CPH Property Pty Limited v Commissioner of Taxation S133/2000

[2000] HCATrans 754

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S127 of 2000

B e t w e e n -

COMMISSIONER OF TAXATION

Appellant

and

CONSOLIDATED PRESS HOLDINGS LIMITED

Respondent

Office of the Registry
  Sydney  No S128 of 2000

B e t w e e n -

COMMISSIONER OF TAXATION

Appellant

and

MURRAY LEISURE GROUP PTY LIMITED

Respondent

Office of the Registry
  Sydney  Nos S132 and S133 of 2000

B e t w e e n -

CPH PROPERTY PTY LIMITED

Appellant

and

COMMISSIONER OF TAXATION

Respondent

GLEESON CJ
GAUDRON J
GUMMOW J
HAYNE J
CALLINAN J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON WEDNESDAY, 13 DECEMBER 2000, AT 10.17 AM

(Continued from 12/12/00)

Copyright in the High Court of Australia

________________________

GLEESON CJ:   Yes, Mr Bloom.

MR BLOOM:   Thank you, your Honour.  Your Honours, with reference to your Honour the Chief Justice’s reference to section 13 of the Acts Interpretation Act, we do rely upon that, your Honour.  It does say that “The headings of the Parts” of the

Act are to be treated as “part of the Act” and that heading does, we say, show that there is a need for the scheme to be one to reduce tax, that is, one intended to reduce tax or, put another way, having that purpose as at least its dominant purpose.

That conclusion was, without reference to section 13, of course, the conclusion of the Full Court in the passage in its judgment at the end of its judgment – I will not take your Honours to it but I will simply give your Honours the reference – at 2295 to 2298.  They examined the various indicia that one might get from the cases about dividend‑stripping schemes and did infer the absence of dominant purpose from those indicia.

GLEESON CJ:   I am not sure that something you told us yesterday was quite accurate, about the determination.  My recollection is that you told us that the determination proceeded on the basis that a purpose of tax avoidance was a necessary element of a scheme of dividend stripping.

MR BLOOM:   Yes, your Honour.

GLEESON CJ:   If you go to the determination at 1193 at line 40, it said:

it is the Commissioner’s contention that the above series of events were conducted in order to obtain a tax-free liberation of the profits of both CPIHL(UK) and CPIL(UK).

Is that what you had in mind?

MR BLOOM:   Yes, your Honour.

GLEESON CJ:   But if you go over to page 1204, when they are considering whether to impose a penalty for tax avoidance, and decide not to impose a penalty for tax avoidance, at line 35 they say section:

177E is a stand alone provision.

This section does not have regard to the circumscribed objective indicia of s.177D (the eight objective tests) to establish…..purpose ‑ ‑ ‑

MR BLOOM:   Yes, your Honour I see that.

GLEESON CJ:   Then they go on to say the reason they are not going to impose a penalty is that it would be inconsistent to do so because their view is that you do not have to have a tax avoidance purpose to attract 177E.

MR BLOOM:   Yes, I see that, your Honour.  Yes, I had overlooked that, I had not gone to that, I had been relying entirely on what was at 1193, your Honour.  It helps us only in this, I suppose, your Honour, that they had found that there was not the presence of the dominant purpose in those passages at 1204.

GLEESON CJ:   But when they came to the question of penalty, they seem to have declined to impose the penalty on the basis that there was no tax avoidance purpose at all.

MR BLOOM:   Yes, yes.  So it detracts from what I said to your Honour as an absolute proposition yesterday, but it helps us, we say, in terms of the determinant’s own findings that there was not a dominant purpose of tax avoidance here.

Your Honours, the second thing is that I should give your Honours a note of the pages at which the dividend-stripping scheme is particularised. That is pages 31 to 32 and 37 of volume 1.  Finally, I should take your Honours to the so-called second limb of section 177E(1) which we deal with in paragraphs 59 and following at page 12 of our submissions.  That is the limb concerning schemes having the effect of schemes:

By Way of –

et cetera –

Dividend Stripping. 

Your Honours will see from paragraph 63 we have again set out that passage from the Explanatory Memorandum which says that:

In the category of schemes having substantially the same effect would fall schemes in which the profits of the target company are not stripped from it by a formal dividend payment but by way of such transactions as the making of irrecoverable loans –

that was what certainly the draftsman had in mind. 

The finding that one needs purpose, if it be right, for the first limb would be entirely otiose if it was not also needed for the second limb.  In our respectful submission, purpose is the necessary element of both first and second limb and the purpose that one needs to find is dominant purpose and one does it by inferring the existence of that purpose from the presence or absence of the particular features of dividend-stripping schemes, as they have been called, in the various cases.

GLEESON CJ:   The Full Court gave an explanation of the aspect of scheme relating to effect, which was rather different from the approach taken by Justice Hill.

MR BLOOM:   Yes, it was.  Justice Hill said if it has that result, that is its effect and, if it has the same result as a scheme by way of dividend stripping would have, that is enough and one does not go to purpose.  We say, with respect, if that is right, there is no need for the first limb.  If we are right in saying the purpose is necessary for the first limb, there is no need for the first limb at all.  It simply has no role at all.

GLEESON CJ:   The Full Court, as I understand it, explained the reference to “effect” by reason of a problem that arose in relation to deemed dividends.

MR BLOOM:   Yes, your Honour, and in relation to the sorts of things that were being done at the time:  the making of irrecoverable loans or the taking up of collapsible shares or collapsible units.  There were all sorts of devices by which the profits were taken out of companies that were being stripped and these were the sorts of things which certainly the author of the explanatory memorandum had in mind in terms of that second limb.  He did not, in our respectful submission, intend that the second limb would render the first otiose.  The balance of our submissions on that point is contained in paragraphs 59 to 64.

If your Honours please, it might then be convenient to turn to section 79D.  May I hand up to your Honours some documents which include something which we have prepared overnight going to the legislative purpose of section 79D.

It might be perhaps convenient if your Honours were to read that document first and put the others aside until I come to them in due course.

GLEESON CJ:   It was section 23Q that used to produce the result that if you got a brief in Hong Kong and managed to get paid there you were better off?

MR BLOOM:   Yes, your Honour.  Also, of course, was the subject of this Court’s consideration in the Spotless Case.

GLEESON CJ:   Yes.

MR BLOOM:   Your Honours, annexed to our submissions there is a diagram - if I could ask your Honours to take that out of Schedule D.  It is handy to have reference to that as we go to the facts which are Schedule A to those submissions.  Now, your Honours see that they are the steps in the entire transaction whereby moneys were provided to CPI (Singapore) which was the CPH representative in the consortium bidding for BAT.

GLEESON CJ:   One thing I am slightly confused about now, is this:  because we are dealing with these appeals in a certain sequence and we have dealt with the Commissioner’s appeals first, we may not necessarily be coming to the problems in the chronological sequence in which they arose.  Am I right in thinking that the issue about the 1989 tax year only arises at this point of the case?

MR BLOOM:   Yes, your Honour.  Chronologically, that is right, but it ought impose no particular difficulty, with respect, because the two are dissociated matters, except, of course, that there were shares acquired as part of this transaction, which was subsequently the shares that were sold to CPIL(Bahamas), but nothing turns of that connection.

GLEESON CJ:   That is where I got into my mind the idea that Mr Shaw, I think, told me it was wrong yesterday, that there was something about the infusion of capital for the proposed BAT takeover that was related to the reorganisation, but I think I was corrected on that yesterday.

MR BLOOM:   I think it is only correct to say that part of the capital in issue, that is the capital of CPIL(UK), was capital that was so raised; that is true, but it goes no further than that, your Honour.

Now CPF was the financier in the Consolidated Press Group and the evidence was that it always was the borrower for funds that were needed for the group and it always on lent at a profit, that is at a margin above what it had borrowed it.  In fact, even in this case, the evidence showed that the moneys went directly from CPF to CPIL(UK) and that becomes important in due course, as I will endeavour to show your Honours.

