Commissioner of State Taxation v EDI Rail (Maryborough) Pty Ltd - [2010] WASCA 17

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

TITLE OF COURT : THE COURT OF APPEAL (WA)

CITATION: COMMISSIONER OF STATE TAXATION -v- EDI RAIL (MARYBOROUGH) PTY LTD [2010] WASCA 17

CORAM: McLURE P
OWEN JA
NEWNES JA

HEARD: 12 NOVEMBER 2009

DELIVERED : 9 FEBRUARY 2010

FILE NO/S: CACV 42 of 2009

BETWEEN: COMMISSIONER OF STATE TAXATION
Appellant
AND
EDI RAIL (MARYBOROUGH) PTY LTD
First Respondent
ROCHE CASTINGS PTY LTD
Second Respondent

ON APPEAL FROM:
Jurisdiction              :  STATE ADMINISTRATIVE TRIBUNAL OF WESTERN AUSTRALIA
Coram  :JUDGE J CHANEY (DEPUTY PRESIDENT)
Citation  :EDI RAIL (MARYBOROUGH) PTY LTD and COMMISSIONER OF STATE REVENUE [2009] WASAT 49
File No  :CC 744 of 2008

Catchwords:

Taxation - Stamp duty - Exemptions for corporate reconstructions - Exemption may be refused where instrument relates or is likely to relate to duty avoidance arrangement - What constitutes a duty avoidance arrangement - Claw-back of exemption where material information has not been disclosed - Meaning of material - Timing of determination of materiality

Legislation:

Income Tax Assessment Act 1936 (Cth), s 260
Revenue Law Amendment (Assessment) Act (No 2) 1996 (WA)
Revenue Law Amendment (Assessment) Act 2000 (WA)
Stamp Act 1921 (WA), s 74JDA, s 75JB, s 75JC, s 75JD, s 75JE
Taxation Administration Act 2003 (WA), s 43A

Result:

Appeal allowed

Category: A

Representation:

Counsel:

Appellant:     Mr G T W Tannin SC & Ms K J Dodd
First Respondent           :     Mr D R Williams QC & Mr A C Willinge
Second Respondent      :     Mr D R Williams QC & Mr A C Willinge

Solicitors:

Appellant:     State Solicitor for Western Australia
First Respondent           :     Blake Dawson
Second Respondent      :     Blake Dawson

Case(s) referred to in judgment(s):

Channel Seven Perth Pty Ltd v S (A Company) (2007) 34 WAR 325
Finance Facilities Pty Ltd v Federal Commissioner of Taxation (1971) 127 CLR 106
Foots v Southern Cross Mine Management Pty Ltd (2007) 234 CLR 52
Minister for Immigration, Local Government and Ethnic Affairs v Dela Cruz (1992) 34 FCR 348
Newton v Federal Commissioner of Taxation (1958) 98 CLR 1
The Commissioner of Taxation of the Commonwealth of Australia v Gulland (1985) 160 CLR 55
Tillmanns Butcheries Pty Ltd v Australasian Meat Industry Employees' Union (1979) 27 ALR 367
Victorian WorkCover Authority v Esso Australia Ltd (2001) 207 CLR 520
Worsley Timber 2000 Pty Ltd (in liq) v Commissioner of State Revenue (2007) 69 ATR 771

McLURE P: The Commissioner of State Taxation (Commissioner) appeals from the decision of the Deputy President of the State Administrative Tribunal (the Tribunal) allowing a review of the disallowance by the Commissioner of the respondents' objection to an assessment of stamp duty.
The first respondent, EDI Rail (Maryborough) Pty Ltd, a company in the Downer EDI group of companies since February 2001, was formerly known as Walkers Pty Ltd (Walkers). In 2002 Walkers had a foundry business known as 'Vaughan Castings' which was conducted in Western Australia.
On 2 January 2003, Walkers transferred the assets comprising its foundry business to its wholly owned subsidiary, the second respondent, Vaughan Castings Pty Ltd (the asset transfer). Vaughan Castings Pty Ltd was incorporated in Victoria on 24 December 2002 and on 17 January 2003 it changed its name to Roche Castings Pty Ltd (Roche Castings).
On 2 July 2003 Walkers transferred all its shares in Roche Castings to Roche Mining Pty Ltd (Roche Mining), another company in the Downer EDI Group (the share transfer).
On 27 August 2003 PricewaterhouseCoopers (PWC), on behalf of the respondents, lodged an application under s 75JD of the Stamp Act 1921 (WA) (the Act) for exemption from stamp duty in respect of the asset transfer. The respondents did not disclose to the Commissioner the fact of the share transfer. On 25 September 2003 the appellant granted an exemption in relation to the asset transfer.
In January 2005 the Commissioner discovered that the share transfer had occurred. As a result of the respondents' failure to disclose that fact, the Commissioner applied the claw-back in s 75JE and assessed stamp duty on the asset transfer on the basis that the share transfer was material information for the purposes of s 75JD(4). The Commissioner issued an assessment of duty of $718,051 together with a fine in the sum of $308,761, giving a total assessment of $1,026,812.
The respondents lodged an objection to the assessment. The Commissioner disallowed the objection. The respondents sought a review of that disallowance by the Tribunal. The primary judge allowed the application for review. The Commissioner appeals as of right to this court under s 43A of the Taxation Administration Act 2003 (WA).

