Commissioner of Taxation v Consolidated Press Holdings Limited S127/2000

[2000] HCATrans 747

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S127 of 2000

B e t w e e n -

COMMISSIONER OF TAXATION

Appellant

and

CONSOLIDATED PRESS HOLDINGS LIMITED

Respondent

Office of the Registry
  Sydney  No S128 of 2000

B e t w e e n -

COMMISSIONER OF TAXATION

Appellant

and

MURRAY LEISURE GROUP PTY LIMITED

Respondent

Office of the Registry
  Sydney  Nos S132 and S133 of 2000

B e t w e e n -

CPH PROPERTY PTY LIMITED

Appellant

and

COMMISSIONER OF TAXATION

Respondent

GLEESON CJ
GAUDRON J
GUMMOW J
HAYNE J
CALLINAN J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON TUESDAY, 12 DECEMBER 2000, AT 10.16 AM

Copyright in the High Court of Australia

________________________

MR B.J. SHAW, QC:   If it please the Court, I appear with my learned friends, MR G.T. PAGONE, QC, MR G.J. DAVIES, QC and MR M.K. MOSHINSKY, for the Commissioner of Taxation.  (instructed by the Australian Government Solicitor)

MR D.H. BLOOM, QC:   May it please the Court, with MR R.F. EDMONDS, SC, I appear with my learned friends, MR A.J. PAYNE and MR J.H. MOMSEN, for the respondents in the first matter and the appellant in the second matter.  (instructed by Gilbert & Tobin)

GLEESON CJ:   Mr Shaw, have you and Mr Bloom worked out an agreed division of time between you?

MR SHAW:   No.

GLEESON CJ:   Maybe at the luncheon adjournment you can have a talk about that and, if it necessary to deal with the matter by agreement, you can make such an agreement.

MR SHAW:   Certainly.

HAYNE J:   Just before you begin, Mr Shaw, I understand the parties have been informed that I hold a small parcel of shares in Publishing and Broadcasting Limited.  I understand also from the Senior Registrar that, having advised the parties of that fact, neither party has any objection to my participating in the matter.

MR SHAW:   That is so, certainly so far as we are concerned, your Honour, and my learned friend says so too.

If the Court pleases, in the Commissioner’s appeals, the first and primary question is the meaning of section 177E of the Income Tax Assessment Act.  If I could take the Court to that section.

GLEESON CJ:   There is a slip in the first line of the judgment of Justice Hill, is there?  He says that the appeals concern the years of income ended 30 June 1990 and 30 June 1991.  He should have included 30 June 1989?

MR SHAW:   Yes, your Honour.  If the Court pleases, the section reads:

(1)  Where:

(a)  as a result of a scheme that is, in relation to a company:

(i)  a scheme by way of or in the nature of dividend stripping; or

(ii)  a scheme having substantially the effect of a scheme by way of or in the nature of a dividend stripping;

any property of the company is disposed of;

(b)  in the opinion of the Commissioner, the disposal of that property represents, in whole or in part, a distribution…..of profits of the company (whether of the accounting period in which the disposal occurred or of any earlier or later accounting period);

(c)  if, immediately before the scheme was entered into, the company had paid a dividend out of profits of an amount equal to the amount determined by the Commissioner to be the amount of profits the distribution of which is, in his opinion, represented by the disposal of the property referred to in paragraph (a), an amount…..would have been included, or might reasonably be expected to have been included, by reason of the payment of that dividend, in the assessable income of a taxpayer of a year of income; and

(d) the scheme has been or is entered into after –

a particular date –

the following provisions have effect:

(e)  the scheme shall be taken to be a scheme to which this Part applies;

(f)  for the purposes of section 177F, the taxpayer shall be taken to have obtained a tax benefit in connection with the scheme that is referable to the notional amount not being included in the assessable income of the taxpayer of the year of income; and

(g)  the amount of that tax benefit shall be taken to be the notional amount.

Section 177F provides that:

(1)  Where a tax benefit has been obtained, or would but for this section be obtained, by a taxpayer in connection with a scheme to which this Part applies, the Commissioner may –

make certain determinations.  While I am referring to that specific provision which relates to dividend stripping, may I take the Court to the more general provisions of the Part.  In section 177A there is a definition of “scheme”, and a statement in subsection (5) with a reference to purpose.  It means if there was more than one purpose, a dominant purpose.  In 177C there is a definition of what obtaining a tax benefit means for the purposes of the Part.  In section 177D it is provided that:

This Part applies to any scheme…..whether the scheme has been or is entered into or carried out in Australia or outside Australia or partly in Australia and partly outside Australia, where:

(a)  a taxpayer…..has obtained, or would but for section 177F obtain a tax benefit in connection with the scheme; and

(b)  having regard to –

the number of matters which are set out there –

it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme –

So, I am drawing attention to those provisions in order to point out to the Court that there is, in the Part, a reference to “purpose” and that purpose is the conclusion reached, or to be reached, having regard to a number of specified matters.  It is a conclusion about the sole or dominant purpose of somebody who entered into or carried out the scheme, not a reference to the sole or dominant purpose of the scheme.

Now, the Full Court - and if I could go to volume 9 of the appeal book at page 2297at paragraph 174 - comes to the conclusion that that:

the first limb of s 177E(1) embraces only a scheme which can be said objectively to have the dominant (although not necessarily the exclusive) purpose of avoiding tax.

The first limb is the limb which is a reference to a scheme in the nature of dividend stripping.  Then, at page 2300 in paragraph 184 the Full Court concludes:

that a scheme is not within the second limb unless the dominant purpose of the scheme is that of a tax avoidance –

and on that basis found against the Commissioner.  So, the first question is whether the Full Court was right in saying that 177E does not operate unless the sole or dominant purpose of the scheme of dividend stripping is the purpose of tax avoidance.

At first instance, Justice Hill had not come to those conclusions; he came to a conclusion something rather like it, in relation to the first limb, saying it was a question of what is the “essential character” in the scheme.  That is at page 2182 but, in relation to the second scheme he said purpose was irrelevant.  What was relevant was effect, and that is at page 2184 and 2186.

GLEESON CJ:   Mr Shaw, I would like to understand a little better than I do at the moment by reference to the facts in relation to the two respondents, how the process of assessment proceeded.  Once you conclude that there is a scheme of “dividend stripping”, to put it shortly, then you have to find that, as a result of that scheme, property of the company is disposed of, and then you have to have the opinion of the Commissioner that the disposal of that property represents a distribution of profits of the company.

MR SHAW:   Yes.

GLEESON CJ:   How did those provisions relate to the facts of the cases in relation to these two respondents?

MR SHAW:   Your Honour, what happened was there were two United Kingdom companies, Consolidated Press International and Consolidated Press International Holdings.  Each of them was incorporated in the United Kingdom, but not resident there, and the consequence of that was that they were not taxable in the United Kingdom.

GLEESON CJ:   What do you mean by “they”?

MR SHAW:   I mean the two United Kingdom incorporated companies which were not resident in the United Kingdom.  The Chancellor announced measures which, if introduced, would, in due course, become taxable in the United Kingdom.  At about the same time, measures were announced in Australia which related to the taxation of foreign income of subsidiaries of Australian companies, and it looked as it that would have the possible effect that the UK companies might either be taxed twice or, if not taxed twice, would be taxed in a way which would mean that when dividends were declared, franking credits were not available in relation to the dividends, and that gave rise to a question about what might be done in relation to the UK companies.

All the shares in the two UK companies were held by the two companies, Consolidated Press Holdings and Murray Leisure Group.  They were incorporated in Australia and taxable in Australia.  As I said, they held all the shares in the United Kingdom companies, so that any dividend declared by the United Kingdom companies would fall into their hands and be taxable here and would not get any rebate or franking credits or whatever.

It was then decided that the appropriate course to take was to seek to preserve the position not of the UK companies but of the profits to be derived from the assets of the companies by moving those assets offshore.  When I say “offshore”, I mean offshore of the UK.  It was decided to move them into a Bahamian company called Consolidated Press International, which is apt to have a “(B)” after it in order to distinguish it from the UK companies which have “(UK)” after them.

Steps were taken which are described in our outline.  If I could take your Honours to page 2, the announcements that I have referred to are referred to in paragraph 6.  In paragraph 9 what is described is the decision to put the UK companies into liquidation and to declare dividends payable on 8 May and the total of the amounts of those dividends, as your Honours will see, is, in the case of CPIL, $US100 million and, in the case of CPIHL, $US53 million.

