Lawrence v Federal Commissioner of Taxation [2009] HCATrans 222 (4 September 2009)

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Lawrence v Federal Commissioner of Taxation [2009] HCATrans 222 (4 September 2009)

Last Updated: 8 September 2009

[2009] HCATrans 222

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Melbourne No M33 of 2009

B e t w e e n -

JOHN PETER LAWRENCE

Applicant

and

FEDERAL COMMISSIONER OF TAXATION

Respondent

Application for special leave to appeal

HAYNE J
HEYDON J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 4 SEPTEMBER 2009, AT 10.34 AM

Copyright in the High Court of Australia

MR N. OROW: If the Court pleases, I appear for the applicant in this matter. (instructed by Sharrock Pitman Legal)

MS A. RICHARDS, QC: If the Court pleases, I appear with my learned friend, MR A.T. BROADFOOT, for the respondent. (instructed by Australian Government Solicitor)

HAYNE J: Yes, Mr Orow.

MR OROW: Your Honours, this application in the main raises two issues. One concerns the proper construction of section 177E of the Income Tax Assessment Act 1936 and, more particularly, the phrase “having substantially the effect of a scheme by way of or in the nature of dividend stripping”. The second issue concerns the relationship between Part IVA and, also more particularly, section 177B and the other provisions of the Income Tax Assessment Act.

As your Honours would note, 177B is expressed in terms of two limbs. The first one applies to schemes by way of or in the nature of dividend stripping and the second applies to schemes having substantially that effect. Both of these limbs were the subject of very extensive and comprehensive examination and statements by this Court in Consolidated Press and the Full Court in that case.

HAYNE J: Well, is it a necessary premise of your argument that, indeed, those statements are, as you put it, comprehensive?

MR OROW: Yes, your Honour. The Full Federal Court in particular in that case conducted the most comprehensive examination of the notion of dividend stripping, perhaps ever carried out in common law countries. They looked at all academic writings, the EM and the context of the provision and came up with the conclusions that they did. The conclusion was that the first limb requires six elements which necessarily includes the disposal or allotment of shares so as to involve a third party known as the stripper. The Court made it very clear that the second limb falls within the first one except in one respect and that related to the manner in which the stripper proceeded to remove the profits from that particular entity, which could be done by, for example.....arm’s length loans to the stripper or to associated entities.

The Full Court said, in relation to the comments by the High Court in Consolidated Press and the Full Federal Court in that case – the Full Court in this case said that they were essentially obiter and by necessary implication did not consider them to be binding. In relation to what the Full Court said as to the meaning of the second limb, the court did not exactly say what effect is sufficient for the purposes of this limb. All the court said was that the arrangements were paradigm examples of schemes that came within the second limb and then approved statements made by the primary judge that the scheme involved the stripping of profits out of a target company and placing them in a capital form in a context which benefited the shareholders.

By inference from that reasoning, and certainly the result that was achieved, the Court took the view that in all instances where profits are removed from a company for the dominant purpose of tax avoidance the second limb applies. The Full Court did not say what the expression “tax avoidance” means, even though the High Court in Consolidated Press and the Full Federal Court in Consolidated Press said that the relevant tax avoidance purpose is the purpose of enabling the vendor shareholders to obtain a benefit in a tax effective way.

With respect, your Honours, the approach adopted by the Full Court leaves little or no scope for the first limb and, in effect, renders all that was said in Consolidated Press irrelevant insofar as future cases are concerned. We say that the decision of the Full Court is contrary to what was said in Consolidated Press, contrary to the context within which section 177E operates and, we say, the purpose for which it was enacted. In addition, obiter or not, the statements made by the High Court do, we say, represent the concluded view of the court insofar as those limbs are concerned.

In relation to the second issue, your Honour, there are very clear indications in the structure of section 177E, and comments in the explanatory memorandum that introduced it, that Part IVA was intended to operate as a measure of last resort. The expression “measure of last resort” is not the product of invention by the applicant, but it is rather an expression that has been used in the explanatory memorandum that introduced Part IVA. I will, if I may, take your Honours to it. We have included the EM as tab 6 in the book of authorities. I will take your Honours to page 9, the third and fourth paragraphs. The third one says:

Subsection (3) reflects –

Subsection (3) formed a part of the notion of tax benefit –

reflects the “last resort” character of Part IVA.

Then the EM deals with the operation of other more specific anti-avoidance provisions and says at the end:

The result is that the specific provision in question will have effect before Part IVA is applied.

In the example straight after, which is used by way of illustration, the EM deals with the operation of section 65, and towards the end the EM says:

The result would be that the application of subsection 65(1) would be considered before, and not after, the possible application of Part IVA is considered.

The last part of the EM that I will take your Honours to, if I may, is at page 10, the last paragraph reads as follows:

It follows that if there is a scheme designed so that an amount is not included in assessable income and another provision of the Principal Act operates to counter that scheme by requiring that it be so included, the amount cannot be a tax benefit obtained by the taxpayer concerned, and Part IVA will be inapplicable. In other words, Part IVA is a “last resort” measure.

Despite these comments and comments in the explanatory memorandum that introduce the value shifting rules, that the value shifting rules were to apply in preference, the Commissioner made submissions at the first instance that the value shifting rules apply. The examples in the EM make it very clear that the value shifting rules apply. Despite all of that, the Full Court proceeded to find that 177E applied in the circumstances. We say, your Honours, that that reasoning and that conclusion is, with respect, wrong and ought not be allowed to stand. These are our submissions, if the Court pleases.

HAYNE J: Yes, thank you, Mr Orow. We need not trouble you, Ms Richards.

An important premise for the arguments which the applicant would seek to advance in this Court is that what was said by the Court in Federal Commissioner of Taxation v Consolidated Press Holdings Limited [2001] HCA 32; (2001) 207 CLR 235 at 276 to 277, paragraphs 138 to 141 and in the explanatory memorandum to the Income Tax Laws Amendment Bill (No 2) 1981 (Cth) which introduced Part IVA into the Income Tax Assessment Act 1936 (Cth) should be read as exhaustive statements of the reach of the section 177E(1)(a) of the 1936 Act. That premise is false. Neither what is said in reasons for decision nor what is said in extrinsic material supplants what is provided by the relevant statutory provisions.

The applicant enjoys no sufficient prospect of disturbing the actual orders made at first instance or on appeal in the Federal Court of Australia. Having particular regard, however, to what we have said about the premise for the applicant’s argument, we are not to be taken as endorsing the reasoning in the courts below if that reasoning were to be understood as proceeding from a premise of the kind we have described.

Special leave to appeal is refused. It is refused with costs.

AT 10.42 AM THE MATTER WAS CONCLUDED