Commissioner of Taxation v Peabody

[1993] HCATrans 342

..

.

,

•

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Brisbane No B29 of 1993

B e t w e e n -

COMMISSIONER OF TAXATION

Appellant

and

MARY GENEVIEVE PEABODY

Respondent

MASON CJ
BRENNAN J
DEANE J

DAWSON J

TOOHEY J
GAUDRON J

McHUGH J

Peabody(2) 1 9/11/93

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON TUESDAY, 9 NOVEMBER 1993, AT 10.17 AM

Copyright in the High Court of Australia

MR B.J. SHAW, QC: If the Court pleases, I appear with my

learned friends, MR G.T. PAGONE and MR C. NEWTON,

for the appellant Commissioner.	(instructed by the
Australian Government Solicitor)

MR D.H. BLOOM, QC: If the Court pleases, I appear with my

learned friend, MR A.H. SLATER, QC, for the

respondent.	(instructed by Sly & Weigall Cannan &
Peterson)

MASON CJ: Yes, Mr Shaw.

MR SHAW:  I hand up two documents, Your Honours. May I

start, if the Court pleases, by saying something

briefly about the facts in the hope that a brief

statement of facts will illuminate the longer

exposition of the facts which one necessarily finds

in the judgments.

What happened was that there were companies in

Queensland dealing in fly ash called the Pozzolanic companies. They were private companies owned as to

62 per cent by Peabody interests and 38 per cent by

another family called the Kleinschmidts. The

Peabody interests were held, one can say, all held for these purposes by a trustee company which was

called TEP Holdings. The only function of that

company was to act as a trustee of a Peabody family

trust, of which for relevant purposes there were

three beneficiaries: the two Peabody children and

Mrs Peabody.	Mrs Peabody is the relevant person
for present purposes.	The Peabody interests were

controlled by Mr Peabody.

Some internal difficulties arose in the

administration of the companies, and Mr Peabody was
any way concerned with what would happen if

Mr Kleinschmidt died, and control of his interest

was taken over by somebody else.	So he thought
that it would be a good idea if he could produce a

result which involved the private companies being

publicly floated, the end result being that Peabody

interests held SO per cent of the public company,

and the public the other SO per cent. That meant

that something had to be done about the

Kleinschmidt shares if the float was to go ahead

and when all this started, although it was designed

that that should happen, it was by no means certain

that it should because it all depended on what

happened in the stockmarket, whether prices went up

or down, whether he could get what he wanted, and

all sorts of questions like that.

But, at any rate, Peabody and Kleinschmidt agreed that the Peabody interests should acquire

the Kleinschmidt shares, and a price was agreed on,

Peabody(2) 2 9/11/93

and Mr Peabody hoped that if the float did go ahead

he would be able to get the public in at a price

which was higher than he paitl to Mr Kleinschmidt,

although, of course, that was by no means certain.

It was realized that if that happened and what was

the ordinary expected thing occurred, namely that

the Kleinschmidt shares were bought by TEP Holdings

and added to the holdings which that company

already had, there would be a problem under section

26AAA because there would be a sale of the

Kleinschmidt shares within 12 months of their

purchase and the profit would fall to tax under

that section.

So, it was thought that a way to get around

this was to devalue the Kleinschmidt shares so that

they lost, in effect, all their value. The whole

value would then reside in the shares which

TEP Holdings already held, and had held for a long

while, and there would be no need, in that case, to

make the profit which would be taxable on the

Kleinschmidt shares. It was thought that if that

was to be done the appropriate way of doing it
would be not to have TEP Holdings buy the

Kleinschmidt shares but to have some third party,

not independent, but some third party, some new

entity, controlled by the Peabodys, be the

purchaser.

DEANE J:  What would be the difference between section 26AAA

and ordinary capital gains tax; the absence of a

consumer price adjustment, or what?

MR SHAW:  I do not think there would be even that,

Your Honour. My learned friend tells me that the

important difference was that the events took place
before the capital gains tax provisions were

enacted.

DEANE J:  I see.

MR SHAW:  I gave the wrong answer. It was an important

difference, Your Honour. As I was saying, it was

thought that the appropriate way to do this was
through - have the purchase conducted by a new

entity and then, that having been mooted, the

question of financing the arrangement was also

mooted, and it was decided that it would be cheaper

to finance the purchase of the shares by preference share financing rather than on overdraft or by bill financing and, of course, if that had to be done,

the financing could not be arranged through

TEP Holdings, you needed some separate company

which could issue the redeemable preference shares

to the financier, which was, as it turned out,

Westpac.

Peabody(2) 9/11/93

All that finally gelled, and one had the events which are set out in the chronology, which r

handed up, take place. The new entity was acquired

in November, that was Loftway. Loftway issued the

redeemable preference shares to the financier, and

purchased the Kleinschmidt shares. There was then

a resolution in each of the Pozzolanic companies -

there were four of them - which had two effects

which are important for present purposes. The

first is that it gave the right to special
preferential dividend to the holder of the shares.

It was necessary to do that so that Loftway could

acquire the amounts necessary to pay the dividends,

or interest, whatever one likes to call it, on the

preference shares. That was to come from the

Pozzolanic companies which, it will be remembered, were private companies.

The other important effect was it reduced the value of the Kleinschmidt shares, in effect, to

nothing because it took away all their rights.	So
there were those two effects.	One has the payment

of the interest or dividends - whatever one likes

to call them - on the preference shares which had

been issued to the financier. They were on the

four dates which are set out towards the bottom of
the first page there, and the total of those was
$732,000-odd. Then, the right to receive the

special dividend was removed. There was the

agreement to sell the original TEP shares which now

represented the whole value of the Pozzolanic

companies into the company that was to be used for

the public float. The public float took place.

That put the Peabodys in funds. Having the funds,

TEP Holdings advanced the 8.7, which was necessary

to redeem the redeemable preference shares which

had been issued to Westpac. They were redeemed and

TEP Holdings forgave the debt which was owing to it

by Loftway and then, in the end, there was a little
bit of tidying up with the now worthless shares

eventually moving into the public company.

There was an assessment made to Mrs Peabody

under Part IVA, which included in her assessable

income for the year ended 30 June 1986 an amount of

$888,005. That occurred in consequence of a

determination made by the Commissioner under

section 177F. If I might now take the Court to the

provisions of Part IVA.

DEANE J: Mr Shaw, just diverting you for a minute. Would

it not be more likely that the section that was

sought to be avoided was 26(a), rather than 26AAA,

because otherwise they would have just waited for

another six months?

Peabody(2) 4 9/11/93

MR SHAW:  Your Honour, the fact of the matter is that what

they were concerned about was section 26AAA,

although maybe they should have been concerned

about other things as well. By that I mean, when

one looks at the material, the provision which is

actually referred to -

DEANE J:  I follow that, except when one goes further down

the track, if 26AAA is the relevant section when

you look at the amounts involved, if one had to would have waited another few months.

have an hypothesis about what would have happened,

MR SHAW:  I accept what Your Honour says, it may affect that

question, but certainly the thing that was

uppermost in their minds, at any rate, was

section 26AAA. Section 177F provides that:

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 -

(a) in the case of a tax benefit that is

referable to an amount not being included in

the assessable income of the taxpayer of a

year of income - determine that the whole or a

part of that amount shall be included in the

assessable income of the taxpayer of that year

of income.

I omit the next part because it is not relevant.

and, where the Commissioner makes such a

determination, he shall take such action as he
considers necessary to give effect to that
determination.

Then subsection (2) gives the Commissioner power to determine under what provision of the Act and the

manner it is included. Subsection (3) and the

succeeding sections deal with the possibility of it

being appropriate to make what are called

compensating adjustments. So that a determination,

or the authority to make a determination, depends

on there being the obtaining of a tax benefit and

for that to be in connection with a:

scheme to which this Part applies.

Now, in 177A there is a definition of "scheme" in

the widest terms and in subsection (3) it is

extended to a unilateral scheme and it includes

agreements, arrangements, understandings,

proposals, actions, courses of actions, all sorts

Peabody(2) 9/11/93

of things. "Tax benefit" is defined in

section 177C. That provides that:

a reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a

scheme shall be read as a reference to -

(a) an amount not being included in the

assessable income of the taxpayer of a year of

income where that amount would have been

included, or might reasonably be expected to

have been included, in the assessable income

of the taxpayer of that year of income if the
scheme had not been entered into or carried

out.

Then there is a like provision in relation to

deductions -

And, for the purposes of this Part, the amount of the tax benefit shall be taken to be -

(c) in a case to which paragraph (a) applies -

the amount referred to in that paragraph.

Then there is a like provision in relation to

deductions, and then there are some exclusions

which are not necessary to go to for the moment.

So that is what a tax benefit is.	The other
element is:

a scheme to which this Part applies.

That is dealt with in section 177D and that says:

This part applies to any scheme that has been or is entered into after 27 May 1981, and to

any scheme that has been or is carried out or

commenced to be carried out after that

date ..... 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 (in this section referred to

as the "relevant taxpayer") has obtained, or

would but for section 177F obtain, a tax

benefit in connection with the scheme; and

(b) having regard to -

and then a number of matters are specified, eight of them, all of them objective matters. There is the manner in which the scheme was carried out, the

form and substance of the scheme, the time, the

result, changes in financial position that result,

Peabody(2) 6 9/11/93

and so on. All those matters are set out. So,

having regard to those particular matters:

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 -

and then it is extended to where there is a tax

benefit to more than one person. So that, to have

a scheme to which the part applies, you have a

taxpayer otherwise obtaining a tax benefit in
connection with the scheme and having regard to the
matters referred to, it would be concluded that
somebody who entered into the scheme or any part of
the scheme did so for the purpose of enabling the

relevant taxpayer to obtain a tax benefit. If one

goes back to 177A(5):

A reference in this Part to a scheme or a part

of a scheme being entered into or carried out

by a person for a particular purpose shall be

read as including a reference to the scheme or
the part of the scheme being entered into or

carried out by the person for 2 or more

purposes of which that particular purpose is

the dominant purpose.

So that in effect one inserts into 177D the word

"dominant" before "purpose".

TOOHEY J:  Mr Shaw, could I just ask you about

section 177F(2), how that operates.	Does that
require the Commissioner to identify	a particular
provision of the Act such as section	25 or one of
the components of section 26?

MR SHAW:  Yes, something like that, Your Honour, or there

might be other sections. It might be included

under - I do not know. It might perhaps be a

section relating to the inclusion of an amount

where something is sold where there has been

depreciation claimed on it. There are all sorts of
sections which result in the inclusion of amounts

in assessable income, and it is for the

Commissioner to nominate which one it is.

TOOHEY J: But he nominates after he has made the

determination that an amount is to be included.	I
just wonder if there is some circularity in this.

In other words, in determining whether an amount is

to be included in the assessable income, presumably

he has at least for his own purposes to say, "Well,
this would have fallen under section 25 or it would

have fallen under some part of section 26."

Peabody(2) 7 9/11/93

MR SHAW:  I suppose there may be alternatives as well.

TOOHEY J: But it does require him, does it, to make a

determination, presumably a determination

communicated to the taxpayer?

MR SHAW:  Yes. This is under whatever it is.

TOOHEY J: Yes, thank you.

DEANE J:  Mr Shaw, while you are being interrupted, perhaps

for the benefit of the transcript, I might mention
that my reference to section 26(a) was quite

inappropriate. It was also an anachronism.

MR SHAW:  Your Honour, that may be the easiest sin to commit

in relation to this Act.	Now, in the first four
propositions - - -

BRENNAN J: It is possible, at some time, to identify for us

the section that would have brought to tax the tax

which, in your submission, was avoided?

MR SHAW: If Your Honour pleases. In the first four

propositions which we make in our outline, I do not

know that there is anything which is likely to
raise controversy except, perhaps, the assertion

that the question which is referred to is the first

question. That may be controversial in the sense
that the matters are really not matters that the

Full Court went to. But, if one ignores the

assertion that it is the first question, the fact

that the power to make a determination exists if
the conditions exist, and that the conditions are
the ones which are set out, and that whether the

conditions exist or not is a matter to be

determined objectively and that the onus lies on

the taxpayer to show that the conditions did not

exist, that matter is likely, it is submitted, to

be uncontroversial.

If I might take the Court, for example, to

Jackson, the first reference to Jackson. That is

the decision in Jackson, at first instance,

89 ATC 4429. That was a decision of His Honour

Mr Justice Gummow. The case went on appeal to the

Full Court but not in respect of the particular bit

that I am going to refer to. At page 4435, in the

first column, about half-way down, His Honour,

after setting out the questions which he was

considering, said:

Subsection 177F(l) vests power in the

Commissioner to make certain determinations.

The power is conditional in that it may be

excercised only if certain circumstances

exist. These are -

Peabody(2) 9/11/93

and then they are set out in the terms

substantially that we have set them out.

His Honour then says that they are defined in some

detail in Part IVA, and he goes on to say:

Whether these conditions are satisfied in any

given case will be something to be ascertained

by the application of objective criteria,

comprising mixed law and fact.

And then, omitting the rest of that paragraph,

going to the top of the next column, the first
complete paragraph:

The conditions are "self-operating" or

"self-executing" in the sense that their
fulfilment in a particular case is not

dependent upon the Commissioner having a

particular satisfaction or holding a

particular opinion. Nevertheless, the process

of assessment requires the application of the

Act (including the conditions) to the facts as

known to and accepted by the Commissioner, and

as part of that process the Commissioner must

adopted a view of the facts.

If conditions (i) and (ii) are satisfied,

then the Commissioner may make determinations

of the character described -

and so on.

In Jackson on appeal, 27 FCR 1, at page 9, in

a judgment of Mr Justice Hill, which was concurred

in by the other two members of the court,

His Honour - and it was His Honour, the Court will

recall, who delivered the judgment in the

Full Court in this matter:

In proceedings under Pt V of the Act,

where a determination under s 177F has

purported to be made and is relied upon by the

Commissioner. It will be open to a taxpayer

to challenge the existence of the conditions

precedent to the making of the determination,
for example, the existence of a scheme,

whether there was a tax benefit, and whether the necessary conclusion as to purpose is to

be arrived at. It will also be open to a

taxpayer to show that no determination was

made, or that an invalid determination was

made, with the consequence that no amount was

to be included in assessable income as a

result of the section or alternatively, that a

deduction otherwise allowable to him will

continue to be allowable.

Peabody(2) 9 9/11/93

And then he goes on to deal with something else.

So that kind of approach is an approach which

the judge who delivered the principal - or the only

judgment, really, in the Full Court below, himself

adopts. It is submitted that the propositions in

paragraphs 1 to 4 are substantially

uncontroversial, except as to this question of

whether the matter that we raise there is the first

question to be considered, and I will come to that

later.

TOOHEY J:  I wonder is that true of proposition four,

Mr Shaw?

MR SHAW: Well, the passages that I read in fact do not go

to that, Your Honour - - -

TOOHEY J:  No, they do not.

MR SHAW: But, section 190(b) makes it quite plain and, it

is submitted that MeAndrew does, even if Daleo does

not and it would be submitted that Daleo does

anyway.

TOOHEY J: Well, except that here the assessment is

dependent upon the existence of certain conditions.

MR SHAW:	Yes.
TOOHEY J:	I mean it may be one thing to say that the

assessment is correct in any event, which is

something to which Justice Hill adverts in that

passage that you took us to, but I suppose we will

have to wait until we hear from Mr Bloom. But, it may not be common ground that the onus lies on the

taxpayer to prove the existence, or disprove the

existence, of the conditions which bring

section 177F into operation.

MR SHAW:  Perhaps if I could take Your Honour to MeAndrew in

98 CLR 263. That was a case of an amended

assessment, and the power of the Commissioner to

make an amended assessment depended on whether

there had been a full and true disclosure, and

whether or not tax had been avoided.

At page 268 in the principal judgment, the

first paragraph, Their Honours say:

The purpose of this case stated is to

raise for the decision of the Full Court the
difficult question whether, when the

commissioner has amended an assessment in

purported pursuance of the authority conferred

upon him by sub-s.(2) of s.170 ..... and the

taxpayer appeals, it rests upon the

Peabody(2) 10 9/11/93

commissioner on the hearing of the appeal to

prove to the reasonable satisfaction of the

Court that the taxpayer had not made to the

commissioner a full and true disclosure of all

the material facts necessary for his

assessment and that there had been an

avoidance of tax.

And then, the Court refers to some previous

pronouncements that had been made, and omitting

that paragraph, going to page 269:

The view that an amendment made in

purported pursuance of s.170(2) cannot be sustained under that provision unless the conditions stated in the sub-section are

fulfilled is not one from which there is any

sufficient reason to depart. But after full

consideration we are constrained to the

conclusion that when upon any appeal to the

Court under ss. 187(b), 197 and 199, there is

an issue as to whether these conditions are

fulfilled and a regular notice of assessment

is produced, or a copy under a proper hand,

then the burden rests upon the taxpayer of
proving to the reasonable satisfaction of the
Court the particular fact or facts which take
the case outside s.170(2). This means that
the onus probandi lies on the taxpayer if his
objection is that he did make a full and true
disclosure of all the material facts necessary

for his assessment or that there had not been

an avoidance of tax.

And, then they go on and explain the reasons for

that and we would submit that the same approach

ought to be taken here.

As to proposition five, we do approach

controversy. It arises out of the terms of

section 177C where it refers to obtaining a tax

benefit being: 

(a) an amount not being included in the

assessable income of the taxpayer ..... where

that amount would have been included, or might

reasonably be expected to have been included,
in the assessable income of the
taxpayer ..... if the scheme had not been
entered into -

In the judgment of Mr Justice Hill at page 947 of volume 4 of the appeal books at the bottom of the

page at line 45, His Honour said, after referring

to the cases set out in the previous paragraph:

Peabody(2) 11 9/11/93

These cases indicate, what would

presumably be in any event obvious, that the

meaning of words such as "reasonable

expectation" depends upon the context in which
they appear. Nevertheless, in the present
context, as in Cockcroft, the words were

intended to receive, and should receive, their

ordinary meaning. So too, as in Cockcroft,

the word "reasonable" is used in

contradistinction to that which is

"irrational, absurd or ridiculous". The word

"expectation" requires that the hypothesis be

one which proceeds beyond the level of a mere

possibility to become that which is the

expected outcome.

Not "an outcome that might be expected", but "the

expected outcome. He goes on to say:

If it were necessary to substitute one

ordinary English phrase for another -

which Cockcroft says you should not do -

it might be said that it requires

consideration of the question whether the

hypothesised outcome is a reasonable

probability.

He refers to Davies v Taylor.

