IEL Finance Limited ACN 008 556 130 v Commissioner of Taxation - [2010] FCA 898

FEDERAL COURT OF AUSTRALIA
IEL Finance Limited ACN 008 556 130 v Commissioner of Taxation [2010] FCA 898

Citation: IEL Finance Limited ACN 008 556 130 v Commissioner of Taxation [2010] FCA 898

Parties: IEL FINANCE LIMITED ACN 008 556 130, QUEENSLAND TRADING & HOLDING CO LIMITED ACN 009 658 762 and SPASSKED PTY LIMITED ACN 003 255 847 v COMMISSIONER OF TAXATION

File numbers: NSD 539 of 2004, NSD 540 of 2004, NSD 543 of 2004; and NSD 94 of 2005

Judge: EMMETT J

Date of judgment: 20 August 2010

Catchwords:
TAXATION – intention to derive assessable income – allowable deductions – whether interest payments deductable – dividend traps

PRACTICE AND PROCEDURE – whether line of argument constitutes an abuse of process

Legislation: Income Tax Assessment Act 1936 (Cth) ss 46, 51, 79, 80, 177
Taxation Administration Act 1953 (Cth) s 14

Cases cited: Commissioner of Taxation v Firth (2002) 120 FCR 450
FCT v Consolidated Press Holdings Limited (2001) 207 CLR 235
FCT v Spotless Services Limited (1996) 186 CLR 404
Federal Commissioner of Taxation v Total Holdings (Australia) Pty Ltd (1979) 43 FLR 217
Fletcher v Commissioner of Taxation (1991) 173 CLR 1
Peabody v FCT (1993) 40 FCR 531
Rippon v Chilcotin Pty Limited (2001) 53 NSWLR 198
Ronpibon Tin No Liability v Commissioner of Taxation (1949) 78 CLR 47
Spassked Pty Ltd v Commissioner of Taxation (No 5) [2003] FCA 84
Spassked Pty Ltd and Others v Commissioner of Taxation [2003] FCAFC 282
Spassked Pty Ltd and Others v Federal Commissioner of Taxation (No 2) [2007] FCAFC 205
Steele v Deputy Commissioner of Taxation (1999) 197 CLR 459

Dates of Hearing: 31 May to 2 June 2010, 7 June 2010, 9 to 10 June 2010 and 16 June 2010

Place: Sydney

Division: GENERAL DIVISION

Category: Catchwords

Number of paragraphs: 290

Counsel for the applicant: T. Bathurst QC, P.M. Fraser and J. Hmelnitsky

Solicitor for the applicant: Freehills

Counsel for the respondent: G.J. Davies QC, D. Fagan SC, A. O’Brien and D.M. Harding

Solicitor for the respondent: Australian Government Solicitor

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY

GENERAL DIVISION

NSD 539 of 2004

BETWEEN:
IEL FINANCE LIMITED ACN 008 556 130
Applicant

AND:
COMMISSIONER OF TAXATION
Respondent

JUDGE:

EMMETT J

DATE OF ORDER:

20 AUGUST 2010

WHERE MADE:

SYDNEY

THE COURT ORDERS THAT:
1.The proceeding be listed for further directions on Friday, 8 October 2010 at 9:30 am.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY

GENERAL DIVISION

NSD 540 of 2004

BETWEEN:
QUEENSLAND TRADING & HOLDING COMPANY LIMITED
ACN 009 658 762
Applicant

AND:
COMMISSIONER OF TAXATION
Respondent

JUDGE:

EMMETT J

DATE OF ORDER:

20 AUGUST 2010

WHERE MADE:

SYDNEY

THE COURT ORDERS THAT:
1. The proceeding be listed for further directions on Friday, 8 October 2010 at 9:30 am.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY

GENERAL DIVISION

NSD 543 of 2004

BETWEEN:
IEL FINANCE LIMITED ACN 008 556 130
First Applicant

AND:
COMMISSIONER OF TAXATION
Respondent

JUDGE:

EMMETT J

DATE OF ORDER:

20 AUGUST 2010

WHERE MADE:

SYDNEY

THE COURT ORDERS THAT:
1. The proceeding be listed for further directions on Friday, 8 October 2010 at 9:30 am.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY

GENERAL DIVISION

NSD 94 of 2005

BETWEEN:
SPASSKED PTY LIMITED ACN 003 255 847
Applicant

AND:
COMMISSIONER OF TAXATION
Respondent

JUDGE:

EMMETT J

DATE OF ORDER:

20 AUGUST 2010

WHERE MADE:

SYDNEY

THE COURT ORDERS THAT:
1. The proceeding be listed for further directions on Friday, 8 October 2010 at 9:30 am.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY

GENERAL DIVISION

NSD 539 OF 2004

BETWEEN:
IEL FINANCE LIMITED ACN 008 556 130
Applicant

AND:
COMMISSIONER OF TAXATION
Respondent

NSD 540 OF 2004

BETWEEN:
QUEENSLAND TRADING & HOLDING COMPANY LIMITED
ACN 009 658 762
Applicant

AND:
COMMISSIONER OF TAXATION
Respondent

NSD 543 OF 2004

BETWEEN:
IEL FINANCE LIMITED ACN 008 556 130
Applicant

AND:
COMMISSIONER OF TAXATION
Respondent

NSD 94 OF 2005

BETWEEN:
SPASSKED PTY LIMITED
Applicant

AND:
COMMISSIONER OF TAXATION
Respondent

JUDGE:

EMMETT J

DATE:

20 AUGUST 2010

PLACE:

SYDNEY

REASONS FOR JUDGMENT
INTRODUCTION
THE LAW
Allowable Deductions: Section 51(1)
Dividend Rebates: Section 46
Dividend Imputation
Transfer of Tax Losses: Section 80G
Dividend Traps
Schemes to Reduce Income Tax: Part IVA
TAKEOVER OF THE IEL GROUP BY THE ADSTEAM GROUP
The IEL Group
The Adsteam Group
The Dextran Takeover
THE SPASSKED DIVIDEND TRAP
THE TAXPAYERS’ APPEAL STATEMENTS
THE EVIDENCE AND THE WITNESSES
THE DETAILED FACTS
IEL Before the Takeover
The Spassked Structure Dividend Trap
The Upstreaming Covenant