GUMMOW J:   Just say that again, Mr Bloom.

MR BLOOM:   The moneys which CPF borrowed were sent directly from CPF to CPIL(UK) and those moneys were loaned by CPIL(UK) to CPI(Singapore) at interest rates which the evidence shows varied between 15 per cent and 16.25 per cent.

HAYNE J:   You say “were sent”; what do you mean by “sent”?

MR BLOOM:   Transmitted, your Honour, in $US.

GLEESON CJ:   From the bank account of one company to the bank account of the other company?

MR BLOOM:   Yes, your Honour, precisely.  I will, today, take your Honours to the evidence that goes to that, and the evidence shows quite clearly that if there is a reasonable expectation here, it is that CPF would have loaned the funds directly to either CPI(Singapore) or CPIL(UK) rather than taking up the shares, if it be presumed against us for the moment that this was entered into to avoid the operation of section 79D.

What else is important from this diagram is that the scheme particularised and insisted upon by the Commissioner in the Full Court are the steps in red only.  They do not include the borrowing by CPH Property or the lending by CPIL(UK).  The steps are solely the taking up of shares by CPH Property in MLG and MLG in CPIL(UK).  If I could just then go to the facts in Schedule A, your Honours, and start at number 9.  It sets out the directors of CPIL(UK) and if it be relevant for the other matter, at least, CPIHL(UK):

Around December 1986 a decision was made to purchase stock in the Valassis Group in the US which carried on a major coupon insert business in that country.

11.  The acquisition of Valassis was completed by Consolidated Press US Inc, [‘CPUS’], a wholly owned subsidiary of CPIL(UK).

12.  The acquisition was financed by a USD 200,000,000 loan from a syndicate of outside bankers, which loan facility contained a covenant that certain financial ratios would be maintained or achieved and in default the banks would be entitled to terminate the facility.

13  In mid 1998, following a price war in the US coupon inserts market which was adversely affecting profitability of Valassis, a decision was made to refinance the facility in Australian dollars.

14.  Mr Bourke, the Financial Controller of the Appellant, had formed the view that the USD Valassis facility should be refinanced and that the borrowing should take place in Australia by reason of a lower cost of funds.

And, he says, because the CPH Group was better known to lenders in Australia.

15.  On 25 May 1988 the Treasurer of Australia issued a consultative document proposing a change to the Australian tax system dealing with foreign source income.  The proposal was to be delayed until the start of the 1989-1990 tax year.

16.  Mr Bourke took advice about how to restructure the finance from Mr Cherry, a consultant to Arthur Young, and Mr Verzi, a partner of the same firm.  A letter dated 10 August 1988, which had been prepared under Mr Cherry’s supervision, contained the relevant recommendations as follows:

Firstly, and if your Honours go back to the diagram:

(a)  That the funds be borrowed by CPF and on-lent to CPH Property at interest…..

(b)  That CPH Property use the funds to subscribe for shares in MLG;

(c)  That MLG in turn use the funds to subscribe for shares in CPIL(UK); and

(d)  CPIL(UK) would then advance the funds to the Valassis companies.

Mr Cherry’s evidence was that he:

acted in the belief, having taken counsel’s advice, that s 79D of the Act had no application.

That, as your Honours will see in due course, was consistent with the respondent’s own contemporaneous view as published in a public ruling in 1990 that investments such as this would not attract section 79D:

His reason –

Mr Cherry’s reason, he said ‑

for suggesting the structure was to preserve foreign tax credits; that purpose did not –

as Justice Hill found –

involve a tax benefit.

The 10 August 1988 letter proposals were not immediately implemented because in around November 1988 News Corporation acquired the coupon insert business of a competitor of Valassis and Valassis returned to profitability.  In March/April 1989 Mr Packer had talks with Sir James Goldsmith about a proposal to make a takeover bid for BAT.  He charged Mr Bourke with responsibility to have available approximately £250 million to participate in the bid.

The profits, as your Honours will see from the next paragraph, 20, were expected to be in the vicinity of a billion pounds.  It was expected that the participation by the group in the BAT takeover would presume profits, presumably in the form of dividends flowing down from CPIL(UK), in a very substantial amount.  Dividends may have been realised within 12 months, although a more conservative estimate may have been longer.  The evidence about that is to be found in the appeal book at page 106 line 36 to page 107 line 20.

Mr Bourke again consulted Mr Cherry and Mr Verzi about the structure to be used to participate in the takeover.  Mr Cherry repeated his earlier advice concerning the Valassis structure, namely, that instead of the funds borrowed by the group being advanced directly to the takeover vehicle, that is CPI(Sing), CPH Property should subscribe for shares in MLG.  That was the finding of both the Full Court and the finding of Justice Hill below, namely, that instead of the funds being advanced directly, they should be provided in this form of capitalisation, again in the context where neither Mr Cherry nor, for that matter, the Commissioner believed that section 79D would apply to a transaction of this kind at that time.

That advice was followed.  The shares were obtained, the moneys were loaned.  The takeover bid was conditional, your Honours see from paragraph 26, upon the sale of the Farmers Group Inc, a company conducting an insurance business.  Regulatory approval to that sale was required in California.  It was not obtained and as a result the Hoylake bid was withdrawn and on 5 June Hoylake went into voluntary liquidation.  So Sir James’ view of the unbundling of BAT and continued dividends thereafter never came to fruition.

If your Honours then turn to our submissions, but keeping the diagram handy, if your Honours would, at page 2 starting at paragraph 6, relevantly here in relation to Part IVA the essential elements are the obtaining by the taxpayer of a tax benefit in connection, we insist, with the scheme as particularised by the Commissioner, which we have called the Commissioner’s scheme, and a conclusion having regard to the eight necessary matters, as this Court referred to them in Spotless, that the sole or dominant purpose of a person who entered into or carried out that scheme was to obtain that tax benefit.  We say of course that neither was present here.  The first of those is tax benefit.  If your Honours were to find that there was no tax benefit because section 79D would not have applied, then that is the end to it and we win on that basis.

GLEESON CJ:   That is the basis on which Justice Hill decided the case.

MR BLOOM:   It is, your Honour.  He decided it on one of the arguments we put forward, namely, that relating to nil amount.  There is a second argument that even if we are wrong on nil amount, nonetheless the act of holding shares here, which was the act which was productive of the dividends that were expected, was not an activity carried on.  If it was an activity carried on, it was not carried on in a foreign country, which is what is required before section 79D can apply.

Your Honours, we have set out section 79D at page 3 and our learned friends were quick to point out that we had an error in it, on the first line, the third last word “during” should, indeed ‑ and we are indebted to them ‑ be “in”.  So it should say “derived by a taxpayer in a year of income from a foreign source”.

GLEESON CJ:   I do not have that.

MR BLOOM:   “Where the amount of a class of income derived by a taxpayer” ‑ ‑ ‑

GLEESON CJ:   Page 3?

MR BLOOM:   Page 3, paragraph 9, section 79D.

GLEESON CJ:   Thank you.

MR BLOOM:   Now, your Honours will find it easier to read section 79D if for the word “source”, which is apt to cause confusion, you insert the word “activity”, because “foreign source” is, in fact, defined as “foreign activity”.  So, really, when one looks at 79D(1), “Where the amount of a class of income derived by a taxpayer in a year of income from a foreign” activity “is exceeded by the sum of”, as will be seen, even Justice Hill, who knows a lot about these things, sometimes confused “foreign source” in the defined sense of “foreign activity”, and “foreign source” in the section 6A, B sense of common law source.

GAUDRON J:   Where do we find the definition of “source”, Mr Bloom?

MR BLOOM:   In paragraph 10, your Honour, of our submissions.

GAUDRON J:   Thank you.

