income –

That is in the second sentence. What is the statutory provision that required Raftland to prove that there were distributions of trust income?

MR ROBERTSON: As I understand it, your Honour, and, in my submission, what her Honour was looking at was to see what the facts were on which statute would then operate. When I submitted before that I did not think there was an immediate provision that her Honour was thinking about when making findings such as that one in paragraph 89 - - -

GLEESON CJ: It is not the finding. It is her statement in the second sentence:

Raftland is required to prove there were distributions of trust income –

What is the requirement of which she is speaking?

MR ROBERTSON: I think what her Honour is looking at is the scheme of Division 6 which would have the result that 99A(4), which your Honours were discussing with my learned friend yesterday, would apply. There was reference to 99A(4A) but there is perhaps not any relevant difference.

GLEESON CJ: But that talks in terms of entitlement. Is it accurate to say that Raftland was required to prove that there were distributions of trust income, or was it sufficient for Raftland to prove that it was presently entitled to trust income as trustee of the E & M trust, and that it did not matter whether there were distributions of trust income?

MR ROBERTSON: In my submission, your Honour, the way her Honour was approaching it was distributions in the sense of were the resolutions that had been propounded effective according to their terms as a matter of intention? That was the way the issue was raised before her Honour. If not, did one then go to – which I understood in answer to an earlier question of your Honours – did one then go to – and it would seem to be common ground – 100A(1)(b) to then look at the issue of the primary beneficiaries?

GLEESON CJ: Well, her Honour seems to have reached a number of conclusions, but one of them was that the tertiary beneficiary had no equitable entitlement to anything except the $250,000, and that not in its capacity as a tertiary beneficiary but as part of the agreement to go away. Is that a fair account of what she held?

MR ROBERTSON: As I read her Honour’s approach, and as I submit her Honour’s approach is, her Honour started by saying, well, what was the legal efficacy, if any, of these instruments which were put forward by the taxpayer as leading to the result that the taxpayer was not liable to be assessed.

GLEESON CJ: But she was doing that for a further purpose.

MR ROBERTSON: Yes, within the statute.

GLEESON CJ: She was, if I may say so, perfectly correctly acting on the basis that in order to apply the provisions of the Income Tax Assessment Act you have to decide what were the rights of the parties or the people involved. The Income Tax Assessment Act operates on the basis of people’s legal rights.

MR ROBERTSON: Yes.

GLEESON CJ: So her Honour was setting out to work out what were the rights, including the rights of these tertiary beneficiaries.

MR ROBERTSON: Yes.

GLEESON CJ: Her conclusion was, was it not, apart from the 250,000, they had no enforceable rights.

MR ROBERTSON: That followed from what her Honour held about the instruments.

GLEESON CJ: That was the reason for that conclusion, but that was the conclusion; they had no enforceable rights. Is that so? They were not presently entitled, which was a question that had to be asked under the Income Tax Assessment Act.

MR ROBERTSON: That would be a consequence of her Honour’s findings.

GLEESON CJ: It is right to say, is it not, that the purpose or the point of the reasoning engaged in under the subheading, “Were these a ‘sham’?”, the point is to reach a conclusion as to what, if any, were the rights of the tertiary beneficiaries.

MR ROBERTSON: Yes, that is so. Then having reached that stage, the question was for her Honour, not for the Full Court, but for her Honour the question then arose under 100A(1)(b), reimbursement agreement, the position of the tertiary beneficiaries.

GLEESON CJ: No. Once you concluded, as she concluded, that the tertiary beneficiaries had no right in respect of anything except the $250,000 - - -

MR ROBERTSON: I am sorry. I misstated that. I withdraw that. The position under 100A(1)(b) of the primary beneficiaries. I am sorry, yes.

GLEESON CJ: Exactly. Now there is no dispute, is there, in this appeal that if her Honour was right to conclude that the tertiary beneficiaries had no rights in respect of anything except the $250,000, then Raftland Pty Ltd was caught by 100A(1).

MR ROBERTSON: With the additional reasoning that I have just mentioned about the primary beneficiaries.

GLEESON CJ: Yes.

MR ROBERTSON: That is as I understand it, yes.

GUMMOW J: Now, this crystallisation of the issues, is that thrown up by the objection decision? We have never really been taken to the foundation out of which all this litigation is framed, which is why it is - - -

MR ROBERTSON: I think it is in volume 1 – the objection. I will have that turned up, your Honour Justice Gummow. It was certainly assumed that once one looked at the derivative pleadings, to use an appropriate expression – the statement of facts, issues and contentions and so on – these issues were squarely thrown up.

GLEESON CJ: In between a conclusion accepting your argument on what has been described as the sham issue and a conclusion that the assessment has not been shown to be excessive, there is an intermediate step or a number of intermediate steps. We just need to understand what they are and to what extent, if at all, they are in dispute.

MR ROBERTSON: Could I attempt to encapsulate it in this way, your Honours. So far as Justice Kiefel’s reasons were concerned, the live issues are sham or not sham; if sham, the question that her Honour addressed and the correctness of which is in part raised in our learned friend’s written document of the day before yesterday is reimbursement agreement - did the present entitlement of the primary beneficiaries arise out of the reimbursement agreement because it is only if, on that limb of the argument, the beneficiary is deemed not to have been presently entitled. That was a necessary part of her Honour’s reasoning, as one can see.

GLEESON CJ: That is a matter that your opponent has said he will deal with in reply. What we need to understand is the step or steps that you take. If you are correct about what you call the sham issue, if you do not mind, I would prefer to call that the present entitlement of the tertiary beneficiaries issue. That is expressing it I think in the form of the words of the statute.

There is a question whether the E & M Trust was presently entitled to this income. Assuming the answer to that question is no, because perhaps there was a sham or perhaps for some other reason, that then raises the question who was entitled to it? I think Justice Kiefel said the primary beneficiaries were entitled to it. Question: why does that produce the consequence then that Raftland Pty Ltd fell to be assessed to tax at the special rate? Justice Kiefel, as I understand it, answered that question from page 3069 in that part of her reasoning beginning with the heading “The application of section 100A”. In other words, Justice Kiefel never thought that the case ended with her conclusion about sham and her conclusion consequently about present entitlement.

MR ROBERTSON: The reason is that - and I hope I am addressing your Honour’s question – she then considered the position of the primary beneficiaries as a beneficiary of the trust estate in terms of 100A(1) and then looked to see, at paragraphs 92 and following on 3069, whether 100A(1) operated so as to deem the primary beneficiary not to have been presently entitled. If that were so, as her Honour held at paragraph 101 on page 3072, that in her Honour’s conclusion 100A(1) applies, so the primary beneficiaries are to be taken not to be presently entitled and, therefore, that took her Honour back to 99A. Now, that link is not in contention, as I understand it.

GLEESON CJ: That is what I wanted to be clear about.

MR ROBERTSON: I am sorry, your Honour. I have been a long time coming to that. But if I can mention by way of contrast the Full Court having proceeded as it did, it was looking at 100A(1) with reference to the E & M Unit Trust and then, necessarily, the Full Court had to go and consider what has been referred to yesterday as the “unit holders” in that trust to see how 100A(3A)(c) applied to reverse the effect of 100A(1).