The statutory scheme

This appeal concerns the proper construction of Pt IIIBAAA of the Act as it stood in January 2003. That part provides exemptions from stamp duty for corporate reconstructions. The primary issues in the appeal are (1) was there a 'duty avoidance arrangement' within either s 75JDA(1)(a) or (b); and (2) did the respondents fail to give material information to the Commissioner within the meaning of s 75JD(4) of the Act.
Section 75JB relates to exemptions from stamp duty between associated bodies corporate. It relevantly provides:
Corporate re-organisations: exemption from duty on conveyances between associated bodies corporate
(1)This section applies if -
(a)an instrument conveys, transfers or assigns a beneficial interest in property from one body corporate ('A') to another body corporate ('B');
(b)the instrument does not convey, transfer or assign any other interest or property which if separately conveyed, transferred or assigned would not be exempt under this Act;
(c)A and B are associated bodies corporate;
(d)at the date of execution of the instrument, A and B have been associated bodies corporate for at least the qualifying period unless -
(i)A and B became associated in the circumstances described in section 75JA(1)(a) to (e) or (1a)(a) to (h);
(ii)A and B have been associated since A acquired at least 90% of the issued share capital -
(A) of B on its incorporation in Australia; or
(B) of B as a body corporate incorporated in Australia that had been dormant since it was incorporated,
and B has been dormant from when A and B became associated until B resolved to acquire the beneficial interest; or
(iii)A and B became associated because B acquired at least 90% of the issued share capital of A, a Part IIIBA statement was lodged in respect of that acquisition, and ad valorem duty was paid in respect of that statement;
(e)B does not hold the beneficial interest on trust for another person; and
(f)the instrument was not made pursuant to or in connection with an arrangement under which -
(i)the consideration, or any part of it, for the conveyance, transfer or assignment was to be provided or received, directly or indirectly, by a person other than A or B or a body corporate that at the time the instrument was executed was associated with either A or B; or
(ii)A or B or a body corporate associated with either of them is to be enabled to provide any of the consideration or is to dispose of any of the consideration by or in consequence (wholly or partially) of the carrying out of a transaction involving a payment or other disposition by a person other than A or B or a body corporate associated with either of them at the time the instrument was executed.
…
(3)If on an application under section 75JD it is shown to the satisfaction of the Commissioner that this section applies, then -
(a)the Commissioner shall exempt an instrument executed on or after 1 October 1996 to which this section applies from duty under item 4, 4A, 13(3) or 19 of the Second Schedule; and
(b)if the conveyance, transfer or assignment effected by an instrument to which this section applies is a relevant acquisition under Part IIIBA that occurs on or after 1 October 1996 - the Commissioner shall exempt a Part IIIBA statement lodged in respect of the relevant acquisition from duty chargeable under section 76AH or 76AO.
(4)If within 5 years after the execution of the instrument or the date of the relevant acquisition ‑
(a)A and B cease to be associated;
(b)B, being a body corporate that became associated with A in the circumstances described in section 75JA(1)(a) to (e) or (1a)(a) to (h), issues or cancels any shares or varies the rights of any of its shares; or
(c)the beneficial interest in any share in B issued in the circumstances described in section 75JA(1)(c) or (1a)(f) is transferred from the person to whom the share was issued; or
(d)B's assets are distributed on a liquidation,
A and B, or B, or the person (as the case requires) shall notify the Commissioner in writing in a form approved by the Commissioner within one month after the relevant event.
(5)If within 5 years after the execution of the instrument or the date of the relevant acquisition A and B cease to be associated then the claw-back applies.
…
(5c)In subsections (5c) to (5j) ‑
'controlling body' means -
(a)in a case to which subsection (5e)(a) applies, a body corporate which, at the time of the execution of the instrument or the date of the relevant acquisition, owned and controlled the parent body;
(b)in a case to which subsection (5e)(b) applies, a body corporate which, at the time the association referred to in subsection (5e)(b) arose, owned and controlled the parent body;
'own and control' a body corporate means to beneficially own (directly or indirectly) at least 90% of the issued share capital of, and have control (within the meaning of section 75J(2)(b)) over, the body corporate;
'parent body' means the other body corporate referred to in subsection (5d) or, if there is more than one of them, whichever of them did not, at the relevant time or date mentioned in the definition of 'controlling body', own and control any of the others;
'qualifying period' has the same meaning as it has in subsection (1)(d).
(5d)An association is a 'prescribed relationship' for the purposes of subsection (5e) if A and B are associated because another body corporate owns and controls each of them.
(5e)For the purposes of subsection (5f), the 'relevant circumstances' have occurred if -
(a)the association between A and B which satisfied the requirement of subsection (1)(c) was a prescribed relationship for the whole or a part of the qualifying period; or
(b)the association between A and B which prevents the claw-back under subsection (5) from applying is a prescribed relationship.
(5f)If the relevant circumstances have occurred and, on or after 25 May 2000 and within 5 years after the execution of the instrument or the date of the relevant acquisition, the parent body -
(a)ceases to beneficially own (directly or indirectly) at least 90% of the issued share capital of B; or
(b)ceases to have control (within the meaning of section 75J(2)(b)) over B,
then -
(c)the parent body and B shall notify the Commissioner in writing in a form approved by the Commissioner within one month after the relevant event; and
(d)the claw-back applies.
(5g)Despite subsection (5f)(d), the Commissioner may, on an application under this subsection, waive the claw-back if -
(a)a body corporate approved by the Commissioner (being a controlling body) continues to own and control B; and
(b)the Commissioner is satisfied that waiving the claw-back would not be inconsistent with the objects of this section.
(5h)The application shall be in writing in a form approved by the Commissioner.
(5i)The Commissioner may require the person making the application to provide any information and evidence that the Commissioner needs for the purposes of subsection (5g).
(5j)If the claw-back is waived under subsection (5g) -
(a)subsection (5f) then applies as if references in it to the parent body were references to the body corporate approved under subsection (5g); and
(b)a reference in this Part to subsection (5f)(c) is to be read as a reference to that provision as applied by paragraph (a).
…
For the purposes of s 75JB(1)(a) and (d), body corporate A is Walkers and body corporate B is Roche Castings. Bodies corporate are associated if they satisfy the definition in s 75J(2). It was common ground that:
(1)at all material times Walkers, Roche Castings and Roche Mining were associated bodies corporate for the purposes of Pt IIIBAAA;
(2)Roche Castings, which was incorporated on 24 December 2002, had not been associated with Walkers (or Roche Mining) for the qualifying period (defined in s 75JB(2)); and
(3)the exception in s 75JB(1)(d)(ii)(B) applied, in which event Walkers and Roche Castings did not have to be associated bodies corporate for the pre‑association qualifying period.
Section 75JC provides for the Commissioner to predetermine whether a proposed transaction or instrument is exempt. Section 75JC(5) relevantly provides:
Corporate re-organisations: application for exemption
If the Commissioner determines that an exemption would be granted then, on an application under section 75JD for an exemption, the Commissioner shall grant the exemption unless -
(a)…
(b)…
(c)the Commissioner is of the opinion that in relation to the request for a determination there was not a full and true disclosure of relevant information and evidence.
Section 75JD relates to applications for exemption. It relevantly provides:
(1)An application for an exemption under section 75JA or 75JB shall be ‑
(a)in a form approved by the Commissioner; and
(b)…
(2)The Commissioner may require the person making the application to provide any information and evidence that the Commissioner needs to determine the application.
(3)…
(4)If any information given to the Commissioner in relation to an exempted instrument … is false in a material particular or any material information is not given to the Commissioner the claw‑back applies and the fine is to be calculated to the date an assessment for the duty and fine is issued by the Commissioner.
All of s 75JDA is relevant. It provides:
Exemption may be withheld in certain cases
(1)In this section -
'duty avoidance arrangement' means an arrangement -
(a)avoiding or circumventing the operation of the provisions of this Part so far as they make the availability and continued effect of an exemption under section 75JB dependent on bodies corporate having been associated for a particular period or remaining associated for a particular period; or
(b)having as its purpose, or one of its purposes, the reduction of duty that might otherwise become payable.
(2)Without limiting section 75JC, the Commissioner may determine under that section that an exemption under section 75JB would not be granted in respect of an instrument or a Part IIIBA statement if the Commissioner considers that the instrument or statement would, if executed or lodged, relate or be likely to relate to a duty avoidance arrangement.
(3)Even if on an application under section 75JD it is shown to the satisfaction of the Commissioner that section 75JB applies, the Commissioner may refuse to grant an exemption under section 75JB(3) in respect of an instrument or a Part IIIBA statement if the Commissioner considers that the instrument or statement relates or is likely to relate to a duty avoidance arrangement.
(4)Despite subsection (3), if the Commissioner is required under section 75JC(5) to grant an exemption in respect of an instrument or a Part IIIBA statement, the exemption is to be granted even if the Commissioner considers that the instrument or statement relates or is likely to relate to a duty avoidance arrangement.
It was accepted by the parties, correctly in my view, that the Commissioner has a discretion under subsections (2) and (3) if he considers that the instrument relied on relates or is likely to relate to a duty avoidance arrangement: see Finance Facilities Pty Ltd v Federal Commissioner of Taxation (1971) 127 CLR 106, 134 ‑ 135; Channel Seven Perth Pty Ltd v S (A Company) (2007) 34 WAR 325 [19].
The claw‑back provision for the purposes of s 75JD(4) is s 75JE. It relevantly provides:
Claw-back (instruments)
(1)If this section applies to an instrument -
(a)the instrument shall be deemed not to have been exempted;
(b)the instrument shall be charged with a fine equal to 20% per annum of the duty chargeable on the instrument calculated from the date of the execution of the instrument to the date the Commissioner is notified under section 75JB(4) or (5f)(c), or if the Commissioner is not so notified, to the date an assessment for that duty and fine is issued by the Commissioner;
…
(2)The Commissioner may remit wholly or in part a fine chargeable under subsection (1).

