Challenger Listed Investments Ltd v Commissioner of State Revenue
[2010] VSC 464
•19 October 2010
| IN THE SUPREME COURT OF VICTORIA |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT
LIST F
No. 10080 of 2009
IN THE MATTER of CHALLENGER LISTED INVESTMENTS LIMITED
| CHALLENGER LISTED INVESTMENTS LIMITED (AS TRUSTEE FOR CHALLENGER DIVERSIFIED PROPERTY TRUST 1) | Applicant |
| v | |
| COMMISSIONER OF STATE REVENUE | Respondent |
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JUDGE: | Pagone J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 21 September 2010 | |
DATE OF JUDGMENT: | 19 October 2010 | |
CASE MAY BE CITED AS: | Challenger Listed Investments Ltd v Commissioner of State Revenue | |
MEDIUM NEUTRAL CITATION: | [2010] VSC 464 | |
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TAXATION – Appeal against assessment by the Commissioner of State Revenue – Public float of a land rich unit trust – Duties Act 2000 (Vic) (‘the Act’) – A trustee cannot hold an ‘interest’ nor ‘acquire’ an interest for the purposes of ss 76 and 77 of the Act – Whether s 89C of the Act applies – Whether transactions occurred ‘under an agreement or arrangement’ – Exemptions under ss 85(1), 85(2) of the Act – Reduction in penalty tax – Taxation Administration Act 1997 (Vic) s 30(3)(a) – Whether taxpayer took reasonable care – Whether ‘may’ confers a power to be exercised when pre-conditions exist – Interpretation of Legislation Act 1984 (Vic) s 45.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr J. de Wijn QC, Mr M. Richmond SC and Mr T. Grace | Mallesons Stephen Jaques |
| For the Defendant | Ms K. McMillan SC and Mr P. Nicholas | Commissioner of State Revenue |
HIS HONOUR:
Challenger Listed Investments Limited (“CLIL”) appeals against an assessment made against it by the Commissioner of State Revenue (“the Commissioner”) of $7,976,100 duty, $1,994,025 penalty and $1,027,950.60 interest assessed under s 89C of the Duties Act 2000 (Vic) (“the Act”). The transactions which gave rise to the assessment concern a public float of a land rich unit trust called the Challenger Diversified Property Trust 1 (“Trust 1”) in October 2006 as part of a public invitation for units in Challenger Diversified Property Group. The transactions included the transfer by the trustee of a Challenger Trust of 61% of the units in Trust 1 to the public and 39% of the units to another trustee within the Challenger Group. The Commissioner determined that s 89C of the Act applied to the transfer of the units including internal transfer of the 39% of the units and assessed the duty, penalties and interest to which I have referred.
The Court of Appeal has since decided Commissioner of State Revenue v Landrow Properties Pty Ltd[1] which the parties agree is binding upon me and requires me to determine the appeal in favour of CLIL. The Commissioner, however, contended that the decision in Landrow is incorrect and seeks to challenge its correctness. The Commissioner has not sought special leave to appeal the decision in Landrow on the basis of advice from senior counsel in Landrow that the case may not be the best vehicle through which to test the important legal issues raised by the decision. In seeking to find a suitable vehicle for the Courts to consider the legal issues raised in Landrow, there is no suggestion of the Commissioner “ignoring the views of the judicial branch of government”[2] or in the Commissioner acting other than dutifully to facilitate the correct judicial declaration of the law. The case before me was, therefore, conducted on the basis that the decision in Landrow applied to dispose of the proceeding in favour of the taxpayer but that I should deal with the other issues in the event that the Commissioner is ultimately successful in having the decision in Landrow overturned.
[1][2010] VSCA 197 (Unreported, Neave, Harper and Hansen JJA, 6 August 2010).
[2]Cf Commissioner of Taxation v Indooroopilly Children Services (Qld) Pty Ltd (2007) 158 FCR 325, 327 [3] (Allsop J).
Challenger Financial Services Group Limited (“Challenger”) is a public company listed on the Australian Stock Exchange. Challenger Life Company Limited (“CL 2” and in the documents sometimes referred to as “Challenger Life”) is a wholly owned subsidiary of Challenger, is a registered life insurance company regulated by the Life Insurance Act 1995 (Cth) and is subject to the supervision of the Australian Prudential Regulation Authority. Before the public float, CL 2 owned 100% of the units in the trust known as the Challenger North of England Gas Holding Trust (which for present purposes may conveniently be described as the “Old Holding Trust”). The trustee of the Old Holding Trust is a company called Challenger Life Nominees No. 2 Limited (“CPFML”). Before the public float the trustee of the Old Holding Trust held all of the units in Trust 1. It was decided to float 61% of the units in Trust 1 to the public and that the 39% of the units in Trust 1, which were to remain within the Challenger Group, were to be transferred from the Old Holding Trust to Challenger Life Nominees Pty Ltd (“CPNPL”) as trustee of the Challenger Australia Listed Property Holding Trust (which for present purposes may conveniently be described as the “New Holding Trust”). In simple diagrammatic terms the ownership of units in Trust 1 before and after the float may be represented as follows:
PRE FLOATPOST FLOAT
The two key components of the transactions to produce the change in ownership were the intra group transfer of units in Trust 1 from the Old Holding Trust to the New Holding Trust and the issue of units in Trust 1 to the public.