GLEESON CJ: Both Justice Kiefel and the Full Court had to consider and apply 100A, but Justice Kiefel approached it upon the premise that the tertiary beneficiaries were not presently entitled to the income, whereas the Full Court approached it on the premise that the tertiary beneficiaries had the rights that they appeared to have on the face of the documents.

MR ROBERTSON: Yes, that is the difference. That is why her Honour was looking primarily at the position of the primary beneficiaries and the Full Court was looking primarily at the position of the unit holders.

GUMMOW J: The objection decision seems to appear in volume 8, page 2642, is that right?

MR ROBERTSON: It begins at 2544, I think, for Raftland. I am sorry, the objection - - -

GUMMOW J: That is the objection.

MR ROBERTSON: I am sorry.

GUMMOW J: I am talking about the reasons for - - -

MR ROBERTSON: The objection is 2544, and the objection decision - - -

GUMMOW J: It is 2642, is it not?

MR ROBERTSON: Pages 2558 and 2561, but, of course, things have moved on since then.

GUMMOW J: I am just trying to find out what it was that is being spoken of, and the initiating document in the Federal Court as found in the Federal Court proceedings.

MR ROBERTSON: Yes.

GUMMOW J: The focus previously seems to have been Part IVA.

MR ROBERTSON: Quite so, yes.

GUMMOW J: With sham tacked on somewhere or other. At page 1 it says the objection decision notified by a notice of decision of objection dated 4 October 2002, and that seems to appear at page 2639. We will not waste any more time. Unless we start at the beginning we are going to get thrust into a thicket.

MR ROBERTSON: If I could add one more reference, your Honour, at 2566 there is a reference. There may be other references, but 2566.

GUMMOW J: There is reference to sham, is there not?

MR ROBERTSON: Yes, at the foot of 2566.

GUMMOW J: Yes, that is what I was trying to get at. Now, to what extent is what you have been saying to the Chief Justice consistent with what is outlined there in the nature of the sham? Unless you have a clear view as to what the nature of the sham is supposed to be it is very difficult to understand Justice Kiefel’s reasons. In particular, the description of the sham there does not seem to focus upon the critical question of present entitlement or absence of present entitlement.

GLEESON CJ: That, on analysis, really has to be what the sham is on your sham argument, is it not, the entitlement? It was a sham entitlement?

MR ROBERTSON: That is certainly the umbrella under which her Honour made the findings of fact as to the status of the instruments.

KIRBY J: The cases seem to say that a sham is something where the documents do not truly reflect the purpose and intention that appears on their face, and if that is the way one approaches sham as a clue to taking the legal steps that you invite the Court to take, I myself do not find it difficult to see the proper use of the word “sham” in this context. Take, for example, what Queen’s Counsel said at page 2846 in his opinion. He says here that:

Whilst, clearly, one of the results of structuring the transaction in this way was to achieve certain taxation consequences for Heran Projects Pty Ltd, on my understanding of the matter, and in particular, of the way that the form of the transaction developed, those income tax purposes should not be characterized as “the dominant purpose” of the transaction within subsection 177A(5) of the Income Tax Assessment Act –

Now, I realise that that is addressed to a particular statutory provision, but for myself I find it, there being no commercial purpose or past association, there being no connection of blood or family, it seems to me that that is a very unconvincing proposition. If that is the view you take of the transactions and the documents, then the use of the word “sham” is not an inappropriate way to describe what the documents - - -

MR ROBERTSON: There are a number of things that arise from that, your Honour. One is certainly when one is looking at “sham”, metaphor though it may be, one is looking at the relationship between what rights, if any, were purportedly created by the instruments - - -

GLEESON CJ: But you are doing that for a reason.

MR ROBERTSON: Of course.

GLEESON CJ: And the reason is related to the words of the statute. So if you are going to argue that something is a sham, and it might be a perfectly valid and correct argument, you have to work out what it is that is supposed to be the sham. Now, you may be right in your argument inviting us to hold that there is here relevantly a sham, but you have to identify what it is that is the sham.

In the case of Scott that Justice Kiefel quoted at some length, Justice Windeyer was dealing with a statutory provision that produced certain tax consequences when you established a superannuation fund for the benefit of employees. Because of what went on in that case, Justice Windeyer concluded that the particular superannuation fund, although it appeared to be established for the benefit of employees and said it was established for the benefit of employees, was not established for the benefit of employees. But if you read the whole of the judgment of Justice Windeyer in Scott’s Case, you will find him ending up asking himself the right question, which was, “Having said all this, I ask myself is this a superannuation fund established for the benefit of employees?” and I answer the question, “No”. That is the point of what has previously been said about the subject of sham.

In the present case, and I am not suggesting Justice Kiefel did not have this in mind, not suggesting that for a moment, but in the present case, when we write a judgment and deal with the question of sham, we are going to end up having to ask ourselves a question, are we not, a question related to the language of the statute. That question has to be, does it not, after all that we have said about this matter of sham, the question is, “Was there a present entitlement in the tertiary beneficiary?”

MR ROBERTSON: I would agree, your Honour, in this sense. Why am I looking at what rights, if any, were created by these instruments? Answer: because I am trying to apply the statute - - -

GLEESON CJ: Exactly.

MR ROBERTSON: And in particular 100A. To go back to your Honour Justice Kirby’s question – and it relates in a sense to what Justice Gummow was asking me – the basic proposition is in this case the facts were unfolding before her Honour Justice Kiefel in the course of the trial. What – and this goes back to a question that his Honour the Chief Justice asked me – the factual instructions were in relation to this advice nobody knows in the sense that there is no evidence about it.

KIRBY J: How could anyone conclude that the dominant purpose was other than tax minimisation? With all respect, it is ridiculous to suggest that it has any other purpose.

MR ROBERTSON: It depends on - - -

KIRBY J: No link of commerce, no purpose of business, no link of family, no blood, no obligations, moral or other kind. To suggest that it is for some dominant purpose other than tax minimisation is, as far as I am concerned – it seems to me – just totally unpersuasive. That therefore leads me to a view that the documents may say what they will but they are a sham. They are a sham which should not fool courts. Perhaps for too long they have and maybe there should be more use of the word “sham” in this context. I just cannot see how any person could say that there was some other dominant purpose.

MR ROBERTSON: Your Honour, it is not part of my role to defend the advice. All I would say, relevantly to our submissions ultimately about penalty, is that it all depends on an unknown. We do not have the brief to counsel, we do not know what written or oral instructions he was given as to the facts. Depending on what he was told about the facts, it may have been a view that was open to him. But the question is, in relation to the taxpayer’s reliance on this advice in relation to penalty, what relationship, if any, do those unstated and unknown facts – instructions – have to the facts before the Court?

KIRBY J: I do not want you to jump ahead. You will no doubt come to that at the end of your argument. It just struck me when I looked at it that there is just an air of unreality about a lot of this.

