Commissioner of Taxation of the Commonwealth of Australia v AXA Asia Pacific Holdings Ltd [2011] HCATrans 63

[2011] HCATrans 63

[2011] HCATrans 063

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Melbourne       No M165 of 2010

B e t w e e n -

COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Applicant

and

AXA ASIA PACIFIC HOLDINGS LTD

Respondent

Application for special leave to appeal

HEYDON J
BELL J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 11 MARCH 2011, AT 10.32 AM

Copyright in the High Court of Australia

MR M.K. MOSHINSKY, SC:   If the Court pleases, I appear with my learned friend, MS D. MANDIE, for the Commissioner.  (instructed by Australian Government Solicitor)

MR G.J. DAVIES, QC:   If the Court pleases, I appear with my learned friend, MR A.T. BROADFOOT, for the respondent.  (instructed by Mallesons Stephen Jaques)

HEYDON J:   Yes, Mr Moshinsky.

MR MOSHINSKY:   Your Honours, the key issue raised by this application for special leave is whether or not the Court needs to undertake a hypothetical fact‑finding exercise to determine, in effect, what would have happened absent the scheme.  We submit that that is not necessary.  However, there is a line of cases in the Full Federal Court which indicates that it is necessary.  The line of cases really starts with the decision of the Full Federal Court in Lenzo and includes a decision of the Full Federal Court in Trail Bros constituted by the same members of the court as in this case and culminates with the decision of the court in AXA.

In our submission, the purpose of the tax benefit provision in 177C of the Income Tax Assessment Act is to determine whether there is a link or a connection between the tax benefit and the scheme.  In other words, it is directed at determining whether it is the scheme that produced the tax benefit.  It is important to note – and this is apparent from the text of section 177C – that it is not a definition of the words “tax benefit”, but rather gives content to the composite expression, “the obtaining by a taxpayer of a tax benefit in connection with the scheme”. 

In this submission we derive significant support from the judgment of this Court in Peabody, particularly at page 384, which I do not need to take your Honours to, but the Court in that case on that page made a clear distinction between the obtaining of a tax benefit which they accepted existed and determining whether the tax benefit had been obtained by the relevant taxpayer in the relevant tax year.

We submit that the hypothetical fact‑finding approach adopted in this line of Full Federal Court cases distorts the whole operation of Part IVA.  In our submission, section 177C, the obtaining by a taxpayer of a tax benefit in connection with the scheme, is intended to be a gateway provision rather than a major forensic exercise.  However, what has occurred in this case and is occurring in other cases now is that it has become a major forensic exercise to determine whether or not there is a tax benefit.  In our submission, in most cases the main issue in Part IVA is the question of dominant purpose in 177D(b).

Your Honours, the facts of this case provide, in our submission, a perfect example of the problem with the current approach.  Could I ask your Honours to turn to the diagram of the scheme which is set out in application book page 160?  Your Honours, what happened here, to simplify what is a very complex transaction on any view, is that at the beginning, looking at the top left, you had AXA owning 100 per cent of the shares in AXA Health, which was a business which included HBA Health Insurance in Victoria.  There was a complicated series of transactions structured by Macquarie Bank Limited which ultimately led to the result, looking at the bottom part of the page, that AXA received 100 per cent of the shares in a company MHA which had as its sole asset $513 million, subject to adjustments, but the diagram simplifies the facts slightly, and a consortium vehicle, MB Health, owned 100 per cent of the shares in MHF which owned 100 per cent of the shares in AXA.

Now, what happened was that AXA sold the shares for a consideration of $570 million.  The consortium vehicle, which was MB Health, paid $570 million.  However, the transaction was structured in such a way by the interposition of Macquarie entities, namely, MHA and MHF, that AXA could utilise the benefit of the scrip‑for‑scrip rollover provisions and in that way defer indefinitely paying tax on a large part of the capital gain.  Now, $383 million of capital gain which would otherwise have been included in AXA’s assessable income on a straight sale was not included in its assessable income and there is no prospect of tax being paid on that capital gain.

Now, in our submission, based on those facts, it is possible to say that, looking at the issue raised by 177C, that a tax benefit, namely, the non‑inclusion of $383 million in AXA’s assessable income, was obtained by AXA in connection with a scheme, and on the construction that we put forward the way one would approach that, remembering that as we put it the question is directed to was a tax benefit produced by the scheme, and focusing on the scheme as being the particular way in which the transaction was structured, we submit that an amount, the $383 million, would have been included in AXA’s assessable income if the scheme had not been entered into.

BELL J:   If I understand it correctly, you challenge the whole line of authority which reads 177C as requiring the courts to engage in a factual inquiry about what might have been the reasonably expected outcome, absent the scheme being in existence; that is the area of debate.

MR MOSHINSKY:   Exactly, your Honour.

BELL J:   It is sufficient for your purposes that you have a scheme and you have got a tax benefit.

MR MOSHINSKY:   Well, we say that there is an added ingredient.  There has to be the connection between the tax benefit and the scheme, and in that respect the definition of the scheme becomes very important.

BELL J:   In requiring consideration of the factual inquiry, the Court is looking, is it not, to the words of subparagraph (a):

might reasonably be expected to have been included, in the assessable income of the taxpayer ‑ ‑ ‑

MR MOSHINSKY:   Well, there are two limbs.  It is “would have been included” or “might reasonably be expected to have been included”.

BELL J:   Yes.

