Commissioner of Taxation v Peabody

[1993] HCATrans 188

..

.

• r

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry No B16 of 1993

Brisbane

B e t w e e n -

COMMISSIONER OF TAXATION

Applicant

and

MARY GENEVIEVE PEABODY

Respondent

Application for special leave

to appeal

BRENNAN ACJ
DAWSON J

GAUDRON J

Peabody 1 1/7/93

TRANSCRIPT OF PROCEEDINGS

AT BRISBANE ON THURSDAY, 1 JULY 1993, AT 3.44 PM

Copyright in the High Court of Australia

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

learned friend, MR c. NEWTON, for the applicant

Commissioner. (instructed by the Australian

Government Solicitor)

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

learned friend, MR B.J. SULLIVAN. for the

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

MR SHAW:  If the· Court pleases, I shall assume, unless told

otherwise, it is unnecessary to go to the facts.

BRENNAN ACJ:  Yes. Perhaps you could just identify for us

the particular issues which, in your submission,

justify the grant of special leave.

MR SHAW: Yes, if the Court pleases. His Honour

Mr Justice Hill, with whom the other two members of the Full Federal Court agreed, held that when the

court is considering an appeal in relation to an

assessment made under Part IVA, the court was

restricted to considering the scheme as identified

by the Commissioner.

DAWSON J: Which is the whole scheme, from whoa to go?

MR SHAW:  Yes, and was not allowed to look at any other

scheme, even if there was one. He said that if one

had a scheme which consists of more. than one step

then, even if one step in the scheme is irrelevant

to the overall object of the scheme, nevertheless

that step ought to be seen as having the purpose,

or at least the person who took all the steps is to

be seen as having the purpose which relates to the

whole scheme and not to the particular step.

He said that when one was considering whether

a tax benefit has been obtained, one had to

consider the matter on the basis, when one was
considering the question whether or not it might
reasonably be expected that an amount would

otherwise have been included in the assessable

income of the relevant taxpayer, one had to

consider the matter on the basis of what was

reasonably probable, which seemed to mean in

His Honour's terms, more probable than not.

In our submission, in each of those respects,

His Honour was incorrect. In each of those

respects an important question in relation to the

interpretation of Part IVA arises. This Court has

never considered the proper interpretation of

Part IVA. Part IVA is now the only general

anti-avoidance provision in the Act and it is,

accordingly, a very important part of the Act. In

Peabody 2 1/7/93

our submission the questions that I have referred

to are questions of such importance that each of

them alone would justify the grant of special leave.

BRENNAN ACJ: 

We will hear from Mr Bloom at this stage.

special leave should not be granted in this
particular case because the Commissioner cannot, in
view of the unchallenged findings of fact, win the
appeal.

MR BLOOM: 

Your Honours, in our respectful submission,

The tax benefit alleged depends upon it being

reasonable to expect that the trustee of the

Peabody family trust, under which the taxpayer

respondent was beneficiary, that that trustee in

its capacity as such would have acquired the

relevant shares and re-sold them at a profit. But

the unchallenged finding is that for legitimate

reasons, namely the obtaining from Westpac of low

cost finance, a company had to be the purchaser of

those shares in its own right.

Now, Your Honours, if a company in its own

right had to be the purchaser of the shares, it

could not reasonably be expected, whatever view is

taken of those words, that a company in its own

right would not be the purchaser of those shares.

In particular, it could not reasonably be expected

in that context that the trustee, as trustee, might

have purchased and on-sold those shares.

The relevant passages in the judgment of

Mr Justice Hill - - -

BRENNAN ACJ:	Why was it essential that the trustee should be the actual purchaser?
MR BLOOM:	It was essential that a company in its own right

be -

BRENNAN ACJ:  Be the purchaser for the purpose of the

finance?

MR BLOOM:  Be the financier.

BRENNAN ACJ: Yes.

MR BLOOM:	Be financed.
BRENNAN ACJ:	Why would the Commissioner fail if the

purchase was by Loftway but yet the shares in

Loftway were held by the trustee?

MR BLOOM:  Simply because the tax benefit is said to be the non-application of section 26AAA - that was the

Peabody 3 1/7/93

12 month purchase and sale provision, which

deemed the profit to be assessable income. It was

said to arise because of the non-application of

26AAA on the purchase and resale of those shares.

Now, if a company had to be the purchaser,

because only a company could take advantage of this

low cost form of financing, in the form of

redeemable preference shares, so one has to say

that the trustee would not have been the purchaser.