MR ROBERTSON: The only deployment of this advice in these proceedings, as I understand it, is in relation to penalty. Your Honour the Chief Justice asked me just before the adjournment yesterday about a particular passage in his Honour Justice Windeyer’s judgment in Casuarina 127 CLR 62 and in particular at page 73. I know your Honour was not putting it to me in this context, but it is worth noting that in the first paragraph of his Honour’s judgment at page 64 he says:

The scheme was as ingenuous as it was ingenious.

But then, importantly:

There was in it nothing hidden –

et cetera, and his Honour was not looking at sham. When his Honour was looking then at section 260 – the passage begins at page 72 about point 4 of the page and then leads on to the passage your Honour the Chief Justice was drawing my attention to last evening, there is a difference, which his Honour remarks on, between legal rights – that is his Honour’s reference to whether there was anything in law restricting Forum exercising whatever rights it had. The subsequent reference to:

Had it not been in law free to do so, the scheme would have fallen to the ground

As I understand it, the difference that his Honour was pointing to was Forum would not in fact exercise those rights. Now, here on the way in which I was putting the argument yesterday – and I should submit if it is not already clear that they are not mutually inconsistent, there is Justice Kiefel’s approach, which is the sham approach, and there is the approach that we were contending for in relation to the unit holders in relation to the E & M Unit Trust, which is the obligations on the unit holders following from the receipt by them of the 220,000.

Just in relation to that last point, while I remember it, my learned friend, Mr Russell, drew the Court’s attention to a document at volume 9, 2826, and submitted in relation to it that there was an assurance by Mr Carey that the unit holders would not disclaim their rights. Now, whether that matters in terms of the document or the executed form of it at 2828, is perhaps a different question, but, in my submission, that document does not say anything about the unit holders not disclaiming their rights in the E & M Unit Trust. It does say something about the trustee agreeing not to disclaim his interest as beneficiary or any distribution to him from the Raftland Trust.

GUMMOW J: Looking at the Commissioner’s “Statement of Facts, Issues and Contentions”, which is a pretty important document in Federal Court litigation - - -

MR ROBERTSON: In volume 1, your Honour?

GUMMOW J: Volume 1, page 44, at the bottom of 45 you see:

In summary, the principal contentions of the Commissioner are that the arrangements . . . The intention –

et cetera. Then:

Section 100A of the Act seeks to catch such arrangements –

et cetera. I can understand all of that, but where does the word “sham” come into it in this formulation of case in this document? Is it just some description to identify how it is that section 100A is working through the reimbursement provision?

MR ROBERTSON: I think page 81 is where - - -

GUMMOW J: On the other side of the case at that stage that loomed very large is Part IVA, but that disappeared.

MR ROBERTSON: Yes, indeed.

GUMMOW J: That is struck out, and that is at page 82.

GLEESON CJ: It is a pity, in a sense, that Part IVA has disappeared, because when it is raised in argument it rather concentrates the mind on the meaning of the concept of sham. If “sham” meant done for a tax avoidance person, then you could tear up Part IVA.

MR ROBERTSON: The breadth of that proposition is not one which one can see in the contentions or before Justice Kiefel.

GUMMOW J: Anyhow, you said there was another page later on in the 80s.

MR ROBERTSON: I am sorry, your Honour. I was looking at 81. While your Honour Justice Gummow is looking at that, the forensic history is referred to by her Honour Justice Kiefel certainly at the end of her judgment in paragraph 107 where her Honour is considering the question of costs. He did not proceed with a case based upon Part IVA, so that is put to one side.

GLEESON CJ: Personally, I am not certain how, when or why Part IVA dropped out of the picture, but it is well and truly out of the picture by the time the case has got to us.

MR ROBERTSON: Yes.

GLEESON CJ: But Justice Kiefel on page 3068 concludes that part of her reasoning headed “Whether the distributions were a ‘sham’” in paragraph 90 where in the second sentence she expresses one conclusion and in the third sentence she expresses another conclusion.

MR ROBERTSON: Yes.

GLEESON CJ: What I was asking you earlier was the precise legal relevance of the conclusion in the second sentence. She says:

I conclude that there were no distributions of income –

Was the relevant question whether there were distributions of income, or was the relevant question whether there was an entitlement to distributions of income?

MR ROBERTSON: What her Honour is saying compendiously in light of her earlier reasons is that neither of those - that is, there were none and there was no entitlement.

GLEESON CJ: Yes. I mean, I am not suggesting that this affects the outcome of her Honour’s reasoning but that heading whether the distributions were a sham could perhaps alternatively have been whether the entitlement of the E & M Unit Trust was a sham.

MR ROBERTSON: Whether the entitlement was a sham?

GLEESON CJ: That is the question under the Income Tax Assessment Act, whether there was a present entitlement.

MR ROBERTSON: Her Honour was addressing what, if any, were the rights.

GLEESON CJ: Yes, which is a different question, although they might be related, to what in fact happened. Your opponents say does not matter whether there were distributions to the E & M Unit Trust, what matters is whether they were entitled to receive distributions and even today your opponents say they could demand those distributions. They may be right, they may be wrong about that but that focuses on the two issues, does it not?

MR ROBERTSON: Yes. I thought my learned friends were saying that on their view of the world, even today the unit holders could or had some rights that they could exercise.

GLEESON CJ: I think that is what they are saying and therefore they are saying it does not matter whether they have received distributions, what matters is whether they were and, for that matter, still are entitled to receive them.

MR ROBERTSON: That is on the Full Court’s approach, of course, where one is looking at the unit holders in the E & M Unit Trust rather than the primary beneficiaries.

GLEESON CJ: Your opponents say, rightly or wrongly, “It would not make any difference to our case if the Heran interests had fraudulently misappropriated this money”. Even if they had done so, the entitlements were as the documents represented.

MR ROBERTSON: Well, there is a difference between what her Honour Justice Kiefel was looking at, which is the existence of rights or the non-existence of rights. My learned friends say, well, the rights are still in existence and able to be exercised. Certainly that is not the respondent’s intention.

GUMMOW J: On this subject, if you just go back to page 81 which you took us to, it is a pity this word “sham” has ever been used really. If you go to page 81, paragraph 187:

There were no distributions to the trustee of the E & M Unit Trust. The purported distributions to the trustee of the E & M Unit Trust were never intended to have effect according to their tenor.

And this may be the critical thing:

There was never any intention that the trustee of the E & M Unit Trust would be, or would be entitled to be, paid the amount of the purported distributions.

MR ROBERTSON: So have no rights.

GUMMOW J: Yes, that is right, but that does not use the word “sham”.

KIRBY J: What is connoted in the ordinary English language by the word “sham”?

MR ROBERTSON: It is at best a shorthand label.

KIRBY J: Why should we be ashamed of using an ordinary old Saxon word in this context to signal that that is what people are up to?

MR ROBERTSON: I do not think anybody is disagreeing - - -

KIRBY J: There is an explanation in that case where Justice Lockhart, I think, explains the way sham is, as it were, an aid or a tool in reasoning. It seemed to me quite a sensible explanation by his Honour of how it is something that once you start to think the documents are a sham then you become vigilant.

MR ROBERTSON: Yes, I think any criticism of the word is not, in a sense, the word itself but the effect it might have in distracting from analysis.

