W.R. Carpenter Holdings Pty Ltd & Anor v Commissioner of Taxation [2008] HCATrans 173 (22 April 2008)

Last Updated: 23 April 2008

[2008] HCATrans 173

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Sydney No S652 of 2007

B e t w e e n -

W.R. CARPENTER HOLDINGS PTY LIMITED AND W.R. CARPENTER AUSTRALIA PTY LIMITED

Appellant

and

COMMISSIONER OF TAXATION

Respondent

Office of the Registry
Sydney No S653 of 2007

B e t w e e n -

W.R. CARPENTER HOLDINGS PTY LIMITED AND W.R. CARPENTER AUSTRALIA PTY LIMITED

Appellant

and

COMMISSIONER OF TAXATION

Respondent

GLEESON CJ
GUMMOW J
KIRBY J
HAYNE J
HEYDON J
CRENNAN J
KIEFEL J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON TUESDAY, 22 APRIL 2008, AT 10.15 AM

Copyright in the High Court of Australia

__________________

MR J.W. DURACK, SC: May it please the Court, I appear with my learned friends, MR J.H. MOMSEN and MS R.L. SEIDEN, for the appellant. (instructed by Becwell Legal Services Pty Limited)

MR A. ROBERTSON, SC: May it please the Court, I appear with my learned friends, MR J.W. de WIJN, QC and MR S.H. STEWARD, for the respondent. (instructed Australian Government Solicitor)

GLEESON CJ: Mr Durack, during the 1980s Mr Stowe’s solicitor consulted me from time to time about various matters. So far as I recollect they had nothing to do with the matters the subject of this dispute, but I just mention that to the parties.

MR DURACK: Yes, your Honour. For our part we were not aware of that, but certainly that causes us no difficulty.

MR ROBERTSON: We are in the same position, your Honour.

GLEESON CJ: Thank you.

HEYDON J: I am in the same position as the Chief Justice, I cannot recollect whether any of the matters that Mr Stowe saw me about related to a matter concerned with this appeal.

MR DURACK: Your Honours, essentially the matters involved in this appeal are questions of principle, although I was going to take your Honours briefly to the facts of the two transactions involved. Once again, your Honours’ previous involvement, whatever it might have been, causes us no difficulties.

HAYNE J: I should also record that I understand that the Registry has informed the parties, or have asked the parties whether having regard to my wife’s engagement as counsel for the Commissioner at earlier stages of this litigation, if they had any objection at my sitting and I understand there is no objection to our sitting.

MR DURACK: There is no objection, your Honour.

KIRBY J: I had a very enjoyable dinner with the tax group. You were present, Mr Durack, but I do not feel that disqualifies me. I just declare it in the spirit of transparency.

MR DURACK: Thank you, your Honour.

GLEESON CJ: Yes, Mr Durack.

MR DURACK: As your Honours know, this appeal concerns the appellants’ right to particulars of matters taken into account by the Commissioner in making determinations that the transfer pricing provisions of Division 13 should apply in proceedings brought by the appellants under the appeal procedure which is provided for in Part IVC of the Taxation Administration Act.

GLEESON CJ: Mr Durack, an issue seems to have dropped out between the Federal Court and this Court. I gather from the written submissions that we are no longer concerned in this appeal, or that we are not concerned in this appeal with section 136AD(4)?

MR DURACK: That is correct, your Honour.

GLEESON CJ: Our only concern is with section 136AD(1)(d).

MR DURACK: Yes, your Honour. I think it is fair to say, your Honours, that the appellants felt they could live with the Full Court’s decision in relation to subsection (4) to the effect that it operated as an averment at the determination under that subsection.

GLEESON CJ: I am not surprised that you are content with that decision.

MR DURACK: Of course, as your Honours will have seen from the written submissions, the real reason we are enjoying each others company – if I can speak from this side of the Bar table at least on this brisk Canberra day – is the more fundamental question, whether a determination made by the Commissioner that the transfer pricing legislation should apply is examinable for error of law in proceedings under Part IVC, or whether section 177 of the Income Tax Assessment Act is effective to exclude such review. Your Honours should be made aware that no notice of assessment of the kind to which section 177 refers has actually yet been tendered in this case but it has been argued below on the basis that there are assessments to which section 177 should apply and, in any event, assessments have been filed in the Federal Court proceedings. They just have not been formally tendered, if your Honours were wondering why there was no copy of the notice of assessment in the appeal book.

KIRBY J: You accept the assumption?

MR DURACK: We do, your Honour. Your Honours, late last month five members of this Bench heard an appeal by the Commissioner – and I will so refer to the respondent from time to time, if I may, when it seems convenient – in the matter of the Commissioner of Taxation v Futuris. I should say that for our part we read nothing into the transcript of those proceedings, we refer to it only to make a point. That appeal, as most of your Honours will recall, was from a decision of the Full Federal Court which had found in proceedings under section 39B of the Judiciary Act that an assessment under Part IVA was invalid and should be quashed, notwithstanding section 177.

On the appeal, senior counsel for the Commissioner argued that there was a comprehensive array of judicial and merit review powers through the mechanism created in Part IVC proceedings and that section 39B proceedings were therefore the wrong proceedings in which to raise the matters on which the taxpayer relied.

No discussion, your Honours, seems to have taken place during the Futuris hearing as to the possible restriction or attenuation of the rights available to a taxpayer in Part IVC proceedings by reason of the due making requirement of section 177.

GUMMOW J: Mr Durack, before we immerse ourselves in this, do we not have to start at the beginning? Was there not a notice of motion that appears at page 2 seeking particulars?

MR DURACK: Yes, your Honour.

GUMMOW J: And does that not then make applicable the sort of inquiry on that application for particulars that Justice Gyles was investigating in Syngenta [2005] FCA 1646; 61 ATR 186? Namely, you have to know what the real issue is.

MR DURACK: Yes, your Honour, although the appellants’ application for particulars - - -

GUMMOW J: In working out what the real issue is, you have to be alert that there is not a fishing expedition going on.

MR DURACK: Yes, your Honour, and, if I may, I will show your Honours why there is no fishing expedition going on a little later by reference to the statement of facts, issues and contentions in this matter.

GUMMOW J: They are incredibly wide.

MR DURACK: They are, your Honour, but - - -

GUMMOW J: Sort of what in another jurisdiction they call an ambit claim.

MR DURACK: That is so, your Honour, but if I could perhaps - - -

HAYNE J: Have there ever been any particulars given by your side of the ambit claim?

MR DURACK: Certainly, your Honour, in the statements of facts, issues and contentions which take the place effectively of pleadings in tax matters, our side certainly gave what we would have thought were extensive particulars of the transactions involved.

HAYNE J: No, if you go, for example, to page 101 of the appeal book, which is typical of a formula found at many places through the statement of facts, issues and contentions, at paragraph 125 you give the litany of possible errors.

MR DURACK: Yes, your Honour.

HAYNE J: Have those ever been particularised by your side?

MR DURACK: Yes, your Honour.

HAYNE J: Where do I find them?

MR DURACK: If I could take your Honour to page 95 of the appeal book. Your Honour, that is part of the statement of facts, issues and contentions which was filed by the appellant, W.R. Carpenter Holdings. It commences at page 59. If your Honours would go to page 59 of the appeal book, there is table of contents that shows the matters which are dealt with in that statement. Your Honours will see that there is extensive reference to the facts extending over 30-odd pages and then there is a reference to the determinations that were made and at page 95 your Honours will see in paragraph 101 that the appellants said that:

For the purpose of making the determinations in para (d) of each of sub-secs 136AD(1) and (2) referred to in para 39(9) of the Respondent’s SFIC, the Applicant understands that the Respondent did not take into account a number of facts, including the following - - -

KIRBY J: Where is that, which paragraph?

MR DURACK: It is paragraph 101 on page 95. Your Honours will see there are there set out the facts which, in the appellants’ understanding, the respondent did not take into account, the first being that the particular agreement fastened on by the respondent “was no more than one of the components of the CHIL transaction”. Then in paragraph (b) there is reference to “value” which I can explain to your Honours later. Then in paragraph (d):

That the CHIL transaction (including its component parts) was a commercial transaction with no tax avoidance purpose.

GLEESON CJ: Just pausing there for a moment. What, in terms of the statutory provisions, is the legal relevance of paragraph (d), assuming it to be correct?

MR DURACK: Your Honours, the statutory provisions make no reference to purpose of tax avoidance.

GLEESON CJ: Not a criterion of liability.

MR DURACK: It is not a criterion of liability. I think it is fair to say that even by reference to the statute and the legislative history of the legislation, it is not possible to maintain that it is necessarily a mandatory factor to be taken into account in all or any situations. But, your Honour, if it is permissible to got to the extrinsic materials in the form of the explanatory memorandum and the Treasurer’s statement on the introduction of the legislation, then it will, in our submission, become apparent that that tax avoidance purpose may be relevant in some situations.

There is specific reference to the legislation not being intended to apply only when there is a dominant purpose of tax avoidance. There is no reference made to the complete absence of tax avoidance purpose – I was planning to take your Honours to this in some detail a little later – but we would say, your Honours, that it is from these extrinsic materials that the relevance of presence or absence of tax avoidance purpose becomes - - -

GLEESON CJ: What difference would it make to the outcome of this litigation, I do not mean today’s argument about particulars, but the outcome of the litigation, if you received a letter from the Commissioner of Taxation saying, “The reason I made the determination under paragraph (d) was that I thought that if I did that, the revenue would collect more money than if I did not make the determination under paragraph (d)”?

MR DURACK: Your Honour, if that were the only reason provided by way of particulars, then we would say that it would become apparent from the legislative context, including extrinsic materials, that that was an inadequate circumstance for the Commissioner to take into account and also, that the conclusion might be wrong because, for the reasons that we would seek to show your Honour by reference to the facts of these transactions - - -

KIRBY J: Could I just ask, a like motive in your submissions is, the point you keep making about the presence or absence of profit shifting.

MR DURACK: Yes, your Honour.

KIRBY J: Now, is that just another sort of code language for tax avoidance?

MR DURACK: No it is not, your Honour.

KIRBY J: Is there anything in the extrinsic material or in the statute or in some other admissible document that makes profit shifting, which you keep coming back to, a relevant consideration?

MR DURACK: We say there is, your Honour, and I would seek to demonstrate that by reference to the - - -

KIRBY J: Yes, very well. You do that in your time. I was just intrigued as to why you kept referring to it but not giving, as it were, the foundation in the statute or other documentation which made it a relevant criterion.

MR DURACK: We would seek to demonstrate that to your Honours but we would certainly make clear that the presence or absence of profit shifting is in our view a different matter from the presence or absence of the purpose of profit shifting.

KIRBY J: If you shift profit you presumably do it for a purpose and the purpose would seem to be to reduce or minimise taxation.

MR DURACK: Not necessarily, your Honour. That is contemplated by the explanatory memorandum in a way that, if your Honours will let me come to it, I will seek to deal with.

KIRBY J: We have not much option. We have got to let you in the end.

MR DURACK: Your Honour Justice Hayne, could I just come to the fishing point. If your Honours could go over to page 96 your Honours will see at about line 18 that the appellant says in the statement that:

Particulars of the matters considered by the Respondent in making the determinations will be sought to confirm the Applicant’s understanding of the facts which the Respondent did not consider.

KIRBY J: You had discovery here, did you not?

MR DURACK: No, we did not, your Honour.

KIRBY J: I thought the Commissioner says you required discovery.

MR DURACK: No, what we did have, your Honour, was, immediately after the assessments issued and when there was no response to an application for particulars that was made at that time, that is, for reasons for the application of Division 13, we sought access to documents under the Freedom of Information Act.

KIRBY J: That is right, yes.

MR DURACK: And there was then quite a long period during which the Commissioner gradually released documents as the matter progressed through the Administrative Appeals Tribunal on a challenge to the original decision and then on appeal to the Federal Court and by the time that process had been concluded, the appellants did have a lot of material from the Commissioner, but it was not discovery and it did not include all the matters that were before the respondent when these decisions were made.

KIRBY J: I do not want to interrupt you too long, but are you entitled to discovery? Why did you not seek discovery? Would discovery not have been an available way, in effect, of getting particulars?

MR DURACK: It might have been, your Honour, except that, because there was so much material - - -

HAYNE J: In aid of what issue, Mr Durack? It is all very well to say discovery might have been available and it might have been this. In aid of what issue raised on your Part IVC proceeding?

KIRBY J: I was thinking of the paragraph (d) issue.

MR DURACK: Yes, I take your point, Justice Hayne. The same question would no doubt have arisen had we applied for discovery, as has been raised by the respondent in this case and, indeed, when Justice Lindgren at first instance gave his decision in this matter he said, “You don’t get particulars and of course you don’t get discovery either for the same reason”, so that - - -

KIRBY J: Is that in his Honour’s reasons?

MR DURACK: It is, your Honour.

KIRBY J: Can I ask a question? I should know the answer to this but I am just not sure. What is the legal foundation in Australia in the common law for your right to particulars? Is it still Johnson v Miller or has it gone to a higher level of particularity in more recent years?

MR DURACK: I think, your Honour, that it is the decision in Giris where three of the members of this Court thought that if a tax liability depended upon the exercise of a discretion by the Commissioner, that the taxpayer should be entitled to the reasons for the decision.

KIRBY J: That was, I remember, from the case of the Public Service Board v Osmond, that that was an important step forward in the general obligation laid down – or at least it was understood a step forward in the general obligation of administrative officers to give reasons for administrative decisions at the time.

MR DURACK: And I think, your Honour, that it was assumed in Giris’ Case and later in Brian Hatch – the only two cases on our list of authorities – that reasons for decision were available where the exercise of a discretion was critical to the ultimate liability.

KIRBY J: Do you understand that not to be in contention between you and the Commissioner in this appeal, that is to say, that if (d) involves a real discretion, which is part of the decision-making of the administrator in this case, that in law in Australia, following Giris, it gives rise to a right to particulars?

I would not have thought that it was in contention, your Honour, but it has not been specifically so conceded. The judgment of the Full Court does contain a comment that if a determination was a criterion of liability, then of course it would have been examinable and it would seem to have flowed from that that the reasons for decision would have been available.

GUMMOW J: Just going back to page 95 for a minute, the Chief Justice was bringing your attention to paragraph (d) which is to some extent standing on one side I suppose, but apart from that, is not the balance of (a) over to (j) directed to an issue under section 136AD(1)(b) or (c)?

MR DURACK: We would say, no, your Honour.

GUMMOW J: Well, why not?

MR DURACK: Would your Honour permit me to deal with that question when I take your Honours to the legislative background and the extrinsic materials?

GUMMOW J: Yes.

MR DURACK: I will not delay too long in doing that. I will be very well aware of the point that your Honour wishes to have covered.

KIRBY J: Could you just put a footnote to yourself and not necessarily in oral argument, but it would be helpful to me to know the legal foundation of the right to particulars generally in this country and if there are any developments recently in England or New Zealand on that issue, any developments of that kind, because I do not wish still to be smarting from the decision of this Court in Public Service Board of New South Wales v Osmond but it is still on my mind. So that I would like to know what has happened in the world in relation to the right to particulars from those who exercise administrative power and authority of a statute, the right of citizens to the entitlement of having them give particulars for why they have made their decisions.

I do not want this case to, as it were, go off into a larger issue, that issue still awaits a future time, but I would like to know where we stand on that general issue because, in a sense, it is one of the building blocks of looking at this case. Why cannot a citizen have particulars and why a person who is purporting to act under administrative power granted by the legislature of the decision that they make? I mean, it is a principle of transparency on the face of things.

MR DURACK: Well, we would have thought so also, your Honour, but I - - -

HAYNE J: Well, an alternative point of view is that the proper starting point is the statute and Part IVC and that is where you begin and you begin in Part IVC and you end in Part IVC.

MR DURACK: Well, your Honour Justice Kirby, I have to say that I agree with Justice Hayne, and - - -

KIRBY J: Yes, but you have to have a theory of a general principle.

MR DURACK: Yes.

KIRBY J: Of course you, in the end, go back to Part IVC and to paragraph (d), that is the anchor.

HAYNE J: I had in mind Part IVC of the Administration Act, which is the proceeding in which the particulars are sought.

MR DURACK: Your Honour Justice Kirby, I am not sure that I am ready to answer your Honour’s question about the broader context because our understanding was that if the question whether there was a real discretion here which might have to take into account a variety of matters, whatever they were, was decided in our favour, then there was no real issue about the availability of particulars.

KIRBY J: I realise that, Mr Durack, but, you see, at least speaking for myself as I sit here, when I answer a particular question I endeavour to answer it in the context of the broad development of the law. I regard that as the function of this Court.

In the end, you have to focus on the statute but you do not ignore the way in which you interpret the statute having regard to the broad developments of the law and the question of the right to reasons and the right to particulars is a broad issue of administrative law, an important one.

MR DURACK: My answer is really by way of an apology, your Honour, that we have not done the research that would enable us to assist your Honour with that particular issue.

KIRBY J: No. I ask you to put it as a little footnote to humour me.

MR DURACK: Very well, your Honour.

GLEESON CJ: You might find part of the answer in Bailey v Commissioner of Taxation [1977] HCA 11; (1977) 136 CLR 214.

MR DURACK: Thank you, your Honour. Your Honours, I am conscious of wanting to get to the point that your Honours have raised quickly, but there are a few preliminary things that I would like to say. Your Honours will have observed that the requirement of section 177 operates according to the syntax of the section, that is, that the due making is conclusive in both Part IVC and all other proceedings. That was something which was to some extent passed over in the reasons for decision which were given by the members of this Court in Richard Walter.

It appears to have been passed over on the basis that the due making referred to in section 177 was concerned only with the validity of the assessment as an assessment and that otherwise the assessment was open to review in Part IVC proceedings. There was, of course, your Honours, in Richard Walter no reason to differentiate between the two limbs of section 177 and their effect in Part IVC proceedings because in proceedings under section 39B of the Judiciary Act and subject only to the Hickman principle the section make an assessment invulnerable to attack on any ground whether related to the due making or to the amount or to the particulars of the assessment.

But, if the correctness of a determination under Part IVA of the Income Tax Assessment Act, like the determination and issue in Richard Walter, is treated as – if the correctness as well as the validity is treated as part of the due making, as it was in Sleight’s Case in the Full Court of the Federal Court, it would be equally invulnerable in Part IVC proceedings and that would have been the answer to the Commissioner’s submission about the alternative remedy that was open to taxpayers in Part IVC proceedings in the argument in Futuris.

The issue in these proceedings is the extent to which what was described by the Commissioner’s representative as the full right of merit and judicial review in Part IVC proceedings is impeded by section 177 and, in particular, whether a determination under Division 13 is protected even in those proceedings as part of the due making of the assessment.