Not being the purchaser it would not have on-sold,

therefore it would not have derived a profit. If

anybody would have on-sold and derived a profit it

would have been Loftway or at least some other

corporate entity in its own right.

That is made clear on a couple of very short

passages in the judgment of Mr Justice Hill. If I

may take Your Honours in the application book,

firstly to page 53, second line:

If finance were to be provided in the ordinary

way at interest, the interest rate payable

would be in the order of 18-20 per cent.	On
the other hand, if the shares owned by the
Kleinschmidt interests were purchased by a

corporation and a financier subscribed for
shares in that new corporation, in
circumstances where after the acquisition of
the Kleinschmidt shares a dividend was
declared on those shares to the acquirer
corporation and thereafter the acquirer

corporation declared a dividend to the

financier, the effective finance cost would be

reduced to 11.7 per cent.

This discrepancy arose because, under the

income tax law at the time, a public company

financier receiving a dividend would receive a

100 per cent rebate of tax pursuant to the

then provisions of s.46 of the Act.

Effectively, therefore, the financier received
the financing charge (equivalent to interest)
tax free.

And if Your Honours go to page 82 point 5, line 22:

This meant that Loftway (or some similar
company) had to be the purchaser to obtain the

benefit of that form of financing. It should

be said that it was not suggested that such a

method of financing was other than commercial

or that it infringed Part IVA. It provided a

tax rebate rather than a tax benefit.

I should read the bottom of that page because that

deals with the only submission by the Commissioner

Peabody 4 1/7/93

as to what might reasonably have been expected to

be done if a company had not purchased:

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 -

the trustee.

In this case, for Loftway to pay the dividend,

it would have been necessary for it to have

derived income by way of interest. That

interest would have been assessable income to

it and taxed at the then rate of 46 cents in

the dollar. This would have completely

negated the financing differential as well as

reducing by 46 cents in the dollar the dividend payable on the shares held by

Westpac.

Just pausing there, what His Honour is really

saying is that if Loftway had received the moneys
it was receiving as interest, rather than as
rebatable dividends, it would have had to receive

twice as much to pay tax and then pay out the

dividend. So that is not a reasonable expectation.

His Honour continues:

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.

So he adopts the test as the Commissioner would put

it.

The only expectation, on reasonable grounds,

that can be formed is that a corporation would

have been the purchaser and that TEP Holdings

Ltd, a trustee, would not have been.

Accordingly, if the scheme had not been

entered into or carried out, it could not

reasonably be expected that any amount would,

in the year of income, have been included in

the assessable income of Mrs Peabody or any of
the other two beneficiaries in the Peabody

Family Trust, arising to them under the

provisions of s.97 of the Act.

This conclusion, namely, that there was no tax

benefit in the circumstances of the present

case, is sufficient to require the appeal to

be allowed.

Peabody 1/7/93

And then he goes on to say, "Well, I also find for

the taxpayer on the question of dominant purpose".

DAWSON J: In other words, that last sentence, it could not

reasonably be expected	that any amount would, in
the year of income, be	included in the assessable
income of Mrs Peabody.	Does that mean no scheme,
the whole thing, would	not have taken place?

MR BLOOM: No. If I understand it - - -

DAWSON J: Given that it was the desire of the Peabody trust

to have a public float and acquire a 50 per cent

interest in the public company.

MR BLOOM:  Given the form of financing chosen, and that was

available at half the cost of any other form of

financing, it was essential to have a company for

that form of financing. Now, that may mean that

the company, whoever it was, Loftway or some other

company, might if it had bought and on-sold the

shares, exposed itself to some sort of 26AAA

assessability. But it could never had led to a

situation that the trustee would have exposed

itself to that sort of assessability.

DAWSON J:  I follow.

GAUDRON J: But is that any more than saying, contrary to

the findings below, that the purpose of the scheme

was not to obtain a tax advantage?

MR BLOOM:  It is to say that the scheme particularized by

the Commissioner - and I might add here,

Your Honours,in view of what my learned friend has

said, no other different or lesser scheme was ever

contended for below - could not get for Mrs Peabody

the tax benefit in respect of which she has been

assessed, and that is why Part IVA cannot apply,

vis-a-vis, Mrs Peabody.

If I might just hand Your Honours a small book

of material which has Part IVA in a certain order.

On page 1, Your Honours see section 1770:

This Part applies to any scheme that has been

or is entered into after 27 May

1981 ..... where -

(a) a taxpayer (in this section referred to as

the 'relevant taxpayer') has obtained, or

would but for section 177F -

which allows the tax benefit to be cancelled -

obtain, a tax benefit in connection with the

scheme.