GLEESON CJ: It sometimes leads to muddled thinking and it is a perfectly good word and it has a perfectly valid use in tax law provided people remember that what they are applying is the language of the Income Tax Assessment Act and provided they do not confuse the concept of sham with the quite different concept of tax avoidance, which is the subject of elaborate provisions in the Income Tax Assessment Act, both general provisions in Part IVA and specific anti-avoidance provisions elsewhere, such as section 100A.

MR ROBERTSON: Indeed.

GLEESON CJ: I am not suggesting for a moment that Justice Kiefel misunderstood the difference between sham and tax avoidance. I am sure she did not.

MR ROBERTSON: That was going to be my submission, because although in a sense one can see that not only from the fact that “sham” is put in inverted commas, for example at page 3064, but then because her Honour by reference to the received principles then looks to see what it means to apply that label. There was certainly no part of her Honour’s reasoning which suggested any such confusion between tax avoidance and a sham.

GLEESON CJ: Exactly, in a case where she was very conscious of the fact that originally this had been a case about tax avoidance and Part IVA and that disappeared from the case. I am not quite sure how, but it had gone.

MR ROBERTSON: From what her Honour says, it went shortly before the hearing, but whether that means a week or a fortnight I do not know. Your Honours, could I go briefly, because although Justice Kirby has mentioned it, not much time has yet been spent on it – Justice Dowsett’s reasons for judgment at 3098. Importantly, his Honour’s conclusion, although we disagree to the extent that he agreed with Justice Edmonds’ conclusion about the non-existence of sham, but his Honour does say at paragraph 8 at 3101 that:

the question is one of intention, and that is a question of fact.

That is what I was endeavouring to put yesterday when I was criticising Justice Edmonds’ approach as a sort of higher level abstract approach, that is, at least the professionals wanted it to work and therefore it did work.

GLEESON CJ: But Justice Dowsett accepted the same inference as that of Justice Edmonds, did he not? He says that at line 40.

MR ROBERTSON: Yes.

GLEESON CJ: In other words, he accepted that the E & M Trust was entitled.

MR ROBERTSON: Yes.

GLEESON CJ: What precisely was the inference that Justice Dowsett was inclining to agree with?

HEYDON J: Paragraph 3 on page 3100, “it should therefore be inferred that they were genuine.”

MR ROBERTSON: It is really that the tertiary beneficiary ought not to be – the appointment ought not to be disregarded, I think. But fundamental to his Honour Justice Dowsett’s approach is what he regarded and which I was contending yesterday was not a fair reading of Justice Kiefel’s judgment, that is, in paragraph 4 on 3100 where Justice Dowsett says halfway through paragraph 4:

My only point of disagreement with the reasons prepared by Edmonds J is that I would not infer that those advising Mr Heran ‘were well aware –

et cetera. Your Honours should, if you would, correct that reference immediately following from paragraph 72 to 81, so that is paragraph 81 of his Honour Justice Edmonds’ reasons. His Honour Justice Dowsett - - -

GUMMOW J: Is that correct, that statement in paragraph 8?

The appointment of the E & M Unit Trust as a tertiary beneficiary did not necessarily result in any benefit passing to it.

But if you go to the terms of the Raftland Trust - - -

MR ROBERTSON: Your Honour is looking at Justice Dowsett’s paragraph 8?

GUMMOW J: Yes.

MR ROBERTSON: Yes, well, I was going to submit that that again is a question of intention and a question of fact, and there was no basis in fact, in my submission, for his Honour’s conclusion that he supports Justice Edmonds for the different reason, that is, the appointment did not necessarily result in - - -

GUMMOW J: Just looking at clause 3 of the Raftland Trust, is it more complicated, but do not take up time.

MR ROBERTSON: Yes. Anyway, I have noted that we agree with Justice Dowsett insofar as his Honour says it is a question of fact, that is, the intention of the parties, his Honour’s disagreement with Justice Edmonds as expressed in paragraph 4 on page 3100 and what his Honour then refers to in paragraph 5 as a possible inconsistency in the primary judge’s reasoning. As I submitted yesterday, that is an introductory paragraph before her Honour gets to the detail.

GLEESON CJ: Those differences of facts between Justice Dowsett and Justice Edmonds are on rather subtle matters. It is the case, is it not, that on the substantial question of fact the members of the Full Court overruled the decision of the primary judge on the question that they said was a question of fact.

MR ROBERTSON: Yes.

GLEESON CJ: So your opponent, on what has been described as the sham issue, has the factual findings of the Full Court in his favour.

MR ROBERTSON: That is so, yes. And your Honours will recall that my criticism yesterday of those factual findings, as your Honour the Chief Justice refers to them, centres upon what I have called the high level reasoning of Justice Edmonds, that is, looking at, well, on paper it was meant to work, therefore it did work, without looking at the detailed findings of fact by her Honour as to the intentions of the parties. That is the point I was making yesterday and the point that really flows from Justice Edmonds at 79 through to 83. That in part is what Justice Dowsett was disagreeing with, one of the integers of Justice Edmonds’s approach.

GLEESON CJ: Justice Dowsett disagreed with Justice Kiefel too.

MR ROBERTSON: Yes.

GLEESON CJ: The Full Court, in reversing Justice Kiefel’s findings of fact, relied not only heavily but almost completely upon the consideration that this was an artificial and contrived scheme of tax avoidance. That, they said, was why it was not a sham because they all knew that it would only work as it was intended to work, that is, a scheme of tax avoidance, if it created the rights that it appeared to create.

MR ROBERTSON: That was the reasoning, indeed.

GLEESON CJ: Yes. And the fact that it was a scheme of tax avoidance, the circumstance that it was a scheme of tax avoidance, explains what would otherwise be inexplicable according to them. They may be right or they may be wrong. If you want to know why these strangers entered into this apparently surprising transaction, they did it because it was a tax avoidance scheme. One side of the transaction stood to save a lot of money if it worked as a tax avoidance scheme and the other side stood to get $220,000. That explains why these unrelated parties created these apparently surprising legal rights.

MR ROBERTSON: But my submission, put as shortly as I can, is that be that as it may, that does not contradict the findings of fact as to the actual intentions of the parties that her Honour Justice Kiefel made.

GLEESON CJ: You may be right about that too.

MR ROBERTSON: That stems in part from saying where is the error where her Honour had seen all this unfold and heard the witnesses. But if I can make one further point about that, that from the Brisbane interest point of view, which your Honour the Chief Justice was putting to me might well be a factor, but so far as the Thomaszes were concerned, at least on their evidence, as long as they got 220,000, the rest of it did not matter.

GLEESON CJ: It did not matter but they knew why they were getting 220,000. They were not getting it because the Herans liked them. They were getting it because they were co-operating with the Herans in a tax avoidance scheme.

MR ROBERTSON: And, we submit, saying, “Give us the money and that is the last you will see of us”. Your Honours, although it only arises late in the piece, the reimbursement agreement, or agreements, becomes an important part of the analysis. Justice Kiefel looked at, in our submission, and with respect correctly, the statutory scheme or framework and then identified the reimbursement agreement and then looked to see, again correctly, in our submission, whether the present entitlement of the primary beneficiaries arose out of the reimbursement agreement.