MR BLOOM:   For the purposes of this section, first, your Honours see there is a dealing with what is a “class of income”.  Interest is a “single class”, “offshore banking income” is a “single class”, and “all other income constitutes a single class”, and “foreign source” in relation to a taxpayer” – it is defined in relation to a taxpayer, not in relation to an item of income – means:

a business carried on by the taxpayer at or through one or more permanent establishments in a foreign country –

That is not an issue here.

GAUDRON J:   But it is in this section.  That definition is in this section.  How do you relate it back to section 79D?

MR BLOOM:   Section 79D(2), which is set out just above paragraph 10.

GAUDRON J:   I see, thank you.

MR BLOOM:   It adopts those definitions, your Honour.  At (b):

any other business, commercial or investment activity carried on by the taxpayer in a foreign country.

We place significance on the words “other” and “business”, “activity carried on” and “in”.  Now, 79D was, in 1991, amended.  It is Schedule B to these submissions and it was amended, relevantly, to this case, in terms of section 79D(1)(b), by now using the words “did not derive any”.  But I have to say at once, your Honours, that if you look at the bottom of the page, you are directed by the legislation to have no regard to that in interpreting the section in the form in which it is before the Court.

GLEESON CJ:   Where is that?

MR BLOOM:   At the bottom of that page on which the new section 79D is set out.

GLEESON CJ:   The bottom of page 26.

MR BLOOM:   Yes, your Honour.  Your Honour sees “History”?

GLEESON CJ:   Yes.

MR BLOOM:  

S. 51(2) of No. 5 of 1991 provides that the substitution is to be disregarded for the purpose of interpreting former s. 79D in relation to any other assessment.

GLEESON CJ:   Thank you.

MR BLOOM:   Now, Justice Hill held that there had to be an amount of income derived, that is, a positive amount of income derived, before you could have something which was an amount, or the amount, within 79D(1), because of the word “derived”, and also, of course, one has to be able to attribute to that which is derived, a class, and it is hard to distribute to a nil amount, a class.

GLEESON CJ:   I thought what he said was that it also had to have a source?

MR BLOOM:   In the sense of foreign activity, your Honour, I think.

GLEESON CJ:   Yes.

MR BLOOM:   He does, with respect - it is probably something for which counsel has to take blame - confuse the two in various places.  The other thing about it is, if you look at paragraphs (a) and (b), one must be able to say that the deductions that one is talking about can be related exclusively to income of that class derived or the Commissioner is given the power to form an opinion that they may be appropriately related to income of that class derived.  No opinion has been formed here, but both of those sections contain within them a mechanism that enables one, having identified the class of something derived, which, of course, means something positive having come in, the ability then to relate deductions to that amount derived.  So his Honour held that nil amount was not an amount to which section 79D was capable of applying.

GLEESON CJ:   But what, on your argument, happens if you carry on a business activity in a foreign country in a year of income and there are deductions which relate exclusively – let me put it this way at the moment – to that activity, but the activity in the year of income has not started to become income producing?

MR BLOOM:   Then you would get the deduction, if there is no income under this section, as it then stood, and there are reasons relative to the wording of other provisions in the statute, including the part which inserted section 160AFD and the predecessor to section 79D, for that conclusion as well.

GLEESON CJ:   But if, on the other hand, you had derived $100 of income from the business activity, the quarantining would operate?

MR BLOOM:   Yes.  It is hard to see that the investment of funds in carrying on a business activity, of the kind which we say was envisaged here, would produce an amount of assessable, that is, gross income, of $100, but the example is right if, for instance, it produced $100,000.

GLEESON CJ:   This may not matter and it may be a search for the Holy Grail, but what would be the legislative purpose of making a distinction of that kind?

MR BLOOM:   The legislature proceeded, we say, your Honour, upon the assumption that activities funded and carried on in a foreign land would be productive of income and, indeed, they gave a carry forward of the excess, the difference, between the outgoing and the income from that source against further income upon the assumption, we say, that the activity would be productive of income.  They simply did not turn their minds to the possibility that an activity would be productive of no income, given the sorts of activities that were comprehended within subparagraph (1).

GLEESON CJ:   Your mean this is what is sometimes called an unintended consequence?

MR BLOOM:   Yes, but it is the sort of thing that simply the draftsman did not need to turn his mind to.

GLEESON CJ:   That is what I want to understand, why?

MR BLOOM:   Well, an activity, of the kind that one would fund to carry on a business or similar activity overseas, would be expected, we suggest, to be productive of income, that is, gross or assessable income in each year.

GLEESON CJ:   Not necessarily in a particular year; not necessarily in the same year in which the activity is carried on.

MR BLOOM:   Your Honour, it is not impossible to envisage situations where there are start-up activities and we would accept that, but we say the draftsman simply has not thought along those lines.  All he has done is to assume that income would be derived.

GLEESON CJ:   Would this cover the case of a barrister providing legal services in a foreign country?

MR BLOOM:   That is complicated by international agreements.  But if there were no international agreements, yes, your Honour.

GLEESON CJ:   All right, then ‑ ‑ ‑

MR BLOOM:   But barristers earn income, your Honour, when they provide those ‑ ‑ ‑

GLEESON CJ:   Yes, and they return their income on a cash basis, not an accruals basis.

MR BLOOM:   They do, yes.

GLEESON CJ:   So, it is very common for the activity to occur during one accounting period and their derivation of income to occur during a later accounting period.

MR BLOOM:   Well, yes, but all I can say, your Honour, is the draftsman probably did not turn his mind to that particular situation, if he thought of it as a commercial activity to be carried on in the first place.

GUMMOW J:   Now, the nub of the Full Court’s reasoning is at paragraph 67 of the Full Court judgment.

MR BLOOM:   Of the judgment, yes, your Honour.

GUMMOW J:   They, in effect, I think, raise some of the matters that the Chief Justice is putting to you.  What is the answer to paragraph 67?

MR BLOOM:   Yes.

GUMMOW J:   Paragraph 66 excludes the possibility that there is only one construction open.

MR BLOOM:   Yes.  Well, your Honour, we say, with respect, that their Honours left out of account three things.  One is that when one looks at this concept of activity carried on, that we say it is fair to infer that the draftsman anticipated there would be income and by giving a carry forward of the differential, if any, he also anticipated there would be a continuing income in the future.  The second thing is that there are two constructional aids:  one is a section which came in 1987 in the same Act which says that nil amount is an amount; and the other is that in section 160AFD, where it was anticipated there might be no deductions, the words “(if any)” were used after the word “deductions”, whereas the words “if any” were not used in section 51(6) at the time that it and section 160AFD were put into the Act.  Section 51(6), of course, was in the precise same terms as section 79D.

GLEESON CJ:   It is a bit difficult to use later amendments of the kind that newspapers would call clarifications to construe earlier provisions of this Act, is it not?

MR BLOOM:   Yes.  Is your Honour talking about an amendment to the exact section itself, or to some other provision of the Act?

GLEESON CJ:   Either.

MR BLOOM:   There is some authority in relation to the former in Dunmunkle in the judgment of Sir Owen Dixon and in the judgment Lord Justice Rowlatt in Cape Brandy Syndicate, both of which are referred to by Justice McHugh in Hepples’ Case.

GLEESON CJ:   But it is the nature of extremely complex legislation of this kind that people notice things about it that they want to clear up as they go along.

MR BLOOM:   Yes, yes, and because we are not allowed in this case, anyway, to look at the amendment because we have been directed by the legislature not to do so, I could not rely upon those cases anyway.  Those cases do not cover the situation of an amendment to another part of the Act, so all we can do in relation to the 1987 amendment to section 160ARY is to point out that there the legislature focused on nil income and said that nil amount is an amount. 

But in relation to section 160AFD, when they wanted to anticipate that there might be no deductions, they said “the deductions (if any)”.  That was in the same piece of legislation that inserted section 51(6) in the same form as section 79D.