The New IEL Dividend Policy
The Deteriorating Financial Position
The Spassked Problem
Disputes with the Commissioner
Asset Sales by the IEL Group
THE EARLIER PROCEEDING
THE DEDUCTIBILITY OF THE INTEREST PAYMENTS
The First Limb of s 51(1)
The Second Limb of s 51(1)
Abuse of Process
Conclusion as to Deductibility
PART IVA
The Alleged Tax Benefit
The Matters in s 177D(b)
The manner in which the Schemes were entered into or carried out
The form and substance of the Schemes
The time at which the Schemes were entered into and the length of the period during which the Schemes were carried out
The result in relation to the operation of the Assessment Act that would be achieved by the Schemes
Any change in the financial position of Spassked that will result from the scheme
Any change in the financial position of any person who has or has had any connection with Spassked
Any other consequences for Spassked or any person having a connection with Spassked
The nature of any connection

Conclusion as to Part IVA
ADDITIONAL TAX
CONCLUSION
INTRODUCTION

These four proceedings were heard together. The principal question in each proceeding is whether interest expenses incurred by Spassked Pty Limited (Spassked) to IEL Finance Limited (IEF) were allowable deductions of Spassked under s 51(1) of the Income Tax Assessment Act 1936 (Cth) (the Assessment Act). Spassked incurred the interest expenses in question in the years of income ended 30 June 1991 (the 1991 Year), 30 June 1993 (the 1993 Year) and 30 June 1994 (the 1994 Year).
As a result of the interest expenses, Spassked incurred losses in each of the 1991, 1993 and 1994 Years. In the 1991 Year, Spassked transferred to Queensland Trading and Holding Company Limited (QTH), under s 80G of the Assessment Act, losses incurred by Spassked in the 1991 Year. In the 1993 Year and in the year ended 30 June 1996 (the 1996 Year), Spassked transferred to IEF, under s 80G, losses incurred in the 1993 Year and the 1994 Year. QTH and IEF claimed the amounts of the losses transferred as allowable deductions.
The respondent, the Commissioner of Taxation (the Commissioner), disallowed Spassked’s claims for deductions in respect of the interest expenses incurred in the 1991 Year, the 1993 Year and the 1994 Year. As a consequence, the Commissioner also disallowed the claims by QTH and IEF to be entitled to deduct the losses transferred by Spassked. In addition, the Commissioner determined, under s 177F(1) of the Assessment Act, that the deductions should not, in any event, be allowable because a tax benefit had been obtained in connection with a scheme to which Part IVA of the Assessment Act applied.
The Commissioner issued assessments to each of Spassked, IEF and QTH (together the Taxpayers) in respect of the relevant years. Taxation objections were lodged by the Taxpayers under s 14ZU of the Taxation Administration Act 1953 (Cth) (the Administration Act) and the Commissioner made objection decisions disallowing the objections. The Taxpayers then appealed to the Court, under s 14ZZ of the Administration Act, from the relevant objection decisions.
There are four appeals before the Court (the Current Proceedings). Proceeding NSD 94 of 2005 relates to an assessment issued to Spassked in respect of the 1994 Year. Proceeding NSD 539 of 2004 relates to an assessment issued to IEF for the 1993 Year and Proceeding NSD 543 of 2004 relates to an assessment issued to IEF for the 1996 Year. Proceeding NSD 540 of 2004 relates to an assessment issued to QTH for the 1991 Year.
The Commissioner sought the summary dismissal of all four appeals on the basis that the Taxpayers were estopped from asserting that the interest expenses incurred by Spassked in the 1991 Year, the 1993 Year and the 1994 Year were allowable deductions. The Commissioner claimed that the estoppel arose from an unsuccessful appeal by Spassked from an objection decision made by the Commissioner in relation to an objection by Spassked in respect of an assessment issued by the Commissioner in respect of the year ended 30 June 1992 (the 1992 Year). That appeal by Spassked was dismissed on 14 February 2003 (see Spassked Pty Ltd v Commissioner of Taxation (No 5) [2003] FCA 84) (the Earlier Proceeding), and an appeal from that decision to the Full Court (the First Full Court) was also dismissed (see Spassked Pty Ltd and Others v Commissioner of Taxation [2003] FCAFC 282).
A judge of the Court accepted the Commissioner’s contention that Spassked was estopped from asserting that the interest expenses incurred in the 1991 Year, the 1993 Year and the 1994 Year were allowable deductions and ordered summary dismissal of each of the Current Proceedings. However, an appeal to the Full Court from those orders was successful (see Spassked Pty Ltd and Others v Federal Commissioner of Taxation (No 2) [2007] FCAFC 205) (the Second Full Court). Nevertheless, the Commissioner contends that he is entitled to rely on the determination in the Earlier Proceeding as an answer to the Taxpayers’ claims in the Current Proceedings.
Much of the factual background relevant to the Current Proceedings was examined in detail in the Earlier Proceeding. Further, significant parts of the evidence in the Earlier Proceeding are also evidence in the Current Proceedings. However, the Taxpayers invite the Court to consider the evidence in a light different from the light that they endeavoured to throw on that evidence in the Earlier Proceeding.
Before dealing with the issues, it is desirable to say something about the relevant statutory provisions and the legal principles relevant to the interpretation of those provisions. I shall also say something about the Taxpayers and the relevant factual background. Each of the Taxpayers is a subsidiary of Industrial Equity Limited (IEL). The relevant background includes the takeover of IEL by Dextran Pty Limited (Dextran). Dextran is jointly owned by companies in the Adsteam Group, which I shall describe below.
THE LAW
There are several discrete provisions relevant to the appeals. I shall deal with them separately.
Allowable Deductions: Section 51(1)
The pivotal provision for present purposes is s 51(1) of the Assessment Act. Section 51(1) relevantly provides that all losses and outgoings, to the extent to which they are incurred in gaining or producing assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income, are allowable deductions. The jurisprudence surrounding s 51(1) is extensive. While there is little dispute between the parties as to the general principles, there is considerable scope for dispute concerning the application of the general principles to particular circumstances.
Expenditure will be an allowable deduction only if it is incidental and relevant to the gaining or producing of assessable income. The expenditure must be incurred in the course of gaining or producing assessable income. It is both sufficient and necessary that the occasion of the expenditure should be found in whatever produces assessable income or, if none is produced, what would be expected to produce assessable income (see Ronpibon Tin No Liability v Commissioner of Taxation (1949) 78 CLR 47 at 56-7).
