BBlood Enterprises Pty Ltd v Commissioner of Taxation
[2022] FCA 1112
•19 September 2022
FEDERAL COURT OF AUSTRALIA
BBlood Enterprises Pty Ltd v Commissioner of Taxation [2022] FCA 1112
File number(s): VID 114 of 2020
VID 247 of 2021Judgment of: THAWLEY J Date of judgment: 19 September 2022 Catchwords: TAXATION – whether notice of assessment issued to trustee an original or amended assessment – assessment not complete until notice of assessment issued – screenshots on ATO Portal did not evidence assessment had been made – placing information on ATO Portal did not constitute giving of notice under s 174 of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) – the relevant assessment was an original assessment – observations about whether s 170(10) of the ITAA 1936 in any event permitted amendment “at any time”
TAXATION – whether agreement to carry out various steps, including a buy-back of shares, constituted an agreement within s 100A of the ITAA 1936 – held that the agreement to carry out the steps was an agreement within s 100A – held that the steps as a whole also constituted an agreement within s 100A – whether agreement entered into in the course of ordinary family or commercial dealing – agreement not entered into in the course of ordinary family or commercial dealing – whether a “reimbursement agreement” must be an agreement which involves an element of “reimbursement” – held that the word “reimbursement” does not limit or control the definition of “reimbursement agreement” – discussion of the operation of s 100A(8) and (9) – whether s 100A(8) requires identification of an “alternative postulate” in a manner similar to s 177C in Part IVA of the ITAA 1936 – danger in construing s 100A by reference to Part IVA – meaning of “parties to the agreement” in s 100A(9) – whether present entitlement of beneficiary arose out of the agreement for the purposes of s 100A(1)(b) – held that s 100A applied
TAXATION – construction of s 207-35(6) of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) – literal terms of s 207-35(6) inconsistent with intended object of the provision – s 207-35(6) construed so as to achieve its intended object
STATUTORY INTERPRETATION – construction of s 207-35(6) which appears to contain a drafting error – application of four conditions mentioned in Taylor v Owners – Strata Plan No 11564 [2014] HCA 9; 253 CLR 531 – four conditions treated as prerequisites for correction of error, but not necessarily sufficient – provision construed to give effect to statutory object
TAXATION – whether share buy-back purchase price paid to trustee was “made as part of a dividend stripping operation” within the meaning of s 207-155 of the ITAA 1997 – meaning of “dividend stripping operation” in s 207-155 – held that payment fell within the first and second limbs of s 207-155.
Legislation: Companies Act 1981 (Cth) s 129
Co-operative Scheme Legislation Amendment Act 1989 (Cth) s 16
Corporations Act 2001 ss 257D, 257G
Electronic Transactions Act 1999 ss 5, 9
Income Tax Assessment Act 1936 (Cth) ss 6, 46A, 46B, 52A, 97, 99A, 99B, 100A, 109C, 109D, 109L, 109XA, 128B, 128G, 159GZZZP, 160APHA, 160APP, 166, 169, 170, 174, 177A, 177C, 177D, 177E, 177F, 260
Income Tax Assessment Act 1942 (Cth) s 30
Income Tax Assessment Act (No 3) 1972 (Cth)
Income Tax Assessment Act 1997 (Cth) ss 104-10, 104-70, 202-40, 207-35, 207-37, 207-40, 207-45, 207-55, 207-57, 207-145, 207-150, 207-155, 960-120
Income Tax Assessment Amendment Act 1979 (Cth)
Income Tax Assessment Amendment Bill (No 5) 1978 (Cth)
Income Tax Assessment Bill 1972 (Cth)
Income Tax (Consequential Amendments) Act 1977 (Cth) s 247
Income Tax Laws Amendment Act (No 2) 1981 (Cth)
Income Tax Laws Amendment Bill 1981 (Cth)
New Business Tax System (Imputation) Act 2002 (Cth)
New Business Tax System (Imputation) Bill 2002 (Cth)
Taxation Administration Act 1953 (Cth) ss 14ZZO, 290-65
Taxation Administration Regulations 1976 (Cth) r 12F
Taxation Laws Amendment Bill (No 3) 1987 (Cth)
Taxation Laws Amendment (Company Distributions) Act 1987 (Cth)
Cases cited: Algama v Minister for Immigration [2001] FCA 1884; 115 FCR 253
Batagol v Commissioner of Taxation [1963] HCA 51; 109 CLR 243
Bell v Federal Commissioner of Taxation [1953] HCA 99; 87 CLR 548
Clyne v Deputy Commissioner of Taxation [1981] HCA 40; 150 CLR 1
Coles Myer Ltd v Commissioner of State Revenue (Vic) [1998] 4 VR 728; 39 ATR 163
Commissioner of Taxation v Consolidated Media Holdings Ltd [2012] HCA 55; 250 CLR 503
Commissioner of Taxation v Prestige Motors Pty Ltd (1998) 82 FCR 195
CPH Property Pty Ltd v Federal Commissioner of Taxation (1998) 88 FCR 21
CTC Resources NL v Commissioner of Taxation [1994] FCA 947; 48 FCR 397
Deputy Commissioner of Taxation v Richard Walter Pty Ltd (1995) 183 CLR 168
East Finchley v Federal Commissioner of Taxation [1989] FCA 720; 20 ATR 1623
Federal Commissioner of Taxation v Auctus Resources Pty Ltd [2021] FCAFC 39; 284 FCR 294
Federal Commissioner of Taxation v Bamford [2010] HCA 10; 240 CLR 481
Federal Commissioner of Taxation v Bidencope [1978] HCA 23; 140 CLR 533
Federal Commissioner of Taxation v Consolidated Press Holdings Ltd (No 1) [1999] FCA 1199; 91 FCR 524
Federal Commissioner of Taxation v Consolidated Press Holdings Ltd [2001] HCA 32; 207 CLR 235
Federal Commissioner of Taxation v Ellers Motor Sales Pty Ltd [1972] HCA 17; 128 CLR 602
Federal Commissioner of Taxation v Hart [2004] HCA 26; 217 CLR 216
Federal Commissioner of Taxation vLudekens [2013] FCAFC 100; 214 FCR 149
Federal Commissioner of Taxation v Patcorp Investments Limited [1976] HCA 67; 140 CLR 247
FJ Bloeman Pty Ltd v Federal Commissioner of Taxation (1981) 147 CLR 360
Georgopoulos v Silaforts Painting Pty Ltd [2012] VSCA 179; 37 VR 232
Guardian AIT Pty Ltd v Commissioner of Taxation [2021] FCA 1619; 114 ATR 136
Hancock v Federal Commissioner of Taxation (1961) 108 CLR 258
Hart v Federal Commissioner of Taxation [2018] FCAFC 61; 261 FCR 406
Idlecroft Pty Ltd v Federal Commissioner of Taxation [2005] FCAFC 141; 144 FCR 501
Investment and Merchant Finance Corporation Limited v Federal Commissioner of Taxation [1970] HCA 1; 120 CLR 177
Investment and Merchant Finance Corporation Limited v Federal Commissioner of Taxation [1971] HCA 35; 125 CLR 249
Lawrence v Commissioner of Taxation [2008] FCA 1497; 70 ATR 376
Lawrence v Federal Commissioner of Taxation [2009] FCAFC 29; 175 FCR 277
Newton v Federal Commissioner of Taxation (1958) 98 CLR 1
McCallum v National Australia Bank Ltd [2000] NSWCA 218
Metlife Insurance Ltd v Federal Commissioner of Taxation [2008] FCAFC 167; 170 FCR 584
Mill v Meeking [1990] HCA 6; 169 CLR 214
Murphy v Farmer [1988] HCA 31; 165 CLR 19
Newcastle City Council v GIO General Ltd [1997] HCA 53; 191 CLR 85
North Ganalanja Aboriginal Corporation v Queensland [1996] HCA 2; 185 CLR 595
Owners of the Ship “Shin Kobe Maru” v Empire Shipping Company Inc [1994] HCA 54; 181 CLR 404
Pascoe v Federal Commissioner of Taxation (1956) 30 ALJR 402
Prestige Motors Pty Ltd as Trustees of the Prestige Toyota Trust v Commissioner of Taxation [1998] HCATrans 279
RCI Pty Ltd v Federal Commissioner of Taxation [2011] FCAFC 104; (2011) 84 ATR 785
Taylor v Owners – Strata Plan No 11564 [2013] NSWCA 55; 83 NSWLR 1
Taylor v Owners – Strata Plan No 11564 [2014] HCA 9; 253 CLR 531
Traknew Holdings Pty Ltd v Federal Commissioner of Taxation (1991) 21 ATR 1478
UNSW Global Pty Ltd v Chief Commissioner of State Revenue [2016] NSWSC 1852; 104 ATR 577
Wentworth Securities Ltd v Jones [1980] AC 74
Whitby Land Company Pty Ltd (Trustee) v Deputy Commissioner of Taxation [2017] FCA 28, 104 ATR 784
X7 v R [2014] NSWCCA 273; 246 A Crim R 402
Zeta Force Pty Ltd v Commissioner of Taxation (1998) 84 FCR 70
Division: General Division Registry: Victoria National Practice Area: Taxation Number of paragraphs: 369 Date of last submission: 18 February 2022 Date of hearing: 6-7 October 2021, 19-20 October 2021 Counsel for the Applicant in VID 114 of 2020 and VID 247 of 2021: Mr A De Wijn with Mr D Lewis Solicitor for the Applicant in VID 114 of 2020 and VID 247 of 2021: Maddocks Counsel for the Respondent in VID 114 of 2020 and VID 247 of 2021: Ms H Symon KC with Ms M Baker and Mr J Phillips Solicitor for the Respondent in VID 114 of 2020 and VID 247 of 2021: Australian Government Solicitor ORDERS
VID 114 of 2020
BETWEEN: BBLOOD ENTERPRISES PTY LTD (ACN 168 732 312)
Applicant
AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Respondent
ORDER MADE BY:
THAWLEY J
DATE OF ORDER:
19 SEPTEMBER 2022
THE COURT ORDERS THAT:
1.The application be dismissed.
2.Unless either party applies within 7 days for a different order as to costs, the applicant pay the respondent’s costs.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
ORDERS
VID 247 of 2021 BETWEEN: B & F INVESTMENTS PTY LTD (ACN 141 828 462) AS TRUSTEE FOR THE ILLUKA PARK TRUST
ApplicantAND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Respondent
ORDER MADE BY:
THAWLEY J
DATE OF ORDER:
19 SEPTEMBER 2022
THE COURT ORDERS THAT:
1.The application be dismissed.
2.Unless either party applies within 7 days for a different order as to costs, the applicant pay the respondent’s costs.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
THAWLEY J:
OVERVIEW
These proceedings concern a buy-back of shares, carried out in the 2014 income year, by a company with retained earnings (IP Co) buying back shares held in it by the trustee (IP Trustee) of a discretionary trust (IP Trust). The proceeds of the buy-back (about $10 million) paid by IP Co to IP Trustee were deemed by s 159GZZZP of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) to be a dividend for tax purposes. However, the share buy-back dividend constituted corpus of the trust for trust purposes. The deemed dividend was fully franked. Although it had never before received income, the IP Trust also received income in the 2014 year of about $300,000. A newly introduced corporate beneficiary (BE Co) was made presently entitled to the trust income of $300,000. The consequence of BE Co being presently entitled to the trust income was that it was assessed on the trust’s net income, which included the share buy-back dividend. The tax payable by BE Co in relation to the share buy-back dividend was wholly offset by the franking credits attached to the deemed dividend. The trustee was not liable to pay income tax because all of the trust income had been distributed.
