Federal Commissioner of Taxation v Macquarie Bank Ltd
[2013] FCAFC 13
•15 February 2013
FEDERAL COURT OF AUSTRALIA
Commissioner of Taxation v Macquarie Bank Limited [2013] FCAFC 13
Citation: Commissioner of Taxation v Macquarie Bank Limited [2013] FCAFC 13 Appeal from: Macquarie Bank Limited v Commissioner of Taxation [2011] FCA 1076 Parties: COMMISSIONER OF TAXATION v MACQUARIE BANK LIMITED (ACN 008 583 542)
COMMISSIONER OF TAXATION v MONGOOSE PTY LIMITED (ACN 103 410 297)
File numbers: NSD 1793 of 2011
NSD 1794 of 2011Judges: EMMETT, MIDDLETON AND ROBERTSON JJ Date of judgment: 15 February 2013 Catchwords: INCOME TAX – statutory interpretation – interaction between Income Tax Assessment Act 1936 (Cth) Pt IVA and Income Tax Assessment Act 1997 (Cth) Pt 3-90 – whether subsidiary member of consolidated group a taxpayer for the purposes of Income Tax Assessment Act 1936 (Cth) s 177F – whether subsidiary member or head company of consolidated group the relevant taxpayer obtaining a tax benefit for the purposes of s 177C – application of s 177D where various participants carry out parts of a scheme – factors to be considered when finding “dominant purpose” per s 177D(b)
Legislation: Acts Interpretation Act 1901 (Cth) s 15AA
Income Tax Assessment Act 1936 (Cth) ss 6, 73BAC, 160ZP, 160ZZO, 177A, 177B, 177C, 177D, 177F, 177G
Income Tax Assessment Act 1986 (Cth) ss 4, 5
Income Tax Assessment Act 1997 (Cth) ss 4-15, 102-5, 126-B, 700-1, 700-10, 701-1, 701-60, 701-85, 705-5, 705-10, 705-15, 995-1
Income Tax Laws Amendment Bill (No 2) 1981 (Cth)
New Business Tax System (Consolidation) Act (No 1) 2002 (Cth)
Taxation Administration Act 1953 (Cth)Cases cited: AAT Case W58; No 5219 (1989) 20 ATR 3777
Branir Pty Limited v Owston Nominees (No 2) Pty Limited (2001) 117 FCR 424
British American Tobacco Australia Services Ltd v Federal Commissioner of Taxation (2010) 189 FCR 151
Citigroup Pty Ltd v Commissioner of Taxation [2010] FCA 826
Commissioner of Taxation v Citigroup Pty Ltd (2011) 193 FCR 380
Commissioner of Taxation v Consolidated Press Holdings Ltd (2001) 207 CLR 235
Commissioner of Taxation v Hart (2004) 217 CLR 216
Commissioner of Taxation v Metal Manufactures (2001) 108 FCR 150
Commissioner of Taxation v News Australia [2010] FCAFC 78
Commissioner of Taxation v News Australia Holdings Pty Ltd (2010) 79 ATR 461
Commissioner of Taxation v Noza Holdings Pty Ltd (2012) 201 FCR 445
Commissioner of Taxation v Peabody (1994) 181 CLR 359
Commissioner of Taxation v Sleight (2004) 136 FCR 211
Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404
Commissioner of Taxation v Star City Pty Ltd (2009) 175 FCR 39
CSR Ltd v Della Maddalena [2006] HCA 1; (2006) 224 ALR 1
Deputy Commissioner of Taxation v Richard Walter Pty Ltd (1995) 183 CLR 168
Eastern Nitrogen Ltd v Commissioner of Taxation (2001) 108 FCR 27
Ex parte Professional Engineers’ Association (1959) 107 CLR 208
Federal Commissioner of Taxation v Ashwick (QLD) No 127 Pty Ltd (2011) 192 FCR 325
Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614
Federal Commissioner of Taxation v Futuris Corporation Limited (2008) 237 CLR 416
Federal Commissioner of Taxation v Lenzo (2008) 167 FCR 255
Federal Commissioner of Taxation v Mochkin (2003) 127 FCR 185
Federal Commissioner of Taxation v Trail Bros Steel & Plastics Pty Ltd (2010) 186 FCR 410
Fox v Percy (2000) 214 CLR 118
Futuris Corporation Ltd v Federal Commissioner of Taxation (2007) 159 FCR
Gauci v Federal Commissioner of Taxation (1975) 135 CLR 81
Jones v Dunkel (1959) 101 CLR 298
McAndrew v Federal Commissioner of Taxation (1956) 98 CLR 263
McCormack v Federal Commissioner of Taxation (1979) 143 CLR 284
McCutcheon v Federal Commissioner of Taxation (2008) 168 FCR 149
Metal Manufactures Ltd v Commissioner of Taxation [1999] FCA 1712; (1999) 99 ATC 5229
Metwally v University of New South Wales (1985) 60 ALR 68
Mills v Commissioner of Taxation (2012) 293 ALR 43
Mills v Meeking (1990) 169 CLR 214
National Rugby League Investments Pty Limited v Singtel Optus Pty Ltd (2012) 201 FCR 147
Noza Holdings Pty Ltd v Commissioner of Taxation [2011] FCA 46
Peabody v Commissioner of Taxation (1993) 40 FCR 531
Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355
RCI Pty Ltd v Commissioner of Taxation [2011] FCAFC 104
Rompibon v Commissioner of Taxation (1949) 78 CLR 47Dates of hearing: 9 and 10 May 2012
Date of last submissions:
26 October 2012 Place: Sydney
Division: GENERAL DIVISION
Category: Catchwords
Number of paragraphs: 318
Counsel for the Appellant: Mr NJ Williams SC with Mr MJ O’Meara
Solicitor for the Appellant: Australian Government Solicitor
Counsel for the Respondents:
Mr AH Slater QC with Mr JO Hmelnitsky
Solicitor for the Respondents Clayton Utz
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 1793 of 2011
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: MACQUARIE BANK LIMITED (ACN 008 583 542)
Respondent
JUDGES:
EMMETT, MIDDLETON AND ROBERTSON JJ
DATE OF ORDER:
15 February 2013
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.The parties confer and thereafter bring minutes to the Court reflecting the outcome of these proceedings (including costs) within 7 days. If the parties cannot agree on the form of proposed orders they are to file within the same 7 days the orders for which they contend and written submissions of no more than 3 pages in support of those orders.
Note:Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 1794 of 2011
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: MONGOOSE PTY LTD (ACN 103 410 297)
Respondent
JUDGES:
EMMETT, MIDDLETON AND ROBERTSON JJ
DATE OF ORDER:
15 february 2013
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.The parties confer and thereafter bring minutes to the Court reflecting the outcome of these proceedings (including costs) within 7 days. If the parties cannot agree on the form of proposed orders they are to file within the same 7 days the orders for which they contend and written submissions of no more than 3 pages in support of those orders.
Note:Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 1793 of 2011
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: MACQUARIE BANK LIMITED (ACN 008 583 542)
Respondent
JUDGES:
EMMETT J
DATE:
15 FEBRUARY 2013
PLACE:
SYDNEY
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 1794 of 2011
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: MONGOOSE PTY LTD (ACN 103 410 297)
Respondent
JUDGES:
EMMETT J
DATE OF ORDER:
15 february 2013
WHERE MADE:
SYDNEY
REASONS FOR JUDGMENT
EMMETT J:
INTRODUCTION........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..... [1] THE LEGISLATIVE PROVISIONS........ ........ ........ ........ ........ ........ ........ ........ ........ ........ [10] THE ISSUES........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..... [17] APPLICATION OF PART IVA........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ [19] Dominant Purpose........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ . [20] Evidentiary Questions........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... [24] INTERACTION BETWEEN PART 3-90 AND PART IVA........ ........ ........ ........ ........ .... [25] CONCLUSION........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .. [47] INTRODUCTION
1 These two appeals are concerned with the incidence of capital gains tax in relation to the sale by Mongoose Pty Limited (Mongoose) of 35.89 per cent of the issued shares in Minara Resources Limited (Minara), an Australian listed company. Prior to March 2004, Mongoose was a subsidiary of Mongoose Acquisitions LLC (Mongoose Acquisitions). The membership interests in Mongoose Acquisitions, which is incorporated in Delaware, United States of America, were owned by two limited partnerships (the Vendors) also incorporated in Delaware. Each of the Vendors was ultimately owned by MatlinPatterson LLC (MatlinPatterson), a United States private equity firm.
2 In February 2004, Macquarie Bank Limited (Macquarie) and MatlinPatterson negotiated the terms on which Macquarie would arrange for Mongoose’s sale of its shares in Minara. A subsidiary of Macquarie was to act as the agent of MatlinPatterson to effect the sale. Macquarie’s subsidiary was to receive a fee consisting of a proportion of the gross proceeds of sale. However, in the course of the negotiations between MatlinPatterson and Macquarie, an alternative proposal emerged. Thus, on 2 and 3 March 2004, Macquarie purchased all of the membership interests in Mongoose Acquisitions from the Vendors, for a consideration of $438,928,590. That consideration represented a price equal to $2.65 for each share in Minara held by Mongoose.
3 Subsequently, Mongoose sold its shares in Minara for $2.90 per share. As a consequence, Macquarie derived a gain, being the difference between the amount it paid for the membership interest in Mongoose Acquisitions and the value of that interest, having regard to the amount received by Mongoose on the sale of its shares in Minara. The gain amounted to $41,408,357. Macquarie returned a capital gain of that amount for tax purposes.
4 Mongoose had acquired its shares in Minara in January 2003 for 97.7 cents per share. Accordingly, it derived a gain between January 2003 and March 2004, when it sold the shares in Minara at $2.90 per share, of $318,507,469, being the difference between the price paid by it for the shares ($161,829,478) and the proceeds of sale ($480,336,947). The question in the appeals is whether the gain derived by Mongoose was subject to capital gains tax.
5 The Commissioner of Taxation (the Commissioner), the appellant in both appeals, formed the view that the steps briefly described above constituted a scheme within the meaning of Pt IVA of the Income Tax Assessment Act 1936 (Cth) (the 1936 Act) and that one or more of MatlinPatterson, Macquarie, Mongoose, Mongoose Acquisitions and the Vendors had entered into or carried out the scheme for the dominant purpose of obtaining a tax benefit. The Commissioner formed the view that a tax benefit had arisen in connection with that scheme, on the basis that, if the scheme had not been entered into or carried out, the original proposal would have resulted in a significantly higher incidence of capital gains tax, payable by Mongoose.
6 The Commissioner asserted that a tax benefit was obtained in connection with a scheme that consisted of the following steps:
·On 2 March 2004, Mongoose Acquisitions declared a distribution of US$244,000,000 to its members, the Vendors.
·On 3 March 2004, Macquarie agreed with Mongoose Acquisitions that Macquarie would lend Mongoose Acquisitions the sum of US$244,000,000 (the Loan Agreement).
·On 3 March 2004, Mongoose Acquisitions drew down the sum of US$244,000,000 pursuant to the Loan Agreement and paid the distribution.