Another fundamental feature in the overall transactions involved in the float was the acquisition by Trust 1 from companies within the Challenger Group of properties for some $637.7 million. In simple terms the overall project (referred to in some of the documents as “Project Contender”) involving the public float included the acquisition by Trust 1 of properties in Victoria and elsewhere from within the Challenger Group. The funds for the acquisitions were to come in part from the proceeds of the public float ($326.7 million), in part from the purchase by the New Holding Trust from the Old Holding Trust of units in Trust 1 ($208.9 million) and in part from borrowings. A consequence of the project was that 61% of the economic interest in real estate previously owned directly or indirectly by Challenger was transferred to the public through its entitlement to units in Trust 1.
The Commissioner, however, did not seek to tax only the transfer of the 61% interest which the public acquired but also the internal transfer of the 39% interest in units from the Old Holding Trust to the New Holding Trust. The imposition of duty upon the 39% internal transfer might seem both counterintuitive and contrary to policy. Intuitively one would think that duty would fall upon such transactions which transferred 61% of the economic ownership from Challenger entities to the public, and that duty would not fall upon the internal Challenger transactions which may not have transferred economic ownership from the beneficial owners. Indeed, the Commissioner contended that duty under the Act fell upon the internal transfers notwithstanding his view that the acquisition of units by the public did not trigger an exception from a determination favourable to the taxpayer made under the relief for corporate reconstruction provided for in Chapter 11 of the Act. The correct result under the Act may be that duty falls upon transactions effecting an internal transfer which do not alter beneficial ownership but, if it is, it may be desirable for the legislature to review whether it intended the provisions to impose duty upon an internal reorganisation where no underlying economic transfer of ownership in property may have occurred. In this case, however, it is important to keep in mind that a step in Project Contender required a transfer of property to Trust 1. A consequence of that was that the fund held beneficially in Trust 1 after the float for CL 2 was not just less than it had been before (39% rather than 100%) but also included properties which had been acquired by Trust 1 through the funds raised through Project Contender.
A. Landrow
Section 89C was enacted with effect from 13 May 2004. The explanatory memorandum accompanying the Bill described s 89C as dealing with “a means of acquiring high-value real property from a private unit trust for the portfolio of a proposed managed fund, without payment of duty”.[3] Section 89C(1) provides:
[3]Explanatory Memorandum, Statute Taxation Acts (Tax Reform) Bill 2004 (Vic) 24.
(1) This section applies if—
(a)a land rich landholder that is a private unit trust scheme becomes, through whatever means, a public unit trust scheme; and
(b)under an agreement or arrangement made before the scheme becomes a public unit trust scheme—
(i)a payment is made to or on behalf of a person who, or persons who together, held units representing an interest of at least 20% in the private unit trust scheme immediately before the agreement or arrangement was made; or
(ii)a person referred to in subparagraph (i) ceases to hold an interest in the public unit trust scheme that is relevant to an interest of at least 20% in the private unit trust scheme immediately before the agreement or arrangement was made (whether as a consequence of a payment referred to in that subparagraph or otherwise).
It is a precondition to the operation of s 89C either that a payment was made to a person or persons who held an “interest” of at least 20% in a land rich unit trust[4] or that such a person cease to hold an “interest” in the land rich unit trust. Section 3 defines “entitled” for the purposes of Chapter 3 (which includes s 89C) to mean beneficially entitled. Section 3 defines “interest” in a landholder to have the meaning given by s 76(1). It was that definition in the context of whether a person had a beneficial entitlement that was the subject of the decision in Landrow.
[4]Duties Act 2000 (Vic) s 89C(1)(b)(i).
In Landrow the Court of Appeal decided that a trustee could neither hold an “interest” nor “acquire” an interest for the purposes of ss 76 and 77 of the Act. It follows from the reasoning of the Court of Appeal in Landrow that under the provisions of Part 2 of Chapter 3 (and in particular s 76(1)), as in force when the Project Contender transactions occurred, a person who held shares in a land rich private company or units in a land rich private unit trust did not hold an “interest” in the company or unit trust for the purposes of the land rich provisions if the person held the shares or units in the capacity of trustee.
In the case before me the only person relevant to the potential application of s 89C(1)(b) was CPFML as trustee of the Old Holding Trust. Only CPFML could be a relevant person to whom a payment was made or who might cease to hold an interest for the purposes of s 89C(1)(b)(i) or (ii). In either case, however, CPFML was a trustee of a trust and as such could not hold an “interest” in Trust 1 within the meaning of the definition of “interest” in s 76(1) as held by the Court of Appeal in Landrow. That, as the Commissioner accepts, is sufficient to dispose of this proceeding in favour of CLIL.
