Commissioner of Taxation v RCI Pty Limited ACN 008 408 848

[2012] HCATrans 29

[2012] HCATrans 029

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S324 of 2011

B e t w e e n -

COMMISSIONER OF TAXATION

Applicant

and

RCI PTY LIMITED ACN 008 408 848

Respondent

Application for special leave to appeal

GUMMOW J
HAYNE J
HEYDON J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 10 FEBRUARY 2012, AT 9.31 AM

Copyright in the High Court of Australia

MR N.J. WILLIAMS, SC:   May it please the Court, in that matter I appear with MR J.O. HMELNITSKY and MR M.J. O’MEARA for the applicant.  (instructed by Australian Government Solicitor)

MR D.H. BLOOM, QC:   May it please the Court, I appear for the respondent with my learned friends, MR T.M. THAWLEY and MS K.J. DEARDS.  (instructed by Mallesons Stephen Jaques)

GUMMOW J:   Yes, Mr Williams.

MR WILLIAMS:   Your Honours, in Commissioner of Taxation v Hart your Honours Justices Gummow and Hayne warned that approaching Part IVA through the elucidating and definitional provisions of sections 177A and 177C must not be allowed to obscure the way in which the part as a whole is evidently intended to operate.  With respect, that is precisely what has occurred here.  The external advisors and company officers whose task ‑ ‑ ‑

GUMMOW J:   What do you say was the error in principle?

MR WILLIAMS:   Your Honour, can I answer that question by reference to the section which is set out from 121.  At the foot of 121, the (a) paragraph is set out.  Essentially, from just above that, the court is quoting from 177C:

a reference in Pt IVA to the obtaining by a taxpayer of a tax benefit in connection with a scheme –

but then in the (a) paragraph we emphasise the words:

(a)an amount not being included in the assessable income . . . where that amount would have been included, or might reasonably be expected to have been included –

That is the first part we focus on.  We say the Full Court has turned that on its head and has looked for a way in which it might reasonably be expected that the amount might not be included.  The second part, over the top of the page:

in the assessable income of the taxpayer of that year of income if the scheme had not been entered into or carried out.

In the application of that to the facts here, it was a relatively straightforward proposition.  Transactions were undertaken in March when Project Chelsea was, at the very least, in contemplation as a serious possibility which had the effect that if there were a disposal by RCI of its shares in the American holding company, the amount of tax that would be paid would be reduced by $172 million.  Those transactions did occur in October 1998.  RCI did dispose of its interest in the American holding company and the consequence of that was that the amount of tax that it had to pay by reason of the scheme having been carried out in March was $172 million less than it otherwise would have been. 

The application of this provision in paragraph (a) in no circumstances, in our submission, is straightforward.  The tax benefit has flowed.  If the scheme had not been entered into or carried out, there would have been $172 million included in income by reason of a capital gain.  That has not been included by reason of the scheme.       So those are the errors of principle that we contend for in the construction of the section.  We also contend for errors of principle in the approach to the findings of fact and we also point to, in respect of section 177D, the reading of the part as a whole.

The court having found that the tax benefit was so large and so significant that Project Chelsea would not have proceeded without it, the court then reached the view in considering dominant purpose, that it was not the dominant purpose of any person, any of the tax advisors or officers charged with bringing forward Project Chelsea, any person who entered into or carried out the scheme to achieve the tax benefit.  That is a conclusion or further even than that, the avoidance of tax was not even a relevant circumstance.

HAYNE J:   May I just interrupt you there.  The point you have just made, as I understand it, is that the arrangements would not have gone ahead but for the deductible, is that right?

MR WILLIAMS:   That is the Full Court’s finding in respect of tax benefit.

HAYNE J:   Do you challenge that as a finding of fact?

MR WILLIAMS:   Yes, we do, but we challenge it first as a matter of construction.  We say the court has ‑ ‑ ‑

HAYNE J:   No.  First as a question of fact.  If the fact is this would not have happened but for, what, if any, consequence follows for the application of Part IVA?  Does it reflect back into, if the scheme had not been entered into or carried out?

