Ludekens & Anor v Commissioner of Taxation [2014] HCATrans 86 (11 April 2014)

Last Updated: 16 April 2014

[2014] HCATrans 086

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Melbourne No M129 of 2013

B e t w e e n -

ANDREW LUDEKENS

First Applicant

PETER VAN DE STEEG

Second Applicant

and

COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Respondent

Application for special leave to appeal

FRENCH CJ
BELL J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 11 APRIL 2014, AT 11.12 AM

Copyright in the High Court of Australia

MR A.J. DE WIJN: If the Court pleases, I appear for the applicants. (instructed by CIE Legal)

MR D.M.J. BENNETT, QC: If the Court pleases, I appear with my learned friends, MR P.G. SEST, SC and MR S.J.H. URE, for the respondent. (instructed by Australian Government Solicitor)

FRENCH CJ: Thank you. Yes, Mr de Wijn.

MR DE WIJN: Your Honours, in this case it is agreed that the applicant’s ultimate purpose was to make a profit and that getting the scheme benefits for others was a vital or integral step in achieving that ultimate purpose. The question is simply whether it is reasonable to conclude that what my learned friends called immediate purpose, that is, getting those scheme benefits, was the dominant purpose or whether, on the other hand, the dominant purpose was to make the profit.

FRENCH CJ: Why was this not just a case of characterisation? How does it raise a question of special leave?

MR DE WIJN: It raises a question of special leave, your Honour, because the approach that the Full Court took in this case departs both from what this Court has said in a general sense as to dominant purpose, albeit in a part for a context, and also what previous Full Courts have said to this question of looking at a promoter’s dominant purpose.

FRENCH CJ: You hang your hat a bit on the words non-competing purposes, do you?

MR DE WIJN: We do, your Honour, in the sense that in that paragraph where – well, in that sentence where the Full Court used the words “Those are not competing purposes”, what the Full Court had done in the previous sentence - this is in paragraph 244 on page 178 - in the previous sentence the Full Court had identified that there were, in fact, three purposes that the applicants had. That was the purpose of getting the scheme benefits, of making a profit and of getting a commission from Gunns. Then, by simply saying those are not competing purposes, the court pushed to one side the two non-tax purposes and, thereby, failed to apply the statutory test, that is - - -

BELL J: Does that summary of paragraph 244 overlook the sentence:

The Plan was centrally driven by the level of the scheme benefits obtained, paid and on-lent to Meloka.

MR DE WIJN: No, your Honour, the plan was centrally driven. Getting the scheme benefits was a necessary step to achieving the ultimate purpose. We say that where getting the benefits was a necessary step and directed towards that ultimate purpose then a dominant purpose must be that ultimate purpose. It is different to the cases, for example, of Hart and of Spotless where one could find steps in the scheme that were only directed to the scheme benefit, in other words, were not necessary to achieving the commercial benefits or the commercial objective. For example, in Hart, Justices Gummow and Hayne - this is at paragraph 66 in Hart, your Honours, this is in tab 4 of the authorities - in paragraph 66, Justices Gummow and Hayne said that:

To say, as Hill J did, that “the manner in which the scheme was . . . entered into –

shows a dominant purpose -

assumes that there were other ways in which the borrowing of moneys . . . might have been effected.

In other ways, it assumes that there were other ways in which the person or the persons that one is looking at might have achieved the commercial objective. Their Honours went on to say that, in this case, it was easy to see how else the taxpayers in that case might have achieved their commercial objective. That is not the case here. Here the Full Court described the getting of the scheme benefits as vital or integral or, if you like, the plan was centrally driven by getting those scheme benefits, but they were all directed towards and necessary for the ultimate purpose of making a profit.

FRENCH CJ: The dominant purpose does not have to be an ultimate purpose, does it?

MR DE WIJN: No, no, it does not, but where the ultimate purpose is a commercial purpose or a non-tax purpose, and where all one can say is that the scheme benefit purposes or the tax purposes were simply necessary steps towards achieving that ultimate purpose, you do not somehow elevate those, what my learned friend has called immediate purposes, up to the dominant purpose. My learned friend’s arguments require, as we understand them, an acceptance that you might have different dominant purposes. There might be more than one dominant purpose. There might be a dominant purpose – different dominant purposes at different levels of generality. We say that is wrong, that there is only one dominant purpose, that one simply looks at all the purposes one can identify to find the ruling prevailing on the most influential one.