Counsel for CLIL contended that in the context of the case before me the decision in Landrow was correct both as a matter of principle of statutory interpretation and as a matter of principle in promoting the policy of the legislation. It is neither necessary nor appropriate for me to consider those matters since the decision in Landrow is binding upon me. It is only relevant to consider the other arguments advanced on behalf of CLIL if the decision in Landrow is overruled and, in view of the Commissioner’s intention to challenge the decision it is desirable that I consider the other arguments. Indeed, although the parties accept that the decision in Landrow governs this case, it was the operation of s 89C which, until Landrow was decided, had been the principal focus of dispute between the parties.
B. Section 89C
The then Treasurer when introducing the Bill enacting s 89C described the fundamental basis of stamp duty as the imposition of a tax upon “changes in beneficial ownership in land”.[5] The enactment of s 89C was said by the Treasurer to ensure that tax was collected on all transactions in property involving land by changing the existing tests to include the conversion of private unit trusts into public unit trusts as part of a sale arrangement and takeovers of public unit trusts. The Bill also introduced general anti-avoidance provisions to deal specifically with the land rich provisions[6] but s 89C itself is made to depend not upon conclusions about anti-avoidance but, rather, upon the existence of specific conditions set out in the section. That is consistent with the Treasurer’s observation in the second reading speech to the effect that s 89C would apply in “specified circumstances”.
[5]Victoria, Parliamentary Debates, Legislative Assembly, 13 May 2004, 1314 (John Brumby).
[6]Duties Act 2000 (Vic) ch 3 div 6.
C. Conversion from private unit trust scheme to a public unit trust scheme: s 89C(1)(a)
A number of other conditions need to be satisfied before s 89C can apply.[7] One is that a land rich landholder must be converted from a private unit trust scheme to a public unit trust scheme.[8] It was common ground between the parties that this precondition was met. Paragraph 24 of the agreed facts recorded that on 20 October 2006 Trust 1 was admitted to the official list of the Australian Stock Exchange and the public float of the stapled units including those in Trust 1 commenced at 12.00pm on 23 October 2006.
[7]Other than the condition discussed above in [4] – [6].
[8]Duties Act 2000 (Vic) s 89C(1)(a).
D. Under an agreement or arrangement
The next precondition for the operation of s 89C is that one of two things must occur “under” an agreement or arrangement: either a payment must be made to a person or persons of the kind contemplated in s 89C(1)(b)(i), or such a person must cease to hold an interest in the public unit trust scheme as contemplated by s 89C(1)(b)(ii). The first of the two alternative events contemplated in s 89C(1)(b) is the making of a payment. This was satisfied by payment of $208,893,199 by the trustee of the New Holding Trust to the trustee of the Old Holding Trust for the agreed purchase price for 208,893,199 stapled units in Trust 1 and Trust 2. The alternative event contemplated by the section was the cessation of the holding of an interest in Trust 1. Upon the issue of units in Trust 1 to the public investors under the initial public offering on 17 October 2006, the Old Holding Trust ceased to hold its 100% interest in Trust 1. Its interest in Trust 1 diminished to a 39% interest constituted by a holding of 208,893,199 units in Trust 1 stapled to the same number of units in Trust 2. The 61% interest was held, collectively, by the public investors constituted by the holding of 326,730,232 stapled units in the two trusts issued to the public investors. The Old Holding Trust ceased to hold its 39% interest in Trust 1 by sale and transfer of the units from the Old Holding Trust to the New Holding Trust.
It follows that either of the two events contemplated by s 89C are satisfied and the focus of inquiry must turn to whether they occurred “under” an agreement or arrangement made before the scheme became a public unit trust scheme. The parties dispute whether this precondition is satisfied and analyse its terms differently. In particular the parties dispute whether the things that might satisfy either of the alternative events contemplated in s 89C(1)(b) can be said to have occurred “under an agreement or arrangement”. In that regard the Commissioner’s submissions tended to focus upon a broad description of the transactions through which the various events occurred whilst the taxpayer’s submissions tended to focus upon the legally independent consequences of potentially separate transactions. Each approach has a danger in misconstruing the terms of the section and in misapplying its terms to the facts. Neither “agreement” nor “arrangement” is defined in the Act but each word is capable of wide meaning and application.[9] An “a priori” identification of an arrangement unconnected with the statutory enquiry is apt to identify the arrangement without sufficient attention to the purpose for which it is to be identified. Similarly a focus upon the legal independence of potentially separate arrangements is apt to focus upon an enquiry not called for by the section and erroneously either include or exclude events that may in truth be “under” one arrangement.