HEYDON J: Are you talking about paragraphs 92 onwards of her judgment?

MR ROBERTSON: Yes.

GUMMOW J: Under the heading “THE APPLICATION OF SECTION 100A”.

HEYDON J: But I thought this was uncontroversial, no one is challenging these paragraphs?

MR ROBERTSON: That is what I thought until the day before yesterday document from our learned friends which says in part that Justice Kiefel was wrong to find the benefit that her Honour did and that is why, when I announced my appearance, I flagged the possibility that we may need to respond to it.

HEYDON J: You say there is no ground of appeal?

MR ROBERTSON: I would say that but I do not know whether your Honours would wish to be taken to the meaning and operation of the statutory provision. It arises in an unfortunate way - - -

HEYDON J: We have no desire whatever to but we will do our duty. But is it controversial or is it not? I mean, which paragraph of their written submissions is the one that troubles you?

MR ROBERTSON: If your Honours have the document, it is a four page document, dated 29 January 2007, but obviously 29 January 2008, and it replies to - - -

HEYDON J: Yes, cross-respondent’s submissions on cross-appeal.

MR ROBERTSON: That is right, and it applies to our document of 15 January. If your Honour Justice Heydon were to turn to 5.2, the second half:

Her Honour’s conclusion was in any event incorrect: if the Primary Beneficiaries were (as her Hour found) presently entitled –

and I took that as, at least the beginning, of an attack on her Honour’s approach to or findings about the reimbursement agreement. Then, of course, the balance of the document deals with Justice Edmonds’ approach to reimbursement agreement. His Honour did not take a different view about the meaning of the statute, but his Honour did identify a different reimbursement agreement. Does your Honour Justice Heydon see the sentence that I am adverting to?

HEYDON J: Yes, I do.

MR ROBERTSON: I do not want to be left high and dry, as it were, in relation to Justice Kiefel’s view or, indeed, Justice Edmonds’ view of the reimbursement agreement.

HEYDON J: What do you want to say about it?

MR ROBERTSON: It is not clear how large the controversy or difference is between the parties. My primary submission in relation to what Justice Kiefel says about reimbursement agreement is that her Honour was correct both in terms of her Honour’s analysis of the statutory provisions and in terms of her Honour’s analysis of the facts and her identification of the benefit. In particular, going back to my learned friend’s document of the day before yesterday, we would part company with them at paragraph 5.1 where we submit that her Honour’s findings in 97 as to the benefit where a benefit was gained by the Brian Heran Discretionary Trust and by Heran Projects the benefit accrued so long as Raftland did not make the payment of trust income to the E & M Unit Trust. So there is a misdescription, in my submission, in line 5 of my learned friend’s 5.1. It was not in not having to pay, it was so long as Raftland did not make the payment.

It then follows that the contention that the supposed benefit did not exist, that is the end of my learned friend’s 5.2, is not made good because, of course, the evidence is that the money has not been called up and the benefit therefore continues to exist and, in our submission, Heran Projects got a benefit in each year because Raftland did not make the payment to either the E & M Unit Trust or to the primary beneficiaries. We have included in our submissions in reply and on the notice of contention what we say the relevant law is and there is no point of disagreement between our submissions and her Honour Justice Kiefel’s approach. What I have just submitted in relation to Justice Kiefel’s approach is perhaps sufficient to deal with 5.1 and 5.2.

The statutory provisions do, of course, have a history which is recited at some length in the two Full Federal Court decisions that her Honour Justice Kiefel refers to in paragraph 95 on page 3070, that is, Prestige Motors and Idlecroft. I will not take your Honours to it but it is Prestige Motors 82 FCR 195, Full Court, Justice Beaumont, Justice Hill and Justice Sackville and the relevant part of the judgment that deals with the construction of reimbursement agreement begins at the foot of page 220 and follows for a number of pages thereafter.

In Idlecroft [2005] FCAFC 141; 144 FCR 501 the relevant contention that her Honour Justice Kiefel was dealing with at 100 was, her Honour held, a contention that had been put and rejected by the Full Court in Idlecroft, that is, that the mere invalidity of an appointment of, in that case – I think the invalid appointment in that case was the appointments of income designed to give effect to the reimbursement agreement. Yes. There was the appointment of an entity called WCC, Westside Commerce Centre Pty Ltd, that was held to be invalid and the argument was, well, therefore the derivative benefits arose from that fact and that fact alone. Her Honour dealt with a similar argument here at 100, page 3072:

Raftland submitted that, whilst there may have been a connexion to the E&M Unit Trust’s entitlement and the reimbursement agreement, this is not so with respect to the Primary Beneficiaries whose entitlement arises because of the operation of the default clause. A similar argument was raised and rejected in Idlecroft. It was held (at [45]) that the requisite connexion is present in such a case. The connecting circumstance is that the entitlements of the default beneficiaries came about because the appointment of income –

that is in Idlecroft –

was invalid. That appointment was made pursuant to the reimbursement agreement. But for the existence of the agreement, the appointments would not have been made. The same analysis applies in the present case.

So that was the submission put to her Honour about reimbursement agreement in respect of the primary beneficiaries, that is, in terms of 100A(1)(b) and, in my submission, rightly rejected for that reason. The Full Court in Raftland identified a different reimbursement agreement and it was said to have different consequences and this is the subject of the cross-appeal in respect of which, as I mentioned at the close of yesterday’s submissions, the respondent seeks special leave to cross-appeal. The arguments are articulated in writing and I will not read them out. They are in a document dated and filed 15 January 2008 entitled “WRITTEN SUBMISSIONS ON BEHALF OF THE CROSS-APPELLANT ON THE CROSS-APPEAL”.

If I may mention one authority, and I will not take your Honours to it, I have a page reference, as to what the relevant criteria are for a grant of special leave to cross-appeal. The issue arose in Director of Public Prosecutions v United Telecasters Sydney Ltd [1990] HCA 5; 168 CLR 594 and the relevant passage in the joint judgment of Justice Brennan, Justice Dawson and Justice Gaudron is at 602 point 4. Their Honours said mere inconvenience or lack of mere inconvenience is not enough, but we would rely on their Honours’ reference to doing “injustice to determine the appeal alone” and, furthermore, that if the question of reimbursement agreements does arise in the appeal, albeit not the subject of a ground of appeal, then the point we seek to raise in the cross-appeal has a sufficient connection with that issue.

The $57,000, the subject of the cross-appeal, your Honours will see the reasons of Justice Edmonds. What in effect his Honour did was to look upstream, as it were, to see where the $57,000 came from in the hands of the Brian Heran Discretionary Trust rather than to see it as part of the - - -

KIRBY J: You did not originally contest this element in this Court, did you?

MR ROBERTSON: In the sense that it was not mentioned in the special leave application?

KIRBY J: Well, that, but I also thought initially in your written submissions you did not protest this matter. Why should we be concerned about these bits and pieces. Really, this is the Commissioner scraping the bottom of the barrel, is it not? Is it integral to the big issues that fall to be decided?

MR ROBERTSON: That is what I was just submitting, that if one of the issues that your Honours are looking at is the – there is two answers, in my submission. One is that if your Honours are looking at the meaning and operation of reimbursement agreement then it is part of that because the issue arises directly as a matter of the construction of 100A(1)(b), that is, whether a particular benefit arises out of the reimbursement agreement.