Your Honours know that, in our submission, it is not and that is why in Futuris, the taxpayer could not say it had no alternative remedy. But if the Commissioner’s submissions in these appeals are correct, and yet there is some discretion involved in the making of a determination under paragraph (d) but section 177 protects or prohibits the correction of an error of law in the making of a Division 13 determination, that could only be, your Honours, because in making a determination it is effectively impossible for the Commissioner to go wrong in a way which affects a taxpayer’s substantive liability. That is what the respondent effectively maintains.

GLEESON CJ: That raises the question, what would constitute an error in making a determination?

MR DURACK: Yes, your Honour. That is what I would like to deal with by way of the extrinsic materials, et cetera. I still have a couple of preliminary matters to deal with before getting to that point, if I may. On the appellants’ case, of course, judicial review is not impeded by section 177 and what this Court called an anterior question when they looked at a privative clause in Darling Harbour Casino, when looking at that anterior question, section 177 does not even purport to shield the exercise of a discretion from examinations for error of law if it is possible to make an error of law.

Your Honours, in order to support our contentions, what we would seek to do, just to give your Honours some idea of how I propose to address these submissions and subject to your Honours’ own views, is first to take your Honours to the legislation itself; to its legislative history and to its place as domestic legislation enacted in the context of the double taxation agreements between Australia and what are now a large number of other countries and to show from that examination what mandatory factors might enter into the exercise of the discretion; then to take your Honours to the extrinsic materials including the explanatory memorandum and the second reading speech and to show, hopefully with more precision, against what mischief and with what legislative purpose the relevant provisions were enacted and so to cast further light on what matters might be relevant to the exercise of the discretion; then to provide some examples of situations where, in our submission, and not withstanding the satisfaction of the conditions in paragraphs (a), (b) and (c) of the relevant subsections of 136AD, the Commissioner would be bound to have regard to other matters and then to take your Honours to Giris and Brian Hatch.

KIRBY J: Are there other matters than the absence of profit shifting that you say are relevant to the Commissioner’s determination? It seems to be the only matter you have nominated.

MR DURACK: Well, purpose, your Honour, but no, there may be other matters, your Honour.

KIRBY J: At a later stage perhaps you can tantalise us with what they would be.

MR DURACK: I should just explain, your Honours, that the reason for the extreme brevity of the appellants’ list of authorities lies in what we understand to be the narrowness of the issue which now divides the parties and also the very explicit instruction in the Court’s practice direction about the list containing only those cases from which passages are to be read. In any event, if it emerges that the respondent puts its case differently, most of the relevant authorities are helpfully provided by my learned friend.

Your Honours, we delivered to the Registry yesterday a set of documents called extrinsic materials and your Honours will find that the terms of the legislation itself are included at tab 7 of that collection of materials. That is an extract from reprint No 8 of the Income Tax Assessment Act 1936 which sets out – and I do not think there is any disagreement about this – the legislation in the form on which this Court can rely. I would say, your Honour, that that is a reference only though to the form of Division 13. The same reprint contains section 177 in the form which it took prior to the form in which it takes for the purpose of these appeals. Your Honours might just go to that. It is about halfway through the materials at page 1394.

KIRBY J: There were two relevant financial years in this case, were there not?

MR DURACK: There were, your Honour, and section 177 in the form in which it appears on page 1394 of reprint 8 does not apply to either of those years because your Honours will see that the section read at that time that:

The production of a notice of assessment . . . shall be conclusive evidence of the due making of the assessment and (except in proceedings on appeal against the assessment) –

whereas the section in its current form reads:

except in proceedings under Part IVC of the Taxation Administration Act –

The former version was found in McAndrew’s Case to apply only – the due making conclusive provision was found to apply only to appeals to a court and not to references to a Taxation Board of Review as it then was, whereas it is clear that the current version of section 177, the one applicable to these appeals, deals with both with appeals to the court and with references to the Administrative Appeals Tribunal.

GLEESON CJ: Do we have that in this bundle of extrinsic materials?

MR DURACK: No you do not, your Honours. It is reprint 9 and I think it is the most current version of the legislation and it was on my learned friend’s - - -

GLEESON CJ: Well, hang on, this is an old problem, Mr Durack. Where do we most conveniently find the version of section 177 that is relevant to these proceedings?

MR DURACK: In reprint No 9, your Honour, rather than reprint No 8 which contains Division 13 in the form relevant to these appeals.

KIRBY J: Is that in the Commissioner’s bundle of documents or not?

MR DURACK: Section 177, as I understand it, in the most recent form of the tax legislation was on my learned friend’s list of authorities. But, your Honours, I do not think that that is a point of great moment for - - -

GLEESON CJ: It is not of great moment but it just saves us getting it wrong. When we have tax cases, we are almost invariably dealing with the application of legislation as it was in force years before the case comes to us and we then get presented with the current version of some statute and have a big chance of getting it wrong.

MR DURACK: Your Honour, just to make it absolutely clear, the version of Division 13 on which your Honours can rely is in reprint No 8.

GLEESON CJ: Thank you.

GUMMOW J: Which is at tab 7, is that right?

MR DURACK: Which is at tab 7, and the version of section 177 on which your Honours can rely is in reprint No 9. It is, of course, also reproduced, as my learned friend reminds me, at the commencement of our submissions and, in accordance with the practice direction, at the back of our submissions.

GLEESON CJ: Thank you.

MR DURACK: If I could take your Honours to section 136AD(1) in that collection at tab 7 your Honours will see that the subsection is expressed in a way which makes four conditions precedent to the operation of the operative provisions. So that there first must be, under paragraph (a), an international agreement; then the Commissioner must be satisfied that the parties are not dealing at arm’s length; then the consideration must be less than the arm’s length consideration and then at the end of paragraph (c) your Honours will see there is an “and” so that there is a fourth condition:

(d) the Commissioner determines that this subsection should apply in relation to the taxpayer in relation to the supply,

then, for all purposes of the application of this Act in relation to the taxpayer, consideration equal to the arm’s length consideration in respect of the supply shall be deemed to have been received and receivable - - -

GLEESON CJ: Is it part of the dispute between you and the Commissioner that you say that in arguing about whether the assessment is excessive there are four criteria of liability that are set out in subsection (1) about which you can argue and the Commissioner says, no, there are three criteria of liability, those in paragraphs (a), (b) and (c) and paragraph (d) is a facultative provision that simply empowers the Commissioner to operate the legislation?

MR DURACK: I am sorry, your Honour, but I cannot answer that question because it seems to us that the respondent’s submissions are not entirely clear.

At paragraph 23 on page 6 of the written submissions, for example, it is conceded by the respondent that:

the making of a determination is a necessary precondition to the operation of Div 13 –

which is what we maintain and what the Full Court seems to have rejected - - -

GUMMOW J: Which paragraph, Mr Durack?

MR DURACK: It is paragraph 23 on page 6.

GUMMOW J: Yes. Well, “specify three conditions which if satisfied empower the Commissioner to make a determination”. Is that not consistent with what the Chief Justice was just saying to you?

MR DURACK: I am sorry, your Honour. Your Honour, at the end of paragraph 23 your Honours will see that my learned friend’s submissions say that:

While the making of a determination is a necessary precondition to the operation of Div 13 the statute does not contemplate judicial review –

It seems to us that the respondent there acknowledges that paragraph (d) is one of four conditions.

KIRBY J: No, there are three conditions and one necessary precondition.

MR DURACK: Well, that would be another way of putting it, your Honour.

GLEESON CJ: Could the Commissioner say, “I’m making this determination because I can”?

MR DURACK: Without making an error of law, your Honour? We would say that if that is the only matter the Commissioner took into account, then that would involve an error of law when you look at the context of this legislation.

GLEESON CJ: Or, more likely, the Commissioner might say, “I’m doing this to raise revenue for the Commonwealth”.

MR DURACK: Yes, and we would say that that also involved an error of law, your Honour. I should say, your Honour, and the reason why we cannot be certain about exactly how my learned friend puts his case, is that on page 13 of the submissions at paragraph 43(b) the respondent’s submissions appear to resile from the concession that appears at paragraph 23, if it is a concession, because it is there said that:

the due making of the determination does not, in any event, form part of the criterion for liability.

GLEESON CJ: No, it is just facultative.

MR DURACK: Yes, your Honour, but that seems to be inconsistent with the statement in - - -

HAYNE J: Why? You can go to the AAT. You can have the AAT do it again. What is the inconsistency to which you are referring there?

MR DURACK: I am sorry, your Honour, I am referring only to what it seemed to us was - - -

HAYNE J: I understand that, but I want to understand what the inconsistency is you identify.

MR DURACK: Well, there may not be an inconsistency, your Honour, but I think your Honour the Chief Justice asked me whether it was my understanding that the respondent’s case was that there are only three conditions and I said, no, that is not clear because the respondent in paragraph 23 seems to concede that the making of a determination is a necessary precondition, which would make it a fourth condition.

GLEESON CJ: Three criteria of liability that go to the excessiveness of the assessment and the argument against you, as I understand it, is that paragraph (d) goes to what I might call the regularity of the assessment.

MR DURACK: Well, I think that is the way it is put, but saying that it is a precondition, it may still only be a matter of regularity, but it seems that the respondent concedes that there are four conditions.

We say there are four conditions, the fourth of which goes beyond the matter of faculty, if you like, or regularity, because we say - - -

KIRBY J: Why is facultative or procedural regularity, if it is a condition to be exercised by the donee of statutory power of the lawful exercise of that power, why is the fact that it is procedural put out of being a necessary condition that Parliament has laid down?

MR DURACK: I am not saying that it would be, your Honour.

KIRBY J: The Full Court seems to have said this is procedural and therefore it is out, but I just do not understand why the fact that it is procedural, if it is a true precondition which the Parliament has laid down takes it out of being something that has to be particularised like the substantive matters.

MR DURACK: If it is indeed only procedural in the way the making of an assessment might be procedural then it would be taken out of a matter which would need to be particularised, but if that were what the legislation intended then you would just have paragraphs (a), (b) and (c) and then the Commissioner would make an assessment.

GLEESON CJ: A way of looking at it is to say, if you said to the Commissioner, “Please provide full particulars of the determination” would it be an answer to the Commissioner to say, “The full particulars are as follows. The determination was made on 1 October 2005 and it is in writing”, full stop.

MR DURACK: Your Honour, if it were so that the determination operated in the same way as an assessment then that might be adequate particularisation and if that is all it amounts to then we have a difficulty, but rhetorically one could ask the question, “Why would Parliament have bothered to put paragraph (d) in section 136AD(1) because the same result would have followed if the Commissioner simply issued an assessment after paragraphs (a), (b) and (c) had been – after the conditions in those subparagraphs had been satisfied.

GLEESON CJ: Your argument, as I understand it, whether it is right or wrong, is that there is more to it than that and that a paragraph (d) determination involves an exercise of a discretion in the course of which you could go wrong.

MR DURACK: Yes, your Honour, that is precisely it. My learned friend’s submission, as I understand it, is, as we said earlier, that there is no possibility of getting particulars and no possibility of review because it is not possible for the Commissioner to go wrong in exercising this discretion in a way which affects a taxpayer’s substantive liability – to use the expression that has been employed in authorities like George’s Case.

There is perhaps one other thing I should observe while looking at the terms of the section itself. My learned friends have suggested that paragraphs (a), (b) and (c) are expressed as preconditions for the exercise of the discretion, such as it is, in paragraph (d). Of course, my learned friend’s view of the discretion is that it is one so - I think the adjective is “exiguous” - it is a discretion so exiguous as almost not to be there. But the legislation is not expressed so that (a), (b) and (c) are preconditions to (d). The legislation is simply expressed to require the satisfaction of four conditions of which (d) is one.

KIRBY J: You have said that now several times. The structure, the expression, the layout, the fact that there is (a), (b), (c) and (d), on the face of things, seems to be putting (d) into the same category as the previous paragraphs.

MR DURACK: Yes, your Honour. I should say that section 136AD had some similarities with a section that used to be in the Income Tax Assessment Act - it was section 31C - which dealt with acquisitions of trading stock from related parties. It applied domestically as well as internationally.

KIRBY J: Is that still there or has that been repealed?

MR DURACK: No, it is not. It has been replaced your Honours by section 70-20 of the 1997 Assessment Act. It provides for three conditions, which perhaps are not dissimilar to those in section 136AD, it just provides that if you buy trading stock and you do not deal at arm’s length with the vendor, and the amount paid is greater than market value, then the amount paid is taken to be the market value.

KIRBY J: But there is not a fourth requirement.

MR DURACK: No, there is not.

KIRBY J: And the Commissioner determines that the subsection shall apply.

MR DURACK: That is so, your Honour. As I say, a section in similar terms, section 31C was in the Act back at the time that the current version of Division 13 was introduced. But it is not quite as simple as section 70-20, because it involved two levels of satisfaction by the Commissioner about dealings at arm’s length. But even it had only three conditions.

KIRBY J: Now are these sections that you have just referred to behind some of these tabs?

MR DURACK: No, I am sorry, your Honour.

KIRBY J: You also in your written submissions refer to the earlier provisions of this, the 1936 Act, and of the 1923 Act.

MR DURACK: Yes, your Honour. They are in this volume of extrinsic materials and I will take your Honours to those in a moment. I am sorry, but we can provide your Honours with a copy of - - -

KIRBY J: There is a very nice little tab 10 that has nothing behind it, and a 9.

MR DURACK: We will arrange your Honours to have copies of section 70-20 of the 1997 Act provided to the Court during the lunch adjournment. The point though, your Honour, is that an interpretation of the legislation which would give paragraph (d) no work to do which the issue of an assessment would do anyway is not the kind of interpretation which would ordinarily find favour with this Court.

Now, your Honours, the first legislative predecessor to the present Division 13 is to be found under tab 4 of the extrinsic materials. That is the 1915 Income Tax Assessment Act. I should say that the section that is supposed to be the legislative predecessor to Division 13 is section 23, but you would only know that because it was said to be a predecessor in Commonwealth Aluminium which is mentioned in the appellants’ written submissions. But it has very little in common with the present Division 13 and I think it can probably be ignored. I only mention it because it was apparently a predecessor.

Then, if your Honours go to tab 5, your Honours will see section 28 of the Income Tax Assessment Act 1922. Your Honours will see that section 28 refers to:

any business which is carried on in Australia is controlled principally by persons resident outside Australia, and it appears to the Commissioner that the business produces either no taxable income or less than the ordinary taxable income which might be expected to arise from that business, the person carrying on the business in Australia shall be assessable and chargeable . . . as the Commissioner in his judgment thinks proper.

Now, the words to which I would ask your Honours to pay particular regard are the words “taxable income which might be expected to arise” because that expression continues to be reflected in the next version of the predecessor to Division 13 and it is also, as I will show your Honours in due course, reflected in the provisions of the double taxation agreement which deals with transfer pricing situations.

I should also remind your Honours that as we have said in our written submissions, section 28 was found in the Texas Company (Australasia) Ltd [1940] HCA 9; (1930-40) 63 CLR 382 it was found to confer a discretion on the Commissioner. The particular reference is in the judgments which are referred to in footnote 19 to paragraph 15 – I only say that because there are quite a few references - of the appellants’ written submissions. As those written submissions also record, it seems to have been assumed that the exercise of the discretion was examinable and the footnote records the parts of Texas Company (Australasia) which are the basis for that statement.

While your Honours have the appellants’ written submissions there is something in them that I should correct. If your Honours go to page 3 of the written submissions your Honours will see that there is a footnote to paragraph 4 and it is footnote 4. The footnote states that your Honour Justice Gleeson pointed out in Plaintiff S15 that a decision to refuse a protection visa under the legislation there under consideration will always satisfy the Hickman tests, et cetera. On rereading Plaintiff S157 I realised that your Honour the Chief Justice was merely intending to record the submissions of the Commonwealth in that case.

If your Honours could then go to tab 6 where the immediate predecessor in the form of the former section 136 appears in the Income Tax Assessment Act 1936.

KIRBY J: What did you get out of 28? I was not quite sure what you were - - -

MR DURACK: I am sorry, your Honour, I asked your Honours to note the use of the expression, “taxable income which might be expected to arise” and I mention that that expression is reflected in section 136, the immediate predecessor to Division 13 and is also reflected in the double tax agreement provision dealing with transfer pricing to the significance of which I will come in a moment. If your Honours are now looking at section 136 under tab 6 your Honours will see that Division 13 was once very short and that it simply provided that :

Where any which is carried on in Australia-

(a) is controlled principally by non-residents –

and there were two other possible preconditions:

it appears to the Commissioner that the business produces either no taxable income or less than the amount of taxable income which might be expected to arise –

then the person carrying on the business in Australia had to pay tax on so much of the income as the Commissioner determines and that also was held in Texas Company (Australasia) and the same parts of the written submissions record the relevant extracts from Texas Company (Australasia) Ltd to involve the exercise of a discretion. That is the Commissioner did not have to apply the provision.

Then if I could take your Honours to – I should perhaps, before I do that – during the special leave application, your Honour the Chief Justice asked the question whether a taxpayer would have been entitled to particulars under the old version of Division 13, the one that we are now looking at, section 136. In our submission, if the section involved a discretion to apply or not to apply the section, as this Court in Texas Company (Australasia) found, then in our submission, a taxpayer would have been entitled to know what matters were taken into account in the exercise of the discretion.

Then if I could take your Honours to tab 8, where your Honours will find – I am sorry your Honours, my learned junior reminds me that the reference to the section involving a discretionary exercise is in Commonwealth Aluminium, not Texas Company (Australasia) Ltd. At any rate, the references are in the written submissions at footnotes 19 and 20 and thereabouts - in the footnotes to paragraph 15, your Honours.

KIRBY J: So that is a principle that goes back to the 1920s or 1930s. What was the year of Texas Co? That was 1940?

MR DURACK: 1940, your Honour.

KIRBY J: So it goes back to 1940. At some stage I would be helped by your saying why, in principle, to make judicial review work a party is entitled from the decision-maker to particulars of the exercise of discretionary powers.

MR DURACK: Well, without wishing to appear unduly sycophantic, your Honour, the reasons are in Justice Gummow’s judgment as a single judge of the Federal Court in Jackson’s Case. As our written submissions in reply - - -

KIRBY J: That is said to have been overtaken by - - -

MR DURACK: It is said to have been overtaken and in our written submissions in reply we say why that is not so, particularly as it was approved as recently as 2006 by the Full Federal Court in their decision in Rio Tinto - - -

KIRBY J: Anyway, if it is at a conceptual level I will make up my own mind on that. I will have a look at that. That is in the Full Court of the Federal Court?

MR DURACK: Yes, the Full Court of the Federal Court. The reference is [2006] FCAFC 86; (2006) 151 FCR 341 and the references to Justice Gummow’s decision in Jackson are at paragraph 63 on page 359 and paragraph 66 on page 360.