The primary judge's findings and reasoning

In February 2001 Downer Group Ltd (DGL), through a subsidiary, acquired EDI Pty Ltd and became Downer EDI Ltd (Downer EDI). Walkers was part of the EDI group of companies. Its main business was the manufacture of locomotives and passenger railcars.
Before the acquisition of the EDI group, DGL had taken over mining operations conducted by Roche Brothers. DGL continued the Roche Brothers mining operations through an entity called Roche Mining Pty Ltd (Roche Mining).
In about February 2002 an unrelated third party expressed an interest in buying the Vaughan Castings business from Walkers. After the proposed sale fell through, Downer EDI started to consider what to do with the business if it was going to remain part of the Downer EDI group. Downer EDI wanted to put the Vaughan Castings business into either its engineering division or mining division and make Walkers a rail‑focused business.
In November 2002 Mr Crane, the company secretary and general manager of finance and administration of Downer EDI, was asked to enquire whether Roche Mining would take on the management of the Vaughan Castings business. Mr Crane prepared and provided to Mr Logan of Roche Mining an information memorandum in relation to the foundry business.
In December 2002 Mr Crane sought advice from the Downer EDI group accountants, PWC, concerning the stamp duty implications of various proposed transfers. That advice referred to a proposed transfer of the Vaughan Castings business not to Roche Mining but to the engineering arm of the Downer EDI group, Downer Engineering Group Pty Ltd (DEG). PWC provided advice by letter dated 19 December 2002. The letter sets out a summary of the advice in the following terms:
This letter concerns the proposed transfer of the Vaughan Casting business conducted by Walkers Pty Ltd ('Walkers') to Downer Engineering Group Pty Ltd ('DEG').
Executive Summary
•It will not be possible to obtain a corporate reconstruction exemption in Queensland or WA, on a direct transfer of Vaughan Casting business from Walkers to DEG. This is because Walkers and DEG have not been associated for the requisite 3 year period in these jurisdictions.
•We consider that the transfer of the business may be effected without the incidence of stamp duty if it is effected by way of the following steps:
Step 1. Roll down Vaughan [Castings] business from Walkers to a newly incorporated subsidiary ('Newco');
Step 2. Transfer the shares in Newco from Walkers to DEG.
•A corporate reconstruction exception should be available in all jurisdictions in which an exposure to duty arises under Step 1. However, we recommend that determinations be obtained prior to the transactions taking place.
•No stamp duty will be payable on step 2 provided that, Newco is incorporated in a jurisdiction that no longer imposes duty on a transfer of unlisted shares (such as Victoria or Tasmania).
•If the transfer of the business is to take effect (as between the parties) from 1 January 2003, then Newco must be incorporated prior to this date to ensure that the requirements for corporate reconstruction relief are satisfied.