[9]Bell v Federal Commissioner of Taxation (1953) 87 CLR 548, 573 (Dixon CJ, Williams, Webb, Fullagar and Kitto JJ); Federal Commissioner of Taxation v Lutovi Investments Pty Ltd (1978) 140 CLR 434, 444 (Gibbs, Stephen, Mason, Murphy and Aickin JJ).
On 13 September 2006 Challenger issued a public disclosure statement inviting subscription for units in an initial public offering of Challenger Diversified Property Group. That was made pursuant to Board approval which appears to have been given in late August 2006. The Board was given a memorandum from Mr Trent Alston and Mr Paul Skinner dated 16 August 2006 setting out the commercial benefits for CL 2 from the project described in the memorandum. It contemplated an initial public offering of 326,730,232 stapled units in two trusts to public investors, the establishment of the New Holding Trust, a purchase agreement by which the trustee of the New Holding Trust would buy from the trustee of the Old Holding Trust 208,893,199 units in the two trusts, the official quotation of the units in the trusts and the transfer of units from the Old Holding Trust to the New Holding Trust. Other contemporaneous documents confirm that a number of transactions were contemplated as part of the project identified as Project Contender, and undertaken, for the one overall objective as conceived and implemented.
An objective of the transactions in question was to raise funds by a public subscription. The independent chairman, Mr Stephen Gerlach, described what Challenger Diversified Property Group was seeking in the public disclosure statement as being to raise $326,700,000 through an issue of units. His statement in the public disclosure statement said that Challenger Life (that is, CL 2) had already subscribed for an additional 208,900,000 units and that the total proceeds raised on completion of the initial public offering would be $535,600,000 with CL 2 (Challenger Life) holding 39% of the units.
It is the mechanics by which the objectives were achieved that are in issue in the question of whether either of the two events contemplated by s 89C(1)(b) occurred under an agreement or arrangement. The mechanics contemplated, and effected, a number of transactions some of which could conceivably have been entered into independently from each other. Amongst them were an issue of 61% of the units in Trust 1 to the public and an acquisition by the New Holding Trust of 39% of the units in Trust 1 from the Old Holding Trust. The Challenger Diversified Property Group (“CDPG”) described in the product disclosure statement was formed by the stapling of units in the Challenger Diversified Property Trust 1 and the Challenger Diversified Property Trust 2 under their respective constitutions. Stapling simply meant that the units in each trust could not be traded separately. Trust 1 was established to hold passive property assets with its income to be distributed to unit holders. Trust 2 was established to undertake “active” property transactions (including developments) on behalf of CDPG and its income was to be taxed as if it were received by a company. The public disclosure statement made no specific mention of any transfer of units from the Old Holding Trust to the New Holding Trust but that had always been contemplated as part of the project. In the public disclosure statement it had been represented that 39% of units would be held by Challenger Life, namely, CL 2. The acquisition by the New Holding Trust of the units in Trust 1 from the Old Holding Trust for $208,000,000 was undertaken as part of the overall project contemplated and described in the public disclosure statement by which the total proceeds raised “on completion of the initial public offering” was to be $535,600,000 with Challenger Life (CL 2) holding 39% of the units. The letter from the independent chairman may not have identified a specific internal transaction but it did note that Challenger Life (CL 2) had “already subscribed for” the additional 208,900,000 units. The same statement appeared on page 6 which described the terms of “the offer” as including Challenger Life (CL 2) having “already subscribed for an additional 208.9 million Units at the Issue Price ($208.9 million)”. The whole of the proceeds were applied for the acquisition of properties from Challenger Life in various places in Australia. Clause 2.3 disclosed that the use of the proceeds following settlement of the offer would be for the funds to acquire interests from CL 2. A property summary appeared in Clause 2.7 and an independent valuation in Appendix A to the public disclosure statement. The acquisition of the units by the New Unit Trust was done for no purpose other than as part of Project Contender.
Section 89C(1)(b) contemplates a nexus between one of either two events and an agreement or arrangement. The nexus required by the section is that the event occur “under” an agreement or arrangement made before the scheme becomes a public unit trust scheme. The use of the word “under” is important and may be contrasted with words requiring a direct causal nexus such as “by”. The meaning of the phrase “under an agreement or arrangement” depends upon its context. In this context the relevant agreement or arrangement must “envisage” or “provide for” the event [10] without needing to be the legally operative source or cause of the event.[11] The word “under” contemplates legally independent transactions occurring as part of a broader scheme. An “arrangement” is broader than a contract or an “agreement” and embraces “all kinds of concerted action by which persons may arrange their affairs for a particular purpose or so as to produce a particular effect”.[12] An “arrangement” may be something less than a binding contract or agreement, and may be something in the nature of an understanding which may not be enforceable at law.[13] In this case it seems clear that there was an arrangement made by at least 13 September 2006 (the date of issue of the public disclosure statement) under which a payment of $208,900,000 was made to or on behalf of the Old Holding Trust. Similarly by that date the Old Holding Trust was to cease to hold an interest in the public unit trust scheme under the arrangement.