KIRBY J: Yes, thank you.

MR DURACK: I should also say at paragraph 73 at the top of page 363. Your Honours, the International Agreements Act is the Act which makes the double tax agreements between Australian and the various countries with which we have concluded agreements which makes them, in effect, part of the Australian law of income tax and makes them more than simple agreements between sovereign nations.

The particular provision to which I would like to take your Honours is a provision of the United States double tax agreement, or the double tax agreement with the United States of America. It is at page 47 and the page numbering is at the top right-hand side of the documents commencing towards the back of the extracts under tab 8. It might be easier to say that it is 10 pages from the back.

Your Honours, the article to which I would take your Honours is generally referred to as the associated enterprises article of the double tax agreements and the articles in the various double tax agreements between Australia and the various other countries are in similar, although not identical, terms. I have taken your Honours to this one because in the matter involving the second appellant, W.R. Carpenter Australia, the Commissioner, although he has made determinations under Division 13, has also purported to apply the associated enterprises article of the double tax treaty.

The double tax treaties, of course, are treaties which have been held or treated, at least by the Full Court of the Federal Court, as involving or as having a permissive role in allocating taxing power to the contracting States, so that the role of the double tax treaties is to indicate to the taxing States what they can do in their domestic laws. When the new Division 13, the one with which your Honours are concerned, was introduced, reference is made to it being introduced in order to bring Australia’s domestic law into line with the double tax agreements.

If your Honours look at Article 9, your Honours will see that it was agreed between Australia and America that where an enterprise of either of them participated directly or indirectly in the management of an enterprise in another and the same persons participate, and in either case conditions operate which differ from those which might be expected to operate between independent enterprises dealing wholly independently with one another, then any profits which, but for those conditions, might have been expected to accrue to one of the enterprises but by reason of those conditions have not so accrued may be included in the profits of that enterprise and taxed accordingly. So again there is the reference to profits which might be expected to accrue.

Your Honours, I would also direct your Honours’ attention to Article 9(2) which provides, in effect, for a compensating adjustment to be made in the other country when sub-article (1) is applied, because it says, in sub-article (2):

Where profits on which an enterprise of one of the Contracting States has been charged to tax in that State are also included . . . in the profits of an enterprise of the other Contracting State and taxed accordingly, and the profits so included are profits which might have been expected to have accrued to that enterprise of the other State if the conditions operative . . . then the first-mentioned State shall make an appropriate adjustment to the amount of tax charged –.

Now, I just mention at this point, your Honours, that the second appellant, W.R. Carpenter Australia, was treated as having received interest income from a related company in the United States of America so that this double tax agreement would apply, and the particular year - - -

KIRBY J: Which particular Carpenter company because there are three or four?

MR DURACK: I am sorry, it was W.R. Carpenter Australia, your Honour. The American company was called W.R. Carpenter North America. W.R. Carpenter Australia made a loan to W.R. Carpenter North America in circumstances to which I will come in a moment. But the particular year in question before this Court, the appeal in question, is the 1993 year. Now, your Honours, the assessment did not issue until June 2004, although the tax audit had commenced in 1995 and, according to the pleadings of the appellant, a full disclosure of the transaction had been made in 1995 when the audit commenced. Nine years went by, the assessment issued.

Plainly, the prospects then of getting an adjustment to the taxable income of the related company in America would have been very slight; nine years had gone by, the chances of persuading another country that they should make an adjustment in those circumstances would be very slight. That is not a matter of which this particular appellant complains in the Part IVC proceedings because the American company was in losses throughout the entire period. But in another matter, your Honours, we would say that it might be mandatory for the Commissioner to have regard to the fact that he took nine years to complete an audit, an audit which, according to the decision of the Administrative Appeals Tribunal, could be described as a rudderless ship. It took him nine years to complete an audit during which he never once exercised his compulsory powers to obtain information.

It might be mandatory in those circumstances for a Commissioner to recognise, before he made a determination that Division 13 applied, that his delays, his inexcusable delays, if that is the case, have made it impossible for the related company – it might be a subsidiary in America – to get an adjustment under the American tax laws. Now, I am not suggesting that is the case here, but it is the kind of matter which, in our submission, might be relevant.

Now, your Honours, in the appellants’ submission, and even without reference to the extrinsic materials to which I will now take your Honours, that examination of the legislative history and context would show that the making of a determination under paragraph (d) was (a) likely to have been intended to have some function otherwise why would it be there, and (b) was likely to have been intended that the operation of Division 13 should be only that profits which might be expected to accrue but for the non-arm’s length dealing are brought to account.

In other words, looking at the statute and its legislative history alone would suggest that it is designed to protect the revenue from disadvantage by the nonaccrual of profits which might have been expected to accrue but for the non-independent transactions. That will not necessarily be the result of treating the conditions in paragraphs (a), (b) and (c) as the only relevant conditions.

GUMMOW J: Can you explain how that can be so?

MR DURACK: I think that the best way to explain, your Honours, is to illustrate by way of an example. I can take examples from the Commissioner’s own rulings. Just before I give an example, your Honours, I might point out that the definition of arm’s length price which is in the legislation under tab 7 at section 136AA(3)(c), your Honours will see that:

a reference to the arm’s length consideration in respect of the supply of property is a reference to the consideration that might reasonably be expected to have been received or receivable as consideration in respect of the supply if the property had been supplied under an agreement between independent parties dealing at arm’s length –

In other words, arm’s length consideration involves postulating a hypothetical situation, presumably identical to the one under consideration, the actual transaction but for the relationship of the parties. So the definition involves having regard to a hypothetical transaction rather than the actual transaction. It is the appellants’ submission that having regard to the hypothetical transaction may obscure the absence of any disadvantage to the revenue in the actual transaction. I think, your Honours, that the most convenient thing for me to do is to hand up the first of two rulings by the Commissioner of Taxation which deal with the application of Division 13.

KIRBY J: These are the two that are mentioned in footnote 5 of the reply?

MR DURACK: Yes, your Honour. Your Honours will see that the taxation ruling, probably which I just handed up, taxation ruling 92/11 is about the application of the Division 13 transfer pricing provisions. If your Honours would go to paragraphs 31 to 33 of that ruling, you will see in paragraph 31, there is a reference to a business purpose not being itself “adequate to take the transaction outside the ambit of Division 13.” There is a reference granting an “interest free loan to an offshore subsidiary”, but then in paragraph 33:

in certain special cases, business purpose may be relevant . . . An example would be the case where the Commission decides that it would be appropriate not to apply Division 13 on the basis that a particular contribution of funds may be treated as equivalent to equity –

If your Honours would then go to paragraph 51(a) and your Honours will see that the discussion is about the Commissioner exercising “the discretion to apply Division 13”. Then in subparagraph (c):

An example of a circumstance to which Division 13 would not be applied to impute interest income would be the case where the Commissioner is satisfied that the contribution of funds should be treated as equivalent to an equity investment.

Then if your Honours would go two pages over to paragraph 60(g) and to the last six lines on the page your Honours will see there that it is recognised that:

the activity of a business may be of a type that no arm’s length lender would lend to that business at that time even on deferred interest terms. An example of such an activity is the prospecting or exploration stage of a mining business. Typically, in this case, there will be no assets of the company that could be provided as security for a loan and the company would not have an income flow. This would be one of the factors that might indicate that the debt or a part of the debt may be the equivalent of a contribution to capital.

So that the Commissioner recognises, and we would suggest as an example, and I will come to another example in a moment, the situation where Division 13 would not be applied would be in a situation of that kind. If I could now hand up, your Honours, another tax ruling, a 1994 tax ruling. I am afraid this is rather bulkier. Your Honours will see that this ruling is described as some basic concepts underlying the operation of Division 13 and some circumstances in which section 136AD will be applied. If your Honours could go first to paragraph 114, your Honours will see that - - -

KIRBY J: This is not endeavouring to establish new facts in this Court that were not in the courts below concerning the practice of the Commissioner, is it, because we cannot receive new evidence.

MR DURACK: No, your Honour. These rulings were referred to below, but this is merely for the purpose of providing examples of situations where paragraphs (a), (b) and (c) might be satisfied but where it might not be appropriate to make a determination under paragraph (d). The fact that that is the Commissioner’s view is not of any particular significance, it is merely that these are useful examples. Also, with respect, your Honours, it is not insignificant, in our submission, that the position which the Commissioner now appears to be taking in his written submissions is inconsistent with the position that he takes publicly in these rulings.

HEYDON J: Are not those last two sentences contradictory? The first sentence said that the opinion of the Commissioner in itself does not matter. The second sentence said that the opinion of the Commissioner matters a lot because it is inconsistent with Mr Robertson’s submission.

MR DURACK: Yes, they are inconsistent, your Honour. Then if your Honours would read down to paragraph 117. Then if I could take your Honours to paragraph 390 which contains, I think, more elaboration of the point made in paragraphs 114 to 118. But then if I could take your Honours to paragraph 138? Your Honours will see there that the example is given of “Start up, market penetration and obsolete stock price situations”:

Where Australian producer/wholesaling companies reduce or discount the price at which property is supplied to a foreign marketing/distribution associates –

Now, and this is the example which I would postulate based on that kind of situation. Take, for example, an Australian manufacturer of widgets who sells to unrelated parties in the United States and United Kingdom at $100 per unit, but to a subsidiary in China, where it is attempting to develop a market, at $50 per unit. The sale prices to the unrelated parties in the United States and the United Kingdom might be thought to provide the arm’s length price, so that the conditions in paragraphs (a), (b), and (c) will be satisfied in relation to the sales to the associate in China.

If the Commissioner’s discretion were as narrow as my learned friends seem to suggest, a determination would follow automatically, but, as the Commissioner’s rulings seem to acknowledge, determinations ought not automatically to be made in such circumstances. The arrangement will have been entered into by the Australian parent with the purpose of market penetration and so that its profits would increase, although perhaps not until later, both as a result of increased volume of sales and from the repatriation of profits made by the subsidiary.

GLEESON CJ: Now, assuming that is correct or reasonable, is that a construction of paragraph (c) or the operation of paragraph (c) of 136AD(1) or is it a discretionary power referable to paragraph (d)?

MR DURACK: Well, I understand the point your Honour the Chief Justice is making and there may be an element of both, but I think your Honour is saying that the arm’s length price may be expected to be lower in those circumstances.

GLEESON CJ: What I was saying was, that the expression “arm’s length consideration” in paragraph (c) might carry a lot of baggage in particular circumstances.

MR DURACK: Yes, and that would certainly be our submission, your Honour, that it does carry a lot of baggage and that it requires consideration of all of the aspects of the transaction to ensure that the hypothetical employed for the purpose of arriving at arm’s lengths price is a true comparable. But, because it would be impossible to hypothesise in the arm’s length situation, the parent subsidiary relationship, which this example involves, because you can not hypothesise an arm’s lengths dealing which reflects an essential element of the actual transaction, then there will necessarily be an occasion for the exercise of a discretion.

In fact, your Honours, that brings me to another difficulty which faces the taxpayer in situations where Division 13 is being applied by the Commissioner, and that is, as your Honours know, a taxpayer is obliged to prove not only that the Commissioner has made an error in most circumstances, but it affects his or her tax liability, but also, precisely what the amount by which the assessment is excessive actually is.

Now, there may be situations, your Honours – and this might be one of them – where the arm’s length price cannot be established by anyone because how can you hypothesise an arm’s length price in relation to a transaction, part of the motivation for which is the very relationship between the companies involved? You then may have a taxpayer in the position where he can prove that the arm’s length price in that situation would have been less than the $100 a unit which was charged to the unrelated parties in the United Kingdom and the United States but not precisely what the arm’s length price would have been in relation to the particular transaction involving the subsidiary in China because it is not possible to include in the hypothetical the relationship between the parent and the subsidiary which explains the particular transaction.

That might be another reason why, even though the arm’s length price might be less than the price in the actual transaction, why it would not be appropriate to make a determination. Certainly insisting on a discretion as narrow as that suggested by the respondent would mean that the question whether such arrangements necessarily depressed profits which might be expected to be derived would not be considered.

HAYNE J: But does not this last set of propositions you have advanced bring us to what I would identify as the starting point for the inquiry, which is Part IVC, and what is the relationship you assert between the determination under AD(1)(d) and the issue, singular, tendered under 14ZZO of the Administration Act?

MR DURACK: It is this, your Honour. If the Commissioner’s determination under paragraph (d) is vitiated by an error of law of the kind that we would suggest could be made by failing to having regard to relevant matters, then one of the four conditions for the operative provisions coming into effect will have been shown not to be satisfied, the operative provisions will not come into effect and the taxpayer will have shown that his situation should have been taxed by reference to the operation of the ordinary provisions of the income tax legislation and will thereby have shown not only that the assessment is excessive but also within the principles established by this Court in Dalco’s Case, not only that it is excessive but also the amount by which it is excessive.

HAYNE J: That proposition seems to contain within it the proposition that demonstrated error of law in making the determination under (d) necessarily means that Division 13 not only was not but could not have been engaged with the consequence, as you had it, that the ordinary provisions of the Act alone were engaged. Is that proposition implicit in what you have just put?

MR DURACK: Not quite, your Honour, because your Honour said “not only was not but could not have been engaged”.

HAYNE J: Just so, and it is to that which I draw your attention, is that implicit in your proposition?

MR DURACK: No, it is not, your Honour, because it might simply mean that the Commissioner could have properly applied Division 13 had he not made an error of law in relation to the making of this determination. The finding that the determination was vitiated, might simply mean that it goes back to the Commissioner to do it again, this Court, of course, being unable to exercise any discretion of its own in the circumstances because it is only the Commissioner’s discretion which can result, in our submission, in a valid determination. The Court could only say he either exercised the discretion properly and without error of law or he made an error of law and in that case the discretion was improperly exercised and the assessment is excessive and might have to go back to him to do it again. So that is how we would seek to answer your Honour’s question.

HAYNE J: To do it again with the possibility of arriving at the same assessable income?

MR DURACK: Yes, that would be possible.

HAYNE J: Which seems at odds with the proposition that you have demonstrated that the assessment is excessive.

MR DURACK: But only in relation to that particular assessment. Another assessment, an amended assessment, producing the same result might not be excessive. This is the kind of thing, as your Honours would well understand, which can often happen when the Commissioner finds an error in the way an administrative officer has exercised a particular discretion. It can go back to the officer, the officer can exercise the discretion again and get the same answer, and the second time he does it can be perfectly valid and have the consequences of a valid decision. We would say that the position under the income tax legislation is no different.

GLEESON CJ: Is your proposition that if you find an error of law in the exercise of what you say is the discretion under paragraph (d), then the consequence of that is that you will demonstrate the assessment as being excessive because it is the general provisions of the Act that should apply?

MR DURACK: Yes, your Honour.

GLEESON CJ: And it is only upon an assumption that there has been a lawful exercise of the power under paragraph (d) that section 136 can arise for consideration?

MR DURACK: Yes, your Honour.

GLEESON CJ: Section 136AD, I should say.

MR DURACK: And that, with respect, seems to us to be the answer to your Honour Justice Hayne’s question about the relevance of this inquiry.

GLEESON CJ: But if the ground of unlawfulness in the exercise of a discretion is the failure to take into account a consideration, it has to be a consideration that was mandatory, does it not?

MR DURACK: Yes, your Honour.

GLEESON CJ: Now, suppose you got a letter from the Commissioner or saw a document that said, “The reason I determined that this subsection should apply was that to do so would increase the assessable income of the taxpayer and therefore the revenue to the Commonwealth”?

MR DURACK: We would say, your Honour, and I think I am repeating myself - well, perhaps first I should say, your Honours, that it would only be necessary for this Court to find that there could be matters which it would be mandatory for the Commissioner to take into account in the exercise of this discretion - - -

GLEESON CJ: In the present case, what are the mandatory matters that would not have been taken into account in such a decision?

MR DURACK: Your Honours, I wonder if I could go, and I will go reasonably quickly, to the second reading speech - the explanatory memorandum, and then to the facts of this case, because they would help me to answer that question.

KIRBY J: Just before you do so, the second reading speech and the explanatory memorandum, if there are any opinions by authors of the tax textbooks or other works on this issue, I would be interested to see them. There are people who live their whole lives in this field.

MR DURACK: Your Honours, there are. I think it is fair to say that - - -

KIRBY J: They go both ways.

MR DURACK: - - - the last few months, or the last couple of years actually, because this litigation has been going for two years, and has aroused quite a lot of interest, has generated quite a few articles. Your Honours, without wishing to single anything out, I do not think that any of the articles are of such a quality that they would assist your Honours a great deal.

KIRBY J: They may not, but if you do not live your entire life in the field of tax law, and you only occasionally make a little visitation to it, it is in my experience at least, for me, useful to see what people who have been thinking and working in this field say about these issues. Not that I do not trust counsel, but it is useful to have these scholars and other professional people.

MR DURACK: Your Honours, we will collect what we can and have references to them delivered to the Court. I should say that we looked carefully at what Professor Ross Parsons had to say in his book about this subject. We do not think that it casts any light on the question one way or another, although it did serve the purpose, looking at it served the purpose of identifying the relationship between Division 13 and section 31C, the section to which I referred earlier. There is a section in Division 13 which specifically deals with the relationship between those two sections.

Your Honours, if I could take you to the second reading speech, it is under tab 1 of the volume of extrinsic materials. It is the second reading speech which was given by the Treasurer, then Mr Howard, on the occasion of the introduction of Part IVA. The reason I draw it to your Honours’ attention is that not only did it deal with the introduction of Part IVA but it also dealt with or foreshadowed the introduction of Division 13.

If your Honours would go to page 2686 of the Hansard extracts which are under tab 1, your Honours will see under the heading “Shifting Income Abroad” that the Treasurer said that he:

would like now to spell out what is involved in the Government’s decision to introduce in the next sittings of the Parliament further anti-avoidance measures –

So that we say it is at least not insignificant that they were so described and then in the second paragraph - in fact, perhaps if I could ask your Honours to read the second paragraph, and also the third paragraph. If I could ask your Honours to pay particular attention to the third paragraph where reference is made to the arrangements being “damaging” to the Australian revenue but being:

entered into for a complex mixture of tax and other reasons. The fact, if it is one, that tax saving is not a key purpose of an arrangement or transaction is, however, no reason why we as a nation should not be in a position to counteract any potential losses of Australian tax inherent in it.

So that the emphasis is on damage to the revenue, losses to the Australian tax inherent in avoidance activity of which tax avoidance does not need to be a key purpose. It begs the question whether there needs to be any purpose at all. If I could then ask your Honours to go to the explanatory memorandum which is under tab 2 of that volume, and that is the explanatory memorandum to the bill introducing Division 13, at the top of page 1, under the heading ‘General outline’, your Honours will see at the first bullet point what the provisions were designed to do:

empower the Commissioner of Taxation to counter arrangements –

shift profits out of Australia. Then if I could take your Honours to page 2 - - -

KIRBY J: Where is that dot point? Which dot point is it?