The letter analysed the different legislative provisions in each State. Reference was made to the duty avoidance provisions of the Act as follows:
Duty Avoidance Scheme
If the Commissioner forms the opinion that the transfer of WA assets from Walkers to Newco constitutes a 'duty avoidance scheme', then the Commissioner may determine that the exemption will not apply. This may be the case even if the relevant conditions for relief have been satisfied. A 'duty avoidance scheme' is relevantly defined in section 75JDA of the Act as an arrangement:
(a)Avoiding or circumventing the operation of the provisions so far as they make the availability and continued effect of an exemption under section 75JB dependent on bodies corporate having been associated for a particular period or remaining associated for a particular period; or
(b)Having as its purpose, or one of its [purposes], the reduction of duty that might otherwise become payable.
As it will not be possible to transfer the WA assets direct to DEG, it is possible that the Commissioner may regard the proposed two step sequence as being contrary to the intended operation of the corporate reconstruction provisions and consider it to be a 'duty avoidance scheme'. We therefore recommend not proceeding into the transaction until a binding ruling is obtained from the WA Commissioner.
After addressing the factual background, the primary judge turned his attention to what constituted the 'arrangement' for the purposes of s 75JDA. In accordance with the submissions of the parties, the primary judge relied upon the approach taken to construing the same expression in s 260 of the Income Tax Assessment Act 1936 (Cth) (Income Tax Act). In Newton v Federal Commissioner of Taxation (1958) 98 CLR 1, Lord Denning delivering the judgment on behalf of the Privy Council, said:
Their Lordships are of [the] opinion that the word 'arrangement' is apt to describe something less than a binding contract or agreement, something in the nature of an understanding between two or more persons - a plan arranged between them which may not be enforceable at law. But it must in this section comprehend, not only the initial plan, but also all the transactions by which it is carried into effect - all the transactions, that is, which have the effect of avoiding taxation, be they conveyances, transfers or anything else (7 ‑ 8).
The primary judge found as follows:
In my view, there was an 'arrangement' in existence as of 1 January 2003, which involved the proposal to transfer [the] Vaughan Castings business to Vaughan Castings Pty Ltd and then to transfer that company's shares to another company within the Downer EDI Group, most likely Downer (sic) Mining Pty Ltd. The arrangements were in the form of a plan understood and pursued by Mr Crane, Downer EDI Group's Chief Executive Officer, Mr Gillies and Mr Logan [of Roche Mining] [49].
The primary judge then considered whether the arrangement was a duty avoidance arrangement under par (a) of s 75JDA(1). Following the decision of Simmonds J in Worsley Timber 2000 Pty Ltd (in liq) v Commissioner of State Revenue (2007) 69 ATR 771, the primary judge held that the test to be applied in determining whether there was a duty avoidance arrangement under par (a) of s 75JDA(1) was that identified by Lord Denning in Newton as qualified by Gibbs CJ in The Commissioner of Taxation of the Commonwealth of Australia v Gulland (1985) 160 CLR 55, 66. They can be described as the business purpose test and the choice principle respectively.
The primary judge concluded that the arrangement had business purposes. He said:
I am satisfied that, while the minimisation of stamp duty liability was clearly a factor in the manner by which the assets of Vaughan Castings were transferred to Roche Mining Pty Ltd, the predominant reason for the transaction was concerned with the orderly re-organisation of the businesses of the Downer EDI Group. I accept Mr Crane's evidence that the group wanted to reorganise the business of Walkers Pty Ltd to make it a more rail focused business. Mr Crane also said, and I accept, that the transfer of management of the Vaughan Castings business was intended to make it more profitable. That evidence is consistent with the terms of the information memorandum prepared by Mr Crane which asserted that 'the business has an excellent potential to realise some cost reductions through integration with Roche …'.
I also accept, that given that responsibility for management of the operations of the Vaughan Castings business was more efficiently placed in a different division of the Downer EDI Group, an alignment of the accounting processes so that ownership of the business reflected the management of the business, was a sensible commercial objective.
All of these purposes were the subjective purposes of Mr Crane and no doubt others involved with the corporate management of the group. They were, in my view, also purposes which were objectively apparent from the transactions in the sense that the outcomes described were actually achieved by the implementation of the arrangement.
The same outcome, with different stamp duty liability, could have been achieved by a direct transfer of the Vaughan Castings business to a wholly owned subsidiary to Roche Mining Pty Ltd. Does the imposition of the intermediate step of first transferring the business to a wholly owned subsidiary of Walkers Pty Ltd mean that the provisions of Part IIIBAAA have been circumvented or avoided? In my view, they were not. Rather they were arrangements which fall in the category of a case referred to in Gulland as 'taking advantage of an opportunity to reduce tax which the Act provides'. The immediate transfers of the Vaughan Castings business to a subsidiary of Roche Mining Pty Ltd apparently have had diverse income tax consequences. The fact that the shares were held by Walkers Pty Ltd for six months enabled the rationalisation of the Walkers Pty Ltd business focusing on rail activities to proceed without delay [57] ‑ [60].
The primary judge also concluded that the business purpose test and choice principle applicable to s 260 of the Income Tax Act governed the approach to be taken to the definition of 'duty avoidance arrangement' in par (b) of s 75JDA(1). Having already determined that there were proper business purposes for the asset transfer and share transfer and that the respondents took advantage of an opportunity to reduce tax which the Act itself provided, the primary judge held there was no duty avoidance arrangement under par (b) of s 75JDA(1).
Finally the primary judge considered whether the respondents failed to give material information to the Commissioner for the purposes of s 75JD(4) of the Act. He answered that question in the negative, reasoning that the share transfer was not material information because there was no duty avoidance arrangement.