·On 3 March 2004, Macquarie and the Vendors entered into an agreement for purchase and sale of all of the Vendors’ membership interests in Mongoose Acquisitions for a consideration of AUS$122,045,472.62 (the Sale Agreement).
·On 3 March 2004, the directors of Mongoose Acquisitions and Mongoose were replaced with appointees of Macquarie, meetings of Mongoose Acquisitions and Mongoose were convened and the new directors of Mongoose resolved to sell its shares in Minara.
· On 3 and 4 March 2004, Mongoose sold its shares in Minara.
7 Accordingly, the Commissioner issued two separate determinations under Pt IVA of the 1936 Act. One determination was issued to Mongoose and one to Macquarie. Amended assessments purporting to give effect to those determinations were issued to Mongoose and to Macquarie. However, the Commissioner made clear that he would ultimately rely on only one determination and one amended assessment and that an appropriate compensating adjustment under s 177F(3) of the 1936 Act would be made in relation to the assessable income of $41,408,357 returned by Macquarie.
8 Mongoose and Macquarie objected to the assessments and the Commissioner made unfavourable decisions on the objections. On appeal to the Federal Court, a judge of the Court upheld the appeals and set aside the assessments. The Commissioner then appealed to the Full Court.
9 Following the acquisition of Mongoose Acquisitions by Macquarie, Mongoose Acquisitions and Mongoose were incorporated in the consolidated group formed under Pt 3-90 of the Income Tax Assessment Act 1997 (the 1997 Act), of which Macquarie was the head company. The appeals raise questions about the interaction between Pt IVA of the 1936 Act and Pt 3-90, as well as the question of the application of Pt IVA to the circumstances of the case.
THE LEGISLATIVE PROVISIONS
10 Under s 177D of the 1936 Act, Pt IVA applies to any scheme where, relevantly, a taxpayer has obtained a tax benefit in connection with the scheme and, having regard to the matters set out in s 177D(b), it would be concluded that the person, or one of the persons, who entered into or carried out the scheme, or any part of the scheme, did so for the dominant purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme.
11 Under s 177F(1)(a), where a tax benefit has been obtained by a taxpayer in connection with a scheme to which Pt IVA applies, the Commissioner may, where a tax benefit is referable to an amount not included in the assessable income of the taxpayer of a year of income, determine that the whole or a part of that amount shall be included in the assessable income of the taxpayer of that year of income. Where the Commissioner makes such a determination, he must take such action as he considers necessary to give effect to that determination. Under s 177C(1)(a), a reference in Pt IVA to the obtaining by a taxpayer of a tax benefit in connection with a scheme is to be read, relevantly, as a reference to an amount not included in the assessable income of the taxpayer of a year of income, where the amount would have been included, or might reasonably be expected to have been included, in assessable income of the taxpayer of that year, if the scheme had not been entered into or carried out.
12 Section 177C(1) provides that the tax benefit is to be taken to be the amount that is not included in the assessable income of the taxpayer. However, under s 177C(2), a reference in Pt IVA to the obtaining by a taxpayer of a tax benefit in connection with a scheme is to be read as not including, relevantly, a reference to the assessable income of the taxpayer of the year of income not including an amount that would have been included, or might reasonably be expected to have been included, in the assessable income of the taxpayer of that year of income, if the scheme had not been entered into or carried out, where:
· the non-inclusion of the amount is attributable to the making of an agreement, choice, declaration, election or selection, the giving of a notice or the exercise of an option expressly provided for by the 1936 Act or the 1997 Act, by any person; and
· the scheme was not entered into or carried out by any person for the purpose of creating any circumstance or state of affairs the existence of which is necessary to enable the declaration, agreement, election, selection, choice, notice or option to be made, given or exercised, as the case may be.
13 Section 700-1 of the 1997 Act provides that Pt 3-90 allows certain groups of entities to be treated as single entities for income tax purposes. Following a choice to consolidate, subsidiary members are treated as part of the head company of the group, rather than as separate income tax identities. The head company inherits the income tax history of subsidiary members when they become subsidiary members of the group. On ceasing to be subsidiary members, the subsidiary members take with them an income tax history that recognises that they are different from when they became subsidiary members. That object is supported by rules that:
·set the cost for income tax purposes of assets that subsidiary members bring to the group;
·determine the income tax history that is taken into account when entities become, or cease to be, subsidiary members of the group; and
·deal with the transfer of tax attributes, such as losses and franking credits, to the head company when entities become subsidiary members of the group.
14Section 700-10 provides that the objects of Pt 3-90 are:
·to prevent double taxation of the same economic gain realised by a consolidated group;
·to prevent a double tax benefit being obtained from an economic loss realised by a consolidated group; and
·to provide a systematic solution to the prevention of such double taxation and double tax benefits that will reduce the cost of complying with the tax legislation and will improve business efficiency by removing complexities and promoting simplicity in the taxation of wholly owned groups.
15 Division 701 sets out the core rules of Pt 3-90. Those include the single entity rule, in s 701-1, and the entry history rule, in s 701-5. Under s 701-1(1), if an entity is a subsidiary member of a consolidated group for any period, it and any other subsidiary member of the group are taken, for the purposes covered by s 701-1(2) and s 701-1(3), to be parts of the head company of the group, rather than separate entities, during that period. The purposes covered by s 701-1(2) are working out the amount of the head company’s liability, if any, for income tax calculated by reference to any income year in which any of the period occurs, or any later income year, and working out the amount of the head company’s loss, if any, of a particular sort for any such income year. The purposes covered by s 701-1(3) are working out the amount of the entity’s liability, if any, for income tax calculated by reference to any income year in which any of the period occurs, or any later income year, and working out the amount of the entity’s loss, if any, of a particular sort, for any such income year. Under s 701-5, for the head company core purposes in relation to the period after the entity becomes a subsidiary member of the group, everything that happened in relation to the entity before it became a subsidiary member is taken to have happened in relation to the head company.
16 Division 705 contains rules for setting the tax cost of an entity’s assets when it becomes a subsidiary member of a consolidated group. When an entity becomes a subsidiary member of an existing consolidated group, the tax cost setting amount for its assets reflects the costs to the group of acquiring the entity. Subdivision 705-A has effect for the head company core purpose set out in s 701-1(2) if an entity (the joining entity) becomes a subsidiary member of a consolidated group (the joined group) at a particular time (the joining time). The object of Subdivision 705-A is to recognise the head company’s cost of becoming the holder of the joining entity’s assets as an amount reflecting the group’s cost of acquiring the entity. That amount consists of the cost of the group’s membership interests in the joining entity, increased by the joining entity’s liabilities and adjusted to take account of the joining entity’s retained profits, distribution of profits, deductions and losses. Under s 705-10(3), the reason for recognising the head company’s cost in that way is to align the costs of assets with the costs of membership interests, and to allow for the preservation of that alignment until the entity ceases to be a subsidiary member, in order to:
· prevent double taxation of gains and duplication of losses, and
·remove the need to adjust costs of membership interests in response to transactions that shift the value between them, as the required adjustments occur automatically.
The alignment is preserved by recognising the head company’s cost of membership interest in the entity if it ceases to be a subsidiary member of the group as the cost of its assets reduced by its liabilities.
THE ISSUES
17 Several questions are raised by the appeals. The first question is whether, assuming the prerequisites of Pt IVA were otherwise satisfied, the Commissioner had authority to issue a determination under Pt IVA to Mongoose, despite it being a subsidiary member of the Macquarie consolidated group. The second is whether the Commissioner was authorised to issue an amended assessment to either Mongoose or Macquarie on the basis of the determination made in respect of Mongoose. The third is whether any taxpayer obtained a tax benefit for the purposes of s 177C. The fourth question is whether any of the parties who entered into and carried out the scheme did so with the purpose specified in s 177D.
18 The first three questions involve the interaction between Pt IVA and Pt 3-90. The last involves the application of Pt IVA in the circumstances of the sale of the shares in Minara. Having regard to the conclusions reached on the question of the application of Pt IVA, it is not strictly necessary to deal with the first three questions. However, given the importance of the issue of the harmonious construction of Pt IVA and Pt 3-90, I propose to say something about them, after dealing briefly with the application of Pt IVA to the present circumstances.
APPLICATION OF PART IVA
19 The specific issues raised in relation to the application of Pt IVA to the circumstances of the present case are directed to whether, having regard to the matters referred to in s 177D, any one or more of Macquarie, Mongoose, Mongoose Acquisitions, the Vendors and MatlinPatterson entered into or carried out the scheme identified by the Commissioner for the dominant purpose of obtaining a tax benefit. The tax benefit consisted of Mongoose having no liability for capital gains tax in respect of the gain derived upon the sale of the shares in Minara. Several evidentiary questions were also raised in that context.
Dominant Purpose
20 I agree with the conclusion reached by Middleton and Robertson JJ, for the reasons given by their Honours, that a reasonable person would not conclude that any of the persons alleged to have participated in the scheme or to have carried out the scheme or any part of it did so for the dominant purpose of enabling Mongoose to obtain a tax benefit. At all relevant times, both Mongoose Acquisitions and Mongoose were wholly-owned subsidiaries of either MatlinPatterson or Macquarie. Accordingly, it was appropriate, in the absence of evidence to the contrary, to attribute to each of them the purpose that existed on the part of MatlinPatterson or Macquarie, as the case may be, at the relevant time.
21 The Vendors had a choice of two commercial transactions, with different financial consequences. They chose to take an immediate and certain payment of the full proceeds of a sale, at a lower price than might otherwise been obtained, as against the uncertain prospect of disposing of the Minara shares in a volatile market. While tax considerations may have been relevant to the Vendors’ decision to proceed with the sale to Macquarie, the primary judge did not err in concluding that the purpose of enabling Mongoose to obtain a tax benefit was not the dominant purpose of the Vendors. The dominant purpose of the Vendors was purely commercial, namely, to sell the Minara shares in a manner that was satisfactory to them, albeit a manner that was satisfactory as regards matters relating to tax, and to realise the profit from the investment that they had made in Minara, through Mongoose Acquisitions and Mongoose.
22 Macquarie clearly had a purpose of making a profit from its dealings with MatlinPatterson and the Vendors, the primary object of which was the sale of the Minara shares. The circumstances do not support the conclusion that the scheme as described was explicable only by the relevant taxation consequences. The obtaining of a tax benefit by Mongoose was not the dominant purpose in entering into the scheme. It had a clear dominant purpose of making a profit from its dealings, in respect of which the primary object was the sale of the Minara shares.
23 It follows that the Commissioner cannot establish that any of the participants in the scheme described had the dominant purpose of Mongoose obtaining the relevant tax benefit. The Commissioner cannot succeed in a case based on Pt IVA of the 1936 Act.
Evidentiary Questions
24 The Commissioner relied on a ground of appeal that the primary judge had erred in accepting evidence that was improbable and was contrary to compelling inferences, in failing to infer that the evidence of persons who were not called as witnesses would not have assisted Macquarie and Mongoose and in failing to conclude that the Court should therefore more readily draw inferences in favour of the Commissioner’s contentions. I agree with the conclusion of Middleton and Robertson JJ, for the reasons given by their Honours, that those grounds should be rejected.