The reference to Davies v Taylor is a

reference to - if one looks at the passages which

are referred to on the preceding page, a reference

to a case about damages payable to a widow in

circumstances where her husband was killed and she

had separated from him. There was a discussion, in

the passages that are referred to, whether one had
to be satisfied that it was more probable than not

that the widow would return to her husband in order to get damages, or whether it was enough that there

was some chance. What the House of Lords says is

that it is enough that there is some chance and

they talk about - in particular Lord Reid talks

about 60 per cent probabilities and 40 per cent

probabilities.

So that it might be, in view of that

reference, that His Honour was not saying by a

reasonable probability that the outcome has to be

more probable than not. But that is, it is

submitted, the only meaning which can be given to

the words:

proceeds beyond the level of a mere
possibility to become that which is the

expected outcome.

Peabody(2) 12 9/11/93

That was not the approach which was taken by

the trial judge and if I might take the Court to
the appeal books again at page 908 at line 40:

The language of paragraph 177C(l)(a) is not very demanding; it merely calls for a

reasonable expectation.

Then he sets out the terms of the section, and at

line 56 says:

Might it therefore be reasonably expected

that, but for the scheme, one-third of the

capital gain arising from the sale of the

Kleinschmidt shares to the public company

would have been included in the assessable

income of the taxpayer -

and so on. Then he refers to Arklay; at the bottom

of the page he refers to Cockcroft, and it is

convenient to refer to Cockcroft in this reference

where Chief Justice Bowen and Justice Beaumont

said:

"(I)n our opinion, in the present context, the

words 'could reasonably be expected to

prejudice the future supply of information'

were intended to receive their ordinary

meaning. That is to say, they require a

judgment to be made by the decision-maker as

to whether it is reasonable, as distinct from

something that is irrational, absurd or

ridiculous, to expect that those who would

otherwise supply information of the prescribed

kind to the Commonwealth or any agency would

decline to do so if the document in question
were disclosed under the Act. It is

undesirable to attempt any paraphrase of these

words. In particular, it is undesirable to

consider the operation of the provision in

terms of probabilities or possibilities or the
like.	To construe s43(l)(c)(ii) as depending

in its application upon the occurrence of

certain events in terms of any specific degree

of likelihood or probability is, in our view,

to place an unwarranted gloss upon the

relatively plain words of the Act. It is

preferable to confine the inquiry to whether

the expectation claimed was reasonably based -

There is a reference to Kioa. Then, His Honour

says that that expectation is, in this case,

reasonably based and, if I omit the rest of the

paragraph at the bottom of that page and go over to

the top of the next page at 911, where His Honour

says at line 15:

Peabody(2) 13 9/11/93

The second answer throws up, once more, the

concept of a reasonable expectation; the

decision maker did not have to be satisfied

that Mrs Peabody would have been the relevant

taxpayer; there need only be a reasonable

expectation "as distinct from something that

is irrational, absurd or ridiculous". The

burden on the taxpayer of proving that the

assessment is excessive is very onerous when

all that is needed to verify it is a

reasonable expectation that an amount might
have been included in the assessable income of

the taxpayer.

So there is a clear difference, it is

submitted, between the views taken in the Full

Court and the views taken by the trial judge and,
in our submission, the view taken by the trial

judge is that to be preferred. It accords with the

words of the section, it accords with the

explanation of reasonable expectation which is

given in Cockcroft, and there is really - - -

DEANE J: But if you read what he says at the top of

page 911, he seems to have dropped out the word

"expectation" completely.

MR SHAW:	Your Honour means in the first two lines?
DEANE J:	there need only be a reasonable expectation
"as distinct from something that is irrational, absurd or ridiculous.

I mean, on any approach, you have got to have the

expectation.

MR SHAW:  Oh, yes.

DEANE J: Well, His Honour seems to have simply dropped the

expectation, if you read what he says literally.

MR SHAW:  Your Honour, when you say you have got to have the

expectation, in our submission, that is not right.

What has to be satisfied is that that amount might

reasonably be expected to have been included.

DEANE J:  I meant you have got to have the expectation in

the test.

MR SHAW:  Oh, yes, certainly you do, but it does not have to

be the expected outcome, it simply has to be - one

has to be able to say of an expectation, if it

exists, that it would be reasonably based to have

that expectation.

DEANE J: Except, do you support what His Honour said and

that is the effect that you have got a reasonable

Peabody(2) 14 9/11/93

expectation if you do not think it is "irrational,

absurd or ridiculous"?

MR SHAW:  Yes, Your Honour, because as it was said in

Cockcroft, one way of expressing the test is to ask, "Is it reasonably based", and -

DEANE J: But, you say "Is it", "Is the expectation?"

MR SHAW:  If the expectation exists, would it be reasonably

based? Yes.

DEANE J: But, I mean the whole proposition seems to involve

getting rid of expectation.

MR SHAW: Well, certainly, Your Honour, if he meant that, you cannot do that. That, we would not suggest. But the - - -

DEANE J: Well, does that not bring you back to the question

whether your starting point must be that it seems

to be at least more likely than not, because

otherwise you have not got an expectation?

MR SHAW:  No, Your Honour, no. It is submitted that people

can have, in some circumstances at any rate, a

whole range of expectations and the question is, in

respect of any of them, "If it exists, was it

reasonable to have that expectation?". The fact

that there are a number of alternatives, some more
likely or less likely than others, is not to the

point.

DEANE J:  So here you could say, you could have the

expectation both that income would have been

included and the expectation that income would not

have been included, and that they would both be

reasonable?

MR SHAW:  Yes.

DEANE J:	I follow the way you put it.
MR SHAW:	And not just two either.  I suppose in respect of

that article, there are only expectations but, in

other circumstances, one might say - - -

DEANE J:  You could have a thousand but you could vary the

amounts of tax.

MR SHAW:  Or in respect of other sorts of expectations,

there might be all sorts of alternatives, yes.

DAWSON J: But does it not mean that the Commissioner has to

have the expectation?

MR SHAW:  No, Your Honour.

Peabody(2) 15 9/11/93

DAWSON J:	Why not?
MR SHAW:	Because it is an objective test and the question

is: might it reasonably be expected to have been

included?

DEANE J: But you can say, "I don't think this is going to

happen, but my expectation is that it will."

MR SHAW:	Is such an expectation reasonably based, yes.
DEANE J:	You then come to the question whether "My

expectation that it will, even though I don't think

it will" is reasonably based, but that is a

subsequent question.

MR SHAW:  Yes.

BRENNAN J: What is meant by "might be"? Is there any

significance in the word "might" as distinct, for

example, from the word "would"?

MR SHAW:  Your Honour, in our submission the presence of the

word "might" is a significant matter, yes, and the

fact that it is not "would" is significant, because

one is saying "might it be reasonably expected that

the amount would be included"; not "would that be

the expectation" but "might it be". There is the

contrast between "might" and "would" in the section

itself.

DAWSON J:  Do you mean the Commissioner has to be satisfied

there is a scheme and, in satisfying himself of

that, he says, "Well, I don't expect that this

would have been included in the assessable income,

but other people might and they'd be reasonable in
expecting that; therefore I will act under the

section"?

MR SHAW:  It does not work in that way, Your Honour.

DAWSON J:  He just does not ever come to a conclusion as to

his expectation.

MR SHAW:  No. What I was going to say, Your Honour, is the

way in which the section - it depends what section

you are talking about, but section 177F does not

work simply on tax benefits.	What it works on is
two things.	It works on tax benefit and its

obtaining by the taxpayer in connection with a

scheme to which the part applies.

The way in which we submit it operates is that

you have, as it were, the low threshold, as

His Honour suggested, in relation to tax benefit but, when you come to a scheme to which the part

applies, you have to have a tax benefit in respect

Peabody(2) 16 9/11/93

of which it would be concluded that one of the

persons who entered into the scheme did so for the
dominant purpose of getting the tax benefit. So it
is operating on the two, and you have in the end to
come to the conclusion that the dominant purpose of
one of the people who entered into or carried out
the scheme or part of the scheme did so for the

purpose of getting the tax benefit.

But, to establish that there is a tax benefit,

one has only to do, in our submission, what it is

submitted, and then one has to come to the

objective conclusion which is set out in

section 177D, before the part operates, and one

does not have, as it were, two hurdles of the same

height, as it were, and the sort of policy

difficulty Your Honour was referring to is really

met, it is submitted, by the requirement in

section 177D, and one does not need to do that in

relation to 177C at all.

BRENNAN J:  I do not understand the concept in this

reasonable expectation in 177C(l). To start with,

the language is naturally difficult, because it is

in the passive voice, so that one does not know who

it is who was to entertain the expectation. You

say that it is objective, but that means that the

notional reasonable person might be called in aid.

Now, does that mean that one can say that various

reasonable people might expect, if the prospects

are various?

MR SHAW: Well, Your Honour, I do not know that, as it were,

introducing people into it when, as Your Honour

points out, there are not any people there in the

first place, would necessarily make any difference

to the question.

BRENNAN J: It is not the Commissioner's view, is it?

MR SHAW:  No.

BRENNAN J: It is not the taxpayer's -

MR SHAW:  That is not to say that the Commissioner does not

have to have a view before he decides to act, but

that is a different question.

BRENNAN J:	The Commissioner has to answer a question.
MR SHAW:	Yes.

BRENNAN J:. But he does not have to - it is irrelevant what

he expects himself.

MR SHAW:  Yes.

Peabody(2) 17 9/11/93

BRENNAN J: But I do not understand the concept, I confess,

of "might be expected" in that context, unless one
can give it some tangible meaning other than any
reasonable person or a reasonable person might

expect.

MR SHAW:  As opposed to "would expect".

BRENNAN J: Yes, or as opposed to "there is but one

reasonable expectation".

MR SHAW:	Yes, as opposed to that too, yes.
DAWSON J:	What is the question the Commissioner has to ask

himself in relation to this?

MR SHAW:  In relation to the tax benefit, what he has got to

say to himself, "Might it reasonably be expected

that this amount would have been included in the

assessable income of a taxpayer if the scheme had

not been entered into?"

DAWSON J: Is that the same as saying, "Might a reasonable

person expect?" or, "Might a reasonable person have

expected?"

MR SHAW:  It is the same as saying - one can turn it round

the other way and say, "Is it irrational to

expect?". That is one way of doing it. The other

way is to say, "Could you say that it was

reasonable to have this expectation?". "Although,

I myself do not have it, as it were, and although I

know other people do not have it, is it reasonable

for somebody to have that expectation?"

McHUGH J: But how concrete is the expectation got to be?

Supposing you came to the conclusion that if an amount would have been brought to tax, there would have been no scheme and there would have been no

transaction at all, full stop, and otherwise the

status quo would have been maintained. Suppose, in

this case, because of the tax implications, the

Peacocks would say, "Well, we are not going to do

anything". Now, what happens in that situation?

If that is the choice the hypothetical observer

would make, are you within this division?

MR SHAW:  You would not, in those circumstances, have a tax

benefit being obtained. What I mean - - -

McHUGH J: There seems to me to be something circular about

it. When you look at 177C you are looking at the matter with the benefit of hindsight, and when you

are looking at 177D you are also looking at it with

the benefit of hindsight but you have got to put

yourself back in the position of the person - - -

Peabody(2) 18 9/11/93

MR SHAW: Well, Your Honour says that, but it is not

necessarily right. Of course, it is true about

you, because you only get hindsights. But, people
who are advising people have to look at it, as it

were, in prospect as well. People are, obviously,

often asked, "If we did this would Part IVA apply

to it, or not?" So that, one -

McHUGH J: But, that is the very thing I understood your

argument rejected. You say it is all objective.

Are purposes objective?

MR SHAW:  Yes, but I did not say anything inconsistent with

that, or if I did I should not have.

McHUGH J:	I thought you were looking at other people's subjectives or motives.
MR SHAW:	No, I was saying that Mr Bloom has been asked, and

I am sure on frequent occasions, and so have I, the

question I pose, and all I was saying to

Your Honour is that one ought not to be looking at
the question only in hindsight, that was all.

Although, of course, when one comes to a question,

as we have got here, of course it is hindsight.

That is not to say somebody did not look at it in

foresight.

Yes, I am saying it is objective, and what one

has to say is, "Would it be irrational to think

that?" "Would an expectation of that kind be

reasonably based?"

McHUGH J: But, you are talking about a particular amount.

MR SHAW:	Yes.
McHUGH J:	Now, you have got to seize on some figure, and you ask yourself, "Might this amount reasonably be
expected to have been included in the assessable
income of the taxpayer if the scheme had not been
entered into or carried out?"  What I was asking
you: if you came to the view, "Well, they just
would not have entered into the scheme, or the
transaction", full stop, if they thought this
amount would have been taxable, what happens then? Are you still within the section?
MR SHAW:	One would have thought not, Your Honour, at least

in this case because if what had happened here was

what everybody first thought of -although it was

not what everybody last thought of - but what they

first thought of was TEP Holdings will buy the

shares from the Kleinschmidts and sell them into

the float and if it makes a profit, well, there you

are. If that had happened, well, then there

obviously would have been an amount included in

Peabody(2) 19 9/11/93

Mrs Peabody's income. The difficulty which arises

is because although that was the first expectation

there is the complication not just of section 26AAA

and a concern about the taxability of the profits, but there is also this problem about the adoption

of what was thought to be a cheaper method of

financing: namely, using redeemable preference
shares, which may affect the result of what is a
reasonable expectation. If one leaves out, for the

purposes of illustration, the question of the

method of financing, I mean, if TEP Holdings had

bought the shares it is obvious what the result

would have been.

McHUGH J:  But the only relevant time can be the time at

which the scheme was entered into.

MR SHAW: Yes. That is so, Your Honour.

TOOHEY J: But, in relation to paragraph (a) of

section 177C(l), Mr Shaw, the word "included" is
used in a different sense, is it not, each time it

appears? It starts off by saying:

an amount not being included in the assessable

income -

which really means an amount not returned by the

taxpayer, and then goes on:

would have been included, or might reasonably

be expected to have been included, in the

assessable income -

Does that mean included by the taxpayer or included

in the concept of assessable income?

MR SHAW:  Your Honour, I had thought that "included" was

used in the same way in each of the places and it

meant something like "in".

TOOHEY J: Yes, but included by the taxpayer, or included

objectively as part of the assessable income?

MR SHAW:	Yes, included objectively, that is why I said
II in"•

TOOHEY J: But it cannot mean that in the first place where

it appears because it says:

an amount not being included in the assessable

income -

which is simply a matter of fact, that it was not

included in the assessable income.

Peabody(2)	20	9/11/93
MR SHAW:	No, Your Honour, no.	Your Honour is reading

assessable, as it were, as returned, or something

like that, but it is not. It is referring to the

objective fact: is it in the assessable income?

So what you have is something which is not in the

income, actually, objectively. One is not looking

at the returns for these purposes, although what

Your Honour says is perfectly right, because if it was not actually in the income we would not expect

it to be returned in the income. So that what

Your Honour says is perfectly right about that, it

certainly would not be returned, but what it is

referring to is not simply that but the objective

fact. It is saying, "Actually, what you have done

means that it is not in the assessable income",

and, if you like, "but, because of the way you

brought about that result, these provisions are

going to have the result that it is when they

operate."

One of the preconditions for the thing

changing from being out to being in is there being

a tax benefit obtained and there is a tax benefit

if the relevant amount might reasonably be expected

to have been included if the scheme had not been

carried out.

TOOHEY J: So, I suppose the Commissioner then could argue

in the alterative. He could say, "Well, this is

included in the assessable income, but if I am

wrong, then I apply Part IVA and it is then deemed

to have been included in the assessable income".

MR SHAW:  Yes, and you could raise the Part IVA assessment

and the Commissioner might fail, but the anyway".

TOOHEY J: Yes, thank you.

MR SHAW:  That is really what Justice Hill was referring to

in Jackson by saying that it is open, in some

circumstances at any rate, for the Commissioner to

defend an assessment, an assessment raised in

reliance on a Part IVA determination, by reference

to other things.

BRENNAN J: 

Mr Shaw, if I could take you back to the question of expectation. Is it your argument that

or by the court on appeal, comes to this?	the matter for consideration by the Commissioner, been included in the assessable income of the
taxpayer.	The question for determination, "Is that

expectation reasonable?".

MR SHAW: 

Yes.

Peabody(2) 21 9/11/93

BRENNAN J: Irrespective of whether there are other

expectations?

MR SHAW:  Yes. The other element in the way in which the

part operates is the question of whether there is a

scheme to which the part applies. Here, there is

certainly a matter of controversy. At page 944,

line 36, His Honour says:

The expression "scheme" is defined ins 177A.

As, indeed, it is and we have looked at that

definition, and His Honour says:

In a particular case a unilateral action may constitute a "scheme for the purposes of the

definition. In other cases ..... the scheme may

consist of a series of steps or a course of

action. That is not to say that where, as a

matter of fact, a scheme consists of a course

of action comprising several steps, the

Commissioner may isolate out of that course of

action one step and classify that as a scheme.

Reference in Part IVA to "part of a scheme" (s

177A(5)) suggests rather that, in a case where

a series of steps constitutes a scheme, that

whole series of steps is to be considered, the

individual steps being seen as parts of the

scheme rather than each step being capable of

being seen as a scheme in itself.

The reference to 177A(5) is a reference to these

provisions:

A reference in this Part to a scheme or a part

of a scheme being entered into or carried out

by a person for a particular purpose shall be

read -

in fact, as a reference to it being carried out for

a "dominant purpose". He refers to Brebner.

DAWSON J: Where is there "A reference in this Part to part

of a scheme"?

MR SHAW:  It is "A reference in this Part to a scheme or a

part of a scheme being entered into".

DAWSON J: Yes, but where is - does "part of a scheme"

appear anywhere else in Part IV?

MR SHAW:  It does, Your Honour, and I will come to that in a

moment, because what I am about to say is that

His Honour in fact did not refer to the other

reference and it is of very great significance in

this case. But what His Honour was there referring

Peabody(2) 22 9/11/93

to was the reference in 177A(S).	Then going to
page 951 at line 41:

It will be seen, from sl77D, that the

conclusion that is required to be drawn is not
a conclusion with respect to the scheme
itself, but a conclusion as to the purpose of

a particular person. In this respect,

Part IVA differs from s260. That person may,

in a particular case, have participated in

only a part of the scheme. In such a case, the question will be whether the conclusion

would be reached that his or her participation

in that part of the scheme was for the purpose
of enabling the relevant taxpayer to obtain a

tax benefit in connection with that scheme.

In other circumstances (including those of the

present case), the participation of the

relevant person will be in the totality of the

scheme. In such a case, the question will be

whether the participation of that person was

activated by that person's dominant purpose of

enabling the relevant taxpayer to obtain a tax

benefit in connection with the scheme.

I am going to come back to that but, if I might go

first to page 964 at line 56, he says:

The question which was required by sl77D

to be answered on the facts of the present

case was whether, having regard to the matters

in sl77D(b), it would be concluded that

Mr Peabody carried out the whole of the scheme

from acquiring the Kleinschmidt shares through

the financing arrangements and concluding with

transferring the shares either to the public

company or to TEP Holdings Ltd, for the

purpose of excluding from the assessable

income of each of the three beneficiaries of

the Peabody Family Trust the sum of $888,005.