The first limb of s 51(1) is directed to expenditure incurred in the actual course of producing assessable income. It is concerned primarily with expenditure voluntarily incurred for the sake of producing income. However, its scope is not confined to cases where the income is derived from carrying on a business. The second limb is more concerned with cases where, in the carrying on of a business, some abnormal event or situation leads to an expenditure that it is not desired to make, but is made for the purposes of the business generally and is reasonably regarded as unavoidable. The references to assessable income in s 51(1) are references to assessable income generally of a taxpayer and not to the assessable income of a particular accounting period (see Federal Commissioner of Taxation v Total Holdings (Australia) Pty Ltd (1979) 43 FLR 217 at 221-2). The reference in s 51(1) to assessable income is not to be understood as being confined to assessable income actually derived in the particular tax year. Rather, it is to be construed as an abstract phrase that refers not only to assessable income derived in that or in some other tax year but also to assessable income that the relevant outgoing would be expected to produce (see Steele v Deputy Commissioner of Taxation (1999) 197 CLR 459 at 467).
In determining the deductibility under s 51(1) of interest expenses, it is not necessarily sufficient to rely on the test of the purpose of the borrowing or the test of the application of the funds. Thus, a taxpayer who borrowed funds for an income producing purpose would not be entitled to continue to receive a deduction after the income producing activity ceased. Similarly, if funds are borrowed to purchase an asset that is not to be used for an income producing activity, but the asset is later used for the purpose of an income producing activity, the interest expense would thereafter be deductible. The question that arises under s 51(1) is whether the interest outgoing was incurred in the course of the income producing activity or, in the case of the second limb, whether the interest outgoing was incurred in the course of a business activity that is directed towards the gaining or producing of assessable income (see Kidston Goldmines Ltd v Commissioner of Taxation (1991) 30 FCR 77 at 85) (Kidston Gold Mines Case).
The question of whether an outgoing is, for the purpose of s 51(1), wholly or partly incurred in gaining or producing assessable income is a question of characterisation. The relationship between the outgoing and the assessable income must be such as to impart to the outgoing the character of an outgoing of the relevant kind. An outgoing will not properly be characterised as having been incurred in gaining or producing assessable income unless it is incidental and relevant to that end. However, to say that it is both sufficient and necessary that the occasion of the loss or outgoing be found in what is productive of the assessable income or, if none be produced, would be expected to produce assessable income, is not to exclude the motive of the taxpayer in making the outgoing as a possibly relevant factor in characterisation for the purposes of the first limb of s 51(1). Where an outgoing has been voluntarily incurred, the end that the taxpayer subjectively had in view in incurring it may, depending upon the circumstances of the particular case, constitute an element, and possibly the decisive element, in characterisation of either the whole or part of the outgoing. There must be a genuine, and not colourable, relationship between the whole of the expenditure and the production of the relevant income. It is not for the Court, or the Commissioner, to say how much a taxpayer ought to spend in obtaining his income. The function of the Court and the Commissioner is to determine only how much the taxpayer has spent. However, the position may be different where no relevant assessable income can be identified or where relevant assessable income is less that the amount of the outgoing (see Fletcher v Commissioner of Taxation (1991) 173 CLR 1 at 17-18).
Section 51(1) is necessarily expressed in language of generality. It provides for the deduction of the larger variety of losses or outgoings than might be described compendiously as normal working outgoings or normal business expenses. There must be a perceived connection between the loss or outgoing, on the one hand, and the assessable income or business, on the other. Alternatively, the expenditure must be incidental and relevant to the operations or activities regularly carried on by the taxpayer for the production of income. It is necessary to identify the essential character of the expenditure in order to determine whether a particular loss or outgoing is in fact incurred in gaining or producing the assessable income or in carrying on a business, which more directly contributes to the gaining or production of the assessable income. The use of the words “to the extent to which” in s 51(1) indicates that losses and outgoings may be apportioned in an appropriate case. If the loss or outgoing has some connection with the assessable income or the business, but, in addition, has some connection that is not a connection contemplated by the section, it will be necessary to apportion the loss or outgoing at that point (see Commissioner of Taxation v Firth (2002) 120 FCR 450 at 452-3).
In many, if not most, cases, the objective relationship between an expenditure and that which is productive of income will provide a sufficient answer to the enquiry called for by s 51(1). In many cases, questions as to a taxpayer’s motives, beyond what may be the outcomes sought, may introduce an unnecessary evidentiary complication into the relevant enquiry. Motive may be relevant in the context of a voluntary expenditure. In such circumstances, explanation may be seen as necessary. In most cases, the reason for the expenditure will be apparent and it will not be necessary to enquiry further. The question of whether the expenditure has been incurred in gaining or producing income will look to the scope of the operations or activities and their relevance to expenditure, rather than to a taxpayer’s reason for the expenditure (see Commissioner of Taxation v Day (2008) 236 CLR 163 at 183-4).
Dividend Rebates: Section 46
In order to explain the circumstances of Spassked’s claim to be entitled to a deduction in respect of its interest expenses, it is necessary to say something about dividend rebates under s 46 of the Assessment Act. Under s 46(2)(b), a shareholder, being a company that is a resident, was entitled to a rebate in its assessment in respect of income of the year of income of the amount obtained by applying the average rate of tax payable by the shareholder in relation to the year of income, to the part of any dividends that is included in its taxable income. Section 46(7) provided that, for the purposes of s 46(2), the part of any dividends that is included in the taxable income of a shareholder of a year of income is so much of the taxable income as equals the amount, if any, of the dividends included in the assessable income of the shareholder of the year of income. However, if the taxable income is equal to, or less than, the amount of the dividends included in the assessable income of the shareholder of the year of income, the whole of the taxable income is included in the taxable income of the shareholder of the year of income.