I said before, your Honours, the approach taken by the Full Court here is contrary to the approaches taken by different Full Courts previously in a Part IIIA context. In particular, I refer to Justice Hill in Sleight’s Case with whom Justice Hely agreed in that case. Justice Middleton set out the relevant passage at page 82 of the appeal book. Towards the top of the page, your Honours will see in that passage that Justice Hill said in that case:

The promoter no doubt was motivated by the profit . . . That profit was no doubt dependant upon Mr Sleight and others entering into the scheme. That in turn - - -

BELL J: I am sorry, did you say - - -

MR DE WIJN: Page 82 of the application book, your Honour. The passage is in italics towards the top of the page.

BELL J: I am sorry, do go on.

MR DE WIJN:

The promoter . . . was motivated by the profit . . . That profit was no doubt dependant upon Mr Sleight and others entering in the scheme. That in turn no doubt depended upon Mr Sleight forming the view that a tax benefit was available to him.

That is the same as here. What Justice Hill has said here is that the promoter was looking for a profit and in order to get that profit he needed to convince Mr Sleight that there was a tax benefit available to him. In other words, the tax benefits were a necessary step towards the promoter getting a profit. Justice Hill, with Justice Hely conferring, rejected the argument that the dominant purpose was to get the tax benefit. It was, in fact, to make a profit. That is the approach that Justice Middleton took, particularly, your Honours, at the bottom of that page about point 57, there is a sentence beginning:

It is not sufficient for the Commissioner to simply submit that the effectiveness of the scheme depended on the investors obtaining . . .

the scheme benefits -

(however true this may be).

FRENCH CJ: You really see 244 as the critical passage and you seem to attach to the reference to non-competing purposes a kind of significance on the basis that it reflects some principle of law – erroneous proposition of law that is being applied by the Full Court. Why should one not simply regard it as just a tool of analysis in looking at the constellation of factors that go to the question whether a purpose can be characterised as dominant?

MR DE WIJN: Your Honour, it is not so much that we attack the use of those words in themselves - - -

FRENCH CJ: I was looking at the last sentence in paragraph 25 of your submissions. You say:

The concept of a ‘not competing purpose is not supported by the authorities.

MR DE WIJN: That is right. We would say it is not, your Honour. By using that phrase – but the real point is that the Full Court simply did not weigh up the three purposes. What the Full Court should have done, having identified three different purposes, it weighed up to find out which was the dominant one. By simply saying they are not competing purposes the court failed to do that. It is not clear, I would say, with respect, what is meant by competing purpose, in any event. What is a competing purpose and what is not a competing purpose. The commission, for example, the getting of the commission would seem to be a purpose that was at the same level as the getting of the scheme benefits. They were both ways in which money was raised to put into the pool to be invested in the foreign exchange business.

BELL J: When you say that the court did not engage in the process of weighing up, one finds again coming back to 244, after the identification of the three strings, the court observes that:

The commission could have been obtained without the need for the scheme –

Then one comes back to the conclusion that it was a scheme centrally driven by the – the plan was driven by the level of the scheme benefits obtained. I was just raising with you whether it is right to say that their Honours were not involved in a process of weighing up?

MR DE WIJN: Your Honour, I am sorry, I have missed your first point. What was your first point, sorry?

BELL J: Well, the first point was that their Honours seemed to have come to a view about the significance of one stream of funding, namely, the Gunns commission.

MR DE WIJN: Yes, but they seem to have done that by not weighing up against the profit making purpose.

BELL J: Is one point that they are making that one could set out to make profit in a variety of ways but this was a way that was centrally driven by the scheme benefits?

MR DE WIJN: There was no evidence, or no suggestion, of any other way that the applicants could have made the profit they were seeking. That is, there was no suggestion of any other way that the applicants could have acquired $7 million worth of these woodlots and been able to repay the loan and service the loan.

FRENCH CJ: So you have no cavil with this statement at paragraph 244 that:

The getting of the GST refunds and tax refunds - in addition to the commission - was vital in order to reduce the level of indebtedness –

and so on?

MR DE WIJN: No, we embrace that description because getting those scheme benefits was vital - - -

FRENCH CJ: Do you characterise them as immediate, not dominant, purposes?

MR DE WIJN: Yes, we do not cavil with the word “immediate” either. In fact, the use of the word “immediate” almost answers the question.

FRENCH CJ: That is what I say, that is why you were.....

MR DE WIJN: Yes, and, your Honours, the point I made before is what distinguishes this from, for example, Hart and, for example, Spotless, because we have simply got a case where the applicants set out to make a profit and the only way that has ever been put forward that they could have done that was this way, was by getting scheme benefits. If the only way you can make a profit is to get some scheme benefits or tax benefits along the way, then those scheme benefits cannot be the dominant purpose.

Your Honours will see in Spotless at page 423, it is tab 3 of the book of authorities, on 423 at the end of that first paragraph - in Spotless it was noted that:

it was the obtaining of the tax benefit which directed the taxpayers in taking steps they otherwise would not have taken by entering into the scheme.