MR WILLIAMS:   It does in this sense.  We challenge the finding at a factual level and we say that it was reached by applying the wrong test, by inverting the test.  Rather than asking whether it might reasonably be expected that the income would be included, the Full Court has asked – and this can be seen at 123 of the book – whether there is a way in which ‑ ‑ ‑

GUMMOW J:   Paragraph 123 or page 123?

MR WILLIAMS:   Sorry, page 123 of the book, at about line 40.  In the concluding sentence of that paragraph the court states that, “In our view, that cannot be correct.”  But what the court is saying in the preceding sentence, in substance, it has rejected the view that the section is satisfied if there a postulate by which the amount might reasonably be expected to have been included.  It states, in substance, that if the court were to conclude that absent the scheme the taxpayer would have or might reasonably be expected to have done something, anything, any one other thing, which did not give rise to a tax benefit then the test is not satisfied and Part IVA does not apply.  That has turned the test around.

GUMMOW J:   They are dealing with this in their consideration of onus, are they not, which starts at paragraph 128?

MR WILLIAMS:   At 125, they do actually go over to the true onus, as they describe it, at 124, but whether it be characterised as onus or test, it is turning the section around, in our submission.  The onus undoubtedly rests on the taxpayer, as the Full Court recognises, but the question is, if one looks at the words of the section at the foot of 121, if the amount “might reasonably be expected to have been included”, that is, if there is a reasonable expectation by which the amount might have been included, then there is a tax benefit.  Then at 123, at about line 39 or 40, if there is a way in which the taxpayer:

might reasonably be expected to have done something which did not give rise to a tax benefit –

then the section is satisfied.  So it has simply been whether it is described as onus or the statutory question, the statutory question might be more accurate, but onus is also relevant because it is always on the taxpayer, that has turned the section around.  So from a section that asks whether there is one reasonable possibility by which the amount might have been included, bearing in mind the threshold or gatekeeper role of tax benefit, a large part of the work in this part is done by the dominant purpose test.  If there is one way, according to the section, in which it might reasonably be expected that the amount might be included, then it is satisfied.  The Full Court said, well, if there is one way in which it might reasonably be expected that it would not be included, then the section is not satisfied.

GUMMOW J:   Did Justice Stone deal with this differently?

MR WILLIAMS:  Yes.  Her Honour deals with these questions from page 32 of the book, about line 32 – and we say these terms are entirely unexceptional, with respect:

The alternative postulate must be a reasonable expectation as to what would have occurred in the absence of the scheme or schemes.

Her Honour then quotes the same passage in Peabody that the Full Court relies on.  Her Honour then quotes Justice Greenwood in McCutcheon, a passage that was quoted with approval by Justices Edmonds and Gordon in AXA, again a passage that is entirely unexceptional, and puts the test or the onus or both in the right way. 

HAYNE J:   You do not challenge, do you, Peabody?

MR WILLIAMS:   No.  We rely on Peabody.

HAYNE J:   Peabody is looking, is it not, for a singular reasonable possibility. 

MR WILLIAMS:   No.  Every case has to be understood according to the facts then under consideration, but Peabody was applying – the critical part of Peabody I will go to in a moment ‑ ‑ ‑

HAYNE J:   The central point you want to make is, as I would understand it, the words “or might reasonably be expected to have been included” are met if there is a range of possibilities, all of them reasonable, and one of them, whether or not it is the more probable or more likely, is a possibility which would see the amount brought to tax?

MR WILLIAMS:   Yes, and we rely on Spotless.  We rely on the plurality of six in Spotless, which is at tab 3 in the green book of authorities. 

GUMMOW J:   Is there any reference to Spotless in the Full Court?

MR WILLIAMS:   No.  Page 424 of Spotless, tab 3 in the green book, at about point 4 on the page, the paragraph beginning “In our view”, at the foot of that paragraph: 

It is sufficient that at least the amount in question might reasonably have been included in the assessable income had the scheme not been entered into or carried out.