The respondent (Commissioner) issued:
(a)to the IP Trustee: an assessment (or, on the applicants’ submission, an amended assessment) dated 11 August 2020, taxing the IP Trustee in respect of the relevant trust income on the basis that s 100A of the ITAA 1936 deemed the beneficiary not to be presently entitled to that income;
(b)to BE Co: an amended assessment dated 15 August 2019, on the basis that s 207-150(1) of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) disentitled BE Co from claiming a tax offset in respect of the franking credits because the deemed (share buy-back) dividend was made a part of a “dividend stripping operation” as defined in s 207-155 of the ITAA 1997.
The Commissioner relied primarily on the 11 August 2020 assessment and only alternatively on the 15 August 2019 assessment. There were four principal issues:
(1)First, whether the Commissioner was authorised to issue the assessment dated 11 August 2020 to the IP Trustee. If the Commissioner was not authorised to issue the assessment, then the second and third issues do not arise.
(2)Secondly, whether s 100A of the ITAA 1936 caused BE Co not to be presently entitled to some or all of the income of the IP Trust for the income year ended 30 June 2014.
(3)Thirdly, if s 100A applied then whether s 207-35(6) of the ITAA 1997 increased the trustee’s liability to tax under s 99A of the ITAA 1936 and, if so, by how much.
(4)Fourthly, whether that part of the share buy-back purchase price paid to the IP Trustee that was deemed to be a dividend was a distribution “made as part of a dividend stripping operation” as defined in s 207-155 of the ITAA 1997.
The applicants contended and bore the onus of establishing that:
(1)The assessment dated 11 August 2020 was excessive because it was an amended assessment issued outside of the limited amendment period and the Commissioner did not otherwise have power to issue it.
(2)If the Commissioner was authorised to issue the 11 August 2020 assessment, s 100A of the ITAA 1936 did not apply to deem BE Co not to be presently entitled to any of the trust income.
(3)If s 100A of the ITAA 1936 did apply, it did not cause the IP Trustee to be taxable to the extent to which the Commissioner contended.
(4)In relation to the Commissioner’s alternative reliance on the assessment issued to BE Co on the basis of s 207-150 of the ITAA 1997, the deemed dividend was not part of a “dividend stripping operation” within the meaning of s 207-155.
When the buy-back occurred, relevant participants were clients of the accounting company, Fordham Business Advisers Pty Ltd. A further six private groups that were then clients of Fordham implemented what were said to be similar arrangements in the 2014 year. Proceedings relating to five of those groups have been stayed pending the outcome of these proceedings: VID 109-111, VID113 and VID 115 of 2020 and VID 246 and 248-251 of 2021. Proceedings relating to the sixth group, which were to be heard together with these proceedings, settled shortly before the hearing commenced: VID 122 of 2020 and VID 245 of 2021.
For the reasons which follow, the Court has concluded:
(1)The assessment dated 11 August 2020 issued to the IP Trustee was an original assessment. It was not excessive on the contended basis that it was an amended assessment issued outside of the limited amendment period.
(2)Section 100A of the ITAA 1936 applied to deem BE Co not to be presently entitled to the trust income.
(3)The IP Trustee was taxable to the extent to which the Commissioner contends.
(4)If s 100A of the ITAA 1936 did not apply, s 207-150 of the ITAA 1997 did apply, because the deemed dividend was part of a “dividend stripping operation” as defined by s 207-155.
The four issues are dealt with in turn after setting out the relevant facts.
FACTS
General background
Mr Brian Blood runs a car dealership known as the “Blood Motor Group” with two business partners: his brother, Mr Sean Blood, and Mr Darron Muir. Mr Brian Blood is married to Mrs Fiona Blood. The Blood Motor Group is owned by entities that are part of Mr Blood’s family group (the “Brian Blood group”) or the family groups of his business partners. The Brian Blood group consists of companies that are wholly owned by Mr Blood, Mrs Blood, another member of his family group, or a combination thereof and trusts of which Mr Blood, Mrs Blood or another member of Mr Blood’s family is a discretionary object.
Mrs Blood was the sole director of Illuka Park Pty Ltd (IP Co) and B&F Investments Pty Ltd (B&F Investments). Mr Blood was the secretary of each. Mrs Blood was also both the sole director and secretary of BBlood Enterprises Pty Ltd (BE Co), after it was incorporated on 25 March 2014. Mrs Blood left the decisions in relation to managing the family group to Mr Blood. She signed documents relating to the buy-back transaction described below without asking any questions about them.
Mr Blood started taking advice from Fordham in 1999. He has always relied heavily on Fordham’s advice. Mr Blood dealt primarily with Mr David Buckley. Mr Blood followed Mr Buckley’s advice.
IP Co was a “General Beneficiary” of the B & F Investments Trust (B&F Investments Trust). Before the share buy-back on 25 June 2014, IP Co was owned as to 99% (99 shares) by IP Trustee and as to 1% (1 share) by Mrs Blood.
The B&F Investments Trust owned 40% of the shares in one of the head companies of the four tax consolidated groups that comprised the Blood Motor Group. It received distributions from other trusts that owned shares in the other head companies of the tax consolidated groups that comprised the Blood Motor Group.
In the period leading up to the 2014 year, the B&F Investments Trust received significant distributions, sourced from profits of the Blood Motor Group. In turn, the B&F Investments Trust distributed most of its income to IP Co. Distributions from the B&F Investments Trust largely accounted for IP Co’s retained earnings, which were $7,421,721.92 as at 30 June 2013.
The Illuka Park Trust (IP Trust) was a discretionary trust established by a deed of settlement dated 15 February 2010 (IP Trust Deed). Clause 4(a) of the IP Trust Deed conferred on the trustee, in respect of each accounting period, the discretion to pay, apply or set aside the whole or any part of the trust’s income for such charitable purposes and/or for the benefit of all or any one or more of the General Beneficiaries, in such proportions and in such manner as the trustee deemed fit. Until the IP Trust Deed was amended on 13 June 2014, “income” was defined in cl 1(a) as follows:
“income” means the net income of the Trust Fund for an Accounting Period calculated in accordance with section 95(1) of the 1936 Act as amended or substituted from time to time and the calculation of income shall include, to the extent allowable, any taxation credits available to the Trustee including but not limited to:
(i) dividend imputation credits;
(ii) foreign tax credits;
(iii) prescribed payment credits; and
(iv) input tax credits,
and “income” on a day other than the last day of an Accounting Period shall be calculated as if that day was the last day of the Accounting Period provided however that the Trustee may determine for any Accounting Period or any other period that the income shall be otherwise determined;
Mr and Mrs Blood were “Primary Beneficiaries” of the IP Trust. The “General Beneficiaries” included Mr and Mrs Blood, as Primary Beneficiaries, and any corporation of which either of them was a member or director.
B&F Investments was the trustee of the IP Trust. In that capacity, B&F Investments is referred to as IP Trustee. The IP Trustee could, at any time and from time to time, by deed, and with the written consent of the “Appointor”, vary the IP Trust Deed. Mr and Mrs Blood were appointors of the IP Trust, along with Mr Buckley.
BE Co was incorporated on 25 March 2014. Upon its incorporation, BE Co automatically became a “General Beneficiary” of the IP Trust.
The Illuka Park steps
In the second half of 2013 (but before 11 October 2013), Mr Buckley spoke to Mr Blood about a potential transaction involving a share buy-back.
The Commissioner identified the following six steps as comprising the “Illuka Park steps”. They were implemented over approximately a three-month period:
First, the B&F Investments Trust distributed its income for the period ended 31 March 2014 by a resolution which made:
·IP Trust presently entitled to $123,237.66 of the B&F Investment Trust’s income; and
·IP Co presently entitled to the remaining $2,999,496.10 of the B&F Investment Trust’s income (which was left outstanding as an unpaid present entitlement (UPE) owing to IP Co).
As regards the distribution to the IP Trust, this was the first time the IP Trust had received income. Until 31 March 2014, the trust property of the IP Trust was limited to $10 of cash on hand in respect of the initial settlement sum, and the shares in IP Co. The 99 shares held in IP Co were recognised with a carrying value of $99, which was offset by a loan of $99 owing to Mr Blood.
As regards the distribution to IP Co, Mr Buckley agreed in cross-examination that this was done at a time when the Illuka Park steps as a whole were contemplated and in order to extract a greater amount of retained earnings using the buy-back strategy: T106.
Secondly, the IP Trust received further income by way of franked dividends from IP Co, on 31 March 2014 ($121,739) and 30 April 2014 ($59,400). Accordingly, together with the distribution of $123,238 from the B&F Investments Trust, the IP Trust received income of $304,377.
Thirdly, the IP Trust Deed was varied on 13 June 2014 to change the definition of “income”. The Deed of Variation amended the IP Trust Deed so as to delete the existing definition of “income” and replace it with the following definition (cl 2.1 of the Deed of Variation):
“income” of the Trust Fund in respect of an Accounting Period shall mean:
(i)the income of the Trust Fund determined by the Trustee according to ordinary concepts; or
(ii)such other definition determined by the Trustee in writing on or before the end of the relevant Accounting Period,
less those outgoings, expenses, charges, provisions and payments that the Trustee determines in its absolute discretion, is properly referable to the derivation of that income having regard to the provisions of the Deed and the nature of the income,
Fourthly, on 25 June 2014, IP Co bought back all of the shares in it held by IP Trust. The buy-back was effected as follows:
(1)by an offer to IP Trustee and notifications to shareholders dated 10 June 2014, signed by Mrs Blood as secretary of IP Co. Mr Andrew Wright of Maddocks lodged the required notice with the Australian Securities & Investment Commission (ASIC);
(2)by circulating resolution made on 25 June 2014 approving the buy-back, signed by Mrs Blood as sole director of IP Trustee and in her personal capacity as the holder of 1 share in IP Co;
(3)by a share buy-back agreement (Share Buy-Back Agreement) dated 25 June 2014, signed by Mrs Blood as sole director and secretary of both IP Co and IP Trustee;
(4)by payment by IP Co of the purchase price for the shares in accordance with cl 4.2 of the Share Buy-Back Agreement, namely by crediting IP Trust’s at-call loan account (the Buy-Back Loan).
IP Co debited $99 of the purchase price to share capital and the remaining $10,189,770 to retained earnings. This gave rise to a deemed dividend (the Share Buy-Back Dividend) for income tax purposes pursuant to s 159GZZZP of the ITAA 1936.
Fifthly, IP Co allocated a franking credit of $4,367,002 (the Franking Credit) to the Share Buy-Back Dividend.
Sixthly, by resolution dated 30 June 2014, IP Trustee distributed to BE Co all of IP Trust’s “income” for the year ended 30 June 2014.
IP Trust’s income distributed to BE Co
By reason of the matter referred to at [24] above, the amount of IP Trust’s income fell to be determined in accordance with ordinary concepts. It was not in dispute that the Share Buy-Back Dividend was a capital receipt according to ordinary concepts. The distribution to BE Co of all of IP Trust’s income therefore did not include the Share Buy-Back Dividend. Determined in accordance with the resolution of 30 June 2014, IP Trust’s income for the 2014 year was $304,376.97, consisting of: the distribution made by the B&F Investments Trust on 31 March 2014 ($123,237.66); the dividend paid by IP Co on 31 March 2014 ($121,739); and the dividend paid by IP Co on 30 April 2014 ($59,400). The distribution to BE Co of IP Trust’s income (totalling $304,376.97) was not paid and therefore remained outstanding as a UPE as at 30 June 2014.
