British American Tobacco Australia Services Limited v Commissioner of Taxation [2011] HCATrans 94

[2011] HCATrans 94

[2011] HCATrans 094

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S278 of 2010

B e t w e e n -

BRITISH AMERICAN TOBACCO AUSTRALIA SERVICES LIMITED

Applicant

and

COMMISSIONER OF TAXATION

Respondent

Application for special leave to appeal

FRENCH CJ
GUMMOW J
CRENNAN J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 8 APRIL 2011, AT 9.33 AM

Copyright in the High Court of Australia

MR T.F. BATHURST, QC:   If the Court please, I appear with my learned friends, MR A.J. PAYNE, SC and MS C.A. BURNETT, for the applicant.  (instructed by Baker & McKenzie Solicitors)

MR B.J. SULLIVAN, SC:   May it please the Court, I appear with my learned friend, MR J.H. MOMSEN, for the respondent.  (instructed by Australian Government Solicitor)

FRENCH CJ:   Yes.  Mr Bathurst.

MR BATHURST:   We accept, of course, that we have to confront the position that there are concurrent findings of fact against us in the courts below.  However, we submit that the methodology applied by the courts below to reach those findings, was incorrect.  Shortly put, in determining the dominant purpose of the persons who entered into or carried out the scheme, the courts below focused on one aspect of the scheme propounded to the exclusion of all the other aspects and, as a result, reached their conclusion ignoring what, we submit with respect, was the purpose of the overall scheme.  Can I take your Honours to the scheme?

CRENNAN J:   From what you say, Mr Bathurst, is this an appeal not in respect of principle but in respect of the application of principle to the dominant purpose issue?

MR BATHURST:   No.  We submit it is a question of principle.  The principle shortly is this, both Justice Emmett in first instance, and their Honours in the Full Court, took the view that what was required by the decision of this Court in Hart was looking solely at the counterfactual.  The approach their Honours took was in effect this, they compared what was done to what could have been done, in effect, a direct transfer from British American Tobacco to Imperial and said there could be no legal or commercial reasons other than the tax benefit.

CRENNAN J:   They looked at other factors though, did they not, in that context?

MR BATHURST:   They looked at the eight factors but they only looked at the eight factors, in our submission, solely through that prism.  The error of principle was looking at it solely through that prism and not weighing up at all what we submit was the plain commercial purpose of the scheme.  If I could go to the scheme which the Court will find on page 24 of the application book, paragraph 67 of Justice Emmett’s judgment.  What gave rise to the tax benefit was, in effect, steps two and steps four of the scheme:

the disposal of the 9 Wills Brands from Rothmans –

and -

the making of the choices by the Taxpayer and Rothmans to obtain rollover [relief] in relation to the capital gains made –

The purpose for the sale, as is appears fairly plainly from Justice Emmett’s judgment, was to satisfy the ACCC requirement that the brands be sold to prevent what was, in effect, a global merger between the Rothmans Group and the British American Tobacco Group to take place.  We would submit with respect, that there is little doubt that at least one of the purposes of the scheme was the commercial purpose of disposing of the brands to Imperial.  That, as your Honours will see, is part of the identified scheme.  It is the third bullet point in the scheme.

As was said in Spotless  and Consolidated Press, a consideration of whether that purpose, or whether the purpose was the tax benefit, requires a comparison of both purposes with reference, of course, to the eight factors in section 177D(b).

CRENNAN J:   But is not the biggest point that that disposal to Imperial did not require going via Rothmans?

MR BATHURST:   That is right.  We accept that.

CRENNAN J:   It could have been done directly.  You do not dispute that.

MR BATHURST:   We do not dispute for a moment that the dominant purpose of the transfer to Rothmans was to take a tax benefit or, at least, or perhaps more accurately, to enable Rothmans to utilises losses to offset against the capital gain when it was ultimately sold.

CRENNAN J:   Yes.