So that passage we say is direct authority.  The parts that we rely upon from Peabody, which is the previous tab, tab 2, page 385.  At the foot of the page, the last sentence going over the page:

It necessarily follows that any profit obtained from the sale of those shares, had the devaluation not taken place, would have been obtained by Loftway so that any tax benefit in connexion with the devaluation and subsequent disposal of the Kleinschmidt shares was obtained by that company.  There is no reason to suppose, and the Commissioner was unable to demonstrate, that, had the devaluation not taken place –

It is the devaluation that was the narrow scheme that Justice O’Loughlin found that became the focus in this Court –

and had that profit been made by Loftway, it would have flowed, or could reasonably be expected to have flowed, to TEP Holdings and hence to Mrs Peabody –

In other words, quite apart from any income tax that Loftway might have been liable to pay, there was no reasonable expectation that Loftway would have declared dividends which would have reached the Peabody family trust.  So the Court, in fact, applies the test in the proper way, with respect, rather than looking for one reasonable way in which the tax might not flow.  It applies the test according to its term.

GUMMOW J:   I suspect that, sub silentio perhaps, the Full Court is approaching this as resting on a factual situation closer to Consolidated Press.  In other words, both Peabody and Spotless involved some, one might say, artificial arrangements, in particular, Spotless was the Cook Islands, you remember?

MR WILLIAMS:   Yes.

GUMMOW J:   This case involves a corporate group with an international business which prospers in one area, does not prosper in another.  How does the local anti‑avoidance provisions bite in that sort of international structure, which is not a contrived structure for this purpose, I think?

MR WILLIAMS:   The structure itself was not contrived and we do not say that Project Chelsea was contrived, but there was one part of Project Chelsea which we attack as a scheme and that was a part that was brought forward by the external tax advisors as identified as being done for Australian capital gains tax purposes.  It involved a revaluation and a payment of $318 million of dividend out of a revaluation reserve that put the American holding company into technical insolvency, absent support from the parent company.  There was not cash to support that kind of payment.  It was paid $20 million as to cash, but the bulk of it was by way of a book entry round robin and that aspect being conceived by the tax advisors and brought forward, it may have had an earlier genesis, but brought forward by the tax advisors as part of Project Chelsea, which it clearly was, being carried out with Project Chelsea in contemplation.  That very clearly points to a tax purpose.

The Full Court does in fact articulate a distinction of the kind that your Honour Justice Gummow refers to between internal reorganisations.  It refers to that at page 128 of the book from about lines 20 to 40.  It refers to voluntary reorganisation.  We challenge fundamentally the voluntary aspect of the reorganisation because there were very clear statements throughout the documents – I can take the Court to a couple of them – showing that this restructure was fundamental and essential.  That is one aspect of it.

HAYNE J:   Fundamental and essential is a matter of commercial need.

MR WILLIAMS:   Yes.

HAYNE J:   So?

MR WILLIAMS:   It means it is not voluntary in that sense, so that is the aspect of that, but that is essentially merely factual.  But we say that, in truth, there is not a distinction between transactions taken as part of a reorganisation and other external transactions.  They are all ultimately dictated by a consideration of costs and benefits.  There is no principle of economics that underlies the passage of the Full Court’s judgment that I have taken your Honours to.  Still less is there any part of Part IVA that has that effect.  In particular, to construe section 177C as not being triggered where the tax benefit is so large that it is essential, is to give the part a perverse operation, in our respectful submission.  This really was like Hart.  It was a legitimate expectation that the wealth optimiser was explicable by tax, a legitimate investment, but explicable by tax.

HAYNE J:   But does that proposition come to more than this transaction could have been done in two ways?  One would have been brought to tax the other is not, therefore Part IVA is engaged.  Is it as simple as that?

MR WILLIAMS:   It was done in a way – the particular scheme was carried out with the tax purpose.  The tax benefit did ultimately come home and that, we say, is enough.  The purpose that 177C serves in a transaction like this, if the March transactions had been carried out for the clear tax purpose, which we say they were and the trial judge found, but the disposal had not ultimately occurred, nevertheless, the part would not be triggered because there would be no tax benefit.  The function that 177C serves in the scheme is to ask whether there was a tax consequence of the transactions for the taxpayer.  Here there was a very clear tax consequence, very clear and very large, so large, the court said, that it was critical to the entire Project

Chelsea reorganisation.  Nevertheless, the court concluded that there was no tax benefit, and moreover that there was no dominant tax purpose.  Your Honours, I see the red light is on.

GUMMOW J:   Thank you, Mr Williams.  Yes, Mr Bloom.