Grounds of appeal

The appellant relies on five grounds of appeal, two of which overlap and are repetitive. Grounds 1, 3 and 4 state that the primary judge erred in law:
•in failing to hold that 'information of the transfer of shares' in Roche Castings from Walkers to Roche Mining was material information under s 75JD(4) in that it was information that was relevant to the Commissioner's consideration of whether the transfer of assets from Walkers to Roche Castings related to or was likely to relate to a duty avoidance arrangement (ground 1);
•in holding that the transfer of shares in Roche Castings from Walkers to Roche Mining was not part of a duty avoidance arrangement under s 75JDA(1)(a) (ground 3) or under 75JDA(1)(b) (ground 4) and that therefore information of that transfer was not material information under s 75JD(4).
The respondents filed a notice of contention. They claim the primary judge erred in not accepting that s 75JDA(1)(a) has no application unless an exemption is sought or obtained without the pre‑association or post‑association requirements having been met. If the appellant is successful, the respondents contend the Commissioner was wrong to impose a penalty or alternatively, wrong not to remit the penalty in whole or in part.

Section 260 - the business purpose test and choice principle

The business purpose test and choice principle were formulated in the context of the construction of s 260 of the Income Tax Act. That section relevantly provides:
(1)Every contract, agreement, or arrangement made or entered into, orally or in writing, whether before or after the commencement of this Act, shall so far as it has or purports to have the purpose or effect of in any way, directly or indirectly:
(a)altering the incidence of any income tax;
(b)relieving any person from liability to pay any income tax or make any return;
(c)defeating, evading, or avoiding any duty or liability imposed on any person by this Act; or
(d)preventing the operation of this Act in any respect;
be absolutely void, as against the Commissioner …
Section 260 has been read down to limit the scope of its literal application. The business purpose test is sourced in the oft quoted words of Denning LJ in Newton. He said:
In order to bring the arrangement within the section you must be able to predicate - by looking at the overt acts by which it was implemented - that it was implemented in that particular way so as to avoid tax. If you cannot so predicate, but have to acknowledge that the transactions are capable of explanation by reference to ordinary business or family dealing, without necessarily being labelled as a means to avoid tax, then the arrangement does not come within the section (8).
The High Court in Gulland explained that the relevant question is whether the arrangement on its face is capable of reasonable explanation by reference to considerations other than tax avoidance or minimisation: Gulland (66) (Gibbs CJ), (108) (Dawson J).
The business purpose test is linked with the meaning attributed by Lord Denning in Newton to the terms 'arrangement' (set out above) and 'purpose' in s 260. Purpose is to be ascertained from the terms of the arrangement itself and from the overt acts or transactions by which the arrangement is carried into effect: Gulland (65) (Gibbs CJ), (104) (Dawson J, with whom Brennan J agreed). Thus the test of purpose is objective.
However, the purpose in s 260 is not the sole or predominant purpose although it has to be more than an incidental purpose: Gulland (67) (Gibbs CJ), (80) (Brennan J), (105) (Dawson J). Brennan J said:
A purpose of avoiding tax is not taken to exist when the means adopted to carry the arrangement into effect are fairly referable to ordinary business or family dealing and the avoidance of tax is merely incidental. If a purpose of avoiding tax is found to exist, the arrangement is caught by s 260 even though the advancing of ordinary business or family interests is one of the purposes and one of the effects of the arrangement (80).
In circumstances where tax avoidance is in issue, the arrangement in question will inevitably have the effect of reducing or eliminating the taxpayer's liability to pay tax. However, in many cases the objective circumstances will not permit the drawing of an inference that the tax effect was a purpose of the arrangement. For example, retirement from employment is likely to have an advantageous tax effect but is capable of reasonable explanation by reference to considerations other than its tax consequences.
The primary judge referred to the choice principle as a qualification on the business purpose test in Newton, quoting Gibbs CJ in Gulland. Gibbs CJ said:
[The test in Newton] is a useful one, and it has often been applied, but it does not provide a guide to the decision of every case. An arrangement which is not capable of explanation by reference to ordinary dealing and which on its face is obviously designed to bring about the result that less tax will be paid may nevertheless do no more than take advantage of an opportunity to reduce tax which the Act itself provides. A line of decisions illustrates that if the Act offers to the taxpayer a choice of alternative tax consequences, either of which he is free to choose, or offers certain tax benefits to taxpayers who adopt a particular course of conduct, the choice of the advantageous alternative or the adoption of the beneficial course does not mean that s 260 is attracted (66).
Thus the choice principle can apply whether or not a purpose of the arrangement is tax minimisation or avoidance. The term 'choice principle' is apt to mislead. It only operates to limit the scope of s 260 in a particular case if, on a proper construction of the Income Tax Act as a whole, that is the statutory intention. This is explained by Brennan J:
One of the limitations to be placed on s 260 is justified by a familiar rule of statutory construction: generalia specialibus non derogant … The Act contains a great number of specific and particular provisions which affect taxable income … and a taxpayer's consequential liability for tax. The intention of the legislature in enacting specific and particular provisions which affect assessable income or add to or increase allowable deductions is that those provisions should have effect according to their tenor, so that a taxpayer who brings himself within a specific and particular provision which purports to confer a tax benefit should be entitled to have that benefit. That intention would fail if s 260 were to operate according to its literal terms, for s 260 would avoid any arrangement which brought the taxpayer within a specific and particular provision of the Act which conferred a tax benefit. It could not have been intended by the legislature that s 260 should prevail over the specific and particular provisions and destroy the tax benefits they were intended to confer. It is necessary therefore to read down s 260, a general provision, in order to provide for the operation of the specific and particular provisions of the Act (77 ‑ 78).
It follows from Brennan J's approach that the choice principle is inapplicable when the arrangement does not attract a tax benefit conferred by a specific provision.
Dawson J approached the issue in a slightly different way. He identified that the problem arises because s 260 seeks to reduce the opportunities which a taxpayer has to avoid the payment of income tax whereas those very opportunities may be provided by other provisions of the Income Tax Act which contemplate means by which a taxpayer may organise its affairs so as to incur a greater or lesser tax liability according to the decision which it makes. In a broad sense all (non‑sham) arrangements which have the effect of avoiding or minimising tax liability take advantage of opportunities provided for by the Act. Thus, there has to be a limit to the operation of the choice principle otherwise s 260 would be meaningless. Dawson J did not adopt the Brennan J criterion of limitation (a tax benefit conferred by a specific provision) but said it was a matter of statutory construction in each case.
The primary judge did not apply the business purpose test as it is explained in Gulland. In relation to the business purpose test, he had regard to the subjective purposes of the parties to the arrangement (Walkers, Roche Castings and Roche Mining) and did so for the purpose of determining whether there were business purposes for the arrangement. Further, the primary judge followed Worsley Timber in applying the choice principle to limit the scope of s 75JDA.
There are a number of differences between s 260 of the Income Tax Act and s 75JDA of the Act. There are two primary ones. First, s 260 is a general anti‑avoidance provision and s 75JDA is a specific anti‑avoidance provision. Secondly, a s 260 arrangement is void against the Commissioner. Under s 75JDA the Commissioner has a discretion to refuse an exemption if he considers that the instrument relates to or is likely to relate to a duty avoidance arrangement. The correct starting point for the determination of the issues in this appeal is the construction of s 75JDA in the context of Pt IIIBAAA in particular and the Act as a whole: Victorian WorkCover Authority v Esso Australia Ltd (2001) 207 CLR 520 [63]; Foots v Southern Cross Mine Management Pty Ltd (2007) 234 CLR 52 [96]. However, the legislative history provides relevant background.