IP Co’s retained earnings
Between 30 June 2013 (when they were $7,421,721.92) and 30 June 2014, IP Co’s retained earnings increased to over $10 million by:
·the distribution from the B&F Investments Trust on 31 March 2014, increasing IP Co’s retained earnings by $2,999,496.10;
·interest receipts ($194,049.16), net of expenses ($157,223.67), increasing IP Co’s retained earnings by a further $36,825.49;
and reduced by $10,445,175 to $12,868.51:
·the 31 March 2014 dividend ($122,969.00), 30 April 2014 dividend ($60,000.00), and the Share Buy-Back Dividend ($10,189,671), reducing IP Co’s retained earnings by $10,372,640; and
·a further dividend on 29 June 2014 ($72,535), declared to IP Co’s then sole shareholder, Mrs Blood.
Tax consequences of the steps taken in connection with the share buy-back
The result of the steps taken in connection with the share buy-back was that the proceeds of the buy-back were deemed by s 159GZZZP of the ITAA 1936 to be a dividend for tax purposes but for non-tax purposes were corpus of the IP Trust. The IP Trust had income ($304,376.97) to which a beneficiary (BE Co) was made presently entitled in full. Because a beneficiary was made presently entitled the beneficiary was assessed on the trust’s “net income” (which included the Share Buy-Back Dividend) in accordance with s 97 in Div 6 of the ITAA 1936.
The Commissioner referred to the steps taken as giving rise, absent the operation of anti-avoidance provisions, to the following “tax result”:
(a)IP Trust received “ordinary” income and capital (the Share Buy-Back Dividend);
(b)IP Trust distributed its ordinary income to BE Co;
(c)BE Co received none of the benefit of the Share Buy-Back Dividend. Despite this, by the operation of s 97 of the ITAA 1936 and Subdivision 207-B of the ITAA 1997, BE Co became liable to tax in respect of the whole of the net income of IP Trust, comprising both the ordinary income and the Share Buy-Back Dividend. However, it paid no additional tax as a result, because the Share Buy-Back Dividend was fully franked. Accordingly, the tax payable on the Share Buy-Back Dividend was wholly offset by the Franking Credit;
(d)IP Trust retained the amount of the Share Buy-Back Dividend as corpus of the trust. However, it was not liable to pay tax under s 99A of the ITAA 1936 in respect of the Share Buy-Back Dividend, because it had distributed all of its (trust) income;
(e)IP Co’s (Buyback Co) retained earnings were thus paid out and retained in IP Trust without payment by any person of any additional tax.
At various places in his submissions, the Commissioner stated that “the tax result relied on creating a mismatch between (trust) income and (tax) net income”. This submission is correct, although it should be recognised that it is the ordinary operation of the law in this area that there may not be identity between the entity that bears the tax on a trust’s net income and the entity that receives the funds to which that amount relates. That is an ordinary result of the scheme of Div 6 – see: Zeta Force Pty Ltd v Commissioner of Taxation (1998) 84 FCR 70 at 78D; Federal Commissioner of Taxation v Bamford [2010] HCA 10; 240 CLR 481 at [43]-[46].
ISSUE 1: THE 11 AUGUST 2020 ASSESSMENT
The assessment the subject of the s 100A proceedings was issued to the IP Trustee on 11 August 2020. The applicants contended that this assessment was in fact an amended assessment that was issued outside the period permitted by s 170(1) of the ITAA 1936 and that the assessment was excessive for that reason.
This submission was based on the contention that the Commissioner had already made an assessment of the trustee’s liability to tax in May 2015 and “gave the trustee notice of the assessment by placing a document on the ATO portal”. For this submission, the applicants relied on webpages depicted in screenshots made by Mr Cahir of Fordham almost five years later on 15 April 2020. These screenshots were said to reveal that an earlier (original) assessment had been made.
It was common ground that, if there was an assessment made in May 2015 it was an assessment made under s 169 of the ITAA 1936, when the IP Trustee lodged its trust tax return – see: Whitby Land Company Pty Ltd (Trustee) v Deputy Commissioner of Taxation [2017] FCA 28, 104 ATR 784 at [81]-[83].
Section 169 of the ITAA 1936 provides:
169 Assessments on all persons liable to tax
Where under this Act any person is liable to pay tax (including a nil liability), the Commissioner may make an assessment of the amount of such tax (or an assessment that no tax is payable).
The Commissioner contended that:
(1)the screenshots did not establish the making of an earlier assessment; and
(2)even if they did, the 11 August 2020 Notice gave effect to s 100A and was therefore authorised by s 170(10) of the ITAA 1936.
It is necessary first to describe when and how the screenshots were made and what they contain. On 15 April 2020, Mr Cahir accessed the Australian Tax Office (ATO) online portal and selected the entry for “The Trustee of the Illuka Park Trust”. He then:
·clicked on the ‘tab’ labelled “Lodgments”;
·clicked on the ‘sub-tab’ labelled “History”
·clicked on the ‘drop-down arrow’ next to the entry “2013-14 Trust”; and
·took a screenshot.
This screenshot (the First Screenshot) included:
As can be seen, this screenshot contains the word “Assessment”. It does not refer to “tax payable”.
Mr Cahir next clicked on the “view details” link contained in the screenshot depicted above. This opened a new webpage which contained information which was, it is to be inferred, taken and reproduced from the relevant tax return which had been lodged. It does not contain the word “assessment”. The first part of the screenshot (the Second Screenshot) included:
The Second Screenshot continued and provided a significant amount of other information not ordinarily found on a notice of assessment. One of the pages of the Second Screenshot contained a note which stated:
Due to internal processes some originally provided detail may have been summarised or changed. Refer to the original return to see the full details. The Commissioner rounds down certain small amounts that may be owed or may be refunded on the account. There may be transactions on the account where this has occurred.
The applicants emphasised, in the part of the screenshot reproduced above, the words “ATO initiated” and “Is any tax payable by the trustee … N”. The applicants submitted that “the proper inference available from the face of each document is that it is exactly what it describes itself as: an ‘Assessment’ made on the date indicated”. The applicants also relied on the fact that the Commissioner later, namely on 20 December 2018, wrote to the IP trustee’s accountants requesting an extension of time to amend assessments. This was submitted to be consistent with documents on the ATO portal being, or at least the Commissioner believing that they were, notices of assessment.
The Commissioner relied upon an equivalent screenshot to the First Screenshot, made by Mr Cahir on 10 August 2021, almost a year after the 11 August 2020 notice of assessment was issued. By this time, the equivalent webpage of the ATO portal referred to an “Assessment issue date” of 11 August 2021 and contained a link to a “Notice of assessment”.
The Commissioner noted that s 169 of the ITAA 1936 provides a discretion whether to make an assessment that no tax is payable: “[w]here under this Act any person is liable to pay tax (including a nil liability), the Commissioner may make an assessment of the amount of such tax (or an assessment that no tax is payable)”. This language is to be contrasted with s 166, which contemplates that the Commissioner “must” make an assessment. The Commissioner further noted that, in May 2015, his practice was (as it remains) not to issue a nil assessment under s 169 to a trustee to reflect the position as returned in the relevant trust tax return: Practice Statement Law Administration PS LA 2015/2 Trustee assessments (issued on 19 February 2015), at point 1.
An “assessment” is not made unless and until a notice of assessment is served on the taxpayer. In Batagol v Commissioner of Taxation [1963] HCA 51; 109 CLR 243 at 251-252, Kitto J (with whom Menzies J agreed) stated (footnotes omitted):
The word “assessment” is defined in s. 6 to mean, unless the contrary intention appears, the ascertainment of the amount of taxable income and of the tax payable thereon. There is nothing in s. 170 to show the contrary intention. But the definition is not sufficient by itself to answer the question before us, because “ascertainment” is a word the force of which depends upon the context. It is here used in an Act under which the service of a notice of assessment is the levying of the tax. Assessment in the sense of mere calculation produces no legal effect. No step that the Commissioner may take, even to the point of satisfying himself of the amount of the taxable income and of the tax thereon, has under the Act any legal significance. But if the Commissioner, having gone through the process of calculation, serves on the taxpayer a notice that he has assessed the taxable income and the tax at specified amounts, the tax becomes by force of the Act due and payable on the date specified in the notice or (if no date is specified) on the thirtieth day after the service of the notice: s. 204. Thus, and thus only, there is brought about an “ascertainment” of the taxable income and of the tax, in the sense that thereafter it is possible to say what could not have been said before: that amounts have been fixed so that they are to be taken for all purposes (except those of appeal: see s 177) to be the result flowing from the application of the Act in the particular case. The respective amounts of the taxable income and the tax have been rendered certain. The word “ascertainment” being understood in this sense, the definition of “assessment” means, in my opinion, the completion of the process by which the provisions of the Act relating to liability to tax are given concrete application in a particular case with the consequence that a specified amount of money will become due and payable as the proper tax in that case. The idea coincides with that which Isaacs J expressed in Federal Commissioner of Taxation v Hoffnung & Co Ltd in relation to war-time profits tax when he said: “If an assessment definitive in character is made, it assumes that, so far as can there be seen, a fixed and certain sum is definitely due, neither more nor less. In short, it ascertains a precise indebtedness of the taxpayer to the Crown”. On this construction of the Act nothing done in the Commissioner’s office can amount to more than steps which will form part of an assessment if, but only if, they lead to and are followed by the service of a notice of assessment.
See also at 255-256 (Owen J; Menzies J agreeing).
The reasoning of Kitto J in Batagol was endorsed by Mason and Wilson JJ in FJ Bloeman Pty Ltd v Federal Commissioner of Taxation (1981) 147 CLR 360 at 371, and in Deputy Commissioner of Taxation v Richard Walter Pty Ltd (1995) 183 CLR 168 by Mason CJ at 182; by Brennan J at 191-2; and by McHugh J at 236. By way of example, Mason CJ observed at 182:
It is only after the Commissioner, having gone through the process of calculation, serves a notice of assessment on the taxpayer that there is brought about an ascertainment of the taxable income and the tax payable for the purposes of s 166 so that, to use the words of Kitto J in Batagol v FCT, “they are to be taken for all purposes (except those of appeal: see s 177) to be the result flowing from the application of the Act in the particular case”.
In summary, notwithstanding the language of s 174 (set out in full at [52] below) which requires a notice to be issued “after any assessment is made”, there cannot be an assessment within the meaning of the definition of “assessment” in s 6(1) or within the meaning of s 170 without service of the notice of assessment fixing the taxpayer’s taxable income and the tax payable thereon. The word “assessment” in s 174 is used in a different sense to its meaning in s 6(1).
The Commissioner submitted that the notice of assessment must bring to the attention of the person on whom it is served that the assessment to which it relates is an assessment of that person to tax: Federal Commissioner of Taxation v Prestige Motors Pty Ltd [1994] HCA 39; 181 CLR 1 at 14 (Mason CJ and Brennan, Deane, Gaudron and McHugh JJ). That submission should be accepted if, by it, what the Commissioner means is that the document served is sufficient to bring to the attention of the person on whom it is served the fact that the assessment to which it relates is an assessment of that person to tax. If the submission was intended to go further and suggest that the person on whom the assessment is served must subjectively realise that an assessment to tax has been made, then the submission cannot be accepted. A notice of assessment can be validly served on a person who cannot or does not understand the notice of assessment or who is ignorant of the fact of service or who evades service, for example, by refusing to check mail or email.
The applicants submitted that “[p]lacing the information in a user-accessible form on the ATO portal was the giving of notice in accordance with s 174 [of the ITAA 1936]” and that “[i]f necessary, s 9(1) of the Electronic Transactions Act 1999 [(Cth (ET Act)] deems service to have occurred”.
Section 174 of the ITAA 1936 relevantly provided:
174 Notice of assessment
(1)As soon as conveniently may be after any assessment is made, the Commissioner shall serve notice thereof in writing by post or otherwise upon the person liable to pay the tax.