MR BLOOM:   Thank you, your Honour.  Your Honours, the Full Court found in favour of the respondent on both issues, namely, tax benefit and purpose and obviously either one is enough for the respondent to succeed.  So far as concerns tax benefit, the court found that it was not reasonable to expect that absent the scheme essentially the payment of the March 1998 dividend on the Commissioner’s narrow scheme that the assessable income of the respondent would have included the amount in question.  At 127 at page 122 the Full Court sets out the relevant passage from Peabody, which my learned friend confirms is not challenged.  That is the principle. 

GUMMOW J:   Where are you reading from?

MR BLOOM:   From paragraph 127, your Honour, page 122:

A reasonable expectation requires more than a possibility.  It involves a prediction as to events which would have taken place if the relevant scheme had not been entered into or carried out –

Now, in Spotless in a part that my learned friend did not take your Honours to at page 424, the court said, second last paragraph, second sentence:

The reasonable expectation is that, in the absence of any other acceptable alternative proposal for “off-shore” investment at interest, the taxpayers would have invested the funds, for the balance of the financial year, in Australia.

“The reasonable expectation” your Honours found.  Your Honours, at paragraph 142 at page 128,and at 143, the Full Court drew attention to the fact that this was a wholly internal reorganisation providing obviously more flexibility to its planners that might a transaction with an external third party.  Then at 145, page 128, they say:

So informed, the cost of implementing the proposal is obviously a relevant consideration as to whether it would be implemented in accordance with its terms.  That a step in the proposal would increase the transaction costs from $35 million to $207 million, or from 2.5% of market capitalisation to 15% of market capitalisation, equivalent to what was going to be, but never was, floated on the New York Stock Exchange, compels the conclusion that if the transaction impugned as the narrower scheme or . . . the wider scheme, were not entered into or carried out, the reasonable expectation is that the proposal, insofar as it involved the transfer by RCI of its shares in JHH(O) to RCI Malta would not have occurred; indeed, in our view, there is no possibility, let alone an expectation, that it would have occurred.

Now, they refer then to the contemporaneous evidence, of which there was much, from which that conclusion is drawn, and that is in 146, 147 and 148 and at 150 they conclude that:

For the foregoing reasons, in our view, if the scheme in either of its manifestations had not been entered into or carried out, the reasonable expectation is that the relevant parties would have either abandoned the proposal, indefinitely deferred it, altered it so that it did not involve the transfer by RCI of its shares in JHH(O) to RCI Malta or pursued one or more of the other alternatives referred to in the Information Memorandum; but they would not have proceeded to have RCI transfer its shares in JHH(O) to RCI Malta at a tax cost of $172 million.  On this view, RCI did not obtain the tax benefit –

A.....application of the cases, namely, Peabody and Spotless.  Your Honours will have seen that the transfer of shares was not a part of Project Chelsea as originally proposed.  That is at paragraph 43 at page 75:

The Pedley paper was faxed to Mr Clemens of C&L . . . for comment on 17 February 1997.  The Pedley paper was the genesis of Project Chelsea.  The primary judge found that the proposal in the Pedley paper was the genesis of Project Scully, which eventually became Project Chelsea, and that, in brief, the proposal was to restructure the Group so that the centre of operations was located in the United States rather than in Australia.  Her Honour went on at [18] of her Honour’s reasons:

‘At this stage the proposal involved the transfer of the Group’s Australian, New Zealand and US operating subsidiaries to a new offshore holding company –

That did not involve any transfer of shares but her Honour goes on –

It also involved the revaluation of JHH(I), the payment of a dividend to RCI and the transfer of RCI’s shares in JHH(O) to JH Newco.’

On the hearing of the appeal, senior counsel for the Commissioner conceded, correctly in my view, that the detail described in these two sentences of her Honour’s reasons was not contained in the Pedley paper proposal, but only subsequently became a part of Project Chelsea.

We say, with respect, that that must have infected her Honour’s judgment with error because it was a critical matter upon which she erred.  Your Honours, in our respectful submission, the Full Court did no more than apply the settled law, the law settled in this Court, in particular Peabody, to the complex facts of this case in order to ascertain as a matter of objective fact the alternative hypothesis or postulate and that provides no occasion, in our respectful submission, for the intervention of the Court.  But, your Honours, even if we assume that there was a tax benefit obtained by the respondent, it is still necessary to ascertain dominant purpose. 