Peabody 6 1/7/93

And if Your Honours go to 177C, at page 5 in those

materials:

Subject to this section, 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.

And then, if one goes to 177F on the next page:

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 -

in effect, determine that an amount equal to, or

less than equal to that, is included in the

assessable income of that taxpayer.

Now, if that taxpayer could never reasonably

be expected to have derived that income, a scheme

relative to her cannot exist for the purposes of

Part IVA. And that is why the Commissioner cannot,

with respect to him, win this case.

I mentioned one aspect in respect of

which - - -

DAWSON J: But what you are saying is, had there been no

scheme, she would not have received that amount by

way of assessable income.

MR BLOOM: 

Your Honour, I do not quite put it as broadly,

but yes, that is the effect of it. Had there been
absent the part of the scheme about which the

Commissioner complains, namely the reduction in

value of the shares acquired by Loftway, that would not have led to Mrs Peabody or the trustee deriving the income in question. If Your Honour goes to

page 3 of these materials - - -

BRENNAN ACJ: Why is that? I mean, let us assume that

Loftway bought the shares and they were on-sold

into the public float. There would then have been

a 26AAA assessment of Loftway?

MR BLOOM:  Yes, Your Honour.

Peabody 7 1/7/93

BRENNAN ACJ:	And Loftway would have derived income?
MR BLOOM:	Upon which it would have had to pay the tax.

BRENNAN ACJ: With what consequences for the taxpayer in

this case?

MR BLOOM:  Maybe none at all, Your Honour. It would have

been necessary before there were any further

consequences for Loftway to have declared a

dividend out of the after-tax amount remaining,

after it had paid, say 50 per cent of it - because

I think the rate then was about 46 per cent - what

was left could have been declared through to the

trust by way of dividend but need not have been.

That could have then, I think as things stood,

exposed Loftway to further tax unier Division 7

which was the undistributed profi~s tax provision,

no longer now there.

BRENNAN ACJ:  TEP was the sole shareholder of Loftway?

MR BLOOM: That is correct, Your Honour. But the tax

benefit the Commissioner has assessed is based upon

the assumption that the trust would have purchased
the shares and it would have re-sold and it would

have been assessable under 26AAA, not on some

further or different suggestion that the company

would have on-sold, made its profit under 26AAA,

paid its tax, and then had a lesser amount to

distribute.

BRENNAN ACJ: Well, your proposition is this, is it: that

if Loftway had bought and on-sold, that would not

have engaged the provisions of Part IVA in the case

of this taxpayer?

MR BLOOM: Correct, Your Honour. That is so.

GAUDRON J: But that is not the reasonable hypothesis upon

which the Commissioner has acted.	He has acted on
the hypothesis that TEP would have bought and sold.

MR BLOOM:  Your Honour, may I just correct one thing, with

respect, that Your Honour said. It is reasonable

expectation, not reasonable hypothesis.

GAUDRON J: Yes, well, reasonable expectation then.

MR BLOOM:  I am assuming there is a difference in the word

"expectation". It signifies that one expects

something as opposed to that one may hypothesize something. But even assuming there is not, what

the Commissioner has done is to say, "That
notwithstanding a company had to be the purchaser,

then it is reasonable to expect it would not have

been". The company had to be the purchaser. It is

Peabody 1/7/93

not reasonable to expect, with respect, that it

would not have been.

GAUDRON J: The company did not have to be the purchaser. A

company had to be the purchaser if certain

objectives were to be satisfied.

MR BLOOM:  The company had to be the purchaser if, as was

accepted to be the intention of all, the legitimate

purpose of raising low interest, low cost finance,

was to be achieved. Only a company could get the

in it.

finance on that basis because it was necessary for shares

GAUDRON J: But your finding at first instance is that that

was not the only purpose of the scheme.

MR BLOOM:  Your Honour, if the scheme had to have a company

as the purchaser, if that had to be the case, then

the scheme cannot achieve a tax benefit for the

taxpayer by non-inclusion in her income. What

achieves that is the fact that a company is a

purchaser. What leads to the fact that the company

is a purchaser is the low cost finance.

GAUDRON J: But it is also that that is part of the scheme,

that there is a company who is purchasing; that is

a step in the scheme.

MR BLOOM:	Your Honour, that step does not achieve any - that step is not entered into for any tax
reasons.

GAUDRON J: No, but it is a step in the scheme, the overall

scheme. The scheme extends beyond that.