The effect of those provisions is that a dividend was included in the assessable income of the shareholder receiving the dividend, which then became entitled to a rebate of the tax payable on the dividend. However, before the tax payable on the dividend was calculated, there was required to be deducted from the amount of the dividend, any amounts directly incurred in earning that dividend. If the shareholder deriving the dividend had incurred interest that was an allowable deduction, because the amount borrowed had been used to acquire the shares on which the dividends were paid, the interest had to be deducted from the dividend before the rebate was calculated. Where the interest incurred was equal to, or exceeded, the dividend, the result was that there was no taxable income upon which tax could be calculated and no tax payable on the dividend that could be rebated. The amount of the rebate allowable was to be no greater than the tax payable on the dividend. The consequence was that the inter-company dividend rebate was lost to the shareholder (the First Full Court [11]).
Dividend Imputation
Dividend imputation was introduced in Australia, in respect of years after 30 June 1987, in order to alleviate what was seen to be the double tax payable as a result of the classic system of taxation of companies and their shareholders. In the classic system, the company pays tax on its taxable income and shareholders pay, additionally, tax on dividends they receive. Full dividend imputation would have the consequence that the shareholder, being a resident individual receiving a dividend out of profits already subjected to tax in the hands of the company, would effectively receive a credit of the tax payable by the company and thus suffer no additional income tax on the dividend. However, that consequent follows only if the rates of tax payable by companies and shareholders are aligned. That alignment does not exist in Australia and, accordingly, the system adopted provides only partial and not full imputation (the First Full Court at [12]).
A dividend may be wholly or partially franked or unfranked, depending upon whether it was paid wholly or only partially out of profits that had borne tax in the hands of the company. If the dividend was paid wholly out of profits that had borne tax in the hands of the company, the shareholder received a credit for the tax paid by the company. The dividend is referred to as a franked dividend. The value of the credit, referred to as a franking credit, was added to the cash dividend. That is to say, there was a grossing up of the dividend and the amount of the franking credit. The resulting figure was included in the taxable income of the shareholder. The shareholder then received a credit for the tax paid by the company. Clearly enough, a shareholder who was an individual would generally prefer to receive a franked dividend. Where the shareholder is a company, the benefit of the franked dividend, and thus the franking credit, could be passed up through a hierarchy of companies through to the parent company and thence directly or indirectly through to an individual shareholder (see the First Full Court at [13]).
Transfer of Tax Losses: Section 80G
In order to explain the position of QTH and IEF in relation to their respective proceedings, it is also necessary to say something about the provisions of the Assessment Act dealing with the availability of losses in previous years as an allowable deduction and the provisions for the transfer of losses from one company within a wholly owned group to another company within the group. Under s 79E(1) of the Assessment Act, a taxpayer incurs a loss in a year of income equal to the amount, if any, by which that taxpayer’s non-loss deductions for the year of income exceed the sum of that taxpayer’s assessable income for that year. Under s 79E(3), so much of a taxpayer’s losses incurred in any of the years of income before a particular year of income as has not been allowed as a deduction from that taxpayer’s income of any of those years is allowable as a deduction.
Section 80G deals with the transfer of loss within a company group. Under s 80G(1), a company is to be taken to be a group company, in relation to another company in relation to a year of income, if one of the companies was a subsidiary of the other company or each of the companies was a subsidiary of the same company during the whole of the year of income. Section 80G(6) relevantly provides that where:
·a resident company (the Loss Company) is deemed to have incurred a loss for the purposes of s 79E in a year of income (the Loss Year),
·a resident company (the Income Company) has a taxable income in a year of income (the Income Year) and
·the Loss Company and the Income Company give to the Commissioner a notice stating that the right to an allowable deduction under s 79E(3) should be transferred to the Income Company in the Income Year, stating the year of income in which the loss was incurred by the Loss Company,
the amount of the loss is, for the purposes of the application of the provisions of the Assessment Act in relation to the Income Company in relation to the Income Year, deemed to be a loss incurred by the Income Company for the purposes of s 79E.
Section 80G(6) was in a different form as applicable to the 1993 Year and subsequent years. Rather than a requirement that the Loss Company and the Income Company give notice to the Commissioner, the requirement was that the Loss Company and the Income Company agree that the right to an allowable deduction under s 79E(3) should be transferred to the Income Company in the Income Year. However, in the Current Proceedings, nothing turns on that difference. In each case, the relevant requirement was satisfied.
Dividend Traps
The effect of the provisions of s 79E and 80G, in conjunction with s 51(1), is that a company that had borrowed money at interest to acquire shares would ordinarily obtain a deduction for the interest that it incurred in the year of income. If the company had, in the year of income, derived income against which the interest deduction could be offset, the company would have incurred a loss in the year of income. That loss could be transferred to a group company, which then had an allowable deduction to offset the assessable income that it derived in that year. However, if the company that incurred the interest were to derive a dividend, to the extent that the dividend equalled or exceeded the interest, assuming there were no other income or deductions, there would be no loss in the company and, accordingly, no loss would be available to be transferred to another company in the group (see the First Full Court at [14]).
If, in a particular year, a company both incurred interest and derived income in the form of a dividend, it would be necessary to deduct the amount of the interest from the amount of the dividend in order to determine whether there was a profit for company law purposes, from which the company could declare a dividend. If the interest equalled or exceeded the dividend, the company would not be able to declare and pay a dividend, because it would have no profits in that year. Further, if the dividend received by the company was franked and, because there were no profits, the company that received the dividend could not itself declare and pay a dividend to its shareholders, the benefit of the franking credit would be lost. However, as a matter of company law, it was not necessary for a company to make good the losses of previous years before it could be said that the company had a profit out of which it could declare and pay a dividend. Thus, a company with accumulated losses that received a dividend in the current year, assuming the company did not incur interest equal to or greater than the amount of the dividend, could declare a dividend. A group company to which losses were transferred for taxation purposes would not be required, for company law purposes, to take those losses into account when determining whether it could pay a dividend out of profits. As a matter of company law, a company with profits, but tax law losses, could declare and pay a dividend to its shareholders (see the First Full Court at [15]-[16]).
It follows from the above that there would be a loss of the tax rebate where a company borrowed at interest to acquire dividend producing shares. In such circumstances, there could be no loss in the company available to be transferred to another company in a group, because the interest deduction would be offset by the dividend received. To the extent that the dividend received was franked, the company would have no ability to declare a dividend so as to pass the benefit of the franking credit through intermediate companies to an individual shareholder, because it would have no profits, for company law purposes, in the absence of any other income (see the First Full Court at [17]).
In any given year, there may be intermediate holding companies in a corporate group that incur accounting losses, notwithstanding that their subsidiaries were profitable and able to pay dividends. Such accounting losses usually arose because the intermediate holding company had borrowed to acquire equity in, or lend money to, the subsidiaries, which used the funds to acquire income producing assets.