The answer to the tax benefit question does not control the answer to the question of dominant purpose, contrary to the submissions of our learned friend.  Purpose is a result of analysis of events which in fact occurred while tax benefit is the result of a predictive exercise upon the assumption that something did not occur.  The Full Court found that that dominant purpose of those who were parties to the scheme was not the purpose of obtaining a tax benefit and there was, with respect in our submission, ample evidence from which the court could conclude that the dividend was paid in fulfilment of a longstanding strategy of repatriating profits from the United States to Australia.  Your Honours will see at paragraphs 33 to 36, pages 66 and following, two board papers of 1966.

HEYDON J:   Not 1996?

MR BLOOM:   I am sorry, 1996, your Honour.  I know the case was a long time ago, but that is probably too far away.  At 33 the first of those papers is set out and your Honours will see over at page 67 at about line 20:

There are limited means of repatriating funds from the US to Australia i.e:

Redemption of Capital
           Payment of a dividend
           The US group purchases assets –

Then at the bottom of that page, redemption of shares, borrowing a significant sum and paying a large dividend.  Over the page, a reference to that being able to be done, second paragraph on page 68, at reduced rates of withholding tax because withholding tax in the United States was only applicable to the amount of earnings and profits and was not calculated on the actual amount of the dividend paid.  Then again in a second paper, which is at page 69 – this is in September 1996 – your Honours will see at about line 40, redemption of capital, payment of a dividend, purchase of assets.

From paragraphs 37 and 38 your Honours will see that in fact in the 1997 year there were repatriations of a royalty of approximately $152 million, redemption of $70 million and a dividend of $50 million from a revaluation and the total amounts that were repatriated in 1997 were $272 million approximately.  All of that was borrowed by the US for the purpose of making those repatriations.  Payment of the 1998 dividend was first proposed in April 1997 well before there existed any proposal that RCI sell shares.  If your Honours will go to paragraph 40 at page 72, there is a reference to Mr Morley, who was the CFO. submitting his first business plan to the board and then over on page 73 at the top:

I told the Board that I would try to secure the payment of another large dividend from the United States to Australia in the 1998 financial year (as had been paid in March 1997) if this could be done.

Now, its original emanation, as your Honours have already seen, Project Chelsea did not envisage the sale by RCI of its shares, so there was not that connection between the payment of the dividend which was being paid to achieve the benefits of the strategy and Project Chelsea in these organisations.  The sale of shares first emerged but only as a possible alternative in May 1997. 

If your Honours will look at paragraph 37 there is a paper from Coopers & Lybrand in the United States.  Mr Sheppard was actually an Australian but he was on secondment to Los Angeles at the time.  In that paper they set out the original concept, namely, US holding company which involves no sale of shares and then they say another possible alternative, a non‑US holding company, and they say that the same issues and planning ideas can be incorporated into a more complex holding company structure using a non‑US holding company, and that is to give rise, you see at the second paragraph on page 79, to reduced rate of tax on interest and royalty flows.

Now, they were calculated by Grant Samuel in their expert report for the shareholders providing benefits of around $20 million maximum per annum going forward provided the legislation did not change.  Then they still go on to deal with how the US holding company structure will be done.  Then in the middle of the page, or probably two‑thirds down – and this is what my learned friend referred to as the advice of the accountants but the accountants never suggested the payment of the actual dividend.  They suggested, as your Honours see here, and for US tax purposes associated with an Act call the Foreign Investment in Real Property Tax Act, the payment of a stock dividend, but the stock dividend, your Honours, was rejected by the company because it did not achieve the benefits sought by the strategy.  Now, if your Honours go to 163 at page 134:

At [104], her Honour also refers to documents referring to a stock dividend being contemplated in the context of achieving ‘a step‑up in basis for Australian capital gains tax purposes . . . and observes that ‘there is no evidence of why that proposal was replaced by the proposal for a cash dividend’.  With respect, we would have thought it is self‑evident.  A stock dividend would not increase interest‑bearing debt in the US, generating deductions in the US, nor increase assessable income in Australia, sheltered by available tax losses, two of the benefits, said by RCI, sought to be achieved by the March 1998 dividend.