…
(3)In subsection (1), tax includes additional tax under Part VII.
In May 2015, the Taxation Administration Regulations 1976 (Cth) provided for certain methods of service. New regulations are now applicable. Under the 1976 Regulations, the Commissioner was authorised, amongst other things, to serve a document on a person for the purposes of the taxation law by: “if the person has given a preferred address for service that is an electronic address - delivering an electronic copy of the document to that address”: reg 12F(1)(c). This regulation is apt to permit, for example, service of a notice of assessment by the attaching of a portable document format (PDF) to an email. Making something available for access by electronic means, should a person choose to access that thing by those means, is not service, either within the ordinary meaning of the term or under the Taxation Administration Regulations 1976 (Cth).
Section 9(1) of the ET Act is concerned with the situation where “a person is required to give information in writing”. The section provides circumstances in which the requirement is taken to have been met, namely “if the person gives the information by means of an electronic communication” in the circumstances described in subparagraphs (a) to (d). The applicants relied on subparagraphs (a) and (d): T221.34:
Division 2—Requirements under laws of the Commonwealth
9Writing
(1)If, under a law of the Commonwealth, a person is required to give information in writing, that requirement is taken to have been met if the person gives the information by means of an electronic communication, where:
(a)in all cases—at the time the information was given, it was reasonable to expect that the information would be readily accessible so as to be useable for subsequent reference; and
…
(d)if the information is required to be given to a person who is neither a Commonwealth entity nor a person acting on behalf of a Commonwealth entity—the person to whom the information is required to be given consents to the information being given by way of electronic communication.
The following definitions, contained in s 5(1), are relevant:
consent includes consent that can reasonably be inferred from the conduct of the person concerned.
…
electronic communication means:
(a)a communication of information in the form of data, text or images by means of guided and/or unguided electromagnetic energy; or
(b)a communication of information in the form of speech by means of guided and/or unguided electromagnetic energy, where the speech is processed at its destination by an automated voice recognition system.
…
information means information in the form of data, text, images or speech.
…
transaction includes:
(a) any transaction in the nature of a contract, agreement or other arrangement; and
(b)any statement, declaration, demand, notice or request, including an offer and the acceptance of an offer, that the parties are required to make or choose to make in connection with the formation or performance of a contract, agreement or other arrangement; and
(c) any transaction of a non‑commercial nature.
Section 9(1) has no relevant application. The Commissioner did not “give” information to the applicants by “electronic communication”. The Commissioner made information available and it was accessed by the applicants’ adviser. This is not the giving information within the meaning of s 9(1). Section 9(1) might apply to the sending by the Commissioner of an email with a PDF of a notice of assessment attached. However, that is not this case.
This conclusion is fortified by the terms of s 9(1)(a) which focuses on what was reasonable to expect at “the time the information was given”. The information was not “given”. It was made available for access and the first time it was apparently accessed was about 5 years after it was made available.
As to s 9(1)(d), I do not infer from the circumstances that the taxpayers consented to the notice of assessment being given by way of electronic communication. The taxpayers adduced no evidence of any such consent.
It is unnecessary in these circumstances to consider the Commissioner’s submission that, if s 9(1) of the ET Act did apply, then – in any event – by reason of s 14 of the ET Act the “time of dispatch” would have been 15 April 2020 when Mr Cahir accessed the information. If this submission were correct, then the assessment would not have been made until 15 April 2020, because an assessment is not made until served: Batagol. The consequence would then be that the assessment made on 11 August 2020 was made within the time allowed for amending an original assessment.
The webpages were not “served” (s 174 of the ITAA 1936) on the applicants, nor “given” to them within the meaning of s 9(1) of the ET Act. An assessment was not made by the uploading of information on the ATO portal. Nor do the screenshots evidence that an assessment was made.
It is strictly unnecessary to deal with the Commissioner’s alternative contention that, even if there was an original assessment in May 2015, nevertheless item 17 of s 170(10) of the ITAA 1936 authorised the amendment of that original assessment “at any time”. Section 170(10) relevantly provided:
170 Amendment of assessments
(10) Nothing in this section prevents the amendment, at any time, of an assessment for the purpose of giving effect to any of the provisions of this Act set out in this table.
Item Provision Brief description … 17 Section 100A Present entitlement arising from reimbursement agreement …
A literal reading of s 170(10) suggests that an amendment to give effect to s 100A can be made “at any time”. However, a relevantly identically worded chapeau (s 170(10AA)) was construed by the Full Court in Metlife Insurance Ltd v Federal Commissioner of Taxation [2008] FCAFC 167; 170 FCR 584 at [29] as only being intended to allow for amendment “to address new facts after the original assessment”. Section 170(10AA) relevantly provided:
170(10AA)Nothing in this section prevents the amendment, at any time, of an assessment for the purpose of giving effect to any of the provisions of the Income Tax Assessment Act 1997 set out in this table.
Item Provision Brief description … 30 Subsection 104-10(3) or (6)
Subsection 104-25(2)
Subsection 104-45(2)
Subsection 104-90(2)
Subsection 104-110(2)
Subsection 104-205(2)
Subsection 104-225(5)
Subsection 104-230(5)The time of a CGT event is decided by there being a contract entered into …
The underlying circumstances in Metlife concerned s 104-10 of the ITAA 1997 which deals with CGT event A1, namely disposal of a CGT asset. Section 104-10(3) provides that the time of CGT event A1 is the time at which “you enter into the contract for the disposal”. The issue which the operation of this provision gives rise to is that it is not until a contract settles that there is actually a disposal, but if the contract does settle then the time of the CGT event is not the time of settlement but the time the contract was entered into. A simple example of the difficulty can be illustrated by assuming a contract entered into in 2010, which settles in 2016. In 2010, there was no CGT event because there was no disposal of the asset; there was only an agreement to dispose of an asset in the future. The actual disposal occurs in 2016. On settlement, there is a disposal of a CGT asset and CGT event A1 occurs. By reason of s 104-10(3), CGT event A1 is deemed to have occurred in 2010 when the contract was entered into. Absent s 170(10AA) of the ITAA 1936, an amendment by the Commissioner in 2016 in relation to the 2010 year would be outside the permissible amendment period.
The Full Court considered that the answer to the dispute between the parties in Metlife turned on the phrase “for the purposes of giving effect to”: at [18]. The Full Court stated:
[21]The timing of the facts of this case is significant, particularly the fact that at the time the original assessment was made (namely 16 July 2001), that assessment had already taken into account the operation of the provision in s 104-10(3). That is, any work which s 104-10(3) had to do in ‘backdating’ the sale to the time of entry into the contract had been performed by 16 July 2001. To now seek to amend the assessment so as to include as income the policy proceeds would be doing more than giving effect to the operation of s 104-10(3)…
[23]As pointed out by the taxpayer, the mischief to be corrected in respect of item 30 (and the other items listed in the table to s 170(10AA)), is that where a subsequent event ‘retrospectively’ alters the taxable income of an earlier year, for example by deeming a CGT event to have occurred or a rollover not to have occurred in a past year, the Commissioner may be prevented by the ordinary scheme of s 170 from amending the assessment to give effect to the retrospective operation of the listed sections…
[25]In our view, the provisions set out in the table to s 170(10AA) reinforce our interpretation of the proper construction of s 170(10AA). In each of the examples, power is given to the Commissioner to amend at any time an original assessment where a new fact occurs after that assessment and where certain provisions of the tax legislation would be frustrated if the Commissioner were not able to take the new facts into account by so amending the original assessment…
[27]...Further, it misconceives the nature and extent of the power afforded by s 170(10AA). The words ‘for the purpose of giving effect to’ were, in our view, chosen deliberately to distinguish between a provision which would give indefinite power to amend an assessment where the entering into, and settling of, a contract for the disposal of a CGT asset occurred at different times, and a provision which was necessary in order simply to effect a ‘backdating’ provision which would otherwise be entirely frustrated. If Parliament intended to create a provision which did the former, it could quite easily have done so. It would not, in our view, have used the term ‘for the purpose of giving effect’ to, but could have drafted laws which gave indefinite power to amend assessments which ‘concerned’ or ‘related to’ or ‘included’ the assessments set out in the table to s 170(10AA). ‘Giving effect to’ a provision cannot mean imbuing that provision with more power that it otherwise would have.
[28]In this case, but for s 170(10AA), s 104-10(3) would be entirely impotent in situations where the settlement of a contract to dispose of a CGT asset occurred more than four years after the making of an assessment – with the potential result that the Commissioner could never make a CGT assessment where a settlement took place more than four years after the tax year in which the original agreement was made. In those circumstances, it is entirely understandable that the legislature chose to enact s 170(10AA), and natural that the words ‘for the purpose of giving effect to’ were used. There are provisions in the tax legislation which allow for general powers of amendment where there has been an error or oversight; s 170(10AA) is not one of them. It is of some import that the power to amend under s 170(10AA) may be exercised ‘at any time’. That power may be contrasted with general powers to amend in, for example, cases of oversight by the Commissioner, where there is usually a time limit of four years.
[29]In our view, s 170(10AA) was not designed to allow for oversight by the Commissioner, but was designed to address new facts after the original assessment, and which could occur at any time, enlivening the operation of s 104-10(3). In situations where the settlement occurs before the making of the assessment, s 170(10AA) will generally have no work to do; this is because s 104-10(3) will already have been taken into account by the Commissioner in his assessment. In other words, where an assessment is made at a time when all relevant events have occurred, no mischief arises and no amendment under s 170(10AA) is needed to ‘give effect to’ the retrospective consequences of the subsequent event.
[30]As we have set out earlier, the Commissioner contended that the power to amend under s 170(10AA) ‘at any time’ is not limited to situations where an assessment is made between the time of the making of a contract of sale and the completion of that sale. We are unable to agree. For reasons we have already discussed, we consider that the purpose of s 170(10AA) was very much to correct any assessment which does not give effect to, in this case, the date deeming provision in s 104-10(3).
Section 170(10) was introduced in 1942 by section 30 of the Income Tax Assessment Act 1942 (Cth). It originally provided:
(10)Nothing in this section shall prevent the amendment, at any time, of an assessment for the purpose of allowing the deduction provided in sub-section (1a) of section seventy-two of this Act.
Section 170(10) has since been amended on a number of occasions.
Section 170(10AA) was introduced in 1997 by s 247 of sch 1 to the Income Tax (Consequential Amendments) Act 1977 (Cth). Section 170(10AA) adopted the same language as already existed in s 170(10). In enacting s 170(10), the legislature was obviously not cognisant of the construction which would later be given by the Full Court in Metlife to the same words when used in s 170(10AA).
The Full Court in Metlife did not apparently consider s 170(10). The reasoning of the Full Court in Metlife is, in substantial respects, not readily translatable to s 170(10) read with the items in the table to that provision. For example, a number of the items in the table to s 170(10), including s 100A, are appropriately characterised as anti-avoidance provisions and do not operate by a statutory “backdating” of a kind referred to in Metlife at [27].
In circumstances where the issue does not strictly arise, it is preferable not to express a concluded view about the correct construction of s 170(10). It is sufficient to note that it does not necessarily or obviously follow from the decision and reasoning in Metlife that the opening words of s 170(10) are properly construed in the same way that the opening words of s 170(10AA) were construed by the Full Court in Metlife.
ISSUE 2: SECTION 100A
The applicants contended that, if the Commissioner was authorised to issue the 11 August 2020 assessment, that assessment was in any event excessive because s 100A of the ITAA 1936 did not apply to deem BE Co not to be presently entitled to any of the trust income.