[10]Federal Commissioner of Taxation v Energy Resources of Australia (1994) 126 ALR 161, 204 (Hill J); Kiwi Brands Pty Ltd v Federal Commissioner of Taxation (1997) 148 ALR 605.
[11]Cf Federal Commissioner of Taxation v Sara Lee Household & Body Care (Australia) Pty Ltd (2000) 201 CLR 520.
[12]Bell v Federal Commissioner of Taxation (1953) 87 CLR 548, 573 (Dixon CJ, Williams, Webb, Fullagar and Kitto JJ).
[13]Newton v Federal Commissioner of Taxation (1958) 98 CLR 1; Federal Commissioner of Taxation v Lutovi Investments Pty Ltd (1978) 140 CLR 434, 444 (Gibbs, Stephen, Mason, Murphy and Aickin JJ).
I am unable to accept the submissions on behalf of CLIL that the arrangement did not extend to the 39% acquisition by the New Holding Trust from the Old Holding Trust of interests in Trust 1 which had become a public unit trust scheme on 20 October 2006. The fact is that each of these transactions were conceived and implemented as part of Project Contender. They were described as part of the stages in the stapled group structuring paper and, indeed, their integral role in the overall arrangement was relied upon by CLIL in its case against the imposition of penalties. In that regard, CLIL contended that the potential application of s 89C was something upon which they had taken reasonable care to obtain advice by the advice sought and obtained from Mallesons about “the stamp duty issues associated with the Project Contender Proposal”. Implicit in that submission is that the events relied upon by the Commissioner to apply s 89C were to occur under the arrangement upon which the advice was sought and obtained. Furthermore, although the various transactions might be capable of being effected independently and had independent legal consequences, they were done and entered into for the one overall commercial end. The transfer of units from the Old Holding Trust to the New Holding Trust was the means by which CL 2 would hold the 39% interest which the public was told about in the public disclosure statement. There was no reason for the transfer of 39% interest other than its place in the commercial objective in the public offering.
E. Land rich at the time when the agreement or arrangement was made
CLIC next contended that s 89C(1) was nonetheless not applicable because the public unit trust scheme must be land rich at the time that the “agreement or arrangement” is made. This construction is said to be supported by a number of textual features in s 89C which it is suggested contemplates that a private unit trust scheme be land rich at the time an agreement or arrangement was made and does not contemplate that a private trust scheme becomes land rich during the implementation of the agreement or arrangement. I am unable to accept that this construction is compelled or required by the language of the provision or by the underlying policy which it expresses. It may be, unsurprisingly, that the section is primarily directed to existing land rich private unit trust schemes becoming public unit trust schemes but neither the language nor the policy requires the exclusion from s 89C of an arrangement in which a private unit trust scheme becomes land rich during the implementation of an agreement or arrangement. The section certainly does not impose any such limitation expressly. The legislature has contemplated temporal requirements and imposed one in respect of the time at which an agreement or arrangement was made. Section 89C(1)(b) makes clear that the relevant agreement or arrangement must be made before the scheme becomes a public unit trust scheme. It therefore contemplates the existence of an agreement or arrangement before a scheme becomes a public unit trust scheme but under which (whether before or after) a specified payment is made or a specified person ceases to hold the stipulated interest. In this case the arrangement was made by no later than 13 September 2006, the scheme became land rich on 16 October 2006 and it became a public unit trust scheme on 23 October 2006.[14]
[14]See above at [8].
F. Inclusion of the conversion in the agreement or arrangement
A separate contention advanced on behalf of CLIL was that the relevant agreement or arrangement contemplated by s 89C must include the conversion of the land holder to a public unit trust scheme. This is said to be a desirable construction to give a sensible operation to the provisions and as being consistent with the policy evident in the second reading speech and explanatory memorandum for the Bill which introduced the section. That such a construction is consistent with the policy of the section need not be doubted and, indeed, it may be the obvious or usual case to which the section is directed. The relevant enquiry, however, is whether the section should be limited by reference to some unstated restriction not found in the provision nor excluded by the policy to which the section is otherwise directed. I can see no reason why the section should be restricted in the way contended on behalf of CLIL. The words do not require it and, in my view, the policy in the section is that of imposing duty upon transactions where land rich entities enter into transactions where underlying ownership is transferred through, in this instance, the change of status from a private unit trust scheme to a public unit trust scheme. That policy is advanced by the construction permitted by the plain words of the section without invoking implications for their restriction. In any event, even if the provision was to be restricted as contended by CLIL, in this case the conversion of the landholder to a public unit trust scheme was provided for by the arrangement as conceived, as announced publicly and as implemented.