INTERACTION BETWEEN PART 3-90 AND PART IVA
25 In the circumstances, it is not strictly necessary to consider the questions concerning the interaction of Pt IVA and Pt 3-90. However, since the questions occupied a considerable part of the appeals and are of some continuing significance, it is desirable to make some observations on the questions.
26 The relevant provisions of Pt IVA and Pt 3-90 must be construed consistently with their language and purpose, in the context of the 1936 Act and the 1997 Act, read together as a whole. They must be construed on the basis that the 1936 Act and the 1997 Act, read together, are intended to give effect to harmonious goals. To the extent that there is a conflict between them, that conflict is to be alleviated, in so far as that is possible, by adjusting the meaning of the relevant provisions having regard to the hierarchy of the provisions, in order to preserve the unity of the statutory scheme. Meaning should be given to every word of the relevant provisions, so that no provision is rendered superfluous, void or insignificant (see Project Blue Sky Inc and Ors v Australian Broadcasting Authority (1998) 194 CLR 355 at [69]-[71]).
27 On the assumption that the Commissioner was empowered to issue the determination to Mongoose, the Commissioner was required by s 177F(1) to take such action as he considers necessary to give effect to that determination. Section 177F(1) does not confer a discretion on the Commissioner as to whether to give effect to a determination. Nor does it contemplate the possibility of a determination to which effect cannot be given. In addition, the decision about the action that is necessary to give effect to a determination is reposed in the Commissioner, albeit to be made according to law. The usual way in which a determination under s 177F would be given effect to is by the issuing of an assessment.
28 In giving effect to the determination in respect of Mongoose, no other means has been suggested other than issuing an amended assessment to either Mongoose or Macquarie. The provisions of Pt IVA and Pt 3-90 should not be construed in a way that would sterilise or limit the proper operation of Pt IVA. The provisions of both parts must be construed consistently with their purpose so as to produce harmonious goals and effects.
29 The effect of Pt IVA will inevitably be to alter the incidence of taxation that would otherwise arise by reason of the operation of the 1936 Act and the 1997 Act. That is the purpose and function of Pt IVA. It is not surprising that a determination under Pt IVA might have the effect of negating the consequences that would otherwise flow from the operation of Pt 3-90.
30 There is a clear hierarchy of provisions underlying the statutory scheme of which Pt IVA of the 1936 Act and Pt 3-90 of the 1997 Act form part. It is clear that Pt IVA is intended to operate at a higher level than Pt 3-90. That is to say, Pt 3-90 is subordinate in the hierarchy to Pt IVA.
31 Macquarie and Mongoose seek to restrict the tax consequences of Mongoose’s disposal of the Minara shares to the difference between what Macquarie paid to the Vendors and the amount paid by the purchasers of the Minara shares. They seek to do so by the application of the single entity rule in s 701-1 of the 1997 Act. However, s 701-85 of the 1997 Act expressly provides that the operation of each provision of Pt 3-90 is subject to any provision of the Act that so requires, either expressly or impliedly. Under s 995-1 of the 1997 Act, the phrase the Act includes the 1936 Act. Thus, the single entity rule will be subject to another provision of either Act, such as a provision of Pt IVA, if a Pt IVA provision expressly or impliedly requires it.
32 Further, s 177B(1) of the 1936 Act, which is in Pt IVA, relevantly provides that nothing in the provisions of this Act, other than Pt IVA, is to be taken to limit the operation of Pt IVA. The phrase this Act is defined in s 6(1) of the 1936 Act to include the 1997 Act. Thus, it is clear that the purpose of s 177B is to give Pt IVA paramount force across both the 1936 Act and the 1997 Act. The phrase this Act is defined in s 6(1) of the 1936 Act to include the 1997 Act. Section 701-85 of the 1997 Act and s 177B, when read together, are to be read as saying that a provision of Pt 3-90, such as the single entity rule, is subject to a provision of Pt IVA, if that is required either expressly or impliedly.
33 There is no reason why a determination issued to one taxpayer cannot be given effect to by issuing an assessment or an amended assessment to another taxpayer. There is no limitation to that effect in the words of s 177F and there is no reason to imply such a limitation. The Commissioner’s power and obligation to take such action as he considers necessary to give effect to a determination are limited only by what the Commissioner could reasonably consider necessary to give effect to a determination. Necessary must be understood as meaning clearly appropriate and adapted for (see Ronpibon v Commissioner of Taxation (1949) 78 CLR 47 at 56). It may be that, in the usual case, giving effect to a determination will result in the issue of an assessment or an amended assessment to the taxpayer that is the subject of the determination. However, that need not always be so. There is no reason why the issue of an assessment to one taxpayer may be appropriate and adapted for giving effect to a determination issued to a different taxpayer, having regard to the relationship between the two taxpayers (see, for example, McCutcheon v Federal Commissioner of Taxation (2008) 168 FCR 149 at [33]-[35]).
34 The relationship between the head company of a consolidated group and a subsidiary member of that group, being the relationship created by the single entity rule in s 701-1 of the 1997 Act, is a particular example of circumstances where a determination to one taxpayer may be given effect to by the issue of an assessment to another taxpayer. By s 701-1, a subsidiary member of the consolidated group is, for certain purposes, to be taken to be part of the head company of the group, rather than a separate entity. One of those purposes is the working out of the amount of the entity’s liability, if any, for income tax, as provided in s 701(3)(a). That is to say, where a subsidiary member of a consolidated group has an income tax liability, it is to be taken to be the liability of the head company and the issue of an assessment to the head company may well be appropriate and adapted for giving effect to the determination issued to the subsidiary member, as is the case in the present circumstances. So long as action taken by the Commissioner can be reasonably considered to be appropriate and adapted to giving effect to the determination, there is no other restriction to be read into s 177F as to what the Commissioner can do.
35 The purpose of Pt IVA is to provide against tax avoidance arrangements that are artificial or contrived. Section 177B relevantly provides that nothing in the provisions of the 1936 Act or the 1997 Act, other than Pt IVA, is to be taken to limit the operation of Pt IVA. The anti-avoidance purpose of Pt IVA is clearly not to be limited by anything else in the general income tax law. Thus, there is nothing in Pt 3-90 that expressly excludes the operation of Pt IVA. Indeed, s 701-85 expressly provides that the operation of each provision of Pt 3-90 is subject to any provision of the 1936 Act or the 1997 Act that so requires, either expressly or impliedly.
36 In the light of those provisions, there is no reason why Pt IVA should not apply to schemes involving consolidated groups. The operation of Pt IVA is not specifically excluded and it is clear that Pt IVA is intended to operate with paramount force, consistently with its general anti-tax avoidance purpose. Section 177C(2) is an example of the paramountcy of Pt IVA and its presence is indicative of that paramountcy. Thus, Pt IVA is capable of having application in circumstances where s 177C(2) has no operation. While not every transaction involving a consolidated group will enliven Pt IVA, it is clear that Pt IVA can be invoked in circumstances where it is necessary for the proper functioning of the anti-avoidance regime of Pt IVA.
37 Pt IVA is not inconsistent with the purposes or policy of Pt 3-90. The benefits of the provisions of Pt 3-90 are available to those who choose to take advantage of them. However, the mere fact that an entity joins a consolidated group is not of itself sufficient to preclude the operation of Pt IVA in relation to the actions of that entity if the prerequisites of Pt IVA are satisfied. If it were, the general anti-avoidance purpose of Pt IVA would be frustrated.
38 The pivotal provisions of Pt IVA are s 177F(1) and s 177D. Pt IVA is applicable only when the Commissioner has made a determination under s 177F(1). Such a determination can be made only where a taxpayer has obtained a tax benefit by connection with a scheme to which Pt IVA applies. Section 177D then identifies the schemes to which Pt IVA applies.
39 Under s 6(1) of the 1936 Act, a taxpayer is a person deriving income or deriving profits or gains that are capital in nature. Most, if not all, active subsidiary members of a consolidated group will in fact receive income or gains. They will therefore be taxpayers for the purposes of Pt IVA. The application of Pt IVA depends upon the concept of a taxpayer obtaining a tax benefit, as defined in s 177C(1)(a). Where it is established that a taxpayer has obtained a tax benefit, and the other criteria of Pt IVA are satisfied, s 177F permits the Commissioner to determine that the whole or part of the tax benefit be included in that taxpayer’s assessable income.
40 Nevertheless, while Mongoose satisfies the definition of taxpayer for the purposes of Pt IVA, it does not follow that Mongoose itself has assessable income for the purpose of the application of the provisions of Pt IVA, such as s 177F. While Mongoose was a taxpayer for the purpose of Pt IVA, the operation of Pt 3-90 precludes Mongoose from being directly assessed.
41 Absent the operation of Pt 3-90, the Commissioner would identify a taxpayer who is alleged to have obtained a relevant tax benefit and make a determination in respect of that taxpayer. In such a case, there would be a clear relationship between the taxpayer, the taxpayer’s assessable income, the tax benefit obtained under the scheme and the counterfactual proposed under s 177C. Where Pt 3-90 is applicable, however, the entity whose actions give rise to a tax benefit may not be liable to be assessed for income tax, since the entity is deemed not to have a separate existence for that purpose.
42 The effect of Pt 3-90 is not that the actions of a subsidiary member will never be subject to, or be the subject of, tax. Rather, its effect is that the head company will be the entity taxed in relation to those actions. Pt 3-90 does not have the effect that there are no tax consequences in relation to subsidiary members of consolidated groups. Rather, it has the effect of transferring the liability of a subsidiary member for income tax to a different entity, being the head company. Thus, the head company will be the relevant taxpayer for Pt IVA purposes, because a subsidiary member is not liable to assessment. All of the members of the consolidated group are treated collectively as a single entity for income tax purposes. The relevant purpose of Pt 3-90 is to avoid double taxation of the same economic gain and to reduce the cost of complying with the taxation legislation. Its object is to ensure that the 1997 Act and the 1936 Act operate in relation to a consolidated group as if the subsidiary members were absorbed into the head company, which becomes the relevant taxpayer for all of the subsidiary members of the consolidated group.
43 When applying Pt IVA to the Macquarie consolidated group, the Commissioner was entitled to make a determination in respect of Macquarie, in its capacity as head company of that consolidated group, as the relevant taxpayer for that purpose. Where a subsidiary member of a consolidated group enters into a scheme to which s 177D applies, the Commissioner is authorised to make a determination under s 177F(1). However, the authorised determination will be, relevantly, one to include an amount in the assessable income of the head company, to which, for tax assessment purposes, the actions of the subsidiary member are attributed, by s 701-1. The legal fiction created by Pt 3-90 requires that determinations and assessments under Pt IVA be administered to consolidated groups in a particular way that gives effect to the legislative purpose of both parts. The Commissioner is not prevented from relying on the combination of the determination in respect of Macquarie and the amended assessment issued to Macquarie.