The legislation
Section 100A(1) of the ITAA 1936 provides:
(1)Where:
(a)apart from this section, a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate; and
(b)the present entitlement of the beneficiary to that share or to a part of that share of the income of the trust estate (which share or part, as the case may be, is in this subsection referred to as the relevant trust income) arose out of a reimbursement agreement or arose by reason of any act, transaction or circumstance that occurred in connection with, or as a result of, a reimbursement agreement;
the beneficiary shall, for the purposes of this Act, be deemed not to be, and never to have been, presently entitled to the relevant trust income.
The term “reimbursement agreement” is defined in s 100A(7), which provides:
(7)Subject to subsection (8), a reference in this section, in relation to a beneficiary of a trust estate, to a reimbursement agreement shall be read as a reference to an agreement, whether entered into before or after the commencement of this section, that provides for the payment of money or the transfer of property to, or the provision of services or other benefits for, a person or persons other than the beneficiary or the beneficiary and another person or other persons.
The word “agreement” is defined in s 100A(13). It defines the concept of an “agreement” broadly, but excludes agreements “entered into in the course of ordinary family or commercial dealing”. It provides:
(13) In this section:
agreement means any agreement, arrangement or understanding, whether formal or informal, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings, but does not include an agreement, arrangement or understanding entered into in the course of ordinary family or commercial dealing
…
Section 100A(8) removes certain types of agreements from what might otherwise fall within the phrase “an agreement” in s 100A(7). It provides:
(8)A reference in subsection (7) to an agreement shall be read as not including a reference to an agreement that was not entered into for the purpose, or for purposes that included the purpose, of securing that a person who, if the agreement had not been entered into, would have been liable to pay income tax in respect of a year of income would not be liable to pay income tax in respect of that year of income or would be liable to pay less income tax in respect of that year of income than that person would have been liable to pay if the agreement had not been entered into.
Section 100A(9) provides that, for the purposes of s 100A(8), an agreement shall be taken to have been entered into for a particular purpose if any of the parties to the agreement entered into the agreement for that purpose. It provides:
(9)For the purposes of subsection (8), an agreement shall be taken to have been entered into for a particular purpose, or for purposes that included a particular purpose, if any of the parties to the agreement entered into the agreement for that purpose, or for purposes that included that purpose, as the case may be.
The issues
The issues raised by s 100A in its potential application to the present case include:
(1)Issue 2(1): whether there was an agreement, arrangement or understanding and, if so, whether it included the “initiation of” and “planning for” the Illuka Park steps as opposed to the agreement to implement, and implementation, of the transaction;
(2)Issue 2(2): whether the agreement, arrangement or understanding was entered into in the course of ordinary family or commercial dealing;
(3)Issue 2(3): whether a “reimbursement agreement” for the purposes of s 100A requires that the “payment” referred to in s 100A(7) be, in substance, a reimbursement for the relevant beneficiary being made presently entitled to the income of the trust;
(4)Issue 2(4): whether, in the terms of s 100A(8) and (9), any party to the “agreement” entered into the agreement for the purpose, or for purposes that included the purpose, of securing that a person who, if the agreement had not been entered into, would have been liable to pay income tax in respect of a year of income would not be liable to pay income tax in respect of that year of income or would be liable to pay less income tax in respect of that year of income than that person would have been liable to pay if the agreement had not been entered into;
(5)Issue 2(5): whether, in the terms of s 100A(1)(b), any or all of BE Co’s present entitlement to income of the IP Trust arose out of the “reimbursement agreement” (if there was one) or arose by reason of any act transaction or circumstance that occurred in connection with, or as a result of the reimbursement agreement.
Issue 2(1): The agreement, arrangement or understanding
The agreement
As noted earlier, s 100A(13) defines “agreement” in the following way:
agreement means any agreement, arrangement or understanding, whether formal or informal, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings, but does not include an agreement, arrangement or understanding entered into in the course of ordinary family or commercial dealing.
The Illuka Park steps have been described at [19] to [28] above. Although he had relied on it in his appeal statement, the Commissioner did not ultimately rely on the incorporation of BE Co as one of the Illuka Park steps or as part of the “agreement” for the purposes of s 100A.
The applicants accepted that there was an “agreement” within the meaning of s 100A(13) that the Illuka Park steps would be undertaken: T11. That concession was properly made. There was an agreement to enter into the Illuka Park steps and an understanding that they would be entered into. Those steps were then implemented. The applicants did not accept that the steps were “causally related to each other” in the sense that it is possible to have an agreement that a number of things occur without any of the steps necessarily being dependent on any other: T11-12.
An objective assessment of what occurred, however, makes it clear that the separate transactions constituted a connected series of steps that were intended to operate in conjunction with each other as part of an overall agreement, arrangement or understanding.
This conclusion is also supported by documents created at the time of the relevant events. A memorandum dated 17 September 2013, entitled “Share Buy-Back Strategy - Test Case - Geoff Harris Group” sent by Mr Neil Cahir (Fordham) to Mr David Buckley (Fordham) and Leigh Baring (Maddocks) (the 17 September 2013 Memorandum) described a “proposed Share Buy-Back of Ordinary Shares” comprising substantially the same steps and having substantially the same result as the Illuka Park steps.
It was not in dispute that arrangements similar to those implemented by the Brian Blood group were implemented by at least seven “private” groups during the 2014 year. The arrangements were implemented by transaction documents prepared by Maddocks. In relation to each of the seven groups, Maddocks sent to Fordham a letter attaching the original signed and dated copies of the following documents: the Deed of Variation in respect of the relevant Vendor Trust; the Share Buy-Back Agreement effecting the buy-back of shares held by the Vendor Trustee in the relevant Buyback Co; and the Distribution Minute by which income (but not the buy-back proceeds) was distributed to the relevant Beneficiary Co. The letters requested the documents be kept in a safe place. The documents were evidently perceived to form part of one overarching transaction or arrangement by those who prepared them, those who advised in respect of them, and those who entered into them.
In conclusion, therefore, I am satisfied that, within the meaning of s 100A(13):
(a)the Illuka Park steps as a whole constituted an overarching “agreement” comprised of a series of connected transactions or steps; and
(b)before the Illuka Park steps were in fact implemented, there was an “agreement” or “understanding” to implement the Illuka Park steps.
Was initiation and planning part of the “agreement”?
There was a dispute between the parties as to whether the ‘initiation’ of and ‘planning’ for the steps could form part of the “agreement”. The Commissioner contended that the initiation of and planning for, and implementation of the Illuka Park steps comprised an “agreement”.
I have concluded at [83] above that the Illuka Park steps as a whole constituted an overarching “agreement” comprised of a series of connected transactions or steps and that there was an “agreement” or “understanding” to implement the Illuka Park steps. However, I am unable to see how ‘initiation’, ‘planning’ or ‘implementation’ can be said to comprise an “agreement” as opposed, for example, to those things comprising evidence from which it might be inferred that an agreement or understanding came into existence or existed.
The contention that ‘initiation’ and ‘planning’ could be part of the “agreement” was said to be supported by the reasoning of Hill and Sackville JJ in Commissioner of Taxation v Prestige Motors Pty Ltd (1998) 82 FCR 195 in what their Honours said over 10 pages from 206G and 216G. Counsel submitted that “the plurality defined the reimbursement agreement in question as including negotiations”. It was not otherwise explained how anything said in the 10 pages of reasoning supported the proposition advanced.
Contrary to the Commissioner’s submissions, Hill and Sackville JJ in Prestige Motors did not state that negotiations or the initiation of and planning for steps formed part of the “agreement” there in question. The reasoning the Commissioner relied upon for his submission begins with the following sentence of 206G:
The Commissioner contended before the primary judge that the reimbursement agreement comprised negotiations for and agreement on the implementation of a series of steps …
It is not possible to read that sentence as an endorsement that “negotiations” are part of the “agreement”, whatever that would mean. It merely records what the Commissioner contended.
Their Honours then set out the various submissions which had been made at trial and the primary judge’s reasons from 206G to 211B. Their Honours recorded the parties’ submissions on appeal from 211B to 215B and set out their reasoning from 215C. On the question of the meaning of “agreement”, their Honours stated at 216D to 217A:
The word “agreement” is given the widest definition in s 100A(13). It includes arrangements and understandings. These can be informal, express or implied, and need not be enforceable or even intended to be enforceable. The only exclusion from the definition is “an agreement, arrangement or understanding entered into in the course of ordinary family or commercial dealing’’.
Some of the submissions on behalf of Prestige rather suggested that in order for an agreement to be within s 100A it had to be one that was legally enforceable. That is clearly incorrect. So, for example, if there were an arrangement that Cholmondeley would act in accordance with the wishes of the Perron group, that would be an “agreement” within the definition in subs (13). If the understanding required the directors of Cholmondeley to ensure that interest paid to it by RLAV would remain available to the Perron interests, that understanding would be part of the agreement, even though no person had any legal right to enforce it.
In each of the three transactions, there is no doubt that there was an agreement in the sense in which that word is used in s 100A(13). In the case of the RLAV transaction, the elaborate documentation and series of steps outlined earlier in this judgment plainly reflected an understanding or arrangement to which a number of companies and persons were parties. These included RLAV, the liabilities of which were effectively consolidated and rearranged by the documents executed on 23 February 1979 and which subscribed for and on l March 1979 received units in the Trust (using the advance from Century Finance to meet the subscription price). It is clear that the arrangements preceding the execution of the documentation contemplated the participation of Cholmondeley in the transaction, since (as his Honour found) an understanding was in place whereby Cholmondeley’s directors would act in accordance with the wishes of the Perron group from time to time and interest payments to Cholmondeley commenced within a short time after completion of the documentation.
None of this suggests that ‘negotiation’, ‘initiation’ or ‘planning’ were considered by the court to form part of a relevant “agreement”. Their Honours do accept, as have I, that an agreement or understanding to carry out a series of steps is capable of constituting an agreement within the meaning of s 100A(13).
There either is or is not an “agreement” (which can include a non-legally binding “understanding”) within the meaning of s 100A(13). If the Commissioner contends that there is one, he should identify it. A statement that the “agreement” includes “initiation” and “planning” says nothing about what the contended “agreement” is. Such statements, unaccompanied by an identification of what negotiation, initiation or planning is contended to constitute a part of the agreement or understanding, and in what way, is conducive to loose thinking in administering the legislation, and to an increase in cost and delay for the parties, and ultimately to a waste of judicial resources in addressing unnecessary argument.
Issue 2(2): Ordinary family or commercial dealing
As noted earlier, s 100A(13) excludes from the definition of “agreement” an “agreement, arrangement or understanding entered into in the course of ordinary family or commercial dealing”. The statutory question is whether:
·the agreement was “entered into in the course of ordinary family or commercial dealing”; it is not whether individual steps carried out in implementing the agreement, viewed in isolation, could be characterised as steps “entered into in the course of ordinary family or commercial dealing”: Prestige Motors at 221E-F;
·the agreement was “entered into in the course of ordinary family or commercial dealing” not whether the agreement was an “ordinary family or commercial dealing”.
In analysing the statutory question, it might be relevant to consider whether individual steps were “entered into in the course of an ordinary family or commercial dealing” or were an “ordinary family or commercial dealing”. However, the statutory question is different.
In amplification of the last point, but expressed in simple terms, it is not sufficient to reason that, because each step in a series of connected transactions is capable of being described individually as “ordinary”, therefore the whole agreement is “ordinary”.
The inquiry about whether the agreement was “entered into in the course of ordinary family or commercial dealing” within the meaning of s 100A(13) is distinct to the inquiry about purpose required by s 100A(8) and (9). That does not mean that one cannot look at the object of what was sought to be achieved by a dealing said to be an ordinary family or commercial dealing in the course of which the agreement was entered into or that one cannot assess whether particular steps were relevant to achieving that object. Nor does it mean one cannot look at whether the agreement or, importantly, particular steps within it, might not in fact be explained by objectives different to the objectives said to be those behind the ordinary family or commercial dealing.