HAYNE J:   If we focus upon the last three lines of 79D(1), that is the lines appearing after paragraph (b), do you point to any difficulty in giving effect to those words if the Full Court’s construction of the earlier words is adopted?

MR BLOOM:   No.  It is really earlier than that that we say the problem arises because you have to attribute a class to the non-income.  The non‑amount has to have a class and you have to be able to relate to that class and every time the word “class” is referred to “income of a class” it is referred to as “income of class derived”, so the activity of relating must be done by reference to income of a class derived and that ‑ ‑ ‑

HAYNE J:   But the effect of 79D(1), that is the operative effect of it, lies in part, perhaps in large part, in the reduction that is directed in those last three lines, is it not?

MR BLOOM:   That is the operative part but may I say this to your Honour, with respect, our submission is that there are essential preconditions before that part operates and if the essential preconditions are not met then, in our submission, that operative part does not operate.

HAYNE J:   Yes.

GAUDRON J:   I would have thought you did take some comfort from the notion of proportionate reductions because if it is nil the notional of proportion of reductions does not actually – does it?

MR BLOOM:   Yes, thank you, your Honour.  Perhaps I was too quick.

HAYNE J:   It is proportionate to the deductions, is it not?

MR BLOOM:   Yes.

HAYNE J:   You can do that, can you not, whether or not the income is nil?  You can apportion – if you have three deductions, $100 for interest, $50 for stationery and $10 for pens or something, you can reduce those proportionately, can you not, as between themselves in the ratio 100:50:10?  Is not that the ‑ ‑ ‑

MR BLOOM:   It is where it is zero.  I suppose that if you have zero as a denominator.

HAYNE J:   But do you ever have zero in that proportionate calculation is the question that we are directing attention to.

MR BLOOM:   As the numerator you must, your Honour, in the case here. The numerator must be zero because it is the amount of income.

HAYNE J:   I do not follow that.  I am sorry, you will have to explain that more elaborately.

MR BLOOM:   You reduce the deductions which are – let us say the deduction is $50,000 and the income is nil.  You reduce the deduction of $50,000 by an amount proportionate to those deductions.  It is the second of them, is it not, your Honour, and equal in total to the amount of the excess that probably makes what I said wrong.

HAYNE J:   At least at the moment, I cannot see how there is a zero element at all in the proportionate exercise.

MR BLOOM:   In those three.

HAYNE J:   There is a zero that would be taken into account if the construction urged against you were adopted in determining the excess.  The excess of deductions would be the whole of the deductions but that is the only ‑ ‑ ‑

MR BLOOM:   Yes.  One can certainly determine the excess, there is no question about that.  The difficulty, of course, is that the deductions referred to are those to which paragraphs (a) and (b) apply and (a) and (b), again, require a relation to income of a class derived.  So, the deductions to which paragraphs (a) and (b) apply are deductions that relate exclusively to “income of that class” and are derived.  We say it is hard to talk of a nil figure as having been derived and as having a class.

HAYNE J:   Just to follow that point out a bit further to see if I understand it.  Let it be assumed that the deduction in question is a borrowing expense. Is the point you just made a point how do you say that that borrowing expense relates exclusively to income of that class derived from that activity, there being no income?

MR BLOOM:   None derived.  None derived, so, how do you give it a class?  And “derived” means, as this Court said in Read’s Case – that was not a tax case – that the word derived means something positive coming in.  I am not sure they used the word positive, but that was certainly the inference from the passage.

HAYNE J:   I am surprised you put the weight there rather than the weight on the word “relate”.

MR BLOOM:   Yes.

HAYNE J:   The difficulty that I thought you were pointing to was a difficulty in identifying relation.

MR BLOOM:   It is a difficulty in performing the task of relating something to something if one of those somethings is a nothing.

HAYNE J:   Sir Humphrey, thank you.

MR BLOOM:   Your Honours, we have given you a reference to Read’s Case on page 5 in paragraph 18(b) of our submissions and the relevant passage is at page 67 – I will not take your Honours to it – and then the three points that we make about the interpretation of the section, which is both nil amount and then this question of foreign activity, whether there is a business‑like activity carried on and in a foreign country, are made in 19 and 20.

I have said what I want to say about nil amount, if your Honours please, and if I might then turn to the question of whether there was here a “foreign source” as defined.  That involves that double question of, was there a business investment, et cetera, activity carried on by – the presumption here is, of course, CPH Property – in holding shares in CPIL(UK), a non‑resident UK company, which was carried on in a foreign country.

GLEESON CJ:   What is the relevant foreign country?

MR BLOOM:   Hong Kong, your Honour.  Your Honours refer to it from time to time, as do our learned friends in their submissions, as England, but it appears that the central management control of CPIL(UK) was Hong Kong.  It is to there that the application for shares was sent by Murray Leisure Group and the assumption is here for the moment, and only for the moment, that we are treating CPH Property as having done what Murray Leisure Group did and acquired the shares in CPIL(UK) that it did not acquire, but that Murray Leisure did.  That is the hypothesis which the Federal Court said we should work upon for the purposes of Part IVA.  I will come to that when I deal with Part IVA.

GLEESON CJ:   Where is the share register?

MR BLOOM:   Of CPIL(UK)?

GLEESON CJ:   Yes.

MR BLOOM:   In Hong Kong, your Honour.  Now, there were two activities identified in argument before the Full Court or two things which might – there is a better way of saying it – qualifies activities.  One was the acquisition of the shares and the other was the holding of the shares.  It is the latter that, in our submission, entitles the putative holder of the shares, CPH Property, to dividends.  You do not become entitled to dividends by acquiring shares, rather by holding them and being a holder at the point of time at which the dividends are properly declared.

Now, the Full Court and Justice Hill treated acquisition as the relevant activity.  We say, with respect, that is wrong.  The relevant activity, if there is an activity, was holding.  But even if the relevant activity was acquisition, we are concerned with the act of the Australian taxpayer in subscribing for shares.  We are not concerned with the act of the company in which the shares are issued in allotting those shares.  The act is one of subscription and the question is, “Was that an activity carried on by the taxpayer in the foreign land?”.  The answer to that we say is, no.

We only have one of the applications, your Honours, but it is at page 229 of the appeal book in volume 7.  I simply give you a reference to it.  The moneys, of course, were sent directly, as I have told your Honours, from CPF up to CPIL(UK) and that act of sealing ‑ ‑ ‑

GLEESON CJ:   What was the page of volume 7?

MR BLOOM:   Page 229, your Honour.

HAYNE J:   It is volume 1, I think, Mr Bloom.

MR BLOOM:   I am sorry, your Honour is right.  Yes, it is volume 1.  I am sorry, your Honour.  That was the application under seal of Murray Leisure Group, and we are presuming that CPH Property did exactly what Murray Leisure Group did.  Your Honours will see at the top of it, the address of the company, the seal is fixed by two directors.

HAYNE J:   Why is it that you locate that activity as occurring in Australia?

MR BLOOM:   It is an Australian company, your Honour.

HAYNE J:   Yes, I understand that.  Why do you locate this act as occurring in Australia?

MR BLOOM:   By inference from that document, and certainly his Honour Justice Hill seemed to accept that the central management control of Murray Leisure Group was in Australia.  There really could be no dispute about that.

HAYNE J:   Thus it is the decision to apply, is it?

MR BLOOM:   Yes, and the affixing of the seal perhaps to the application and the forwarding of the application.

GLEESON CJ:   Why is it not the communication of the application?

MR BLOOM:   The activity by the taxpayer in making that communication, your Honour, is putting it in the mail or on the fax machine or however it is done.

HAYNE J:   We seem to be getting down to a postal acceptance rule almost, Mr Bloom, analysing it in this way, do we not?