MR BLOOM:  Your Honour, we are not dealing with, as one was

with section 260, an annihilation provision. This

is a very different provision, Part IVA, and if the

Commissioner could win this case on appeal we would

probably be suggesting it was an appropriate

vehicle for special leave. But, because he cannot

win, we are suggesting it is not. And he cannot

win because it is necessary for him, in the

exercise of his discretion, to identify a scheme

that brings about a tax benefit to the taxpayer.

Now, one cannot say, looking at the finance

step, that the purpose of that was to bring about a

tax benefit. The purpose of that, the sole purpose

of that, was to achieve the low interest finance.

GAUDRON J:  But that is only one aspect of the scheme. scheme is wider than that. The

MR BLOOM:  Yes, but, Your Honour

Peabody 9 1/7/93

DAWSON J: What really resulted in the ultimate profit was

reducing the shares to Z class shares.

MR BLOOM: Quite so. If one goes to page 3 of the

materials, we have extracted from the judgement of

Mr Justice Hill the scheme particularized by the

Commissioner. Step 1 of the scheme particularized

involves, as Your Honour Justice Gaudron points

out:

The purchase of all of the shares ..... by

Loftway.

But the steps which were targeted below by the Commissioner as steps which had the tax avoidance purpose - and no other step was so suggested - were steps (3) and (4), namely:

The conversion of -

Loftway -

shares ..... to "Z" class preference shares -

eventually being worthless shares. Now, that step

is what is alleged to give rise to the purpose of

avoidance of tax in the hands of Mrs Peabody, not

the step of acquisition by Loftway.

If one takes the whole scheme, and if one does

effectively a section 260 and annihilates it, one

is still left with any scheme that will be entered

into, Your Honour, as one which will involve a

company as a purchaser because of the low cost of

finance, the differential being something like

8 or 9 per cent. Never Mrs Peabody.

GAUDRON J:  I think that comes back to what I said to you

before. Any scheme of this nature, any scheme, is

one the purpose of which is to secure favourable

financing and not to secure a tax advantage.

MR BLOOM:  The purpose of that step - yes. And so far as

the purpose of that step enables one to ascertain

the purpose of the whole scheme, yes, Your Honour,

I agree entirely.

But we would, with respect, say the purpose of

this was using finance at its most - this is the

whole scheme - advantageous rate to acquire the

shares of the Kleinschmidt interests and float the

group as to 50 per cent. That was the purpose of

the whole scheme.

DAWSON J: Well, could you say that Loftway obtained a tax

benefit, perhaps, on which the provisions would

Peabody 10 1/7/93

operate, but he did not say that, so that is that

as far you are concerned.

MR BLOOM:  I am appearing for Mrs Peabody, not for Loftway.

DAWSON J: Yes, exactly.

BRENNAN ACJ:  But your proposition really has nothing to say

about purpose. You accept, I take it, that the

scheme can be characterized as having a tax

avoidance purpose, if I can use that phrase, but

you say that you focus on the absence of a tax

benefit as defined. Is that right?

MR BLOOM:  No, Your Honour. I make no concession of the

first kind, with respect.

BRENNAN ACJ:  No, I am not suggesting you are conceding

anything, but let us assume that the case is

otherwise, as you put it, a suitable case for

special leave. Is the argument against it that, do

what one wishes with the steps in this scheme, that

there is no possibility of a tax
benefit reasonably to be expected for the taxpayer

for whom you appear?

MR BLOOM: That is so, yes, Your Honour.

DAWSON J: Whatever may be the position with Loftway - - -

MR BLOOM: Different case.

DAWSON J: Yes.

GAUDRON J: But this is to say, in effect, having regard to

the scheme particularized by the Commissioner, he

could not reasonably expect that TEP would have

bought and on-sold the shares.

MR BLOOM: That is it.

DAWSON J: Because people do not suffer an interest rate of

20 per cent when they can get 11 per cent.

GAUDRON J: And because they do not pay more tax than they

can organize their affairs so as they do not have

to.

MR BLOOM: Nicely put, yes, Your Honour.

GAUDRON J: And then it is a question of which is the

dominant purpose, is it not?

MR BLOOM:  The dominant purpose of the scheme, looking at

the scheme as particularized - - -

GAUDRON J: A whole.

Peabody 11 1/7/93

MR BLOOM:  Yes, because it was never put that the scheme was

different or lesser below. If that is now

desired to be put that is a significant departure

from the way the case was argued below. Nor was it

put below, formally or otherwise, that the decision

of the Full Court in Jackson was wrong. Indeed,

the case was conducted below on the basis that the

decision of the Full Court in Jackson was correct.