Going down to line 21, he says there was a dominant
commercial purpose for the whole of the scheme, and

at line 26:

The fact that an element of that scheme had a

tax advantage does not detract from the

dominant purpose of Mr Peabody in relation to

the scheme as a whole.

Your Honour, the reference to ttparttt that I was

referring to was in section 177D itself. It says:

This Part applies to any scheme -

entered into on particular dates -

Peabody(2) 23 9/11/93

where -

(a) a taxpayer ...... has obtained ..... a tax

benefit .....

(b) having regard to -

the particular matters which are set out:

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 -

and that is the reference to "part" -

did so for the -

"dominant purpose", if you like -

of enabling the relevant taxpayer to obtain a

tax benefit - - -

DAWSON J:  You say the devaluing of the Kleinschmidt shares

was the "part"?

MR SH,AW:  Yes.

DAWSON J: And you can - - -

MR SHAW:  Yes. Here, if one assumes an overall scheme,

there is absolutely no doubt at all and, indeed,
the Full Court seems to have accepted what the

trial judge found, namely, that the devalue of the

Kleinschmidt shares was carried out for the purpose

of avoiding the operation of section 26AAA.

DAWSON J: Why do you need to go as far as that? If you

look at the definition of the scheme, you could

look at that in isolation as a scheme.

MR SHAW: Well, one would have thought so, Your Honour.

DAWSON J: As part of a scheme, you say it does not matter.

MR SHAW: Yes, we do, Your Honour, we do say that. What we

say is that His Honour simply does not give effect

to the words "a part of the scheme" here, because

here one has "a part of the scheme", however one

looks at it, which indubitably was carried out for the required purpose.' But, His Honour says, "Does not matter, it is simply a step in scheme, the

overall purpose of which was commercial," and I say

that the dominant purpose of the whole scheme was

commercial and I, therefore, ignore the fact that

there are these couple of little sidesteps here

which have got "getting a tax benefit" written all

over them.

Peabody(2) 9/11/93

DAWSON J: But, it does matter when you come to say, "What

would have happened when the scheme is put to one

side?"

MR SHAW:  Yes, it does, Your Honour. Yes, that is certainly

so. But, for present purposes, I say, "Well,

either I can have a small scheme, or I can have a

big scheme with this little bit", and it is enough

to satisfy 177D, that I can say, "That bit

satisfies it." Once I can say, "That bit satisfies

it," the part applies to the whole scheme. I said

that His Honour did not really refer to this. That

may, perhaps, not be quite fair to His Honour,

since it is referred to by implication, perhaps.

But, the point that we wanted to make was that there is this reference in section 177D to part of

a scheme, and His Honour apparently reads it as

meaning that the person, or one of the persons, who

carried out the whole scheme, carried out the whole

scheme for the necessary purpose. Or, where you

have a case where somebody carried out only part of
the scheme, he carried out that part, being the
only bitt he did for the purpose.

That produces, it is submitted, an irrational result because if something chances to be carried

out - if you like, an overall scheme so far as Mr A

is concerned - in a little bit by one person, then

the scheme might apply. But, if you can arrange it

so that every single bit is done by one person then

you say, "The overall purpose is not to obtain a
tax benefit." And, in our submission, that leads

to a very odd operation of the part and would seem to have no sense in the circumstances. It is that

point that we are trying to make in paragraph 7 of

our outline.

BRENNAN J:	You will then have to come to the stage of saying, "Well now, the expectation must be based
upon the hypothesis that the transaction which
created the Z-class shares did not take place, and
that the ordinary shares in the Pozzolanic
companies were onsold to TEP, which then sold into
the public float".

MR SHAW: There are other alternatives, as well, that I will

come to, Your Honour, but that is certainly one

possibility. The answer which is advanced against

that is that if there had not been the devaluation

of the shares, there would still have been the

redeemable preference share financing, and you

could not do that through TEP, and that is

really - - -

BRENNAN J: There is no reason why Loftway could not sell on

to TEP, is there?

Peabody(2) 25 9/11/93

MR SHAW: That is one of the things we say, Your Honour,

yes. A problem arises, or might be thought to

arise about that, because it might be suggested

that if Loftway had waited to sell on until right

at the very end, even if it sold at cost, the

consideration given might be attacked by the

Commissioner under, I think it is,

section 26AAA(4), but, that is to say, once the

float was actually under way, and the price at

which it was proceeding was not $24 million for the
value of the companies, but $30 million, then it

was plain that the Kleinschmidt shares were worth

more than had been paid for them. But, if the sale
had been agreed on that Your Honour has suggested,

namely from Loftway to TEP, at the beginning, as

soon as Loftway had purchased the shares, simply
allowing time for the dividends to flow in from the

Pozzolanic companies necessary to pay Westpac, then

that problem would not arise. So we would say that

what Your Honour says is one perfectly reasonable

possibility.

BRENNAN J:  The point that I was going to draw your

attention to is that there was the thought about

the nondisclosure in the prospectus - - -

MR SHAW:	Yes, that is true.
BRENNAN J:	- - - of the terms on which Loftway, or TEP, had

acquired the shares, and if your argument is

correct, will it be necessary to remit the matter

to the Federal Court in order to determine whether

it is a reasonable expectation that, apart from the

scheme, there would have been the inclusion of this
amount of income, or whether it would have been

inevitable, having regard to the desirability for confidentiality, that the scheme was perfected in

the way in which it was?

MR SHAW:  We would say not, Your Honour. This was a matter

which Mr Justice O'Loughlin addressed, the

significance of the non-disclosure question, and he

came to the conclusion that it was really not

nearly as significant as the question of obtaining

the tax benefit. But I will come to what

His Honour says about that.

What the Full Court said was that, when a

court was considering this question, what the court

was limited to was the scheme which had been relied

on by the Commissioner, and he says that on the

basis that Avon Downs somehow leads to that

conclusion. Now, at page 960, at line 61,,

His Honour says:

It is abundantly clear that the determination, which the Commissioner is

Peabody(2) 26 9/11/93

authorised to make under s.177F must depend

upon the scheme which he has identified. It is that scheme which has to be considered by

the Court when an objection decision is

referred by a taxpayer to this Court. As was

explained in Jackson (at 13), this Court

cannot stand in the shoes of the Commissioner

and exercise discretions which the legislature

has committed to the Commissioner. This Court

is confined to deciding whether the

Commissioner's decision has been affected by

some error of law, whether the Commission has

addressed himself to the right issue or

whether he has taken some extraneous factor

into consideration or failed to take into

account some relevant factor.

It may well be that if the Commissioner

in the present case were now to form the view

that some quite different scheme had been

entered into or carried out, he could make a
fresh determination and, subject to the limits

contained in s.170 of the Act, make an amended

assessment. But that is not a matter of

concern in the present appeal.

Then he says:

Once it is realised that the scheme to be

considered is that propounded by the

commissioner -

then going down to the second-last line, after

having identified the scheme commencing with the

acquisition and going through the public float and

the finance transactions:

it is obvious that the appeal must be allowed.

So that what His Honour contemplates is that

one might have, as it were, assuming one could

somehow satisfy the time limits of section 170, an

apparently endless string of determinations under

section 177F, assessments, the court considering

them, saying you have got it wrong, back it comes,

and so on. Now, that, in our submission, produces

a very curious result. It does not really appear

exactly why that should be the result because if we

are right in saying, as His Honour at least
elsewhere seemed to accept, that whether or not the

part applies depends on the existence of two
objective conditions, namely whether a tax benefit

has been obtained and, secondly, whether or not it has been obtained in connection with the scheme to

which the part applies. They are two objective

matters which one could look at and see whether or

not it is or it is not. At that point, what scheme

Peabody(2) 27 9/11/93

the Commissioner has identified or particularized
does not seem to matter.

It is true that when one comes to look at the

determination, it may be relevant to take into
account the particular way in which the

Commissioner has identified the scheme. I mean,

take this case for example. If the position is
that it was wrong to identify the scheme in the terms which the Commissioner did, and I will go

come to what he did in a minute, but assume it was

wrong, and that includes quite a number of steps,

but one can see, not a part of the scheme which is

caught be section 177D, but one says, "Look, the

scheme itself is the devaluation of the

Kleinschmidt shares" and what was consequential on

that. Assume that is the scheme for the present

purposes.

If it turned out that that was not what the

Commissioner had identified, but he identified something which included a lot more, but it was

obviously that that had led to what he did, why

should it matter that he has put in a lot of things

which are neither here nor there? I suppose, if he

got one of them entirely wrong and that was a

matter which was disadvantageous to the taxpayer,

that might be one thing, but assume that all the

things that were taken into account were things

which actually happened, as indeed they were here, assume that none of them was that the taxpayer had

green eyes or red hair or whatever it is, but they

were all perfectly sensible things to take into

account, the fact he has got it a bit wrong would

seem not to matter. Why should it matter?

DEANE J: Well, does it not matter because the fact that he

has got it wrong means that he has asked himself

the wrong question, and a court can only speculate

about whether, if he had asked the right question,

he would have given the same answer?

MR SHAW:  It is submitted that in the present circumstances

that is not so.

DEANE J: Well, what, that he did not ask himself the wrong

question, or that one can look and say, well, if he

had asked himself the right questions it is pretty

obvious what the answer would have been.

MR SHAW: Both.

DEANE J:  The first one seems to me, as a matter of law, you

are going to have some difficulty in making good.

Peabody(2) 28 9/11/93

MR SHAW:  Your Honour, the scheme which the Commissioner

identified will be found at page 939. At line 11

His Honour said:

This scheme was identified by the Commissioner

as "including" the taking of the following

steps:

(1) The purchase of all of the shares of -

the Pozzolanic companies -

which were owned by R.T. Kleinschmidt by

Loftway Pty Ltd;

(2) The issue of preference shares by Loftway

Pty Ltd to Westpac Banking Corporation;

(3) The conversion of shares in the target

entities to "Z" class preference shares;

(4) The reduction in the considered value of the target entity shares by Loftway Pty Ltd;

(5) The special resolution by the target

entities to remove the right of "Z" class

preference shareholders to receive

preferential dividends;

(6) The loan made by TEP Holdings Pty Ltd

which was trustee of the Peabody Family Trust

to Loftway Pty Ltd and the terms and

conditions of that loan;

The Court will remember that the money was lent to

Loftway to enable Loftway to redeem the redeemable

preference shares and then the loan was forgiven.

(7) The public float of Pozzolanic Industries

Ltd which float excluded the "Z" class shares;

that is, the Kleinschmidt shares -

(8) The redemption of its preference shares in

the target entities by Loftway Pty Ltd from

Westpac Banking Corporation;

(9) The sale of the target entities "Z" class

shares by Loftway Pty Ltd to TEP Holdings Pty

Ltd for a consideration of $476.000;

(10) The transfer of the shares by TEP

Holdings Pty Ltd as a gift to Pozzolanic

Industries Ltd.

Then, His Honour says:

Peabody(2) 29 9/11/93

During the course of the hearing below,

para (10) of these particulars was amended by

adding the words "or at par value" after the

word "gift". Nothing turns upon this
amendment.

I do not suppose it matters but, if what His Honour says is right, then presumably one could

not have done that. If one was, as it were, tied

forever to whatever scheme it was that the

Commissioner had identified when he made the

determination, it would be impossible to amend the

particulars. Indeed, I suppose the particulars are

not necessarily all that relevant. The question is

not what the particulars say, but what scheme it

was that the Commissioner had in mind.

DAWSON J: But if you say that the scheme is (3) and (9),

which you really do, do you not, it is possible

then to say if you eliminate (3) and (9) so that

the sale of what became the z class shares was at

the full price, you can say, "Well, Mrs Peabody

would have had the extra income."

MR SHAW:  Yes.

DAWSON J: But that is because the rest of the scheme would have gone ahead, but he identifies the whole thing as the scheme. If you put that to one side, you

cannot say what would have happened. That is the

point, is it not?

MR SHAW:  One could say, Your Honour, as was suggested by

Your Honour Justice Brennan, that if that had not happened, then maybe either the shares would have

been bought by TEP Holdings itself or, if they were

not bought by TEP Holdings itself, they would have

been bought by a company like Loftway which would

have onsold them to TEP Holdings. So that, when

Your Honour says one cannot say what would have

perfectly clear that one way or another there was	happened, in one sense that it is true, but it is
going to be an acquisition of the shares and, as it
turned out, a public float, and that in fact went
ahead. One has to ask oneself when one is
considering a tax benefit what might reasonably
have been expected in the absence of the scheme.

DAWSON J: But the absence of the scheme is the absence of

everything if you classify the scheme in those

broad terms, not if you classify it in terms of

only 3 and 9.	The scheme encompasses the float in
effect.

MR SHAW: It encompasses the float, but a float,

Your Honour, excluding the Kleinschmidt shares; not simply a float. Our submission is that whether the

Peabody(2) 30 9/11/93

part applies does depend on the objective factors

that we have referred to and it does not matter

what the Commissioner thought. Whether the part

applies or not is a matter to be determined

objectively. In our submission, the approach which

the trial judge took was correct.

DAWSON J:  Can I press - if the scheme had not been carried

out - and that is what you are looking at - you

have to say what would have happened if the scheme

had not been carried out.	The scheme here includes
the float.	If that had not been carried out, who

can say what would have happened.

MR SHAW:  Your Honour, it is submitted that what one asks

oneself, you say, "If the scheme had not been

carried out, what might reasonably have been

expected?" Not, "What would have happened, but

what might reasonably have been expected?"

DAWSON J: Well, what might - yes, that is right.

MR SHAW:  If this particular scheme had not been carried

out, then it might reasonably have been expected

that something else would have occurred, not

nothing, and it might reasonably have been
expected, well there are a range of expectations,

but one possibility is simply that the shares - the

Kleinschmidt shares - would have been purchased by

TEP Holdings, and TEP Holdings would have sold them

into the float. His Honour said that was not a

reasonable expectation because preference share

financing was cheaper than borrowing on overdraft,

and TEP Holdings could not issue redeemable

preference shares because of its position as a

trustee.

If one accepts that, well then one will say,

"Well, what would have happened if Loftway had been

set up to gain the advantage of preference share

financing?" Well, one answer is that it might,

itself, have bought the shares and onsold, as

Your Honour suggested. Another possibility is that

having obtained the preference share financing, it

might have lent the money to TEP Holdings in order

to enable TEP Holdings to buy the shares. There

are all sorts of possibilities.

McHUGH J: Yes, but is not the difficulty that you have got

to sheet home TEP's Holdings part in it because

otherwise you cannot sheet it home to Mrs Peacock?

MR SHAW:  Yes, that is true, Your Honour, yes, that is so.

It is no good our getting, say, Loftway - - -

MCHUGH J: Yes.

Peabody(2) 31 9/11/93

MR SHAW:  Or it is no good getting Mr Peabody, or whoever

you like, one has to - - -

McHUGH J:  You have got to point to some expectation that in

some way TEP would have gained and, therefore,

Mrs Peabody would have had some amount included in

her assessable income.

MR SHAW:	Yes, we do have to do that and, we say, we can.
MR DAWSON:	Am I entitled, sitting in an appellate court, to say, "Well, look the Commissioner really got it
wrong.  The essential scheme is (3) and (9), and
the rest are just surrounding circumstances, and,
therefore, I say that if (3) and (9) had not taken
place, and the other events did take place, well then the result which is required is reasonably to
be expected.  Am I entitled to do that?
MR SHAW:	In our submission the answer to that question is,

"Yes," and I will come to why in a moment. But, in

our submission, that is perfectly possible, in

accordance with the authorities, yes.

McHUGH J:	Mr Shaw, I am sorry to take you back in your argument, but when you were dealing with 177D you
seem to place particular reliance on the words "any
part of the scheme", particularly when you were
criticizing those passages in the judgment at
page 951. But, they have got no relevance at all
in this case, have they? They are part of an adjectival description of the person or persons, are they not? It may not be against your argument
at all, because it is whether - you did say, for
the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme.
But, the words in 177D:

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 -

In this case, Mr Peabody carried out the whole of the scheme, so we are not concerned with whether he

carried out part of the scheme.

MR SHAW: Well, Your Honour, in our submission, we are

because what Your Honour says is perfectly correct,

namely, he carried out the whole of the scheme.

That means necessarily that he carried out the

separate parts, and if the fact is that one of

those parts had the dominant purpose then, in our

submission, the section applies.

Peabody(2) 32 9/11/93

McHUGH J: But it is the person has got to have the purpose

of enabling the relevant taxpayer to obtain a tax

benefit in connection with the scheme.

MR SHAW:	Yes.
McHUGH J:	I just do not see what the words "or any part of the scheme" have got to do with this case. That is
not to say that - I do not see that it hurts your
argument at all, it just seems to me, it is
irrelevant to it.

MR SHAW: Let me attempt, Your Honour, to see a relevance.

Your Honour, the part applies to any scheme where

the necessary conclusion can be reached and it will

apply to the whole scheme if the necessary

conclusion can be reached about anybody who entered

into any part of it. Now, Your Honour correctly

says, "Mr Peabody entered into the whole scheme".

He did, that is true. He also entered into - not

also, that is wrong - as concomitant on entering

the whole of the scheme, he entered into each part
of it and one of those parts was the devaluation of

the Kleinschmidt shares.

Now, assume for a moment that not just the

dominant purpose, but the only purpose, of doing

that was to obtain a tax benefit. Then you have a

scheme which, if you like, in the end has an

expected commercial outcome or purpose, but you

have one step in the whole of it, the only purpose

of which is to obtain a tax benefit. Now, we would

say that that being so, one can come to the

conclusion that Mr Peabody entered into part of the

scheme for what I will call a required purpose, and

the consequence of that is that Part IVA applies to

the whole scheme. That is the relevance, we

submit, exists.

McHUGH J:  I think I understand the argument, but at the

moment, it lacks persuasion as far as I am

concerned.

MR SHAW: Well, Your Honour, its lack of persuasiveness is

sort of something for which I am not responsible.

The fact that I have not been able to explain it to

Your Honour is something for which I can, and really, Your Honour, it all depends on what "did

so" means.

DEANE J:  But do you not come back to the plain fact that

Part IVA is concerned with identifying what

Justice Menzies called a tax dodge?

MR SHAW:  Yes.

Peabody(2) 33 9/11/93

DEANE J: Well now, when you look at this on any approach,

the tax dodge was what Justice Dawson identified.

MR SHAW:	Yes, it was.
DEANE J:	And the problem is that the Commissioner, on

page 28, has simply got it wrong and has labelled a

whole course of commercial conduct, including a tax

dodge, as itself, in its entirety, being the

scheme. Well then, if that is so, why should it

not just go back to the Commissioner so he can

address the proper question, whether this Z-class
preference shares diversion to stop tax being

incurred attracted Part IVA?