MR BATHURST:   We cannot dispute that and we accept, as we put in our submissions, that but for that tax benefit the transaction would not have been structured in that way.  We do not dispute that.  We cannot dispute that, but what we say is the mere fact one step in a scheme was to obtain the tax benefit, does not mean that the dominant purpose of the scheme identified by the Commissioner does not automatically follow - I should put more accurately - that the scheme identified by the Commissioner had that dominant purpose.  The Commissioner did not choose in this case to elect to propound a narrow scheme, namely, just the simple disposal in the making of the election.

There was good reason for that because that is permitted by the legislation.  That is why the wider scheme was chosen, but, once the wider scheme was chosen, in our submission, it was necessary to look to the purpose of that scheme.  Both the trial judge and the Full Court simply looked at the alternative postulant, and as I think I said, reached the conclusion that because it could it have done without the transfer that was the end of the matter.  Can I take your Honours, in that regard, to the judgment of Justice Emmett at page 31 of the book, paragraph 89?

FRENCH CJ:   The essential element finding?

MR BATHURST:   The essential element, yes.  What his Honour says is that the “analysis ignores the essential” element of the concept:

the essential element is to be found in the disposal of the 9 Wills Brands by the Taxpayer to Rothmans and the subsequent disposal by Rothmans to the Imperial Group of the 9 Wills brands, together with the Rothmans Brands.  The desired objective of all of the disposition . . . could have been achieved by a transfer direct from the Taxpayer to the Imperial subsidiaries –

Then, if your Honours could turn to paragraph 91 where his Honour deals with the first factor in section 177D(b). He said in the last sentence of that paragraph:

However, as I have said, once Imperial had chosen the 9 Wills Brands, there is no reason why the Taxpayer could not have transferred or disposed of those brands direct to Imperial or its subsidiaries.

I will not read how his Honour deals with the other factors, but they are all dealt with in our submission through that prism.  The Full Court took the same approach.  If your Honours could go to the judgment of the Full Court in paragraph 53 on page 62 of the book:

The trial judge’s approach and conclusion were both open and correct.  As was said in Hart, “to draw a conclusion about purpose from the eight matters identified in s 177D(b) … require[s] consideration of what other possibilities existed”: at [66] and [94]. In addressing s 177D(b)(i) – (v) and (vii), the trial judge compared the Scheme as carried out with the counterfactual: see [42] above. Such an approach was not only open but is usually required in assessing the dominant purpose of a scheme. A comparison between the Scheme carried out and the counterfactual was important in the present case because it revealed that the manner in which the Scheme was formulated and carried out was, when compared with the counterfactual, explicable only by taxation consequences -

Now, what your Honours ‑ ‑ ‑

GUMMOW J:   Just a minute.  Looking at the Full Court reasons, as one might expect really, this case is fact rich.

MR BATHURST:   The case is fact rich to this extent, that it involved a transaction whereby to satisfy the ACCC requirements the brands had to be transferred.  It involves in an admitted way the brands were transferred.

GUMMOW J:   It involved adoption of a “strategy”, did it not?

MR BATHURST:   It involved the adoption of a strategy to give effect to what, we say, was the commercial purpose.  As we conceded before, but for the tax benefit, a different approach may have been adopted to achieve that commercial purpose.

GUMMOW J:   That does not seem like a special leave case, really, or Part IVA cases, if they are argued properly, will throw up these sort of situations on which there can be different views taken that are properly open.

MR BATHURST:   We accept that, but the difficulty in our respectful submission in this case is that the court, with respect, misinterpreted what your Honour and Justice Hayne said in Hart.  In Hart your Honours certainly said the matter had to be considered by reference to the counterfactual.  We accept that.  What your Honours also said was that the mere fact that a tax benefit was obtained does not of itself invariably lead to the conclusion that the dominant purpose of the scheme was the obtaining of the tax benefit.

FRENCH CJ:   There is the weighing exercise, really involved in that in the end, is there not?  The diversion through the Rothmans Group reminds me a little of the role of the round robin in Lenzo – a case where, I think, I was reversed for giving too much weight to commercial benefits.