Where the underlying assets had not yet produced sufficient income to service borrowings or to pay dividends, the intermediate holding company would sustain a loss represented by interest on the borrowings. Consequently, the intermediate holding company’s financial statements and accounts might show it as having a net asset deficiency, meaning that it had no accumulated profits available from which to declare a dividend. Such an intermediate holding company was referred to as a dividend trap, because dividends paid to it by profitable subsidiaries could not be passed on to the shareholders of the intermediate holding company until such time as it became solvent and had a fund of distributable profits available.
Schemes to Reduce Income Tax: Part IVA
Part IVA of the Assessment act is concerned with schemes to reduce income tax. A scheme includes any agreement, arrangement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable, or intended to be enforceable, by legal proceedings. It also includes any scheme, plan, proposal, action, course of action or course of conduct.
Section 177F provides for cancellation of tax benefits. Where a tax benefit has been obtained by a taxpayer in connection with a scheme to which Part IVA applies, the Commissioner may, in the case of a tax benefit that is referable to a deduction, determine that the whole or part shall not be allowable to the taxpayer in relation to that year of income and, where the Commissioner makes such a determination, he shall take such action as he considers necessary to give effect to that determination.
Section 177C(1) provides that a reference in Part 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 a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out.
Under s 177D(b) of the Assessment Act, Part IVA applies to any scheme, where a taxpayer (the relevant taxpayer) has obtained a tax benefit in connection with the scheme and, having regard to:
(i)the manner in which the scheme was entered into or carried out;
(ii)the form and substance of the scheme;
(iii)the time at which the scheme was entered into and the length of the period during which the scheme was carried out;
(iv)the result in relation to the operation of the Assessment Act that, but for this Part, would be achieved by the scheme;
(v)any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme;
(vi)any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;
(vii)any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out; and
(viii)the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi),
it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme, did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme.
In order to avoid the consequence that the operation of Part IVA of the Assessment Act might depend upon the fiscal awareness of a taxpayer, the application of s 177D turns upon objective matters set out in s 177D (see FCT v Consolidated Press Holdings Limited (2001) 207 CLR 235 at 264). Thus, the eight factors set out in s 177D(b) as matters to which regard is to be had in determining dominant purpose are posited on objective facts. The phrase “it would be concluded that” indicates that a conclusion as to the dominant purpose of a person who entered into or carried out the scheme must be the conclusion of a reasonable person (see FCT v Spotless Services Limited (1996) 186 CLR 404 at 421-2).
In arriving at a conclusion for the purposes of Part IVA, the Commissioner must have regard to each of the factors referred to in s 177D(b). However, that does not mean that each of them must point to the necessary purpose; some of the matters may point in one direction and others may point in another direction. The evaluation of all of the factors, either alone or in combination, is required by s 177D(b) in order to reach the conclusion to which s 177D refers (see Peabody v FCT (1993) 40 FCR 531 at 543).
TAKEOVER OF THE IEL GROUP BY THE ADSTEAM GROUP
A significant aspect of the present dispute is concerned with the consequences of the merger, by takeover, of the IEL Group of companies with the Adsteam Group of companies. It is therefore desirable first to say something about the two groups and the takeover.
The IEL Group
IEL was incorporated in Victoria in 1964. IEL and its subsidiaries (the IEL Group) underwent a dramatic growth in the period from 30 June 1974 to 30 June 1987. For example, the consolidated net profit of the IEL Group after tax rose from $1.1 million for the year ended 30 June 1974 to $230.116 million for the year ended 30 June 1987. The number of companies in the IEL Group rose from 117 as at 30 June 1974 to 591 as at 30 June 1987. The total number of employees of the IEL Group rose from 850 as at 30 June 1974 to 23,000 as at 30 June 1987. Finally, average shareholders funds of the IEL Group as at 30 June 1974 were $8.9 million, whereas, by 30 June 1987, average shareholders funds were $1,007.9 million.
In the period from 1974 to the end of 1989, most of the investment activity within the IEL Group was directed towards delivering high returns to its shareholders. That object was achieved through the active pursuit of the acquisition of external companies that would deliver a steady income and dividend stream. By the late 1980s, IEL was almost entirely reliant for income and returns to its shareholders upon the dividend stream flowing up from its subsidiaries. IEL itself had ceased to play any direct role in investments. However, IEL had fairly significant operational expenses, including the payment of directors’ fees, head office salaries, rent and other expenses. By the end of 1989, the IEL Group operated major businesses and chains such as Woolworths, Big W, Dick Smith Electronics and Mac’s Liquor and included businesses operated under well known Australian trade and brand names such as Yates, Hortico, Glad, Pura Milk, Simplicity Funerals and Mason Gray Strange Auctions.
From around 1976, the fund of profits available within the IEL Group from which dividends could ultimately be paid up to IEL’s shareholders was calculated on an ad hoc basis from company records, including trial balances and company accounts. Depending upon the requirements of IEL in any given year, which were estimated from budget forecasts and trial balances, the dividends that needed to be paid by subsidiaries up to IEL to meet those requirements were calculated and incorporated into dividend recommendations, which were accepted by the boards of the relevant subsidiaries. From about 1985, a more systematic approach to the review of dividend recommendations was adopted as part of the overall trial balance review process.
IEF was incorporated in 1981 and, in 1985, commenced acting as an in-house finance company for the IEL Group. One of the objects for establishing an in-house finance company was to simplify group borrowings through one company. It was considered that that would also make it easier to manage the on-lending of funds within the IEL Group. From 1985 onwards, IEF lent funds to other members of the IEL Group at interest. By 1986, the majority of external borrowings by the IEL Group were by IEF. By 1987, IEF’s external borrowings were approximately $2.3 billion out of total borrowings of the IEL Group of approximately $3 billion. The majority of loans made by IEF were to other members of the IEL Group. By 1987, IEF had made loans to other members of the IEL Group of sums exceeding $1.95 billion.
The Adsteam Group
In the early 1980s, each of The Adelaide Steamship Company Limited (Adsteam), Tooth & Co Limited (Tooth) and David Jones Limited (DJL) was a public listed company. In late 1980 and early 1981, Tooth was the subject of a successful partial takeover by Adsteam. At that time, DJL was an associated company of Adsteam. It is convenient to refer to Adsteam, Tooth and DJL collectively as the Ultimate Parent Companies and to refer to the Ultimate Parent Companies and their respective subsidiaries collectively as the Adsteam Group.
A feature of the Adsteam Group was the large cross-shareholdings between the Ultimate Parent Companies themselves, and other associated companies in the Adsteam Group. Thus, as at 30 September 1989:
·Adsteam held 48.9% of DJL and 20.3% of Tooth;
·DJL held 44.3% of Adsteam and 44.2% of Tooth;
·Adsteam and Tooth respectively held 14.8% and 49.8% of National Consolidated Limited which, in turn, held 18.2% of DJL;
·Tooth and DJL respectively held 48.9% and 11.6% of Petersville Sleigh Limited, which, in turn, held 27% of Tooth.
As at 30 September 1990, similar holdings existed although the proportions had changed marginally. The Ultimate Parent Companies had a policy of participating in dividend reinvestment plans offered by the others. That enabled each of the Ultimate Parent Companies to pay large dividends while not substantially draining cash resources. It also enabled them to increase their shareholdings in each other.
By June 1989, the Adsteam Group was a major industrial enterprise, with wholly owned operations, joint ventures and substantial investments in associated companies carrying on business in a broad range of industries in Australia and overseas. The Adsteam Group operated or had substantial interests in businesses in the food, meat, wine and smallgoods, retailing, timber and building, towage and port services, manufacturing, real estate, import and distribution sectors. The businesses included many conducted under well known brand and trade names. Significant investments included holding, directly or indirectly, large investments in the major Australian trading banks, which provided large franked dividends, which the Ultimate Parent Companies were able to pass on to their shareholders. The Ultimate Parent Companies shared a common objective of maximising dividends to shareholders.
The Dextran Takeover