Legislative history

Part IIIBAAA of the Act was inserted by the Revenue Laws Amendment (Assessment) Act (No 2) 1996 (WA) to remove the stamp duty burden which would otherwise prevent groups of companies from adopting a more efficient corporate structure. The legislation as originally drafted contained a public interest test which would have allowed an exemption to be disallowed where it was considered that a transaction was not consistent with the purpose for which the exemption was intended. Industry opposition to the public interest test on the ground it would create uncertainty resulted in it being removed from the bill.
Section 75JDA was inserted by the Revenue Laws Amendment (Assessment) Act 2000 (WA) (the 2000 Amendment Act). As explained in the second reading speech, that provision was in response to emerging practices indicating that attempts were being made to manipulate the exemption in Pt IIIBAAA. In particular, the pre and/or post‑association requirements were avoided by a series of transactions (described as asset stripping and asset packaging into company structures) which had no commercial efficacy apart from the minimisation of stamp duty. It can be inferred from the second reading speech that if the corporate veils were put to one side, the arrangements effected in substance a sale of property to unrelated third parties.
At the same time as s 75JDA was inserted, s 75JB was amended to insert subsections (5a) ‑ (5j) which address changes in control of the transferee (body corporate B).

The construction of s 75JDA

The first point to make is that the Commissioner's powers, which are to be found in subsections (2), (3) and (4) of s 75JDA, fall to be exercised before the Commissioner has made a determination as to whether an instrument is exempt under Pt IIIBAAA. In this case, the Commissioner had already determined that the asset transfer was exempt under that Part. Thus the time for the exercise of the power in s 75JDA had passed. However, it was common cause that if the asset transfer was part of a duty avoidance arrangement, the respondents had failed to provide material information to the Commissioner for the purposes of s 75JC(4) with the consequence that the claw‑back in s 75JE applied.
I propose to commence with par (a) of the definition of duty avoidance arrangement in s 75JDA(1). To come within that definition there must be:
-an arrangement
-avoiding or circumventing
-the operation of the provisions of Pt IIIBAAA
-so far as the provisions of that Part
-make the availability and continued effect of an exemption under s 75JB dependent on having been associated for a particular period or remaining associated for a particular period.
The respondents contend that s 75JDA(1)(a) has no application unless an exemption is sought without the pre‑association or post‑association requirements having been met. I infer from the respondents' brief submissions on the subject that the reference to 'pre‑association requirements' is an intended reference to par (d) of s 75JB(1).
It is clear from the language of s 75JDA as a whole that the definition of duty avoidance arrangement in par (a) is not intended to be confined to cases where the requirements for exemption are not in fact met; it also applies where those requirements are met. The statutory intent evident is from subsection (3) which provides that the anti‑avoidance provision is intended to apply even if it is shown to the satisfaction of the Commissioner that s 75JB applies. It is also evident from the fact that the exemption is not automatically forfeited even if the instrument relates, or is likely to relate, to a duty avoidance arrangement. Under subsections (2) and (3) the Commissioner retains a discretion to refuse to grant an exemption. Thus, there can be compliance with all of the statutory requirements for an exemption under Pt IIIBAAA and yet be a duty avoidance arrangement as defined. This construction is also supported by the second reading speech for the 2000 Amendment Act.