There were, of course, other benefits.  Indeed, the evidence is extracted at paragraph 66 at page 92.  That is the evidence of Mr Morley.  He says in paragraphs 43 and 44 that he:

was not in favour of paying a stock dividend . . . did not [therefore] recommend the payment of a stock dividend to the board.  Ultimately, no stock dividend was paid.

Likewise, Mr Harman, at paragraph 80 at paragraph 104, to the same effect.  Your Honours, the court also found that in many ways the payment of the dividend was at odds with Project Chelsea, and that appears at paragraphs 31 and 32 which is at page 65:

At [12] of the primary judge’s reasons, her Honour found that:

‘At regular meetings over the next few years “the recognition of Australian tax losses as an FITB continued to be an important issue” as was the balance of franking credits available for distribution to JHIL’s shareholders.  Various measures were considered as a means of addressing the problems.’

Her Honour then said:

‘One such proposal mentioned at a meeting on 21 January 1998 was Project Chelsea.’

Their Honours then point out in 32 that not only was not mentioned at the meeting of 21 January – so her Honour had that wrong, with respect – but it did not address those problems, and again there was another error which infected her Honour’s reasoning in terms both of tax benefit, with respect, and of purpose.  The Full Court returned to this at paragraph 100 which is at page 114 where they say that further capital ultimately had to be contributed when Project Chelsea went ahead and they say towards the end of that paragraph:

This situation was undoubtedly contributed to by the March 1998 dividend of US$318 million, but it exemplifies the point made at [32] above that the object of repatriating assets to Australia to generate income in Australia and deductions in the US by measures such as the transaction, were at odds with the objects of Project Chelsea.

Your Honours, there was ample evidence, in our submission, from which the Full Court was entitled to conclude that the dominant purpose of those who were party to the payment of the dividend was to achieve the benefits which the repatriation strategy achieved, one of which was that the dividend itself was completely exempt from Australian taxation under section 23AJ of the Act and those benefits arose immediately and certainly regardless of whether Project Chelsea proceeded at all.  If your Honours want to see the way in which the Commissioner put his case below in terms of tax benefit, can I ask your Honours to look at 137 at page 125 and you will see at the end of that paragraph – and this is contrary to his written submissions, at least on this application:

It is to be observed that the Commissioner did not put his case on the higher level that, in lieu of the scheme, RCI would have nevertheless transferred its shares in JHH(O) to RCI Malta, but only on the lower level that, such a course was one which, in lieu of the scheme, might reasonably be expected to have occurred.

Then at 132, earlier, at page 123 they referred to the gateway provision submission that had been made to this Court in seeking unsuccessfully special leave in AXA, and over the page at 124:

This no doubt explains the submission of senior counsel for the Commissioner towards the end of the hearing of the present appeal:

‘[W]e submit our submission is reasonable…  We don’t say it is the only counterfactual.  We don’t even say it is necessary[ily] the most probable counterfactual, but it meets the threshold.’

GUMMOW J:   The sooner this phrase “counterfactual” is got rid of the better.

MR BLOOM:   Yes, your Honour.  I think your Honours ‑ ‑ ‑

GUMMOW J:   We did.

MR BLOOM:   ‑ ‑ ‑preferred an alternative postulate, and I think it was introduced, with respect, in argument by the Commissioner in Hart’s Case, but be that or not, the Full Court found that the most reasonable prediction was that Project Chelsea would not have proceeded in the way it did if when they were looking at the tax costs, which they looked at as part of putting this to the shareholders for approval, they had to add in another $172 million.  That was the most reasonable prediction and it is not enough, the Full Court said, that it might have been a possibility and, indeed, that is what this Court said, with respect, in Peabody.  If your Honours please.

GUMMOW J:   Yes, Mr Williams.

MR WILLIAMS:   The fact that in Spotless the Court found that there was a particular reasonable expectation that could be identified does not detract from the test that the Court formulated and applied.  It need only be one that might reasonably lead to the tax benefit flowing and that reflects plainly the words of the sections.  The Full Court’s finding on which the respondent places strong reliance comes from, first, inverting the test in the way that we had identified, looking for a reasonable possibility by which the income might not have flowed rather than applying the words of the section and, secondly, is a finding made without evidence. 