MR BLOOM:   We only do because the focus of the section is on an activity carried on by the taxpayer.  The acceptance of the taxpayer’s offer is not an activity carried on by the taxpayer, albeit that may take place overseas.

GLEESON CJ:   Suppose there were a law of Hong Kong that made it an offence to subscribe for shares in a company in certain circumstances and this came within those circumstances.  You would construe the Hong Kong law as applying to activity occurring in Hong Kong.  Why would this not be a contravention of that law on the assumption I have made?

MR BLOOM:   I am not sure that in order to get the territoriality there, your Honour needs more than having the Hong Kong company.  That would be ‑ ‑ ‑

GLEESON CJ:   A company with a share register in Hong Kong.

MR BLOOM:   Yes.  That would be the sufficient nexus with Hong Kong to provide the territorial connection for that sort of legislation.  One suggests it still would not answer the question of whether the subscription took place in Hong Kong.

HAYNE J:   Let us test it against Murray Leisure Group deciding in Australia at a board meeting it held in Australia to buy shares on the London exchange.  Where does that investment activity occur?

MR BLOOM:   If one defines it as the activity of subscribing, we say that takes place in Australia, your Honour.

HAYNE J:   That was not my example, Mr Bloom, was it?  It was to buy shares on the London exchange.

MR BLOOM:   I am sorry, yes, your Honour, it was.  It depends on whether the broker overseas is acting as an agent for the company here or whether it is doing it directly or whether he is acting as an independent agent.  Indeed, those are the sorts of differences that the Commissioner himself makes in his ruling.  It may be as well to go to that now.  It is Schedule C to our submissions.  Your Honours will see the second‑last paragraph of what I might conveniently refer to as the digest.  Where section 160AFD(7)(a) does not apply, that is the company does not have a branch it will be a question of fact as to whether the business, commercial or investment activity of a taxpayer is carried on in a foreign country for the purposes of (7)(b).

The key test, therefore, against which all the circumstances of each such activity are to be measured is whether those circumstances lead to the conclusion that the activity is essentially managed, controlled, organised and conducted by the taxpayer in Australia or in the foreign country.

Over at paragraph 17, that is repeated.  At the top of page 12,897, the first full sentence:

Support for this view is to be found in the ordinary dictionary meaning of “carried on” in relation to a trade or business, being to conduct, undertake or prosecute that activity.  The consideration that the business activity results, or may result, in the derivation of income that would be foreign income…..will not be the sole determinant of the matter…..

18.  In that regard, one of the relevant considerations would be whether there is some active involvement in the foreign country of the taxpayer, the taxpayer’s employees or appointed representatives (not being independent agents, or dependent agents of the type that would constitute a permanent establishment) in the business activity giving rise to foreign income.  Where, for example, the business activity of the taxpayer is essentially managed, controlled, organised and conducted by the taxpayer in Australia, and foreign income is derived from sales arranged in a foreign country (or countries) through independent agents of goods manufactured by the taxpayer in Australia, or of industrial property rights or know‑how developed by the taxpayer in Australia, it would normally be accepted that relevant deductible expenditure is not incurred in respect of the derivation of income from a “foreign source” for the purposes of para (b) of the definition.

19.   The expenditure would not in those circumstances be subject to foreign loss quarantining.  It would therefore be available for set off against Australian source and other foreign income of the taxpayer for the year of income.

Then, in paragraph 21:

The variety of commercial or investment activities that may fall for consideration under para. (b) of the definition are too numerous for the position of each to be specifically addressed in this Ruling.  It is considered that the terms of para. (b) and established principles of statutory interpretation require that the basic guidelines set out in para. 17 of this Ruling, for determining when any other business activity should be regarded as carried on by a taxpayer in a foreign country, should generally apply equally with respect to commercial or investment activities.  The key test, therefore, against which all the circumstances of each such activity are to be measured is whether those circumstances lead to the conclusion that the activity is essentially managed, controlled, organised and conducted by the taxpayer in Australia or in the foreign country.

22.   As a general rule, it is considered that the activity of renting out real property –

now, they do not talk there about acquiring the real property but, rather, the income earning activity of renting it out –

situated in a foreign country would fall under that test to be treated as a commercial or investment activity carried on in a foreign country for the purposes of para. (b) –

and then, very importantly, paragraph 23:

Conversely, a “passive” investment undertaken from Australia, for example by an Australian resident investor who acquires shares in a foreign company listed on a foreign stock exchange by means of instructions placed from Australia with an independent stockbroker, located either in Australia or in the other country, could normally be expected to be not regarded under that test as a commercial or investment activity carried on by the taxpayer in a foreign country.

GLEESON CJ:   What does that expression “passive investment” mean?

MR BLOOM:   Well, they go on at 24, your Honour, to, I think, give an idea about it and it would cover the sort of situation here:

an Australian resident investment company or other taxpayer investing in foreign shares and/or securities may appoint or engage a manager or investment adviser in a foreign country or countries to facilitate and transact those investments.  Providing the significant decisions with respect to the management, control, organisation and conduct of those investments remain with the resident taxpayer in Australia, the dividends and interest income derived from the foreign shares and/or securities, and related expenses, could normally also be expected to be treated as attributable to an activity carried on by the taxpayer in Australia.  The would not, therefore, be subject to the foreign loss quarantining provisions of the Assessment Act.

25.   However, the dividends and interest –

and 25 sets out what he regards as active as opposed to passive –

would be treated as related to an activity carried on in a foreign country or countries – and thus be subject to the foreign loss quarantining provisions – if the investment power accorded to the overseas manager or investment adviser is so wide as to effectively delegate to that person the essential management, control, organisation and conduct of the foreign investment ‑ ‑ ‑

GLEESON CJ:   Where was the central management at control of CPIL(UK)?

MR BLOOM:   Hong Kong, we understand, your Honour, but of Murray Leisure Group and, therefore, on the hypothesis that the Federal Court adopted, CPH Property, Australia, and if it matters, CPH Property, Australia, as well.  So your Honour Justice Hayne sees that my answer to your question comes really from what I have discerned as a distinct differentiation by the Commissioner himself in his public ruling published in 1990.

HAYNE J:   What is the significance that we are to attach to the public ruling?

MR BLOOM:   It is not a binding public ruling, your Honour.  Its significance lies more, in relation to Part IVA, when given the twin facts of the Commissioner’s ruling, which is contemporaneous, relevantly, and Mr Cherry’s own evidence that he believed, through counsel’s advice, that section 79D – in another matter – that section 79D did not apply, whether one would objectively form the view that there was a reasonable expectation that this scheme was entered into to avoid section 79D.

GLEESON CJ:   Where do we find the ruling referring to 79D and its
non-application?  I see, it is for a reason different from the one that Justice Hill adopted.

MR BLOOM:   Yes.  The reference is section 160AFD.

GLEESON CJ:   Did the evidence about Mr Cherry’s understanding of the application or non‑application of 79D indicate the basis of that understanding?  I mean, was it Justice Hill’s point or was it your second point, or did not the evidence show it?

MR BLOOM:   It does not show the basis of it, simply that he had taken advice in other matters, as Justice Hill noted, that led him to the conclusion in his evidence that 79D had no application.  He simply had not thought it necessary to do something to avoid section 79D because he did not believe it applied.

GLEESON CJ:   What is the relevance of individual’s beliefs about the operation of certain provisions of the Act when you come to apply section 177D?

MR BLOOM:   That is not clear, your Honour.  There are two cases which have recently gone on appeal to the Full Federal Court concerning the same issue of sales and lease back where one single judge has held that subjective purpose is a relevant matter to be taken into in relation to section 177D(b)(i), that is, “manner” of “the scheme” and the other judge of the Federal Court has held that it is not a relevant matter.  It is not clear to what extent it is relevant.  It seems to us, with respect, that it may only be a point of advocacy, somewhat unusual, but if neither the Commissioner nor the taxpayers thought 79D would apply one could assume that they entered into this transaction to avoid it.