There were available profits out of which those dividends could be declared.  The position of the companies is described in paragraph 16.  CPIL had net assets of $550 million and CPIHL had net assets of about $190 million.  The shares in the UK companies were agreed to be sold by CPH and MLG to the Bahamian company.  That is referred to in paragraph 12.  The shares were sold and the dividends were declared before the sale and purported to be paid afterwards, not in cash but by transfer of debts.

GLEESON CJ:   Am I not right in thinking that the declaration was that the dividends would be paid to whoever were the members on 8 May?

MR SHAW:   Yes, your Honour, and a direction was given after the declaration by CPH and MLG to the liquidators to pay the dividends to CPIL Bahamas.

GLEESON CJ:   That was the company that was entitled to the dividends according to the resolution.

MR SHAW:   No, it was not that the ‑ ‑ ‑

GLEESON CJ:   It was not the member on 8 May?

MR SHAW:   No, your Honour, no.  If I might interpose there, your Honour, a question arose about whether or not the directors, in fact, had power to declare the dividend and his Honour Justice Hill thought that did not matter because either way there was an actual declaration or there was a distribution of assets which had the same effect as if there had been a proper declaration.  We sought to argue that even if the directors did not have the power, the declaration was sanctioned by the members and was, accordingly, valid, but his Honour did not think it was necessary to decide that, and none of these questions were decided by the Full Court because they decided that it was necessary, in order that section 177E should operate, that the sole or dominant purpose of the scheme should be the obtaining of a tax benefit.  The scheme did not have that sole or dominant purpose and, accordingly, the Commissioner could not succeed and so they did not go on to any of the other questions.

GLEESON CJ:   Now, applying those facts to the provisions of 177E, first of all, the company referred to in paragraph (a) is each of the two UK companies.

MR SHAW:   Yes, your Honour.

GLEESON CJ:   And what is the property of the relevant company that is disposed of?

MR SHAW:   It is the dividends, your Honour.  If your Honour looks in paragraph 177E(2), a disposal of property includes payment of the dividend.

GLEESON CJ:   Yes.  So, it is the payment of the dividends to the Bahamian company?

MR SHAW:   Yes.

GLEESON CJ:   Then the Commissioner formed an opinion under paragraph (b).

MR SHAW:   Yes.

GLEESON CJ:   That that represented a distribution of profits of each company?

MR SHAW:   Yes, your Honour, and perhaps if I could interrupt your Honour there?

GLEESON CJ:   Yes.

MR SHAW:   On that matter, which was not a matter to which the Full Court went, Justice Hill concluded that the formation of that opinion was defective and invalid.

GLEESON CJ:   Why was that?

MR SHAW:   It was because of the terms of the determination report.  His Honour said that the person in the Commissioner’s office who formed the opinion had wrongly looked at the net assets of the company and treated them as if they were profits and that was looking at the wrong thing.

GLEESON CJ:   There was also a question of combining the assets of the company, was there not?

MR SHAW:   Partly that, yes, your Honour.

GLEESON CJ:   What did the delegate do in that regard?

MR SHAW:   Our submission is, first of all, he clearly formed an opinion in relation to each of the companies before any possible pooling happened and the opinion he formed, in our submission, is an opinion about profits.  It is true that the words say “net assets” but it is, in our submission, perfectly clear that the report was referring to that part of the net assets which was profits.

GLEESON CJ:   Where do we find this process of opinion formation and determination?

MR SHAW:   Your Honour, you will find it in volume 5. If I could take the Court to volume 5, 1191, your Honour will see that that is the first page of the determination report. It commences with a description of the sequence of events and the Court will see that on that page No 5 is the declaration of one of the dividends and on the next page No 10 is the declaration of the other of the dividends. At page 1196 at line 16 it is said:

A vehicle entity [the stripper, CPIL(Bahamas)], acquired shares in the target companies [CPIHL(UK)  and CPIL(UK)].  These companies have either accumulated a current year’s profits that are represented by cash or other readily realisable assets.  This is reflected in their balance sheets dated 10 May 1990 when the dividends of $100M and $53M US are added back.

The vendor shareholders received shares in the stripper, CPIL(Bahamas) in lieu of receiving a payment…..

CPIL(Bahamas) in effect drew off the profits by having paid to it a dividend totalling 153M US from CPIL(UK) and CPIHL(UK).  These dividends were not subject to tax in the Bahamas.

Then, going over to the next page, that is 1197, and this is the passage which his Honour said contained the fatal fault:

Paragraph (b) of sec. 177E(1) contains a further requirement that, in the opinion of the Commissioner, the disposal of the relevant property represents, in whole or in part, a distribution to a shareholder or another person of profits of the company.  This will occur in the accounting period in which the disposal occurred or any earlier or later accounting period.

The Commissioner contends that there was sufficient profits out of which the dividend could have been paid.

In support of the above, it should be noted that the net assets of the two companies [after adding back the dividends of $153M to CPIL(Bahamas)] from their Balance Sheets dated 10 May 1990 were:

CPIL(UK)       86, 456,205 US$
CPIHL(UK)   103, 282,414 US$

GLEESON CJ:   What is the point of that aggregation?

MR SHAW:   Your Honour, there is no point.

GLEESON CJ:   What was its relevance to the process of determination of the delegate?

MR SHAW:   In our submission, it had none, but assuming it did, it is perfectly clear that what is being said is that there were a particular amount of net assets of each of the companies.  This is a conclusion reached before the pooling or the addition of the two.  The report goes on:

Further, when the dividend is deemed to have been paid out of profits, the Commissioner contends that at the time, it is not necessary for there to be sufficient profits available for the payment of a dividend…..

It is the Commissioner’s contention that the above net assets of both companies represents profits available for distribution.

Then the opinion is expressed over on the next page, your Honours, at about line 10:

In summary, it is the Commissioner’s opinion that the payment of dividends pursuant to s 177E of $153M US or $201,156,980 AUS in total to CPIL(B) –

the Bahamian company –

represents a distribution of profits of CPIL(UK) and CPIHL(UK).

So, it is clear that the opinion was formed, but if one looks - I have already pointed out to the Court that the net assets of the companies were not the amounts which appear on page 1197, but were – and this is in paragraph 16 of our outline - $550 million and $186 million.

Now, the balance sheets are in volume 7, first of all at 1808, and that is Consolidated Press International as at 10 May and it will be seen that the net assets are $550 million.  It will also be seen that there was in the profit and loss account at that time, which is 10 May, $3 million-odd.  That is the last line but one of the balance sheet.

The Court will see that there was in the balance sheet an amount due to Group companies of $131 million‑odd, and this is after the declaration of the dividend, and accordingly includes the amount of the dividend.  If one goes over to CPIHL, which is at 1837, one sees again that the net assets are $186 million‑odd, the amount in the profit and loss account is $33 million and there is an amount due to a Group company of $53 million.  One sees on the next page, 1838, the last item, that liability is a liability to the Bahamian company and that is the amount of one of the dividends.

GLEESON CJ:   If I could go back to pages 1191 and 1192, I thought you said a little earlier that the disposal of property in each case was the declaration of a dividend.

MR SHAW:   Yes, I did, your Honour.

GLEESON CJ:   On page 1191 at line 36 there is a reference to CPIHL declaring a dividend of 53 million.  Is that one of the disposals of property?

MR SHAW:   Yes, your Honour.

GLEESON CJ:   On page 1192 there is a reference to CPIL declaring a dividend of $US100 million.  Is that the other disposal of property?

MR SHAW:   Yes, your Honour.

GLEESON CJ:   Does that not explain why the pooling is going on?  If you relate those two numbers appearing respectively on 1191 and 1192 to the numbers on 1197, you need to pool, do you not?

MR SHAW:   Well, your Honour, you do not.

GLEESON CJ:   Just take CPIL.  CPIL, according to page 1192, line 35, declared a dividend of $US100 million, which I suppose is about $A140 million or whatever.

MR SHAW:   Yes.

GLEESON CJ:   It did not have what are referred to as net assets of that amount.

MR SHAW:   No, your Honour, it had net assets on that calculation of 103.  What has happened is that the two have been transposed.