A dealing might not be an “ordinary family or commercial dealing” if the dealing, or the agreement which arose out of the dealing, is contrived or artificial or involved more than was required to achieve the relevant objective. The fact that the objective is achieved through numerous transactions, or that the transactions are complex, is not of itself sufficient to show that the dealing is not “ordinary”. Many ordinary commercial transactions are effected by an interlocking set of documents that might be characterised as complex. Likewise, agreements entered in the course of a family dealing can be complex.
On the other hand, if the dealing, or the agreement which arose out of the dealing, is overly complex, involving more than is needed to achieve the relevant objective, or includes additional steps which are not necessary to achieving the objective, then the dealing might more readily be seen as not being “ordinary”.
In Prestige Motors, in concluding that the three transactions did not arise out of an ordinary family or commercial dealing, Hill and Sackville JJ (with whom Beaumont J agreed) referred to an absence of:
·“commercial motivation” for one transaction: at 222F-G;
·“commercial justification”, leaving “the only explanation for the entry into the agreement as the elimination or reduction of tax liabilities”: at 223C; and
·“commercial necessity or justification for the transaction” or “commercial reason to raise capital from outside the group”: at 223E-F.
The taxpayer bears the onus of establishing that the agreement was entered into in the course of ordinary family or commercial dealing: s 14ZZO(b) of the Taxation Administration Act 1953 (Cth) (TAA 1953); Prestige Motors at 223C-F.
The agreement has been identified at [83] above. The question raised by this issue is whether the applicants have shown that the agreement to implement the Illuka Park steps and the agreement comprising the Illuka Park Steps were “entered into in the course of ordinary family or commercial dealing”.
The agreement comprising the Illuka Park steps as a whole was not an agreement “entered into in the course of ordinary family or commercial dealing”. Nor was the agreement to implement the Illuka Park steps. Whether the agreement is viewed as the agreement to enter into the steps, or the steps as a whole, the agreement was unusual. Its complexity was not shown to be necessary to achieving a specific outcome sought to be achieved by a dealing aptly described as “an ordinary family or commercial dealing”. It was not explicable, for example, as having been entered into for family succession purposes. Nor was it explicable as having been entered into as part of an ordinary commercial dealing.
As I have said, whilst it may be relevant to the statutory inquiry, it is not necessarily persuasive that an individual step can be seen to be “ordinary”. Viewed in isolation, the generation of income in IP Co of about $300,000 might be something done in the course of an ordinary family or commercial dealing. Even that is doubtful because this was the first time this had occurred and was accordingly not consistent with the historical behaviour of the parties. Moreover, this component of the Illuka Park steps does not suggest that the agreement to implement the Illuka Park steps or the agreement comprising all of the Illuka Park steps were “ordinary”.
It might be said that a buy-back is an ordinary commercial transaction. The statutory question, however, is whether the agreement as a whole was entered into in the course of an “ordinary family or commercial dealing”. In any event, even viewed in isolation, the applicants did not establish a sensible commercial or family rationale for adopting the buy-back procedure. As is explained further below, the explanations given for the buy-back component of the agreement are unlikely. The buy-back was not conducted for the purpose of simplifying the corporate structure as suggested. Nor was it done for succession planning purposes as suggested.
It might be said that the variations to the IP Trust Deed were, viewed in isolation, an ordinary family or commercial transaction. Although relevant, that is not the issue. The issue is whether the agreement as a whole was entered into in the course of a family or commercial dealing.
Having examined the agreement as a whole, I am not satisfied that the agreement to implement the Illuka Park steps was an agreement which was entered into in the course of ordinary family or commercial dealing. I am also not satisfied that the agreement comprised of the Illuka Park steps as a whole was an agreement which was entered into in the course of ordinary family or commercial dealing.
Issue 2(3): Must the payment be a “reimbursement”?
As noted earlier, s 100A(1)(b) requires that “the present entitlement of the beneficiary [to a share of the income of the trust estate within s 100A(1)(a)] arose out of a reimbursement agreement or arose by reason of any act, transaction or circumstance that occurred in connection with, or as a result of, a reimbursement agreement”.
The term “reimbursement agreement” is defined in subsection 100A(7), which provides:
(7)Subject to subsection (8), a reference in this section, in relation to a beneficiary of a trust estate, to a reimbursement agreement shall be read as a reference to an agreement, whether entered into before or after the commencement of this section, that provides for the payment of money or the transfer of property to, or the provision of services or other benefits for, a person or persons other than the beneficiary or the beneficiary and another person or other persons.
The applicants’ submissions
The applicants contended that:
(1)the meaning of the term “reimbursement agreement” required that “the payment of money, transfer of property or provision of services or other benefits referred to in s 100A(7) be, in substance, a reimbursement for the beneficiary being made presently entitled to trust income”;
(2)“s 100A was not intended to apply, and does not apply, where the beneficiary (together with its associates) keeps the trust income for its own benefit”;
(3)where the beneficiary keeps the trust income for its own benefit, s 100A does not alter the basic rule that the beneficiary, rather than the trustee, is taxed on the corresponding share of the trust’s net income;
(4)s 100A applies where it was thought inappropriate to shift the tax liability away from the trustee for the very reason that, in the words of the explanatory memorandum, the “‘beneficiary’ retains only a minor portion of the trust income” despite being presently entitled – see: Explanatory Memorandum to the Income Tax Assessment Amendment Bill (No 5) 1978 (Cth) at 5 (1978 EM).
The payment relied upon by the Commissioner was the payment of the buy-back proceeds to the trust or, in the terms of the Commissioner’s Appeal Statement at [62.1]: “IP Co credited the IP Trust’s at call loan account with IP Co”.
The applicants submitted that:
·the payment (of about $10 million) was not, in any way, a “reimbursement” of the beneficiary’s entitlement to trust income (of about $300,000);
·the payment of the buy-back proceeds did not prevent, in any way, the beneficiary enjoying the full benefit of the trust income to which it was entitled; and
·the beneficiary was paid its entitlement (of about $300,000) in cash and used the cash for its own purposes.
The applicants continued:
Indeed, here there is no connection at all between the payment and the present entitlement. The payment did not give rise to trust income to which a beneficiary became presently entitled, nor conversely was the payment sourced directly or indirectly from trust income to which a beneficiary was presently entitled. The payment was simply the purchase price paid to the trustee in exchange for its sale of its existing shareholding and the income to which the beneficiary was presently entitled had no relationship with that payment. In no way could it be said that the payment had the effect of recouping or reimbursing the trust or anyone else for the beneficiary’s present entitlement.
…
Before subsection (7) is considered there must be an agreement as defined in subsection (13). Subsection (7) builds on that requirement by adding that there must be a payment. It is the payment that turns an ‘agreement’ into a ‘reimbursement agreement’. Hence the two concepts of ‘payment’ and ‘reimbursement’ are inextricably linked and, properly construing the section as a whole and in context, the latter gives meaning to the former.
That approach, and the link between ‘payment’ and ‘reimbursement’, is supported and given further effect by the requirement in subsection (1) that the present entitlement ‘arose out of’ the reimbursement agreement. As explained below, that requires a ‘but for’ analysis. It requires that the present entitlement would not have arisen but for the reimbursement agreement; in other words, but for the payment (being the essence of a reimbursement agreement). That might be expressed by saying, as the explanatory memorandum did, that the present entitlement was conferred ‘in return for’ the payment [see below]; in other words, and viewed from the perspective of the payment, that the payment was a reimbursement of the present entitlement. The present entitlement and the payment were intended to be the quid pro quo of each other.
In support of its contentions, the applicants referred to the following portions of the 1978 EM (applicants’ emphasis in bold):
Tax avoidance by trust-stripping arrangements
(Clause 18) [Section 100A]
By this clause it is proposed to overcome certain tax avoidance arrangements designed to enable trading profits and other income derived by trusts to escape tax completely.
…
The particular tax avoidance arrangements rely on a nominal ‘beneficiary’ being introduced into the trust and being made presently entitled to income of the trust, thus relieving the trustee of any tax liability in respect of the income. However, it is a feature of the arrangements that the introduced beneficiary also escapes tax by one means or another, e.g., as a tax-exempt body or organisation. This ‘beneficiary’ retains only a minor portion of the trust income, while the group in whose favour the trust in substance exists effectively enjoys the major portion, but in a tax-free form. For example, a corresponding amount may be gifted to form the corpus of a further trust for the group’s benefit. [EM at 5]
…
The amendment proposed will look to the existence of an agreement or arrangement that is entered into otherwise than in the course of ordinary family or commercial dealing and under which present entitlement to a share of trust income is conferred on a beneficiary in return for the payment of money or the provision of benefits to some other person, company or trust. [EM at 6]
…
Invariably, the arrangements require this introduced beneficiary to retain only a minor portion of the trust income and to ensure that some other person - the one actually intended to take the benefit - effectively secures enjoyment of the major portion of the trust income but in tax-free form (e.g., by the settlement of a capital sum in another trust estate for the benefit of that person). [EM at 32]
The applicants also noted that, soon after its introduction, s 100A was amended in 1981. The explanatory memorandum to the Income Tax Laws Amendment Bill 1981 (Cth) (1981 EM) said of the arrangements to which s 100A applied (at 56; applicants’ emphasis):
The arrangements were such that the bulk of the trust income was effectively returned by the introduced beneficiary to the ‘real’ beneficiary in a non-taxable form, eg, by the receipt of a loan that was never intended to be repaid or by a capital settlement of funds.
The applicants submitted:
Both explanatory memoranda clearly and consistently identify the ‘mischief’ to which s 100A was addressed, being situations in which the beneficiary made presently entitled to trust income does not retain that income (or the majority of it) but instead, through an agreement for a payment, provides the benefit of that income to someone else, such that the present entitlement is ‘in return for’ (or ‘arose out of’, to use the language of subsection (1)), and is reimbursed by, the payment.
The applicants referred to the decision of Hill J in Traknew Holdings Pty Ltd v Federal Commissioner of Taxation (1991) 21 ATR 1478 at 1492. His Honour said that s 99B (which was introduced by the same Act as s 100A) could only be understood in its historical context. His Honour raised the possibility of reading down the “extreme width” of the provision “having regard to the obvious legislative purpose in enacting it”. His Honour did not ultimately have to resolve that issue.
The effect of the two schemes in Lawrence, which resulted in the conclusion that the schemes fell within s 177E(1)(a)(ii), were that profits which were held for distribution by companies in which the appellant was the only shareholder were effectively converted into capital sums held by another company (an associate of the shareholder) on trust for a class of discretionary beneficiaries which was confined to the appellant and members of his family: Lawrence at [2]. The profits of the company were placed into the hands of the associate in a tax-free form: Lawrence FFC at [52]; Lawrence at [80]. It was not necessary for a conclusion that the ‘second limb’ applied that what was effectively a transfer of profit occur by way of a dividend or distribution of company property. It was not necessary for there to be a transfer of shares in the target company to a person or entity separate from the original shareholders. It was sufficient that the effect of the scheme was to diminish the value of the companies’ property for the benefit of the shareholder or his associates with the purpose of avoiding tax.
Summary of the applicants’ submissions
First limb
As to the first limb, the applicants submitted that the second to fifth dot points referred to in CPH FFC extracted at [311] above were absent. It was submitted, correctly, that there was no transfer or allotment of shares in IP Co. IP Co simply bought back shares in itself from its shareholder for their market value and the shareholder received a proportionate share of both the company’s share capital and profits. The applicants observed that the transaction did not involve a sale and purchase or transfer of shares; it was simply a cancellation of shares, referring to Coles Myer Ltd v Commissioner of State Revenue (Vic) [1998] 4 VR 728; 39 ATR 163 at 744.18 and 745.10. The applicants submitted that, without a vendor or purchaser, the third, fourth and fifth elements are meaningless and cannot be satisfied, referring to Lawrence FFC at [29]-[30].