44 The entry into the Sale Agreement constituted the entry of Mongoose into the Macquarie consolidated group as a wholly-owned subsidiary of Mongoose Acquisitions. The primary judge found that, if the scheme described above had not been entered into or carried out, Mongoose would have sold its Minara shares as an independent entity and not as a subsidiary member of Macquarie consolidated group. The Commissioner contends that, in those circumstances, a gain of $318,507,469 would have been included in the assessable income of Mongoose. Mongoose is the relevant taxpayer for the purposes of Pt IVA. However, the actions of Mongoose, including the sale of the Minara shares, and the income tax consequences attaching to that sale, are taken to be the actions of Macquarie as head company by virtue of the operation of Pt 3-90.
45 Section 177C(1)(a) relevantly provides that a reference in Pt IVA, to the obtaining by a taxpayer of a tax benefit in connection with a scheme, is to be read as a reference to an amount not included in assessable income of the taxpayer of a year of income, where that amount would have been included, or might reasonably be expected to have been included, in assessable income of the taxpayer of that year of income if the scheme had not been entered into or carried out. Thus, there must be a clear connection between the relevant taxpayer, the assessable income of that taxpayer and the tax benefit.
46 While Mongoose is a taxpayer for the purposes of determining whether it has assessable income, the effect of Pt 3-90 is to put Macquarie in the shoes of Mongoose. Certainly, Pt IVA must be construed and applied according to its terms. The question is whether the terms of Pt IVA apply to the facts and circumstances of the particular case. That question must be decided in the context of the way in which Pt 3-90 is clearly intended to operate. While Mongoose cannot be the subject of direct application of s 177C, the assessable income of Mongoose must be taken to have been assessable income of Macquarie. I consider that a tax benefit was obtained by Mongoose and that, if there were a Pt IVA scheme, then Macquarie, as the head company, would be the correct entity to whom the Commissioner would issue a determination and amended assessment.
CONCLUSION
47Both appeals should be dismissed. The Commissioner should pay the costs of the appeals.
I certify that the preceding forty-seven (47) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett. Associate:
Dated: 15 February 2013
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 1793 of 2011
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: MACQUARIE BANK LIMITED (ACN 008 583 542)
Respondent
JUDGES:
MIDDLETON AND ROBERTSON JJ
DATE OF ORDER:
15 February 2013
WHERE MADE:
SYDNEY
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
nsd 1794 of 2011
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA
BETWEEN: COMMISSIONER OF TAXATION
AppellantAND: MONGOOSE PTY LIMITED (ACN 103 410 297)
Respondent
JUDGEs:
MIDDLETON AND ROBERTSON JJ
DATE:
15 february 2013
PLACE:
SYDNEY
REASONS FOR JUDGMENT
MIDDLETON AND ROBERTSON JJ:
INTRODUCTION
48 The appellant (Commissioner) appeals from the orders of the primary judge of 26 September 2011 [2011] FCA 1076, by which the primary judge set aside objection decisions of the Commissioner dated 15 December 2009 and ordered that the respondents’ objections against two amended assessments of 23 June 2009 be allowed in full. Those amended assessments followed determinations issued by the Commissioner on 5 June 2009 under s 177F of Pt IVA of the Income Tax Assessment Act 1936 (Cth) (1936 Act).
49 It is convenient to commence with a brief overview of the relevant facts and background to these appeals.
50 By the assessments under objection in these proceedings, the Commissioner, in reliance on the provisions of Pt IVA (“Schemes to Reduce Income Tax”) of the 1936 Act sought to cancel the tax consequences that would otherwise apply to the respondents as members of a consolidated group under Pt 3-90 (“Consolidated Groups”) of the Income Tax Assessment Act 1997 (Cth) (1997 Act). These tax consequences related to a gain made by the applicant in NSD 106 of 2010, Mongoose Pty Limited (Mongoose). This gain related to the sale of Mongoose’s principal asset, being shares in the Australian listed company Minara Resources Limited (Minara).
51 At the time when Mongoose sold the Minara shares it was a subsidiary member of the consolidated group of which the applicant in NSD 105 of 2010, Macquarie Bank Limited (MBL), was the head company (MBL consolidated group). Consistent with the provisions of Pt 3-90 of the 1997 Act (in particular Divs 701 and 705), the gain on the sale of the Minara shares was returned by MBL as head company of the MBL consolidated group by reference to the difference between the proceeds of sale of the Minara shares ($480,336,947) and MBL’s cost of bringing Mongoose into the MBL consolidated group ($438,928,590). This comprised a total gain of $41,408,357. MBL – again, as head company of the MBL consolidated group – was assessed to tax as returned.
52 The Commissioner asserted that the events which culminated in the sale of the Minara shares by Mongoose formed part of a scheme entered into by the relevant parties in contravention of Pt IVA. The tax benefit alleged was calculated by reference to the gain that would have been derived by Mongoose on the sale of the Minara shares had it sold them when it was not a subsidiary member of the MBL consolidated group. This was said to be a gain of $318,507,469 (calculated by reference to the difference between the proceeds of sale – being $480,336,947 – and Mongoose’s actual cost of acquiring the Minara shares, being $161,829,478). Accordingly, in respect of this amount, in June 2009 the Commissioner made determinations in respect of and issued amended assessments to each of Mongoose and MBL. These determinations and amended assessments were made and issued in the alternative.
53 The primary judge ultimately concluded that the Commissioner’s action against the respondents could not be supported either by reference to the provisions of Pt IVA or otherwise, and found in favour of the respondents. The Commissioner appealed this decision (giving rise to the current proceedings, NSD 1793 and NSD 1794 of 2011). On appeal, the respondents sought to have the primary judge’s conclusions affirmed, albeit on slightly different grounds (about which more will be said below).
54 Against that background, the issues for determination in these appeal proceedings are broadly as follows:
1.how Pt IVA of the 1936 Act and Pt 3-90 of the 1997 Act are intended to interact – specifically, whether and how the Commissioner may make determinations and issue amended assessments under Pt IVA in respect of income derived by (or as a result of the actions of) a subsidiary member of a consolidated group to which Pt 3-90 applies; and
2.if a determination could properly be made and an amended assessment could properly be issued by the Commissioner in this case;
(a)whether a tax benefit was obtained by a relevant “taxpayer” in connection with the scheme relied upon by the Commissioner for the purposes of Pt IVA; and
(b) whether it would be concluded, having regard to the matters specified in s 177D(b), that one or more of the scheme participants entered into or carried out the scheme (or part thereof) for the purpose of enabling the relevant taxpayer to obtain a tax benefit, as required by s 177D.
55 A number of other issues were also raised by the Commissioner on appeal, for example, involving the primary judge’s treatment of and findings regarding the evidence before him at trial, and the application of the High Court’s decision in Federal Commissioner of Taxation v Futuris Corporation Limited (2008) 237 CLR 146 to the issue of compensating adjustments under s 177F(3). These matters will be dealt with briefly at the conclusion of these reasons.
FACTUAL BACKGROUND
56 The primary judge set out much of the relevant factual background in his reasons for judgment. There is no contest about these facts between the parties (but we note that the Commissioner seeks to supplement the facts set out by the primary judge with a number of further facts, which are addressed below in the context of the inquiry as to purpose under s 177D of the 1936 Act). Accordingly, it is convenient to reproduce these facts here, adopting the acronyms and abbreviations referred to by the primary judge. These acronyms and abbreviations were originally set out in a table at [60] of his Honour’s reasons for judgment (which in turn purported to adopt the same acronyms and abbreviations that appeared in contemporaneous documents in evidence before his Honour, and/or documents filed with the Court). For convenience we substantially reproduce that table here.
Acronym/Abbreviation Entity/Expression Acts:
1936 Act
1997 ActIncome Tax Assessment Act 1936 (Cth)
Income Tax Assessment Act 1997 (Cth)Agency Proposal The proposal described at [61] below APRA Australian Prudential Regulation Authority ASIC Australian Securities and Investments Commission ASX Australian Stock Exchange Commissioner The Commissioner of Taxation Cornerstone investors The institutional investors who gave a commitment to MECM to buy Minara shares Glencore Glencore International AG Loan Agreement The agreement between MALLC and MBL on 3 March 2004 referred to at [65(b)] below MALLC Mongoose Acquisition LLC MatlinPatterson MatlinPatterson LLC MatlinPatterson group All of MatlinPatterson, MPAM, MPGP, MPGA, MPGOP, MPGOPB, MALLC and Mongoose MBL Macquarie Bank Limited MBL amended assessment The amended assessment referred to at [74] below MBL consolidated group The consolidated group for the purposes of Pt 3-90 of the 1997 Act, of which MBL was the head company and Mongoose was a subsidiary member MBL determination The determination referred to at [73] below MECM Macquarie Equity Capital Markets Ltd Minara Minara Resources Limited Minara shares The 165,633,430 ordinary shares in Minara held by Mongoose Mongoose Mongoose Pty Limited Mongoose amended assessment The amended assessment referred to at [72] below Mongoose determination The determination referred to at [71] below MPAM MatlinPatterson Asset Management LLC MPGA MatlinPatterson Global Advisers LLC MPGOP MatlinPatterson Global Opportunities Partners LP MPGOPB MatlinPatterson Global Opportunities Partners (Bermuda) LP MPGP MatlinPatterson Global Partners LLC Relevant years of income For Mongoose the year ended 31 December 2004 in lieu of year of income ended 30 June 2005; for MBL the year ended 30 September 2004 in lieu of year of income ended 30 June 2004 Sale Agreement The agreement between MPGOP, MPGOPB and MBL on 3 March 2004 referred to at [65(d)] below. 57 In January 2003, Mongoose, a company incorporated in Australia, made a takeover offer for all the shares in Minara (then called Anaconda Nickel Limited), a company which operated a nickel and cobalt mine in Western Australia. Minara was also incorporated in Australia, and its shares were listed on the Australian Stock Exchange (ASX).
58 At the time, Mongoose was wholly owned by Mongoose Acquisition LLC (MALLC), a limited liability company incorporated in Delaware, United States of America. MALLC was part of the MatlinPatterson group, a US private equity firm, having no ownership of or other relationship with MBL.
59 The ownership structure of the MatlinPatterson group was depicted by a diagram in the relevant takeover documents, which is reproduced below:
1 General Partner of the Fund
2MatlinPatterson Global Opportunities Partners (Bermuda) LP holds approximately 25% participating interest in the Fund
60 Mongoose’s takeover was unsuccessful and it only succeeded in acquiring a 36% interest in Minara. The cost of that interest to Mongoose was $161,829,478. As it did not accept Mongoose’s offer, Glencore International AG (Glencore), Minara’s principal shareholder, retained a 47% interest in Minara.
61 In February 2004, having formed the view that MatlinPatterson would not wish to retain a minority stake in Minara (namely, 36%), MBL made an unsolicited approach to MatlinPatterson to assist it in a sale of the minority interest by organising through a subsidiary, Macquarie Equity Capital Markets Ltd (MECM), a bookbuild for the sale of the Minara shares in return for a commission (Agency Proposal). By this time, the ASX price for Minara had substantially increased. Discussions in relation to the Agency Proposal began in early February 2004 and continued until the weekend of 22–23 February (or thereabouts), but MECM was not in the event appointed agent for MatlinPatterson (or Mongoose as its subsidiary) and the Agency Proposal did not proceed.