The second, I suppose, but less ultimately significant point in terms of the construction of the statute is that of course it goes to the correctness or otherwise of the assessment. But I am reminded, your Honours, that this point was raised in the respondent’s summary of argument in the special leave application so it is not a notice of contention point, it is a cross-appeal point, and subject to special leave, the cross-appeal was filed in time and our written submissions were served and - - -

KIRBY J: Just let us test it this way. If you had come to us for special leave on this point alone, would we have given it? I think there is no question that the Court would not have. I mean, it may be that, as you say, once it is here it is necessary to do right in the whole matter, but if the Commissioner had appealed against that part of the Full Court’s decision, he would have been pushing uphill to get special leave, I would have thought.

MR ROBERTSON: Well, it would have been put as a matter of the construction of the statute and whether one needs to look, as it were, behind the immediate source of the money that came to the beneficiary or not. Whether at that level of abstraction your Honours would have been minded to grant special leave is, of course, a different thing, but we do rely on the fact that it is part and parcel of - - -

KIRBY J: Just explain to me how this point arises out of the difference between the Full Court and Justice Kiefel on the sham issue?

MR ROBERTSON: It does not.

KIRBY J: It does not?

MR ROBERTSON: It does not.

KIRBY J: No, I did not think it did. So this really arises out of something separate and discrete in the reasoning of the Full Court?

MR ROBERTSON: It arises out of the step subsequent, that is, how does 100A apply, 100A(1) primarily, 100A(1), how does that apply, and then that leads to the 100A(3A) point. But we have articulated the arguments in writing and in the alternative, we submit, within the notice of contention or the amended notice of contention that the Full Court took, in departing from her Honour Justice Kiefel’s articulation of the reimbursement agreements, their Honours took too narrow a view of what the reimbursement agreement was. So we put the two points in the alternative. Even if the Full Court was right, and this is the subject of the cross-appeal, their Honours got distracted by the ultimate source of the 57,000. That appears from paragraph 95 of his Honour Justice Edmonds’ reasons and in the alternative their Honours should not have departed from the identification of the reimbursement agreement by her Honour.

MR ROBERTSON: The common point, the factual point, to each of those matters it the evidence of Mr Brian Heran at page 507 of volume 2 of the appeal book, that is, that without the downstream benefits, the arrangements between Heran Projects and Maggside would never have been entered into. Perhaps the last thing I should say in answer to your Honour Justice Kirby is that those submissions on the cross-appeal, although not yet subject to the grant of special leave, have been dealt with on their merits by my learned friend’s in their document of the day before yesterday. But the only thing that I would wish to add in answer to that submission is that the 57,000 was part of the larger sum, 386,000 referred to in paragraph 94 of Justice Edmonds’ judgment.

It arises out of the arrangements and the 386,000, in our submission, is part of the benefit between the E & M Unit Trust and Raftland and, therefore, there is a sufficient connection between the 57,000 as part of that amount to which E & M was presently entitled on this view and to which it became presently entitled, E & M being the beneficiary identified in the reimbursement agreement.

Your Honours, I will need to come back finally to the penalty point, but in terms of the structure of our submissions, if Justice Kiefel was right in her approach, then, in our submission, the penalty finding follows. Our learned friend submitted yesterday that it was put to Justice Kiefel that the penalty was excessive even if her Honour found sham. I do not understand that submission to have been put. Perhaps it does not matter one way or the other. Furthermore, if, as we submit, the unit holders had – and this is on the alternative argument, that is, the Full Court approach, the non-sham approach – agreed that the 250 or 220,000 they would not have or exercise any further rights, then again the penalty would flow because that was a matter that the taxpayer knew and which was certainly not the subject of any evidence as to the legal advice that was obtained or given founded on that factual matter.

GLEESON CJ: If such an agreement were made, a description of the claim and the tax return as reckless would be modest.

MR ROBERTSON: Quite so. Indeed, before her Honour Justice Kiefel, I think, a higher penalty was contended for. Her Honour rejected that and said that the reckless factual basis was open, presumably her Honour choosing between the range of different states of mind of the taxpayer in filing its return and - - -

HEYDON J: The big question is why did Justice Edmonds maintain the penalty in view of his different conclusion on sham?

MR ROBERTSON: Your Honour, he does not say why.

HEYDON J: Why was it right for him to have done so?

MR ROBERTSON: If one takes the two elements of Justice Edmonds’ reasons in relation to 100A(3A)(c), his reasoning would have been something like – his imputed reasoning, perhaps I should say – the taxpayers have not shown any more than that they knew that the E & M Unit Trust had substantial losses and there was no basis of assumption that there was net income available. That would have had to have been what his Honour had in mind or, in the alternative, about the paying or setting aside the reasoning would have had to have been that the taxpayer had not shown that the trustee of the E & M Unit Trust intended to or did create vested and indefeasible rights in the unit holders under the E & M Unit Trust.

HEYDON J: Those propositions are inconsistent with Justice Edmonds’ explicit reasoning.

MR ROBERTSON: His Honour certainly makes a finding about the substantial losses. He does not make any explicit finding about what people’s state of mind might have been about those losses because his reasoning really is as a matter of construction either of the – of the deed, really, because that was the legal result.

HEYDON J: Remember yesterday the Chief Justice put to you three categories. One was no intention to have legal effect. Two was collateral agreement not to enforce something that did have a legal effect but for that agreement. If you lost on those two points, how could the penalty stand?

MR ROBERTSON: That is the issue I am trying to grapple with, your Honour. It is difficult to articulate or impute to their Honours on the Full Court what that process of reasoning would have been. What I have just put is as high as I can put it, convincing or otherwise.

KIRBY J: Once you move away from Justice Kiefel’s sham categorisation finding, then it is more difficult, is it not, for the Full Court to reach a conclusion that the conduct of the taxpayer was reckless?

MR ROBERTSON: I accept that and, as I have just accepted in answer to Justice Heydon, subject to - - -

KIRBY J: Just let us pause and ask, how could you – I mean, the Full Court itself did not really give us very much of a clue, if any clue, as to how it reasoned on this subject but, how do you seek to support on the hypothesis of the Full Court’s approach a conclusion of recklessness where the taxpayer is acting on a solicitor’s advice which is in turn supported by a Queen’s Counsel?

MR ROBERTSON: It is not so much acting or not acting on the advice. It is really whether the taxpayer has shown – because this is, of course, part of assessment, whether the taxpayer has shown that – and we have put this in the written submissions – that the specific facts were put before the adviser and we have made the submission that it is not at all clear that they were. Even going back to the written advice that your Honours were being taken to and, in particular, the pages at 2848 and 2849, there is a paragraph in the middle of page 2849 which – I do not take any point obviously about the typographical error, but the position is put that 100A(3A) “applies in respect of the income received by the Raftland Trust” and, really, the issue as we would see it is whether it applies in respect of the present entitlement of the E & M Unit Trust as a beneficiary of Raftland.