And that decision was to the effect that the court

is limited, as in all exercises of discretion of

the Commissioner, to reviewing -

GAUDRON J: That seems to be an important point in itself

though, does it not?

MR BLOOM: Well, the Commissioner did not seek special leave

in Jac<:-0 on. That is the first point. And nor did

he in - :is case make any suggestion, formally or

otherwise, that Jackson was wrong. He conducted

the case on the basis that Jackson was right, which

is why he limited himself to the scheme as

particularized. And that was how the case was run

and that is really, with respect, where it ought to

end. But it does not matter. Even if Jackson were

wrong, the fact is that here the scheme cannot get

the tax benefit for this particular taxpayer

because of those facts.

DAWSON J: Would you go as far as to say, if there was a tax

benefit, without conceding if there was, it must

have been a tax benefit which was received by

Loftway, in these circumstances?

MR BLOOM: Yes, Your Honour, I would go that far. If

Your Honours please.

BRENNAN ACJ: Yes, thank you, Mr Bloom. Mr Shaw.

MR SHAW:  If the Court pleases, what my learned friend

submits is absolutely not so. If one looks at

page 83 one sees that His Honour Mr Justice Hill

said that it was:

Unreasonable or irrational -

to think that TEP Holdings would have been the

purchaser.	Now, the first thing that we say about
that is this.	In the ordinary course, one would

expect the most obvious form of financing to be

adopted, namely, borrowing money in order to

finance your purchase and paying interest on it.

What His Honour is saying involves the

proposition that it is irrational to think the ordinary course would be adopted. Now, in our

submission, that cannot be right.

Peabody 12 1/7/93

DAWSON J: Well, irrational to think that a course would be

adopted when there is a much cheaper course

available. Is that not irrational, in business

terms?

MR SHAW:  But, Your Honour, you have got to know of this

swizz before you do it.

DAWSON J:  Not swizz. They knew of the possibility. No one

is suggesting anything - - -

MR SHAW: No, no, quite. But all I am saying, Your Honour,

is this, that the ordinary course would be simply

to borrow the money.

DAWSON J: Well, may be if you did not know about this, but

no one is suggesting that Loftway did not know, or

TEP did not know about this.

MR SHAW:  But then the next thing is this: my learned

friend says, "All right, well, you have to have

Loftway". Now, assume for the moment that is right

and, in our submission, it is not right because

there in fact are, and we could show that there

are, cheaper ways of doing it and that it is all

tied up, this scheme, with the fact that Loftway

was not intended to make a profit and the fact that

redeemable preference share financing is only the
better form of financing when the subject of the

financing is either going to make a loss or at least no profit. But leave that aside for the

moment.

Assume that you need something like Loftway,

but assume too that the Kleinschmidt shares in the

Pozzolanic companies have to be got in to the float

because their value is not going to be reduced and

they are going to represent 38 per cent of the

value of those companies, so they have to be got in

to the float.	The question is: what is the best
way of doing it?
Now, one way would be the way that Your Honour

Justice Brennan suggested. Loftway could sell at the float price, if I could call it that, and itself make the profit. That profit would then be subject to tax in its hands and we would say that

the reasonable expectation then is that a dividend

would have been declared to TEP so that moneys

would have been distributed to, amongst other

people, Mrs Peabody, although not as much as if

Loftway had not made the profit, because it pays

tax beforehand. But there is an alternative to

that.

BRENNAN ACJ: And that would have been assessable income in

the hands of Mrs Peabody?

Peabody	13	1/7/93
MR SHAW:	Yes, it would, Your Honour.	But there is another

thing that could be done, and it is this.

DAWSON J: But it would be much less.

MR SHAW:  It would be much less, yes, it would be less, but

it would still be some. There is another course

that could be followed - - -

BRENNAN ACJ:  Can I just interrupt you there. Was that mode

of looking at the transaction ever debated in the

courts below?

MR SHAW:  Your Honour, there was debate about the various

steps which might be taken.

BRENNAN ACJ: Yes, I appreciate that, but the significance

of it is that the assessment would necessarily have
been varied if that had been an acceptable way of

analysing the transaction.

MR SHAW:  Yes, but I have not got to the end of the

explanation, Your Honour, because there is a way,

and in our submission the preferable way, which

leads to precisely the same result.

BRENNAN ACJ: Yes.