GLEESON CJ:   No, of 86, did it not?

MR SHAW:   It does say that, yes, your Honour.  If I could take your Honour back to the CPIL balance sheet at 1808, your Honour will see that there is $3 million‑odd in the profit and loss account.  If you add to it $100 million from the amount due to the Group companies in respect of the dividend, you get the figure which appears at page 1197 beside CPIHL(UK).  If you do the same in respect of CPIHL, if you look at page 1837, you add to the amount in the profit and loss account of $33 million‑odd the dividend of $53 million‑odd, you get the figure which appears beside CPIL(UK).

GLEESON CJ:   So, on page 1197, between lines 15 and 20, there are two mistakes.  The word “assets” should be “profits”, and they have transposed CPIL and CPIHL, is that right?

MR SHAW:   Yes, that is right, your Honour.

GLEESON CJ:   Well, now, let it be assumed that that is right, and just concentrating on CPIL for the moment, it declares a dividend of $US100 million, which is $A140 million, or something.

MR SHAW:   Yes.

GLEESON CJ:   CPIHL declares a dividend of $53 million.

MR SHAW:   Yes, your Honour.  So assuming that I am right about the net assets which are referred to there are net assets which represent the available profits in each case, for which there must be some such explanation because, as I have pointed out to the Court, the net assets are in fact vastly in excess of those sums.  In one case, it is half a billion dollars or more than half a billion dollars.  So, it is obviously not all the net assets that are being referred to.  One gets a situation in which a conclusion has been formed about each of the companies that there were sufficient profits to support these dividends.

GLEESON CJ:   And the aggregation was just a ‑ ‑ ‑

MR SHAW:   It does not matter, no, because it is clearly a conclusion that there is enough there in each case for the declaration.

GLEESON CJ:   Your argument is that what appears between lines 15 and 20 on 1197 is just a distraction.

MR SHAW:   No, your Honour, not that it is just a distraction, but that between 15 and 20, there is a formation of a view about the available profits of each of the companies.  It is true that the names have been transposed and it is perfectly clear what is meant when one refers to the actual balance sheets.  The conclusion that was come to in the case of each was a conclusion which meant that there were available profits sufficient to support the dividends.  That shows that the conclusion expressed over on page 1198 is fully supported by the facts.  It is perfectly true that there has been the addition of the two on page 1197 but, in our submission, that is neither here nor there.  In that sense, that bit of it is a distraction, but not all of it is a distraction.

GAUDRON J:   You do not make anything of what appears at lines 20 to 23 inclusive?

MR SHAW:   No, your Honour. 

GAUDRON J:   So that is a distraction.

MR SHAW:   That is a distraction.  Your Honour, I am not submitting that the formation of the opinion is expressed in perfect terms, but I am submitting that when you look at what is said in the light of what are clearly the facts, it is abundantly clear that an opinion was formed about each of the companies and that, although a slip has been made in that the two companies’ names have been transposed, that conclusion was, in the case of each of them, that there were profits available which were sufficient to support the declaration of each of the dividends.

GLEESON CJ:   Which is really neither more nor less than what each company was purporting to do; that is, pay a dividend out of profits.

MR SHAW:   Yes, quite.

HAYNE J:   Well, are we to understand that the relevant Companies Law, applicable to these companies, was of the kind we are familiar with?

MR SHAW:   There was not any evidence about UK law, but the evidence was that the directors thought that there were sufficient profits to declare the dividends, and that will be found in volume 1 at page 81 at lines 26 to 30.  The position is, your Honour, it is submitted, just exactly what one would expect, that the directors thought there were profits and declared dividends out of them, it is as simple as that.

GUMMOW J:  There was then a distribution of assets, was there not?

MR SHAW:   There were two distributions of assets, yes.

GUMMOW J:   Yes, one in each - - -

MR SHAW:   By “two”, I mean two in each company:  a distribution for the dividends and a distribution on the liquidation, as it were, yes.

GUMMOW J:   Yes, it was the second I was – yes.

MR SHAW:   Yes, there was.

GUMMOW J:   Now it is said against you that that has some significance for a notion of stripping, the fact that there were these two steps.

MR SHAW:   Your Honour, it is submitted that - I do not know whether it would have mattered if there was only one step, because of section 47, but there were, in fact, two steps, so that it bears more clearly the stamp of dividend stripping than it would if there were not, but if I could go back to the question which your Honour asked me about the facts and how they relate to this question of dividend stripping, I explained the circumstances out of which the transactions arose.

GLEESON CJ:   There is one other aspect of the facts, is there not?  Am I not right in thinking that one of these companies, I think it was CPIL, was substantially overcapitalised as a result of the fact that the takeover bid for BAT did not go ahead?

MR SHAW:   Well, your Honour, there is another fact which I have not mentioned, but it is not that one, and it is a fact which his Honour Justice Hill thought was relevant, was that one of the companies – I cannot remember which – CPIL, had a deficiency in shareholder’s funds, and although it had sufficient current year profits to support the declarations of dividend, there were deficiencies in shareholder’s funds, and his Honour thought that, in those circumstances, you could not have a dividend strip.

GLEESON CJ:   Was not one of the concerns, however, that a large amount had been injected into CPIL to enable it to provide funds to a Singapore company, which was to be used as the vehicle for a takeover which ultimately did not proceed, and I presume part of the purpose of the exercise was to get the money back?

MR SHAW:   No, because the money did not come back and, indeed, had dividends been declared on the shares which CPH and MLG owned in the UK company, some of the money would have come back, but it did not.  All the monies went to the Bahamian company and our submission is that the fact that you have a company reorganisation taking place really does not conclude the question of whether or not there is involved in the reorganisation a dividend strip ‑ ‑ ‑

GLEESON CJ:   Actually, a scheme by way of dividend strip.

MR SHAW:   A scheme by way of dividend strip – because what is perfectly clear is that what was desired was to preserve all the assets for the purpose of earning future profits and if dividends had been declared, there would have been a large amount of tax payable on the amount of those dividends, and the assets, to that extent, would not have been available any more to earn future profits.

GLEESON CJ:   What, in your submission, is either, (a), necessary, or (b), sufficient, to constitute a scheme by way of dividend stripping.

MR SHAW:   Your Honour, it is, in our submission, not possible to give a final description of what is and what is not a dividend strip because the form of it keeps on changing.  But if I could take the Court – if I could hand up to the Court copies of an article that was referred to both in the Full Court and by Justice Hill by Mr Vincent.  It is an article which was written in 1989 and if I could just explain to the Court the structure of the article.  On page 82, he commences to go through the English cases and he concludes that examination on page 86, and draws a conclusion about what the English authorities show.

Then, on page 87, he commences to examine the Australian cases about it and he does that for the next four or so pages, and at page 92, in the first column, about two-thirds of the way down, he draws conclusions about what they show about what a dividend strip is.  Then, at page 92, in the second column, about a third of the way down, there is a heading “Consolidated Conclusion from the Anglo-Australian Authorities”, and this is set out by the Full Court in their judgment.  The author says:

A condensation of all the foregoing cases reveals, that the Imperial and Antipodean Courts have only attributed the expression dividend stripping to an arrangement, which exhibited all of the following features:–

1.  The acquisition of shares in a (“target”) company by a party:  whether by a sale from the existing members, or via an allotment thereto from the target company.

2.  The payment of a dividend, or a liquidator’s distribution, to the purchaser out of target company profits:  whether pre or post acquisition; and whether distributed immediately, or over a period of time.

3.  The purchaser claiming not to be taxable upon the distribution received thereby.  This claim may have ensued from –

then there are all sorts of various reasons which are given –

4.  The vendor shareholders, or the target company, obtaining a capital sum not substantially less in monetary terms than the quantum of profits distributed to the purchaser.

GLEESON CJ:   Just applying 3 to the present case, the purchaser is the Bahamian company, is that right?

MR SHAW:   Yes, not taxable.  Then, omitting the next 10 or so lines, right at the bottom of the page the author says:

However, I submit that for there to be a dividend stripping scheme, then the factors denoted in clauses 1 and 2 must be present; and the condition designated in clause 4 must also be applicable – at least to the extent of obtaining consideration.

Upon this point there is, in my view, no necessity that the consideration received –

to –

be either capital in their hands, or approximately equate with the quantum of profits –

and then he discusses why that is so and he gives an example about two‑thirds of the way down.  Then he says a little bit further down:

I am also strongly of the view that the fiscal implications for the stripper…..are not of consequence insofar as identifying a dividend stripping operation is concerned.