That cannot be said in this case, your Honours. On the question of the use of the phrase “tax driven”, Justice McHugh in Spotless again used that phrase on page 425 in the very last paragraph of the decision:

The elaborate nature of the scheme and its attendant circumstances lead inevitably to the conclusion that the scheme was not merely tax driven but that its dominant purpose was to enable the taxpayer to obtain a tax benefit –

So to say that something is tax driven does not answer the question about – sorry, does not lead to the conclusion that the dominant purpose was to get the tax benefits.

FRENCH CJ: What happened in Lenzo? I was in the first instance of that and then it went to the Full Federal Court, and I think there, notwithstanding that there was a commercial purpose, the dominant purpose was made out, was it not? I was trying to recall.

MR DE WIJN: I think that is right, your Honour, in Lenzo. We do not - - -

FRENCH CJ: I mean it was viable - that the project was commercially viable notwithstanding the tax benefit in that case, the upfront deductions or whatever it was.

MR DE WIJN: Yes. Your Honour, to be clear, we do not cavil with the principle that you can find, as the cases clearly say, that within a commercial course of conduct you can find perhaps a smaller scheme or the way the scheme was carried out may indicate there was a dominant purpose. What we say is that that is not the case where you have got a commercial course of conduct and the only way you could have achieved that profit you were seeking was to get these tax benefits.

It is not unlike the example again given in Hart of a taxpayer who chooses to rent a property because the deductions make it cost effective. If that person would not have rented the property without the tax deductions, you cannot simply say, well, the dominant purpose was to get a deduction for the rent. The dominant purpose was, of course, to get use of the property from which to conduct one’s business.

Your Honours, the other previous Full Court case I would like to quickly mention is Vincent which we put in the book of authorities. It is at tab 5 and it is just to draw your Honours’ attention briefly to paragraph 100 in that decision of the Full Court. Towards the end of paragraph 100, the court said that the primary judge had not erred by considering the purpose of the promoter:

We may doubt, however, whether we would reach the same conclusion . . . we would be inclined to the view that the dominant purpose . . . was to obtain the profits –

In that case, it was not necessary to consider the question any further. That approach is very similar to the approach Justice Middleton took, that is to say, that it is quite open for the Commissioner to allege that it is the promoters under these provisions, that it is the promoter that has the dominant purpose. That might not be the usual case but it is open to the Commissioner to allege that, but as Justice Middleton said, it would be a very unusual case in which the promoters did have that dominant purpose precisely for the reason identified here in Vincent and in Sleight and by Justice Middleton. The promoters will normally simply be seeking a profit.

Your Honours, we say that the approach taken by this Full Court is different both to the approach taken by this Court generally to the question of dominant purpose in Part IVA and to the approach specifically taken – taken to the specific question by previous Full Courts, albeit again in the context of Part IVA. Of course, we say that, as Justice Middleton recognised, that the legislation here was clearly designed to pick up and adopt the concept of dominant purpose as it is used in Part IVA. That was made explicit in the explanatory memorandum. For those reasons, your Honour, we say that this application gives rise to important questions of principle that warrants this Court’s attention. If the Court pleases.

FRENCH CJ: Thank you, Mr de Wijn. We will not need to trouble you, Mr Bennett.

In this case, the applicants seek special leave to appeal from a decision of the Full Court of the Federal Court on a question said to raise the construction and application of section 290-50 of Division 290 of Schedule 1 to the Taxation Administration Act 1953 (Cth) which prohibits the promotion of tax exploitation schemes as defined in section 290-65 of that Schedule.

The applicants complain that the Full Court of the Federal Court erred in determining that the relevant scheme was a tax exploitation scheme within the meaning of section 290-65 by characterising the dominant purpose of the scheme as deriving “scheme benefits” within the meaning of section 995-1 of the Income Tax Assessment Act 1997 (Cth) read with 284-150(1) of Schedule 1 of the Taxation Administration Act.

The applicants contend that the commercial purposes of the scheme from which scheme benefits were said to have been derived, other than the purpose of deriving those scheme benefits, were relevant in determining what was the dominant purpose of the scheme within the meaning of section 290-65. They complain that the Full Court should have concluded that the dominant purpose of the scheme was to make a profit for the purchase of woodlots and not to derive scheme benefits. Notwithstanding everything that has been said by counsel for the applicants, on its face the decision of the Full Court involved characterisation of the purposes of the scheme in a way that, in our opinion, did not raise a question of construction which would warrant the grant of special leave. Special leave will be refused with costs.

AT 11.33 AM THE MATTER WAS CONCLUDED