62 Instead, an agreement was reached between MatlinPatterson and MBL for the sale to MBL of MatlinPatterson’s indirect investment in Minara, on terms by which MBL would purchase MALLC and take the market and other risks on the subsequent sale of the Minara shares held by Mongoose.
63 At that time – late February 2004 – the only difference in the ownership structure of the MatlinPatterson group from that depicted in the diagram reproduced at [59] above was that MatlinPatterson Global Opportunities Partners (Bermuda) LP (MPGOPB) had exchanged its 25% interest in MatlinPatterson Global Opportunities Partners LP (MPGOP) for a 25% interest in MALLC. Thus:
64 MBL understood that if it acquired Mongoose it would be liable to pay tax on the net profit to it from the transaction, that is, the proceeds of realisation of the Minara shares less the cost to MBL of its investment and transaction costs. Concerns as to a potentially adverse operation of s 457 of the 1936 Act (part of the Controlled Foreign Companies provisions in Pt X of that Act) were the subject of consideration, advice and steps taken to avoid any adverse consequences of an arguable application of that provision.
65On or about 2 or 3 March 2004 the following transactions took place:
(a)MALLC declared a distribution of US$244 million to its members, MPGOP and MPGOPB;
(b)MBL agreed with MALLC to lend it US$244 million (Loan Agreement);
(c)MALLC paid US$244 million to its members;
(d)MBL and the members of MALLC entered into an agreement for the purchase and sale of the membership interests in MALLC for A$122,045,472.62 (Sale Agreement);
(e)the membership interests in MALLC were transferred to MBL;
(f)senior executives of MBL, Messrs John Prendiville, Michael Carapiet and Richard Phillips, were appointed directors of MALLC, and then of Mongoose; in consequence, MALLC became a resident of Australia for the purposes of the 1936 and 1997 Acts, and MALLC and Mongoose members of a consolidated group, of which MBL was the head company; and
(g)the directors of Mongoose resolved to sell the Minara shares using MECM as its broker.
66 Thus, Mongoose became a subsidiary member of the MBL consolidated group in consequence of, inter alia, MBL purchasing all the membership interests in MALLC from the MatlinPatterson vendors (both non-residents of Australia) for $438,928,590. This figure comprised a purchase price of $122,045,472.62, plus a liability of MALLC owing to MBL for moneys lent to MALLC in the sum of US$244 million ($316,883,117.38).
67 The MatlinPatterson vendors of the membership interests in MALLC sold their indirect interest in Minara for a gain of $277,099,112 ($438,928,590 less the cost to Mongoose of the Minara shares, being $161,829,478). It is common ground that this gain was not subject to Australian income tax to the MatlinPatterson vendors, being (as it was) a sale by non-residents of their respective interests in a non-resident company.
68 The Minara shares were sold by Mongoose on 4 March 2004 at a price of $2.90 per share, for a total amount of $480,336,947.
69 As noted above, the cost to MBL of acquiring all the membership interests in MALLC was $438,928,590. That was also MBL’s tax cost of Mongoose’s interest in Minara for the purposes of Pt 3-90 of the 1997 Act (see Div 705). In consequence of Mongoose’s sale of the Minara shares, for the year of income ended 30 September 2004 (in lieu of the year of income ended 30 June 2004), MBL returned, as head company of the MBL consolidated group (of which Mongoose was, by then, a subsidiary member) an assessable gain of $41,408,357. This comprised the difference between the proceeds of the disposal by Mongoose of the Minara shares ($480,336,947) and MBL’s tax cost of Mongoose’s interest in Minara ($438,928,590). The primary judge noted that it was “common ground” that, the application of Pt IVA aside, in the relevant year of income –
(1)MBL did not derive a gain of $318,507,469; its gain, as head company of the consolidated group, was limited to that which it returned, namely, $41,408,357; and
(2)Mongoose is deemed not to be a separate entity, and not to be liable to tax, in that part of the relevant year of income during which the gain was derived.
70 The relevant determinations and assessments made and issued by the Commissioner were as follows.
71 On 5 June 2009 the Commissioner made a determination pursuant to s 177F of the 1936 Act (Mongoose determination) in the following terms:
I, Paul Duffus, Deputy Commissioner of Taxation, Large Business and International, in the exercise of the powers and functions delegated to me by the Commissioner of Taxation determine under paragraph 177F(1)(a) of the Income Tax Assessment Act 1936 (the Act) that the amount of $318,507,469 being a tax benefit that is referable to an amount that has not been included in the assessable income of Mongoose Pty Ltd, TFN … (the taxpayer) for the substituted accounting period 1 January 2004 to 31 December 2004 in lieu of year of income ended 30 June 2005, shall be included in the assessable income of the taxpayer for that year of income.
I further determine under subsection 177F(2) of the Act that the amount shall be deemed to be included in the assessable income of the taxpayer by virtue of section 102-5 of the Income Tax Assessment Act 1997.
72 On 23 June 2009 the Commissioner issued an amended assessment to Mongoose for the year ended 31 December 2004 (in lieu of the year of income ended 30 June 2005), including the sum of $318,507,469 in Mongoose’s assessable income (Mongoose amended assessment). The amount of the tax benefit alleged – $318,507,469 – comprises the proceeds of disposal of the Minara shares (namely, $480,336,947) minus the cost to Mongoose of acquiring the Minara shares ($161,829,478).
73 On 5 June 2009 the Commissioner made another determination pursuant to s 177F of the 1936 Act (MBL determination) in the following terms:
I, Paul Duffus, Deputy Commissioner of Taxation, Large Business and International, in the exercise of the powers and functions delegated to me by the Commissioner of Taxation determine under paragraph 177F(1)(a) of the Income Tax Assessment Act 1936 (the Act) that the amount of $318,507,469 being a tax benefit that is referable to an amount that has not been included in the assessable income of Macquarie Bank Ltd, TFN … (the taxpayer) for the substituted accounting period 1 October 2003 to 30 September 2004 in lieu of year of income ended 30 June 2004, shall be included in the assessable income of the taxpayer for that year of income.
I further determine under subsection 177F(2) of the Act that the amount shall be deemed to be included in the assessable income of the taxpayer by virtue of section 102-5 of the Income Tax Assessment Act 1997.
74 On 23 June 2009 the Commissioner issued an amended assessment to MBL for the year ended 30 September 2004 (in lieu of the year of income ended 30 June 2004), including this same sum of $318,507,469 in MBL’s assessable income (MBL amended assessment).
75 It was said by the primary judge that the Commissioner’s action in taxing the gain was “obviously attended by uncertainty on his part as to which applicant to tax, so he taxed both”. It was conceded by the Commissioner that both assessments could not be correct, and also that:
if one is correct, he would have to make a compensating adjustment pursuant to s 177F(3) of the 1936 Act excising from MBL’s assessable income the gain of $41,408,357 returned by, and taxed to, MBL as head company of the MBL consolidated group in respect of the sale. In his closing written outline of submissions, the Commissioner submitted that for him to proceed otherwise than the way he did “while tax appeals are pending would risk a loss of the tax on $41 million to the revenue which on any view is properly assessable, if the appeals succeed”.
76 The primary judge rejected these submissions, in part on the basis of the Full Court’s decision in Futuris Corporation Ltd v Federal Commissioner of Taxation (2007) 159 FCR 257. This issue – which is the subject of one of the grounds of appeal asserted by the Commissioner, but was not ultimately necessary for this Court to determine – will be dealt with later in these reasons.
77 The scheme relied upon by the Commissioner – which was set out in the primary judge’s reasons, and is not in contest between the parties – is as follows:
(a)On 2 March 2004, the declaration of a distribution of US$244 million by MALLC;
(b)On 3 March 2004, the entry into the Loan Agreement by MBL and MALLC;
(c)On 3 March 2004, the drawdown by MALLC of US$244 million pursuant to the loan agreement;
(d)On 3 March 2004, the entry into the Sale Agreement pursuant to which MPGOP and MPGOPB sold their membership interests in MALLC to MBL;
(e)On 3 March 2004, replacement of the existing directors of MALLC and Mongoose with MBL appointees, the convening of meetings by the new directors of MALLC and Mongoose and the resolution of the new Mongoose directors to sell the Minara shares; and
(f)On 3 and 4 March 2004, the sale of the Minara shares by MECM on behalf of Mongoose, at a price of $2.90 per share.
78 In [40] of the amended appeal statement filed in each of the proceedings NSD 105 of 2010 and NSD 106 of 2010, the Commissioner quantified the tax benefit alleged to have been obtained under Pt IVA and particularised the relevant counterfactual required by s 177C, as follows:
Mongoose (alternatively, MBL) obtained a tax benefit in connection with a scheme of $318,507,469 (being the expected proceeds of $480,336,947 less the cost of the shares $161,829,478) being the amount not included in its assessable income for the income year ended 31 December 2004 where that amount would have been included or might reasonably have been expected to have been included if the scheme had not been entered into or carried out.
Particulars
If the scheme had not been entered into or carried out it might reasonably be expected that Mongoose would have sold the Minara shares in accordance with the Agency Proposal for a price equal to $2.90 per Minara share.
79 As noted at [27] and following of the primary judge’s reasons, the Commissioner initially argued that, having regard to the factors in s 177D, the dominant purpose of MBL, MPGOP and MPGOPB in entering into or carrying out the scheme (as previously defined) was to enable Mongoose (alternatively, MBL) to obtain the tax benefit in question. During the course of the proceeding before the primary judge, the Commissioner expanded the scope of his dominant purpose argument to include MALLC and Mongoose as relevant parties.
THE FINDINGS OF THE PRIMARY JUDGE
80 As previously noted, the primary judge upheld the respondents’ applications at first instance. Central to the primary judge’s reasoning in this regard appears to have been certain defects or inconsistencies perceived in the manner in which the Commissioner purported to issue assessments to and make determinations in respect of Mongoose and MBL, and the combinations thereof that the Commissioner sought to rely upon for the purpose of his case under Pt IVA.
81 His Honour was inclined towards the view (albeit ultimately not deciding) that the Commissioner theoretically could make the Mongoose determination, despite the fact that Mongoose was a subsidiary member of the MBL consolidated group at the relevant time. But the primary judge ultimately held that:
(a)On the assumption that a determination can only be given effect to by issuing an assessment to the specific taxpayer whose assessable income is to be increased, the Commissioner could not rely on the Mongoose amended assessment to give effect to the Mongoose determination because, as a subsidiary of the MBL consolidated group (to which Pt 3-90 applied), Mongoose was not a separate entity liable to tax at the relevant time.
(b)Further, the Commissioner could not use the MBL amended assessment to give effect to the Mongoose determination. Outside of specific contexts involving trustees and beneficiaries (about which it was not necessary for his Honour to ultimately decide), the primary judge doubted whether the Commissioner could issue an amended assessment to one taxpayer to give effect to a determination made in respect of another. The primary judge considered that even if such a thing were possible in certain limited circumstances involving consolidated groups, this was not such a case.