Then he goes on and discusses various sections in which dividend stripping is used in the Act.  There is not only 177E, but also a significant number of other sections dealing especially with the position of the stripper, but he makes clear what his position is in relation to “purpose” on page 96.  In the first column, at about point 4 on the page he says:

Whilst the parties may be at arm’s length –

and he is referring to an example he has given –

and a tax avoidance purpose plays no part in the transaction, those factors are not – as previously indicated – relevant to the application of section 177E.

So his conclusion is that the tax avoidance purpose is not relevant and that the cases show the position which he spells out at page 92 in the second column.  After discussing what the cases show, he comes to the conclusion which I read out from the bottom of page 92, the second column over on the top of page 3.

What we submit, your Honours, is that we satisfy either of those series of tests.  It is true that there is not a capital sum, but there is the capital shares; the vendors received the shares.  So that, in our submission, however one looks at it, the tests which the authors suggest are satisfied here and we would submit, if the Court pleases, that if you have a scheme, a significant element of which involves the acquisition of shares in a company with a view to obtaining the profits of that company, either accumulated or anticipated, and then those profits are obtained, it is highly likely there will be a dividend stripping-scheme.

GUMMOW J:   What is the force of the word “stripping”?  It has a pejorative ring to it.

MR SHAW:   Not in all circumstances, your Honour.  I think it is this, your Honour, that what one has in mind is that here is this company with a sum of accumulated profits or anticipated profits, whatever they might be, and the stripper is going to denude the company of those, to a substantial extent.  I mean, one can have, of course, partial undress as well as complete nudity and stripping would include both.

CALLINAN J:   Not to use the profits for an orthodox business purpose and to pay them, perhaps without regard to any future utility that they might have for the company in an ordinary business pursuit.

MR SHAW:   Well, your Honour, the presence of that element may be an element which will assist one to the conclusion but, in our submission, is not necessary.  I mean, there are so many thing which ‑ ‑ ‑

CALLINAN J:   No, but that might answer the description of “dividend stripping”, that is all I am suggesting.

MR SHAW:   Yes.

GUMMOW J:   There is no suggestion that there is any violation of any company law principles in any of this?

MR SHAW:   No.  If I could go back to where I was, or more or less to where I was.  I had submitted to the Court that the first significant thing in looking at this question of sole or dominant purpose of the scheme is that it seemed strange that one has in 177D a reference to “purpose”.  There is none in 177E, and yet, a more substantial purpose is required by judicial interpretation of dividend stripping scheme in 177E than there is in 177D.

If I might take the Court to the accompanying material to my learned friend’s outline of submissions, there is included in that at the back the explanatory memorandum and second reading speech relating to the introduction of Part IVA and if I could go first to the first page of the explanatory memorandum.  The reason I do that is to remind the Court of the provisions of the previous general provisions relating to anti-avoidance, section 260.  My friend has put numbers on the pages and it is page 29.  It will be seen that section 260 provided:

Every contract, agreement or arrangement…..shall so far as it has or purports to have the purpose or effect of in any way, directly or indirectly –

and then, if you look at (c):

defeating, evading, or avoiding any duty or liability imposed on any person by this Act –

So that section 260 was draw in terms of, amongst other things, avoiding tax or tax avoidance.  The avoidance which was provided by section 260 was an avoidance of an arrangement so far as it has “the purpose or effect” of tax avoidance.  It is not a requirement that the arrangement have the sole or dominant purpose of tax avoidance.  So, again, one has the preceding section which was thought to be unsatisfactory providing for purpose but in terms much less onerous than those which the Full Court has found appropriate in relation to a dividend-stripping scheme.

If I could then take the Court to the second reading speech, the page I want to go to is at page 54.  In the second column at the top of the page, the first full paragraph, Mr Howard says:

What is it that general anti-avoidance provisions should aim to achieve?  Few people have faced up squarely to that question…..We are acutely aware that the term ‘tax avoidance’ means different things to different people.  Reasonable men and women are bound to differ on this crucial question and on the subsidiary matter of the appropriate tests for determining what behaviour a general anti-avoidance provision ought to proscribe.

Then going to page 55 ‑ ‑ ‑

GLEESON CJ:   Do you say the next paragraph has any significance, the one beginning with the words “The proposed provisions”?

MR SHAW:   Your Honour, the whole of what the Treasurer said is a matter of significance, it is submitted, because what it makes perfectly clear is that the terms of section 260 were found to be unsatisfactory in their operation and what was being sought to be done was avoid any test of tax avoidance because that had been found to be unsatisfactory, and yet the Full Court has reintroduced it in a more extreme form.  It would be wearisome if I read it all out.  I was going to go to page 55 where reference is made to the definitions of “tax benefit” and at about point 6 on the page in the middle of the paragraph that begins “The other form of tax benefit covered by the Bill” and so on, the Treasurer says:

This approach – of specifying in the new provisions what constitutes a tax benefit and that the relevant purpose for application of the provisions is one of obtaining such a benefit – should help to eliminate some of the uncertainties associated with the use in section 260 of less precise expressions.

That section uses phrases that speak of ‘altering the incidence of any income tax’ and ‘defeating, evading or avoiding any duty or liability imposed on any person by this Act’.  These very wide, but uncertain, expressions appear to have been at the root of the development by the courts of the so-called ‘choice principle’, a rule of interpretation which, together with other established defects, has greatly limited the scope of section 260.

There are two other significant limitations on the effectiveness of section 260 which the new Part can be expected to remove.  The present section does not permit the purposes of the persons entering into an arrangement to be inquired into, except by reference to the effect of the arrangement itself.

Then it refers to some other defect.  In the next column at about point 3 on the page the Treasurer says:

I draw to the attention of honourable members that Part IVA contains a supplementary code applicable to schemes that are commonly called dividend stripping – and to similar schemes – under which shareholders in effect receive company profits in a tax free form, in substitution for taxable dividends.  The reason for such specially tailored provisions within the new general measures is to be found in particular features of such schemes when viewed in the context of the structure it has been necessary to give to the basic provisions of Part IVA.  It is this:  When profits have been accumulating in a company, possibly for extended periods, there will be no clear answer to the question whether those profits might reasonably be expected to have been distributed as dividends if the scheme had not been entered into.  As often as not, that expectation could not be established to exist.  Where this is so – and despite the fact that the company had been stripped of profits – the result under the basic provisions would be that there is technically no ‘tax benefit’ –

and so on.

So, what was being said is, it is submitted, that here we have these general provisions which do not use the test of tax avoidance, but even those general provisions are not, in the form they are enacted, adequate to deal with the problem of dividend stripping, so we have to have a wider provisions to deal with that.  The effect of what the Full Court has done is to make the test of purpose in relation to dividend stripping much more difficult to meet than it was under section 260.

If I might then go back to page 41 in the explanatory memorandum, at that page, the explanation of section 177E is commenced.  At page 42, the first complete paragraph:

Schemes of the kind to which section 177E is directed could on occasions come within the general ambit of section 177D, but section 177E is needed for situations where, for example, although profits are in fact stripped from a company –

and then he deals with that question I referred to, the matter that I read about in the second reading speech.  But in the next paragraph the explanation goes on:

Also, without section 177E Part IVA may not operate to counter a dividend strip carried out in relation to current-year profits of a company, where tax purposes other than those of avoiding tax on dividends may also be present.

So, it seems to be expressly said, it is submitted, that 177E is being enacted, amongst other things, to catch circumstances in which it cannot be said that there is a sole or dominant purpose of a tax avoiding kind.  Yet, the Full Court has found that to be necessary.

If I might then draw the Court’s attention to Newton’s Case (1958) 98 CLR 2. That is a case which, although it was not described as a dividend-stripping case at the time, has subsequently been described in that way. I shall not read the description of the facts because it is very complicated, but if I could take the Court to page 9, at about point 5 on the page, Lord Denning, delivering the opinion of the Privy Council, says:

Next, what was the purpose of the arrangement?  It can clearly be seen to be three-fold:  (i) To increase the capital of the motor companies – and to do it by ploughing back over £1,000,000 of the profits into the businesses – and to do it in a way which would attract as little tax as possible.  (ii) To enable the original shareholders to receive a large sum – nearly £500,000 in cash – without paying tax on it.  (iii) To enable the Pactolus company –

that was the stripper –

to make a handsome profit in return for its part in the affairs.