Neither party challenges the correctness of applying to s 75JDA(1) the meanings given to the terms 'arrangement' and 'avoiding' in the case law on s 260 of the Income Tax Act. I will assume that is correct. However, there is no proper basis in my respectful opinion for implying a 'purpose' requirement in par (a) in circumstances where that paragraph is in terms confined to the effect of the relevant arrangement and there is a separate purpose test in par (b) of the definition of duty avoidance arrangement. It follows that there is no justification for applying the business purpose test formulated for s 260 of the Income Tax Act.
As there can be a duty avoidance arrangement even if the requirements of Pt IIIBAAA have in fact been met, a practical test for the application of this limb of the definition may be to look behind the corporate veils to determine whether as a matter of substance the pre‑association and post‑association qualifying periods have been met. However, it is unnecessary to determine that question in this case because in my view par (a) is confined to arrangements that circumvent or avoid pre or post‑association qualifying periods where they are intended to apply.
By its terms, par (a) only applies so far as the provisions of Pt IIIBAAA make the availability and continued effect of an exemption under s 75JB dependent on having been and remaining associated for a particular period. It is the avoidance of the particular periods that is the focus of the paragraph. Thus, par (a) of the definition of duty avoidance arrangement does not apply where an exemption under s 75JB does not depend on any prior period of association because the arrangement falls within the exceptions in (i), (ii) or (iii) of s 75JB(1)(d). The only issue in this appeal is the alleged avoidance of the pre‑association period. In this case the availability of an exemption under s 75JB is not dependent on Walkers and Roche Castings having a prior association for any particular period. Although this outcome may be regarded as consistent with the choice principle, it is actually grounded in the statutory language of s 75JDA(1)(a) in the context of the exceptions to the pre‑association period requirement in s 75JB(1)(d).
Thus the primary judge was correct to conclude that the arrangement as identified by him was not a duty avoidance arrangement under par (a) of s 75JDA(1).
The construction of par (b) of s 75JDA(1) is not as straightforward. It squarely raises the question of construction at the heart of the choice principle. To be a duty avoidance arrangement under par (b) there must be:
-an arrangement
-having as its purpose, or one of its purposes
-the reduction of duty
-that might otherwise be payable.
I accept for present purposes that the paragraph does not apply if the reduction of duty is only an incidental purpose. However, I am not persuaded that the objective business purpose test formulated by Lord Denning in Newton is intended to apply to s 75JDA. Such a test is inconsistent with a statutory scheme whereby the Commissioner is given a discretion to refuse to grant an exemption and the condition enlivening the discretion depends on the Commissioner's satisfaction that the instrument relates or is likely to relate to a duty avoidance arrangement. In a context where the condition depends on the satisfaction of the Commissioner, the expression 'is likely to' means in effect 'probably': Tillmanns Butcheries Pty Ltd v Australasian Meat Industry Employees' Union (1979) 27 ALR 367, 380. That is, the condition is met if the Commissioner is satisfied that the instrument relates or probably relates to a duty avoidance arrangement. The objective issue is whether there are reasonable grounds for the Commissioner to be satisfied that the instrument relates or is likely to relate (probably relates) to a duty avoidance arrangement under par (b) of the definition.
There is no challenge to the finding in [49] of the primary judge's reasons as to the arrangement. In essence the arrangement was that the Vaughan Castings business be transferred to a separate legal entity directly owned, managed and controlled by a company in the Downer EDI group other than Walkers, most likely Roche Mining. The overt acts and transactions to implement the arrangement include, in the following sequence (1) the incorporation of Roche Castings in Victoria as a wholly owned subsidiary of Walkers; (2) the transfer of the assets of the Vaughan Castings business from Walkers to Roche Castings as soon as possible to ensure that Roche Castings maintained its status as a dormant company until it resolved to acquire the beneficial interest in the business; and (3) the transfer of all of the shares in Roche Castings from Walkers to Roche Mining. If the transfer of the shares in Roche Castings had preceded the asset transfer, the arrangement would not have been exempt just as it would not have been exempt if there was a transfer of the assets of the Vaughan Castings business directly to Roche Mining.
The respondents contend the evidence establishes that the purpose of the arrangement was wholly confined to business (non‑stamp duty) considerations. Stamp duty is only payable on a conveyance of, or agreement to sell, property. Ordinarily, a person would not take steps to sell or transfer property unless there was a non‑stamp duty related purpose(s) for doing so. Stamp duty considerations may be a reason for not taking such steps but not for the taking of positive steps which may attract stamp duty. At this level of decision‑making it cannot be said that there is any purpose to reduce stamp duty. However, at this level of decision‑making the proposal in this case was for a direct transfer of the business from Walkers to a company that was formerly part of the DGL group. It is at the stage of formulating and implementing the arrangement that stamp duty purposes were significant in this case.
Having regard to the arrangement and the overt acts and transactions as a whole, the objective circumstances compel the inference that the arrangement was structured for the purpose of bringing it within the exemption in Pt IIIBAAA. That is, one of the purposes of the arrangement (and not merely an incidental one) was the reduction of stamp duty.
The first question of construction is whether par (b) is intended to cover a person who in fact brings itself within a specific and particular provision in Pt IIIBAAA which prima facie entitles that person to an exemption from stamp duty. As with par (a) of the definition of duty avoidance arrangement, that question has to be answered in the context of the operative provisions of s 75JDA. For the reasons given in relation to par (a) of the definition, the terms of s 75JDA(2) and (3) disclose an unequivocal statutory intention that s 75JDA applies even if the requirements in s 75JB have been satisfied. Thus, the specific opportunity for a stamp duty exemption provided by s 75JB is not excluded from the operation of s 75JDA.
The next issue is more difficult. Should par (b) of the definition of duty avoidance arrangement be read down by some other criterion and if so what. The only arguable possibility is to exclude from the definition in par (b) arrangements with a stamp duty reduction purpose, but which satisfy the requirements in s 75JB in form, substance (assessed by looking behind the corporate veil) and statutory purpose. In that way, the parties could structure the arrangement having regard to both commercial reconstruction considerations and stamp duty considerations without coming within the definition of duty avoidance arrangement in par (b). On balance, I do not think that was the statutory intention. The issues of substance and purpose raise questions of degree and involve value judgments which, in my view, the legislature intended to leave to the Commissioner by giving him a discretion to refuse to grant an exemption to an instrument that relates or is likely to relate to a duty avoidance arrangement. This conclusion is consistent with the broad scheme of Pt IIIBAAA which provides for binding predeterminations and imposes full disclosure obligations.
As one of the purposes of the arrangement found by the primary judge was the reduction of stamp duty, it was a duty avoidance arrangement under par (b) of s 75JDA(1). That being the case, it was accepted that the respondents failed to provide material information and the claw-back applied.
For these reasons, I would dismiss ground of appeal 3 and allow ground 4. In the circumstances it is not strictly necessary to address ground 1 which is predicated on the assumption that the arrangement was not a duty avoidance arrangement. However, the matter was fully argued and I propose to address it.