But I acknowledge, your Honour, the difficulties, subject to the point that his Honour the Chief Justice put to me, that is, if, as we have contended, there was the agreement that her Honour Justice Kiefel found that for 250,000 the beneficiaries gave up their rights, subject to that point which is not a point before the Full Federal Court but which has been the subject of contention, that would also, as his Honour the Chief Justice has put to me, in my submission, support the finding of recklessness in relation to the return. But I cannot, apart from those two alternatives, that is, the sham and the 250,000, I cannot articulate any higher than I have put to Justice Heydon what the reasoning of the Full Court in relation to penalty was.

KIRBY J: There is no intermediate provision, is there? You either get the whole of the penalty that was fixed by Justice Kiefel or you get nothing on this score?

MR ROBERTSON: No. In theory, anyway, the appellant in the appellant’s submissions, 5.31 and 5.33, has raised a different alternative, which is 226G, and they say penalties should not be imposed under 226G at 25 per cent either, that is, because they say that they did it all carefully and reasonably and we put the same arguments about that in the alternative. So because it is not judicial review in the classic sense, it is a matter for the Court to make a finding of fact about what the quality of the behaviour was, then an alternative approach is available, but I do not say any more about it than that it is available.

KIRBY J: Our duty is to make the order which should have been made by the court below.

MR ROBERTSON: Yes. Your Honours, in relation to Upton v Brown briefly, the question is there whether there was any trust law income, so there is really two points that his Honour Justice Edmonds found against the taxpayer under 100A(3A)(c). One was his Honour found that there was no trust law income, the other was that the taxpayer had not shown that there was an allocation in the taxpayer’s favour.

The starting point has to be that we have to persuade your Honours that the principle in Upton v Brown goes beyond life tenants and remainderman and the submission is that a similar approach can flow from looking at this trust deed considering the differences and potential differences between income beneficiaries on the one hand and capital beneficiaries on the other, there being here the possibility of future unit holders, that is, that the unit holders are entitled to annual income, that their entitlement to non-income is deferred until the unit holders by resolution call for an advancement of capital or the vesting day or the exercise of the trustee’s discretion to vest the trust.

So, that is, as we have put in the written submissions, the submission in support of why Upton v Brown goes beyond the strict terms of the decision in that case and can apply here. Then the second point turns on the proper construction of the deed and we put the submissions in relation to that in our written document, the written submissions on behalf of the respondent at 25 and 26, and part of that submission is that assuming, as we contend, that there was a discretion, it is appropriate for the trustee to reserve or, indeed, consider reserving a proper share of the income of the trust to meet or help meet outstanding liabilities.

Your Honours, lastly, in light of the time, we sought to reduce to writing, rather than take your Honours through accounts, our references to the evidence, if your Honours need to look at it, in terms of the accounts in answer to the details in 5.21 and 5.22 of my learned friend’s submissions. If I could hand that document to the Court. Otherwise, I would not propose to say anything more on that topic.
GLEESON CJ: Thank you, Mr Robertson.

MR ROBERTSON: Those are the submissions on behalf to the respondent.

GLEESON CJ: Thank you, Mr Robertson. Yes, Mr Russell.

MR RUSSELL: Very briefly, your Honours. If I might first go to the observation Justice Kirby made in relation to Mr Harrison’s opinion at page 2846 of the record, volume 9, in particular the observation in relation to – sorry. Heran Projects and the possible application of Part IVA. Section 177A is, as your Honour would be familiar, the commencing words of Part IVA. The general anti-avoidance provision in section 177D is the operative provision. As the Court has heard, the Commissioner has obviously agreed with Mr Harrison’s view so it should not perhaps automatically be taken as being as bizarre as - - -

GUMMOW J: If one looks at page 36 of the appeal book, your side took the point that, but for the then alleged scheme under Part IVA, none of the applicants would have had any amount included in his or her assessable income or have had any allowable deduction.

MR RUSSELL: Yes. So far as Heran Projects itself was concerned, this all had the genesis in the bringing forward of income which would have been earned in the later years. So even in relation to Heran Projects, although it is not relevant for the present decision, we would say that both Mr Harrison’s expression of opinion and the Commissioner’s subsequent dealing with the matter were correct.

KIRBY J: I have to think this through. I am not entirely clear in my own mind. You may well be right on what you have just said.

MR RUSSELL: It is just that your Honour almost said, how could any responsible person express such a view? I am trying to explain why.

KIRBY J: But I did respond to a similar submission yesterday by saying that the answer to that may well be in the equally single Anglo-Saxon word “quite” , that the sham is the very reason for ineffectiveness. Why is it ineffective? Because it is a sham. I realise this is a bit of a side issue, what Queen’s Counsel said here, but it just seemed to me when I was addressing my mind to the issue of recklessness that to say that it was not for a dominant purpose of tax avoidance strikes me, at least arguably, as reckless and very unconvincing.

MR RUSSELL: One simply would respond that if it were done for a dominant purpose of tax avoidance, then presumably the Commissioner would be relying on Part IVA, and is not. That is what engages the operation of Part IVA.

GLEESON CJ: The problem about relying on Part IVA in a case like this is, is it not, that you can destroy something, cancel a tax benefit, say the scheme did not exist, but you have to create something to end up with taxable income or taxable income as assessed.

MR RUSSELL: Yes, the counterfactual, as the Court has put it. But in this case the point that really comes clear from the judgment of the Full Federal Court is that the starting point of this was the generation of income which would not otherwise have been derived. In a sense the scheme included, amongst other things, the artificial creation of assessable income which then flowed down the chain.

GLEESON CJ: Exactly. That is the problem of applying - - -

MR RUSSELL: That was the benefit which Justice Edmonds identified and that, of course, is why Mr Harrison said the dominant purpose of this cannot be to save tax for Heran Projects because the tax liability comes into existence as part of the scheme.

GLEESON CJ: Exactly. If they had not done this, if they had not entered into this tax avoidance scheme, the income would not have gone to Raftland Pty Limited.

MR RUSSELL: The income would not have been there, full stop. That is why the statement, in our respectful submission, is factually correct but, as your Honour Justice Kirby has reminded me, it is a side issue. Our learned friends submitted that one possible justification for Justice Kiefel’s approach might have been that there was – he used the expression – a “chasm” between the intentions of the professional advisers and the intentions of the Herans and, in particular, the professional advisers, it was said, might well have intended all the documents to be effective but the Herans might have had a different intention. That, whilst theoretically possible, in our respectful submission, cannot be sustained on the evidence. It is very plain at every point that the Herans saw themselves as doing nothing other than acting in accordance with advice.

I will not take the Court to the pages but the relevant transcript references are page 116 at line 47 going to the end of the page, 117 at line 36 going through to line 40, 129 at line 41 through to line 11 on page 130, page 135 at line 20 through to line 40, page 152 at lines 14 and 15, page 161 at line 45 through to line 3 on the next page. In our respectful submission, this is not a case that can be analysed in terms of a difference of intention between the clients and their solicitors. Quite the reverse. The clients’ only intention was to do what their legal advisers advised.