At page 10 at point 1 on the page, his Lordship says:

It is clear from this analysis the avoidance of tax was not the sole purpose or effect of the arrangement.  The raising of new capital was an associated purpose.  But nevertheless the section can still work if one of the purposes or effects was to avoid liability for tax.  The section distinctly says “so far as it has” the purpose or effect.

And that view of the section was adopted by this Court in Gulland 160 CLR 55, and the relevant passages are in the judgment of Chief Justice Gibbs at page 67, where he refers to what he said in Hollyocks’ Case in 1971.  The reason I have referred to that is that Gulland is 1985, which is after the enactment of Part IVA, and the other relevant judgment is the judgment of Justice Dawson at page 105, where his Honour says the same.  So it is clear that section 260 does not require a sole or dominant purpose and it is submitted further that when one looks at other dividend-stripping cases one finds dividend stripping in circumstances where there was no purpose of tax avoidance.

If I could take the Court first of all to the twin cases of Hancock 108 CLR 258 and Rowdell 111 CLR 106. The reason I call them twin cases is that Rowdell was the stripper, which was involved in the Hancock Case, although other cases as well as the Hancock Case were involved in the Rowdell Case, but the Hancock Case was also involved in it.  The target company, if that is the right word, in the Hancock case, was a company called Mulga Downs and that was a company in which the Hancocks held shares and so did a family called the Lefroys.  The Lefroys held the majority of the shares, something over 11,000 out of almost 19,000.  The Hancocks held something like 7,000/7,500, something like that.  So the majority of the shareholders were not the Hancocks, but the Lefroys.

A transaction took place, which is described in the headnote of the Hancock Case, which resulted in all the shares, both the Lefroys and the Hancocks, being purchased by Rowdell, the company being stripped of profits, that is Mulga Downs being stripped of profits, and all of the shares were sold back to the Hancocks, so that it ended up with the Hancocks owning the whole of Mulga Downs.

It was held that section 260 applied to the Hancocks but it did not apply to the Lefroys.  It did not apply to the Lefroys because all the Lefroys had done was to sell their shares for a capital sum.  So we had a transaction which involves some people who had a purpose of tax avoidance – that is the Hancocks – and other people, the Lefroys, who did not.  In the case of the Hancocks, their dominant purpose was not to avoid tax, it was to attain all the shares in Mulga Downs.  But, nevertheless, the transaction with the Hancocks was struck down by section 260.  If one looks at page 272, 108 CLR, in the judgment of Justice Fullagar, at the bottom of the page, the fact that the Lefroy transactions were not affected by 260 is referred to by his Honour at the bottom of that page and the top of the next page, and what his Honour says there is confirmed by what is said by Justice Menzies, on appeal.

GLEESON CJ:   What does Justice Fullagar mean by it “is no more than a genuine unconditional sale of a capital asset”?  The word “genuine” is intended by way of contrast with what?

MR SHAW:   I think what is meant, your Honour, is this, that if all you do is have something and sell it, and that is all there is to it, and there are not any strings attached, like you get something back, or whatever, as the Hancocks did because they sold their shares and got them back again, if you simply have a sale of an asset, you will not be able to find that 260 applies.  But where you have the extra elements that were in relation to the Hancocks, you might or, in fact, did.

GLEESON CJ:   That is what I am interested to understand.  What precisely was the difference between the Hancocks and the Lefroys?

MR SHAW:   Well, the difference is, your Honour, that in the case of the Lefroys, all they did was sell the shares which they had for £40,000 and that was the only transaction there was.

GLEESON CJ:   Just like a person selling shares cum dividend.

MR SHAW:   In some circumstances it might be.  But in the case of the Hancocks, there was a sale of the shares under an arrangement which involved the sale of the shares, the agreement that there should be the stripping off of the dividends and the sale back.

GLEESON CJ:   Yes.

MR SHAW:   At pages 291 to 292, his Honour Justice Kitto says, on the third-last line of page 291:

One may accept without hesitation their stoutly-maintained assertion that in their minds the arrangement was predominantly a means for getting in the Lefroy shares.  That was, no doubt, their longstanding ambition.  It was that which drew them into the arrangement when it was proposed to them.  But the stubborn fact remains that, for whatever else the arrangement was a means, it was a means for the avoidance of tax.

I am referring to that to demonstrate that in this dividend-stripping case the sole or dominant purpose of the Hancocks was not the avoidance of tax.

GLEESON CJ:   No, but it is also interesting to understand why there was no tax‑avoidance purpose on the part of the Lefroys.

MR SHAW:   Yes.

GLEESON CJ:   It would not have made a difference if part of the attraction of the deal to the Lefroys was that they did not have to receive dividends and pay tax on the dividends.

MR SHAW:   No.

GLEESON CJ:   That is often part of the attraction to a person who sells shares cum dividend.

MR SHAW:   If the Court would excuse me a minute?  The other side of the transaction is the Rowdell’s side and that is dealt with in 117 CLR.  There were 10 or so transactions involved in the case, one of which was the transactions which involved the Lefroys and the Hancocks and at page 125 his Honour is discussing the effect of section 260 and he says, commencing at the third top line on page 125:

The section cannot be treated as having an operation extending beyond its expressly delineated function of defeating the purpose of tax-avoidance by the shareholders which it was the overtly manifested nature of the arrangement to achieve; (see the language of Lord Denning in Newton’s Case.  To grasp that s 260 defeats as against the Commissioner the tax-avoiding efficacy of an arrangement, and not any part of the arrangement itself or anything done under it, is to see at once that it cannot support an assessment made against Rowdell on the footing that any of the transfers of shares to it were void - unless, of course, the arrangement was a means of tax-avoidance by Rowdell itself.

Anticipating this conclusion, counsel for the Commissioner submitted that the section applies to each of the relevant transactions not only as being a means for avoiding a tax liability on the part of the vendor-shareholders but also as being a means for avoiding a tax liability on the part of Rowdell.  As to this, no more need be said than the tax-avoidance on the part of Rowdell was clearly not within either the purpose or effect of the transactions.  No doubt among the considerations which led Rowdell to enter into the transactions was the consideration that its tax liability resulting from the transactions would be reduced by the application of ss 44(2), 46 and 107…….but it is impossible to point to any tax liability which Rowdell would have incurred if the arrangement had never been made and for the avoidance of which the arrangement was a concerted means.

I might say that Justice Kitto dissented, in one respect, in relation to this case but not in that respect and indeed Chief Justice Dixon agreed with his Honour.  But, what that demonstrates, it is submitted, is that in the Hancock/Lefroy/Rowdell dividend strip one has an example, taking Lefroy as an example, where there was no tax avoidance purpose under section 260, so far as the Lefroys were concerned and none so far as the stripper was concerned – Rowdell – and, yet, the Full Court says, “You cannot have a dividend strip unless there is a sole or dominant purpose of dividend stripping.

GLEESON CJ:   Now, if you applied the facts of that to section 177E, where would the current provision leave the Lefroys?

MR SHAW:   The Lefroys would be like Mr Slutzkin.  They would be caught and the reason they would be caught, your Honour, is this.  If I could take your Honour back to section 177E:

(1) Where:

(a) as a result of a scheme –

that is a dividend strip, I will not read that –

(b) in the opinion of the Commissioner, the disposal of that property represents, in whole or in part, a distribution…..of profits…..

(c) if, immediately before the scheme was entered into, the company had paid a dividend out of profits of an amount equal to the amount determined by the Commissioner to be the amount of profits…..an amount (in this subsection referred to as the “notional amount”) would have been included, or might reasonably be expected to have been included, by reason of the payment of that dividend, in the assessable income of a taxpayer –

So that it operates in a dividend‑stripping scheme, but the point one looks at is the point immediately before the scheme was entered into.

GLEESON CJ:   Right, so applying this section to what the Lefroys did in relation to Mulga Downs, first of all, Mulga Downs, I presume, would be the company in paragraph (a)?

MR SHAW:   The target, yes.

GLEESON CJ:   What would be the disposal of the property of the company?

MR SHAW:   The declaration of dividends to Rowdell.