Material Information - s 75JD(4)

The appellant contended that in failing to inform the Commissioner of the share transfer (the omitted information) at the time of the application under s 75JD, the respondents failed to give material information to the Commissioner.
The respondents' submissions focused on the timing of the determination of the materiality of the information in question. They contend that for the purposes of s 75JD(4) materiality is to be determined after the exemption has been granted and by reference to whether or not there is a proven duty avoidance arrangement. They also rely on the fact that the review of the Commissioner's disallowance of their objection to the assessment under s 75JD(4) and s 75JE is a hearing de novo which requires materiality to be determined by what is then known, including that there was no duty avoidance arrangement. There being a finding by the Tribunal that there was no duty avoidance arrangement, the respondents say the omitted information cannot be material.
The appeal was conducted on the assumption that the only potential relevance of the omitted information related to the Commissioner's powers under s 75JDA. I will proceed on that basis.
Section 75JD(4) is not the source of the obligation to provide material information to the Commissioner. It simply states the consequences of the failure to do so, namely the application of the claw‑back in s 75JE. The source of the obligation to provide information in this case is in s 75JD(1)(a) and (2). There are express continuous disclosure obligations in s 75JB(4) and (5i) but they are not presently relevant. Some, but not necessarily all, of the information the subject of the disclosure obligations will be material for the purpose of s 75JD(4).
The respondents applied for an exemption on the form approved by the Commissioner for the purposes of s 75JD(1)(a). Item 2 of the approved form seeks 'Full facts and circumstances surrounding the transaction including the reasons therefore'. PWC purported to provide that information in its covering letter of 27 August 2003. It exhaustively identified the restructure as being the asset transfer, the purpose of which was stated to be to 'place the legal ownership of the Castings division business in a new company to facilitate the management of the business separately from the engineering business retained by Walkers'. The Commissioner was not advised of the share transfer (or that at the time of the asset transfer it was proposed to transfer ownership, management and control of Roche Castings to another company in the Downer EDI group). Having regard to the finding of the arrangement, the omitted information fell within the information sought in Item 2 of the approved form. There is no alleged breach of the continuing disclosure obligations.
It follows that the obligation to provide the omitted information had to be complied with in this case before the determination of the application for exemption under s 75JD. The materiality of the omitted information is to be assessed at the time of the application by reference to what is known (and ought to be known) by the respondents at that time. I should make express what is implicit in this discussion. The consequence in s 75JD(4) only applies if the applicant for an exemption is under an obligation to provide the information to the Commissioner.
The term 'material' has two further aspects. First, information cannot be material unless it is relevant. In this case it must be relevant to the exercise of the power in s 75JDA. There are two steps in that process. The Commissioner must first be satisfied (on reasonable grounds) that the instrument relates or is likely to relate to a duty avoidance arrangement. The connector 'relates to' is used because the instrument may only be part of the arrangement in question. If this condition is satisfied the discretionary power to refuse an exemption is enlivened.
The appellant contends that information is relevant if it may ‑ not only if it must or if it will ‑ be taken into account in making the relevant decision, relying on Minister for Immigration, Local Government and Ethnic Affairs v Dela Cruz (1992) 34 FCR 348, 371. This statement has been approved and applied in a number of cases. It is clear from the context that the court in Dela Cruz was considering relevance in the context of the exercise of a discretionary power. I am not satisfied that is the meaning of relevance for the purpose of determining whether the conditions necessary to enliven a discretion exist. The court in Dela Cruz also said that to be material the information must be of significance, not merely trivial or inconsequential.
In this statutory context, I accept that the information must be both relevant and significant in the sense that it is capable of influencing the outcome, either in combination with the information the respondents were obliged to supply to the Commissioner under s 75JD(1)(a) and (2) or because it would have led to a further line of factual inquiry. This construction of the requirement of materiality in s 75JD(4) distinguishes it from the phrase 'relevant information' in s 75JC(5).
Materiality cannot be assessed without reference to the actual scope of the expression 'duty avoidance arrangement'. On the construction of par (b) that I favour, the omitted information is both relevant and significant and thus material. For present purposes I will assume that (1) on its proper construction, par (b) does not cover arrangements that satisfy s 75JB in form, substance and statutory purpose, even though a purpose of the arrangement was to reduce stamp duty; and (2) the respondents' arrangement complies with the form, substance and statutory purpose of s 75JB.
On that narrower construction of par (b), the omitted information is relevant but is not significant in the sense that it is capable of affecting the outcome. The allegation of breach is confined to the omitted information. It was not suggested that the omitted information would have led to a line of further inquiry. The Commissioner must have reasonable grounds to be satisfied that the instrument relates, or is likely to relate (probably relates) to a duty avoidance arrangement in order to enliven his discretion. The fact of the share transfer is not, together with the other information which the respondents were obliged to supply, capable of providing a reasonable basis to be so satisfied.
I would dismiss ground of appeal 1.

Penalty

The respondents contend the Commissioner erred in imposing a penalty or alternatively erred in not remitting the penalty in whole or in part.
There is no merit to the submission that the Commissioner was wrong to impose the penalty. The failure to provide material information attracts the automatic statutory consequence of the application of the claw‑back provision: s 75JDA(4). The statutory consequence of the application of the claw‑back is that the instrument is deemed not to have been exempted and a fine is payable: s 75JE(1)(a) and (b). However, s 75JF(2) gives the Commissioner a discretion to remit wholly or in part a fine chargeable under s 75JE(1). Thus, the only avenue open to the respondents is to challenge the Commissioner's refusal to remit the fine in whole or in part. In order to successfully challenge a discretionary decision, the respondents must demonstrate that the Commissioner made an express or implied material error of fact or law. Error will be implied if the decision is manifestly unjust or unreasonable. The respondents were content to rest on their written submissions which do not identify any material error in the exercise of the discretion. Moreover, in circumstances where the respondents did not follow the recommendation of their professional advisor to seek a predetermination because of uncertainty surrounding s 75JDA, it is unlikely that any error would alter the result in any event.

Conclusion

I would uphold ground of appeal 4, dismiss the other grounds of appeal and dismiss the notice of contention. I would order that the appeal be allowed, the notice of contention be dismissed and the orders made by the primary judge on 19 March 2009 be set aside. I would hear from the parties on costs.
OWEN JA: I agree with McLure P.
NEWNES JA: I agree with McLure P.

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

TITLE OF COURT : THE COURT OF APPEAL (WA)

CITATION: COMMISSIONER OF STATE TAXATION -v- EDI RAIL (MARYBOROUGH) PTY LTD [2010] WASCA 17 (S)

CORAM: McLURE P
OWEN JA
NEWNES JA

HEARD: 12 NOVEMBER 2009 AND ON THE PAPERS

DELIVERED : 9 FEBRUARY 2010

SUPPLEMENTARY
DECISION :12 MARCH 2010