By 14 November 1989, the Adsteam Group and its associates had acquired 17.63% of the issued shares of IEL. The decision was then taken to launch a takeover bid for IEL. The acquisition was to be largely debt funded. For that reason, it was not considered appropriate to use a wholly owned subsidiary of any one of the Ultimate Parent Companies as the takeover vehicle, because the increased debt would have been too great for any one of them to carry. Dextran Pty Limited (Dextran), which was owned as to one-third by subsidiaries of each of the Ultimate Parent Companies, was chosen as the vehicle for the takeover. The debt funding would therefore be spread across Adsteam and its subsidiaries, Tooth and its subsidiaries and DJL and its subsidiaries.
On 14 November 1989, Dextran announced a cash offer for the 82.7% of the issued capital of IEL to which it was not already entitled. The press release stated there was no minimum level of shareholding that Dextran proposed to acquire. On 15 November 1989, Dextran acquired further shares in IEL and, as a consequence, Dextran’s shareholding in IEL was then slightly more than 50%.
On 21 November 1989, following Dextran’s obtaining control of the IEL Group on 15 November 1989, Mr John Spalvins, the Managing Director of Adsteam, Mr Michael Kent, the Finance Director of Adsteam, Mr Trevor Thiele, the Group Financial Controller of Adsteam, Mr Rodney Mewing, a director of DJL, Mr Robert Wright, a director of Tooth, and Mr George Haines, a director of Tooth, were appointed to the board of IEL. In February 1990, Mr Spalvins became executive chairman of IEL and Mr Kent deputy chairman. Thus, by that time, the board of IEL consisted of twelve directors, of whom six were Adsteam Group directors. As executive chairman, Mr Spalvins had a casting vote on the board.
Dextran’s takeover offer closed in March 1990, by which time Dextran was entitled to more than 90% of the issued shares in IEL. On 18 April 1990, the National Companies and Securities Commission (the Commission) granted modifications of the Companies (Acquisition of Shares) (Victoria) Code to enable Dextran to proceed to compulsory acquisition of the shares in IEL that it did not already hold. That decision was taken in light of Dextran’s ownership of in excess of 92% of the issued shares of IEL. Dextran then made an unconditional offer for the remaining shares and, by late 1990, IEL was a wholly owned subsidiary of Dextran.
The IEL Group was regarded as part of the Adsteam Group although, because of the structure of Dextran, no member of the IEL Group was a subsidiary of any of the Ultimate Parent Companies. While the Taxpayers are all members of the IEL Group, it is necessary to have regard to the corporate structure that resulted from the takeover of IEL by Dextran, since that was a significant factor in the conduct of the affairs of the IEL Group after the takeover.
THE SPASSKED DIVIDEND TRAP
By late 1986 or early 1987, officers of the IEL Group considered that, if the IEL Group did not change the way that it funded its subsidiaries, its debt lines would become even more complex. Internal restructure of the IEL Group was therefore thought to be necessary. To that end, various officers of IEL consulted with directors, employees and external advisors of the IEL Group and, in about mid-1987, a proposed structure was formulated (the Spassked Structure).
The Spassked Structure involved the following:
·Spassked, which was incorporated in New South Wales in March 1987, would borrow funds from IEF at a commercial rate of interest.
·The interest would be capitalised. That is to say, the interest expense that would be incurred by Spassked in respect of the borrowings from IEF would be added to the principal and, from that time, would also attract interest that would be credited as interest income in the books of IEF and debited as interest expense in the books of Spassked. Interest on the borrowings had to be capitalised because Spassked would not have the funds to pay the interest.
·Group Investment Holdings Pty Limited (GIH), which was incorporated in New South Wales in March 1987, would adopt articles of association that would permit it to allot A Class shares, which would carry the right to both franked and unfranked dividends, and B Class shares, which would carry the right to franked dividends only.
·Spassked would use the funds borrowed from IEF to subscribe for A Class shares in GIH and IEL would subscribe for B Class shares in GIH.
·GIH would use the moneys subscribed by Spassked and IEL to acquire shares in either:
-newly incorporated companies or entities already owned by the IEL Group, which would deposit the funds with IEF at interest until such time as the funds were required for a specific acquisition or investment; or
-companies in the IEL Group with existing assets that were expected to produce a franked dividend stream, which companies would apply the funds subscribed in satisfying existing inter-company debt or, to the extent that there was a surplus, would deposit the surplus with IEF at interest.
·Because it would have no income, Spassked would incur losses, which it would transfer to other members of the IEL Group.
Other proposals were considered, but the Spassked Structure was thought to be the most effective for dealing with issues of concern because it:
·enabled franked dividends to be distributed to IEL without being subsumed in a dividend trap;
·enabled unfranked dividends to be distributed to GIH without being subsumed in a dividend trap;
·allowed the IEL Group to maximise the value of tax losses available to be transferred to other members of the IEL Group, by minimising the wastage of tax losses and ensuring the availability of tax rebates under s 46 of the Assessment Act;
·allowed the removal of pockets of non-wholly owned subsidiaries within the IEL Group that restricted grouping for tax loss transfer purposes;
·allowed for the pre-capitalisation of a number of shelf companies that had no corporate history that could jeopardise a takeover bid, which could be held in readiness for takeover bids or other investment purposes; and
·allowed for the possibility that companies holding particular assets could be sold, rather than the particular assets themselves, which may have yielded a higher cost base for tax purposes.
The Spassked Structure was implemented as follows:
·In February 1988, IEL subscribed $150,000,000 for B Class shares in GIH, which entitled IEL to franked dividends only, conferred only limited voting rights and excluded any right to participate in any surplus on a winding up.