MR MOSHINSKY:   We accept that there are alternative constructions available clearly of that provision.  The prevailing approach now seems to be to – as the Full Federal Court did in this case – say that the court needs to determine what would have happened, or might reasonably be expected to have happened absent the scheme.  Now, we would submit that goes beyond the words of the section and what they require.  There is an alternative approach, and it does produce some real anomalies apart from the forensic problem.

Can I illustrate the real anomaly in this case?  If one takes this transaction, there was an actual sale by AXA generating an actual capital gain.  Now, if the hypothetical fact‑finding exercise comes to the view that if the transaction had not been entered into in this particular way nothing would have happened – so let us just say, just to simplify the point, it is not exactly the facts here, but just to simplify the point – if the taxpayer gives evidence which is accepted that, “Well, absent this scheme and absent the tax benefits I would have done nothing”, then on the Full Federal Court’s approach one has to say there is no tax benefit.

Now, that is a real problem because we have had an actual transaction with all the commercial benefits and the tax benefits, and it means that Part IVA is incapable of applying.  One has not even got to the dominant purpose issue.  One does not even get through the door of applying Part IVA.  Where you have an actual transaction which produces an actual tax benefit from the scheme we would submit that the construction that we have put forward is clearly preferable.

Your Honours, in a nutshell that is our first special leave point.  I should just add one further point.  Even if – and this is an alternative point on Part IVA – even if one does go to the “might reasonably be expected” limb, what the Full Federal Court has done is to say that the court needs to determine the one alternative postulate, the one thing that might reasonably be predicted to have happened.

Now, in our submission, there is no warrant for reading the words of 177C in that way, and there is a clearly available alternative construction which is that to satisfy 177C it is enough if it might reasonably be expected that the amount would be included in the assessable income in the sense that there might be a number of reasonable expectations and it is sufficient if, on any one of those, the amount would have been included in the assessable income.

Your Honour, the second special leave issue is that of arm’s length dealing.  In that respect we rely on the dissenting judgment of his Honour Justice Dowsett.  The difference between the majority and the minority in essence turns on a characterisation of Macquarie’s role in the transaction, and one can most clearly see the difference – if I could take your Honours to two passages?  First, in the judgment of his Honour Justice Dowsett at application book 103 at paragraph 56 of the judgment his Honour said:

In my view there was an identity of interest in the transaction, as between AXA and Macquarie, which was not simply that of vendor and purchaser.  Macquarie had, in effect, undertaken to assist AXA to dispose of AXA Health in a way which would minimize AXA’s capital gains tax exposure.

Then over the page, towards the end of that paragraph, the sentence:

The transaction was designed to enable Macquarie to obtain fees for services, not to acquire an asset.

One needs to remember, just harking back to the diagram, the on‑sale of AXA Health to the consortium vehicle, MB Health, was preordained from the outset of this transaction.  There were two alternative ways that that could be achieved, an intended method and a fallback method through a combination of call options and put options, but on either route it was on‑sold to the consortium.  So that is Justice Dowsett’s characterisation. 

Earlier in his judgment Justice Dowsett correctly, in our submission, with respect, points out an error in the way the trial judge approached the question of arm’s length and that he unduly confined his consideration of the issue.  In the majority’s judgment – just to try to find one place which best encapsulates the difference with Justice Dowsett – at application book

123, at the foot of the page, starting with the last few words on that page, their Honours said:

The fact that a purchaser of an asset seeks to obtain, for its own benefit, a collateral advantage from the purchase transaction (in this case the earning of fees) over and above the acquisition of the asset, cannot, without more, lead to a conclusion that the parties to the transaction were not dealing with each other at arm’s length.

Now, the problem with that sentence – and we believe that encapsulates the thrust of the majority reasoning – is that it treats Macquarie Bank as the purchaser of an asset - that is the first problem - but when one really looks at what was going on here, the on‑sale to the consortium was preordained.  The other problem with this sentence is that it says that “a collateral advantage from the purchase transaction” was the earning of fees, but in our submission, a true analysis of what is going on here is that the primary advantage to be attained by Macquarie of this transaction was the earning of fees, it was not the acquisition of an asset.

Your Honour, while at one level characterisation of this transaction may appear to be specific, it does raise a wider issue in that increasingly, as this transaction is a very good example, one has investment banks which facilitate transactions such as in this case, including by participating in them, and it therefore raises issues which will be of interest and importance to many other cases, and there are many provisions of the – many, many provisions, as I am sure your Honours are aware – of the tax legislation that use the expression, “arm’s length dealing”; we have collected them in the footnote at the end of our primary summary of argument.

BELL J:   If the Court were to become enmeshed in this factual issue it would be perhaps to prefer the approach that Justice Dowsett took to the resolution of the fact but hardly to cast light on the use of “arm’s length” as it appears in the legislation.

MR MOSHINSKY:   Well, we would submit that in the process of doing that one would necessarily look at the principle.  If your Honours please, those are our submissions.

HEYDON J:   Thank you, Mr Moshinsky.  We need not trouble you, Mr Davies.

In our opinion the second of the two points to which Mr Moshinsky referred is essentially a factual controversy.  The first point is a question of construction in relation to which the Full Court of Australia has taken a particular approach.  We think there are insufficient prospects of successfully disturbing that approach on appeal.  Accordingly, special leave is refused with costs.

AT 10.50 AM THE MATTER WAS CONCLUDED