MR BATHURST:   We do not suggest for a moment that the weighing exercise does not have to be done.  The error of principle in this case, in our respectful submission, is that weighing exercise was not done.  The approach that the courts took was simply to ignore commercial purpose.  If you look at their Honours’ analysis – I have taken you to Justice Emmett and to the analysis of the Full Court - they do not do what we say is the weighing analysis required.

FRENCH CJ:   They could hardly have ignored commercial benefit.  That was the very large pink elephant.  Where do you say they did that?

MR BATHURST:   If your Honours go, for example, to the end of paragraph 53:

Next, that under the Scheme, and the counterfactual, the merger and its commercial benefits . . . would have been achieved.  Put another way, as the trial judge concluded, it was unnecessary to implement the Scheme to achieve both objectives – the merger and the commercial benefits –

The only basis they took commercial benefit into account was in concluding that it could have been achieved in another way.  They take a similar approach, in our respectful submission, for example, in paragraph 55 where they refer to the:

(value) from Rothmans on the disposition of 9 Wills Brands and avoid a capital gains tax and (2) Rothmans acquired . . . and then was able to participate in the tax losses.

They state what has happened but do not relate it in any way to the competing purposes.  That, in our respectful submission, is where the court fell into error.

The question is important, in our respectful submission, because we do submit that if we are correct in saying that all the court did was look solely at the tax consequences of this scheme and the tax consequences of the counterfactual and that is the correct approach, then, in any case where a commercial transaction is executed, having regard to tax benefit, and one cannot see in the manner of execution as compared to the counterfactual any other reason but the tax benefit, then Part IVA will always apply.  That was not, in our respectful submission, the intention of the legislature and, we submit, it is not what has been said by this Court in Spotless, Consolidated Press or in Hart.  For those reasons, we submit special leave should be granted.

FRENCH CJ:   Thank you, Mr Bathurst.  Yes, we will not need to trouble you, Mr Sullivan.

This case concerns the application by the Commissioner of Taxation of Part IVA of the Income Tax Assessment Act 1936 to deny a tax benefit accruing to the applicant from the non‑inclusion in its assessable income of a capital gain of over $118 million derived from the sale of valuable cigarette brands. The sale of the brands was made to a competitor in the Imperial Group of tobacco companies in order to satisfy a regulatory requirement attaching to the proposed merger of the applicant’s corporate group, the British American Tobacco Group with the Rothmans Group of companies.

The applicant sold the brands to a member of the Rothmans Group which on‑sold it to the competitor company.  This enabled the applicant and the Rothmans Group to take advantage of accrued capital losses in the Rothmans Group and obtain rollover relief pursuant to subdivision 126B of the Income Tax Assessment Act 1997 in relation to capital gains made by the applicant on the sale of the brands.

The Full Court of the Federal Court dismissed the applicant’s appeal against a decision of a single judge of the court dismissing the applicant’s appeal against an amended assessment issued by the Commissioner. The applicant seeks special leave to appeal from the decision of the Full Court. The special leave questions relate to the approach taken by the Full Court to the application of section 177D(b) of the Income Tax Assessment Act 1936 in determining whether it could be concluded that a person who entered into the scheme identified by the Commissioner did so for the purpose of enabling the applicant to obtain a tax benefit in connection with the scheme.

The particular issues which were raised in that context included the allegedly erroneous application of a “but for” test by the Full Court in determining purpose and the allegedly erroneous proposition in the Full Court’s judgment that the question posed by section 177D(b) could be answered by concluding that it was unnecessary to implement the scheme identified under Part IVA in order to achieve the commercial benefits effected by that scheme. In our opinion, the approach taken by the Full Court applied an uncontroversial interpretation of the legislation to the facts. No question of general principle warranting the grant of special leave is exposed. Special leave will be refused with costs.

AT 9:48 AM THE MATTER WAS CONCLUDED