MR DURACK: It is the first dot point, your Honour.

KIRBY J: I see.

MR DURACK: Then, on page 2, the first paragraph again there is a reference to the Bill being introduced:

to counter arrangements that result in avoidance of Australian tax -

Then, if your Honours could go to the next page in the top paragraph, the first paragraph, your Honours will see a reference to a “serious deficiency” which had been revealed in the previous section 136 by the decision of this Court in Commonwealth Aluminium and then about half the way down the page, your Honours will see that:

Proposed Division 13 accordingly does not depend on basic tests of control or share ownership. Instead, the Commissioner of Taxation will be authorised to apply the substantive provisions of the Division –

Your Honours will see that there, only paragraphs (a), (b) and (c) of the conditions are referred to, but the fact that the Commissioner has authorised effectively picks up the fourth condition. Then, if your Honours go to page 4, your Honours will see the second-last paragraph on the page, that:

The revised Division 13, which this Bill will insert into the Principal Act, is designed to also overcome these difficulties and to provide in the international area a general supplement to the new Part IVA of the Principal Act. Because of policy and technical interrelationships between the two, a number of the now proposed provisions draw on the measures contained in Part IVA.

Once the initial tests in the revised provisions, referred to earlier, permit the Commissioner to make adjustments . . . and the case is one where it is appropriate for the Division to apply, the Commissioner will be required to re-determine the taxpayer’s assessable income or allowable deductions, basically by using the internationally accepted “arm’s length” principle –

There is a reference there to the double tax agreements.

KIRBY J: I thought in your written submissions you contest the existence of a duty and repeatedly assert the provision of a power or a discretion.

MR DURACK: Yes, that is correct, but the duty that is referred to in that part of the explanatory memorandum, your Honour - - -

KIRBY J: You say the duty only arises when all four of the preconditions are exercised and the fourth is the one that obliges the Commissioner to have regard to these type of considerations that allow in some senses a mollification of (a), (b) and (c) and in some senses a clarification of what the whole thing is getting at.

MR DURACK: Yes, your Honour. In other words, (a), (b) and (c) cast a very wide net and then situations are filtered through the exercise of the Commissioner’s discretion. On the top of page 6 – no, I will not take your Honours to that. If your Honours could then go to page 59.

HAYNE J: I am sorry, which are the provisions that provide for the compensating adjustments mentioned at the top of page 6? Just give me the numbers of the provisions.

MR DURACK: It is 136AF, your Honours, which is very similar to the compensating provision in Part IVA which was the subject of discussion in this Court in the Futuris appeal. The reason why I was going to take your Honours to the top of page 6 – perhaps this is a very small point, but the explanatory memorandum makes it plain that there is to be provision for compensating adjustments and that those adjustments will come into effect where the Commissioner considers it fair and reasonable to make the adjustments. We would say, therefore, that fairness and reasonableness are matters which are not irrelevant to the way in which the Commission is intended to act under this Division.

KIRBY J: Is that formula used somewhere in the explanatory memorandum, “fairness and reasonableness”, or do you - - -

MR DURACK: Yes, on the top of page 6, but only, your Honour, in relation to the making of compensating adjustments. The formula “fair and reasonable” is used in the legislation itself in relation to compensating adjustments. Your Honours, then on page 59 under the heading, “Introductory note” there is another reference to the purpose of the legislation being:

to combat avoidance of Australian tax through international transfer pricing and other profit shifting arrangements.

We would say that what is implicit in this is that there must be some loss to the revenue.

On page 62, I merely draw your Honours attention to the last sentence on the page, the reference there to the arm’s length principle being embodied in the double tax agreements with other countries.

GLEESON CJ: What do you mean by loss to the revenue? Loss from what as compared with what?

MR DURACK: Your Honour, when I come to take your Honours to the facts, and perhaps it is convenient for me to do this now because it assists in making these points. If your Honours would go to the appeal book at page 133, your Honours will see part of the statement of facts, issues and contentions by the appellant, W.R. Carpenter Australia, which recites the facts that led up to this assessment. In paragraph 23e) on page 133, your Honours will see that:

On 15 December 1988 WRCA –

that is, the appellant –

and a number of related companies entered into a joint and several guarantee . . . with Westpac (San Francisco) in respect of the Westpac loan 3.

Now, that is a loan referred to in paragraph 23a), which was made by a number of banks to the United States companies, including W.R. Carpenter North America, which was the related company in issuing in this particular set of proceedings.

If your Honours could then go to the next page, paragraph 24, your Honours will see that the provision of the third guarantee – I am sorry, your Honours, I should say these are the facts as pleaded of course by the appellant, they are not necessarily conceded, but for the purpose of these proceedings it does not seem inappropriate to assume that the facts might be correct – occurred, in paragraph b), so that Westpac loans 1 and 2 under which the Australian company’s parent was exposed to potential liability under a guarantee could be discharged – and then in paragraph 24e) so that W.R. Carpenter Australia “could receive guarantee fees”.

If your Honours would then go to page 136, at the top of the page your Honours will see that:

On 23 May 1989 the directors of WRCA . . . resolved to: ‘...make a short term loan of US$3,600,000 –

to the American company, WRCNA, to provide it with working capital. Then in paragraph 29 your Honours will see that on 12 October 1990 the terms of the loan were reduced to writing and the rate of interest was to be nil, until varied by the lender. About halfway down that paragraph your Honours will see that it is said that most of the advances had been made to provide the American company with working capital, including funds to meet interest payments on loans the subject of the third guarantee, that is the guarantee that had been given by the Australian company of the external borrowings by the US company. Then there is a reference to the balance also including nine six-monthly amounts representing guarantee fees.

If your Honours could then go to the top of page 139, first sentence in paragraph 33 there is a reference to:

The adverse trading conditions which had been experienced by WRCNA and UpRight in 1987 continued –

If your Honours could then go to page 142, paragraph 43, your Honours will see that it was said that:

At no time between May 1989 and June 1994 did the WRCNA have any capacity to repay any part of Loan 13 or interest on amounts owing to WRCA and during each of the 1989 to 1994 years of income WRCNA incurred a substantial loss as shown in Schedule 2 –

If your Honours could go to page 164, your Honours will see that there are set out the results of the American company for the periods during which the respondent has imputed interest.

KIRBY J: Which paragraph is this?

MR DURACK: It is on page 164, and it is a schedule setting out the results of the American borrower for the periods during which interest was imputed to the Australian lender, that is the appellant, W.R. Carpenter Australia. In the first column, your Honours will see what the profit or loss, and in all cases it was a loss, incurred by the American company was during that period, and in the second column are shown the interest which the assessments effectively involved saying should have been paid by the American company to Australia.

GLEESON CJ: I have no difficulty understanding the relevance of that paragraph (c), but what is its relevance to paragraph (d)?

MR DURACK: Your Honours, I see the difficulty that your Honour has identified. This is a situation where the Australian company was related to the borrower in the United States. I think what your Honour is saying is that an arm’s length lender, trapped as it were in the same situation, having guaranteed third party borrowings of the overseas company, might have done the same thing.

GLEESON CJ: Yes, I imagine the taxpayer says to the Commissioner, “We made an interest free loan to our related American company. Big deal. Have a look at the financial circumstances in which we did that.”

MR DURACK: It does say that, your Honour. The difficulty is that no interest was charged on this loan, nor was there any provision for interest on this loan. An arm’s length party trapped in the same situation and, in effect, obliged to put more money into the pot to avoid losing a greater amount of money, is, with respect, unlikely to have said you do not have to pay any interest on it. They would have required some consideration, even if it was only a promise to pay interest, and it would have been interest no doubt at a very substantial rate, when the American company became able to pay it.

Now, that would mean, your Honour, that the consideration paid in this transaction, which was none, was less than arm’s length consideration because what an arm’s length party would have done, it might well have made the loan but it would have extracted a promise at least to pay interest at some time in the future. So that the conditions of paragraphs (a), (b) and (c) will be satisfied and, if the Commissioner is right, then there is a lot of interest to be imputed and the only let out for a taxpayer in that situation is the exercise of the discretion.

GLEESON CJ: That is what I want to understand, what is the let out? In other words, I understand an argument that could be put under paragraph (c) and your response that that argument may not take you as far as you want to go, but what expressed in legal terms is the argument you would then put on those facts under paragraph (d)?

MR DURACK: You would say that when you look at the legislative history of the division and of the comments that were made at the time that the legislation was introduced, it is apparent that the division was intended to recompense the Australian revenue for tax on profits which might have been expected to have been made and it was also intended to protect it from disadvantage.

Now, in a situation where the facts are as these are indicated by this schedule where there were no profits from which interest could be paid, you could say, well, there were no profits in this situation which the Australian revenue could reasonably have expected to have been received and for tax to be payable on. Moreover, the Australian revenue in the circumstances was unlikely to have been disadvantaged, indeed, may have been advantaged because the making of these loans, in effect, put off the day when the guarantees were called upon and the Australian company had to meet the, as your Honours will have seen, $65 million liability under the guarantees.

So we would say that those matters added together were matters which the Commissioner should have considered in deciding whether it was appropriate to apply the division in these circumstances. I have said nothing about the other matter, that is the possibility that the American company, because of the lapse of time and what in the appellants’ submission are the delays in the audit which were substantially the fault of the Commissioner, had no chance of getting a compensating adjustment in America, but we have not pleaded that.

GLEESON CJ: I would just like to understand the rubric, as it were, in terms of conventional grounds of challenge to discretionary decisions that you would put that one under. No practical possibility of compensatory adjustment because of inexcusable delay on the part of the Commissioner. Suppose those were the facts, is that failing to take into account a relevant consideration, or taking into account an irrelevant consideration?

MR DURACK: Well, your Honour, there might need to be more. It might need to be combined with, if there was an absence of tax avoidance purpose, if that were established, and if it were also established that the delays were all the Commissioner’s own fault, then those factors taken together, yes, your Honour, we would suggest, in that unique situation, would be factors which it would be mandatory for the Commissioner to at least take into account.

It might not necessarily mean that a decision which took them into account and still applied the division would be so unreasonable that it could be brought down on Wednesbury principles but, in our submission, if the circumstances were such that there was no tax avoidance purpose and if the Australian taxpayer’s subsidiary in America, if that were the position, had suffered because it could not get a compensating adjustment in America, then we would say that they were factors which, if the Commissioner did not have regard to them, he would be failing to do something he should have done.

HAYNE J: Now, that is an argument that appears to invoke notions of fairness, is that right?

MR DURACK: Yes, it does, your Honour.

HAYNE J: Why is that not wholly dealt with by 136AF? Why is fairness engaged at the level of AD(1)(d) rather than dealt with wholly in AF?

MR DURACK: Well, your Honour, the difficulty with AF is that it operates only after an amount has been brought to tax under Division 13 and the only way that you could employ the discretion under AF in order to cure this situation would be first to apply Division 13 to impute interest to the Australian company and then, under section 136AF, to take it away again. We would suggest, your Honours, that that would be a clumsy way to go about doing something which the legislation, in our submission, implies can be done when considering the exercise of the discretion in the first place. That is why we say that notions of fairness and reasonableness might come into the exercise of the discretion because, otherwise, you would have a two stage process which brought you back to the same result.

HAYNE J: But on your construction, fairness and reasonableness used to be considered at the stage of AD(1)(d) and then further considered, is it?

MR DURACK: No, your Honour.

HAYNE J: At AF?

MR DURACK: No, your Honour, in a situation like that, if it were thought that the application of the division to impute interest to the Australian company would be likely to lead subsequently to a separate exercise in which it was taken out again by making a determination under section 136AF, then we would just say that that would be a consideration which would leave the Commissioner not to make a determination in the first place, or ought to. It would be different if the compensating adjustment affected another taxpayer. Then it may well be appropriate to leave Division 13 applying to the Australian lender and giving a compensating adjustment to some other taxpayer, perhaps in the same group. But where the only party to whom the compensating adjustment could be made, or in relation to whom it could be made, would be the taxpayer involved in the first place, then, in our submission, the whole exercise, or all those considerations, would be bound up in the paragraph (d), discretionary exercise.

GUMMOW J: Just looking at 136AF for a minute, the text of it, what is the significance looking at 136AF(1)(a)(i):

if, in the opinion of the Commissioner:

(i) there has been included, or would but for this subsection be included . . .

determine that that amount or that part of that amount, as the case may be, should not have been included or shall not be included –

and then, what is the significance of subsection (4) particularly the phrase “at any time”?

In other words, could not the taxpayer at this moment be making the request as a pre-emptive strike, if you like, under 136AF?

MR DURACK: It is certainly the case, your Honours, that if this litigation goes against the appellants, then they would be making that application. Those applications have been drafted, but - - -

GUMMOW J: You tell us too much, Mr Durack.

HAYNE J: We will put No 1 in the title of the case.

MR DURACK: But, your Honour, the fact that the application of Division 13 by the making of a determination to apply it in circumstances which, in effect, ignored the likelihood, if that were the case, that a compensating adjustment would not need to be made, having regard to the circumstances under this subsection, that might be another reason why the Commissioner erred in making the determination.

KIRBY J: I understand that.

HAYNE J: The bottom line of this branch of the argument, Mr Durack, is this. Why in construing what you say are the criteria to be engaged in 136AD(1)(d) should we include in those criteria matters explicitly dealt with elsewhere in the Act in AF?

MR DURACK: Your Honour, I do not put that part of the submission very strongly which is why I was not even going to take your Honours to that part of the explanatory memorandum.

HAYNE J: That then brings us back to this. As your argument has developed thus far I understand it to be this, 136AD(1) requires a decision by the Commissioner, see paragraph (d). That decision is not arbitrary but is to be made having regard to the subject matter, scope and purposes of the applicable provisions. So far so good?

MR DURACK: Yes, your Honour.

HAYNE J: The debate we are presently having is what are the criteria that are to be engaged other than or more than revenue effect for the revenues of the Commonwealth?

MR DURACK: I would put them like this, your Honour. Whether there was disadvantage to the Australian revenue, whether at least in certain circumstances there was a purpose of causing that disadvantage, whether as a consequence of the putting of that purpose into effect the Australian revenue failed to receive or failed to be able to tax profits which it might be expected to have been derived and then coming a very poor last, if I may say so, considerations of fairness and reasonableness of the kind that we have just been talking about.

So that, your Honours, if the existence of section 136AF is a complete answer to the introduction into the discretionary exercise of elements of fairness and reasonableness then, in our submission, that is not an answer to the inclusion of the other three factors that I mentioned.

HAYNE J: Then, as thus articulated, the key element seemed to be no purpose, no effect, of tax avoidance, is that right?

MR DURACK: I would rather put it, no effective disadvantage to the Australian revenue, yes.

HAYNE J: And those are matters wholly within your camp’s knowledge. It is for you, is it not, to make your case under Part IVC that there is such a case? At some point we have got to come back to this. It is a Part IVC case where you are looking for particulars of what the Commissioner did.

MR DURACK: Yes, your Honour, but, if I may say so, if in answer to the request for particulars the Commissioner said, “We took into account that there was no tax avoidance purpose and we took into account that because of the strained circumstances of the overseas companies there was no lack of profits which might otherwise have been expected to have been received by the Australian company, but we still thought we should make a determination”, then we would know where we stood and there might very well then be no error of law involved in the making of the determination and we might be left to argue entirely the case on the basis of effectively subparagraph (c).

The only thing that we might be left with then is that, granted that the Commissioner concedes those matters, the decision was so unreasonable that no reasonable commissioner could have made it. But if the Commissioner says, “On the contrary, when making the determination the absence of tax avoidance purpose was not taken into account and the absence of disadvantage to the Australian revenue was not taken into account”, then of course we would go off and seek to prove that those matters existed and should have been taken into account. With respect, your Honour, it is not as simple as saying that you can prove those matters.

HAYNE J: No, it is not as simple as saying you can prove this, it is as simple as identifying that Part IVC requires you to prove that the assessment is excessive.

MR DURACK: Yes, your Honour.

HAYNE J: That is the start point. It is your case.

MR DURACK: But your Honour, where the assessment depends on the exercise of a discretion, and I am repeating myself, if we prove the discretion was vitiated then we prove the assessment excessive without more. Your Honours, I see the time, but I would like very briefly to take your Honours to the facts of the other transaction. If your Honours could go to the appeal book at page 65, your Honours will see at paragraph 8(c) that there is a summary of what was called the CHIL transaction, which is the transaction which gave rise to these assessments. Part of these facts, your Honours, are recorded in these decisions below, but not all of them. It involved the sale by the appellant, W.R. Carpenter Holdings, WRCH, to the overseas company, CHIL, of two subsidiaries. We can call those the island companies because one subsidiary was in Papua New Guinea and one in Fiji:

for a purchase price of approximately A$129,000,000, of which approximately A$79,000,000 was to be paid to the vendor WRCH at the end of 15 years, without interest. At the time of the transaction –

according to this pleading, the island companies –

had a market value of approximately $60,000,000. The transaction was undertaken to raise A$50,000,000 by WRCH for use by the Griffin Group.

If your Honours could then go to page 78. There is a slight degree of repetition here, but your Honours will see in paragraph 53 that the group needed to raise 50 million. The 50 million was raised under what is called a financing transaction. It took the form of the sale of the shares in the island companies:

and a borrowing by CHIL from Westpac with Westpac being secured, inter alia, by the grant of a put option by –

the appellant over the shares in the island companies. Then there is a reference to Griffin Holdings and WRCH, the appellant, being subject to what are called “the Restrictive WRCH Covenants”. Those would have been breached had the shares in the island companies been sold:

at a figure substantially less than the net tangible assets of those companies as reflected in their accounts at 30 June 1985.

Then in the next paragraph your Honours will see that in 1985 it is said:

the market value of the shares in WRCSP and WRCPNG was approximatelyA$60,000,000. However, the net tangible assets of WRCSP and WRCPNG, as disclosed in their accounts . . . was approximately A$142,000,000 –

The 129 million is derived from that 142 million, after some adjustments.

If your Honours would then go to page 117, your Honours will see another schedule similar in kind to the one that accompanied the other statement of facts, issues and contentions setting out the consolidated results of the purchaser company, CHIL, for the periods during which the respondent imputed interest. Your Honours will see there in the left-hand column the profits after tax made by CHIL, the overseas company, and its subsidiaries – so their consolidated results per their audited accounts. In the right-hand column your Honours will see the interest imputed by the respondent back to the Australian company.