MR SHAW:  And it is this: if one again assumes that the

Pozzolanic shares are not going to be devalued and

one assumes that they have to be got in to the

public company which is being floated, which needs

to own 100 per cent of the value of the Pozzolanic

companies, instead of Loftway taking the profit,

Loftway could sell to TEP at the price at which it

had bought so that it made no profit, then TEP

could sell in to the· float at what I call the float

price so that it makes the same profit that it

would have made had it been the original purchaser.

And if that is done, it produces much more

favourable financial outcomes to the Peabodys than

the alternative which I have just been discussing

with Your Honour, namely that Loftway should make

the profit.

What it does is produce in TEP exactly - it is

as if indeed it had been the original purchaser

because Loftway buys at what I might call the

Kleinschmidt price, sells on at the Kleinschmidt

price, TEP sells into the float at the float price.

It produces exactly the same consequence.

His Honour is quite wrong, in our submission, when he says at page 83 that:

Accordingly, if the scheme had not been

entered into or carried out, it could not

reasonably be expected that any amount would,

Peabody 14 1/7/93

in the year of income, have been included in

the assessable income of Mrs Peabody -

because the most financially advantageous way,
assuming Loftway to buy, and assuming the

Pozzolanic shares not to be devalued, is simply for

Loftway to on-sell to TEP. The profit has to be

kept in the Peabody camp, so TEP is the logical

buyer from Loftway if the profit is not going to be

taken by Loftway. Then the profit is all made by

TEP and you get precisely the same financial

results as if TEP had bought in the first place and

the question would be, which of the two

alternatives is the preferable course? Is it
preferable to take the profit in Loftway and bear

some tax there, or is it preferable to take the

whole profit in TEP and bear all of the tax there?

DAWSON J: What would have happened with TEP, would it have

reduced the value of the Kleinschmidt shares by

making them Z shares?

MR SHAW:  No, on this basis you would not reduce the value

of the Kleinschmidt shares at all. The only

purpose of reducing the value of the Kleinschmidt

shares is to avoid the section 26AAA taxation.	So
what one assumes is - - -

DAWSON J: Would that not be a problem? You see, TEP would

have acquired the shares then sold them to the

public company.

MR SHAW:  If one assumes that one wanted to use redeemable

preference share financing so that one needed a

company like Loftway in order to utilize that bit,

one then has the shares in Loftway's hands not

devalued, not reduced in value.

DAWSON J: Yes.

MR SHAW:  One then has to get them into the company which is

being floated. They can either go directly

straight into the float, in other words, sold by

Loftway to - I do not know what it is called,

Pozzolanic Public, I will call it - and if you did

that you would obviously have to sell at what one

might call the float price, which puts the profit

into Loftway. The alternative is to have Loftway

sell to TEP at the unincreased price, the ,

$24 million price rather than the $30 million

price, and take the profit not in Loftway but in

TEP.

BRENNAN ACJ:  And disclose in the prospectus the outstanding debt to Loftway?

MR SHAW: Well, not if you paid it.

Peabody 15 1/7/93

BRENNAN ACJ: Well, who would pay it?

MR SHAW:  Or you could disclose it, yes.

BRENNAN ACJ: Well, you could. But it would be commercially

undesirable. That was one of the objects of the scheme, was it not?

MR SHAW:  No, Your Honour, it was not. The non-disclosure

was put to one side by everybody, really, by

Justice O'Loughlin and by the Full Court.

BRENNAN ACJ:	I mean the whole basis on which the bank's debt, if you can call it that, was retired was it
was possible to leave Loftway in possession of the valueless shares and to pay out the bank from the
proceeds of the float.
MR SHAW:	Yes.
BRENNAN ACJ:	Your scheme, or your alternative method of executing a scheme, would have left the bank in a
situation requiring to be discharged and no source of money with which to discharge it, unless - - -
MR SHAW:	No, no, not so.
BRENNAN ACJ:	- - - they were prepared to wait until the

float had taken place.

MR SHAW: Well, they did wait until the float took place,

Your Honour.

BRENNAN ACJ: Yes, they did.

MR SHAW:  So they were paid out of money which came from the

float. Your Honour will remember what happened was

the float took place, TEP got its half the shares

and half the money, it made a loan to Loftway,

which then paid out Westpac, and then TEP forgave
the debt.	If one assumes for the minute that one

has the - we say it is not irrational to think that

TEP would be the original holder. But, putting

that to one side, if one assumes that one wants to

do ••••• preference share financing, and so one

assumes that one has a company like Loftway, one

gets the Kleinschmidt shares into Loftway, they are
shares which remain at full value and therefore
they have to be put into the Pozzolanic public

company so that the float can take place in the way

it did.

The question is:  how did they get there?