MR SHAW:  Your Honour, that may be one possible outcome but,

in our submission, a more satisfactory outcome is

the one that I am just about to come to, and I was

about to take Your Honour to the way in which the

trial judge approached the matter at page 903 at

line 30. Your Honour says:

I find that the facts of this case constitute a scheme for the purposes of Part IVA of the Act. It was a unilateral

scheme in the sense that it was a course of

action that was implemented by Mr Peabody -

then he talks about his advisers counting as the

same -

it was not a bilateral scheme because there

was no other party at arms length who was

involved in the scheme; the course of action

that constituted the scheme was the decision

to convert the Kleinschmidt shares to

worthless Z class shares and certain consequential transactions that were

implemented to give effect to that decision.

as stopping with the conversion of the shares	Whether the scheme should be classified
to z class shares or whether it should be
extended to include Loftway's issue of redeemable shares to fund their purchase is an
interesting question, but it is one which it
is not necessary to decide. Let it be assumed that the scheme did extend to the legitimate
purpose of obtaining cheap finance through the
issue of redeemable preference shares; that
will not save the relevant taxpayer if some other proscribed purpose existed that can
properly be classified as the dominant purpose of the plan:

Peabody(2) 34 9/11/93

So that His Honour did not think it was necessary

to look at the precise parameters of the scheme,

but what he did at page 913 was to say, at line 49:

In this case "the substance of the

scheme" (placitum (ii)) - that is, the

conversion of the Kelinschmidt shares to

worthless Z class shares - and the

advantageous "change in (Mrs Peabody's)

financial position" that resulted ..... were,

without more sufficient to bring about -

the section 177D conclusion. At page 917 at

line 20, he says:

The conclusion that I have reached is

that the conversion of the shares to z class

shares was the essential element of the scheme

that gave rise to the tax benefit.

Then he goes on and talks about that. So that, he

proceeded on the basis that it was not necessary to

see what the precise limits of the scheme were.

DAWSON J: But it is, is it not, because you have got to say

what might reasonably to have been expected if the

scheme had not been entered into or carried out?

MR SHAW:  Yes.

DAWSON J: Well, now, you have got to know what you are

setting to one side, as it were.

MR SHAW:  And what your saying might reasonably have been

expected - - -

DAWSON J:  - - -in those circumstances. And if it had just

been the devaluing the shares, that is one thing,

but if the whole of the scheme identified by the

Commissioner had not been carried out, that is a

very different thing.

DEANE J: And if I can just add to that? Unfortunately,

from the Commissioner's point of view, he did not

leave it fuzzy. If you look at page 28 of the

appeal book, he has spelled out a tax benefit in

respect of which a determination was made includes.

MR SHAW:	Yes, he does.
DEANE J:	I mean, if he had said, "I cannot define

precisely, but it was those steps which involved

this", you might have had some escape route.

MR SHAW:  If I might take the Court to Minister for

Aboriginal Affairs v Peko-Wallsend, 162 CLR 24, at

page 39 Your Honour the Chief Justice commences to

Peabody(2) 35 9/11/93

set out a number of propositions of law relating to

"Failure to Take into Account a Relevant

Consideration", and also, as appears just above the

letter (a), "the related ground of taking into

account irrelevant considerations", and at page 40,

after the letter (c), about the middle of the page,

Your Honour said:

(c) Not every consideration that a

decision-maker is bound to take into account

but fails to take into account will justify

the court setting aside the impugned decision

and ordering that the discretion be

re-exercised according to law. A factor might

be so insignificant that the failure to take
it into account could not have materially
affected the decision -

and there is a reference to a number of cases - A similar principle has been enunciated in

cases where regard has been had to irrelevant

considerations in the making of an

administrative decision -

there is again a reference to a number of cases.

Now, it cannot be suggested, it is submitted,

that any of the matters which are referred in the

particulars, a, did not take place, orb, were not

relevant. They may have been extraneous to the

definition of the scheme, but their inclusion in
the scheme, if it were wrong, cannot, it is
submitted, be said to have materially affected the

decision.

McHUGH J: But why do you say that, because if, as the trial

judge found, the course of action that constituted

the scheme was the decision to convert the

Kleinschmidt shares to worthless Z-class shares and

certain consequential transactions, then you would

be dealing with a different taxpayer; it would

probably be Loftway. The reasonable expectation

would be that Loftway would have onsold the shares

and it would have had some - they would have made a

profit on the sale of the shares.

MR SHAW:  As Your Honour put to me before, if the correct

conclusion is that a tax benefit was not obtained

in relation to Mrs Peabody, which means, as

Your Honour said, in relation to TEP Holdings, but

only, if you like, in relation, as Your Honour has
just suggested, to Loftway, then, of course, the

determination must fail.

But for present purposes one has to assume a

tax benefit to Mrs Peabody. If one does not get a

Peabody(2) 36 9/11/93

tax benefit to Mrs Peabody, then that condition is

not satisfied and that is that, subject to

something that I am going to come to.	But assume
for a moment that that is that.

McHUGH J:	I do not know how you can make that assumption, because the two sections intertwine; they go round
and round.
MR SHAW:	Yes, and they stop here. Yes, they are

intertwined, that is true, but there seems to be an

identification of two things which are treated

separately. One is the obtaining of a tax benefit,

which is dealt with in section 177C, and secondly

the tax benefit being obtained in connection with a

scheme to which the part applies, which is 177D.

It is true they reflect on one another to a certain

extent but they are, it is submitted, separate

things.

If it can be said that there is a tax benefit to Mrs Peabody, then the question arises whether or

not that tax benefit was obtained in connection

with a scheme to which the part applies. What the

answer to that question is depends on applying the

test in section 177D, that is whether it would be

concluded that a person who entered into the scheme

or part of the scheme did so for the dominant

purpose of obtaining the tax benefit for the

relevant taxpayer.

If the position is that the scheme properly

defined is to be limited to the devaluation of the
Kleinschmidt shares and the steps consequential

upon that, then it is submitted - and one has to

assume for deciding this question that there is a

tax benefit to Mrs Peabody - that one has to ask

oneself: has the way in which the Commissioner has

identified the scheme materially affected his

decision? In our submission, the answer is, once

one has made those assumptions, obviously no, it

has not, because all those things are perfectly

relevant things and the only effect they could

possibly have would be in favour of the taxpayer.

So that, while what Your Honour says to me is

perfectly right, you do have to have a tax benefit

for Mrs Peabody and if all you can find is the tax

benefit somebody else, then it makes things

difficult for us but, if one assumes that one can

say that, then, in our submission, we are entitled

to say, "It's wrong, but so what?"

McHUGH J:  The reason you have got to put so much emphasis

on the words "part of the scheme" is because of the

definition of "purpose" in subsection 177A(S).

Peabody(2) 37 9/11/93

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

DEANE J: But if you identify the scheme as the z class

aspect of it, why is not what Justice McHugh

suggests to you correct, that is the only result of

a determination on that basis would be that Loftway

would have been assessable for the amount in

question because, once you remove that, you are

left with Loftway buying the shares and the

artificially reduced sale price.

MR SHAW:  There are a number of answers to that question but

if I might begin by saying that, in our submission,

the last few words of what Your Honour said is

simply not supported by the evidence, that is to

say, "at the artificially reduced sale price".

DEANE J:	I mean artificially reduced by the steps taken.
MR SHAW:	Afterwards, you mean? I thought you meant at the

24 million - - -

DEANE J:	No, the afterwards.
MR SHAW:	The answer to that is this, Your Honour: if the

shares had not been reduced in value, they would then constitute 38 per cent of the value of what

was to be the public floater, if you like. They

obviously had to get into the public company that

was to be floated one way or another and, in our

submission, one possible way and, indeed, probable

way - although that is a word I have sought to

eschew - is the way which was suggested by here you had Loftway; it had the shares; they had

to go into the public float some way or other.

One way to do it would be for Loftway to sell

the shares to TEP, which held all the other shares,

and to sell them more or less immediately upon

their acquisition so that the price paid by TEP

Holdings to Loftway was the same price as Loftway

had paid to the Kleinschrnidts. Then, had the

public float gone ahead, had it occurred at the

increased value which was hoped for, that is, from

24 to 30 million, TEP would have sold the shares,

all of them, which then would constitute the whole of the capital of these companies into the company

which was to be floated, TEP would then have made

the profit on the Kleinschmidt shares and you would

have a tax benefit to Mrs - - -

McHUGH J:  Why would they have done that? Why would they

have incurred the stamp duty? After all, Peabodys

were the directors of Loftway, were they not? Why

would Loftway itself have sold the shares direct?

Peabody(2) 38 9/11/93

MR SHAW: It is true, Your Honour, that there would, or

might have been, stamp duty in that.	It all
depends on where the advantage lies.

BRENNAN J:  The advantage would surely lie in a direct sale

from Loftway to the Pozzolanic Industries Limited.

MR SHAW:  Your Honour, it would all depend on the

circumstances. Or another possibility would be

that Loftway might have been set up; it could have

issued the redeemable preference shares to Westpac

and it could have then lent the funds which it had

acquired and which were necessary to pay for the

Kleinschmidt shares, to TEP and TEP could have bought them.

BRENNAN J:  Which brings us back to the question of a

reasonable expectation.

MR SHAW:  Yes, that is right.

McHUGH J: It seems to me a long way removed from a

reasonable expectation, at this stage, Mr Shaw;

that you are engaging in a lot of speculation.	And
another difficulty, it seems to me that you may
have, is the question of whether it would be the

identical amounts that we are talking about in any

event.

MR SHAW: Questions of amount might arise, yes, Your Honour,

they might, but if it turned out, for example, that

the Commissioner had included a million dollars in

relation to a particular tax benefit, when he

should have included only, say, $500,000, because
he calculated it wrongly, or whatever, that is

simply an arithmetical error which the Court could

correct, it is submitted, if it is only a matter of

having the figures wrong.

MCHUGH J: Yes.

DEANE J: But why is not the obvious approach this: if you

cut out what I have referred to as the tax dodge,

the reasonable expectation, when you only cut that

out, is that Loftway would have sold the shares for

their true value, which would not have been $476,

but which would have been the figure which includes

the $800,000 profit.

MR SHAW:  Yes. Altogether it was, yes, 2.6 or something.

DEANE J: But that brings me to the point of the question,

that is this: if, contrary to your submission, one

reaches the conclusion that the whole thing was not

a scheme, or if it was 177D gets you nowhere, once

one can ask those questions about the effect of

identifying the smaller scheme, it immediately

Peabody(2) 39 9/11/93

becomes apparent that one cannot say the

Commissioner's mistake in asking himself the wrong

question did not have any consequences, because the

more obvious conclusion is that it did, and a

different taxpayer would have got landed with the

assessment.

MR SHAW:  Your Honour, if the position is that the only tax

benefit which can be identified is a tax benefit to

Loftway and not one to Mrs Peabody, or the

beneficiary of the trust more generally - to put

the matter in another way, if it might not

reasonably be expected that an amount would have

been included in the assessable income of

Mrs Peabody if the scheme had not been entered into

or carried out, then the determination must fail.

DEANE J: But what I was really saying to you was what if

one reaches the stage of saying if the Commissioner

had correctly identified the smaller scheme, one

can only speculate about what conclusion he would

have reached in relation to Mrs Peabody or Loftway.

I have trouble seeing how we can simply say his

identification of the wrong scheme had no effect.

MR SHAW:  Your Honour, if the proper outcome of coming to

the kind of conclusion that Your Honour has

indicated is simply that in effect who knows what

would have happened, then I accept I would not be

able to sustain the assessment.

BRENNAN J:	Mr Shaw, for my part I do not understand why you have accepted the proposition that the scheme that
is relevant under Part IVA is a tax dodge scheme.
It seems to me that although Part IVA is directed
to tax dodging, the existence of the scheme is only
one of the elements that activates the power under 177F, and if the Commissioner says to himself,
"Here is the entirety of the scheme, in this case,
it is a scheme which falls within the literal
description of 177C, therefore it is a scheme to
which Part IVA relates, I will now hypothesize that
that scheme would not have been carried out, but
that another scheme - which contains all the same elements, save the tax dodge elements - would have
been carried out, then the question simply is whether or not that alternative scheme would have been one which would have resulted in the inclusion
of an item of assessable income."

MR SHAW: That is one of the things we wish to say,

Your Honour.

BRENNAN J: Well, I understand that, but it seems to me that

your hypothesis, thus far, in your answer to

Justice Deane has been put on the basis that the

Peabody(2) 40 9/11/93

relevant scheme is numbers (3) and (9).	Why do you
say that?

MR SHAW:  Your Honour, because I wanted to persuade

His Honour that on his hypotheses we won, as well

as on the other hypotheses. If I could just take

Your Honour over to paragraphs 22 and 23,

Your Honour will see that we try and put it a

number of alternative ways, and one of them was

intended to be the way in which Your Honour put it.

Although it is not, of course, in those words.

BRENNAN J: It seems to me that once you annihilate a scheme

which contains (3) and (9), the primary inference

that you draw from the facts of the case is that

there would not have been a sale of shares from

Loftway to TEP. You may hypothesize that there

would have been, in the way in which you put it

forward here, in either of the ways you have

earlier mentioned by way of loans and so forth, but

then you are back to the question of whether you

can regard that as a rational hypothesis. And it

is obvious that it is only one of a number of

hypotheses that might be rational, if it is that at

all, but then you would come back to 177C for - - -

MR SHAW:  You do.

BRENNAN J: Well, it really says it may be rational, but it

is barely so. It scraps in because we do not know

what might have been the disadvantages of a sale

through TEP.

MR SHAW:  Your Honour, it is submitted that when one looks

at the way in which the part works, one has to have

the two elements which are, as

His Honour Justice McHugh says, somewhat

intertwined, but they are treated separately,

namely, the question of tax benefit and the

question of whether you have got a scheme to which

the part applies, or rather, whether the tax benefit was obtained in connection with the scheme to which the part applies. So you have to have the

two elements. Under 177D, it says:

This Part applies to any scheme ..... where -

(a) a taxpayer ..... has obtained, or would but

for section 177F obtain, a tax benefit in

connection with the scheme; and

it would be concluded -

having regard to all the various things that are

set out, that somebody:

Peabody(2) 41 9/11/93

who entered into or carried out the scheme or

any part of the scheme did so -

in effect, to enable the tax benefit to be

obtained.

At that point, when one is deciding whether or

not it would be concluded that one of the persons who entered into the scheme or any part of it did

so with the required dominant purpose, then one is

asked to answer a question which really turns on

the balance of probabilities, if you like: is the

dominant purpose of one of these people to obtain

this tax benefit? That, it is submitted, provides

a sensible test on which to base a conclusion that

the scheme is one to which the part applies.

But if one assumes, for example, as

Your Honour put to me, which we would not accept,

that one of our hypotheses is rational but barely

so, if it would be concluded, despite the fact that
the hypothesis is barely rational but nevertheless
rational, that the dominant purpose of one of the

people who entered into the scheme was to get that

very thing, barely rational as it might be, if you

come to that conclusion, then, in our submission,

there is every reason for thinking that the part

should apply.

In our submission, it is doing something which

the words of the sections do not require and which

is unnecessary from any policy point of view to

seek to erect the tax benefit test to something

like the expected outcome, as His Honour suggested.

As long as one has something that is a

reasonable hypothesis or might reasonably have been expected, then the only thing one need be concerned

about, it is submitted, is the test which is

imposed by section 177D, because after all, the

question which it asks is, to the court in this case, "Are you satisfied that the dominant purpose	of somebody who did one of these things was to get
back tax benefits?". Assume one is satisfied, if
you like, 100 per cent, not just the dominant
purpose, the only purpose of doing this was to get the tax benefit, in our submission, it is nothing
to point to this kind of legislation to say, "Well,
the tax benefit was one which arose only in what I
might think are unlikely circumstances."

If one is satisfied that what was done was

nevertheless to do it, to obtain the tax benefit,

one would have thought, it is submitted, that the

whole purpose of the parties is satisfied.

Peabody(2) 42 9/11/93

In our submission, the approach which is taken

by the trial judge, namely that you have what he

called a low threshold in relation to the tax

benefit, is an approach which might reasonably have
been expected from the court. There is nothing

abhorrent or difficult or gives rise to any
difficulties in adopting the kind of approach he

did.

Then, if I might go back again. There is a

question about the authority, or power, which is

given by section 177F. What it says is that - so

far as is relevant - subsection (1):

the Commissioner may -

(a) in the case of a tax benefit that is

referable to an amount not being included in

the assessable income of the taxpayer of a

year of income - determine that the whole or a

part of that amount shall be included in the

assessable income of the taxpayer of that year

of income -

and our submission in relation to that is contained

in paragraph 14 of our outline. What we submit is

that when the power arises the Commissioner may do

one or other of the two alternative things, but he

must do one of them. It is true that the word

"may" is used, but "may" sometimes means shall, and

it certainly does not say "may include the whole or

a part or none" .

One illustration of the kind of cases where

"may" is read as meaning "shall" is Finance

Facilities - it is referred to in paragraph 14 -

127 CLR 106. What the Court was there concerned

with was the power of the Commissioner to allow a

rebate if he was satisfied of certain things. The

words were - it is in the headnote at the top of

the page 107:

the Commissioner may allow a ..... rebate -

if he is satisfied, and so on. At page 134

Justice Windeyer at the bottom of the page said:

This does not depend on the abstract

meaning of the word "may" but of whether the

particular context of words and circumstance

make it not only an empowering word but

indicate circumstances in which the power is

to be exercised - so that in those events the

"may" becomes a "must". Illustrative cases

going back to 1663: R v Barlow. Today it is enough to cite Julius v Bishop of Oxford; and

add in this Court Ward v Williams -

Peabody(2) 43 9/11/93

which in fact was what Mr Justice Owen relied on at
page 138 -

But I select one other reference out of a multitude: Macdougall v Paterson. There

Jervis CJ said in the course of the argument

"The word 'may' is merely used to confer the

authority: and the authority must be

exercised, if the circumstances are such as to call for its exercise". And, giving judgment, he said:

"We are of opinion that the word 'may' is not used to give a discretion, but to confer a

power upon the court and judges; and that the

exercise of such power depends, not upon the

discretion of the court or judge, but upon the

proof of the particular case out of which such

power arises."

I consider that to be directly applicable to

the present case. If the Commissioner, having
considered the matter, is satisfied of facts

out of which the power to allow a rebate

arises, he cannot nevertheless refuse to allow

it.