The respondent refers to abundant evidence to support the Full court’s finding.  At page 120 is one of the two pieces of important evidence that the court described.  At about line 35 there is a reference to costs and it was costs that the Full Court regarded as decisive, but the court has not given weight to the passage further up at about line 22 on the page:

Doing nothing, as some people have suggested, is therefore not an option the Board could sensibly or responsibly contemplate.

The other passage, the other important document is back on 117, that the court referred to and again, your Honours, have been taken to the passage about market capitalisation.  Ultimately, of course, this was a question of the costs and the benefits of this transaction and those were not quantified.  At page 117, about line 20:

A number of the more significant alternatives considered by the Board and their general implications are discussed blow.  It should not be assumed that the Board would be prepared to pursue any of these alternatives.

In other words, doing nothing was not an option, according to the Board, and none of the transactions were acceptable, according to the Board.  In order to determine whether some other thing might have been done, and the Full Court conspicuously did not identify any other thing that might have been done, it would have been necessary to deal with it on the basis of evidence.  First there would have needed to be evidence of the US tax treatment of the alternative that RCI threw up below because it was a reconstruction focused on the US  There was no such evidence.

All of the principal architects of Project Chelsea, or at least the principal architects were called and gave evidence, but none of them gave any evidence whatever of an alternative that might have been viable to the transactions that were in fact carried out.  Her Honour concluded, rightly, consistently with authority, with respect, that the inference could be drawn that that evidence would not have assisted the respondent.  Your Honours, 177D(b), the purpose question, the applicant seeks to emphasise the facts.  There are short factual answers to those points, but can I take the Court first to page 135 where we see the Full Court’s consideration of these matters, or the critical parts.  At about line 22:

As to matter (iv) – the result achieved but for Pt IVA – this is self‑evident . . . 

As to the matters in (v) to (viii) inclusive –

That includes, of course, the financial affect on the financial position of the company and related entities –

these provide little to no assistance in the determination of the s 177D(b) issue in the present case.

In other words, the obtaining of the tax benefit which the Full Court had already found was critical to the whole Project Chelsea reorganisation going ahead, was not a matter to be taken into account as pointing toward a dominant purpose.  If I can just, in the time remaining, go to the one key document that deals with the point, page 91.  There are short factual answers to each of the factual points made by the respondent.  At page 91, this is a fax, 30 January 1998, just a couple of months before the transactions and after a series of meetings that have dealt with Project Chelsea matters in the US, Mr Sheppard, one of the architects, to Mr Morley, another, at about Step 4:

To enable a step‑up in basis of the US Group for Australian tax purposes –

This is all part of proposed reorganisation steps in Project Chelsea structure.  Step 5:

To further gear‑up the US Group and to achieve a step‑up in basis for Australian capital gains tax purposes.

As to where the idea came from for the dropping of the stock dividend, Mr Morley never made any recommendation to the board about this, but at page 105, line 30:

Mr Harman sent a facsimile message to Mr Clemens –

another principal architect.  About line 40, this is the day before the transaction:

Ryan and Keith –

now they were Coopers & Lybrand external tax advisors working on Project Chelsea –

seemed to be heading for no stock dividend in our Saturday conversation.  I need to be sure you are happy with this.

So the company is going to its external tax advisor and saying, “Your staff are suggesting no stock dividend.  I need to be sure you are happy with this.  I thought we had to have one.”  The fact is the company discovered relatively late that it could, consistently with its banking covenants, make the transaction by way of a round robin payment and that is what it did.  Your Honours, I see the red light is on.

GUMMOW J:   We will take a short adjournment. 

AT 10.16 AM SHORT ADJOURNMENT

UPON RESUMING AT 10.26 AM:

GUMMOW J:   We are not satisfied that the applicant has sufficient prospects of success in demonstrating error by the Full Court in its finding respecting the criterion in section 177C of the statute to warrant the grant of special leave.  It is on that ground that special leave is refused with costs.

AT 10.27 AM THE MATTER WAS CONCLUDED