To this end, his Honour held that any assessment intended to give effect to an anterior determination (whether issued to the taxpayer referred to in the determination or otherwise) “must be factually consistent with the hypothesis upon which that determination is predicated”. His Honour held at [61] that the MBL amended assessment was not factually consistent with the hypothesis on which the Mongoose determination was predicated (namely, that if the scheme was not entered into, Mongoose would have sold the Minara shares otherwise than as a member of the MBL consolidated group). Accordingly, the MBL amended assessment could not give effect to the Mongoose determination.
(c)Further, the Commissioner could not rely on the MBL amended assessment to give effect to the MBL determination, as this would also be inconsistent with the Commissioner’s counterfactual that Mongoose would have or might reasonably be expected to have sold the Minara shares otherwise than as a subsidiary of the MBL consolidated group. Regarding this issue, his Honour commented at [45] of his reasons that “MBL could never, and did not, obtain such a tax benefit from such a sale”.
(d)Notwithstanding the foregoing conclusions (which were, in his Honour’s opinion, sufficient to permit him to dispose of the proceedings in favour of Mongoose and MBL), the primary judge was asked to determine the issues of “tax benefit” and “dominant purpose” under ss 177C and 177D of Pt IVA, as a precautionary measure “in the event that these proceedings go further”. His Honour proceeded to do so on the assumption that the MBL amended assessment was capable of giving effect to the Mongoose determination (and that Mongoose was the relevant taxpayer for the purpose of the Pt IVA analysis).
In respect of the tax benefit issue, his Honour concluded that Mongoose had obtained a tax benefit for the purpose of s 177C, as – had the scheme not been carried out – Mongoose might reasonably be expected to have sold the Minara shares under the Agency Proposal and derived a gain equivalent in amount to the alleged tax benefit.
Further, in respect of what was referred to as the “dominant purpose” inquiry under s 177D, the primary judge found that because none of the parties identified by the Commissioner entered into or carried out all of the steps of the scheme, it was necessary to determine whether each party entered into or carried out their particular step/s of the scheme for the dominant purpose of enabling Mongoose to obtain a tax benefit. His Honour concluded that when the question was so confined, it could not be concluded that any of MBL, Mongoose, MALLC, MPGOP or MPGOPB entered into or carried out their respective step/s of the scheme for such a purpose.
ARGUMENTS ADVANCED BY THE PARTIES ON APPEAL
82 As previously foreshadowed, on appeal the Commissioner challenges each of these conclusions (with the exception of the primary judge’s finding regarding the existence of a tax benefit).
83 Grounds of appeal 1 to 4 in the Notices of Appeal filed by the Commissioner relate to the conclusions in sub-paras (a) to (c) of [34] above. At the heart of the issues raised by those grounds of appeal are questions of construction concerning the interaction of Pt IVA of the 1936 Act and Pt 3-90 of the 1997 Act.
84 The conclusions summarised in sub-para (d) of [34] above are taken up in grounds of appeal 5 to 9 of the Notices of Appeal. The issues raised in those grounds of appeal concern the correctness of the construction of Pt IVA of the 1936 Act adopted by the primary judge, the correctness of the primary judge’s conclusions on the issue of dominant purpose and his Honour’s treatment of the evidence and findings of fact in this regard.
85 Ground of appeal 10 (which is misnumbered as ground of appeal “11” in the Notice of Appeal for proceeding NSD 1794 of 2011) is a discrete point and is directed towards the primary judge’s observations at [4] of his Honour’s reasons concerning the Commissioner’s power to make compensating adjustments under s 177F(3) of the 1936 Act.
86 By contrast, the respondents submit that the determinations made in respect of and assessments issued to Mongoose and MBL cannot be supported under the 1936 and 1997 Acts, and that the appeals should be dismissed.
87 It will be apparent that the issues raised by these appeals can broadly be divided into two categories: those issues that fall to be determined before the specific provisions of Pt IVA can be applied (i.e. because they relate to or turn on the manner in which Pt IVA interacts with other parts of the income tax legislation), and those that concern the substantive operation and application of Pt IVA. Each of these categories will be addressed in turn.
STATUTORY INTERPRETATION – THE INTERACTION OF PT IVA AND PT 3-90
88 As will be readily apparent from the foregoing, the legislation primarily in issue in these proceedings is Pt IVA of the 1936 Act, and Pt 3-90 of the 1997 Act.
89 It was noted by the primary judge – and conceded by the Commissioner in the submissions provided to this Court on appeal – that two separate determinations were made in respect of and two separate amended assessments were issued to each of Mongoose and MBL respectively, specifically as a result of “the uncertainties regarding the interaction of Part IVA of the 1936 Act and Part 3-90 of the 1997 Act”. Many of the issues raised by the parties on appeal fall to be determined by reference to the correct interaction of these Parts. This inquiry has two stages. First, it is necessary to determine how – at a conceptual level – the two Parts are designed to interact with each other. This aspect of the inquiry involves determining the parties’ arguments about whether one Part restricts or “sterilises” the other. Secondly, it is necessary to determine the precise mechanics of the interaction of the two Parts – it is this part of the inquiry that requires determination of whether the Commissioner is capable of relying on any of the determinations and amended assessments that are the subject of these proceedings (and if so, which ones).
90 These issues will be addressed in turn. It is convenient to first set out the text of the relevant statutory provisions. To this end, we note that the primary judge set out a number of key provisions as they existed at the relevant time at [31] to [37] of his reasons for judgment. In the interests of brevity, we will reproduce here only the most relevant provisions.
Part 3-90 of the 1997 Act
91 Part 3-90 of the 1997 Act was introduced by the New Business Tax System (Consolidation) Act (No 1) 2002 (Cth) (No 68 of 2002). The Explanatory Memorandum to the New Business Tax System (Consolidation) Bill (No 1) 2002 (Cth) indicates that the consolidation provisions were born out of a desire for greater business efficiency and tax system integrity in the taxation of wholly-owned entity groups (Explanatory Memorandum at [1.7] and [1.9]).
92Section 700-1 of the 1997 Act provides an overview of the effect of Pt 3-90:
This Part allows certain groups of entities to be treated as single entities for income tax purposes.
Following a choice to consolidate, subsidiary members are treated as part of the head company of the group rather than as separate income tax identities. The head company inherits their income tax history when they become subsidiary members of the group. On ceasing to be subsidiary members, they take with them an income tax history that recognises that they are different from when they became subsidiary members.
This is supported by rules that:
(a)set the cost for income tax purposes of assets that subsidiary members bring into the group; and
(b)determine the income tax history that is taken into account when entities become, or cease to be, subsidiary members of the group; and
(c)deal with the transfer of tax attributes such as losses and franking credits to the head company when entities become subsidiary members of the group.
93Section 700-10 provides that the objects of Pt 3-90 are:
(a)to prevent double taxation of the same economic gain realised by a consolidated group; and
(b)to prevent a double tax benefit being obtained from an economic loss realised by a consolidated group; and
(c)to provide a systematic solution to the prevention of such double taxation and double tax benefits that will:
(i) reduce the cost of complying with this Act; and
(ii)improve business efficiency by removing complexities and promoting simplicity in the taxation of wholly owned groups.
94 Division 701 sets out the “Core Rules” of Pt 3-90. Critically, these include ss 701-1 (the “single entity rule”) and 701-5 (the “entry history rule”):
Common rule
701-1 Single entity rule
(1)If an entity is a *subsidiary member of a *consolidated group for any period, it and any other subsidiary member of the group are taken for the purposes covered by subsections (2) and (3) to be parts of the *head company of the group, rather than separate entities, during that period.
Head company core purposes
(2)The purposes covered by this subsection (the head company core purposes) are:
(a)working out the amount of the *head company’s liability (if any) for income tax calculated by reference to any income year in which any of the period occurs or any later income year; and
(b)working out the amount of the head company’s loss (if any) of a particular *sort for any such income year.
Note:The single entity rule would affect the head company’s income tax liability calculated by reference to income years after the entity ceased to be a member of the group if, for example, assets that the entity held when it became a subsidiary member remained with the head company after the entity ceased to be a subsidiary member.
Entity core purposes
(3) The purposes covered by this subsection (the entity core purposes) are:
(a)working out the amount of the entity’s liability (if any) for income tax calculated by reference to any income year in which any of the period occurs or any later income year; and
(b)working out the amount of the entity’s loss (if any) of a particular *sort for any such income year.
Note:An assessment of the entity’s liability calculated by reference to income tax for a period when it was not a subsidiary member of the group may be made, and that tax recovered from it, even while it is a subsidiary member.
…
Head company rules
701-5 Entry history rule
For the head company core purposes in relation to the period after the entity becomes a *subsidiary member of the group, everything that happened in relation to it before it became a subsidiary member is taken to have happened in relation to the *head company.
Note 1:Other provisions of this Part may affect the tax history that is inherited (e.g. asset cost base history is affected by section 701-10 and tax loss history is affected by Division 707).
Note 2:Section 73BAC of the Income Tax Assessment Act 1936 overrides this rule for the purposes of the research and development incremental expenditure provisions.
…
95 Division 701 also contains special rules to calculate the cost to the head company of a consolidated group of an entity becoming a subsidiary member of that group (s 701-10: “Cost to head company of assets of joining entity”), and to determine the tax position of subsidiaries for periods when they were not part of the consolidated group (see, for example, s 701-30: “Where entity not subsidiary member for whole of income year”).
96 Section 701-85 notes that “[t]he operation of each provision of this Division is subject to any provision of this Act that so requires, either expressly or impliedly”. For these purposes, “this Act” was – and still is – defined in s 995-1 to include the 1936 Act.
97 Division 703 defines what a consolidated group is, and when a company will be a subsidiary thereof. It also sets out the mechanics of how a consolidated group is created (something that was not directly relevant in these proceedings, as the date from which the MBL consolidated group came into being was 1 October 2002).
98 Division 705 contains the rules for setting the tax cost of an entity’s assets when it becomes a subsidiary member of a consolidated group. Subdivision 705-A deals with the basic case of a single entity joining an existing consolidated group. Section 705-5 is a guide to Subdiv 705-A and provides:
When an entity becomes a subsidiary member of an existing consolidated group, the tax cost setting amount for its assets reflects the cost to the group of acquiring the entity.
99Section 705-10 deals with the application and object of Subdiv 705-A in the following terms:
Application
(1)This Subdivision has effect, subject to section 705-15, for the head company core purposes set out in subsection 701-1(2) if an entity (the joining entity) becomes a *subsidiary member of a *consolidated group (the joined group) at a particular time (the joining time).
Object
(2)The object of this Subdivision is to recognise the *head company’s cost of becoming the holder of the joining entity’s assets as an amount reflecting the group’s cost of acquiring the entity. That amount consists of the cost of the group’s *membership interests in the joining entity, increased by the joining entity’s liabilities and adjusted to take account of the joining entity’s retained profits, distributions of profits, deductions and losses.