Your Honours will see that during the period – it is complicated by the fact that one column is in US dollars and the other is in Australian dollars – the overseas company, according to its accounts, made 37 million. The Commissioner is looking to treat interest of 167 million as having been paid to the Australian company. If I could also point out to your Honours, the last figure in 1995 was a profit of 25 million, but the 15-year term of the loan was brought to an end then. In the last two lines on the page your Honours will see that:

But for extraordinary item representing a US$25,599,000 “gain” on the early repayment of the amount due to –

the Australian company, the result in that year would have been a loss.

Your Honours, this was a situation then when, on the appellants’ case as pleaded, the Australian company sold an asset as part of a financing transaction designed to raise 50 million. The sale of the island companies raised 50 million, which the purchaser had borrowed from Westpac. The statement of facts, issues and contentions does not make clear what the 50 million was required for, but it does make clear that the group had borrowings of about 140 million at the time.

Then at the time the island company shares were worth no more than about 60 million. They had to be sold at the book value of 129 because of the borrowing covenants that are referred to. They were sold at that figure, 50 million down, and 79 million at the end of 15 years without interest, economically worth, according to the pleadings, about $10 million. So that 50 million down and the balance in 15 years without interest, the balance of 79 million, was worth in discounted cash flow terms about 60 million, which was the value of the companies at the time.

So that the effect of the Commissioner’s assessment is to deem 167 million in interest to have been paid to the Australian company, whereas if the transaction had been undertaken by independent parties the profits which might have been expected to accrue, would have been, in our submission, no greater - or on the pleadings - no greater than those which in fact accrued, and the Australian revenue would not have suffered and might even have benefited.

So that is, on our submission, another example of the kind of situation in which, if the conditions in paragraph (a), (b) and (c) are satisfied in those circumstances, then the Commissioner would have been bound to have regard to the fact that had the transaction been entered into by arm’s length parties then the Australian revenue was unlikely to have received any more than what it in fact got.

Your Honours, before I was diverted to looking at the facts of the cases themselves, I was taking your Honours through the explanatory memorandum to the Bill introducing Division 13. I wonder if I could finish that process, so that if I could take your Honours back to tab 2 of the extrinsic materials. I think I was just about to take your Honours to page 64.

KIRBY J: This is all on the basis that your contention is that not that the Commissioner is obliged to take into account the revenue loss or profit shifting, because it is generally fair and reasonable only, but because that is the very purpose of the legislation as revealed in your contention by looking at the section in its context, looking at what the Minister said in introducing it and looking at what the explanatory memorandum reveals.

MR DURACK: Yes, your Honour.

KIRBY J: If they are the purpose, then the donee of the statutory power is obliged to exercise the statutory power in order to fulfil that purpose and to the extent that the Commissioner does not do so or will not reveal that he does or does not do so, then he is leaving it in doubt as to whether he has exercised his statutory power for the purpose for which Parliament has given it to him.

MR DURACK: Yes, your Honour. I am continuing with that process by taking your Honours to this page 64, under the heading “Section 136AC: International agreements”, on the middle of that page, second sentence in that paragraph.

For the Division to apply, there will need to be an international element, that is, a situation where, broadly, transfer pricing arrangements result in a shifting overseas of profits that would otherwise have been taxable in Australia.

Implicit again is the idea of what would otherwise have been expected. When the explanatory memorandum says that “For the Division to apply, there will need to be” that element, that is, arrangements which “result in a shifting overseas of profits that would otherwise have been taxable in Australia”, that is not in the legislation. So it must be comprehended by the discretion, unless my learned friend is correct in saying that it is all in paragraphs (a), (b) and (c).

Now, your Honours, on page 65, your Honours will see in the third paragraph on that page, last sentence, that “none of the sub-sections”, that is subsections (1), (2) and (3) “will have application unless specified pre-conditions are satisfied”. The first paragraph deals with the condition in paragraph (a), the second with the condition in paragraph (b). On page 66, about the middle of the page there is the reference to the third condition in paragraph (c). In the next paragraph:

A fourth condition in each case (paragraph (d)) is that the Commissioner determine that the provisions should apply. Application is not mandatory and the intent of the condition is to enable the Commissioner to have regard to whether the use of non-arm’s length prices has resulted in a shifting of taxable income from Australia.

It does not say that application is not mandatory and the intent of the condition is to have regard to whether the use of non-arm’s length prices has meant that taxable income is less than it would have been had the arm’s length prices been employed, which is the effect of my learned friend’s submissions. Then in the last paragraph on the page, the first sentence, your Honours will see that:

Where these conditions of sub-section 136AD(1) are satisfied and the Commissioner determines that the sub-section is to apply –

and the result follows.

KIRBY J: Just clarify for me, is it your understanding that the Commissioner accepts that the exercise of the power is not mandatory?

MR DURACK: Yes, that is my understanding, your Honour. Indeed, in my learned friend’s submissions he quotes that part of the explanatory memorandum in aid of his submission.

KIRBY J: So he accepts that he has a power which he can use or, in accordance with the purposes of the statute, not use?

MR DURACK: Yes, your Honour.

KIRBY J: He just will not reveal whether he paid attention to that discretion?

MR DURACK: That is the position, your Honour. Your Honours, I see the time.

GLEESON CJ: Yes, how long do you expect to require to complete your argument?

MR DURACK: Half an hour, your Honour.

GLEESON CJ: How long will you need, Mr Robertson?

MR ROBERTSON: I would think, your Honours, between an hour and a quarter and an hour and a half.

GLEESON CJ: We will adjourn now and will resume at 2.00 pm.

AT 12.45 PM LUNCHEON ADJOURNMENT

UPON RESUMING AT 2.03 PM:

GLEESON CJ: Yes, Mr Durack.

MR DURACK: Yes, your Honours, I promised during the luncheon adjournment to copy section 70-20 of the 1997 Act and I provide duly hole-punched copies of that section for inclusion at tab 10 of the extrinsic authorities to the extent that they represent extrinsic - - -

GLEESON CJ: Yes, thank you.

MR DURACK: Your Honour Justice Kirby was asking about developments in the law in relation to the provision of reasons since your Honour’s judgment in Osmond v Public Service Board. There is an interesting discussion, your Honours, in the most recent edition of Aronson Dyer and Groves, Judicial Review of Administrative Action, Lawbook Company, 2004 at page 554, and I will say no more than that the editors refer to your Honour’s judgment and to its subsequent reversal in this Court and say that much of the dicta in Osmond, meaning the High Court decision, looks dated in the face of developments in other jurisdictions, and there mentions - - -

KIRBY J: I have been waiting here these past 12 years for a case to come up and challenge it, but it never it came.

MR DURACK: I am not sure that this is the one, your Honour.

KIRBY J: No, no, this is not the case.

MR DURACK: Apropos of that, at page 559 the editors say:

Although Osmond has attracted much comment and criticism, it has survived for longer than many might have expected. One possible reason is that legislative reforms made subsequent to Osmond have increased the number of rights to reasons.

Section 13 of the Administrative Decisions (Judicial Review) Act would be one of those.

These changes have clearly lessened the possibility that a suitable vehicle to reconsider Osmond may arise.

KIRBY J: Well, in fairness to the view taken by the High Court in that case, that was one of the points that Chief Justice Gibbs made, that the matter was appropriate for legislative rather than common law reform.

MR DURACK: Your Honours, in this Court’s decision in Bailey your Honour the Chief Justice was good enough to indicate that some justification for reasons in tax matters might have been provided and there the Court has, of course, referred to the fact that the onus was on the taxpayer as a matter which increased the importance to a taxpayer of receiving reasons.

That might be why this kind of tax matter is not an appropriate vehicle for review of that law anyway, quite apart from the fact that, in our submission, the last two authorities that I will mention to your Honours, Giris and Brian Hatch, would seem to have settled the position, or at least in the appellants’ submissions, assuming of course that your Honour Justice Hayne’s concerns are answered and that the particulars would go to an issue which is relevant in the proceedings.

Your Honours, I was just finishing dealing with the extrinsic materials and we were dealing with the explanatory memorandum at tab 2 of the extrinsic materials. I was just about to take your Honours to page 79 of the explanatory memorandum and I ask your Honours to go to the first paragraph on the top of the page. I refer to it only because the section refers to an expanded amending power which is conferred on the Commissioner when applying this division, and the second sentence in the paragraph is to the effect that:

The sub-section also contains a corresponding power of amendment where a matching provision of a double taxation agreement is applied instead of Division 13.

The use of the expression “matching provision” is an indication of the interdependence of the two sets of legislation. Your Honours, if you would be good enough then to go to the second reading speech on the introduction of the bill which introduced Division 13 which is at tab 3 of the extrinsic materials. If your Honours would be good enough then to go to the last full paragraph in the first column of the second reading speech of the then Treasurer, Mr Howard, your Honours will see that these are the “companion amendments” to Part IVA:

thus completing a package of general measures that are designed to render ineffectual arrangements that have the purpose or effect of avoiding Australian tax.

So the purpose would seem to be a matter that the Treasurer understood was relevant. I ask your Honours to read the last sentence of that paragraph and then the next paragraph. Your Honours will see that the next paragraph and at the top of the second column on that page refers to the need:

to repose broad powers of judgment in the Commissioner of Taxation. His exercise of these will, of course, be subject to review and appeal in the normal way.

Then in the next paragraph there is a reference to “The shifting of profits to minimise or eliminate a taxation liability” it not being a new problem. If your Honours could then go to about the middle of the next paragraph, the middle of that column:

Since I announced the Government’s intention to revise section 136 to deal more effectively with international profit shifting arrangements, the Senate Standing Committee on National Resources, in its report on the development of the bauxite, alumina and aluminium industries, has also commented upon the operation of the existing section –

I should say, your Honours, that there is nothing in that report that assists in the understanding of this division. Then in the next paragraph your Honours will see again that:

Although complementary to Part IVA, the proposed measures are not limited in scope to arrangements that have a dominant tax avoidance purpose.

As your Honours know, one of the appellants’ contentions is that it is implicit that there be at least some avoidance purpose or effect, although they would not go so far as to say that it would be a mandatory consideration to take into account in all circumstances.

KIRBY J: Can I ask a question which also came up in the Futuris litigation. What would you say in answer to those who might think, well, why is he standing here before us, raising this ancillary matter to a judicial review proceeding? Why does he not just go to the AAT and get it over with? If you read the transcript in the Futuris you will see that sort of theme came up. Now, it may not be a legal proposition, but it is a sort of a practical proposition.

MR DURACK: Well, there are two answers to it, your Honour. The first is that the Administrative Appeals Tribunal is not a judicial body and the fact that there may nor may not be a review available in that forum is no answer to the appellants’ argument about the effect of an incontestable tax. If that is the only place you can get review, and Justice Gummow clearly contemplated it in your Honour’s decision in Jackson’s Case, that it was essential that review be able to undertaken of the exercise of a discretion of this kind in the courts.

So that is an in principle answer. The second answer, your Honour, is that it is not clear on my learned friend’s submissions whether review of this kind would be available in the Tribunal because your Honours will recall that the part of section 177 that deals with the due making of an assessment applies in proceedings whether on appeal or on reference to the Administrative Appeals Tribunal. If a determination of this kind is conclusive for all purposes, then there must be a real question whether the Administrative Appeals Tribunal would even have the opportunity or would even be permitted to re-exercise the discretion, as it were.

There is a section, as your Honours will know, in the Administrative Appeals Tribunal Act, section 43, that puts the Tribunal in the same position as the Commissioner was in when ruling on the objection to the assessment, but it is not plain that if the making of the determination is rendered conclusive by section 177 that section 43 would operate to allow the Tribunal to make a different determination. So that if in the Tribunal a taxpayer were unable to show that all three conditions in (a), (b) and (c) were satisfied, then the appellants in this case would certainly like to argue, because they do have matters in the Tribunal – indeed, there are another 42 matters involving these and some other transactions that are in Tribunal proceedings – the appellants would like to argue that point in those proceedings but it will not be clear to them whether they can until after this Court has given its decision in this case.

KIRBY J: I remember from my Court of Appeal days that where you had matters come up from the Industrial Commission, and there was an opportunity of internal appeal, we would invariably refuse to deal with the judicial review matters and send the parties away on the footing that sometimes problems go away from courts and they are not troubled by them. Is that an appropriate matter to have in mind in this case, or not?

MR DURACK: We would not have thought so, your Honour. The possibility that the problem might go away somehow is no more than a possibility. It will not go away in the two matters that are on appeal to this Court. In those matters, the appellant taxpayers have sought to utilise the procedure under the Taxation Administration Act which involves an appeal to a court.

GUMMOW J: So-called appeal.

MR DURACK: I am sorry, your Honour, the so-called appeal to a court.

HAYNE J: Is either of section 175 or 177 engaged in any relevant way on your submission in the Part IVC proceedings pending in the Federal Court?

MR DURACK: Yes, your Honour.

HAYNE J: How, in particular, is section 175 engaged in respect of a determination by the Commission under (1)(d), which you say was made, or may have been made, not taking account of relevant matters and confining attention to relevant matters? How is 175 engaged in that regard?

MR DURACK: Your Honour, when I answered your Honour’s first question affirmatively, it was in terms of, is section 177 engaged? Your Honour did not qualify it by reference to the determination. Section 177 is of course engaged in the Part IVC proceedings, in the sense that in those proceedings it makes the validity of the assessment beyond question. Whether it makes the correctness of the determination conclusive is an issue that we say should be answered in the negative. I think that it is possible that the determination could be regarded as valid in the same way that section 177 makes the assessment valid without necessarily being correct. So that an assessment can be valid but not correct.

One view of the operation of section 177 in relation to the determination is that the determination is valid but not correct. Our preferred submission is that section 177 simply is not engaged in relation to the determination so that, if your Honours were considering this in terms of the jurisdictional error, which was in question in the Futuris appeal, then questions of jurisdictional error would be dealt with in relation to considering the determination in the Part IVC proceedings, whereas the validity of the assessment itself would remain incontestable. I think that is the best I can do by way of an answer to your Honour’s question.

If your Honours would be good enough to go back to the second reading speech, we were looking at the second column. If your Honours could read the last full paragraph in the second column – I am sorry, I think I just asked your Honours to do that, my apologies. If your Honours go over to the next page, the last sentence in the first partial paragraph in the first column, your Honours will see that it is said that provisions operate:

Where the Commissioner of Taxation determines that the new provisions should apply –

and then if your Honours could go to the last full paragraph in the first column, where there is a reference to the statutory penalty to be imposed. Your Honours will see that it is there said that an important feature of the new provisions is the imposition of a statutory penalty, and then in the second sentence:

Without that, taxpayers who engage in profit shifting to reduce their Australian tax liabilities would have the odds to nothing when they engaged in such arrangements.

Now that, in our submission, is another indication that the legislature contemplated that there would be some element of intention or purpose because otherwise a provision which sought to prevent people from doing something deliberately would not affect them. I am not sure that I have put that very clearly, your Honours, but I think your Honours get the general drift. If the legislation is, in effect, finding it necessary to include a deterrent from people doing something to reduce their Australian tax liabilities, then it must assume that generally, and it may not be the dominant reason for what they do, the dominant purpose of what they do, but that people will have some purpose, whereas of course, it is the contention of the appellants in these appeals that there was no purpose whatever of tax avoidance.

GLEESON CJ: Does your argument, in effect, import into paragraph (d) all the old and endless disputes about what constitutes tax avoidance? One of the reasons for Part IVA is that the very meaning of that expression “tax avoidance” is so unclear.

MR DURACK: Well, your Honour, Part IVA of course is concerned with establishing what happens when there is a dominant purpose of tax avoidance. It is clear that Division 13 is not intended to require a dominant purpose of tax avoidance, so when your Honour the Chief Justice speaks of all the old law about tax avoidance, it certainly does not import all the old law about the dominant purpose of tax avoidance. But if it is beyond argument that something was done with no purpose of tax avoidance, and one would have thought that that was a relatively simple thing to establish if it was true, then in our submission, that would be in most instances, a matter which the Commissioner would be bound to take into account.

I should say, in concluding this examination of the extrinsic materials, that in the appellants’ submission, in a case where a discretion is conferred in apparently unlimited terms or at least in terms which are not expressed in the legislation, then the role of extrinsic materials such as those to which I took your Honours is particularly important in identifying the legislative purpose. In our submissions those materials show that the exercise of the discretion involved in the making of the determination was indeed intended to confer wide powers on the respondent Commissioner and to do so to allow the exercise of the discretion in a way which would promote the purpose or object underlying the legislation which is identified in the passages to which I have taken your Honours.

Your Honours, in the course of the hearing in the Futuris matter, your Honours – apart of course from your Honour Justice Kiefel and the Chief Justice – were taken in some detail to the decisions in Bloemen and Richard Walter and more briefly to SGLB and Plaintiff S157, as well as to those authorities like Hoffman, dealing with tentative assessments. I do not seek to traverse any of that ground again. I would seek only, and relatively briefly, to take your Honours to the decisions of this Court in Giris v Federal Commissioner of Taxation [1969] HCA 5; (1969) 119 CLR 365.

Your Honours, the legislation which was there in question is set out in the first page of the Chief Justice’s judgment at page 369. The legislation in question was section 99A of the 1936 Act and it provided for a special rate of tax to be payable by trusts where there was no beneficiary presently entitled to trust income and it was generally a penal rate – that is, a rate greater than the rate that would otherwise apply. Section 99A, which is set out about two-thirds of the way down page 369, starts by saying:

This section does not apply in relation to a trust estate in relation to any year of income if the trust resulted from –

certain things, and then in subsection (2):

This section does not apply . . . if the Commissioner is of the opinion that it would be unreasonable that this section should apply –

Then in subsection (3) there is set out a number of matters to which the Commissioner should have regard in forming that opinion, and then in subparagraph (c), near the bottom of the page, it is said:

the Commissioner shall have regard to such other matters, if any, as he thinks fit.

The attack which was launched on the legislation in Giris’ Case was based on the discretion – because of the Commissioner’s ability to have regard to such matters as he thought fit being so wide as to be one that could not be contested and also could not be delegated to an administrative officer.

Your Honours, at page 371 – I appreciate that many of your Honours are very familiar with this case so I will ask your Honours to read, if I may, having regard to the time – if your Honours would read from about the middle of page 371 what his Honour the Chief Justice had to say about the type of the discretion that was there to be exercised, a “discretion in the nature of a dispensing power” and also to what his Honour the Chief Justice said about it placing “the Commissioner under any duty to decide pro or con as to the reasonableness”. His Honour the Chief Justice thought it did. Justice Kitto thought it did not.

Then if your Honours could go over to the next page. I am sorry, but I have to ask your Honours to read fairly briefly most of what is on that page.

KIRBY J: We do not have to read it whilst we sit here, do we, pleasurable though it always is?

MR DURACK: No, you do not, your Honours, and perhaps I could just direct your Honours to particular bits. About the middle of the page the Chief Justice called it “a legislative discretion”. Towards the bottom of the page, about eight lines from the bottom, it:

gives to the Commissioner a wide charter which it might have been thought he was ill-equipped to exercise.