The applicants also submitted that the required tax avoidance purpose was absent. The applicants submitted that there was no avoidance of tax that would or might have been payable had IP Co paid a dividend to its shareholders. In this regard, the applicants relied on submissions made in relation to s 100A, that – had IP Co paid a ‘real’ dividend to the IP Trust – then it is likely that the IP Trust would have distributed the dividend to BE Co. If that had occurred, the entity which would then have paid tax on the dividend (BE Co): (a) was the same entity which in fact was liable to pay tax on the deemed dividend; and (b) would have paid tax in the same amount as the amount that the entity was in fact liable to pay.
The applicants relied on the observation made by in Lawrence FFC at [30] that the Commissioner was correct not to appeal the primary judge’s conclusion concerning the ‘first limb’. The Full Court stated:
[29]At [72] his Honour observed that the first characteristic identified in Consolidated Press (FC) was present in the circumstances facing the appellant. However, at [74] his Honour concluded:
I could not hold that the second, third, fourth or fifth of the characteristics identified in Consolidated Press (FC) were, or that any of them was, present in this case. There was no sale or allotment of shares in Plaster Plus or Zinkris. Necessarily, there was no payment of a dividend to the allottee (or, should it matter, to the applicant). Since there was no ‘purchaser’ of shares, there was necessarily no question of such a person escaping income tax. There were no ‘vendor shareholders’. Counsel for the Commissioner urged upon me the purpose of Pt IVA of the 1936 Act, and submitted that what the applicant had done here was well within the scope of the evil to which s 177E is directed. The fact is, however that the Full Court in Consolidated Press (FC) held that a scheme would not be in the nature of dividend stripping unless it retained the central characteristics to which their Honours referred, including those mentioned in this paragraph which were manifestly absent from the transactions entered into by the applicant in relation to Plaster Plus and Zinkris. In the circumstances, I would conclude that the schemes were not by way of or in the nature of dividend stripping, as required by subpar (i) of s 177E(1)(a) of the 1936 Act.
[30]Not surprisingly, no appeal is brought from his Honour’s conclusion on the first limb; more relevantly, the Commissioner does not, correctly in our view, put his Honour’s conclusion on the first limb in issue by way of notice of contention.
Second limb
The applicants referred to what the High Court stated in CPH HC set out above, namely:
What sub-par (ii) [the second limb] was aimed at was a scheme that would be within sub-par (i) [the first limb] except for the fact that the distribution by the target company was not by way of a dividend or deemed dividend. Dividend stripping does not lose its connotation of tax avoidance purpose. But a scheme may have substantially the effect of a scheme by way of or in the nature of dividend stripping even though some means other than a dividend or deemed dividend is employed to make the distribution.
The applicants observed that s 207-155 was enacted in 2002, after the High Court had delivered its decision in CPH HC. The applicants submitted that, in enacting s 207-155, Parliament is presumed to be aware of the High Court’s decision, and that its use of the expression in s 207-55 without apparent attempt to depart from the High Court’s formulation, indicated that it did not intend for that language to have a different meaning, referring to Georgopoulos v Silaforts Painting Pty Ltd [2012] VSCA 179; 37 VR 232 at [40] and McCallum v National Australia Bank Ltd [2000] NSWCA 218 at [17].
The applicants referred to the explanatory memorandum to the New Business Tax System (Imputation) Bill 2002 (Cth) at [5.58], which it contended indicated that Parliament intended to enact s 207-155 with an effect consistent with the High Court’s construction:
Schemes having substantially the same effect as dividend stripping schemes include those in which the profits of the target company are not stripped from it by a formal dividend payment, but where irrecoverable loans are made to entities that are associates of the dividend stripper or where the profits are used to purchase assets from such entities at greatly inflated prices.
The applicants accepted that, in Lawrence FFC, the Full Court decided that, notwithstanding what the High Court stated in CPH HC, the second limb could apply if the scheme did not involve any transfer or allotment of shares in the target company to the dividend stripper. The applicants submitted, however, that, in doing so, the Full Court confirmed that the second limb only applied where profits of a company are extracted by some means other than a dividend or deemed dividend. The applicants submitted that, if a transaction involves the extraction of profits by way of a dividend or deemed dividend, it is necessarily a ‘first limb’ case, referring to Lawrence FFC at [52(1)].
The applicants submitted that the essential effect of dividend stripping is:
(a)the extraction of profits from a company through some payment of money or transfer of property to a person (the stripper) other than the original shareholder(s) who was not economically exposed to the risks and rewards of share ownership when the company derived the profits; and
(b)the original shareholders of the company, who were exposed to the risks and rewards of share ownership, receiving a capital sum in lieu of a distribution of profits – this sum being described as the “corresponding capital sum”, referring to Lawrence FFC at [51], citing Lawrence at [82].
The applicants submitted that, on the present facts, these essential effects of dividend stripping were absent:
(a)the transaction involved a distribution of profit by a company to a long-term shareholder and that shareholder retaining that profit;
(b)the transaction did not involve the introduction of a stripper into the affairs of the company;
(c)the transaction did not involve the profit of the company being extracted from it and provided to a stripper or, indeed, anyone other than the long-term shareholder;
(d)the transaction did not involve a stripper providing to the long-term shareholder a “corresponding capital sum”;
(e)the requisite tax avoidance purpose was absent.
The applicants submitted, consistently with the submissions made in relation to s 100A and the ‘first limb’ of s 207-155, that the entity which would have paid tax had IP Co paid a ‘real’ dividend:
(a)was the same entity which in fact was liable to pay tax on the deemed dividend, namely BE Co; and
(b)would have paid tax in the same amount as the amount that the entity was in fact liable to pay.
Summary of the Commissioner’s submissions
First limb
The Commissioner submitted that the term “dividend stripping” is not a legal term of art with a fixed meaning, but rather an expression which must be understood in the context of the legislative provision that it serves, and which cannot adequately be explained independently of that context, referring to CPH HC at [100] and [132].
The Commissioner disputed that the term should necessarily be construed in the same way in both s 177E and s 207-155. The Commissioner observed that the presumption that words used in the one statute are used with the same meaning yields readily to context, referring to Clyne v Deputy Commissioner of Taxation [1981] HCA 40; 150 CLR 1 at 15 (Mason J).
The Commissioner submitted that, in CPH HC, the High Court did not attempt to define the precise boundaries of what constitutes “dividend stripping” in the context of s 177E or elsewhere. According to the Commissioner, the High Court did not go as far as suggesting that the characteristics identified by either Hill J or the Full Federal Court defined the ambit of what constituted “dividend stripping”. Rather, the High Court merely observed that a number of the characteristics common to “typical” dividend stripping schemes were absent; it was the absence of a taxation purpose which was decisive, referring to CPH HC at [133] (set out above at [316]).
As to the Full Court’s decision in CPH FFC, the Commissioner submitted that the Full Court did not seek to conduct a broad survey of the cases in which the expression “dividend stripping” had by then been applied and did not express a concluded view on whether departures from the paradigm of a dividend stripping operation, considered independently from the question of purpose, would have prevented the transactions under consideration in that case from falling within the first limb of s 177E(1)(a): CPH FFC at [164].
The Commissioner submitted that there was nothing in the consideration of the Full Court in CPH FFC which ruled out dividend stripping in the absence of the purchase of, or allotment of shares to, a third-party stripper. The Commissioner observed that the four cases cited by the Full Federal Court were each decided at a time when Australian companies could not buy-back their own shares.
Referring to the common characteristics of a dividend stripping operation set out at [311] above, the Commissioner submitted that it is now possible for the sale of shares, the payment out of retained earnings, and the receipt of a capital sum to be collapsed into the one transaction – that is, a share buy-back. The money received by the vendor shareholder has the character of capital for trust law purposes and the deemed dividend, together with any associated franking credit, can be directed to a newly introduced beneficiary.
The Commissioner submitted that the scheme here may properly be regarded as a variation on the paradigm case of dividend stripping, which can be accommodated by that term’s protean meaning and, if necessary, by the words “by way of, or in the nature of” in s 207-155(a). The Commissioner submitted that, as a matter of substance, the characteristics of dividend stripping were present because the scheme involved:
·a company, Buyback Co (IP Co), which had substantial undistributed profits creating a potential liability either for the company or its shareholders;
·the sale of shares in that company – albeit to the company itself;
·the making of a distribution out of the company’s profits;
·that distribution being deemed, for Australian income tax purposes, to be paid to a newly introduced third party, Beneficiary Co (BE Co);
·the third party escaping the payment of additional tax on the distribution, by virtue of the tax offset associated with the Franking Credit and the third party’s own particular tax characteristics (namely, being liable to the corporate tax rate);
·the vendor shareholder (IP Trust) receiving a capital amount (the Share Buy-Back Dividend, which it accumulated to corpus) in an amount the same as the dividend treated for income tax purposes as paid to the third party.
According to the Commissioner, the scheme exhibited the “hallmark” of dividend stripping schemes – that is, the particular purpose of avoiding (additional) tax on distribution of profits.
As to the observations of the Full Court in Lawrence FFC at [29] and [30], the Commissioner submitted it was open to read the Full Federal Court’s reasons as no more than a statement that a transaction will not be “by way of or in the nature of dividend stripping” for the purposes of s 177E in circumstances where each of the second to fifth characteristics of a dividend stripping operation is absent, given they were each absent in that case.
Second limb
In CPH HC, the High Court stated that the second limb in s 177E was directed to schemes that would be within the first limb “except for the fact that the distribution by the target company was not by way of a dividend or deemed dividend”: at [140]. In reaching that conclusion, the High Court placed significant reliance on the explanatory memorandum that accompanied the Income Tax Laws Amendment Bill (No 2) 1981 (Cth). The explanatory memorandum referred to schemes in which the profits of the target company are stripped “by way of such transactions as the making of irrecoverable loans to entities that are associates of the stripper, or the use of the profits to purchase near-worthless assets from such associates”: CPH HC at [110] and [139]-[140].
The Commissioner submitted that s 207-155(b) must be understood in its context and that the legislative history suggests that s 207-155(b) should not be construed in the same way as the interpretation of s 177E(1)(a)(ii). In particular, s 207-155(b) and its predecessor, former s 160APHA(b), would be otiose if they were construed as being limited to schemes where the distribution by the target company was made otherwise than by way of dividend or deemed dividend.
A full imputation system of company taxation was introduced in Australia from 1 July 1987 by the Taxation Laws Amendment (Company Distributions) Act 1987 (Cth). Later in 1987, ss 160APP(6) and 160APHA were inserted into the ITAA 1936 by the Taxation Laws Amendment Act (No 3) 1987 (Cth) to deny franking credits on dividends paid as part of a dividend stripping operation. Former s 160APP(6) stated:
No franking credit arises if the dividend was paid as part of a dividend stripping operation.
“Dividend stripping operation” was defined by former s 160APHA in substantially the same terms as the present s 207-155(1)(g), namely:
For the purposes of this Part, a dividend paid to a shareholder in a company shall be taken to be a dividend paid as part of a dividend stripping operation if, and only if, the payment of the dividend arose out of, or was made in the course of, a scheme that:
(a)was by way of or in the nature of dividend stripping; or
(b)had substantially the effect of a scheme by way of or in the nature of dividend stripping.