MR SHAW:  So that we would submit that the power or

authority which is given by section 177F is of that

kind. We would submit that it must follow that the

power cannot be exercised arbitrarily. Here there

is nothing in the evidence to suggest any other

course than the inclusion of the whole, and we

refer to Kolotex, 132 CLR 535. There a question

arose about what should happen under a section

which provided that the Commissioner should do

certain things if he were satisfied about the
existence of some matters. In fact, the

Commissioner had not been satisfied about some matters, but he made errors in coming to that

conclusion, and the question was, "What, in those

circumstances, the court should do?" The court

took the view that it should say, "Well, in the

circumstances, the Commissioner could not have been

satisfied, could not properly have been satisfied,"

and to make an order on that basis.

At the bottom of page 567, Justice Gibbs said,

the last paragraph on the page:

The questions that then arise are whether

the conclusion of the Commissioner is open to

review and, if so, whether it should be held

that he should reach the requisite

satisfaction. The grounds on which the

conclusion by the Commissioner that he is not

satisfied may be examined by a court of appeal

Peabody(2) 44 9/11/93

are those stated in Avon Downs ..... and Brian

Hatch Timber -

Going to the top of the next page:

It seems that a court in deciding whether some

ground has appeared to justify a review of the

Commissioner's conclusion that he is not

satisfied should consider the question on the

basis of the material which was before the

Commissioner even though further material is

before the court ..... However, it would appear

to me that once it is decided that the

conclusion of the Commissioner should be
disturbed, for example, on the ground that it

was based on error, it is right for the court

to reach its final conclusion as to whether or

not the Commissioner ought to be satisfied by
reference to all the material before the

Court, because if the matter were referred

back to the Commissioner to reconsider the

question he would obviously be entitled and

bound to consider all the information then

available.

And he said that both parties had proceeded on that

basis.

At page 574, at the bottom of the page, at the

last paragraph, His Honour says:

Some of the questions dealt with may be

regarded as technical and unrewarding, but

sections 80A and 80C require them to be

explored. For the reasons I have given, if,

in accordance with the principles stated in

Avon Downs ..... the Commissioner's conclusion

should be reviewed, upon a reconsideration of

the matter the same conclusion must be

reached, although for different reasons.	The
Commissioner was not satisfied, and could not

properly be satisfied, of the matters stated

in section 80A in respect of the claim to

deduct the losses -

and so on. He says he would dismiss the appeal.

His Honour Justice Stephen, at page 576 - it is

about point 6 of the page:

before the court may review the Commissioner's

failure to be satisfied it must detect some
error of law affecting that conclusion or some
other of the grounds for interference referred

to by Dixon J. in Avon Downs ..... Here such

grounds exist, they are provided by the errors

affecting the Commissioner's course of

reasoning which led him to his conclusion.

Peabody(2) 45 9/11/93

But having entered upon a review of the

Commissioner's conclusion the court must form

its own opinion of what should have been the

Commissioner's conclusion and must do so

unaffected not only by those errors which led

the Commissioner to his original conclusion

unfavourable to the taxpayer but also
unaffected by any other errors or oversights,

whether or not favourable to the taxpayer,
which may have affected the Commissioner's

original conclusion. The court will therefore

necessarily have to consider any new grounds

urged by the Commissioner as justifying the

assessment, not because they may support the

Commissioner's already vitiated state of

dissatisfaction of mind, but rather because

they may assist the court in determining

whether either a contrary conclusion should be

substituted for the Commissioner's original

failure to be satisfied, founded as it was

upon reviewable error, the appeal therefore being allowed, or whether, on the contrary,

the assessment should stand unaffected and the

appeal be dismissed because, once all errors

and oversights are rectified, the case is not

seen to be one in which the Commissioner

should have been satisfied in terms of the

Act.

So that it is on that basis that we make those

submissions which are contained in paragraph 14 of

TOOHEY J:  Mr Shaw, how does the notion of arbitrariness

arise in relation to section 177F? You say the

power is not to be exercised arbitrarily.

MR SHAW:  Yes.

TOOHEY J: Obviously, if the conditions have not been met,

well then the power cannot be exercised at all.

MR SHAW: That is that, yes.

TOOHEY J:  If they have been met, you say the power must be

exercised?

MR SHAW:	Yes.
TOOHEY J:	Once you reach that point, how can it be

exercised arbitrarily?

MR SHAW:  I suppose, Your Honour, it might be exercised by

somebody saying these conditions are satisfied, but

in respect of all taxpayers less than 5 foot 10

tall, or whatever it is in centimetres, I will

Peabody(2) 46 9/11/93

include the whole, but if you are over 5 foot 10, I

will include only part, 50 per cent.

I mean, it is very difficult, Your Honour.

Because the situation is entirely hypothetical you have to make up mad cases which I have just done,

and the answer to Your Honour's question is, I can

make up a mad case - - -

TOOHEY J: But it is in the area of whole or part that you

refer to arbitrariness, is it?

MR SHAW:  Yes, all I am saying is that in most cases one

would have thought that one would inevitably

include the whole. One might have thought the

reference to a part was included to allow for cases

where, if an amount of assessable income had been

included, then there would have been some other

deduction which would have been allowable. It

looks as if it is not referring to that, because

section 177F(3) expressly makes provision for

compensating adjustments.

But, nevertheless, there is still this

provision, "whole or a part", and I have to face

the fact, Your Honour, it does say, "a whole or a

part", and I can only think of mad examples.

MASON CJ:  We will adjourn now and resume 2.15.

AT 12.50 PM LUNCHEON ADJOURNMENT

UPON RESUMING AT 2.17 PM:

MASON CJ: Yes, Mr Shaw.
MR SHAW:	I am not sure that Your Honour Justice Deane

actually was wrong this morning. It is true that

section 26(a) was repealed at the relevant time but
it was replaced by section 25A which contained

similar provisions but extended, in effect, and

given interpretations and things.	I think this is
right.	I will try and have it right by the
morning.	I think what then happened is that part

of that went on the introduction of the capital

gains tax provisions, that is to say, the bit about

profit making by sale, went, and that was all

subsumed under the capital gains tax provisions

which were not relevant here. But, at any rate, we

will try and discover when the various provisions

came into effect and what was actually in effect at

Peabody(2) 47 9/11/93

the time. I think, although Your Honour referred

to the wrong numbers, there was something to the

same effect. I say that introducing it by, I

think, and it is only "I think" at the minute.

If I might take the Court back to the

particulars which were provided by the
Commissioner, and they can be found either at

page 28 of the appeal book, or in the final volume

at page 939. What we draw attention to is that

although Justice Hill in the Full Court regarded the scheme as particularized as including what I

might describe as the overall commercial

transaction, or something in terms like that, in

fact, the particulars are limited to the purchase

of the Kleinschmidt shares by Loftway, their
devaluation, the public float but described as the
public float excluding the Kleinschmidt shares, and
the loan made to Loftway in order to repay Westpac
and the final transfer of the shares.

So that the particulars are, in fact, limited to the specific steps which were taken in relation to the transaction as it actually took place, and

it is wrong, in our submission, to regard it as
simply referring in a general kind of way to the
acquisition of the Kleinschmidt shares and the

public float, without any qualification.

It is submitted that when one looks at the

scheme in that way, that whether or not one accepts

the submissions which we made about part of a

scheme, on the facts of this scheme there was a

scheme to which the part applied and if I might go

to paragraph 19 of our outline, at page 958 of the

appeal book, perhaps if I was to start at line 11:

It was submitted for Mrs Peabody that in

computing the amount which should ultimately

be included in Mrs Peabody's income if

Part IVA applied, it would be necessary to

take into account the fact that if the scheme had not been entered into or carried out, the

financing would most likely have been by bank

bill borrowings. There was evidence that such
borrowings would have involved the incurring

of an additional cost of at least $1,160,952.

And that thought finds another form at page 963 -

perhaps if I go back to the bottom of page 962, at

line 56:

There was, as the solicitor's memorandum

recording the conversations of 13 and 14

November 1985 showed, a difference in the

financing costs of redeemable preference

shares financing as against loan at interest

Peabody(2) 48 9/11/93

financing of between 6.3 per cent and 8.3 per

cent. Converted into monetary terms, this

difference was, we were told, in the order of

$1,160,962.

In fact, the $1.16 million is a figure which

comes from exhibit A6, which is at page 879, and

that represented a calculation by one of the

witnesses, Mr Wruck, of the cost of bank bill

financing. Then there was obtained a letter from

the Westpac Bank, which is exhibit A7, which is on

the next page, addressed to my learned friend's

instructing solicitors. It says, in the second

paragraph:

As advised verbally if overdraft finance of

$8.7M had been approved to a company within

the Peabody Group in the period between

December 1985 and July 1986 the interest rate

which would have been applied would have

been -

and then it set out what it is. That was worked
out in exhibit A8, which is on page 881, and is
$1.05 million. So, if there had been bank bill
financing, it would have cost $1.16 million in what

one might call interest. If it was borrowings on

overdraft, it was $1.05 million, and in the outline

at that paragraph there is a reference to the pages
at which the exhibits were introduced into

evidence. It was sort of right at the end. But,

obviously, that cost is not, of itself, an

additional cost.

There was a cost itself obviously of

redeemable preference share financing, and that was

represented by the total of the dividends which

were declared on the redeemable preference shares.

They total just a bit more than $732,000. So that

the difference between the cost, if one does not

worry about after tax cost and sophisticated

matters of that kind, just looking at those two

figures, which might be an unsophisticated way of

doing it but, at any rate, it provides something to
start with, the cost of financing by redeemable

preference shares was less than the cheaper of the

two costs of financing other ways by about

$300,000, say.

If one looks at the profit which was going to

be made on the Kleinschmidt shares, assuming that

they were going to be sold on the $30 million

basis, then that was about $2.7 million. There was

a question about whether, in calculating the net

profit that was available, one should take into

account the interest which would have been payable

or not. If one does not, then one would say there

Peabody(2) 49 9/11/93

is a profit of 2.7 million and by making it you

would expose yourself to tax which would amount to

something like $1.6 - 2 million or, if you take

into account the interest, that would reduce the

amount of profit and that would reduce the amount

of tax. You end up with figures of the saving by
avoiding making that profit and by avoiding the

liability to tax, which is obviously very much

greater than the saving which one makes by having

redeemable preference share financing.

So that if one is looking at the scheme as it

was carried out, obviously it was desired to make

each of the savings, but the saving by avoiding the

tax on the profit of the shares was obviously very

much greater than the saving which was made by

using redeemable preference share financing. The

reason we have referred to that is that if one is

saying, well, the purpose of the particular scheme

as it was entered into was partly to make the

redeemable preference shares, taken partly to make

the tax saving, obviously the tax saving is more

important than the finance saving, that is all. So

that one would say, looking at it in that way, that
the dominant purpose of the scheme as

particularized, even without going to the question

of part of a scheme, was obviously to obtain a tax

benefit. If I might then go back to

paragraph - - -

BRENNAN J: Can I just ask you this: what is the need for

finance for that period? Was it just to cover the

period of the float?

MR SHAW:	Yes, I think so, Your Honour.
BRENNAN J:	From the time of the acquisition of the

Kleinschmidt shares to the public float?

MR SHAW:  Yes. What happened was, Your Honour, that they

did not have the cash available at the beginning.

Once the public float took place they did have the

cash, and TEP having got that cash, lent it to

Loftway, Loftway used it to pay back Westpac - that

is not right, is it - I should say to redeem the

redeemable preference shares. Then there was, of

course, the loan outstanding, but it was forgiven.

BRENNAN J: But the period of the finance required from

Westpac was from the date of the acquisition of the

Kleinschmidt shares until the money came in from the public float?

MR SHAW:  Yes, Your Honour. If I might then go back to

paragraph 17 of the outline. It is pointed out

there in the first few lines that Loftway got the

money to buy the shares from the redeemable

Peabody(2) 9/11/93

preference shares which were issued to Westpac, and
then the money was used to buy the Kleinschmidt

shares and their value was then, at once,

destroyed. So that you had a situation in which at

that point of time these redeemable preference

shares were issued, they obviously had to be
redeemed at some point of time but there were no

assets in Loftway to redeem them.

What happened, of course, was that when the

money came in from the public float, enough to pay

Westpac out was lent by TEP Holdings to Loftway,

and then the debt was forgiven and if something of

that sort had not been in contemplation, obviously

Loftway could not have agreed to the Kleinschmidt shares being totally devalued. It would have had

to do something else in order to enable the

redemption of the shares to take place and,

obviously, or obvious alternatives - and no doubt

there are others, but obvious alternatives are
either to pass the shares on to TEP Holdings or to

sell them directly into the float.

At about point 6 on page 5 in the middle of

paragraph 17(a) we say that:

If the sale to TEP Holdings had been the

preferred option, the sale would most probably

have been arranged about the time of the
original purchase from Kleinschmidt (although

after the dividends had flowed) because of the possibility that the value of the shares might increase or decrease.

And then we point out that if that had happened:

TEP Holdings would have made a section 26AAA

profit, taxable as such in the hands of the

beneficiaries.

And we refer to example, and I will come to that in

a minute, and we say:

On this basis there as a tax benefit to

Mrs Peabody.

And then we refer to another possibility, namely:

that Loftway be used as the financing

vehicle ..... on-lend to TEP -

and TEP buys the Kleinschmidt shares itself. We

say on that basis too there is a tax benefit to

Mrs Peabody. If we might go over to the pages

behind the outline, there are there a number of

examples, four of them, with the sources for the

figures as set out on the last page.

Peabody(2) 51 9/11/93

DEANE J:  What this approach does is treat the tax avoidance

scheme, in effect, as the interpositioning of

Loftway covering the ..... shares and everything

else. Indeed, it is a bit like the old section 260

approach with the problem of identifying a

particular receipt have gone because Part IVA now

no longer requires it.

MR SHAW:  Indeed, Your Honour. In one sense one is haunted

by section 260 here. In the course of his reasons,

Justice Hill refers to the difficulties which had arisen about section 260 and the ways in which it

was hoped to fix up some of the difficulties which

had arisen in the course of the years. I am not

exactly sure whether His Honour saw the provisions

as effecting the remedies that were hoped for, but

he does seem to have erected a method of operation

for Part IVA which itself is beset with a number of

practical administrative difficulties which, at any

rate, our client would prefer were not there.

The two examples, if I might go to them

briefly - the first one is example 2. That speaks

of Loftway buying the Kleinschmidt shares using

share preference - - -

DEANE J:  Mr Shaw, can I interrupt you again. On that

approach, should not particular (7) -

The public float of Pozzolanic Industries Ltd

which float excluded the "Z" class shares -

be read almost as reversed? Is not the relevant

part of the scheme the exclusion of the z class

shares from the public float in that the public

float - it probably does not matter in that it is

an ambiguous particular anyway, but, if you put the

exclusion of the z class shares from the public
float in (7), looking at it, all of the steps

involve the exclusion of the interpositioning and

the Z class share exercise.

MR SHAW:  Yes, it perhaps would be more happily expressed

the way Your Honour has suggested it. There is

always a difficulty about the precise expression of

these things. The two examples that have been

referred to in the paragraph I have just been

looking at, first of all, example 2; that is

Loftway purchasing the Kleinschmidt shares using preference share financing without removing their value but having extra rights to facilitate the

streaming of the dividends and immediate transfer

to TEP but after the dividends have flowed and the
transfer takes place at cost, and the consequence

is that total cost of the shares from Kleinschmidt

is $8.7 million. There is a transfer to TEP at

that price. There is a sale with the profit. You

Peabody(2) 9/11/93

have the dividends coming in and going out;

slightly more coming in than going out and the

relevant figure for present purposes is the

$2.7 million. The two bottom lines are meant to

explain what people would end up left with, but

that figure is slightly greater than the figure

which was worked on to produce the $888,005, I

think probably because of the $67,000.

The other example is example 4. That is the

example where Loftway uses the same sort of

preference share financing; lends the funds to TEP

and TEP buys, and you produce the same sort of

outcome because you have got the same figure,

$2.7 million, three from bottom. The other two

examples are simply to explain other things that

might have happened. They produce smaller amounts

in the hands of the beneficiaries at the end and

would therefore, presumably, not be so attractive.

For those reasons, we submit that on one hand

there is a scheme to which the part applies, and on
the other hand, there is a tax benefit and we make
the submissions to which I referred Your Honour at

paragraphs 22 and 23 on page 7. If I might just go

back to page 961 in the appeal book, in a passage

that I have already read to the Court, starting at

line 49, His Honour says:

Once it is realised that the scheme to be

considered is that propounded by the

Commissioner, in the present case commencing

with the acquisition of Loftway of the

Kleinschmidt shares and ending with the

transfer of the 'Z' class shares to either TEP

Holdings Pty ltd or Pozzolanic Industries Ltd

(and including the steps involving the finance

transaction with Westpac), it is obvious that

the appeal must be allowed. This is so

because there cannot be found to be, in my

opinion, a tax benefit to Mrs Peabody, nor can	the requisite conclusion as to purpose be made
under s.177D. I shall deal with each of these
matters separately.

Then His Honour deals, on that page and the next

two pages, with the question of tax benefit to

Mrs Peabody and, in effect, His Honour says that,

at line 30 on page 962:

The real difficulty lies in the submission of the Commissioner that it would be reasonable

to expect that the Kleinschmidt shares would,

as a matter of fact, have been purchased by

TEP Holdings Ltd.

Peabody(2) 53 9/11/93

He goes on and says that they would not have been

because of the existence of the desire to have

preference share financing which makes the saving
which he overstates, in our submission, at the top
of page 963, and at the bottom of the page, he

says:

It was submitted by the Commissioner that
Loftway need not have been the purchaser if it
had been interposed as an intermediary

financier between itself and TEP Holdings Ltd.

In this case, for Loftway to pay the dividend,

it would have been necessary for it to have

derived income by way of interest.

Then he says that would be not a reasonable thing

to think of and, at line 15 on the next page, says:

The hypothesis that if the scheme had not been entered into or carried out, the purchaser

would have been TEP Holdings Ltd is, in my
view, one that can properly be described as

unreasonable or irrational.

And we have explained why we say that, one way or

another, it is perfectly rational to think that the

shares might have been expected to end up in TEP's

hands. Then, at the bottom of the page and going on over the next page, he deals with the question

of whether or not there is a scheme to which the

part applies. He concludes that it does not. He

does that, on the one hand rejecting by implication

our argument about part of the scheme, and on the

other hand by saying, in effect, if one goes down

to line 45:

Once the scheme is analysed as encompassing

the acquisition of shares, the financing of
those shares and the ultimate flotation of a

public company, it is hard to see, in a case

such as the present, how the relevant

conclusion as to purpose could have been

drawn.

In our submission, His Honour has in that passage stated the scheme so widely that it simply does not

accord with either the particulars or the argument

as it was being put to him, and His Honour was not

justified, it is submitted, in taking that view of

the scheme or of the particulars.

DEANE J:  Where do these examples of yours lead in the event

that you were ultimately to succeed on the main

point? Do they lead to the matter being sent back

to the Federal Court to deal with subsidiary

questions?