·In the years of income ended 30 June 1988, 1989 and 1990, Spassked borrowed from IEF, on ten occasions, amounts totalling $3,737,142,866. The terms of the borrowings were not reduced to writing and were not recorded in the minutes of meetings of the boards of directors of either Spassked or IEF. The contemporaneous records refer only to movements of money. Spassked was debited with interest on those borrowings but did not pay the interest, which was capitalised. No loans were made after 28 June 1990.
·Spassked applied the funds lent, as to $3,457,142,866, in subscribing for A Class shares in GIH, as to $280 million, by making an interest free loan to GIH and, as to $25,613,377, in eliminating a foreign exchange loss that it had sustained.
·GIH used $3,541,972,708 of the funds subscribed for A Class shares by Spassked to subscribe for, or purchase, shares in various subsidiary companies. Some of the subsidiaries owned assets and some of them were shelf companies without assets.
·The subsidiary companies that owned assets applied the funds received from GIH in repayment of existing debt, including debt owed to IEF, and deposited any surplus with IEF at interest, until such time as the funds were required for a specific purpose.
·The subsidiary companies that were shelf companies deposited the funds received from GIH with IEF at interest until such time as the funds were required for a specific purpose.
·GIH placed the balance of the funds subscribed by Spassked on deposit with IEF.
The amounts borrowed by Spassked remained owing throughout the 1991, 1992, 1993 and 1994 Years and accrued interest. Seven annual amounts of interest totalling $3,272,715,111 were capitalised over the years of income ended 30 June 1988 to 1994 inclusive. By a series of repayments from July 1990 to June 1994, Spassked repaid the borrowings to IEF, using funds lent to it by GIH and IEL on an interest free basis. That resulted in the elimination of the Spassked dividend trap.
THE TAXPAYERS’ APPEAL STATEMENTS
The Taxpayers contend that, in the 1991, 1993 and 1994 Years, when Spassked incurred interest expenses and made interest payments to IEF, it was the intention and expectation of the directors of Spassked that dividends would be paid by GIH to Spassked at the earliest available opportunity. They also say that there was the potential for such dividends to be paid. They contend that, by late 1991, when a policy of liquidation of the IEL Group was adopted, it was inevitable that Spassked would receive from GIH either unfranked dividends or other assessable distributions approximately equal to, or greater than, the interest expenses it claimed as deductions. They say that, in the 1991, 1992 and 1994 Years, Spassked had an expectation that the incurring of the interest expenses to IEF would ultimately produce assessable income in the form of dividends or assessable distributions from GIH, in which it had invested the borrowings that generated the liability for interest.
The Taxpayers say that a deduction was allowable under the first limb of s 51(1) because of the expectation and intention that dividends would be paid, albeit in the long term, even if GIH would not have made, or was unlikely to have made, distributions to Spassked until Spassked had transferred out all of its accumulated losses to other members of the IEL Group. They contend that the borrowed funds, on which the interest was payable, were, in the 1991, 1993 and 1994 Years, being used for an income producing purpose, namely, the derivation of dividends in the future on the shares acquired with the borrowed funds: the mere deferral of income for a period of seven years from 1990 to 1997 did not mean that the interest expenses were non-deductible.
There is considerable overlap in the specific assertions made by the Taxpayers in their respective appeal statements. They begin by referring to the Spassked Structure, and refer to an unfranked dividend of $29,308,093 paid by GIH to Spassked on 30 June 1990 and a further unfranked dividend of $14,654,046 paid to Spassked on 8 October 1990. They also refer to a consolidated fund of profits in GIH and its subsidiaries as at 30 June 1991, of $1,338,749,042, 95% of which was unfranked and was, they say, therefore capable of being distributed only to Spassked. It is convenient to summarise all of the assertions made by the Taxpayers in order to explain the case.
QTH asserts that, in the circumstances relevant to the 1991 Year, the intentions and expectations of IEL, Spassked and GIH were relevantly those of the Ultimate Parent Companies. IEF and Spassked also assert that, in the circumstances relevant to the 1993 Year and the 1994 Year, the intentions and expectations of IEL, Spassked and GIH were relevantly those of the Ultimate Parent Companies. QTH relies on the acquisition of shared control of IEL by the Ultimate Parent Companies through Dextran. IEF and Spassked rely on that fact and also point to the following additional circumstances to support their assertion in relation to the 1993 and 1994 Years:
·A committee of lenders to the Adsteam Group was constituted in May 1991 to consider the financial position of the Adsteam Group and make decisions about its future.
·In September 1991, the Ultimate Parent Companies adopted a plan for the liquidation of the Adsteam Group, including the IEL Group.
·The Adsteam Group, including the IEL Group, entered into refinancing arrangements and then instituted a programme of selling assets.
The Taxpayers point to the fact that the takeover of IEL by Dextran was financed by funds borrowed both by Dextran and by subsidiaries of the Ultimate Parent Companies. In the 1991 Year, Dextran and those borrowers had continuing financial obligations in relation to those borrowings. They required significant funds in order to meet their financial obligations as well as to pay dividends to the shareholders of the Ultimate Parent Companies.
Prior to the takeover of IEL by Dextran, the IEL Group had a different dividend policy from the Ultimate Parent Companies and paid a significantly lower proportion of group profits to its shareholders than did the Ultimate Parent Companies. The Ultimate Parent Companies intended and expected that a proportion of the consolidated profits of the IEL Group would be included in their respective consolidated profits to ensure that appropriate returns on the investment in IEL were shown in their financial statements. They also intended and expected that they would pay dividends to their shareholders that reflected the consolidated profits of the IEL Group.