The Commissioner submitted that it is clear, from both its terms and the extrinsic materials, that former s 160APP(6) was intended to apply to schemes that involved the payment of a franked dividend, referring to the explanatory memorandum to the Taxation Laws Amendment Bill (No 3) 1987 (Cth) at 6. The Commissioner noted that, at the time, the definition of “frankable dividend” in former s 160APA included only dividends within the meaning of s 6 of the ITAA 1936 and certain types of deemed dividends. The Commissioner submitted that it follows that the second limb of former s 160APHA would have been otiose if it had applied only to schemes involving neither a dividend nor a deemed dividend – because in such cases there would have been no frankable dividend, and no franking credit for former s 160APP(6) to deny.
According to the Commissioner, the legislative context and history therefore suggest that the expression “dividend stripping”, when used in the context of former s 160APHA, must have connoted a scheme that involves the making of a franked dividend. Sections 207-145(1)(d), 207-150(1)(e) and 207-155 of the ITAA 1997 were intended to replicate former ss 160APHA and 160APP(6) of the ITAA 1936 – see: explanatory memorandum that accompanied the New Business Tax System (Imputation) Bill 2002 (Cth) at [5.57]. The ITAA 1997 sections apply to dividends and “non-share dividends” (see the definitions of “frankable distribution” in s 202-40 of the ITAA 1997, “distribution” in s 960-120(1) and “non-share distribution in s 974-115); but limiting s 207-155(b) to schemes that involve neither a dividend nor a deemed dividend would leave the provision with little work to do. As against this, the Commissioner also observed that the extrinsic materials stated that schemes having substantially the effect of dividend stripping schemes “include” those in which profits are stripped by making irrecoverable loans or purchasing assets at greatly inflated prices – see: explanatory memorandum to the Taxation Laws Amendment Bill (No 3) 1987 (Cth) at 48 and the explanatory memorandum to the New Business Tax System (Imputation) Bill 2002 (Cth) at [5.58]
The Commissioner submitted that s 207-155(b) should be construed as referring to a scheme the effect of which is substantially the same as a scheme by way of, or in the nature of, dividend stripping. According to the Commissioner, a scheme would fall within s 207-155(b) if, irrespective of its form, it:
·was undertaken for a dominant purpose of avoiding tax on distribution of profits;
·has the effect of distributing substantial retained earnings from a company, with that company’s existing shareholders receiving a payment in a substantially equal amount; and
·has the effect of avoiding the tax that would have been payable by the company’s existing shareholders if they had received a dividend.
Consideration
First limb
By the time the term “dividend stripping” was first introduced into Australian tax legislation, it had for many years been used to refer to a number of cases, involving a “protean variety of detail”, albeit that “their essence remain[ed] the same”: Windeyer J quoting Fowler’s in Investment and Merchant at 179. It is unlikely that the term was intended, at least by the time of its use in s 207-155 of the ITAA 1997, to refer only to cases where there was present each of the criteria common to the particular dividend stripping operations which had been referred to by the Commissioner in the submissions he had made to the High Court in Patcorp, decided in 1976. Neither the High Court in CPH HC, nor the Full Court in CPH FFC, so concluded in relation to s 177E(1)(a) of the ITAA 1936.
At the time Patcorp was decided, a company was prohibited from acquiring its own shares or interests in its own shares – see: former s 129 of the Companies Act 1981 (Cth); Consolidated Media at [25]. An exception to the prohibition against a company acquiring its own shares or interests in its own shares was first created by an amendment to the Companies Code in 1989: s 16 of the Co-operative Scheme Legislation Amendment Act 1989 (Cth); Consolidated Media at [26].
Australia did not have a full imputation system when Patcorp was decided. A full imputation system of company taxation was introduced in Australia from 1 July 1987. Section 207-155 is part of the imputation system.
At its simplest, a dividend stripping operation is an operation to extract profits from a company in a way intended to avoid or reduce tax which, absent the operation, would have been payable by a person on those profits being distributed by way of dividends. Historically, this was often done by: (a) the original shareholder selling its shares to a new shareholder, say $10m reflecting the accumulated profit in the company; (b) the company paying the new shareholder a dividend (company profits of $10m) in respect of which the new shareholder would not be liable to tax. When a dividend stripping operation is carried out in this way, the original shareholder receives a capital sum rather than taxable dividend income.
IP Co had retained earnings. Mr Buckley’s advice, which Mr Blood always took, was that IP Co’s retained earnings should be moved into a trust structure. Mr Buckley considered a trust to be a better investment vehicle. The distribution of IP Co’s profits or retained earnings by dividend would likely create additional tax liabilities in others. By way of example: if IP Co had paid a dividend to the IP Trust and the IP Trust resolved to make Mr Blood presently entitled to the dividend, then Mr Blood would have paid tax on the dividend amount at his marginal rate. The relevant franking credits would have flowed through to Mr Blood and he would have offset the franking credits against the greater amount of tax to which he would have been liable. In practical terms, if Mr Blood’s marginal rate was 47% he would have paid an additional 17% tax after taking account of the 30% tax paid by the company as reflected in the franking credits. By way of further example: if the IP Trustee had not resolved to make any person presently entitled to the dividend, it would have paid tax under s 99A. In practical terms, the IP Trustee would have paid additional tax in relation to the dividend.
IP Co did not declare and pay dividends to its shareholder. Rather, together with others, it agreed to enter into a series of transactions including a share buy-back the end result of which was to transfer the retained earnings to IP Trustee in capital form without any person being liable to pay tax on the distribution of the retained earnings. Immediately before the buy-back, IP Co’s retained earnings were increased by about $3 million, by a distribution from B&F Investments made to maximise the amount of retained profits to be extracted through the buy-back strategy: T106. As a matter of substance rather than legal form, the effect of the scheme included:
·a sale of shares by the target company (IP Co), in the legal form of a cancellation of shares, at a price which reflected the company’s retained profits;
·the payment out by the target company of substantially all of its profits;
·the liability to tax in respect of the payment out of the retained earnings falling upon a newly introduced corporate beneficiary (BE Co) which would not need to pay tax in respect of the retained earnings;
·the original shareholder (IP Trustee) ultimately taking the benefit of a capital sum, rather than receiving taxable dividend income.
Assessing the circumstances and events objectively, but also taking into account the evidence of subjective purpose, the predominant purpose of entering into the scheme was to move the profits of IP Co to its shareholder (IP Trustee) in capital form and without subjecting any person to tax beyond the level of corporate tax already paid on the profits, as reflected in the Franking Credits. Absent the scheme, dividends would have been declared and paid to the IP Trust and additional tax would have been paid. BE Co has not discharged the onus of establishing that the scheme was not undertaken for a tax avoidance purpose. The hallmark feature of tax avoidance necessary for both limbs of s 207-155 permeates the scheme.
I accept that the precise mechanism by which the profits were stripped is not the same as the mechanism in cases such as those mentioned in Patcorp. As the cases recognise, however, the mechanisms have tended to change frequently; they have always been “protean”. The essence of a dividend stripping operation is present here. I do not regard the decision in Lawrence FFC as requiring a conclusion that the present scheme was not “in the nature of” a dividend stripping operation.
It is not a part of the ratio of Lawrence FFC that a dividend stripping operation must contain each of, or even most of, the particular steps which were identified as common to the mechanism of the particular dividend stripping operations to which the Commissioner referred in submissions made in Patcorp, as summarised by the Full Court in CPH FFC at [136] and [137].
In my view, the scheme is appropriately described as a scheme which is “in the nature of” dividend stripping within the meaning of s 207-155(a). BE Co has not discharged its onus of establishing the contrary.
Second limb
For the reasons just given, the scheme was also one which “had substantially the effect of a scheme by way of, or in the nature of, dividend stripping”. However, it is desirable to make some further observations.
I do not accept the applicants’ submission that a scheme which involves the payment of a (deemed) dividend as part of the stripping operation can never fall within the ‘second limb’ and can only potentially fall within the ‘first limb’. Both CPH FFC and CPH HC referred to the 1972 EM, which included:
In the category of schemes having substantially the same effect would fall schemes in which the profits of the target company are not stripped from it by a formal dividend payment but by way of such transactions as the making of irrecoverable loans to entities that are associates of the stripper, or the use of the profits to purchase near-worthless assets from such associates.
In CPH HC at [140], the High Court said that what the ‘second limb’ of s 177E(1)(a) “was aimed at was a scheme that would be within sub-par (i) except for the fact that the distribution by the target company was not by way of a dividend or deemed dividend”. The High Court did not hold that the ‘second limb’ of s 177E(1)(a) could never apply if the scheme involves payment of a dividend. The 1972 EM did not say that either; it merely identified what the drafter of the explanatory memorandum understood at the time as circumstances which would fall within the second limb.
The particular mechanism of dividend stripping operations as they existed in 1972 can be accepted to be important in construing provisions concerning dividend stripping, so long as it is recognised that this is only context relevant to the question of the proper construction of the words in the particular statute concerned – see: Consolidated Media at [39]. The relevant provision is s 207-155(b) which appears in a statutory context which is in various ways different to the context of s 177E(1)(a). It should not be assumed that the phrase “dividend stripping” or “dividend stripping operation” was intended by the legislature to have a fixed and static meaning when it was first introduced or that, when used in more recent and different contexts, it is intended to bear precisely the same meaning as it then had, unaffected by the context in which it is used.
Soon after the introduction of the full imputation system, ss 160APP(6) and 160APHA were inserted to deny franking credits on dividends paid as part of a dividend stripping operation. Former s 160APP(6) stated that “[n]o franking credit arises if the dividend was paid as part of a dividend stripping operation”. It is difficult therefore to presume that the legislature intended that the ‘second limb’ of the definition in former s 160APHA be restricted to schemes which would have been schemes within the first limb except for the fact that a dividend was not paid.
Like former s 160APP(6), s 207-155 is directed to “manipulation” of the imputation system – see: the heading to s 207-150(1). A conclusion that the second limb of s 207-155 would apply only to a scheme that would be within the first limb, except for the fact that the distribution by the target company is not by way of a dividend or deemed dividend, would leave s 207-155(b) without much of the operation it was evidently intended to have: its principal purpose, read with s 207-150(1)(e) and (g), lies in denying an offset in relation to franking credits attached to distributions such as dividends.
BE Co has not discharged the onus of establishing that the scheme did not have “substantially the effect” of a scheme in the nature of dividend stripping falling within the ‘second limb’ of s 207-155.
Conclusion in relation to the alternative assessment
If the earlier conclusions about the application of s 100A are incorrect, BE Co has not discharged its onus of establishing that the notice of amended assessment of income tax in respect of the 2014 year was excessive. It has not shown that s 207-150(1)(e) does not apply. The Share Buy-Back Dividend was made as part of a scheme which was “in the nature of” dividend stripping within the meaning of s 207-155(a) and was one which “had substantially the effect of a scheme by way of, or in the nature of, dividend stripping” within the meaning of s 207-155(b).
CONCLUSION
Returning to the issues identified at [3] above:
(1)First, the Commissioner was authorised to issue the assessment dated 11 August 2020 to the IP Trustee. Therefore, the second and third issues arise.
(2)Secondly, s 100A caused BE Co not to be presently entitled to the income of the IP Trust for the income year ended 30 June 2014.
(3)Thirdly, s 207-35(6) increased the trustee’s liability to tax under s 99A by the amount of the Franking Credit and the amount of the Share Buy-Back Dividend.
(4)Fourthly, the Share Buy-Back Dividend was a distribution “made as part of a dividend stripping operation” as defined in s 207-155. This issue is only relevant in the event that Issue 2 is wrongly decided. If Issue 2 is wrongly decided Issue 3 is irrelevant to the outcome.
The applications should be dismissed.
I certify that the preceding three hundred and sixty-nine (369) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Thawley. Associate:
Dated: 19 September 2022
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