Then at the bottom of the page it is said:

Its repose in the Commissioner means that the citizen cannot know when disposing of his affairs what the impact upon him or them the law –

might be –

and unless the Commissioner is required to disclose the factual basis of his opinion as to unreasonableness, the taxpayer will not know after he is assessed upon what factual basis he was required to pay the tax imposed.

Then I ask your Honours to read the second paragraph on page 373. Then there is a discussion of the attack that was launched on the sections as to their not amounting:

to a law with respect to taxation –

as to their creating an unchallengeable tax. On that subject at page 374, about five lines down - - -

KIRBY J: Can I just ask you, you do not contest that you know the case that is put against you on paragraphs (a), (b) and (c), it is the particulars in relation to (d) that you lack, you say?

MR DURACK: Yes, your Honour. More particularly, to adopt the analysis that was adopted by your Honour Justice Gummow in Jackson’s Case, the matters in paragraphs (a), (b) and (c) are matters of objective fact which the taxpayer can either – if he can disprove them that is entirely up to him. The matters in paragraph (d) are matters which he will not necessarily know about and they are the matters, because they go to the exercise of a discretion by an administrative officer, that we say the taxpayer is entitled to have the reasons for.

Your Honours, the Chief Justice went on to say how those reasons would then be dealt with by a court that was looking at an assessment based on section 99A. I should say, your Honours, that later in a decision of this Court in Duggan v The Commissioner, Justice Stephen sitting as a single judge of this Court found that if the Commissioner based his opinion on facts which were erroneous then the opinion was vitiated just as much as if he had had regard to an irrelevant - - -

GUMMOW J: What is the citation of Duggan?

MR DURACK: I am sorry, your Honour, it is [1972] HCA 66; (1972) 129 CLR 365.

GUMMOW J: Thank you.

MR DURACK: There was another case involving 99A, Perron’s Case and there are also a series of cases based on the discretion involved in the carry forward loss provisions. Some of those cases are mentioned in our written submissions. They include the Brian Hatch Case. Avon Downs was the first of them in which the familiar expression of error of law was formulated by Justice Dixon. In Avon Downs no reasons were given. Then in all the other cases, including Perron in relation to 99A, politics in relation to the carry forward loss provisions and – I am sorry, I have forgotten another one – but in Brian Hatch no reasons were given nor were they applied for by the taxpayer.

Now, your Honours, I perhaps should just say that as far as the rest of Giris’ Case is concerned, in our written submissions we give reference to those judgments of the members of this Court who agreed with the Chief Justice in saying that reasons should be provided. There is at least one judgment where it is apparent that that – and perhaps I should mention it – it was Justice Kitto, it appears from his judgment at page 379, that he might not have ordered that reasons be given, although it is not absolutely plain. It is clear from the judgment of Justice Windeyer, which commences at page 382, that a taxpayer could ask the Commissioner to state the grounds and that if asked he should do so.

Perhaps if your Honours would be good enough to go to page 384 in the judgment of Justice Windeyer, about halfway down the page your Honours will see that Justice Windeyer commented that the fact that the Commissioner:

has formulated certain considerations by which he is guided, and made them publicly known, may be important as showing that in the exercise of his statutory discretion he acts honestly, consistently, and, as he thinks, in accordance with the legislative purpose.

Of course, as your Honours now know, the Commissioner has done the same thing in relation to Division 13, but it is now maintained that the courts cannot inquire into whether the Commissioner’s rulings are followed in relation to the exercise of this discretion. Then in the last paragraph on page 384 Justice Windeyer comments that he has:

come to agree with the Chief Justice in thinking that the Commissioner’s decision is not removed entirely from examination by the Court, because I think that he could be asked by a taxpayer to state the grounds of his opinion; and if asked, that he should do so.

His Honour put his finding that if asked he should do so as being the reason why the Commissioner’s decision is not removed entirely from examination by the Court. In other words, what his Honour was saying was that if the Commissioner was not obliged to state his reasons then what he did could be removed entirely from the examination of the Court. That would be so whether a discretion is wide or narrow.

KIRBY J: Justice Windeyer seems to be getting close to a constitutional point at the very end of that paragraph.

MR DURACK: He does, your Honour.

KIRBY J: Is this how you bring in the Constitution, to reinforce an interpretation of the statute that you urge, or is it brought in in a true attempt to have something declared invalid?

MR DURACK: The former, your Honour, definitely the former.

KIRBY J: That is how I assumed you were putting the constitutional point, but it has taken a long time to get to the Constitution. It is always such a pleasure to discover it hidden there, waiting in reserve.

MR DURACK: Your Honours, we have in our written submissions gone into some detail about the constitutional questions which would arise if these determinations could not be reviewed in the way we say they should be reviewed. Of course, that begs the question whether it is possible, as we said earlier, for the Commissioner to go wrong in making these determinations. If it is not possible for him to go wrong in any way, then there may be a question whether those submissions are apposite, although, your Honours, even if the Commissioner’s discretion was as narrow as my learned friend, as we understand it, puts it, there would still be the potential for it to be exercised in a discriminatory way. As we said in our written submissions, it might not be exercised in relation to a competitor, or it might not be exercised in 99.9 per cent of circumstances identical to those of the taxpayer, but exercised in his case.

If I could take your Honours now to the decision in The Commissioner of Taxation v Brian Hatch Timber [1972] HCA 73; (1971-1972) 128 CLR 28, this was one of those loss carry forward cases where the Commissioner was required to be satisfied that at all times during the year of income there had been a continuity of ownership of shares. It is significant to the question whether the reasons for the exercise of a discretion should be supplied.

Your Honours, I mentioned earlier that in Duggan, Perron and Kolotex, reasons had been supplied, reasons were available. The only loss carry forward case in which reasons had not been supplied was Avon Downs, and there the taxpayer attempted unsuccessfully, as it turned out, to show that even without knowing how the Commissioner had arrived at his state of dissatisfaction, he must have made an error of law, and in that he was unsuccessful.

If your Honours could go to page 42, your Honours will see that at about point 8 on the page, that Justice Walsh said that:

The respondent called no evidence. That was within his rights. But it cannot prevent the Court from examining his decision and it leaves the –

appellant, the respondent of course was the taxpayer - - -

HAYNE J: Justice Walsh was set aside on appeal? Is that right? See page 62.

KIRBY J: The headnote says “Decision of Walsh J reversed”.

MR DURACK: Yes, of course. Sorry, your Honour. It was. I merely drew attention to this passage to show how it was that the question arose and how it came about that there were no reasons before the court.

If your Honours could then go to page 45 in the reasons for decision of Chief Justice Barwick, not surprisingly in the first full paragraph commencing on that page his Honour referred to the decision in Avon Downs. If your Honours could read about six lines down and then if your Honours could go to about point 7 on the page where his Honour, the Chief Justice, referred to it being somewhat:

unsatisfactory that the Commissioner did not call any evidence of any matter which he had before him at the time he disallowed the claim.

Then if your Honours could go to page 52, you will see at the top of the page that Justice Menzies also regarded:

it as unfortunate that the basis for the Commissioner’s not being satisfied . . . was not revealed. It seems to me that a taxpayer, in the position of the appellant, might properly have inquired from the Commissioner why he was not so satisfied. Such an inquiry would no doubt have been answered . . . This is the central problem which his Honour –

Justice Walsh had faced. If your Honours could then go to page 56 where Justice Windeyer’s reasons for decision appear and then to page 58, or perhaps the bottom of page - - -

HAYNE J: His Honour, Justice Windeyer, at 56 identifies the question in that case as whether a fact existed, not an exercise of discretion. Is there a distinction to be drawn between provisions of a kind such as here in issue, where the determination is that a particular provision should apply, a provision of the Act, and other provisions of the Act, which speak of the Commissioner being satisfied about a state of facts, or affairs? Are the two different, relevantly?

MR DURACK: Justice Windeyer said in the second last – well, it is a question actually – the second-last question in the paragraph. The question was: was the Commissioner duly satisfied in fact? Applied to these appeals, the question is: was the determination duly made, that is, with reference to relevant factors and so on. I should say, your Honour, that these comments, those made by Justice Windeyer, were relied on by Justice Gibb in the Kolotex Case – I am sorry, that would be a digression, which I do not think we have time for.

If your Honours would then be good enough to go to page 58, at the top of the page your Honours will see that Justice Windeyer commented that it is not easy to see how – I am sorry, I should have taken your Honours to the bottom of page 57 first, the last three lines:

it is the material that was before the Commissioner that this Court has to consider, to see whether it can be said that in failing to be satisfied by that material he must have been moved by some misconception of it or by some extraneous consideration. It is not easy to see how that could be established without evidence from the Commissioner himself of what material was before him or perhaps from some one of his officers who had advised him in the particular matter.

If your Honours would then go to page 60 in the reasons for decision of Justice Owen where Justice Owen said that – again, perhaps I should go to the bottom of page 59:

The taxpayer, however, did not take that course nor does it appear to have taken any steps to ascertain what material was before the Commissioner in making his assessment or to inquire from him what matters he had considered . . . Had this been done I have no reason to think that the Commissioner would not have paid due regard to –

what Chief Justice Barwick had said in Giris about entitlement to those reasons. His Honour thought that, although that was said in relation to section 99A, it is equally applicable here and, of course, Justice Windeyer had said that he agreed with these reasons for decision at page 56.

Now, it is the appellants’ submission, therefore, that your Honours should reverse the decision of the Full Federal Court and make the orders for particulars which are sought in each appeal. Your Honours will have observed that I have not gone back over the arguments advanced in the appellants’ written submissions. In light of the way the respondent now puts his case that would not seem to be necessary.

The way the respondent now puts his case faces us with this very narrow issue of whether there can ever be any mandatory matters which the Commissioner is required to take into account in exercising a discretion. As we understand the respondent’s position there are none, apart perhaps from those in conditions (a), (b) and (c). We have sought to show why an interpretation of the legislation that would lead to that result would give paragraph (d) no work to do and would be inconsistent with the extrinsic materials to which I have taken your Honours. So it would not seem to be necessary to track back over the way the Full Court arrived at its decision. That does not seem to be being defended, at least on the basis put forward in the reasons for decision of the Full Court. So that unless there is any other aspect of these submissions on which I could further assist the Court, those are our submissions.

GLEESON CJ: Thank you, Mr Durack.

MR ROBERTSON: Thank you, your Honours. The starting point factually, despite the references to the much more discursive basis on which the appellants put their case in the statement of facts and contentions and other such material, in my submission, is paragraph 11 of the appellants’ written submissions, that is to say, that the Commissioner’s determinations, according to the appellants, under paragraph (d) – and I am reading from the last four lines of paragraph 11 of those submissions:

the Commissioner’s determinations under para (d) were flawed by the failure to take into account the absence of “profit shifting” as a consequence of the transactions and the absence of any purpose of profit shifting or tax avoidance on the part of the appellants.

KIRBY J: That was expanded somewhat. That remained the anchor for the submission, but in oral submissions that was expanded into a slightly wider class of matters which were relevant to the exercise of paragraph (d) which were not taken into account. Do you accept that statement made at the end of Mr Durack’s submission that your contention was that there was nothing, save perhaps consideration of paragraphs (a), (b) and (c), that was obligatory to be taken into account by the Commissioner in discharging the discretion provided for in the section?

MR ROBERTSON: Yes, I do. To go back a step, your Honour, the way, as I understood it in answer to a question of your Honour Justice Hayne, there was said to be the revenue effect, which is part of those lines I read out from paragraph 11, and then there was said to be a purpose of causing a disadvantage to the revenue, which again is in paragraph 11, as I would see it. Then there was a point about whether the Australian revenue failed to be able to tax profits it might be expected to have derived. I would see also that as part of paragraph 11. Then there was a self-confessed faint submission about fairness and reasonableness. So I did not understand my learned friend to travel far, if at all, from those propositions in paragraph 11.

KIRBY J: But if he is right, his essential complaint is that he just does not know. I know he has to postulate what he says are the reasons for granting the discretion and what you could properly and could not properly take into account, but if you decline to answer the particulars, resting, as you do, on your interpretation of the statute, then he just does not know.

MR ROBERTSON: Your Honour, I would put it slightly differently, with respect. What my learned friend is putting in paragraph 11 there is how he construes the statute and, obviously, that is the fundamental point between us. When I say “how he construes the statute”, in my respectful submission, that includes 136AD and Part IVC and sections 175 and 177 and a section that I do not think your Honours have been taken to which 136AA which gives additional content to one of the integers in 136AD(1) which is paragraph (c).

It is a question of statutory construction. I should also mention in passing, unless your Honours might be puzzled as to really why, as we would see it, the taxpayer is here, and that is section 170 which is the time limits provision which has some peculiar provisions in relation to 136AD. I am told your Honours have a 2008 volume 3. I will not spend much time on this but if your Honours would be kind enough to turn to page 607 of that volume, one can see that a real issue of statutory construction would arise without needing to go to the answer but if your Honours look at 170(9B):

Subject to subsection (9C), nothing in this section prevents the amendment, at any time, of an assessment for the purpose of giving effect to a prescribed provision –

That is defined, that is, “prescribed provision” is defined on page 615. That is in section 170(14), “prescribed provision” means section 136AD” amongst other things. Then 170(9C), going back to page 607, and this is where the issue would arise:

Subsection (9B) does not authorize the Commissioner, for the purpose of giving effect to a prescribed provision or a relevant provision, to amend an assessment made in relation to a taxpayer in relation to year of income where . . .

the prescribed provision has been previously applied.

So there is a question there as to whether, contrary to my learned friend, Mr Durack’s submission, the effect of setting aside an exercise under 136AD could be one that could be remitted to the Commissioner to do again. I do not tarry on what the answer might be, but your Honours can see there is a significant question which might be usefully explained why the taxpayer is agitating these issues at this time. So it is common ground, as I would understand it, that the exercise is one of statutory construction.

I said I would take your Honours to a section that I do not think your Honours have been referred to which is 136AD read with AA. If your Honours have tab 7 of the appellants’ folder of statutory and extrinsic materials, your Honours will see, and I will not read it out again, 136AD(1)(c). When you read subsection (c), that is where:

consideration was received or receivable by the taxpayer in respect of the supply but the amount of that consideration was less than –

if one pauses there, the words “arm’s length consideration in respect of the supply” are dealt with in AA(3)(c). So that one reads that to mean the consideration that might reasonably be expected to have been received or receivable as consideration in respect of the supply if the property had been supplied under an agreement to independent parties dealing at arm’s length with each other in relation to the supply. The point of making that submission is to put that (b) and (c), more particularly (c), of 136AD(1) has a very substantial and wide-ranging content in terms of what matters may be taken into account by the fact finder. The fact finder obviously for that purpose being the primary decision-maker, the Commissioner or the Tribunal on an appeal to the Tribunal or the court on an appeal to the court.

On that point, if I can take your Honours to what the Full Court said about these matters – and I should interpolate to say for our part we do not see any difference between the submissions we now put and the submissions we put to the Full Court and, indeed, we do not see any difference between our submissions and the approach that the Full Court took, or the reasons of the Full Court. So it is not a case where we accept what my learned friend put that there is any difference between now and then.

KIRBY J: What is the Commissioner’s understanding of the obligation to provide particulars? What is the source of it? It is a common law principle.

MR ROBERTSON: No, no, your Honour. The source here was that identified by Justice Lindgren in the appeal book at page 275, paragraph 36 – I do not recall if the Full Court said anything about this but perhaps assumed it was so – where his Honour Justice Lindgren having looked in paragraph 35, a particular Federal Court rule, then went on to say:

In my view, however, the Court has implied power to order particulars (cf the reference to “inherent” power –

I assume his Honour is making that point of distinction because the Federal Court is a statutory court. Then his Honour refers to the judgment of this Court that your Honour the Chief Justice referred to. So that is the power that, as we would see it, the Court was being asked to exercise.

So just to complete that point, there was a tendency, as we would understand it, in the appellants’ submissions to treat a power to order particulars as though it was the same perhaps as a freestanding power to order a statement of reasons, but it is not a freestanding power or a common law power.

KIRBY J: But if it is neither of those but is implied in the Federal Court’s own governing statute, then by inference it is implied for the purpose of allowing the Federal Court and the parties who come to the Federal Court to be assured that the Federal Court is discharging its functions correctly and lawfully, including the functions of the kind provided in the Constitution, section 75(v) and section 39B of the Judiciary Act. That presumably is what it is incidental to.

MR ROBERTSON: Applied, if I could put it this way, your Honour, distributively. Obviously there is no 39B jurisdiction invoked in this case. It is the Federal Court dealing with a tax appeal under Part IVC of the Administration Act but in a different case what your Honour says, with respect, must be correct and, indeed, I think your Honour Justice Gummow this morning referred to Justice Gyles’ decision in Syngenta [2005] FCA 1646; 61 ATR 186, and that was exactly how his Honour approached the question under this very section, which is to say it had large elements of practice and procedure about it, how best the case could go forward and I will not take your Honours now to that case. It is discussed both in Justice Lindgren’s judgment and in the Full Court judgment, but that is certainly an aspect, as Justice Lindgren says, of the implied jurisdiction of the Court.

HAYNE J: That is further explicated in paragraph 40 of his Honour’s reasons.

MR ROBERTSON: Four zero, your Honour?

HAYNE J: Four zero, paragraph 40.

MR ROBERTSON: Yes, I had not been going to take your Honours to paragraph 40 because that is about the discarded subsection (4), but the same source of power or principle would apply. I am sorry, I was looking at the Full Court rather than Justice Lindgren. Yes, quite so, your Honours, on page 276. My learned friend, Mr Durack, referred I think this morning to the result of Justice Lindgren’s approach as extending to discovery on his Honour’s construction of the provisions and that is in paragraph 145 on page 304 of the appeal book where his Honour says:

not only should the Commissioner not be ordered to provide particulars relating to judicial review grounds, but also he should not be required to give discovery - - -

KIRBY J: What is that paragraph?

MR ROBERTSON: Sorry, your Honour. Paragraph 145 of Justice Lindgren on page 304 of the appeal book. I was about to take your Honours to page 339 of the appeal book where at paragraphs 27 and 28 the Full Court dealt with the question of how does Division 13 work and underlying much of what the appellants submitted was a view borne of the extrinsic materials that sought to, as we understood it, qualify the bare words of the statute. What their Honours there say is, there are:

a number of objectively ascertainable criteria, the satisfaction of which will create liability. Relevantly for present purposes, those are-

and their Honours really go through some of those matters in 136AD, that is:

•	an international agreement

•	between parties not dealing with each other at arm’s length

•	under which property

•	is supplied

•	for less than the arm’s length consideration in respect of the supply or for no consideration.