GLEESON CJ:   Right.  The Commissioner would have the opinion that that disposal represented a distribution of profits of Mulga Downs?

MR SHAW:   Yes.

GLEESON CJ:   Then you would say if, immediately before the scheme ‑ and I will come back to that ‑ was entered into, Mulga Downs had paid a dividend out of profits, that amount would have been assessable income of the Lefroys.

MR SHAW:   Yes.

GLEESON CJ:   That then makes it critical, does it not, to identify the scheme?

MR SHAW:   Yes.

GLEESON CJ:   What is the scheme in which the Lefroys are involved that is a scheme by way of dividend stripping? 

MR SHAW:   The acquisition of shares by Rowdell from them with a view to stripping the profits of the company.  I am using shorthand, but –

GLEESON CJ:   The shorthand may be important.  Your submission, as I understand it, is that if the facts of Hancock were repeated under the legislation we are presently concerned with, the Lefroys would be parties to a scheme by way of dividend stripping?

MR SHAW:   No.

GLEESON CJ:   How do you get the Lefroys ‑ ‑ ‑

MR SHAW:   Your Honour, I suppose that is right, in one sense.

GLEESON CJ:   The scheme has to involve them.  Otherwise, they are not caught up in paragraph (c), are they?

MR SHAW:   The scheme does involve them because they sell the shares to Rowdell.

GLEESON CJ:   Yes.

MR SHAW:   If I can illustrate that, perhaps more dramatically, by reference to Slutzkin 140 CLR 314. The headnote reads:

All the shareholders in a company which had accumulated profits sold their shares for cash.  The price was equivalent to the value of the company’s assets.  The buyer stipulated that the company’s assets should have been converted to cash by the date of settlement of the transaction and that it should have no liabilities.  The buyer subsequently caused a dividend to be declared on the shares.  The Commissioner of Taxation issued assessments of the former shareholders’ income tax upon the footing that s.260 –

applied.  It was held that it did not.  This is on the same basis as the Lefroys, but if one goes to 318, his Honour Chief Justice Barwick cites from the decision of Justice Rath below and he says:

“According to the evidence Mr Slutzkin and Mr Hapgood then left”…..”the part of the banking chamber where the meeting of directors was being held for the purpose of banking the payment cheques.  Mr Rosenblum and Mr Wallace proceeded with the further business of the directors’ meeting.  By this stage the transactions culminating in the sale of the shares had come to an end, and the subsequent activities of the company and Cadiz Corporation were no part of any arrangement to which the appellants as trustees were parties, or of the implementation of any such arrangement.  What did in fact occur is what was described in evidence as a dividend stripping operation.

Then he goes on and again at the end of the paragraph describes what happens as a dividend-stripping operation.  That view of the matter is accepted by Justice Stephen at page 322 and by Justice Aickin at 324 where he cites from some of the evidence and the evidence describes the transactions which took place as dividend‑stripping transactions.  So that here one has ‑ ‑ ‑

GUMMOW J:   This is the high-water mark of the so-called choice principle, is it not?

MR SHAW:   Yes.  What I am putting, your Honour, is this:  if it is necessary to have a dominant purpose of tax avoidance, the sole or dominant purpose is to have a dividend‑stripping scheme, it is perfectly clear from Slutzkin that the Court held that he did not.  It seems to be being suggested that the provision which is clearly enacted to catch these dividend‑stripping schemes does not catch them because there is no dominant or sole purpose in the scheme of tax avoidance, at least in the sense in which those terms are used in section 260.  In our submission, that is to turn Part IVA on its head.

The next thing to which I should refer is the fact that section 177E was not the first section in which the term “dividend-stripping scheme” in some form or other occurred in the Act.  There had been earlier provisions in the Act from as early as 1971/1972.  There are provisions in section 46A, for example, which deal with dividend stripping.  Provisions relating to dividend stripping have continued to be enacted since that time of various kinds, the most recent enactments being enactments at the time when imputation and franking credits were introduced.  There were provisions enacted which stopped the availability of franking credits in the case of dividend‑stripping schemes.

The reason I have mentioned that is that the Full Court seemed to think that it was of some significance that capital gains were made on the disposal of the shares by MLG and CPH but it is perfectly clear, it is submitted, that the presence of dividend‑stripping schemes is accepted as continuing or possibly continuing after the introduction of capital gains tax.  However that may be, there is a whole series of provisions in the Act dealing with the stripper, as opposed to the vendor shareholder.  If one looks at Rowdell, it would seem that on the test enunciated by the Full Court, a significant number of what one might reasonably think were dividend‑stripping schemes would not be dividend‑stripping schemes and not be caught by these sections which are directed to the stripper, as opposed to the vendor shareholder, because the stripper does not have this purpose of tax avoidance, according to Rowdell.

So it is submitted that the Full Court, in coming to the conclusion that a sole or dominant purpose of tax avoidance is necessary in order for there to be a dividend‑stripping scheme, or a scheme with substantially the effect of a dividend‑stripping scheme, has not listened to the history which preceded the enactment of these provisions, which were directed to overcoming the very problem caused by a test like the test the Full Court has imposed on dividend‑stripping schemes.  It is submitted that they must be wrong in that.

We go on to say that, in our submission, it is not necessary to have a tax avoidance purpose at all for there to be a dividend‑stripping scheme but, if it is necessary, it was present here as a substantial purpose because what was being sought to be being done was to avoid tax on dividends had they flowed to MLG and CPH, and the amount of those dividends is very substantial indeed.

GLEESON CJ:   Could you say that again?  What was sought?

MR SHAW:   It was sought, amongst other things, in what was done to preserve the assets of the UK companies, untouched by tax, with no tax being paid on the amounts of the dividends which were declared, or purportedly declared, to MLG and CPH, and on which they would have had to pay tax had they, in fact, received them.

GLEESON CJ:   What was the scheme exactly?

MR SHAW:   Well, your Honour, the scheme was – there is, if you like, a large scheme and a small scheme and, in our submission, it does not matter which one one takes.  In either case, there is a purpose of tax avoidance.  The large scheme is all the steps involved in the declaration of dividends and the wind up of the UK companies and the transfer of the assets to the Bahamian company.  The smaller scheme is simply the scheme which involves the declaration of dividends and the acquisition of the shares by the Bahamian company.

GLEESON CJ:   Was the Commissioner not asked to particularise the scheme at some stage of this litigation?

MR SHAW:   I am not sure what the answer to that is, your Honour.

GLEESON CJ:   Why is it significant that you say there is a purpose of tax avoidance?  Why does it matter whether there is a purpose of tax avoidance?

MR SHAW:   Your Honour, we say it does not.

GLEESON CJ:   I thought a moment ago you said ‑ ‑ ‑

MR SHAW:   What I said was, your Honour, we say you do not have to have a purpose of tax avoidance, but we say, if you do, then it is not a sole and dominant purpose, but simply a substantial purpose.

GLEESON CJ:   It may be interesting for us to know whether the Commissioner says or does not say that there has to be a purpose of tax avoidance for the operation of section 177E.

MR SHAW:   Your Honour, he says that you do not, but, if you do, there is.

GLEESON CJ:   So the Commissioner makes two alternative submissions?

MR SHAW:   Yes, your Honour.

GLEESON CJ:   One is that no purpose of tax avoidance is necessary and the alternative submission is that if a purpose of tax avoidance is necessary, it is sufficient that such a purpose exists and it is not necessary that it be dominant.

MR SHAW:   Yes.

GLEESON CJ:   And upon which of those two alternative bases did the Commissioner proceed in making this assessment?

GAUDRON J:   He did not have to form an opinion about it, did he?

MR SHAW:   Your Honour, I do not know what the answer to that question is.

GLEESON CJ:   Thank you.

MR SHAW:   I really do not know.

GAUDRON J:   He did not form an opinion about it?

MR SHAW:   He probably did not, your Honour.

GAUDRON J:   And you say he did not have to?

MR SHAW:   No.  There are a number of incidental matters to which I should refer.  If I could take the Court to 293 to 294 ‑ ‑ ‑

GLEESON CJ:   Just before you pass from that last submission, one of your alternative submissions is that there has to be a purpose of tax avoidance, but it is not necessary that it be a dominant purpose?

MR SHAW:   Yes.

GLEESON CJ:   For that submission, what do you mean by the expression “purpose of tax avoidance”?