(3)The reason for recognising the *head company’s cost in this way is to align the costs of assets with the costs of *membership interests, and to allow for the preservation of this alignment until the entity ceases to be a *subsidiary member, in order to:
(a)prevent double taxation of gains and duplication of losses; and
(b)remove the need to adjust costs of membership interests in response to transactions that shift value between them, as the required adjustments occur automatically.
Note:Under Division 711, the alignment is preserved by recognising the head company’s cost of membership interests in the entity if it ceases to be a subsidiary member of the group as the cost of its assets reduced by its liabilities.
Pt IVA of the 1936 Act
100 Part IVA of the 1936 Act was inserted by the Income Tax Laws Amendment Act (No 2) 1981 (Cth) (No 110 of 1981).
101 The Explanatory Memorandum for the Income Tax Laws Amendment Bill (No 2) 1981 (Cth) explains the proposed replacement of the previous anti-avoidance provision – s 260 of the 1936 Act – with the new general anti-avoidance provisions in Pt IVA. It states that this new Part was designed to overcome the “difficulties” associated with s 260, and to “provide – with paramount force in the income tax law – an effective general measure against those tax avoidance arrangements that – inexact though the words be in legal terms – are blatant, artificial or contrived” (Explanatory Memorandum at p 2).
[Emphasis added]
297 Accordingly, the Commissioner has not demonstrated that either MPGOPB or MPGOP had the dominant purpose of enabling Mongoose to obtain a tax benefit. Rather, their dominant purpose was purely commercial – to sell the Minara shares in a manner that was satisfactory to them (having regard to matters including tax considerations), and to make a profit.
MALLC and Mongoose:
298 In their submissions, the respondents note that “[n]o submission is addressed to the purpose of either MALLC or Mongoose; which is unsurprising in the light of the passive role which each played in the events of 2004”.
299 As each of these companies was, at all relevant times, a wholly-owned subsidiary of either MatlinPatterson or MBL, we consider that it is appropriate (in the absence of evidence to the contrary) to attribute to each of them the dominant purpose that existed on the part of MatlinPatterson and/or MBL at the relevant time. Accordingly, we find that, having regard to the factors set out in s 177D(b), neither MALLC nor Mongoose had the requisite dominant purpose.
MBL:
300 We find that MBL had a clear dominant purpose of making a profit from its dealings with MatlinPatterson, in respect of which the primary objective was sale of the Minara shares. As previously set out, MBL initially proposed an agency arrangement by which to sell the Minara shares on behalf of MatlinPatterson, and under which MBL was to receive fees and take little financial risk. Eventually the preferred transaction (the change to which, as we have previously concluded, appears on the evidence to have occurred at least in part at the behest of the vendors) became the scheme as implemented, being a riskier, but potentially more profitable, venture.
301 We do not think that enabling Mongoose to obtain a tax benefit was the dominant purpose of MBL entering into the scheme. On balance, our analysis of the s 177D factors as they apply in this case does not support that proposition. Rather, MBL’s dominant purpose was to make a profit by effecting a sale of the Minara shares in a manner that met its client’s objectives. The real risks associated with entry into the scheme meant that there was potential for MBL to earn significantly more profit on the sale of the Minara shares than would have been the case under the Agency Proposal (but there was also the potential for MBL to incur a loss, given factors such as the share price volatility, and the fact that MatlinPatterson was unwilling to grant any termination events or give more than minimal warranties). The fact that the operation of the consolidation provisions was the mechanism by which this profit could be made is not enough in and of itself to give rise to a finding of dominant purpose under s 177D. Although the taxation consequences produced by the operation of the consolidation provisions were doubtless a consideration for MBL when determining whether to enter into the scheme (as evidenced by the advice obtained on the subject), neither these consequences nor the possibility of Mongoose getting a tax benefit were the ruling, prevailing or most influential purpose of MBL in deciding to do so. As Gummow and Hayne JJ noted in Hart (2004) 217 CLR 216, tax laws affect the shape of nearly every business transaction (citing Frank Lyon Co v United States (1978) 453 US 561 at 580; at 239). Further, the bare fact that a taxpayer pays less tax if one form of transaction is pursued rather than another does not demonstrate that Pt IVA applies (at 240). This was not a case in which entry into the scheme was explicable only by the relevant taxation consequences (Hart (2004) 217 CLR 216 at 244).
302 For the foregoing reasons, we do not consider that the Commissioner could succeed in his case against the respondents under s 177D, even if it were assumed that Mongoose was the relevant taxpayer for the purpose of the Pt IVA analysis.
OTHER MATTERS
303 The remaining appeal grounds concern the application of the High Court’s decision in Federal Commissioner of Taxation v Futuris Corporation Limited (2008) 237 CLR 146 to the issue of compensating adjustments, and the Commissioner’s submissions regarding evidence. It is unnecessary for us to deal with the former ground of appeal, in light of our conclusion that the appeals should be dismissed (such that the issue of compensating adjustments does not arise). Further, Senior Counsel for the Commissioner indicated that the observations of the primary judge at [4] played no part in his Honour’s reasoning. In respect of the latter grounds of appeal, we reason as follows.
Grounds of Appeal Relating to the Primary Judge’s Treatment of Evidence
304 Two of the Commissioner’s grounds of appeal concerned the primary judge’s treatment of the evidence before him at trial. These grounds alleged that the primary judge had erred in the following ways:
(a)by accepting the evidence of Mr Upfold set out at [40] of the judgment in that the primary judge misused his advantage, the evidence was glaringly improbable and was contrary to compelling inferences; and
(b)in respect of the failure of MBL and Mongoose to call Mr Phillips, Mr Curry and Ms Walpole, by failing to infer that the evidence of those persons would not have assisted MBL and Mongoose; by failing to conclude that the failure of MBL and Mongoose to call those persons cast a “great slur” over the whole of MBL and Mongoose’s case; and by failing to conclude that the Court should therefore more readily draw inferences in favour of the Commissioner’s case.
305 In respect of this first ground of appeal, [40] of the primary judge’s reasons for judgment (and the surrounding paragraphs required for context) is as follows:
[38] The Commissioner’s grievance — or the “taxation Alsatia” as he called it in his written submissions — is that the parties availed themselves of the Consolidated Groups provisions of Pt 3-90, in particular, the express provision of the legislation that where a subsidiary member joins a consolidated group, and subsequently disposes of an asset, the subsidiary member is not taxed on the difference between proceeds and cost (the profit actually or “in fact” made by the subsidiary), because of the operation of s 701-1, while the head company is taxed not on the profit “in fact” made by the subsidiary, but on the economic profit made by the head company (the cost to the head company of the acquisition of the subsidiary is pushed down to become the tax cost setting amount of the asset disposed of by the subsidiary (Div 705)), to avoid tax on a substantial portion of the gain on a once and for all transaction — the sale of the Minara shares — and not for purposes consistent with the objects of Pt 3-90 as set out in s 700-10.
[39] The Commissioner’s senior counsel articulated it in the following way: MBL devised a solution to realise a substantial part of the unrealised gain on the Minara shares without MatlinPatterson paying tax on that part of the gain and as a quid pro quo, MatlinPatterson ceded the balance of the gain to MBL. In his words: “[T]hey split [the proceeds] on a commercial basis. MatlinPatterson might have made a whole lot more profit on the deal [than MBL], but then they owned the [Minara] shares before this started, and so their bargaining position might have been thought to be a whole lot stronger”.
[40] This scenario was never put to any witness called on behalf of MBL; certainly not in those terms. Certain questions were put to Mr RN Upfold, an Executive Director within Macquarie Group Ltd, in cross-examination concerning an email he sent to Ms Jess Walpole at MBL on Tuesday, 17 February 2004. The transcript reads (at 188):
Now, going through the material in the email, it starts:
There are a number of ways to achieve this and they exist along spectrums of difficulty and time involved.
The first option, which you describe as easy and quick, is for MBL or SPV — is that special purpose vehicle? — Yes.
Continuing:
Acquires Mongoose LLC. Change residence of LLC by appointing Australian directors as head company in a consolidated group. We would be able to sell shares with no tax payable unless sale price in excess of cost, and no Australian tax on this for fund.
Who was “fund”? — That was my impression at the time for the vendor, MatlinPatterson.
So you are referring there to the MatlinPatterson entity, or the vendor. Now, you were addressing there, were you not, the tax consequences of different possible structures for the Australian tax position of MatlinPatterson entities? — I was addressing how Macquarie might be involved in a transaction involving various entities, yes. That was what I was advising on.
But this — these paragraphs, paragraph 2 deals with the tax consequences for a MatlinPatterson entity; is that correct? — Yes, it would, insofar as Macquarie could be involved in the transaction. There would be consequences for the other side of the transaction.
And ensuring that no Australian tax was paid on this for the MatlinPatterson Fund was a matter at the forefront of your consideration in this email? — Not especially. I was more concerned with how Macquarie could be involved in the transaction.
How in a tax sense Macquarie could be involved in it? — Only tax, yes.
Because given your role and your expertise, the question that you understood you were being asked to advise on didn’t simply concern how Macquarie Bank could buy Mongoose: it was how Macquarie could buy Mongoose with certain tax consequences; is that correct? — No, this question was only about buying an LLC. Jess Walpole was at the meeting when that was discussed, and she was puzzled as to what on earth Macquarie would do in buying an LLC if that was available. That is what this was responding to.
And it was responding to the tax consequences of buying the LLC? — That is what I put in the email. She didn’t ask me that question.
But you understood, in light of your role at Macquarie and your expertise, you understood that she was asking you for assistance in relation to the tax consequences, rather than corporate law or some other consequence? — For Macquarie Bank, yes.
And you included in your consideration tax consequences for the MatlinPatterson Fund, at least in 1(ii)? — Yes, I did.
And you understood that to be included in the questions on which you were asked for assistance? — No, I wasn’t. She only asked me about how Macquarie could buy an LLC. She was puzzled at the meeting when it arose.
Now, the issues in (i) about change of residence by appointing Australian directors, that is significant only for tax reasons, is it not? — Yes and now. It is significant for tax reasons, but it is part of Macquarie’s corporate policy. If we buy a company, you have to appoint directors, and there is a policy on that. So, yes we would, once we acquired a company, appoint directors.
And appoint Australian directors? — We would in this case, certainly. That is a Macquarie policy.
And you would certainly do so in this case because appointing Australian directors would have consequences for the entity’s ability to enter the Macquarie Consolidated Group? — Well, that doesn’t — I was certainly comfortable that that would be the effect, and that was an effect that I was very happy with. But just to be clear, that is a Macquarie policy. I can’t do anything about that.
But Ms Walpole wasn’t coming to you to ask for your assistance in respect of Macquarie’s policy as to residence of directors, was she? She was asking for assistance about tax? — Correct. Well, she was asking me for a comment about the LLC. I can’t help writing about tax. That is what I do.
In terms of acquisition of the LLC, there were potentially two groups of issues, were there not? One group of corporate law issues, and one group of tax issues? — Yes, I think that is right. As far as I was aware, there were corporate and tax issues.