G. Exemption under s 85(1)
The taxpayer maintained that it was nonetheless entitled to an exemption under s 85(1) even if s 89C applied. Section 85(1)(a) provides an exemption where there is an acquisition by a person of an interest in a landholder:
[I]f the means by which the person acquired the interest would have resulted in no ad valorem duty being payable under Chapter 2 had the subject of the acquisition been a transfer of the land of the landholder to the person.
The operation of this exemption contemplates the postulation of an hypothetical transaction in which the subject of the acquisition is a transfer of the whole or part of the land of the landholder rather than the interest in the landholder which was actually acquired. In other words, the section requires one to ask whether duty would have been payable if, instead of a transfer of an interest in the land, the means by which the person acquired the interest had, rather, been a transfer of the land of the landholder instead.
On the hypothesis required by s 85(1)(a), CLIC maintained, and the Commissioner accepted, that the 39% acquisition in the units in Trust 1 from the Old Holding Trust by the New Holding Trust would have had the benefit of s 250B of the Act and, therefore, would have been exempt from duty through the definition of “eligible transaction” in s 250A. However, the Commissioner contended that s 85(1)(a) does not apply to s 89C because of the exclusion in s 89C(4).
Section 89C(4) provides:
Despite anything to the contrary in Division 1 of Part 2 of Chapter 11, nothing to which this section applies is capable of being an eligible transaction for the purposes of that Division.
The clear purpose and effect of s 89C(4) is to exclude the operation of Division 1 of Part 2 of Chapter 11 of the Act where s 89C would otherwise apply. Section 250A is found in Division 1 of Part 2 of Chapter 11 of the Act and, therefore, is excluded from operation where s 89C operates. CLIC contended, however, that s 89C(4) is not in conflict with s 250A where an exemption is conferred by a provision other than s 250A. In this case it was contended that the exemption was not conferred by s 250A but by s 85(1)(a).
The relationship between ss 85(1)(a), 89C(4) and 250A could, perhaps, be expressed more clearly than it has been but the possibility of textual improvement does not establish ambiguity or contrary construction. It seems to me, however, that the specific provision in s 89C(4) evinces a legislative intention to exclude the operation of s 250A whether directly or indirectly and that, therefore, there is no warrant to limit its exclusion as effected by s 89C(4) by applying a more generally expressed exemption which does not in turn direct itself to the clear, express and specific exclusion in s 89C(4). Accordingly s 85 can have no operation to enliven s 250A in the face of s 89C(4).
H. Exemption under s 85(2)
The next exemption relied upon by CLIL was that found in s 85(2) which provides:
An acquisition by a person of an interest in a landholder is an exempt acquisition if the Commissioner so determines, being satisfied that the application of this Part to the acquisition in the particular case would not be just and reasonable.
CLIC maintained that the Commissioner ought to determine that it would not be just and reasonable to apply s 89C to the acquisition in this case. CLIL contended that the Commissioner ought to have considered whether the application of s 89C to the New Holding Trust’s acquisition of the 39% interest of the Old Holding Trust was within the legislative purpose of s 89C read in light of the scheme of the land rich provisions as a whole. It contended that the Commissioner had not addressed that question and, therefore, that the exercise of his discretion miscarried in law.
The Commissioner accepted that his position with respect to the nature and scope of the dispensing power under s 85(2) was as quoted from his reasons for refusing to apply the section as follows:
(b)Where a tax is imposed subject to a discretionary dispensing power, the purpose of the dispensing power is to avoid the need to specify the minutiae of every circumstance where the tax burden is to be relieved. However, the dispensing power is incidental and ancillary, and must not defeat the primary object of the taxing legislation. See Giris Pty Ltd v Federal Commissioner of Taxation (1968) 119 CLR 365 at 381 per Menzies J and Federal Commissioner of Taxation v Swift (1989) 20 ATR 1434 at 145 per French J. The dispensing power is thus to deal with unforseen or unexpected consequences arising on the facts of a particular case.
(c)In the context of Part 2 of Chapter 3 of the Act, given that the legislation already contains very detailed provision for which (sic) is and is not to be brought to duty, it is considered that the scope for exercise of the discretion in section 85(2) is limited. This is reflected in the Revenue Ruling DA.036 where the Commissioner has described his approach to section 85(2) stating (at page 4 of the Ruling):
The Commissioner does not consider section 85(2) of the Act to have a broad application. Generally, the Commissioner will exercise the discretion under section 85(2) to exempt the acquisition of an interest in a land rich landholder if the acquisition would be dutiable because of an anomaly in the application of the land rich provisions (whether or not a specific exemption in the Act applies). The Commissioner takes the view that under these circumstances it would not be just and reasonable to impose duty under Part 2 of Chapter 3 of the Act to the acquisition.
(d)The Commissioner’s view is that the application of section 89C of the Act to this matter is not anomalous or abnormal and the Commissioner does not exercise the discretion in section 85(2) in the taxpayer’s favour for any of the reasons submitted in the Objection.