MR SHAW:   Your Honour, if I could put it this way:  whatever the Full Court meant.  The trouble with the phrase is that nobody knows what it means, but the Full Court thought they did know; they did not tell us, but whatever it was, was there.  It is too hard a question, your Honour.

HAYNE J:   Thank you so much.

MR SHAW:   But all I am saying, your Honour, is this, if it be true that it is nigh impossible to assign a meaning to the phrase “tax avoidance”, which will provide any sound path to decision making about what a dividend‑stripping scheme is, then it cannot be the right test.  On the other hand, if I am wrong and, in my submission, it is very difficult to know, and the Full Court actually did know and was able to assign a meaning to it, which was difficult to understand how they could, in the light of the cases, but never mind, assume they did, then, whatever it is, it must be here.

Then if one goes to Justice Fisher at 594 at about line 12:

The crucial end result had, notwithstanding this oversight, been achieved.  Mr and Mrs Clough retained control of the furniture manufacturing and sales businesses and had received as proceeds of sale of their shares in Detail the entire net operating profit and reserves of that company less Mr Goldspink’s fee.  Detail for its part was left without resources from which to pay its current year primary tax and any Div 7 undistributed profits tax.

Then in the full paragraph from the bottom:

On the hearing of the appeal counsel for the Commissioner disputed the applicability of Slutzkin’s Case, contending that there was a great deal more to the transactions in this matter than a mere realisation by the taxpayers of their shares.  He referred to particular aspects of the matter in which the taxpayers were themselves or through their agents knowingly concerned.  In these circumstances he said Slutzkin’s Case and Hennessey v FCT (1974) 5 ALR 168 were clearly distinguishable upon their facts. Viewed objectively the transactions in this matter were not capable of explanation as comprising “an ordinary business dealing” but were necessarily labelled as a means of avoiding tax.

What was relevant was Newton, Hancock, Mayfield, Ellers Motor Sales and Gulland.

There are a number of grounds upon which I accept the submissions of the Commissioner.  In arranging for the “restructuring of their affairs” and the sale of shares in Detail, the taxpayers and their advisers placed crucial reliance upon the reasoning in Slutzkin’s Case…..However in my view, the facts, both in Slutzkin and in Hennessey, are very significantly different and neither case is conclusive or even persuasive authority in support of the taxpayers’ contentions.

In Slutzkin’s Case…..(the target company) was at the relevant time not carrying on a business and had become redundant.  It had no “tax problem”, whether primary or undistributed profits tax, and no necessity to make any distribution of its profits.  The taxpayers wanted to dispose of their shares and realise the assets of the company in a manner which would not attract the tax which would be payable if the accumulated profits were distributed by way of dividend or on a liquidation.  At the time of sale all the assets of the target company remained within its control in a bank account.  The sale by the taxpayers of their shares in these circumstances, the High Court found, did not defeat or frustrate the provisions of the Act and was capable of explanation as an ordinary business dealing.  It was nothing more than a mere realisation by the taxpayers of their shares.

Again, absence of purpose.  Likewise, he goes on to say, Hennessey and Malone.

To the same extent is Justice Lockhart at 611 line 25 over to 612 at the top of the page, and Justice Spender at 616 and 617, relying upon the fact that there was “no commercial, professional or family purpose to be served”.  But of course, in this case there was.  In the case before your Honours there was a commercial purpose to be served, namely, that of reorganisation.  The Act itself ‑ ‑ ‑

GAUDRON J:   You are using “commercial” very loosely though, are you not?  It did not have to reorganised.

MR BLOOM:   It did not have to be?

GAUDRON J:   No, and there did not have to be a holding company outside Australia.

MR BLOOM:   Yes, there did, your Honour.

GAUDRON J:   To achieve what you wanted to achieve, but there did not have to be.

MR BLOOM:   Your Honour, the whole purpose of this was to avoid double taxation.  With respect, it would not ‑ ‑ ‑

GAUDRON J:   Well, exactly.

MR BLOOM:   I mean, the directors of these companies were people like Mr Wolfensohn and Mr Vernon Jordan and the head of Daimler Benz.  These are not people who could consider the interests of their incorporators upon the basis that double tax was a good thing for them.

GAUDRON J:   That may be so, but there was no necessity for there to be a holding company, for this company to be a holding company, was there?

MR BLOOM:   Yes, there was.  This was the international group.  It operated businesses in America.  It did not operate in Australia.  It operated businesses in America, in the Netherlands and elsewhere around the world.  This was the International Consolidated Press group, not the Australian group.  The whole purpose of this was to ensure that the income of the holding company would become taxed in Australia because up to that point there was no tax by accrual.  It was to ensure that it would become taxed in Australia without the detriment of double taxation.  With respect, your Honour, to suggest that there is no necessity, that is contrary anyway to the findings of fact of the court, findings of fact, with respect, by which even my learned friend is bound.

GAUDRON J:   I can understand that there were advantages in a reorganisation.  I do not see what is commercial about it other than that there were advantages in the reorganisation in terms of the overall tax liability of the members of the group.

MR BLOOM:   There were advantages in ensuring, as there always are, as this Court pointed out in Spotless.

GUMMOW J:   Exactly.

MR BLOOM:   The point is, those tax benefits, that is, the benefit of being taxed in Australia and not being taxed twice, are not tax benefits relevant to 177D or E here.

GAUDRON J:   I just do not understand your use of the adjective “commercial”.

MR BLOOM:   Your Honour, perhaps it comes from the area in which I practise, but, with respect ‑ ‑ ‑

GUMMOW J:   Spotless was designed to discourage it as setting up some false dichotomy.

GLEESON CJ:   You have used the word “tax benefit”, perhaps also in a way that needs clarification.  That is an expression that is defined in Part IVA, and it is defined by reference to Australian income taxes.

MR BLOOM:   Yes, your Honour, quite so.

GLEESON CJ:   “Tax benefit”, as defined in Part IVA, has nothing to do with the cost of doing business in other countries ‑ ‑ ‑

MR BLOOM:   Absolutely not.

GLEESON CJ:   ‑ ‑ ‑ which includes salaries and wages, and interest on borrowed funds, and the exemptions by the revenue authorities in those countries.

MR BLOOM:   Quite so, your Honour.

GAUDRON J:   My point is, I really do not see what difference it makes.  I do not think that the description “commercial” is accurate, in the ordinary sense of that word, and I do not see what difference it makes if it is.

MR BLOOM:   Well, may I answer each of those ‑ ‑ ‑

GAUDRON J:   Yes.

MR BLOOM:   ‑ ‑ ‑ simply by saying this, that it may not be persuasive to your Honour, but I will try anyway.  It is commercial to take into account the possible incidence of double taxation in jurisdictions outside Australia.  That is a commercial thing to do and it is a proper thing for the directors of a company to do.  Secondly, it does make a difference, because unless you have this purpose, you do not have any distinguishing factor ‑ ‑ ‑

GAUDRON J:   Unless you have which purpose, the commercial purpose?

MR BLOOM:   No, unless you have the tax avoidance purpose, which has not been found to be present here.

GAUDRON J:   But you are using it, as I understood, to say, “If there is a commercial purpose, there is no tax avoidance purpose”.

GUMMOW J:   That is the problem, Mr Bloom.

HAYNE J:   One is a word of approbation and the other is a word of disapprobation.

GUMMOW J:   Exactly, and you seek to make yourself holy, and it does not seem to me it matters whether you are holy or whether you are not holy.  The only question is whether you have to be taxed.

MR BLOOM:   I should be careful about that at any time, your Honour.

GAUDRON J:   It just does not seem to be the relevant question to me, or the relevant way to approach it.

MR BLOOM:   Your Honour, with respect, let me say why I am drawn into this area.  My learned friend’s submissions in reply, at least in writing and as far as we understood them today, was that 177E was meant to overcome Slutzkin.  Gregrhon illustrates what is the difference between a case like Gregrhon, where the tax avoidance purpose drives what has happened, and a case like Slutzkin, where it does not.  Now, it is in that context, in answer to what is put against us, that I am seeking to draw the age old distinction, which has been there since Lord Denning talked about it, and I think, earlier, in Purcell’s Case, between ordinary family commercial business dealings and those of which you could predicate that they were done in a particular way to avoid tax.