GLEESON CJ:   That is what I am not clear about.  I mean, suppose you had an argument about whether Part IVA operated in a situation where the tax benefit in mind at the time of applying 177D is one that flows under a particular provision of the Act and it can be demonstrated objectively that the scheme produced that tax benefit but it also appears conclusively from the evidence that it never occurred to anybody connected with the scheme at the time that that tax benefit would result, perhaps, for example, because you had actual evidence that they honestly misunderstood the effect of the legislation.  What, if any, relevance would that have?

MR BLOOM:   Either none at all, or, if it comes in, it comes in under subparagraph (i), but here, of course, Justice Hill found that there were two tax benefits that flowed from the scheme.  Potentially, one was not a defined tax benefit and that related to foreign tax credits.  The other was the section 79D benefit.  Now, if one is looking, as his Honour did, for dominance amongst those two purposes, which is the task his Honour performed, one would have thought that at least it was relevant to destroy the dominance of section 79D as the purpose, given both the Commissioner’s ruling and Mr Cherry’s evidence.

GLEESON CJ:   I had in the back of my mind, and my memory might be playing tricks with me, an idea that one of the reasons why the courts in section 260 insisted on what they called “an objective purpose” was to avoid having to psychoanalyse people.

MR BLOOM:   Yes, it is intended to be, as we understand it, subjective purpose objectively ascertained, and if that is strictly confined to the eight matters in section 177D, something we said the Full Court did not do here, then it is hard to see where actual subjective purpose of anybody comes in because - the other example I suppose is if a taxpayer objectively would be taken to have the view but vehemently denies that he had it, can that take it out.  There are difficulties with trying to import actual subjective purpose, your Honour.  We see that.

Your Honour, in that ruling, the reference to 79D and 51(6) is in paragraph 3 on page 28 of the supplementary materials.  But we say, in any case, your Honours, that the relevant activity was not subscription, any more than acquiring real estate entitles one to income from it.  What entitles one to income from real estate is renting it out and income from shares is being the holder of those shares at the relevant time.  So, it is the holding of shares which, if anything qualifies as an activity, has to qualify as the activity.  That activity, holding the shares, did not take place in the foreign country.

GLEESON CJ:   That is what I just do not understand at the moment.

MR BLOOM:   The holding of the shares?

GLEESON CJ:   Why does not the holding of shares occur where the share register is?

MR BLOOM:   Well, your Honours, we have a bit of assistance from some judgments of Sir Garfield Barwick and Sir Ninian Stephen in Esquire Nominees.  We have handed to your Honours this morning a diagram in an attempt to set out clearly the facts of that case and the question involved ‑ ‑ ‑

GUMMOW J:   They were concerned with common law source, were they not?

MR BLOOM:   They were, but as we have endeavoured to show on that piece of paper we have handed up, a question arose in the course of answering that question, where did the company in question make its investment income, that is, dividends from the holding of the shares?  And the answer given by both Sir Garfield and Sir Ninian was, where it had its central management and control.

GLEESON CJ:   But the question is slightly different here, is it not?  It is a question of where the activity was carried on and you have identified the activity as the holding of shares.

MR BLOOM:   Yes, we say first of all it was not carried on, but if it was it was carried on in Australia, because that is where the central management control was and that finds support in those two passages in the judgments of Sir Garfield and Sir Ninian; Sir Garfield at page 212 of 129 CLR 177 and at the second full paragraph, his Honour said:

Further a company may make profits without trading in goods or commodities or for that matter in securities.  It may make profits simply by investment and may do so though its investment portfolio consists only of shares in one other company or even of all the shares in one other company.  In such a case its net income from its investments will be its profits.  Further, in my opinion, the place where the company makes its investment income will be the place where it has its central management and control.  It will, of course, be different in the case of a company conducting manufacturing or trading activities.  In the case of such companies the place where these activities are carried on can be seen in fact to be the geographical source of the profits these activities yield.

Now, yes, he is talking about source, but we do seek to get out of that a suggestion, with respect, that central management control identifies, in the case of an investment company, the place where it carries on its activity of holding, if that is an activity and it is carried on within the section. 

We do say, of course, your Honours, that “carrying on” imports a need for repetition in the context of a section that has the word “business” in it: “other business, investment and commercial activity, carried on”, and although the High Court in Thiel’s Case said that, in the context of the international treaty with Switzerland, an activity or an enterprise could be carried on by a singular act, that was in the context of the treaty and their Honours relied, as we understand it, upon the absence there, of the word “business” in the same part of the section that dealt with the words “carried on”.

GLEESON CJ:   But you make the point that the relevant activity here is the holding of shares, which is, from one point of view, a state of affairs.

MR BLOOM:   It is a state of affairs which continued, but it is wrong, with respect, to call it “carried on”.  One might say of it, at the end of the day, that it carried on for some time, but to say that the taxpayer carried on the activity of holding shares, is a different thing, in our submission.

GUMMOW J:   Well, what follows from that?  Are you saying the section can have no application?

MR BLOOM:   To a passive investment, yes, as the Commissioner thought.

GLEESON CJ:   Can we come back again to this concept of a passive investment, I am just not 100 per cent sure I understand that?

MR BLOOM:   A mere investment of this kind, of shares in a company, where there is no active management involved, where there is no constant buying and selling of shares ‑ ‑ ‑

GLEESON CJ:   Well, I can understand that if I own shares in BHP, I have a passive investment in the manufacture of steel, but suppose I am in the business of manufacturing steel and I form company A in which I own all the shares and company A finds it convenient to form company B in which company A owns all the shares and company B carries on the business of manufacturing steel.  From my point of view, is that a passive investment?

MR BLOOM:   If it is part of your business of manufacturing steel and your Honour is doing so simply by holding shares in a company which does it in that particular instance, then it would be part of that business activity, your Honour, part of the steel activity, we would say.  But if your Honour takes up shares for an investment in an English company and does so in the sort of circumstances contemplated by the ruling, where there is no active management of it involved in the foreign place, then that is the sort of thing which is managed from Australia.

The difference would be, say, a London-Australia investment‑type company which carried on a business of buying and selling shares and switching investments, that sort of thing.  That would be an activity carried on and dividends from that activity would be caught.  But the mere acquisition of shares in another company, or even all of the shares in another company, would not, in our respectful submission, be an activity; still less would the holding of shares in it be an activity carried on; and still less, if we are wrong on that, in the foreign country, because we are focussing on the acts of the taxpayer.

Your Honours, I see I have limited time to deal with Part IVA.  It may be appropriate, then, to turn to that and there are three things, really, I need to mention.  The first is the impermissible attribution of purpose by the Full Court.  The second is that the Full Court needed, in order to construe the purpose of the scheme, that is the Commissioner’s scheme, that is, the scheme in red, as the necessary purpose for section 177D to go outside of that scheme and to say, “Oh, it is true that the Commissioner has isolated two steps from a broader scheme which is in its entirety commercial, but the purpose of those two steps is to be judged not by reference to those two steps put under the microscope of section 177D, but by reference to their context in the whole scheme”.

GLEESON CJ:   Or was the conclusion that the purpose of those two steps or a sufficient purpose of those two steps was to avoid the effect of the quarantining under section 79D?

MR BLOOM:   You could only conclude that about those two steps if you leave out of account the lending and the borrowing by going back to the lending and the borrowing.  That is our point, your Honour.

GLEESON CJ:   But is that conclusion the conclusion on which the assessment is based?