It is clear from the Commissioner’s reasons that he applied the view that the statutory criteria of whether something is just and reasonable is to be satisfied by asking whether the application of the section to particular facts is “not anomalous or abnormal”. In my view there is no warrant for the substitution of “not anomalous or abnormal” for the statutory formula “just and reasonable”.
It may readily be accepted, as the Commissioner said, that the purpose of a dispensing power is to avoid (in many if not in all cases) the need to specify the minutiae of every circumstance where the tax burden is to be relieved. It may also be the case that in some circumstances whether it is just and reasonable to exercise the dispensing power in s 85(2) will be satisfied by considering whether the application of the section is anomalous or abnormal. However, there is no justification to embark upon a consideration of whether to apply the section in the way he has done in this case. The statutory test is not whether application of the provision to the facts of a case are anomalous or abnormal but rather (however helpful those concepts may be to the conclusion) whether application of the provisions to the acquisition “in the particular case” would “not be just and reasonable”. What the Commissioner is compelled to consider is everything which may bear relevantly and probatively both for and against the exercise of the discretion and to do so by reference to the statutory criteria. The Commissioner’s stated reasons for refusing to apply s 85(2) do not reveal a consideration of whether the application of s 89C to the circumstances in question come within the policy the section was intended to cover.
Taxpayers able to rely upon s 85(2) have a statutory right to have considered whether their facts and circumstances come within the statutory criterion by reference to which a discretion might be exercised in their favour. The taxpayer in this case is entitled to have the Commissioner consider whether its facts come within the statutory criterion of whether application of the section to its particular circumstances would not be just and reasonable. It is not appropriate for the Commissioner to substitute some other test for that which the legislature has chosen as the basis upon which the taxpayer may be treated favourably or to narrow the breadth of the statutory inquiry which is called for. It is clear from the Commissioner’s reasons, and from his failure before me to justify the exercise of the discretion on any other basis, that application of s 89C to the facts in question on the basis that it was “not anomalous or abnormal” was seen by him as a limitation on what would otherwise have been a broader inquiry for a consideration of whether to exercise the discretion conferred by s 85(2).
I would, if I had been required to do so, remit the matter back to the Commissioner for a re-consideration of whether s 85(2) should be applied to the particular circumstances by reference to all matters which bear relevantly and probatively on the exercise of the discretion. It is a feature of modern taxing legislation that the basis of tax is at times expressed more broadly than the policy underlying the tax requires and that the language used to impose the tax is expressed less precisely than may be desirable in every case. The discretion in the Commissioner to relieve a taxpayer from the burden of tax is a means by which the legislature has entrusted to the Commissioner the duty to administer the tax legislation by reference to its terms to the extent that they are consistent with the policy they express. The exercise of the discretion is a matter for the Commissioner but a matter that may be relevant to its exercise is the extent to which the assessment brings to tax “changes in beneficial ownership in land”.[15] In that context it may also be relevant for the Commissioner to consider the policy and effect both of the corporate reconstruction relief provided for in Chapter 11 of the Act and the impact of such determinations as were made in this case under those provisions.
[15]Victoria, Parliamentary Debates, Legislative Assembly, 13 May 2004, 1314 (John Brumby).
I. Reduction in penalty
Whether the penalty should have been reduced by the Commissioner is a question which arises if CLIL failed on the substantive issues. Section 30(1) of the Taxation Administration Act 1997 (Vic) (“the Administration Act”) provides that the amount of penalty tax payable in respect of a tax default is 25% of the amount of tax unpaid. Section 30(3) provides that the Commissioner may determine that no penalty tax is payable in respect of a tax default if the Commissioner is satisfied either that the taxpayer took reasonable care to comply with the taxation law or the tax default occurred solely because of circumstances beyond the taxpayer’s control other than by reason of financial incapacity.[16] In this case CLIL sought remission of penalty on the basis that it took reasonable care and that any “tax default” occurred because of circumstances beyond the taxpayer’s control.
[16]Taxation Administration Act 1997 (Vic) ss 30(3)(a), (3)(b).
CLIL plainly took reasonable care to comply with the taxation law. CLIL, and indeed other companies within the Challenger Group affected by the transactions, sought the advice of Mallesons on the stamp duty issues associated with what was referred to as “The Project Contender Proposal”. Mallesons were given details of the proposal in a paper entitled “Stapled Group Structuring Paper” dated 11 September 2006. That document was tendered in evidence by Mr Michael Foggarty, a member of Mallesons and formerly a Deputy Commissioner of Stamp Duties with the State Revenue. The structuring paper upon which the Mallesons opinion was based clearly shows each of the transactions which the Commissioner maintains gave rise to the assessment under s 89C. The advice sought was on the stamp duty issues associated with the project and there is no suggestion of any attempt to exclude the possibility of s 89C being considered. The advice from Mallesons did not refer to s 89C nor to any potential liability to land rich duty on account of the conversion of a private unit trust scheme to a public unit trust scheme. Mr Skinner, an executive director with Challenger who was actively involved with the modelling and investment structure, gave evidence of no advice having been received from anybody or of anybody having mentioned the possibility of s 89C applying to the transactions until after they had been completed. Similarly, Mr Vardanega, the in-house lawyer who acted for CLIL in relation to the initial public offering pursuant to the public disclosure statement, gave evidence that none of the advice received referred to the possibility that the conversion of Trust 1 (a private unit trust scheme) to a public unit trust scheme would potentially trigger a liability to land rich duty in Victoria or to the application of s 89C.