I have taken your Honours to AA(3)(c). In the tax appeal the Commissioner accepts that if it were shown – and I am now adding to what might happen in a tax appeal – if the taxpayer were able to show that there was no determination under paragraph (d), then the section or the division would not apply. That is what we are endeavouring to convey in paragraph 23 of the respondent’s submissions which my learned friend read out to your Honours this morning, that is, where we submitted that there were three conditions, which, if satisfied, empower the Commissioner to make a determination and the making of a determination under (d) is a necessary precondition to the operation of Division 13. Then there is the issue between the parties as to whether the statute contemplates judicial review of the making of the determination.

GUMMOW J: I am still not clear what the Commissioner says about this. Is paragraph (d) more than facultative? If it is more than facultative, what are the matters which have to be taken into account? What are the matters which must not be taken into account? What are the relevant considerations, what are the irrelevant considerations?

MR ROBERTSON: My submission, your Honour, is that is facultative, that is, that where (a) and (b) and (c) are satisfied, then the Commissioner has a power, which I accept involves a state of mind, a power necessarily involves a state of mind, but - - -

GUMMOW J: Sir Garfield Barwick says in one of the cases he has to write it down.

MR ROBERTSON: Maybe he does not have to write it down in this case. I do not think a determination - - -

GUMMOW J: He had to take a note of it somewhere.

MR ROBERTSON: Do it, do it. It would certainly be safer to write it down. There are some provisions, I am not sure in this division, which says a determination must be in writing, but whether it has to be or not - - -

KIRBY J: But is it a problem for you, the use of the verb “should apply”?

GUMMOW J: If I may say, you have not finished answering me yet, so what does he then do? What is this determination, this faculty of determination?

MR ROBERTSON: He says “I determine that the subsection should apply in relation to the taxpayer in relation to the supply” and then balance of 136AD operates.

GUMMOW J: How does that then fit in with the explanatory memorandum on page 65 which Mr Durack made something of before lunch, you will remember, which seemed to say something different?

MR ROBERTSON: The explanatory memorandum?

GUMMOW J: Page 66, I am sorry. It is tab 2. The fourth condition.

MR ROBERTSON: Yes, I see that, your Honour. In my submission, what that amounts to is in substance no more than to see whether (a), (b) and (c) are made out because if (a), (b) and (c) are made out, then, in most cases, anyway, there will be a result there described, that is, a shifting of taxable income. So to put it more broadly - - -

GUMMOW J: What, do you say the second sentence of that paragraph there, “Application is not mandatory”, et cetera, is designed to encapsulate what would be the practical effect of satisfaction as to (a), (b) and (c)?

MR ROBERTSON: Yes, and to put it more broadly, perhaps, or more colloquially, as the second reading speech which my learned friend took your Honours to makes clear at the next tab, I think tab 3, where – if I may be permitted to say this before going to that page – the appellants’ case is really to load up 136AD with purpose, for example, the subject of extensive explicit provisions in Part IVA, your Honours will recall. There is, I think, eight factors which have to be taken into account in order to determine purpose and whether it is subjective or objective. But, leaving that aside, if one goes to the first page right-hand column – and I do not think my learned friend took your Honours to this – of 24 March 1982 Hansard, there is the last full paragraph on the right-hand side, “Although complementary to Part IVA” it begins and then the then Treasurer says:

However, as I mentioned in my earlier statement to the House on this matter, the fact that tax saving is not a key purpose of a particular arrangement or transaction is no reason why we, as a nation, should not be in a position to counteract any loss to the Australian revenue inherent in it.

That is what, in my submission, it is directed to. That is the purpose. It says, of course, that it is not mandatory and from the contrast with the previous provision, that is, the old 136, was that that section when it is - - -

GUMMOW J: Tab 7, is it not?

MR ROBERTSON: I think the old 136 is tab 6 of this folder, but my memory was, your Honours, that – and I will see if I can find it – that did state - - -

GUMMOW J: Page 772?

MR ROBERTSON: I will have that checked, but the point I was going to make, your Honours, was that one of the predecessors of Division 13 made it clear that when it applied it overrode the other provisions of the Act. One of the functions here of course of paragraph (d) is to, in my submission, allow for the non-applicability of Division 13 where, in a sense, there is no revenue result from its application.

HAYNE J: Is that on this asserted construction of (d)?

MR ROBERTSON: I am sorry, your Honour?

HAYNE J: On this asserted construction of (d), would that be the only purpose of (d), or would (d) then be operating also as an additional reflex of AF in this sense, that the power to make a determination under AD(1)(d) would enable the Commissioner to short circuit the combined operation of AD and AF, or is that reading too much into it?

MR ROBERTSON: In my submission, your Honour, it would be reading too much into it and that AF is there as a separate and, as it says, provision for compensating adjustments where a particular event had taken place, that is, that Division 13 applied.

GLEESON CJ: Why is (d) there at all? Why is (d) needed? Why does it not just jump from (c) to the words “then, for all purposes”?

MR ROBERTSON: It is there, in my submission, for the possible case – perhaps an uncommon case – where, if (a), (b) and (c) exist, or are made out, nevertheless there is no tax consequence or revenue consequence. We have given some examples of how that might come about in the written submissions – I will not read them to your Honours – at paragraph 24 in particular, that is, whether or not every change to the consideration would give rise to a change in taxable income and a change in taxable income is, in my submission, closely related to the revenue collection purpose.

GLEESON CJ: Does this mean that the ordinary purpose for making a determination under paragraph (d) is to collect more revenue?

MR ROBERTSON: Yes, and if there is no resulting revenue in an unusual case, perhaps, then the Commissioner can take the position that there is no advantage to the revenue in Division 13 applying.

GLEESON CJ: Does that mean that AF is the safety net that deals with considerations of the kind referred to in the second reading speech?

MR ROBERTSON: That is part of it, but some of the other considerations would be bound up in AD(1)(c).

GLEESON CJ: Yes, and AA. But the question of what would be an arm’s length price between independent parties is usually what generates most of the argument in these cases. The question of what kinds of hypotheses you make for the purpose of determining that can be a very large question.

MR ROBERTSON: Indeed, and I am not suggesting by taking your Honours to AA(3)(c) that it admits of an easy or mechanical answer. My purpose in taking your Honours to it was to show the breadth of it, and the amount of content in a sense, in terms of what sort of evidence could be adduced, what sort of submissions could be advanced as to what the consideration that might reasonably expected between arm’s lengths parties would be.

GUMMOW J: But suppose the taxpayer wants to challenge this view of the Commissioner, if it has been formed, that there were revenue consequences. Why is that to be foreclosed?

MR ROBERTSON: Well, he would do that, in my respectful submission, by proving, as I think Justice Gyles had in mind in Sygenta or disproving (a) and (b) and (c). You would get to that result. There was no effect as we submitted in paragraph 24 on - no effect on the taxable income as we submitted in our paragraph 24.

KIRBY J: But is that not what the taxpayer sought to do in this case, at least by the - - -

MR ROBERTSON: Not yet. One of the submissions I will make is that the structure of the legislation and the provisions that I have mentioned are designed to keep tax disputes to the merits. In a sense, what the taxpayer seeks to do here, by as it were, investing (d) with, we would submit an impermissibly large content and then saying that the power had miscarried is to be able to say “I don’t have to go near the merits”.

KIRBY J: I understand that submission, but on the other hand, irksome though it may be, we do in this country have judicial review. We have the constitutional writs and the principle trickles down to the Federal Court and taxpayers have rights and they can bring judicial review proceedings and seek remedies in that alternative course.

MR ROBERTSON: Yes, I fully accept that, your Honour. As I said, that is not this case, but - - -

KIRBY J: The problem I have with your construction is that if you actually look at the section 136AD, the structure of it appears to be to be expressing four conditions; the way it is laid out, the way it is expressed, and it is expressed in terms of “should” apply. It just seems to me the type of submission you are advancing would be more easily acceptable if it said the Commissioner determines that the subsection applies, whereas then it would simply be a procedural decision. But once you insert the value judgments, which you yourself accept by your submissions come in with the “should”, then it is hard to see why the Commissioner can be required to give particulars under (a), (b) and (c) but not under (d).

MR ROBERTSON: Well, the question of particulars under (a), (b) and (c) is quite different, your Honour, because - - -

KIRBY J: In a sense it is different and Mr Durack accepts that. It is different because they are objective facts and therefore particulars are not so important, but particulars may be important under (d) because it imports by the word “should” value judgments, assessments, weighing the issues, reaching the conclusion, and if you look at the explanatory memorandum and the second reading speech, including the second second reading speech you drew our attention to, it does seem to import reference to the profit shifting purpose of the legislation, which is what Mr Durack has been laying emphasis on. He wants to have you spell it out.

MR ROBERTSON: We would submit, not the profit shifting purpose. As I have submitted earlier, “purpose” is not a word that one can see, certainly explicitly anywhere in 136AD, certainly the revenue effect - - -

GLEESON CJ: “Blatant” is not a word you can see in Part IVA either.

MR ROBERTSON: “Blatant”, your Honour? No, that is perhaps an apropos epithet, I think they call it. But the submission is that one does not look only at the form of the language that is used, and 136AD(4) was an example where one can see in the form of it that you have such amount as the Commissioner determines and if one looks at Avon Downs and the other cases, one can see references to where the Commissioner is satisfied of a particular fact.

Although it is not in contention, even paragraph (b) of 136AD has an element of the Commissioner having regard to one thing and another. He is satisfied - - -

KIRBY J: I just have a bit of a difficulty with this like motive that is woven through the case, that if the Commissioner says, “Well, I think it should apply because it will increase the revenue of the Commonwealth”. If, for example, the Treasurer said, “Well, we’ve got all of these new and good ideas and we’ve got to raise more revenue”, I think it will be quite a wrong use of the power of the Commissioner to determine that the subsection should apply simply to raise more revenue. I do not think that is what it is there for. It is much more focused on these particular cases. Once you allow that, then the spelling out of the reasons, or the particulars of the considerations the Commissioner has taken into account, seems as inescapable in (d) as it is in (a), (b) and (c), but more important.

MR ROBERTSON: Certainly, there is no element of discretion on any view, in my respectful submission, in (a) and (c). I may have been ambiguous in what I put, your Honour. I do not certainly say that under 136AD or under Division 13, generally, the Commissioner in any sort of freestanding or independent way – this is not a part of my case although perhaps it would be permissible to do so – say , “Well, I have to administer the Act and the result of administering the Act is to get revenue”.

What I was putting was that (a), (b) and (c) have to be satisfied, and I think this is common ground, before one gets to (d) and what I was submitting, your Honour, is that once one had looked at and reached a conclusion about (a), (b) and (c), then the Commissioner would be in a position to be able to say whether or not it was worthwhile, from a revenue perspective, in Division 13 applying.

HAYNE J: Can I take up what you have said in that regard, in particular by reference to paragraph 24 of your submissions. You have told us that there may be a rare case in which (d) could be applied, though (a), (b) and (c) are satisfied, is that right?

MR ROBERTSON: Yes, if there was a change to the consideration received or receivable and the case we are trying to deal with in 24 was that not every such change would change the taxable income.

HAYNE J: I understand, as Justice Gaudron used to remind counsel in your position, it is no part of your brief to give away the powers of the Commissioner. I understand that, but in what circumstance could (a), (b) and (c) be satisfied and there be no diminution of revenue when what appears under (d) is a deeming for all purposes of the application of the Act in relation to the taxpayer? By that I mean this; you give as an example the capital gain and you say some capital gains are not taxable. Be it so, you can deem as much as you like but if the capital gain is not taxable, the deeming gets you nowhere.

The point I think you have to grapple with is this, Mr Robertson, if (a), (b) and (c) do not have – the proposition is that there can be no case in which (a), (b) and (c) are engaged where, for all purposes of the application of the Act, the requisite deeming would not have a particular revenue effect to the detriment of the revenue.

MR ROBERTSON: Even if that be so - - -

GUMMOW J: Is it? Do not be too canny, Mr Robertson.

MR ROBERTSON: When your Honour says the words underneath (d), that is:

for all purposes of the application of this Act in relation to the taxpayer, consideration equal to the arm’s length consideration in respect of the supply shall be deemed to be the consideration received or receivable - - -

HAYNE J: And the non-taxable capital gain, because that kind of capital gain was not, at one point, caught by the Act. You apply the Act, you deem as much as you like, all to no effect because the Act is not engaged. Now, you may say there is the occasional de minimus case, be it so. Leave aside de minimus, can there be any case in which (a), (b) and (c) is engaged, and there not be a net effect on the revenue, to the detriment of the revenue?

MR ROBERTSON: In my submission, there could be.

HAYNE J: The moment you acknowledge that, that is giving content to (d), that is requiring content to (d) which tips you over into Avon Downs. Non constat that the particulars now sought need to be given, altogether different field of discourse resolved as I plaintively remind you by reference to Part IVC, but what is the content you are giving to (d)?

MR ROBERTSON: The submission is, your Honour, that that provision is there to allow for those cases where there is no impact on the revenue.

HAYNE J: That is circular. Give me a case where there is such an absence of impact, where for all purposes of applying the Act to the taxpayer, et cetera.

MR ROBERTSON: The example we give in 24 is capital gains. There may be a case of perhaps, tax exempt organisations such as charities, but in my submission, your Honour, what followed, what your Honour put to me as following from that supposition, that is, if there is a case, it would not follow in my submission that Avon Downs judicial review would apply in a Part IVC tax appeal because if it is a facultative power, which leads as, in our respectful submission, the Full Court found only to a number which number would be dealt with in a Part IVC appeal by reference to whether or not that number was excessive, then that is a case where the determination under (d) would be part of the process as the Full Court found, rather than having any content as a criterion of liability. So that, in my submission, not every power leads to Avon Downs judicial review in a Part IVC proceeding.

As we would submit, that is the basis upon which the Full Court and Justice Lindgren arrived at the conclusion they did by reference to considering the authorities that they did. What I put in my submission is entirely consistent with what we have repeated or set out in paragraph 25 of those submissions, that is, that the intent of the condition, indeed, is to enable the Commissioner to have regard to whether the use of non-arm’s length prices has resulted in a shifting of taxable income from Australia. In a sense that is not a power that, as we would put it, is an issue between the taxpayer and the Commissioner. Indeed, we put that it is analogous to the power to make determinations under 177F, and also we put in paragraph 31 that it is analogous to the general power to administer the Act, and indeed to make assessments.

GLEESON CJ: What is the timeframe within which the Tax Commissioner considers whether has been a shifting of revenue from Australia or a loss of revenue to Australia? Is it year by year or can or must the Commissioner take a longer term view of this? Suppose you had a situation in which a foreign corporation set up an Australian subsidiary that was selling goods, the foreign corporation was supplying the goods to its Australian subsidiary and the Australian revenue authorities said, “Well, there’s transfer pricing going on here; you’re charging more than an arm’s length price to the Australian subsidiary and the Australian subsidiary is making less profits”. And suppose the foreign corporation says, “Well, that’s too bad because if you exercise your power to tax us under Division 13, we’re just going to close down our Australian subsidiary and take our business elsewhere”. Is that a matter that the Commissioner either can or should take into account?

MR ROBERTSON: No. To answer the first part of your Honour’s question, although the assessment obviously is year by year, the wider timeframe would come into at least AA(3)(c), that is, to the question of the consideration that might reasonably be expected, et cetera, so that one could see what the commercial reasons were for the price being as it was at a particular time. As to the second part of your Honour’s question, my submission would be that that would not be a matter under 136AD(1)(d). In other words, it is looking at the administration of the Tax Act, not at other broad - - -

GLEESON CJ: But year by year?

MR ROBERTSON: Year by year in the result, but not limited to a 12 month period when looking at how the consideration might be measured in context - - -

GLEESON CJ: So what I might call the longer term commercial considerations would be caught up under (c).

MR ROBERTSON: Yes, in (c), including with the definition of (c) in 136AA, in my submission.

KIRBY J: You say that, say, the closing down of a very large motor plant because of the levying of this form of taxation would not be a matter that the Commissioner could take into account?

MR ROBERTSON: No. If one posed this question in a Peko Wallsend sense, what is the subject matter, scope and purpose of the Act, and looked at the terms of Division 13 and, indeed, looked at the legitimate extrinsic material, one would not find any suggestion that that was so and my answer would be that if that was the result of the administration of the Act, then it would be a matter for Parliament or the Executive Government to deal with as they tend to deal with such matters of manufacturing plants.

GLEESON CJ: What do you say about Mr Durack’s example of a case where, because of delay on the part of the revenue authorities in Australia in, for example, conducting an audit, it was too late to make a compensating adjustment in some other country?

MR ROBERTSON: I assumed he was not putting that as a fact in this case because - - -

GLEESON CJ: I think he was tempted to, but he was putting it as a hypothetical example to test the construction of the Act.

MR ROBERTSON: Yes, certainly as to the former of the disputation on that score. The proposition, as I understood it, your Honour, was that AF was unavailable but on a factual level because there is nothing in AF that limits it to any particular point of time.

GLEESON CJ: It says at any time.

MR ROBERTSON: Yes.

GLEESON CJ: You say AF would cover a case like that?

MR ROBERTSON: As I would understand it, yes, because AF, as I think was put to my learned friend in argument, that in relation to any taxpayer:

(a) if, in the opinion of the Commissioner:

(i) there has been included, or would but for this subsection be included . . .

(ii) it is fair and reasonable that that amount or a part of that amount should not be included –

and then there is a power to make a determination. But it is not a matter, in my submission, that is dealt with in paragraph (d). Mr de Wijn tells me that in terms of time limits – I will not take your Honours to it – but under section 170(10) item 24 it says that amendments for 136AF purposes may be made at any time.

GUMMOW J: What was that paragraph again?

MR ROBERTSON: It was 170(10) item 24 and it is on page 609 of that CCH volume.

GUMMOW J: Thank you.

MR ROBERTSON: So coming back then to the propositions that were put, I have made submissions that the purpose as contended for by the appellants are not part of the statutory purposes in terms of 136AD and insofar as profit shifting is referred to in the extrinsic materials as relevant, in my submission, that comes back to what I put before about the revenue consequences of (a), (b) and (c) being satisfied.

I have taken your Honours to the matters that the Full Court – and I have added one or two propositions to that – what the Full Court said in paragraph 27 about how Division 13 works in a Part IVC context. The legislative scheme, as I earlier put, that is, the division and 175 and 177 and Part IVC together, seek to channel, which is I think Justice Brennan’s words from Richard Walter, into Part IVC proceedings disputes about the excessiveness of the figure, there to be dealt with on the merits and, of course, leaving aside, as not arising in this case, whatever might be the content of the scope of attack under 75(v) or 39B, the scope of which I understand your Honours will be dealing with in the Futuris case that has been mentioned.