Peabody(2) 54 9/11/93

MR SHAW:  No, they would not, I do not think, Your Honour.

I suppose it might depend a bit on what one meant

by the main point, but I think the answer is no

because those two examples each have an amount of

tax benefit which is in fact larger by some small

amounts than the amount which was used to

calculated the third that was actually included.

DEANE J:  None of the examples would lead to a reduction in

the amended assessment?

MR SHAW: Yes, Your Honour. Neither (2) nor (4) would have.

If one came to the conclusion that they postulated

things which might not reasonably be expected but,

on the other hand, one of the other examples, that

is to say (3) or (1), postulated something which might reasonably be expected, then, assuming one

could also show a scheme to which the part applied,

it would lead to a reduction.

What I was about to say was also related to

that. I did not want to develop it at the moment

but, if I could just hand up this page and give my

learned friends a copy of it, it deals with

something which I suppose may not arise, but it

may, and it may be convenient if my learned friend

has the page. A notice of contention has been

filed on behalf of the respondent dated 4 November.

What that says in effect is, "Even if you're right in principle, the calculation which you have made

of the tax benefit is too large. If you are going to take into account the profit on the sale of the shares, you ought also take into account the

interest which would be payable if some other form

of transaction had taken place in this case

purchased direct by TEP." They make a calculation

which leads to the conclusion that the tax benefit

was not $888,000-odd but $501,000-odd.

Our page is intended to demonstrate, in case

that ever becomes relevant, that there are two

errors in my learned friend's notice of contention.

By that I mean two errors in it on the basis that

the notice of contention is soundly based. We

would say it was not, for the reason which we give

in the first sentence of paragraph 24. Of course,
the matter was considered by the trial judge and

the argument was rejected but, assuming that there

were anything in the argument, we say that my

learned friend's calculations first of all adopt

the bill financing figure of $1.16 million instead

of the overdraft financing which is about $100,000

less at 1.05 and it also fails to take into account

the flow of dividends from the Pozzolanic

companies - that is the $800,000-odd - which we say

ought to be taken into account which produces a

Peabody(2) 55 9/11/93

figure which is not as great as $888,005 but it is
over $800,000.

I merely mention that so that the Court may be aware of it and so that my learned friend knows

what we are going to say and can deal with it in a

convenient way if he wants to. I hope tomorrow

morning, if we are still here, I can tell the Court

what the position is about those various sections.

If we are not, I would speak to my learned friend

it it would be something about which we could

undoubtedly agree, as it is only a question of when

things were repealed or when they are effected and

we could let the Court know. If the Court pleases.

McHUGH J:  Mr Shaw, in paragraph 22 of your written

submissions you seem to treat unreasonableness of

an expectation as being the same concept as it not

being irrational, but that is not correct, is it?

One can accept an expectation cannot be reasonable

if it is irrational, but it does not follow that an

expectation that is not irrational is a reasonable

expectation.

MR SHAW:  The reason the word was used was it was the word

used by His Honour.

McHUGH J: Yes, but His Honour was using it in an exclusory

sense, was he not? His Honour Mr Justice Hill was

saying an expectation must be one which is

reasonable and it cannot be reasonable if it is

irrational. It is not a dichotomy, is it? I mean,

it might not be irrational to think that I can run

and finish in the next Paris marathon but it may

not be a reasonable expectation.

MR SHAW:  I would be cheering for Your Honour.

DAWSON J:	The word "rational" is the equivalent of "reasonable", is it not?
MR SHAW:	Yes.

DAWSON J:  As it is when you talk about a rational

hypothesis. You do not mean that it is not the

product of a mind?

MR SHAW:  I think it is fair to say, Your Honour, that both

the trial judge and the Full Court, in

Justice Hill's judgment, did treat them as if they

were simply inverting the same idea.

McHUGH J:  I know. They also used the word "hypothesis",

but we are talking about a reasonable expectation.

I am not sure - - -

Peabody(2) 56 9/11/93

MR SHAW:  I suppose, Your Honour, that that is the trouble

you get into if you insist on using words that are

not the words of the Act. Cockcroft itself says it is perfectly simply words used then, do not use any

others. Then off we go, we talk about hypotheses

and outcomes and we talk about reasonable

probabilities and all sorts of other things. The

point is you do, you undoubtedly do. The trouble

is that, especially in this area where words have

all sorts of shades of meaning, once you change the

words you are conveying, maybe not an entirely

different idea, but often a different idea and

different enough, it may be, in some circumstances.

That is why we have tried to say, well, really the

question is, might it reasonably be expected that

so-and-so would occur. At least, Your Honour, one

may criticize the answer but not the question.

For those reasons, if the Court pleases, in

our submission, the appeal should be allowed.

MASON CJ:  Thank you, Mr Shaw. Mr Bloom?

MR BLOOM:	If the Court pleases. May we hand Your Honours an outline of submissions and a bundle of
materials.

MASON CJ: Yes, Mr Bloom?

MR BLOOM:  Yes, thank you, Your Honour. If I could just

first quickly go to the capital gains tax question

that His Honour Justice Deane raised this morning.

Your Honour should have a separate sheet headed

"Potential Tax Liability in Respect of a Profit".

That shows that section 26(a) did not apply, having

been repealed and replaced by section 25A, but that

likewise section 25A did not apply to the sale of

property acquired after 20 September 1985. The

property with which we are concerned was acquired

after that date.

Section 26AAA did apply and for the period in

question Part IIIA, by section 160L(3)(b) - that is the capital gains tax provision by 160L(3)(b)- made the capital tax provisions subject to

section 26AAA. So, section 26AAA applied; the CGT

provisions did not. Section 26AAA was ultimately,

effectively, taken out of the Act with respect to

acquisitions after 25 May 1988. So that now

capital gains tax would apply, but it certainly did

not apply in relation to the acquisition of sale

with which Your Honours are concerned.

I might then go to our main outline of

submissions. It is our submission that Part IVA

was enacted specifically to restore the position,

for the general anti-avoidance provisions of the

Peabody(2) 57 9/11/93

Act, to what was thought to flow with regard to

section 260 from the Privy Council's decision in

Newton's case, and to overcome the limitations

which this Court particularly had pointed up, until

1981 in the operation of section 260.

The first significant limitation was the

inapplicability of the section to arrangements

providing for a deduction under section 51(1).

That is now addressed by section 177C(l)(b)

specifically, which says that:

a reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a

scheme shall be read as a reference to -

(b) a deduction being allowable to the

taxpayer in relation to a year of income where
the whole or a part of that deduction would
not have been allowable, or might reasonably

be expected not to have been allowable, to the

taxpayer in relation to that year of income -

Except to note that it is there for that purpose,

Your Honours will not again be concerned with that

sub-paragraph.

In John's case, 166 CLR 417, this Court

considered the operation of section 260 in relation

to a deduction claimed under section 51(1). At the

very bottom of page 431, the Court said:

We turn now to s 260 of the Act which

provides -

and, then section 260 is set out.	Your Honours
will note subsection (2):

(2) This section does not apply to any

contract, agreement or arrangement made or

entered into after 27 May 1981."

Contracts, agreements or arrangements

made after 27 May 1981 are now governed by

Pt IVA of the Act.

That is one reason why, in our respectful

submission, it is necessary to ascertain when a

scheme commences, because if a scheme commences

before 27 May 1981 it will be to section 260 that

one looks. But, if the scheme commences after

27 May 1981 it will be to Part IVA that one looks,

and so the identification of the scheme can be a

very material fact from that transitional point of

view. The Court continued:

Peabody(2) 58 9/11/93

The application of s 260 to arrangements

entered into for the purpose of reducing tax

liability has proved to be a matter of some

difficulty. That difficulty is readily

understandable. In the first place, the

section has to be applied in a context in

which for a long time certain specific

taxation advantages have been expressly

permitted. In some cases those advantages

have been permitted to effectuate economic

policy or to encourage particular types of

investment. Secondly, s 260 effects a

fictitious annihilation of contracts,

agreements and arrangements. It does not

proceed to substitute an alternative basis on

which tax should be calculated. Of course in

some cases the annihilation of a legal form

will itself reveal a basis for the calculation

of tax. Federal Commissioner of Taxation v

Gulland was such a case.

Gulland was decided, I might add, Your Honours,

after Part IVA was inserted into the Act.

There the annihilation of the arrangements in

question revealed the source of income as the

personal exertions of the taxpayer respondents

in the same form as had existed prior to the

arrangements which were held to offends 260.

If one then goes over the page to the bottom of

433:

It may be that, because the question of

deductibility under s 51 is always to be

answered by the ascertainment of a past event
(ie a loss or outgoing having been incurred)

s 260 cannot "apply to defeat or reduce any deduction otherwise truly allowable under s 51", as was suggested in Cecil Bros.

There one has the reason for 177C(l)(b).

The second major limitation on section 260 was

of course, as the Court referred to in John, the

inability under the section to reconstruct. That

is what section 177F is there to do. Your Honours

have a clean copy in the materials that we have

handed up behind tab 1, if it is a convenient way

to look at them. Your Honours have been taken to

it but I will take Your Honours to it again if I

may. That says:

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 -

Peabody(2) 59 9/11/93

and that is of course defined by section 177D, "a

scheme to which this Part applies" -

the Commissioner may -

If Your Honours just contrast	that word "may",
leaving aside paragraphs (a)	and (b), with the next
full line, the word "shall".	The Commissioner may
do (a) and (b) or (b):

and, where the Commissioner makes such a

determination, he shall take such action as he

considers necessary to give effect to that

determination.

Our learned friend suggested to Your Honours that

"may" means "must" in this context. With respect

to him, it does not as a matter of construction of
the section but, as was said by this Court in Ward

v Williams, which I think is in 82 CLR but I will

give Your Honours the precise reference in a

moment, the onus lies upon the person alleging such

an interpretation of the word "may" to show that

that is correct.

Finance Facilities, Your Honours, was a case

where the Commissioner had a discretion to allow a

taxpayer something. That, in our respectful

submission, is a million miles away from a power to
make an adverse determination under Part IVA,

carrying with it as it does significant penalties

under section 226, significant automatic penalties

of 200 per cent of the tax involved, subject to

remission by the Commissioner. Your Honours have

section 226 in the materials behind tab 1 after

Part IVA:

Where -

(a) for the purpose of making an

assessment ..... the Commissioner has calculated

the tax that is assessable to a taxpayer .....

(b) in calculating the tax ..... a determination
or determinations made by the Commissioner

under sub-section 177F(l) .....

(c) either .....

(i) no tax would have been assessable ..... if

no determination had been made -

or less tax, then -

the taxpayer is liable to pay, by way of

penalty, additional tax equal to -

Peabody(2) 60 9/11/93

double the amount of the tax difference. That is

subject to remission under section 227(3) in the

Commissioner's discretion but it is hard to
conceive, with respect to my learned friend, that
the Commissioner must make a Part IVA determination

carrying with it those penalties and that to look

at section 177F in that context is the same as

looking at something like conferring a benefit, as

was the case in Finance Facilities.

TOOHEY J: But does it help you, Mr Bloom, if you make good

the proposition that "may" is not mandatory?

MR BLOOM:  Yes, Your Honour. Whether it helps us or not,

that is our proposition.

TOOHEY J: Yes, but what implications does it have for this

appeal?

MR BLOOM:	What it shows is that 177F reposes a discretion in the Commissioner and it shows that the case is
of the kind that Sir Owen Dixon referred to in Avon or exercise of a discretion by the Commissioner.
So, in due course, I will be submitting to
Your Honours that that is the reason why the
scheme, which the Commissioner nominates, and the tax benefit, which he cancels, are the ones which
the court examines in seeing whether the
Commissioner's discretion has been properly
exercised.

Your Honours, it may be convenient at that

point to go, at first instance, to Jackson's case,

87 ALR 461. The same submission was put and not

decided by Mr Justice Gummow, at page 469, line 24:

Unless a determination is made to include the whole or part of the amount in the assessable

income of the taxpayer, then none will be

cancelled. Thus, the failure to make any	included, and the tax benefit will not be
determination will be to the disadvantage of the revenue rather than the taxpayer. There was some discussion by counsel before me as to
whether the identification ins 177F(l) of the
determination as something the Commissioner
"may" make means that it is mandatory for him
to make a determination so that, in effect,
all tax benefits must be cancelled at least as
to part. The word "may" is usually the
language of authorisation and not of command:
Re Carl Zeiss Pty Ltd's Application (1969) 122
CLR 1 at 5. And the use of "shall" later in
the same sub-section is some indication that the draftsman was aware of the authorities
which indicate that it lies on those who

Peabody(2) 61 9/11/93

assert that the word "may" has a compulsory

meaning to show, as a matter of construction

of the statute, that the word was intended to

have such a meaning: see Ward v Williams

(1955) 92 CLR 496 at 505-6. It is unnecessary

to express a concluded view on this question

in these proceedings.

Where, as in the present cases, the

Commissioner does make a determination under s

177F(l) so that all or some part of the amount referable to the tax benefit is to be included

in the assessable income, then the amount so

determined "shall be deemed to be included in

that assessable income by virtue of such

provision of this Act as the Commissioner

determines": s 177F(2).

In Fletcher v FCT (1988) 84 ALR 295 at 303,

the Full Court of this court described s 177F as giving to the Commissioner a discretion to cancel the tax benefit obtained by a taxpayer

in connection with the scheme to which Pt IVA

applies. Thus, these provisions fall within that category where an opinion formed by the Commissioner or a determination by him or his

state of mind, is made a crucial element in

the process of assessment: cf Bailey v FCT

(1977) 136 CLR 214 at 225; 13 ALR 41 at 49 per

Aickin J.

The "assessment" referred to ins 190(b) of

the Act is the Commissioner's ascertainment of
the amount of tax chargeable to a given
taxpayer, on consideration of all relevant
circumstances including, in this case, his own

determinations in exercise of his discretion

under s 177F ..... It is this process of

assessment which by virtue of s 190(b) the

taxpayer in these proceedings must satisfy the

court is "excessive". The assessment will be

excessive if some step in that process which

affects the amount of tax lacks "the authority

of the Act": Bailey v FCT, supra, CLR at 217;

ALR at 42-3 per Barwick CJ.

The Commissioner's determinations under s

177F(l) and (2) will lack the authority of the

Act if the Commissioner did not address

himself to the questions which the sub-
sections formulate, if his conclusions were

affected by some mistake of law, if he took

some extraneous reason into consideration or

excluded from consideration some fact which
would affect his determination: Avon Downs Pty

Ltd v FCT (1949) 78 CLR 353 at 360 per Dixon

J. In that passage, Dixon J said that the

Peabody(2) 62 9/11/93

fact that the Commissioner did not make known

the reasons he had decided as he did would not

prevent review of his decision. His Honour

continued:

"The conclusion he has reached may, on a full

consideration of the material that was before

him, be found to be capable of explanation

only on the ground of some such misconception.

If the result appears to be unreasonable on

the supposition that he addressed himself to

the right question, correctly applied the

rules of law and took into account all the

relevant considerations and no irrelevant

considerations, then it may be a proper

inference that it is a false supposition. It
is not necessary that you should be sure of

the precise particular in which he has gone

wrong. It is enough that you can see that in

some way he must have failed in the discharge

of his exact function according to law."

Now, can I take Your Honours back to section 177F. The discretion, as those who drafted

the title at least of the CCH copy of the Act refer

to it, and which we respectfully suggest is the

correct way of referring to it, is a discretion:

in the case of a tax benefit that is referable

to an amount not being included in the

assessable income of the taxpayer of the year

of income - determine that the whole or a

part of that amount shall be included in the

assessable income of the taxpayer of that year

of income -

About that again, there are some things to be

noted. First, the tax benefit must be referable to

an amount not being included in the assessable

income of the taxpayer of a particular year of

income, and the Commissioner can determine that the

whole, or a part, not necessarily the whole, but a
whole or a part, that was to cover the old problem
of section 260, that one was not sure whether the
whole or part of the scheme was void, as against

the Commissioner, and it is for that reason, at

least according to what the Treasurer said in the

second reading speech, that those words appear in paragraph 177F(l)(a). So, it is a discretion to:

determine that the whole or a part of that

amount shall be included in the assessable

income of the taxpayer of that year of

income -

and those words are relevant because, as we will

endeavour to show Your Honours shortly, when one

Peabody(2) 63 9/11/93

gets to examples talking about the payment of

dividends, it is clear beyond any doubt that if

dividends had been paid by Loftway to the trust

they would not have been paid until the next year
of income.

Subsections (2) and (3) are also important in

the construction of 177F as a whole. F(2) deals
with the particular provision under which the

Commissioner determines an amount is included.

Here is was 26AAA, in the assessable income of the

trust estate, and then section 97 in the assessable

income of the beneficiary, Mrs Peabody. And F(3)

is also important in requiring the Commissioner to

make compensating adjustments. So that where he

has made a determination under subsection (1), then
he is given a further discretion to, in effect,

right the situation with respect to other persons

who may have paid tax on the same amount, or who

may have not had a deduction that they should have

a deduction for. And it shows that the whole

section, in our respectful submission, is a

discretionary section, reposing in the Commissioner

the power if, as a matter of fact and law, he

concludes that there is a tax benefit, that it is

referable to a scheme which is a scheme to which

the Act applies, to then include a whole or part of

the amount of that tax benefit in the assessable

income of the taxpayer of that year of income.

Your Honours, the third limitation with

section 260, which it was seen that Part IVA would
fix up, was the problem that the purpose under
section 260 was that of the arrangement and not

that of a party to it. Part IVA, objectively we

agree, focuses, however, on the dominant purpose of

a party to the scheme, and if we may take

Your Honours back to section 177D - and this is critical - a scheme is only a scheme to which the

part applies, firstly, if it:

has been or is entered into after 27 May 1981,

and to any scheme that has been or is carried out or commenced to be carried out after that

date -

So, again, identification of the scheme, the first

step in it, is vital to working out whether it is

this part that applies, or the previous

anti-avoidance provision, and then having regard to

eight matters after the Commissioner has concluded

firstly that:

a taxpayer ..... has obtained, or would but for

section 177F obtain, a tax benefit in

connection with the scheme -

Peabody(2) 64 9/11/93

the whole scheme - the eight matters referred to in subparagraph (b) are all matters which refer to the

scheme. One looks to:

the manner in which the scheme was entered

into or carried out;

the form and substance of the scheme -

that is the whole scheme -

the time at which the scheme -

again the whole scheme -

was entered into into and the length of the
period during which the scheme was carried

out;

the result in relation to the operation of

this Act that, but for this Part, would be

achieved by -

again, the whole scheme.