In Snowy Hydro Ltd v Commissioner of State Revenue[17] Davies J said:
In my view, the SRO erred in law in not reducing penalty to nil under s 30(3)(a) of the Act. It was a relevant consideration that the taxpayer had obtained legal advice as to the duty consequences of the transaction. It was also a relevant consideration that the liability to pay the tax involved difficult questions of characterisation of the units as fixtures and chattels and of construction of the Act about which other minds may differ from the view of the SRO.
The SRO should have taken these matters into account in determining whether it was satisfied that the taxpayer had taken reasonable care.[18]
The application of taxing provisions has become increasingly complicated, and at times uncertain, with the inevitable consequence that taxpayers must rely upon expert legal advisors to navigate their way through complex and difficult provisions. The taxpayer in this case did precisely that. The duty cast upon the lawyers by the retainer and the law was to consider provisions which were likely to apply to the transactions in question.[19] Whatever fault may be found with the legal advisors, the taxpayers took reasonable care to comply with the law by seeking advice and acting upon it. The Commissioner was in error in not considering that CLIL had taken reasonable care to comply with the taxation law. The evidence available to me would appear to satisfy the condition stipulated in s 30(3)(a) to permit the Commissioner to determine that no penalty tax was payable.
[17][2010] ATC 20-185.
[18]Ibid [81]-[82].
[19]Bristol & West Building Society v May May & Merrimans (a firm) [1996] 2 All ER 801, 809 (Chadwick J).
The conclusion that s 30(3)(a) had been satisfied might ordinarily determine the question of penalty in favour of the taxpayer if the word “may” were construed as conferring a power upon the Commissioner which had to be exercised when its pre-conditions were found to exist, rather than as conferring a discretion which might or might not be exercised. The word “may” in statutes is sometimes used to confer a power which is to be exercised if the conditions upon which the power may be exercised are found to exist.[20] Section 45 of the Interpretation of Legislation Act 1984 (Vic), however, requires that the word “may” when used in a conferring power be construed as meaning that the power so conferred “may be exercised, or not, at discretion”. The proper construction of s 45(1) in such circumstances may be problematic.[21] It is not clear how such a discretion is to be exercised where the statute conferring the power stipulates all of the considerations relevant to the exercise of the discretion. In particular it is not clear how s 45(1) might permit the Commissioner not to exercise the power if the only considerations permitted by the conferring statute to be taken into account have been satisfied. Indeed, if the Commissioner were to take into consideration factors other than those in the conferring statute it might be thought that the exercise of the discretion had been misdirected and was wrong in law. Nonetheless, the effect of s 45(1) upon s 30(3) of the Administration Act would appear to be to confer upon the Commissioner a discretion not to exercise the power notwithstanding that the only conditions capable of being taken into account in favour of the exercise of the discretion have been satisfied.
[20]Finance Facilities Pty Ltd v Federal Commissioner of Taxation (1970) 127 CLR 106.
[21]Shields v Chief Commissioner of Police [2008] VSC 2 (Unreported, Bell J, 30 January 2008) [95]–[113].
The enactment of s 45(1) may have its genesis in attempts by the legislature to counter what might superficially be perceived to be arid pedantic arguments encapsulated by such phrases as “may means shall” or “may means must”. The problem with a solution to such arguments as that found in s 45(1) is that it may strike indiscriminately both at the arid pedantic arguments as well as the substantial and significant issue which lies behind them: namely, that sometimes the legislature has used the word “may” to confer a power which is to be exercised when the conditions it has determined for its exercise have been found to exist and which is to be exercised only by reference to the criteria which the legislature has identified as those which must be considered. In such cases there is no room for the repository of the power refusing to exercise it as a matter of discretion by criteria which are not stipulated by the legislature and which may be inconsistent with those that are. Section 45(1) leaves uncertain the basis upon which the power “may” not be exercised where the statutory criteria upon which the power could be exercised have been established. For present purposes, however, it may be sufficient that I indicate that I would have remitted the matter back to the Commissioner for re-exercising the discretion in accordance with the law.
Orders and costs
In the circumstances of this case I will order that the appeal be allowed, that the objection decision be set aside, that the objection be allowed in full and that the respondent pay the costs of the appellant including all reserved costs subject to any submission which the parties may make about costs.
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