So here, in my submission, there is no indication either in the language of 136AD or in the content or the substance of that provision that the Commissioner’s state of mind is to be attacked as itself a criterion of liability rather than the excessiveness, if any, of the consequence, that is, the taxable income consequence or the assessment consequence, building on the arm’s length factors in (a), (b) and (c). So the effect is that the figure flows from (a), (b) and (c), and that figure is attacked on its merits under the Part IVC proceedings whether in the Administrative Appeals Tribunal, subject to the supervision of the Chapter III court by virtue of the application or appeal “under section 44” or directly in the court.

GLEESON CJ: In relation to paragraph (d), what sort of things could you argue about before the Administrative Appeals Tribunal in relation to paragraph (d) that you could not argue about before a court?

MR ROBERTSON: If the Full Court, as we submit it is, is right in relation to the nature of (d), and that is that it is part of the process or the due making, then the answer would be you would not argue about anything under (d) in the Tribunal nor in the court. You would argue about whether or not, as I earlier put, you would argue whether there was a supply of property under an international agreement, whether the parties were dealing at arm’s length, the arm’s length consideration, and each of those matters would be dealt with on the merits in the subject of no doubt of evidence saying the arm’s length consideration, as defined, is not the figure.

GLEESON CJ: But in relation to (d), you do not get a wider scope of review in the Tribunal. The Tribunal does it for itself, but if your construction of the legislation is right, then that just means the Tribunal asks itself whether the taxable income would be greater if they did it.

MR ROBERTSON: Well, yes, and both the court and the Tribunal – perhaps the court more than the Tribunal – would ask whether there was a paragraph (d) determination, because if there was not, certainly in the court, then the consequences of 136AD would not follow. But it does follow, in my respectful submission, from the structure of the legislation, including 177(1), that although the court – the Full Court in this matter – was directing its attention to the matter before it, which was the nature of the power and the consequences for the Part IVC proceedings in the court, which is where they were, the consequence would be the same, in my submission, for the Administrative Appeals Tribunal in that respect.

GLEESON CJ: I have in mind that part of the explanatory memorandum that said this is not mandatory. If all the Commissioner is doing under paragraph (d) is looking to see whether the Australian revenue will benefit in the form of a greater amount of taxable income by the making of the determination, what is the discretion? What is the area of discretion?

MR ROBERTSON: That is what it is, no more.

GLEESON CJ: You have got to be able to count.

MR ROBERTSON: Yes. Perhaps the word “discretion” is a distraction. What is the area of the power?

GLEESON CJ: The Treasurer said to Parliament this is not mandatory. It is to enable the Commissioner to do something.

MR ROBERTSON: Yes. What I have been endeavouring to put, your Honour, is that where the Commissioner looks at (a), (b) and (c) and does the arithmetic and arrives at a figure, then he does or does not make the determination.

GLEESON CJ: It is common ground, I take it, that there would be certain extraneous purposes that would vitiate the determination, is it, such as doing it for a punitive purpose, doing it maliciously?

MR ROBERTSON: Certainly in what were described in Futuris as 39B proceedings there is a difficult question about the extent to which, if at all – and I think the Court has been taken last month to the relevant passages – and it may be an open question, as to whether those sorts of matters that your Honour the Chief Justice put to me are relevant in Part IVC proceedings as going to excessiveness. Your Honours may recall that in Bloemen’s case, I think all the members of the Court agreed in the joint judgment of Justice Mason and Justice Wilson that inadmissible purposes were not relevant to Part IVC proceedings on the basis that their Honours were saying it is the number that you are aiming at to show that that is excessive. Certainly, Chief Justice Mason, as he was in Richard Walter, repeated that view.
I can give your Honours the page reference. I think the Court was taken to this in Futuris, but I will give your Honours the page references, if I may.
That is in Bloemen’s Case 147 CLR 361 at 378 point 5, which was in the joint judgment of Justice Mason and Justice Wilson. I am sorry, this is old ground for your Honours - - -

GLEESON CJ: Just the page references will do.

MR ROBERTSON: Yes. In Richard Walter, that view was repeated by Chief Justice Mason in [1995] HCA 23; 183 CLR 168 at page 187 point 8.

GLEESON CJ: All events, leaving aside issues like that, your argument is that paragraph (d) gives the Commissioner very little room to manoeuvre, and the only circumstance in which he might make a determination that the subsection should not apply, given (a), (b) and (c), is if there is no point in it.

MR ROBERTSON: It is futile, to put it compendiously.

KIRBY J: That does not seem to fit very comfortably. It may be that it is what it means, but with the statements in the explanatory memorandum in particular but also in the Minister’s second reading speech about the purpose of this particular tax, which is to focus on repairing a hole in the dyke, in a sense, before shifting revenue offshore.

MR ROBERTSON: Yes, I can see, with respect, why your Honour says that, but the focus that your Honour is being asked to have is, in a sense, all on paragraph (d), but, of course, what the Treasurer and what the explanatory memorandum were focusing on were the whole of the provisions. So what the Parliament was saying is that although there was an integer of the extrinsic material that focused on (d), but as to the rest of it, it was really saying, this is what this is for, this is what this is directed to.

KIRBY J: But exactly so. If this is what it is for, then the power is given to the Commissioner to achieve that objective and not to achieve other objectives and therefore, if you are looking at the repository of the power and the purpose for which the repository has the power, it is to further that objective and not other purposes.

MR ROBERTSON: Yes, well, that is what I am putting.

KIRBY J: I just do not see, and you may be able to help me, at the end of the day why it does not further good administration of your obligations under the Act to be forthright and say, well, we did this because we thought this was shifting revenue offshore, if that is what you thought. I do not see why that is not transparent administration of the Act for the purpose of the Act and if that is so, I think that is what you should have to do, and at least then everyone knows where the battle lines lie. Instead of that you say, no, this is our power, we will not tell you, you go away, you try and find out and you prove it. That does not seem to me to be good administration.

MR ROBERTSON: Your Honour, what we are concerned with is a court process where the court is asked, as a matter of implied jurisdiction and, as I have earlier put to your Honour in answer to an earlier question, as a matter of the running of the litigation, to put it in its broadest terms, is asked to make an order.

KIRBY J: Only because you refused to give the particulars.

MR ROBERTSON: No, and then the question became, do these matters that the taxpayers wish to agitate form part of the power that is given to the Commissioner? I have identified what matters the taxpayers were putting and the basis upon which Justice Lindgren and the Full Court said no, this is not a matter that is relevant to the advancement of this litigation is because this is the nature and content of the power and the effect of the statutory scheme is to deal with these matters on their merits, by which I mean the number, that is, the resultant figure, that is excessiveness question, that is the merits, and what (d) goes to, their Honours held, in my respectful submission correctly, is what one might describe as a collateral matter, that is, one which falls within 177(1), the due making of the assessment.

So, that was the reasoning. So to ask, with respect, your Honour, what would the position be as a matter of good administration, is not the correct question. If one wanted to go into the background of it all, my learned friends have referred to reported cases in the Administrative Appeals Tribunal, the judgment of Justice Giles which says that there are x-thousand pages and x-number of volumes of paper that have been produced per taxpayer and Justice Lindgren says that the taxpayers know, at least in the court, the case that the taxpayers have to meet. So, that is where the battle lines are drawn, your Honour, rather than a more general question such as your Honour put to me.

So, in essence, what the Full Court’s view was is expressed at paragraph 29 – and I will not read it, it would be repetitious – but at page 340 paragraph 29, what the making of the determination is and, put in slightly different terms – that is the beginning of paragraph 29 on page 340 and at the end of page 344:

But where Parliament has exhaustively set out the criteria for liability by reference to objective matters, but has made the application of those criteria dependant upon a step being taken by the Commissioner –

So that was the base on which their Honours held that step was procedural and therefore covered by the due making provision. Your Honours, as to the other matters, including the references to the cases, we rely on our written submissions. Those are the submissions for the respondent, if the Court pleases.

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

MR DURACK: Your Honours, the respondent’s argument, in our submission, makes paragraph (d) meaningless, unnecessary and otiose. The suggestion that it is there simply to allow the Commissioner not to make a determination in cases where the satisfaction of (a), (b) and (c) would not result in any taxable income is, with respect, a fanciful suggestion because, as your Honour Justice Hayne pointed out, if the application of the ordinary provisions after the substitution the deeming of the arm’s length amount is not going to increase the taxable income because it is an exempt capital gain and because my friend gave the example of an exempt institution, a charity, and at the special leave application the suggestion was there that it might be there to deal with private or domestic expenditure, that, with respect, is an entirely fanciful suggestion.

If my learned friend is right and we are not entitled to these particulars, it is because paragraph (d) adds nothing to paragraphs (a), (b) and (c), which the making of an assessment immediately following the satisfaction of (a), (b) and (c) would not provide for.

HAYNE J: Is it not the inevitable corollary of the proposition that you have just put that where (a), (b) and (c) are engaged, there will be a revenue effect to the detriment of the Australian revenue?

MR DURACK: Not necessarily, your Honour, unless you take the view - - -

HAYNE J: You described the examples given as fanciful and other rather large expressions. In what circumstance can (a), (b) and (c) be engaged without adverse revenue effect?

MR DURACK: The fact that (a), (b) and (c) are satisfied and that the application of the division would increase taxable income merely shows that the application of the division would increase taxable income. It does not show that there has been the kind of profit shifting at which the division was directed.

HAYNE J: That then comes to purpose of profit shifting, does it?

MR DURACK: It may do, your Honour, but your Honour made the suggestion that these matters can all be dealt with in, I think, treating paragraph (d) as an additional reflex of section 136AF. There is a matter which I should have mentioned in submissions in-chief but it is in reply, anyhow, in the event, and that is that section 136AF only comes into operation after there has been this inclusion in the taxpayer’s assessable income and the issue of an assessment with all of its commercial consequences which the application of Division 13 ultimately involves.

The other thing I should say, your Honours, is that when speaking of the example of the delay in the audit which has meant that a compensating adjustment is now out of time, as it were, I was not intending to refer to section 136AF but to the kind of adjustment that is contemplated under Article 8(2) of the United States Double Tax Agreement, that is to say, a compensating adjustment in – your Honours will find it at tab 8 of the extrinsic material. I remind your Honours that under - - -

GUMMOW J: Article 9(2).

MR DURACK: Under Article 9(2) provision is made in a case like this one for an adjustment to be made in the United States and the suggestion that was being made in submissions in-chief was that delays of the kind that have been involved in this audit might mean that an adjustment of that kind was impossible in the United States.

HAYNE J: And could not such an adjustment be reflected in a compensating adjustment under AF either before or after the engagement of AD?

MR DURACK: Yes, your Honour.

HAYNE J: Before or after?

MR DURACK: Only after.

HAYNE J: What operation do you give to the words in AF(1)(a)(i):

if, in the opinion of the Commissioner:

(i) there has been included, or would but for this subsection be included, in the assessable income - - -

KIRBY J: Are not the opening words, “Where, by reason of the application of section 136AD”?

MR DURACK: Yes, thank you, your Honour. I thought those words were there.

HAYNE J: What operation do you give to the expression:

if, in the opinion of the Commissioner:

(i) there has been included, or would but for this subsection be included - - -

MR DURACK: I am sorry, your Honour; I see the point your Honour is making. But that would only mean that it could be done at the same time. That would mean that you would have to have a two-step process involving the application of Division 13 and then the removal from it by the exercise of that discretion to make a determination of the amount that has been theoretically, if you like, brought in.

That, your Honours, would, with respect, involve – well, I think I am repeating myself – it would involve a very clumsy process if the same kind of discretion was not intended to enter into the exercise when the Commissioner was considering whether to make a determination under paragraph (d).

Your Honours, there is another point that I should make at an early stage of this reply and that is that there is a suggestion that the only reason that the issues before this Court are being ventilated is that the appellants wish somehow to take advantage of what may be the disabilities the commissioner has in issuing an amended assessment if it followed from these proceedings that the assessment which has been made is vitiated by an error of law in the making of the determination.

Now, your Honours, in the first place I would refer to section 170(7) which deals with amendment powers to give effect to a decision on an appeal but also, your Honours, I would refer to fact that, as the appeal book makes clear – if I could take your Honours, just for example to page 117 of the appeal book. Your Honours will see that in addition to the 1987 year, for example, involved in the assessment issued to W.R. Carpenter Holdings, interest has been imputed by the respondent to W.R. Carpenter Holdings in relation to the 1986 year and in relation to the years 1988 to 1995 and all of those other matters are in the Administrative Appeals Tribunal

The reason why only this matter is in the Federal Court is that it is not complicated by reference to other issues involved in the assessments, and the same can be said of the assessments to the other appellant where your Honours will see from page 165 that there are another five years involved in assessments, all of which are before the Administrative Appeals Tribunal and in each one of those the Administrative Appeals Tribunal has the power to make the decision, again subject to what my learned friend has said about its ability to remake the determination. So that I reject the suggestion that the reason why we are agitating these matters in this Court is that we are somehow seeking to take advantage of an opportunity to hamstring the Commissioner in relation to his power to make an amended assessment.

I am not sure that it matters but it is said that the submissions in the Full Court of the Federal Court were no different to those advanced in this Court. Well, in the Full Court of the Federal Court the argument was put differently. The choice involved in making a determination under paragraph (d) was said to be there to deal with de minimis situations and also to deal with situations where the Commissioner may, rather than have applied Division 13, decided to apply the provision of the double tax agreement but that involved a choice which was part of the choice involved in making a paragraph (b) determination.

Your Honours, as to the suggestion that there are large elements of practice and procedure involved in this appeal, and that his Honour Justice Lindgren dealt with the appellants’ arguments at page 274 of the appeal book, what Justice Lindgren said there and also at page 281 of the appeal book at about line 19 about the use of particulars and what was said in George, in effect, answered an argument which was never put by the appellants. The appellants never argued for the availability of particulars on what might be regarded as the conventional basis on which they are ordinarily sought, that is, in order to understand the case made by the other party. I should say, your Honours that it made no such case is reflected in the fact that there is no reference to that aspect of the trial judge’s decision in the Full Court of the Federal Court’s decision.

The case put by the appellants before the Full Court was that on the basis of the authorities mentioned by Justice Lindgren but distinguished by him as state of mind rather than Commissioner’s determination cases, the appellant was entitled to details of the matters taken into account in making the determinations, whether or not they were needed to understand the case which the Commissioner himself was going to make.

I took your Honours to Brian Hatch v Giris. Those cases show that, regardless of whether they are needed for a taxpayer to understand the case which the Commissioner is going to make at the hearing, a taxpayer is entitled to know what they are, amongst other things, because it will give the taxpayer the opportunity to know whether there is an error of law which can be complained of.

Your Honours, as to the question that your Honour the Chief Justice raised about timing, that is a significant matter because the application of Division 13 must necessarily be made on a year by year basis, whereas the question whether the Australian revenue is going to suffer or has suffered or has suffered any disadvantage may need to be considered on the basis of a broader timeframe, particularly in that market penetration type situation which I gave as an example to your Honours.

GLEESON CJ: Now, your opponents say that can all be picked up under paragraph (c).

MR DURACK: Yes, they do, your Honour, and I attempted in the course of submissions in chief to point out the difficulty of identifying an arm’s length consideration within the words of the definition in 136AA(3) which deals with a situation where an arm’s length party would never do what the taxpayer has done. Could I give the example, your Honours, of a situation where the Australian parent makes a loan to an overseas subsidiary which is in dire financial circumstances, does it to prop it up and perhaps in the hope that eventually loans will be repaid or something of that kind. The situation in which the overseas subsidiary might find itself, already borrowed to the hilt, mortgaged to the hilt, the parent still makes the loan, how do you apply the arm’s length consideration test in those circumstances and where does that leave a taxpayer who, if my learned friend is right, has to deal with what he calls the merits, the only merit, being what is the arm’s length price?

On the question of merits, your Honours, what could be more relevant to the merits than the absence of a tax avoidance purpose and the absence of loss to the revenue? Yet those are matters which, on my learned friend’s case, are matters which would never be able to be dealt with by a taxpayer in an attack on the exercise of a discretion under paragraph (d).

GLEESON CJ: How does Division 13 deal with the case, not of a loan, but of a subscription for equity in circumstances where no independent party would even contemplate subscribing for equity?

MR DURACK: I suppose that a subscription of equity would be treated as a supply. It could potentially be an international transaction of a kind to which subsections (1) or (2) could apply. I am sorry, your Honour, I think the answer is that I do not know.

GLEESON CJ: If section 136AD applied to that kind of situation, I am just wondering whether AA would provide any kind of alleviation of the problem. We have been talking in this case about loans, interest free loans, to an overseas subsidiary, but if it is within the division, and I have no idea whether it is or not, a more obvious and stark example would be a subscription for capital in an insolvent overseas subsidiary in circumstances where no independent party would do that.

MR DURACK: Yes, your Honour. I am sorry, when I say it would answer the description of a supplier under an international agreement the substitution by the operation of the operative provision of arm’s length consideration for that actually provided would be unlikely to have any tax consequences. It is in that sense that I am not sure that you could say that the division deals with the situation.

GLEESON CJ: Does the division require you in every case to assume that there is an independent party who would enter into a transaction of that nature?

MR DURACK: No, I do not think it does, your Honour, and that is precisely why subsection (4) is there, in order to allow the Commissioner to fix an amount of arm’s length consideration if it cannot otherwise be established or arrived at. Subsection (4) uses the expression, if it is not practical to determine - - -

GLEESON CJ: Yes, but you are content with the result you got in the Full Court on subsection (4).

MR DURACK: Well, we are, your Honour, except that it leaves any taxpayer whose transaction is an extraordinary one, that is, one of a kind which might not be entered into by an arm’s length party, in the difficult position, if my learned friend is right, of having to prove what the arm’s length consideration is when there might be no arm’s length consideration.

The Commissioner having made his determination, the taxpayer will be stuck with that unless he can prove what the right arm’s length consideration is and that is, as I sought to indicate in the course of submissions in-chief, that difficulty, that problem about arriving at the actual arm’s length consideration may well be another matter which, for example, if the Administrative Appeals Tribunal is allowed to reconsider the determination, it might be something that an administrative tribunal might take into account in deciding that a determination should not be made, notwithstanding that a taxpayer has not succeeded in showing what the actual arm’s length consideration might be.

So the answer to your Honour’s question is that I do not think that – there is I think a statement in one of the decisions below that the legislation proceeds on the basis that there is an arm’s length consideration, but I do not think that that is necessarily the case. I am not sure that was a very adequate answer, your Honour, but it was some answer.

GLEESON CJ: Thank you.

MR DURACK: Unless your Honours have any other questions, those are our submissions.

GLEESON CJ: Thank you, Mr Durack. We will reserve our decision in this matter and we will adjourn until 10.15 tomorrow.

AT 4.20 PM THE MATTER WAS ADJOURNED