MR BLOOM:   The Commissioner has been given the ability, after the decision of this Court in Peabody, to use a scheme different to that he has relied upon for the purposes of his assessment.  When he comes to Court, he can, as he did in Peabody and as he did, as we understand it, here at first instance, and he has steadfastly retained that scheme since then, selected these two steps, two steps which, if one just looks at those in isolation, are inherently commercial.  CPH Property acquires shares in MLG equivalent to what it has paid for them, MLG shares in CPIL(UK) equivalent to what it has paid for them and, in each case, substantial dividends of up to £1 billion are expected to flow through.

So they are both very commercial steps, and the Full Court left out of account altogether the commerciality of those two steps.  What it says is, we can judge the tax purpose of them by calling them the interposition.  Now, that changes the scheme immediately because once you say interposition, interposed between what?  The act of interposition was never particularised by the Commissioner as a part of the scheme and yet, when the Full Court talks, as it does, about looking at the scheme in context and seeing then that it involves interposition, it is doing what we say the High Court said you cannot do in Peabody when it said that, relying upon the decision of the House of Lords in Brebner, you cannot narrow the scheme for Part IVA purposes if to do so would rob it of all practicality.  Now, what does that mean?  It means, in our submission, in the context, to divorce it from the other steps, to consider its purpose, but having to go back to the other steps in order to do that, that robs the narrowing of all practicality in the context in which it has been done.

Now, your Honours, the third matter is as to reasonable expectation.  The Full Court seemed to think that the Court in Spotless authorised less of a predictive approach than they had specified in Peabody and that when the High Court said in Peabody that a reasonable expectation was required and seemingly meant that, they had somehow in Spotless narrowed that test and that reasonable hypothesis would suffice, hypothesis in the sense of possibility, your Honours.

It is, indeed, in that fashion, and that fashion only, that the Full Court management to get to the point where they found that the dominant purpose of the particularised scheme was to produce that tax benefit.  If I might say to your Honours that, as a matter of fact, the reasonable expectation, having regard to the evidence, was only that absent the Commissioner’s particularised scheme, the moneys would have been lent and lent at interest to either CPIL(UK) or CPI (Singapore).  The Full Court, firstly, in volume 9, at page 2236 ‑ ‑ ‑

GUMMOW J:   Paragraph?

MR BLOOM:   Paragraph 5, bottom of the page:

Central to that repeated advice, of which no record was kept –

that is of the repeat of it –

was the proposition that instead of funds borrowed by the Group being advanced directly –

Justice Hill dealt with it at 2151, line 20:

Obviously -

he uses no lesser word than that to commence –

Obviously, if income tax were no consideration, there would then be a borrowing from the Australian borrower –

he says CPH but it was CPF, that is an error –

or ACP…..directly to the companies which were to use the funds borrowed.

Now, there is some evidence in volume 1 at, firstly, 96 to 97.  At the bottom of 96, about line 38, Mr Bourke, in cross-examination, is saying that they were going to borrow in Australia.  Then, at page 103, line 8, the question is:

What were those factors?---Well, the first is that we – the borrowings for Australia were always carried out through Consolidated Press Finance and it was a finance company and one of the things we had to do is we borrowed from that – that was the borrowing vehicle for Australian operations.  We lent throughout the group at a commercial interest rate plus – which included a margin for the borrowing.

Then, if you go to 114, line 30, my learned friend, Mr Pagone, was endeavouring to have admitted into evidence certain documentary evidence to show that the transfer of funds went directly to CPIL(UK), and if you go over to page 116, your Honours will see that after an adjournment we were able to agree with that, starting at line 26, to the end of that page, which his Honour treated as admissions through counsel over to page 117.

Now, as I say, examples have a tendency to conceal more than they disclose, but that is an example, we would say, of a situation that these provisions as they stood in the Act at the relevant time were not intended to cover.  My learned friend spoke about dominant purpose.  As I understood his submission, he spoke of dominant purpose of a scheme and, of course, while that was relevant to the issue of section 260, it is not relevant in relation to the application of Part IVA.

Next he took the court to the income tax return for Murray Leisure which appears in volume 7 of the appeal book at page 1758.  If I could just ask your Honours to go to that page.

GUMMOW J:   How do you overcome this embarrassment?

MR EDMONDS:   Well, we do not consider it to be an embarrassment at all, your Honour.  At page 53 of our friends’ submissions, it is suggested that this disclosure – I do not want to misquote them – but it said that:

Mr Bourke, as a director of MLG, clearly accepted that s.79D did apply to its investment in CPIL(UK) for in its 1989 Income Tax Return MLG notified the Commissioner that s.79D applied to quarantine expenditure incurred in borrowing money to finance its purchase of shares in non-resident corporations, presumably CPIL(UK).

Now, really, that reference in that return cannot possibly be a reference to CPIL(UK) because MLG had no borrowings in relation to its investment in CPIL(UK).

GLEESON CJ:   But that does not matter, does it?  What this says, it is the last sentence:

As no foreign sourced income was derived the whole amount is quarantined.

That is the point that is made against you, as I understand it.

MR EDMONDS:   Well, the point is Mr Bourke gave evidence in these proceedings, your Honour.  He was not cross-examined on that particular issue nor was Mr Cherry.

GLEESON CJ:   And Justice Hill noted it as a curiosity, as I understand it.

MR EDMONDS:   He did.

GLEESON CJ:   He did not make any finding about it.

MR EDMONDS:   He did not make any findings about it.  The relevant passage appears at page 2152 in Justice Hill’s judgment just after line 15, where he said:

Mr Cherry said in evidence that in supervising the writing of the letter he gave no thought, nor was there any discussion about, the provisions of s 79D of the Act, the terms of which are set out later in these reasons.  This was because he had, whether on behalf of the Consolidated Press Group or some other client was not made clear, taken counsel’s advice…..  It would seem that Mr Cherry concurred with that advice.  Whether the advice was correct is a matter which arises in the present case.  It is perhaps interesting to note, however, that the 1989 income tax return of MLG prepared by Mr Cherry’s firm and on which his name appears in the postal address proceeds on the basis that that section did have application.  The discrepancy was not put to Mr Cherry.

Nor was it put, your Honours, to Mr Bourke, and the suggestion is made in the submissions that Mr Bourke, in some way, shape or form, was, to use the correct words, accepted that 79D did apply.  Indeed, if one goes back to the evidence, and my recollection – I think this is at page 98 – at about line 21, your Honours, my learned friend put to Mr Bourke, he said:

Was section 79D a consideration as well, Mr Bourke?---I do not know what section 79D is.

So, the submission that is made at paragraph 53 of our friend’s submissions we say cannot stand.  There is no evidence whatsoever as to the circumstances of the transaction or transactions to which the statement in the return refers and it cannot therefore be suggested that its existence supports a conclusion that Mr Bourke accepted that 79D applied to MLG’s investment in CPIL(UK).

Your Honour the Chief Justice raised with my learned friend the matter of Justice Hill’s conclusion at 2174 in relation to the matter of the two competing purposes.  If one goes to 2174 the conclusion which his Honour draws – he refers to:

The s79D advantage –

and:

the tax credit advantage –

and then at the third paragraph on the page he says:

With some doubt I am of the view that a conclusion would be drawn that the dominant purpose of some person who participated in the scheme, and in particular those (perhaps not Mr Cherry, but there were others) who advised the group at Arthur Young and later Ernst & Young, was to bring about the result that a deduction would be allowed to the Applicants which, but for the scheme, would have been disallowed to them because of the application of section 79D.  I reach this conclusion because it seems to me that the interest deduction was more immediate than the adoption of a neutral structure for non interference with tax credits.

GAUDRON J:   Does that not strictly have to be “which, but for the scheme, might have been disallowed to them”, when you consider how section 79 operates?

MR EDMONDS:   Absolutely, your Honour, certainly, we would agree with you on that entirely.

GAUDRON J:   And how does that then relate to the conclusion that has to be drawn?