Your Honour Justice Crennan asked yesterday, and your Honour the Chief Justice returned to the issue this morning, what was meant by the further co-operation that Justice Kiefel referred to in paragraph 85 of her judgment. Your Honours were taken to page 2804 of the appeal book, which is the letter that is in volume 9, which deals with that issue. We would say that it is quite plain that whatever else was - - -

GUMMOW J: What page was that, Mr Russell?

MR RUSSELL: Page 2804, your Honour, volume 9. It is perfectly plain, in our respectful submission, that this was not in any sense a contractual undertaking to provide, for example, an assurance of units in the unit trust or anything of that nature.

The relevant paragraph is at line 25 of the record on page 2804. Having listed the steps:

These are all the steps that are necessary at this stage. Further steps may be desirable after the proposed amending legislation has been passed.

This is a reference to the cost/loss provisions –

We would expect your clients to co-operate with any reasonable requests made by our client, but are not seeking to impose any contractual obligation on them to do so.

So the further co-operation was not in any sense contractual, in our respectful submission.

GLEESON CJ: One of the steps that was taken in this transaction was, was it not, that on 30 June 1995 Mr Carey, who was then the trustee of the E & M Unit Trust, appointed somebody in the Heran camp his attorney.

MR RUSSELL: Yes, your Honour.

GLEESON CJ: Plainly the object of that was to ensure that there was no point in time at which, insofar as the E & M Unit Trust had any rights, the trustee or the person capable of exercising the powers of the trustee of E & M Unit Trust would exercise those in a hostile fashion.

MR RUSSELL: In our respectful submission, in the first place the matter was not dealt with in evidence.

GLEESON CJ: What are the possible explanations of the appointment of somebody as attorney for Mr Carey apart from the one that I mentioned?

MR RUSSELL: In the event that it turned out that there was some extra document that needed to be executed in a hurry, we would submit, your Honour. In fact an attorney could not countermand the wishes of his principal anyway, as we apprehend it. If Mr Carey did decide to take any steps and there were an attorney appointed and Mr Carey took those steps, it would not lie in the mouth of the attorney to say “disregard that”.

GLEESON CJ: It is one of the things Justice Kiefel referred to, is it not, in talking about the change in control of the trust?

MR RUSSELL: I should say too, your Honour, that no steps were taken under the power of attorney that I am aware of and certainly there are none of which evidence was given.

GLEESON CJ: Two things of possible practical importance occurred that gave a degree of insurance against the real risk that Mr Tobin referred to. One was the appointment of that attorney for Mr Carey on 30 June 1995 and the other was the way in which they in fact applied the funds in question, that is, by investment in shares in Navygate Pty Limited.

MR RUSSELL: Your Honour might have added the change of trustee too that occurred on 3 July.

GLEESON CJ: 10 July.

MR RUSSELL: Sorry, 2 July my learned junior reminds me.

GLEESON CJ: That is when Raftland took the place of Mr Carey.

MR RUSSELL: Yes. That did not change its obligations of course as trustee. The power of attorney is non-exclusive. It is at page 2827 of the appeal book.

GLEESON CJ: I just wondered if that was part of the practical background or factual background against which counsel said in his advice that the E & M Unit Trust would not be enforcing those rights.

MR RUSSELL: That probably comes from the minutes of 3 July of Raftland Pty Limited. I will have my learned junior give me the page reference. If I can come back to that and just deal quickly with three other things. The first, there was some discussion, your Honour, in relation to the statutory provision. It is, of course, as emerged, 99A, section 97, the issue is present entitlement. Your Honours will be familiar with the amendments to the Act made by the enactment of section 101.

In the Union Fidelity case this Court pointed out it was really not appropriate to talk about a beneficiary who had actually been paid as having a present entitlement, so one of the series of amendments that were made to Division 6 when it was recast to overcome the result in the Union Fidelity case is that a beneficiary who is paid is nonetheless by section 101 deemed for the purpose of the Act to be presently entitled. So that people who have been paid and people who are presently entitled are dealt with under section 97. Then section 99A picks up the balance. The question is, as your Honour said, whether or not there was a present entitlement rather than whether or not there was a distribution. To the extent that her Honour in paragraph 82 says the question is whether or not there was a distribution and Raftland had to satisfy me of that, that if by that expression her Honour was meaning distribution in fact as opposed to present entitlement, at times in her judgment one gets the impression that that was what she was saying, we would say that was an incomplete statement of the law. The test was whether there was present entitlement and, in particular, whether or not the trust deed of the Raftland Trust created one.

The trust minute that I was referring to is to be found in volume 9 at page 2836. It is reported that the funds “did not expect to require the funds to which it was entitled”.

The remaining issue as we see it is the cross-appeal and that really comes down to how one interprets what her Honour said at paragraph 79 of the judgment. I suppose one should start by saying the vice of this was that the benefits that are required to exist for the purposes of a reimbursement agreement were not particularised in the pleading. The relevant pleading is at page 79 paragraph 170:

The arrangements provided for benefits to persons other than the beneficiaries of the Heran Trusts.

The difficulty once one had those pleadings was to say that if the beneficiaries are within Heran group, then on the face of it they are not the benefits relied on, and it was precisely that I think - - -

GUMMOW J: Sorry, where did you refer to it? On page 79?

MR RUSSELL: Page 79 paragraph 170, from recollection. Yes. So it was not a particularly precise pleading and it became necessary then for benefits to be identified. Her Honour found, as we apprehend it, in paragraph 79 of her judgment because she says, you do not have to pay the E & M Unit Trust, its appointment is a sham, and the Full Court, of course, finding the appointment was not a sham necessarily starts with the proposition that you do have to pay the E & M Unit Trust, so it then becomes necessary to find another benefit. The Full Court finds that in the payments that moved income at the top of the trust chain rather than at the bottom.

In our respectful submission, if the Full Court is right in its identification of a reimbursement agreement, then that is the only place where you can find a benefit of the sort relied on here.

HEYDON J: You keep saying paragraph 79 but I think you must mean some other paragraph.

MR RUSSELL: Sorry, paragraph 170 on page 79, your Honour.

HEYDON J: Yes, but before that and since you took us to that you keep talking about paragraph 79 of Justice Kiefel. I think you must mean another paragraph, 92 or after.

MR RUSSELL: I am sorry, your Honour, I am talking from notes. Yes, your Honour is quite right. Paragraph 97, your Honour. My apologies. We read that as being a statement this is one of the things that flows from the sham. If we have misread that, then perhaps what we say is not correct but certainly the Full Court seems to have taken the view you could not find a benefit there and look elsewhere.

GLEESON CJ: Mr Russell, I know that there are issues relating to the 1996 and 1997 tax year as well as 1995 but can the questions that govern the outcome of the case be disposed of by concentrating on the 1995 year?

MR RUSSELL: Yes, the only issue that is different in respect to the 1996 year, as we apprehend it, is the $57,000 that is subject to a cross-appeal.

GLEESON CJ: Apart from the $57,000, in terms of writing a judgment, it would be good enough to address the 1995 year?

MR RUSSELL: Yes. Those are our submissions, if the Court pleases.

GLEESON CJ: Thank you, Mr Russell. We will reserve our decision in this matter and adjourn for a short time to reconstitute.

AT 12.16 PM THE MATTER WAS ADJOURNED