Same in subparagraph (5), subparagraph (6) and

subparagraph 7. Subparagraph (8) makes no

reference to "scheme" or "part". The natural

construction, in our respectful submission, when

one gets below subparagraph (b) is that one is

looking to a person and ascertaining his purpose by

reference to whether he is a person who entered
into the whole of the scheme or by reference to the

question whether he is a person who entered into

part only of the scheme. It is adjectival - I

think that is the word that Justice McHugh used

this morning - but one is trying to find out the

purpose of the person, not the purpose of the
scheme, not the purpose of the part of the scheme

but the purpose of the person who entered into the

scheme. Or, if he did not enter into the scheme

and he is the relevant person, then his purpose in entering into a part of the scheme. I do not know

if one gets much assistance on this from 177A(5),

it is probably neutral on the question. But it

does say that:

A reference in this Part to a scheme or a

part of a scheme being entered into or carried

out by a person for a particular purpose shall be read as including a reference to the scheme or the part of the scheme being entered into

or carried out by the person -

So it tends to suggest in one way that one

looks to either a person who has entered into the

whole scheme and ascertains his purpose in relation

Peabody(2) 65 9/11/93

to the whole scheme, or looks at a person who has

entered into part only of the scheme and ascertains

his purpose in relation to that.

BRENNAN J: But not the purpose of a person who has carried

out a part of the scheme, albeit he has carried out

the whole scheme.

MR BLOOM:	We would say no, Your Honour.
BRENNAN J:	Why not?

MR BLOOM:  As a matter of construction. As a matter of

construction of the section.

McHUGH J:  Why should you not give it a purposive

construction?

MR BLOOM:  I think one does, Your Honour. When one looks to

the second reading speech that I will take

Your Honours to briefly in a moment, and when one

looks to what Part IVA was intending to do and what

it was intending to overcome, it was not intending

to strike down a scheme that was essentially a

commercial one, notwithstanding it had some aspects

about it that were, to use the jargon, tax driven.

McHUGH J:  I can understand - I have no problem with that

but why should you not read 177D so that you look

at the purpose that the words "did so" refer to a

person who carried out part of the scheme? That is

to say, he carried out a part of the scheme for a

purpose of enabling the relevant tax payer to

obtain a tax benefit in relation to the scheme.

MR BLOOM: Well, that is the opposite construction of the

one for which I am contending, Your Honour.

McHUGH J:  I must say prima facie I think the construction

you put on it is the more attractive one, but it is

a question of looking at the purpose of the

construction trying to make it work.

MR BLOOM:  Your Honour, there is probably every good reason

for construing a specific tax avoidance section

strictly against the taxpayer. His Honour the

Chief Justice has said so in the Students World

case, but with a general anti-avoidance provision it is not so easy to see why that ought to be the

case. A general anti-avoidance provision is meant

to deal with all sorts of situations, and if one

has regard to the purpose of that general provision

being to, in effect, restore the Newton view of

section 260, and to strip away the limitations

which the Court subsequently said existed in

relation to section 260, that purpose is

effectuated by the construction which we advance.

Peabody(2) 66 9/11/93

I will, in due course, take Your Honours to a

couple of English cases. One of them is a dividend

stripping case in which there appears a useful

passage, with respect, in the judgment of

Mr Justice Megarry, where His Lordship says you do

not take a transaction and strip away the parts of

it to see whether it contains a lot of mini

transactions. I think there will obviously be a

difference if the part of the scheme in question is

discrete, but if it is a part of what is overall a

commercial transaction, for instance, involving

here Loftway, it is interposition and its utility

in terms of the preference share financing, then

one does not go merely to the tax aspects of that

overall commercial scheme and, effectively, deny

the scheme its efficacy for tax purposes.

The cases say it works both ways, of course,

Your Honour. A scheme which is overall for fiscal

purposes cannot succeed merely because some small
parts of it have a commercial aspect, so it works

both ways.

McHUGH J: Well, the difficulty on language is that in this

particular case Mr Peabody answers both limbs, does

he not? He is a person who carried out the scheme,

he is also a person who carried out part of the

scheme, in one sense, because he carried out the

whole of it.

MR BLOOM:  He is that, but whether that answers the

description where one has the word "or" is not so

clear, with respect.

McHUGH J:  And, depending on which limb you select has a

great deal of relevance when you come to the

question of purpose.

MR BLOOM: Certainly. If the Commissioner had here been

entitled to select the part of the scheme about

which he complains as the scheme - and it is still

not clear to us, with respect, even after hearing

our learned friend today exactly how many of the steps would be said to be that separate scheme -

and if it was separate and discrete, in the sense to which I have already referred, that might be a

different matter. But, there has been no attempt,

at any stage in these proceedings, to do that.

Mr Justice O'Loughlin did it without invitation,

but even there, of course, his formulation of the

scheme has the defect for the Commissioner, in this

case, that it does not achieve the tax benefit

which he has cancelled.

Your Honours, the dominant purpose requirement

in section 177A(S) comes, in our respectful

submission, from the Privy Council's decision in

Peabody(2) 67 9/11/93C

Mangin's case. That is in (1971) AC 739, a case

where every year a farmer, in effect, disposed of

the income from his farm on a rotating paddock

basis to his family, and was held unable to do so

under the New Zealand equivalent of section 260.

But the relevant passage is at 751. There is there

set out Lord Denning's predication test from

Newton's case, and underneath that at letter D,

Their Lordships say:

In their Lordships' view this passage,

properly interpreted, does not mean that every

transaction having as one of its ingredients

some tax saving feature thereby becomes caught

by a section such as section 108. If a

bona fide business transaction can be carried

through in two ways, one involving less

liability to tax than the other, their

Lordships do not think section 108 can

properly be invoked to declare the transaction

wholly or partly void merely because the way

involving less tax is chosen. Indeed, in the

case of a company, it may be the duty of the

directors vis-a-vis their shareholders so to

act. Again, trustees may in the interests of

their beneficiaries, deliberately choose to

invest in government securities issued with

some tax-free advantage, and to do so for the

express purpose of securing it. They do not

thereby fall foul of section 108. The clue to

Lord Denning's meaning lies in the words

"without necessarily being labelled as a means

to avoid tax." Neither of the examples above

given could justly be so labelled. Their to is, to adopt the language of Turner Jin

the present case,

"a scheme ... devised for the sole purpose,

or at least the principal purpose, of bringing

it about that this taxpayer should escape

liability on tax for a substantial part of the

income which, without it, he would have

derived."

The most important limitation, as it turned out on

the operation of section 260 was, of course, the

choice principle, and that is now significantly

reduced in scope by an express provision,

section 177C(2), which excludes certain kind of

specific elections, but is far more limited, as

Your Honours will see, than the choice principle.

In particular, if one looks at 177C(2)(a)(ii),

which is the one dealing with assessable income:

Peabody(2) 68 9/11/93C

the scheme was not entered into or carried out

by any person for the purpose of creating any

circumstance or state of affairs the existence

of which is necessary to enable the

declaration, election, selection, notice or

option to be made, given or exercised, as the

case may be;

The cases, Your Honours will recall, Mullens and

Cridland, depending precisely on the creation of

just such a state of affairs.

In Gulland's case, 160 CLR 55, Your Honour

Justice Deane dealt with the ascendancy of the

choice principle and the descendancy of any use for

section 260 in its wake. At the top of page 88:

Two further points should be made about

the effect of the majority judgments in

Casuarina. The first is that they left no

room for conflicting applications of the

"choice" principle enunciated in Keighery and

the "predication" test applied in Newton and

subsequent cases. The reason for that was

that the majority judgments made plain that

the "predication" test is incapable of being

applied at all to a case corning within the

"choice" principle. In such a case, that test
is simply irrelevant. That being so, as the

scope of the "choice" principle came to be

subsequently expanded, the area of operation

of the "predication" test and of s 260 itself

was correspondingly reduced.

If one goes over then to page 89, about point 3 of
the page, after the reference to

Sir Victor Windeyer and the number 20:

Be that as it may, the comments of Barwick CJ

were not so confined but would appear to have

been carefully chosen to express the broad

approach that steps taken to bring about any

legal state of affairs upon which even general

provisions of the Act could operate to impose
some liability to tax could not attract the

operation of s 260 regardless of whether one

could discern in the Act a legislative intent

that the taxpayer should have an effective

"choice" between alternatives. It was that

broad approach of Barwick CJ which was

subsequently to prevail in this Court. It was
developed, adopted and applied in three
subsequent cases in which the application of

the "predication" test of Newton was held to

be precluded. Those three cases are Mullens,

Slutzkin and Cridland. They were all decided

after the time when this Court became the

Peabody(2) 69 9/11/93

final appellate court in matters involving the

application or interpretation of the Act.

They are of critical importance in the

resolution of the present appeal.

In issue in Mullens was the taxpayer's

entitlement to deductions in respect of
payments on shares in a petroleum exploration

company. It could plainly be predicated of

the contrived arrangements and transactions
that they had been artificially structured to

enable the taxpayer to obtain the benefit of

the deductions. It was held by a majority of the Court ..... that the provisions of s 260 of the Act could not be applied to avoid the

relevant transactions.

Just pausing there, Your Honours, there is no doubt

that if facts such as those in Mullens occurred

today, the deduction obtained or sought in that

case would clearly be a tax benefit which the

Commissioner would be entitled to cancel under

Part IVA.

If one goes to page 92, after the reference to

Slutzkin - and I just might tell Your Honours that to deal with the situation in Slutzkin, a specific

provision was inserted into Part IVA. That was

section 177E and that was inserted because the

ordinary provisions of Part IVA would not deal with
the situation in Slutzkin where a shareholder has

available to him a choice whether to hold on to his

capital asset and continue to derive dividends from

it or to sell them. It could never be predicated

of a sale of shares that it was done for the

purpose of avoiding the tax on the dividends that

would thereafter flow. For that reason, a specific

provision in section 177E was inserted to deal with

that sort of situation.

It may be, of course, that if one were

permitted, under Part IVA, to look at subjective

motive that one might take a situation like

Slutzkin and say, "Well, having a finding of a

motive of avoiding the tax on the dividends would

turn that into a part for a struck down benefit".

But, of course, one does not look at the subjective motive under Part IVA. At page 92, at point 4,

Your Honour Justice Deane referred to Cridland's

case:

In Cridland, the full significance of what had been said and decided in Mullens and Slutzkin

was explained and accepted by a Court of five

Justices. Mason J, with whom the other

members of the Court (Barwick CJ, Stephen,

Jacobs and Aickin JJ) agreed, quoted critical

Peabody(2) 70 9/11/93

passages from the judgment of Barwick CJ and

Stephen Jin Mullens and summarized the effect

of Mullens and Slutzkin as follows:

"The decision in the Mullens Case and the

passages from the judgments to which I have

referred show that the principle which

underlies the Keighery Case is ... not

confined to cases in which the Act offers two

alternative bases of taxation; it proceeds on

the footing that the taxpayer is entitled to

crease a situation by entry into a transaction

which will attract tax consequences for which

the Act make specific provision and that the

validity of the transaction is not affected by

s 260 merely because the tax consequences

which it attracts are advantageous to the

taxpayer and he enters into the transaction

deliberately with a view to gaining that

advantage.

The distinction drawn by Lord Denning in

Newton v Federal Commissioner of Taxation, between arrangements implemented in a
particular way so as to avoid tax and

transactions capable of explanation by

reference to ordinary business or family
dealing has not been regarded as the

expression of a universal or exclusive

criterion of operation of s 260.

LorD Denning's observations were applied

neither in the Mullens Case nor in the

subsequent case of Slutzkin v Federal

Commissioner of Taxation."

Mason J went on to underline the limited scope

of any residual authority of Newton's Case.

The decision in Newton must now be explained

on the basis of a "finding of fact" that the

moneys received by the taxpayers were or were

deemed to be dividends. Unless Newton's Case	is so explained, it would rest "on the use of
s 260 as a charging provision, for the
receipts would not have been liable to tax
under the ordinary provisions of the Act
unless they could be characterized as dividends". His Honour indicated that such a
use (ie as a charging provision) of s 260
would be impermissible since it is now
established thats 260 is not such a
provision: see Europa Oil (N.Z.) v Inland
Revenue Commissioner.
Cridland, Your Honours, is at 140 CLR. If I

may take Your Honours to the judgment of the

Chief Justice now, but not then, at page 340 in the

report.

Peabody(2) 71 9/11/93

The transactions into which the appellant entered in the present case by acquiring

income units in the trust funds in question

were not, I should have thought, transactions

ordinarily entered into by university

students.	Nor could they be accounted as
ordinary family or business dealings.	They

were explicable only by reference to a desire

to attract the averaging provisions of the

statute and the taxation advantage which they

conferred. But these considerations cannot,

in light of the recent authorities, prevail

over the circumstance that the appellant has

entered into transactions to which the

specific provisions of the Act apply, thereby

producing the legal consequences which they

express.

Accordingly, it is my view thats 260 has

no application to this case.

Your Honour the Chief Justice went on to call for

amendment to section 260, which finally happened

25 years after the first call for such amendment

was made by Sir Frank Kitto.

But there could be no doubt, in our respectful

submission, again, that the taxation advantage sought and obtained in Cridland would be a tax

benefit for the purposes of Part IVA objectively,

so ascertained, and that Cridland would not today

survive Part IVA.

Your Honours have behind tab 8 in the materials the second reading speech for the bill

for the Act which inserted Part IVA.	The treasurer
was then the Honourable Mr Howard.	If Your Honours

go to the page marked 302, right-hand column,

second full paragraph:

The proposed provisions - embodied in a new Part IVA of the Income Tax Assessment

Act - seek to give effect to a policy that such measures ought to strike down blatant,

artificial or contrived arrangements, but not

cast unnecessary inhibitions on normal

commercial transactions by which taxpayers

legitimately take advantage of opportunities

available for the arrangement of their

affairs.

And then to the paragraph at the bottom of the

page:

In order to confine the scope of the

proposed provisions to schemes of the blatant

or paper variety, the measures in this Bill

Peabody(2) 72 9/11/93

are expressed so as to render ineffective a

scheme whereby a tax benefit is obtained and

an objective examination, having regard to the

scheme itself and to its surrounding

circumstances and practical results, leads to

the conclusion that the scheme was entered
into for the sole or dominant purpose of

obtaining a tax benefit. Certainly, different

approaches might have been taken. The

Government tried many of them in the course of

developing this Bill. One possibility

considered was to adopt the language of the Privy Council in the well-known decision in

Newton's case and, positive tests of inclusion

having been expressed, make the new provisions
inapplicable to schemes entered into in the

course of ordinary business or family dealing.

It has been decided, however, that the better

test of what is blatant, contrived or

artificial is the positive one that has been

adopted.

And then the next paragraph:

I have already said that one of the

conditions for the application of the new
Part IVA is to be that a taxpayer has obtained

what the Bill terms a tax benefit. Such a

benefit will have been obtained if, after all

other provisions of the income tax law have
been applied, an amount is not included in a
taxpayer's assessable income that might
reasonably be expected to have been included

if the scheme had not been entered into.

The other form of tax benefit covered by

the Bill concerns an amount that, again after
all other provisions have been applied, is an allowable deduction to a taxpayer, but is one the whole or a part of which might reasonably

be expected not to have been allowable if the	scheme had not been entered into. 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

Peabody(2) 73 9/11/93

'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. Moreover, it does not

provide a power or procedure once an
arrangement is struck down, to reconstruct a

taxable situation.

As to these points, I have already

mentioned that, under the provisions of this

Bill, an inquiry must be made, on objective

grounds, into the purpose of a person who

entered into the arrangement. The

'reconstruction' problem is to be overcome by

an express provision for the cancellation of a

tax benefit obtained under a scheme to which

the Part applies. Authority will be given to
the Commissioner of Taxation to eliminate the

benefit in an appropriate way. In other

words, the Commissioner will be specifically

authorised to disallow the whole or an
appropriate part of a deduction or to include

in assessable income an omitted amount. This

method of eliminating the sought after

benefit, or part of it, is designed also to

remove another uncertainty which surrounded

the application of section 260.

Now, that is a reference, of course, to 177F, not

177D.

It was unclear whether an arrangement to which

that section applied had to be treated as

wholly void or could be treated as only partly
void as against the Commissioner.

And then over the page at 304, left-hand column,

second full paragraph:

Another key part of the legislation

covers the imposition of statutory additional

tax on taxpayers whose future schemes are

struck down by Part IVA. Bearing in mind that

the Part is concerned with blatant, contrived

and artificial schemes, the Government has

concluded that taxpayers who, in the face of

it, wish to persist with such schemes should

be exposed to something more than only the tax

Peabody(2) 74 9/11/93

they seek to avoid. We have seen it as highly

relevant that a taxpayer who omits assessable

income from a return, or who claims deductions

in excess of expenditure actually incurred, is

liable to statutory additional tax of twice

the tax avoided.

Pausing there, that, of course, in this case, is

Mrs Peabody.

Accordingly, a taxpayer to whom the new Part

applies will be liable by statute to pay an

amount of additional tax equal to double the

tax sought to be avoided.

We have already said to Your Honours that

part IVA differs from section 260 in that while
section 260 in that while section 260 was

self-executing, Part IVA gives the Commissioner a

discretion to cancel the tax benefit. we have

referred Your Honours to what Mr Justice Gummow

said in Jackson's case in that regard.

In paragraph 3 of our outline we submit that a

determination made by the Commissioner under

section 177F is not a determination that Part IVA will apply. It is, so far as is here relevant, a

determination that the amount of a particular tax
benefit is included as assessable income of the

taxpayer. Part IVA is not, in our submission, an

authority to the Commissioner to simply make a

determination increasing a taxpayer's assessable

income and then to throw on the taxpayer - as my

learned friend's submissions seem to suggest - the

burden of showing that there is no conceivable

basis on which the determination is sustainable.

He makes a determination in relation to a scheme

which he has identified as a scheme to which the

part applies and he cancels a tax benefit, being a

tax benefit that he says was obtained by the

taxpayer in connection with that scheme and in the

relevant year of income.

We seek to then distinguish Part IVA from

section 167 of the Income Tax Assessment Act. I am not sure if Your Honours have a copy of that in the

materials, but it was in a separate sheet inside

the bundle, Mr Slater tells me. One has first

section 166, which deals with assessments

generally:

From the returns, and from any other

information in his possession, or from any one

or more of these sources, the Commissioner

shall make an assessment of the amount of the

taxable income of any taxpayer, and of the tax

payable thereon.

Peabody(2) 75 9/11/93

Then section 167 deals with default assessments:

If -

(a) any person makes default in furnishing a

return; or

(b) the Commissioner is not satisfied with the

return furnished by any person; or

(c) the Commissioner has reason to believe
that any person who has not furnished a return

has derived taxable income,

the Commissioner may make an assessment of the

amount upon which in his judgment income tax

ought to be levied, and that amount shall be

the taxable income of that person for the

purpose of section 166.