There are two ways. One involves a direct sale by

Loftway to Pozzolanic Public Industries, or

whatever it is called. That would involve taking

the profit, that is to say the difference between

Peabody 16 1/7/93

the price that the purchase had been made from the

Kleinschmidt's, between that and the public float

price, that involves taking the profit in Loftway.

BRENNAN ACJ:  But you could take the profit wherever you

chose, on that basis.

MR SHAW:  You can but, Your Honour, one would choose,

presumably, to take the profit in the place which

left the greatest amount in your hands at the end

once you had paid expenses, interest, dividends,

whatever it might be, plus any tax. And there is

that possibility, namely, Loftway sells at the

increased price into Pozzolanic Public and it makes

a profit ..

BRENNAN ACJ:  Now, these various hypotheses that might be

canvassed, are they to be canvassed on no other

facts than those which are established in the

evidence?

MR SHAW: Yes, they are. The evidence is all there.

BRENNAN ACJ:	So it is a question of what inferences might be drawn from the evidence as it exists.
MR SHAW:	Oh yes, yes it is. And the other way of doing it

is the indirect way, namely, Loftway selling the

Kleinschmidt shares, not direct into the float but

selling them to TEP and letting TEP take the

profit.

BRENNAN ACJ: Yes, we understand. Have you got anything to

add to that, Mr Shaw?

MR SHAW:  If Your Honour would just excuse me for a minute.

If I could hand this - - -

GAUDRON J:  Mr Shaw, can I just ask you one question? Do

you accept that the Federal Court was bound to

proceed on the basis and only on the basis of the

scheme as particularized by the Commissioner?

MR SHAW:  No, most certainly not, Your Honour.

GAUDRON J: Was some point taken about that at the

appropriate time?

MR SHAW:  You see, His Honour Mr Justice O'Loughlin did not

proceed on the basis of the scheme as identified by

the Commissioner. He said, "Look, it has got this step in it which involves the devaluation, if that

is the right word, of the Kleinschmidt shares, and

I need not bother about whether there are any more

steps in it or not". So that His Honour proceeded,

in fact, on the basis of the fact that there was a

scheme which involved at least that and maybe some

Peabody 17 1/7/93

more_.	His Honour said that at page 22, it is at
line 45:

Whether the scheme should be classified

as stopping with the conversion of the shares

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 -

and so on. So he proceeded on the basis of a

different scheme and said, "I really do not have to

bother"

For present purposes, the relevant comparison,

all the Court need look at is (ii) and (iv). And

(iv) is, as we have worked out from the evidence,

the financial consequences, or that is to say what

is left for the Peabody's, if there is a direct

sale by Loftway into the float, that is taking the

profit in Loftway; (iv) is Loftway buying

Kleinschmidt shares and selling to TEP at cost and

TEP itself taking the profit. It will be seen there is a distinct financial advantage in doing the second and not the first.

All we say is, it does not really matter which way you look at it, we can show there is a tax

benefit to Mrs Peabody. We can show i~ even if one

says that it is unreasonable to expect ?~ything

other than to a sale to Loftway. But~- also say

we can show that it perfectly reasonably might be

expected that the sale might take place direct to

TEP. That was the point of some of the other

things, but it is not necessary to go into those.

In our submission we can clearly show the tax

benefit to Mrs Peabody. If the Court pleases.

BRENNAN ACJ:  Mr Bloom, I imagine you have got something to

say about some of that, have you?

MR BLOOM:  Thank you, Your Honour. Your Honour has that

prescience usually to expect that. On the

proposal 2 in my learned friend's list - which the

first time, I might say, we have seen that is right

now - on that proposal, may I say that there are at

least four reasons why he should not be advancing

that. The first is not unimportant - it was never

put to any witness nor any judge below as a

possibility. The second is the factor of

non-disclosure, which Your Honour Justice Brennan

mentioned. The third is that it depends upon the

assumption that within the framework of the Tax Act

Loftway could have purchased and on-sold to the

trust for the same amount and the trust could have

taken the profit. Section 26AAA(4) prevents that

Peabody 18 1/7/93

from happening. It says, effectively, that if

Loftway had purchased and on-sold to the trust and

the trust had on-sold for a greater amount, then

Loftway is to be treated by the Commissioner as

having sold for that greater amount.

So the way that the Tax Act works is that it

would have been Loftway always as the entity making

the profit, notwithstanding it may have attempted

to do what my learned friend has suggested. And if

that is not sufficient to deal the death blow to
that proposition, then it also assumes that the

trustee would not have tried to avoid

section 26(AAA) in the same way as Loftway had by

devaluing its shares in the Kleinschmidt companies,

and finally, the transfer by the trust to the

public company took place in the next year of

income.