MR EDMONDS:   Your Honour, can I just say this.  It would cast, in my respectful submission to his Honour, further doubt on that conclusion.  The point I was really seeking to take up was the one which I understood his Honour the Chief Justice to put to my learned friend, that the immediacy of a tax benefit can lead to the conclusion, having regard to the matters which one is mandated to have regard to under 177D, that that immediacy creates a more dominant purpose or would enable you to conclude that the alleged 79D benefit was the dominant purpose. 

We have dealt with that, your Honours ‑ and if I could take your Honours to the relevant passage in our written submissions, page 15, paragraph 58, where we say this.  In any case it is respectfully submitted that Justice Hill erred in reaching the conclusion he did that the “interest deduction was more immediate than the adoption of a neutral structure for non-interference with [foreign] tax credits”.  The suggested “immediacy” of the interest deduction over the need for a neutral structure to preserve foreign tax credits, does not withstand scrutiny.

First, there were losses elsewhere in the group capable of being applied against the appellant’s assessable income even if 79D applied to quarantine an allowable deduction for the interest in the year of income – and there is a reference to the evidence. 

Second, section 79D only quarantined the interest deduction to a later year of income when there was foreign income of the relevant class against which the interest could be claimed.  In other words, you did not lose the deduction forever; it was merely quarantined and passed back to a later year.

Thirdly, on the other hand, because of our system for giving credit for foreign tax, which is based on the lesser of the Australian tax and the foreign tax in respect of the foreign income ‑ so you might have income coming in from the United States which has been subject to tax at 30 per cent and it is taxed here at the rate of 25 per cent ‑ the foreign tax credit is confined to the lesser, that is, the lesser of the Australian tax.  In a situation where, for example, the company had domestic losses, those losses would have the effect that the foreign income would be subject to no Australian tax with the result that the foreign tax credit would be abandoned forever.

Your Honours will see, when you read the explanatory memorandum that has been handed up by our learned friends, that when our foreign tax credit system was initially designed and adopted to begin from 1 July 1987, there was no provision for either carry back or carry forward of any excess foreign tax credit.  So, while his Honour found that the interest deduction was perhaps more immediate, in terms of the permanency of the benefit, the advantage that was secured by adopting a neutral company so that we could take advantage in the future of the foreign tax credit was a far more permanent advantage and one which, if that neutrality was not observed, would be lost forever.

GUMMOW J:   Mr Edmonds, am I right in thinking that section 190 applies in these proceedings, the ordinary onus of proof provisions?

MR EDMONDS:   Yes, your Honour.

GUMMOW J:   It does.

GLEESON CJ:   What is the status of a finding such as that that appears on page 2174 at lines 35 to 40?  Is that a finding of fact?  The reason I ask that question is because a possible point of view is that you would then have concurrent findings of fact against you.

GAUDRON J:   That is the finding required by 177D, is it not, which seems to be not so much a finding of fact as the conclusion that would be drawn by some person, a hypothetical person, having regard to all those matters.

MR EDMONDS:   The paragraph has a number of inherent difficulties, not the least of which is the fact that the purpose that his Honour has concluded one would come to.

GLEESON CJ:   But from the point of view of our position, of course this is a gross oversimplification of the issues in the present appeals, but suppose you had a case in which considering Part IVA a judge at first instance said, “Well, I have got some doubt about it but I have come to the conclusion that a person would conclude this” and then the Full Court of the Federal Court says, “Well, we have looked at it and we have come to the same conclusion”.  Leave aside any possibility of misdirection in law on the part of either the judge at first instance or the Full Court of the Federal Court, when that issue is ventilated in this Court are we inhibited in our consideration of it by the kind of consideration that applies where you have concurrent findings of fact or do we just have the capacity and the obligation to make up our own minds on the very same issue?

MR EDMONDS:   I think the latter, your Honour, we would say.

HAYNE J:   There is a whole raft of unstated assumptions in that assertion, unstated assumptions about the nature of the process which 177D requires the primary decision maker and the courts to engage in, considerations that I think have attracted perhaps five minutes of argument in the space of the last two days.

MR EDMONDS:   As to the latter, I cannot say anything.  What we would say in response to the question that your Honour the Chief Justice has raised is that it is open to this Court on the material before it, having regard to those matters in 177D, to approach the matter afresh.  When I say that, there are obviously certain findings made below which are what might be called underlying fundamental findings which your Honours would rely on for the purposes of reaching that conclusion.  But we do not say that it sets up some sort of impediment or bar to the Court coming to a different conclusion to the conclusion come to by his Honour Justice Hill.

GUMMOW J:   When you say we approach it afresh, we approach it afresh bearing 190 in mind, do we?  It could not be right at this level

MR EDMONDS:   When you say that bearing 190 or the fact that we carry the onus, your Honour?

GUMMOW J:   Yes.

MR EDMONDS:   Yes.

GUMMOW J:   That could not be right at this level or, putting it more precisely, it could not be as simple as that.

MR EDMONDS:   Your Honour, the difficulty here is the case that was put and that we had to meet below ‑ the case that we had to meet below basically was one which said that, but for what occurred, ACP, or, as it is now known, CPH Property, would have invested directly by way of shares or loan, and in our learned friends’ submissions, it did not matter which was done, and that we would have invested directly into CPIL(UK).  Now, it was on the basis of that case that we met, or sought to meet, that the case was conducted.

Now, in the course of both the trial before Justice Hill and in the Full Court findings were made by both that, but for what was done, but for the tax considerations involved, the course of action that would have been pursued would have been a loan directly to the overseas structure established for the purposes of the BAT bid.  What we say is that, faced with those findings, both his Honour Justice Hill and the Full Court, should have, by reference to the indicia of matters in 177D(b), come to the conclusion that, but for what was done, the transaction which would have been entered into would be a direct loan and there would be no tax benefit.

GAUDRON J:   Well, now, while we are on that passage, and perhaps this might affect Mr Pagone more than you, but I would appreciate some help on it at some stage, perhaps in writing if the Chief Justice so directs ‑ ‑ ‑

HAYNE J:   Could I just pose a question, not inviting you to answer at once.  Section 177D is engaged by these integers:  scheme, taxpayer has obtained tax benefit, perhaps deductibility in the tax year concerned, “having regard to” eight matters “it would be concluded that”, what is the nature of the conclusion that is reached?  Is it of the same quality, though of different kind obviously, as a finding by a court, for example, of the defendant departed from the standard of reasonable care of the reasonable accountant?

MR EDMONDS:   Yes, I understand what you are putting to me.

HAYNE J:   That kind of conclusion.

GLEESON CJ:   Yes, both sides will have seven days from today to put in further submissions on that issue.

MR EDMONDS:   If your Honour pleases.

GAUDRON J:   The matter I wish to raise is this, the finding, or whatever it is, at page 2174 about which there has been so much discussion, seems to

me to blend together whatever is required by 177D, that is, enabling the relevant taxpayer and 177C(2) to obtain a deduction, that being the tax benefit, which would not have been allowable, or might reasonably be expected not to have been allowable, if the scheme had not been entered into.  But it seems to me, or one argument is, that the reason it is not allowable – or might not have been allowable has got more to do with the failure of the takeover bid than the scheme.  Now, how does that relate?  What is this “might reasonably be expected” to do, and how do we make a finding that there is, in fact, a tax benefit in this situation?  By that I mean to say, it is if the scheme had not been entered into.  There seems to be posited a causal connection between the scheme and the deduction.

MR EDMONDS:   Well, your Honour, all I can say is that I think some of what your Honour has just said was lying behind some of the comments that fell from his Honour the Chief Justice’s lips earlier today.

GLEESON CJ:   You might like to take that on board too, and both sides can put in written submissions about that.

MR EDMONDS:   Yes, if your Honour pleases.

GLEESON CJ:   Very well.  Then, subject to those written submissions, we will reserve our decision in this matter and we will adjourn until 10.15 tomorrow morning.

AT 4.20 PM THE MATTER WAS ADJOURNED