So he fixes an amount which, in his judgment,

is a taxable income, the end figure upon which tax

is payable. He does not do what the Commissioner does under part IVA. If the Commissioner makes a

determination under part IVA by cancelling a tax
benefit then, relevantly in this case, he includes
in the assessable income as one of the integers

going towards making up the taxable income at the end of the day a positive figure. That is a very

different thing to determining simply the end

figure, the taxable income, which is going to be

that taxpayer's taxable income unless he can show

that the figure of it is excessive.

That is what George's case said in relation to

section 167 and we take it, with respect, what

Dalco's case also said in relation to section 167.

George is in 86 CLR.	The case commences at 183.
The relevant passage is at page 203.	The

distinction between section 167 and Part IVA is

immediate in a passage about point 7 of the page.

There the Court said:

The formation of the judgment as to what is

the amount of the income that ought to be

taxed is no condition precedent to the power

to assess.

And Your Honours recall Mr Justice Gummow pointing

out that the existence of a scheme in a tax benefit
are conditions precedent to the Commissioner's

entitlement to make a Part IVA determination.

Their Honours go on:

It is part of the very process of assessment itself. Section 166 and 167 do not prescribe

distinct duties or functions. They combine to

show what the commissioner may or must do in

performing his single duty of arriving at an

assessment.

Peabody(2) 76 9/11/93

And so here, if the Commissioner chooses a

scheme, and identifies that, and it is not a scheme

to which the part applies he has made such an

error. If he says that the tax benefit in question

is one obtained in connection with that scheme, but

the scheme is not one capable of achieving that tax

benefit then, again, his exercise of discretion

will be bad, and the proper course will be for the

Court to say, "Go and re-exercise your discretion,

if that is what you choose to do, and exercise a

fresh discretion, fresh determination, and make a

fresh assessment".

My learned friend referred, Your Honours, in

this context, to the decision of the Court in the other side of the coin. There, the

Commissioner was not satisfied as to certain

matters and remained unsatisfied. Effectively,

then, for the taxpayer in that case, it was

necessary to show that the Commissioner had to be

satisfied to get the benefit of the discretion

exercised in his favour, and hence the Court went,

in that case, to facts before it that were not

before the Commissioner. But this is a case where,

on the contrary, the Commissioner is satisfied, and

has made his determination and the distinction is

made in the judgment of Sir Ninian Stephen at 575

to 576. I do not need to take Your Honours to it

but I simply ask Your Honours to note that that is

where it is.

Your Honours, on page 3 of the outline of

submissions, in paragraph (c), we say what is

probably trite, that the power to make a

determination under section 177F is one vested in

the Commissioner; it is not one that the Court

could make. The tribunal can make it because its

function is to do over again what the Commissioner

has done, but the Court cannot, and we rely again

upon Avon Downs if any authority is needed for

that.

What we say the Court may do is set out in

paragraph (d), and that is, the Court may determine

whether the particular scheme identified by the

Commissioner was, within section 1770, a scheme to

which Part IVA applied, whether a party to that
scheme entered into it, or carried it out for the
dominant purpose of enabling the taxpayer to obtain
the particular tax benefit identified, and whether
that tax benefit was a tax benefit obtained by the
taxpayer in connection with that scheme, and these

are all questions, in our submission, for the

Court, but if any one of them is answered

unfavourably to the Commissioner, then he did not

have the power to make the determination which he

Peabody(2) 77 9/11/93

made which, after all, was a determination

cancelling the particular tax benefit that he said

was obtained in connection with that particular

scheme.

We distinguish cases where it might be argued

that there is more than one possible source of

power, the Brown v West situation.

BRENNAN J: Before you go past that, can I just take you

back to 177C(l)(a), and the definition of "tax

benefit"? The hypothesis that is expressed at the

end of that paragraph is:

if the scheme had not been entered into or

carried out -

MR BLOOM: That is so.

BRENNAN J:  Now that has echoes of annihilation in it. Does

this Part IVA suffer from the same problem as

section 260, that there is no reconstruction

provision?

MR BLOOM: 

The reconstruction provision is in section 177F,

and it is effective if one has a scheme the
dominant purpose of which is to achieve a tax

benefit.

BRENNAN J: But, 177F is, as you have pointed out, the

conferring of a power conditioned, inter alia, upon

the existence of a tax benefit as defined in 177C,

and it seems that if your argument be right then

any transaction which is a tax dodge, as it were,

if the hypothesis is that that had not been entered

into, or carried out, where would the assessable

income come from which would constitute the tax

benefit?

MR BLOOM:	From the Commissioner.
BRENNAN J: But, you do not get it from 177F. You cannot

get to 177F until you have passed the stage of

annihilating the relevant scheme.

MR BLOOM:  One looks to reasonable expectation, of course,

and -

BRENNAN J: But is this the problem, that the Act does not

express what it is, or what the factual hypothesis

is, on which the reasonable expectation is to be

developed?

MR BLOOM:  One determines that, Your Honour, we think, as a

question of fact. If the scheme had not been

entered into, what is it reasonable to expect would

have happened?

Peabody(2) 78 9/11/93

BRENNAN J: In all the circumstances of the case?

MR BLOOM:  In all the circumstances of the case, and if it

is reasonable to expect in all those circumstances

that the taxpayer would have derived an amount of

income but for the scheme, then section 177F

arises.

McHUGH J: Well, is it the concluding words of 177F(l) that

enables the Commissioner to reconstruct or do what

he wants to:

shall take such action as he considers

necessary to give effect to that

determination.

MR BLOOM:  Yes. But, we would not dare suggest that 177F(l)

and F(2) did not contain an effective power of

reconstruction, and if one goes to cases like

Cridland or Mullens it is quite that Part IVA was

intended to, and would today, cover the facts which

occurred in those cases were they to occur today.

Mr Slater reminds me more complicated schemes - if

there could ever be a more complicated scheme than

that in Mullens - such as that involved in Bell's

case or Jaques' case all those many years ago.

But that is where one gets to the reasonable expectation, I think, Your Honour. It is not

really an annihilation section. What is

annihilated at the end of the day is the tax

benefit.

BRENNAN J:  The dodgier the scheme might be, the less likely

it is that something would have taken its place.

How does one ever get out of this vortex of

177C(l)(a)? Is it not only if you have got a

scheme which has got some genuine, to use that

overworked word, aspect about it but with a part of

it designed specifically for tax avoidance, that

you have got any foundation for operating

177C(l)(a)?

MR BLOOM:  No, Your Honour. If one takes Mullens, for

instance, that was a clear case of the whole scheme

being tax driven, if I may use that word, to dodge,

and Cridland likewise. The whole exercise - the

university student acquiring the units in the

particular unit trust - was tax driven. The

entirety of that would be a scheme to which the

part applied. What one does, I think, Your Honour,

is to transpose the words from 177C(l)(a) into 177D

and, when one is looking at the purpose of the

person to see whether the purpose was to enable the

relevant taxpayer to obtain a tax benefit in

connection with the scheme, one puts in the words

there from 177C and says "One will have that

Peabody(2) 79 9/11/93

purpose if it is reasonable to expect that but for

the scheme, if the scheme hadn't been entered into,

an amount would have been included in the

assessable income of the taxpayer of a particular

year of income."

McHUGH J:  But you have also got to include the definition in 177C in paragraph (a) of 177D as well.

BRENNAN J: Exactly.

MR BLOOM:  Yes, Your Honour.

McHUGH J: This morning I asked Mr Shaw what would be the

position in this case if you came to the conclusion

that there would have been no scheme if they

thought they could not have got a tax deduction.

Now, is that an issue that you could fight this

case on?

MR BLOOM:	Your Honour, certainly it was not an issue explored in the evidence.
McHUGH J:	A court could make a finding of fact that without

the conversion of these shares into z shares,

nothing would have ever happened.

MR BLOOM:  Your Honour, I think that is right, with respect.

Suppose that I buy some land in South Australia

with the view to giving up the law and becoming a

vintner and somebody approaches me and says within

12 months - and we have got section 26AAA - "Please

sell that land", and I say "I do not want to" and,

in particular, "I am going to have to pay tax on

it, and if you can find a method by which I can

sell it to you without paying tax I will sell it to

you, and if you cannot, I will not." That is the

sort of case Your Honour has in mind, and that may

well be a question of fact to be explored in the

particular case.	It may be that the tax saving of
an entirely commercial transaction is the real

benefit of it.

McHUGH J: That seems to defeat the whole purpose for what

this division is striving. That is why I asked the

question this morning, because as

Mr Justice Brennan just pointed out to you, the

dodgier the scheme the less likely it is that -

well, not necessarily, I suppose, but frequently,

in the case of manufactured deductions

particularly, one might think that - - -

MR BLOOM:	The deduction would disappear, so part IVA would be very effective. It would absolutely cancel out
the deduction because the scheme would achieve it.
The purchase of shares for dividend stripping for
instance: that purchase would not happen

Peabody(2) 80 9/11/93

effectively for the purpose of part IVA.	The
benefit associated with it would go.	So in
deductions it works very, very well.

McHUGH J:  But it is the case of income that causes the

difficulty, is it?

MR BLOOM:  With a deduction, the circumstances have existed

that entitle you to that deduction if Part IVA is

not going to operate. With income, your derivation

of it is entirely something as yet to happen, and

that is where the words "reasonable expectation"

come in, in our submission. What one does, in

order to give effect to it, is to see what would
reasonably be expected to have occurred if the
scheme had not been entered into or carried out.

And one looks, inter alia, at matters of fact, such

as that in the example which I gave Your Honour.

BRENNAN J: In this case, say this scheme, as itemized by

the Commissioner, had not been carried out.	What
is the hypothesis?

MR BLOOM:  Do we have to use that word, Your Honour? Can we

use "reasonable expectation"?

BRENNAN J: Yes. That Mr Kleinschmidt remains as a

shareholder in the Pozzolanic four companies?

MR BLOOM:  No, Your Honour, that is not a reasonable expectation. I am assuming that this matter, if

explored on the facts, would have led to the

conclusion that I suggest now to Your Honour.	What
would have happened is that Loftway would have

purchased the shares of Mr Kleinschmidt and that,

presumably, at some stage, if those shares were to
be gotten into the float, would have sold them to

the public company. That might reasonably be

expected to have happened.

If the parties had been asked, "What if this

had not happened?", would it be reasonable to

expect, for instance - take the intriguing schemes

that my learned friend, Mr Shaw, has come up with.

Would it have been expected that shares would have

been issued here and dividends paid there and

Mrs Peabody, who probably knew and knows nothing

about all of this, would have derived a sum of

money in another fashion. The accountants and the

solicitors, and Mr Peabody, who were in the

witness-box unable to answer that question, may

have said, "No, we wouldn't have done that", for a

particular reason. But none of that was explored.

The Commissioner at all times in this case at

all levels until now has relied upon one scheme and

one scheme only. The only reasonable expectation

Peabody(2) 81 9/11/93

if that scheme had not been entered into, at least

on the facts which are available to us in the
evidence, is that Loftway would have purchased the
shares because Loftway was necessary for the

financing reason and at some point in time would

have sold them.

DEANE J:  But why do you need to speculate at all here? Why

is this not within the old section 260 territory
anyway in that your starting point is a receipt by

TEP of 30 million for the sale of the equity shares in the companies. That is not assessable income.

If one assumes against you that the Commissioner's

identification is right and what was a purchase by

the 62 per cent shareholders of the 38 per cent shareholders and sale on-sale to the new public company was converted by this scheme into the

Loftway diversion and the z shares diversion, you

strike out the scheme and you see 30 million was

received for the sale of all the equity capital of

which 38 per cent were the shares purchased from

Kleinschmidt, then applying not the "would

reasonably be expected to be" but the "would have

been", you have a classic 260 case.

It is exactly what happened in Newton's case.

You changed what was a capital receipt for one set-

up into the divided receipt which it would have

been. I realize this is assuming against you the

validity of the Commissioner's scheme but, once one
assumes that, I do not see why you are not slap

bang in the middle of Newton's case.

MR BLOOM: It is a little different - -

DEANE J:  I realize this is assuming against you the

validity of the Commissioner's scheme, but once one
assumes that, I do not see why you are not slap

bang in the middle of Newton's case.

MR BLOOM:  Your Honour said the first step was the receipt

of $30 million. That, of course, is the last step.

DEANE J: Well, it is the last step as you would put it, but

in terms - - -

MR BLOOM:  It is the last step in the Commissioner's scheme

too.

DEANE J:  - - - of looking at a natural receipt in the

Newton's case sense, it is the first step; that is that you received, you being the TEP, $30 million for the sale of the equity shares in these

companies.

MR BLOOM:  The trust never acquired those shares - the

38 per cent.

Peabody(2) 82 9/11/93

DEANE J: But if the scheme - well actually, the trust did.

MR BLOOM: It acquired the value.

DEANE J:  No, it ended up acquiring the shares and passing

them on to the public companies.

MR BLOOM:  I am sorry, Your Honour is quite right, but not

in the year of income with which we are concerned.

DEANE J:  No, but if you look at the whole scheme, the whole

thing is clear enough surely?

MR BLOOM:  Your Honour, no, with respect. I mean, I have to

say that, but I say it because I think it is

correct.

DEANE J:	Do you not say it with conviction.
MR SHAW:	He believes it as well.
MR BLOOM:	Your Honour, that ignores that there was a very

commercial reason in using Loftway in the first

place.

DEANE J:  I was going to ask you that. Where do the trial

judge's findings fit in to that?

MR BLOOM:  The trial judge makes findings specifically that

it was necessary to have a company for the

preference share financing and that Loftway was

explicable upon that basis and that was purely

commercial, both the financing arrangement and the

need for Loftway.

DEANE J: That was not my question, really. I got the

impression, and I have not analysed the trial

judge's judgment, that what he said was that you

could explain Loftway and the Z shares by both

financing and tax avoidance reasons, but the tax

avoidance reason was the dominant.

MR BLOOM:	No, Your Honour, he never said that.
DEANE J:	He confined his findings of that to the Z shares.

MR BLOOM:  He most certainly did. The z shares in his

view - he - and wrongly, in our submission, as we
will endeavour to show Your Honour - - -

DEANE J: Did he make any finding that the tax avoidance

purpose did not affect the introduction of Loftway

and the z shares?

MR BLOOM:  Did not affect the introduction of Loftway and

the A redeemable preference share issued to

Westpac, yes.

Peabody(2) 83 9/11/93

He misconceived the importance of the non-disclosure, as we will endeavour to show

Your Honour. That is another commercial aspect

associated with the conversion which he

misunderstood. He did not focus on it, with

respect to him, in the same way as Your Honour has

and make findings that would be necessary to

support a scheme such as Your Honour has just put

to me.

DEANE J: What I was really asking was: did he make the

findings that would negative?

MR BLOOM:  I think so, yes, Your Honour, and in due course I

will take Your Honour to those. I think it is

sometimes helpful too to look at this overall from a layman's point of view and remind ourselves that the Peabody family trust starts off with 62 per

cent of the four Pozzolanic companies and wants, at

the end of the day, to end up with 50 per cent of

the public company which owns those four companies.

If one looks at it from a layman's point of

view, one acquires the other 38 per cent, assuming

they go to a Peabody-associated entity such as

Loftway, and really but for the need which the

lawyers impose of selling all of the shares into
the public company, in order to get his 50 per cent
back it is not necessary for Mr Peabody to sell, or
the interests associated with him to sell, the

Kleinschmidt shares that are acquired; they are

only 38 per cent. He can sell in that sense 50 per

cent of that which he started off with and end up

with the same end result.

Can I also say this, Your Honour. There were

company of Mr Kleinschmidt's shares.

a lot of other alternatives in fact considered. public

DEANE J: These points are irrelevant unless - one cannot

accept the Commissioner's scheme as the relevant

scheme affected by tax avoidance because, if one

accepts the Commissioner's scheme, one simply

deletes it and sees what is left. It is not to the

point to say the Peabody interest may not have sold

100 per cent. The fact is they did. That is like

saying, "If I knew I had to pay tax, I wouldn't

have worked and earned the income." It just does

not work that way. You say the scheme was to avoid

tax, therefore you disregard the scheme, but you do

not go on and say that "If I'd known I had to pay

tax, I wouldn't have worked. I would have stayed

at home and therefore IVA doesn't catch me at all."

MR BLOOM:  I shall never put that argument to Your Honour. Your Honour, Loftway is interposed for finance

Peabody(2) 84 9/11/93

reasons which are conceded by the Commissioner, at

first instance and in the Full Court, to be

perfectly legitimate, and so found by the trial

judge and the Full Court. Loftway is the

purchaser. If, contrary to our submission, there

was not a commercial purpose associated with

non-disclosure in the Z class conversion, it was

something that was only capable of achieving a tax

benefit for Loftway.

So, Your Honour is right, with respect, that one goes back and sees what might reasonably have happened, but one has to add in, surely, the fact

that Loftway would have been the purchaser as it

was, because of the preference share financing that
was available to it at the cheaper rate, and

whether it be $350,000 or $700,000, whatever the

figure is, that is a figure worth saving in having

Loftway there. Indeed, if my learned friend is right, Loftway got both benefits, the tax saving on

not selling on, and the saving in terms of the cost

of finance.

DEANE J:  I follow all that, and I will not persist, partly

because of the time, but I think you still come
back to the situation where, if the Commissioner's

scheme be the correct scheme, be the correct tax

avoidance scheme, and you delete that, you will be

landed with a taxable income. What you are really

putting are the strong argument against accepting the whole of the Commissioner's scheme as, in its

entirety, a tax avoidance scheme.

MR BLOOM: Except that the Commissioner's scheme, as

particularized, includes the acquisition by

Loftway.

DEANE J: That is what I am saying.

McHUGH J:  What I am not quite following in this dialogue

between you and Justice Deane is - - -

MR BLOOM:  I am sure it is my fault, Your Honour.

McHUGH J: The public company, Pozzolanic, never got any

Loftway shares.

MR BLOOM:  It did right at the very end of the day, the Z

class shares in 1987.

McHUGH J:  No, the public company did not get any. Some of

the subsidiary companies got them.

MR BLOOM:  That may be right, Your Honour, yes. I will

check that overnight.

Peabody(2) 85 9/11/93

McHUGH J:  I thought that those shares were specifically

excluded from the float.

MR BLOOM:  Oh, they were specifically excluded from the

float.

McHUGH J: Yes, and ultimately the z shares went to one of

the subsidiary companies.

MR BLOOM:  I will check that, Your Honour.

DEANE J: If that is so, the Commissioner's chronology is

wrong because the Commissioner's chronology says

they ended up going to the public company.

McHUGH J: Yes, that is right, and if that is right,

Number 10 says - - -

MR BLOOM:  We will check that overnight, Your Honour, to see

what is the true situation with regard to that.	Is
that a convenient time?

MASON CJ: Yes. We will adjourn until 10.15 am tomorrow.

AT 4.17 PM THE MATTER WAS ADJOURNED

UNTIL WEDNESDAY, 10 NOVEMBER 1993

Peabody(2) 86 9/11/93