HAYNE J:   If you begin from the premise that a duty, some may say the primary duty, of company directors is lawfully to maximise their profits, then that has inexorable consequences about so ordering the affairs of the company as lawfully will minimise the exactions taken from those companies by governments anywhere.  That is perfectly laudable, lawful activity.

MR BLOOM:   And maximising Australian tax at the same time, in this case.

HAYNE J:   At least for the moment it is not self-evident to me that it is part of a company director’s duty to maximise the amount of tax that the corporation pays, but I pass that by.  But non constat that it is laudable and lawful to maximise profits, that that may not lead to adoption of arrangements which pay less tax than the adoption of other arrangements.  The solution to the problem which is contemplated by the Act is not to be found in the attribution of tags intended to convey approbation or dis‑approbation.

MR BLOOM:   My bottom line for this point, before answering the difficult question which has me in this trouble ‑ ‑ ‑

GUMMOW J:   You are not in trouble.

MR BLOOM:   I am in something, your Honour - was simply to endeavour to show that, yes, 177E would catch Gregrhon because of the existence of the naughty purpose, but a case like Slutzkin, which if one finds it involves no more than the sale of a capital asset, would not be within 177E.  What is the distinguishing factor, what is the thing that makes one within 177E a scheme by way of dividend stripping and the other not, is the existence of the purpose.

CALLINAN J:   Mr Bloom, in Gregrhon, it is the company financing the acquisition of its own shares.

MR BLOOM:   It most certainly was, your Honour, and that is ‑ ‑ ‑

CALLINAN J:   So it was in breach of the Companies Code as well.

MR BLOOM:   Yes, well, it was disgraceful behaviour.  They handed over all of the company’s assets to the purchaser and enabled him to purchase ‑ ‑ ‑

CALLINAN J:   In my quick look at it, there does not seem to be any reference to that breach, although it is apparent from the facts that that is what happened, is it not?

MR BLOOM:   No, the Court contented itself to rely upon the fact that that was done without looking at the ‑ ‑ ‑

CALLINAN J:   There is no reference to the statutory breach of the Code.

MR BLOOM:   No.

CALLINAN J:   But it is apparent that that occurred.

MR BLOOM:   And so here, the Chief Justice asked this morning whether the payment of a dividend made any difference to the Bahamian holding company.  The answer is it did not because it did not need a dividend in order to finance the purchase.  What often happened, what always happened in these dividend-stripping cases, was that the funds came out of the company to assist the purchaser one way or another, either by repaying his bank or by coming into his hands as in Gregrhon, to make the purchase.  Here, of course, the purchaser issued shares in itself.

That is put against us as being equivalent to money, but shares in a private company are not equivalent to money and Sir Owen Dixon said so in Hancock’s Case at page 280.  He said that you needed either money or readily realisable assets and that shares in a private company may well not fall into that category.  Here, of course, Bahamas issued shares in itself so that you ended up with the same shareholders owning shares in Bahamas, owning the assets that the two UK companies had owned immediately prior.

GLEESON CJ:   Is it Bahamas or Bermuda?

MR BLOOM:   It is Bahamas.  There was a choice; Mr Wolfensohn’s strong preference, you will see in the documents, was for Bermuda, from a stability point of view.  It just was not able to be achieved.

GUMMOW J:   That is still a British colony.

MR BLOOM:   I am sorry, your Honour?

GUMMOW J:   Because Bermuda is still a British colony.

MR BLOOM:   Does that go to its stability ‑ ‑ ‑

GUMMOW J:   I think so.

MR BLOOM:   - - - or to Mr Wolfensohn’s preference, your Honour?

GLEESON CJ:   But Part IVA is presumably a provision in aid of the Australian revenue.

MR BLOOM:   Quite so, your Honour.

GLEESON CJ:   Not any other revenue.

MR BLOOM:   No, your Honour.  And sections 160 – I will simply give your Honours references to them – 160ZZPA and ZZPC, are sections then in the capital gains tax provisions, which specifically talk about corporate reorganisations.  Now, on the basis of our learned friend’s case, reorganisations carried out pursuant to either of those sections, which involved either the liquidation of a company or the payment of a dividend, would be dividend-stripping schemes, notwithstanding that they were carried out precisely as the sections of the Act contemplated.

Your Honours, what Justice Hill said about it is at volume 9, page 2182, at the bottom of the page, line 45:

Obviously not all sales of shares, even if cum dividend, are in the nature of dividend stripping.  Nor is the sale of 100% of shares in a company necessarily dividend stripping, even if the company has accumulated profits.  What is missing in the first case and may be missing in the second is the conclusion that an objective observer would reach as to why the scheme has taken place.  For a scheme will only be a dividend stripping scheme if it would be predicated of it that it would only have taken place to avoid the shareholders in the target company becoming liable to pay tax on dividends out of the accumulated profits of the target company.  It is that matter which distinguishes a dividend stripping from a mere reorganisation.

In my view an objective examination of what took place here would not lead to the conclusion that there was a dividend stripping scheme, or for that matter a scheme in the nature of it, if that is a significantly different thing.

GLEESON CJ:   His Honour was not addressing the point but would it make any difference to the proposition involved in the first line on page 2183 if after the word “pay” and before the word “tax” you inserted the words “Australian income”?

MR BLOOM:   No, your Honour.  No.

In my view, an objective examination of what took place here would not lead to the conclusion that there was a dividend stripping scheme, or for that a scheme in the nature of dividend stripping, if that is a significantly different –

So, that is his finding:

At least one of the United Kingdom companies did have substantial accumulated profits - that much is clear.  Both, also, had substantial investments in overseas companies from which dividends could be derived.  The United Kingdom companies had no need to distribute accumulated profits.  Any accumulated profits could have sat there forever.  The sale of shares and subsequent liquidations were brought about not to enable the shareholders to receive capital instead of dividend distributions, although that was one consequence of what happened, but as part of a reorganisation of the United Kingdom companies for reasons which had to do with United Kingdom and Australian tax other than in respect of dividends which might be derived from the accumulated profits by way of dividend.

GAUDRON J:   Now, what if you took out “only” at the bottom of page 2182, then that conclusion does not follow, does it, and, “it would only have taken place”.  If you changed that to “predicated of it”, that one purpose was to, then you get a quite different ‑ ‑ ‑

MR BLOOM:   Not on the facts of this case, your Honour.

GAUDRON J:   Well, I think you need to have a different analysis, “one purpose” or “it would be concluded that a purpose of it was”.  The questions are two-fold:  what is the justification for requiring a sole purpose and what is the justification for requiring subjective actual purpose rather than imputed purpose of the kind referred to in 177D?

MR BLOOM:   Well, your Honour, I am not sure about subjective purpose.  I think it was the Full Court who turned to sole or dominant purpose.  That is not the test Justice Hill is coming to.  I will take you to the Full Court in a moment.  Justice Hill is using the predication test and he is saying, you have to be able to look at this and say, it only took place ‑ ‑ ‑

GAUDRON J:   You have to predicate a sole purpose, all right.

MR BLOOM:   He did not express himself in terms of purpose unlike the Full Court.  The Full Court expressed themselves in terms of sole or dominant purpose.

GAUDRON J:   It would only have taken place to – that seems to employ purpose.

MR BLOOM:   Yes.

GLEESON CJ:   Mr Bloom, we will adjourn in a moment until 10.15 tomorrow morning.  You and Mr Shaw have an opportunity overnight to make any agreement you wish to make to vary what I am about to say, but subject to any agreement that you and Mr Shaw make, we will resume at 10.15 tomorrow.  You will have until 12 noon to say whatever you want to say on both cases.

MR BLOOM:   On both cases?

GLEESON CJ:   Yes.  Mr Shaw will then have until 3.45 and then you will have until 4.15 to reply on your appeal.

MR BLOOM:   Yes, I understand, your Honour.

GLEESON CJ:   Now, in relation to the next case, that is, your appeal, when you come to deal with that there is one matter that I would like some assistance on, because my thinking is not clear on it at the moment, but in relation to section 79D, I would like to understand better than I do at the moment what the purpose of that quarantining was.  I understand that I believe what the effect of it was, but I would like to understand what the legislative purpose of it was.

MR BLOOM:   Yes, your Honour.

GLEESON CJ:   We will adjourn until 10.15 am.

AT 4.18 PM THE MATTER WAS ADJOURNED
UNTIL WEDNESDAY, 13 DECEMBER 2000