So if the profit is said to arise on the

transfer to the public company, that would not have

given rise to a tax benefit on any view of it, even

assuming no section 26(AAA)(4) in the tax year in

which Mrs Peabody has been assessed. And the

assessment which the Commissioner defends is the

assessment which he made. · It is an assessment

based on the trustee acquiring and reselling and
making a profit to which section 26(AAA) applied,

in the year of income, so that Mrs Peabody is a

beneficiary in that year, derived her share of it.

And Your Honours, for those reasons, that

alternative simply cannot get the Commissioner out

of the position in which he finds himself.

BRENNAN ACJ: What do you say about the possibility that

Loftway did buy in, did sell out, did pay 46 per

cent and the balance was distributed, so there is a

lesser, but none the less substantial, tax benefit

flowing to Mrs Peabody?

MR BLOOM:  One has to have put to the witnesses, with

respect, in that context, whether it is likely or

possible that a dividend would have been declared

in that scenario. First the scenario had to be

put, and never was: is it likely a dividend would

have been declared? Is it likely that if a

dividend had been declared, Mrs Peabody would be

the beneficiary who would have received that income under the trust. You see, the way the Commissioner

has operated is that with respect to other income under the trust, it was divided amongst the three beneficiaries equally, Mrs Peabody being one of

them, but it may well not have been the case that

it was reasonable to expect that with this

particular amount coming through, it would have

gone one third to Mrs Peabody; it may have gone to

Peabody 19 1/7/93

the other beneficiaries or all to Mrs Peabody - one

just does not know.

And again, Your Honour, the amount is

different; the amount which the Commissioner has included in the exercise of his discretion under

Part IVA, is a different amount, and he cannot

support, with respect, the inclusion of a lesser

amount on a different basis, given that it is the

exercise of his discretion, and one is restricted,

in the Avon Downs test of Sir Owen Dixon, to

reviewing the exercise of that discretion on the

facts taken into account by the Commissioner. And

those facts were a scheme involving the purchase

and sale by the trustee and not the company and the

inclusion of the larger amount as profit under

section 26(AAA) in the assessable income of the

year of income in the trust's income.

BRENNAN ACJ:	Mr Shaw.
MR SHAW:	In our submission, my learned friend has got

things the wrong way around. The position is, in

our submission, that Part IVA applies to a scheme

if it is shown that there is a tax benefit which is

an objective matter and if it is shown that, having

regard to the various things which are referred to

in section 177D(b), it would be concluded that one

of the persons who entered into the scheme did so

with the dominant purpose of obtaining a tax

benefit.

Now, in order that Part IVA should apply, those two objective facts must be established; it

has got nothing to do with Avon Downs. The

position is like McAndrew; in McAndrew the Court

will remember that in order for an amended

assessment to be justified it had to be shown there

had not been full and true disclosure and that

there had not been an avoidance of tax. And for

the discretion to arise you needed the facts to

exist. They did not depend on the discretion of

the Commissioner; neither does it here. And as it

was held in McAndrew, the onus lies on the taxpayer

to show that the necessary preconditions do not

exist if he wants to avoid the consequences that

flow from the fact that the discretion does exist.

BRENNAN.ACJ: What do you say about section 26(AAA)(4)?

MR SHAW:  Your Honour, that depends on the discretion of the

Commissioner.

BRENNAN ACJ: Yes, but it is the liability that is imposed,

is it not?

Peabody	20	1/7/93
MR SHAW:	Yes, Your Honour.	And the other thing that

Your Honour asked my learned friend was, well, what

if it was done the other way and it was a smaller

amount? In our submission, so long as the

Commissioner has identified an appropriate tax

benefit, it does not matter, the fact he got the

amount wrong. It may lead, if he is wrong as to

the amount, to a reduction in the assessment, but

it will not lead to its destruction.	I mean,
Part IVA cannot work in that way.	The Commissioner

gets it two cents too high and the assessment

fails; that cannot be so, but that is what my

learned friend is suggesting. If the Court

pleases.

BRENNAN ACJ:  The Court will consider its decision in this

matter and will give its decision tomorrow morning.

That is not meant to indicate that it will be

necessary for counsel to remain in Brisbane if they

have other engagements.

AT 4.35 PM THE MATTER WAS ADJOURNED

UNTIL FRIDAY, 2 JULY 1993

Peabody 21 1/7/93