And you understood that your assistance had been sought in respect of the tax issues rather than the corporate issues? — I am not sure anyone asked me for my assistance in acquiring an LLC at this stage, but that is what I would be advising on.
Now, when we come further down to the demerger question, you see the steps there. See (iv)P/L. Was that a reference to the Australian resident company, Mongoose Pty Ltd? — Yes, it is.
And in (v) you are advising about demergers under CGT relief rules? — I am commenting on them, yes.
And you’re commenting on capital gains tax for Mongoose Proprietary Limited — ? — Yes.
—and capital gains tax for MatlinPatterson fund? — Capital gains and revenue profit, it says, but yes.
Well, capital gains — you make an assumption in parentheses that there wasn’t going to be a revenue profit? — Yes. That was a — at that stage I had no facts really.
Well, you had enough facts to give this outline of — ? — Certainly had a structure diagram, yes.
Yes. And you also there refer to no dividend withholding tax? — Yes.
Right. Who would that be significant for? Would that be significant for Macquarie or fund? — That would be significant for Mongoose Pty Limited.
The reference — the discussion under 2 is focussed primarily upon capital gains tax, but also on dividend withholding tax. Agree with that? — Yes, it is.
The Australian tax you refer to in 1(ii) would include capital gains tax? — Yes, it would.
And that, indeed, would be a primary issue for consideration in relation to a transaction of this kind? — For MatlinPatterson, yes, it would.
The capital gains tax implications were at the forefront of consideration in both options you put forward. Is that correct? — Yes.
What you were putting forward here was a solution to capital gains tax issues which might suit the tax planning needs of the MatlinPatterson entities? — I’m not sure I was presenting a solution. I was presenting an explanation of what role Macquarie might have in acquiring the LLC, but yes. Both would have tax impacts for MatlinPatterson, the vendor.
You were putting forward a possible solution? — Possible involvements of how we would buy the — the question that Jess raised was, what role would Macquarie have in buying an LLC? That’s what I was trying to say, because this is a spectrum, and there are elements of risk, funding, management that vary between these two ends of the spectrum and — and a number of situations that are possibly in between. I had no idea what role Macquarie would play other than in answering a question that she asked, what role would we have in buying an LLC? What could we do?
But she didn’t need to consult you if buying the LLC where the only objective; you were consulted with a view to obtaining a very specific tax outcome — that of no CGT on the disposition of the Minara shares held by Mongoose? — That’s not true.
Well, that’s what these two matters are directed to, is it not? — They mention those, yes, but she asked me — she was puzzled as to what role Macquarie could have in buying an LLC. I don’t think she had experience in it, and I was telling her we could have all sorts of roles, depending on how we were going to fund it, if we were funding it, how much risk we were going to take. So the range. That’s all it’s doing. A spectrum, and yes, it’s dealing with tax because that’s what I do.
[41] After a short consultation with his junior counsel, the Commissioner’s senior counsel then put to Mr Upfold:
Could I suggest that the answers that you’ve given about the questions that were put to you are not frank?’
Mr Upfold effectively rejected this suggestion before objection was taken to the question. The questions to which reference was being made in that question were not identified, but even if it is a reference to some or all questions in the extract from the transcript in [40] above, I do not agree that Mr Upfold’s answers were “not frank”. My review of the transcript confirms my view at the time that Mr Upfold answered all questions put to him in a direct and forthright manner and to the best of his recollection, conceding as he did, that his tax expertise was the catalyst for much of what he put in the email because: “That is what I do”. It was subsequently submitted by the Commissioner that I should not accept Mr Upfold’s evidence. I make it quite clear, that I accept Mr Upfold’s evidence without reservation. On the other hand, insofar as his evidence is seen as going to the s 177D(b) issue (I am unable to perceive as to what else it might go to), it needs to be said at the outset that the s 177D(b) issue, if it arises in this case and on my view of other issues it does not, is to be determined objectively, by reference to the eight matters referred to therein, and not by reference to the personal or subjective purposes of those involved in the process, be they advisers or participants. The contemporaneous documents in evidence and their explication by reference to the events that occurred are more likely to contribute to an informed conclusion on the s 177D(b) issue than the oral evidence, over seven years later, of a witness involved in those events; particularly if the latter is inconsistent with the former.
306 The email referred to in this cross-examination has been substantially extracted in our reasons for judgment at [202] above.
307 The Commissioner submits that the compelling inference to be drawn from this email is that it was written by Mr Upfold in response to a question from Ms Walpole as to how MBL could purchase MALLC in a manner that achieved specific tax consequences, namely, the disposal of the Minara shares without attracting Australian capital gains tax. The Commissioner further submits that Mr Upfold denied this meaning in the course of cross-examination, and that the primary judge’s credibility finding in relation to Mr Upfold should be given no weight as it was based on an assessment of Mr Upfold’s demeanour whilst giving evidence with no assessment made “against the inferences arising from the contemporaneous documents and the logic of events” (citing Fox v Percy (2000) 214 CLR 118 at 129). Further, the Commissioner submits that “the primary judge’s prior professional and social relationship with Mr Upfold makes his assessment of Mr Upfold’s demeanour an unsound basis for the resolution of a disputed issue of fact” (citing CSR Ltd v Della Maddalena [2006] HCA 1; (2006) 224 ALR 1 at [107]-[108], [162]-[163]). Instead, the “proper conclusion” (as submitted by the Commissioner) is that Mr Upfold’s email to Ms Walpole of 17 February 2004 was “a powerful indicator” that the scheme as ultimately implemented emerged from tax advice, and was directed to achieving the tax objectives of MatlinPatterson, thereby improving the yield to MBL. The Commissioner further submits that this is relevant to s 177D(b)(i), and is a “powerful indicator of dominant tax purpose”.
308 We do not accept the Commissioner’s submissions in this regard. We do not understand Mr Upfold to have been denying that the email in question dealt with tax consequences of the bought deal – rather, he was simply not willing to concede that the principal or sole purpose of his email was to specifically provide a “solution” as to how a certain tax outcome could be achieved, namely, sale of the Minara shares with no CGT implications for MatlinPatterson (and involving an acquisition of MALLC by MBL). We do not find that Mr Upfold’s evidence in this regard was “glaringly improbable” when assessed against the contemporaneous documents. We see no reason to reject his evidence on the issue and overturn the primary judge’s decision on point. The Commissioner’s assertions that Mr Upfold has “considerable expertise in tax law” and was at the time “an internal MBL tax adviser” do not alter this conclusion. We note that Mr Upfold states in his affidavit that in his role as Executive Director of the Investment Banking Group, he “did not provide formal advice to Macquarie Bank or its clients (this was the role of external advisers from legal or accounting firms)”. It will be apparent from the foregoing s 177D analysis that we accept that tax considerations played some part in determining the shape of the transaction, but did not comprise the dominant purpose of entry into the scheme by its participants. Mr Upfold’s evidence as extracted at [40] of the primary judge’s reasons for judgment is entirely consistent with this conclusion.
309 As to the suggestion made in submissions about the trial judge’s relationship with Mr Upfold, this is a matter that would only be relevant to an allegation of bias, and no such allegation has been made before this Court.
310 Ultimately, the weight to be accorded to the evidence of witnesses is a matter for the primary judge, and we are not persuaded that the exercise of his Honour’s discretion in this regard miscarried so as to require this Court to intervene. Accordingly, we would dismiss this ground of appeal.
311 We would similarly dispose of the grounds of appeal regarding the alleged failure of MBL and Mongoose to call Messrs Phillips and Curry and Ms Walpole to give evidence, and the findings that the Commissioner submits should have been drawn therefrom by the primary judge. The principal submission put by the Commissioner in this regard is that an adverse inference should be drawn in respect of the failure to call these witnesses in accordance with Jones v Dunkel (1959) 101 CLR 298 (although we note that it appears from the Commissioner’s submissions that this argument is ultimately pressed only in respect of Ms Walpole and Mr Phillips).
312 Putting aside arguments about the precise role played by Ms Walpole and Mr Phillips in the implementation of the scheme, it is not correct to say that no adequate explanation was given for the failure to call these witnesses. The two affidavits of Mr Nicholas Mavrakis (as one of the solicitors for MBL) set out the relevant facts in this regard.
313 In respect of Ms Walpole (who was still working at Macquarie at the relevant time), an approach was made in July 2010 to ascertain whether she was prepared to give evidence. It appears that she was not prepared to do so voluntarily at that time, for reasons including health concerns and “bad experiences” with previous litigation. After the issue was revisited in May 2011, Ms Walpole’s doctor provided a letter recommending that she not be involved in or give evidence in the proceedings.
314 In respect of Mr Phillips (who by then had moved on to a corporate advisory firm), contact was made in or about May 2010 regarding the proceedings. Mr Phillips expressed the view that he was reluctant to give evidence voluntarily, but would consult with others within his firm about the matter. In late May 2010, Mr Phillips informed Mr Mavrakis that from a business perspective, the partners consulted did not want him involved in the matter and would not support his involvement on a voluntary basis. Mr Phillips indicated that he would review his position if compelled to give evidence.
315 In respect of both Ms Walpole and Mr Phillips, much was sought to be made by the Commissioner of the fact that the correspondence from MBL’s solicitors effectively sought to confirm their disinclination to give evidence in the proceedings (rather than asking the question of willingness and availability in a manner that did not presuppose the response). It was also submitted that the Commissioner suffered prejudice as a result of only learning in June 2011 that, on the asserted basis of unavailability, the respondents did not seek to call either Ms Walpole or Mr Phillips to give evidence, such that there was then insufficient time remaining to serve these witnesses with subpoenas. Specifically in relation to Ms Walpole, the Commissioner submits that the letter from her doctor “rises only as high as a recommendation”, and does not suggest any unfitness to give evidence. In relation to Mr Phillips, the Commissioner submits that he was a witness plainly “in Macquarie’s camp” at the relevant time.
316 Counsel for the Commissioner acknowledged that no attempts were made either to communicate with Mr Phillips regarding his evidence, or to subpoena him. If this witness, or Ms Walpole, were important witnesses for the Commissioner, they could have been called upon to give evidence. If the Commissioner wanted more time to serve subpoenas, this could have been applied for. No such application to the Court was made, and no reason was given by the Commissioner for not making such an application.
317 Efforts were made by MBL to get Ms Walpole and Mr Phillips to cooperate in giving evidence and they refused to do so. These circumstances do not enliven the Jones v Dunkel (1959) 101 CLR 298 principles. Accordingly, we do not think that the primary judge was required to draw the sorts of inferences from the absence of these witnesses at trial as are contended for by the Commissioner. We would dismiss these grounds of appeal.
CONCLUSION
318 We propose to order that the parties confer and thereafter bring minutes to the Court reflecting the outcome of these proceedings (including costs) within 7 days. We are of the tentative view that the appropriate orders should be that the appeals be dismissed with costs. If the parties cannot agree on the form of proposed orders they should file within the same 7 days the orders for which they contend and written submissions of no more than 3 pages in support of those orders.
I certify that the preceding two hundred and seventy one (271) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Middleton and Robertson Associate:
Dated: 15 February 2013
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