However, a change in accounting standards meant that consolidated profits of Dextran and the IEL Group could not be included in the consolidated profits of the Ultimate Parent Companies unless dividends were paid by IEL to Dextran and then by Dextran to its shareholders, being subsidiaries of the Ultimate Parent Companies. Accordingly, IEL was aware that the Ultimate Parent Companies desired it to pay dividends equating to all or substantially all of its consolidated profits to Dextran, so that Dextran could pay dividends to its shareholders, thereby enabling the Ultimate Parent Companies to include the profits of IEL in their consolidated financial accounts.
In the 1993 Year and the 1994 Year, the Adsteam Group was in “liquidation mode”. The asset realisation programme, commenced in part by reason of pressure from the Adsteam Group’s lenders, was being implemented. Thus, it was clear, by the 1993 Year, that the sale of all the major assets held by the Adsteam Group would proceed and it was the intention of the Adsteam Group, in the 1993 Year and the 1994 Year, that most, if not all, of the assets of the IEL Group, including the business and assets owned by subsidiaries of GIH, would be sold.
The principal assets of the Adsteam Group were sold during the 1993 Year and the 1994 Year. Those sales were undertaken with a view to applying the proceeds of sale in payment of the borrowings of the Adsteam Group. IEF and Spassked say that it was intended that the proceeds of sales be distributed up through the IEL Group and ultimately to the Ultimate Parent Companies and that a distribution of profits and a return of the capital of the liquidated subsidiaries would occur as soon as possible.
The Taxpayers say that it was an inherent part of the proposals being considered and implemented in relation to the liquidation project that the funds available within GIH and its subsidiaries would flow to Spassked by way of dividends and liquidation distributions, following elimination of the Spassked dividend trap. In the 1993 Year, the Adsteam Group were aware that Spassked continued to be a dividend trap, but intended to eliminate the dividend trap, thereby removing the barrier to Spassked receiving dividends and enabling Spassked to earn significant assessable income as a result of the liquidation of GIH and its subsidiaries. Thus, they say, steps were taken from 30 June 1992 that significantly reduced the size of the Spassked dividend trap, which was eliminated as at 1 July 1994.
The Taxpayers also rely on the existence of an ongoing tax dispute with the Commissioner, concerning the availability of losses for transfer by Spassked, as precluding the distribution of significant assessable income to Spassked in the course of liquidating GIH and its subsidiaries. They say that, at all material times, it was the intention of the Adsteam Group that, when the tax position of GIH and its subsidiaries was determined, the profits available for distribution would be distributed to GIH by its subsidiaries and GIH would pay dividends to Spassked and IEL in accordance with the rights conferred by the A Class shares and the B Class shares. By 30 June 1994, the consolidated fund of profits of GIH and its subsidiaries had grown to a sum in excess of $3,000,000,000. They say that in excess of 95% of those profits were unfranked and were therefore only capable of being distributed to Spassked. However, notwithstanding the elimination of the dividend trap in Spassked, the directors of GIH and its subsidiaries were not able to determine conclusively the quantum of profits in those companies from which it would be possible to pay a dividend to GIH and then to Spassked, IEL and Dextran. That was because of the uncertainty raised by the tax dispute with the Commissioner as to the availability of Spassked’s tax losses.
THE EVIDENCE AND THE WITNESSES
The evidence in each of the Current Proceedings was the same. It consisted of statements of agreed facts and affidavit evidence from officers and former officers of and advisers to the Taxpayers and related or associated companies in the IEL Group and the Adsteam Group. The Taxpayers also tendered substantial documentary evidence and the Commissioner also relied on substantial documentary evidence. Before dealing with the facts in detail, it is desirable to say something about the witnesses. Their evidence in chief was given by affidavit. Some of the witnesses were cross-examined on behalf of the Commissioner and part of the documentary material relied on by the Commissioner included affidavit evidence and cross-examination of a witness in the Earlier Proceeding. The Current Proceedings have been conducted on the basis that all relevant witnesses have been called and were available for cross-examination.
There is no real dispute as to the primary facts that are relevant to the questions in issue in the Current Proceedings. Rather, the dispute is concerned with the conclusions that should be drawn from the primary facts. Accordingly, no significant question of the credit of witnesses arises for determination, except possibly in relation to Mr Ross Daniels, to whom reference is made below. That is not to say, however, that the whole of the affidavit evidence should be accepted literally.
Mr John Spalvins was a director of Adsteam from July 1979 until July 1991. He was appointed Managing Director in 1981, a position that he held until July 1991. In September 1980, Mr Spalvins was also appointed Chief Executive Officer of DJL and, in February 1981, he became a director and was subsequently appointed Chairman of Tooth. He held his offices in DJL and Tooth until July 1991. During his time in those offices, Mr Spalvins was involved in a significant number of corporate takeovers, some of which were hostile. In the latter cases, it was not possible to perform in-depth investigations in respect of target companies before making a takeover bid. The takeover bid for IEL was such a case. Mr Spalvins’ philosophy during that period was to assume control of the target company by appointing, as directors of the target company, people who were directors of companies in the Adsteam Group. It sometimes took some months for new directors to become aware of potential problems within the businesses and structures of the target company.
Mr Brian Eggert has worked in accounting, treasury and advisory roles within a number of Australian companies, banks and professional services firms since 1968. In December 1986, Mr Eggert commenced employment with IEL as Group Treasurer. As Group Treasurer, Mr Eggert reported to Mr Rodney Price, who was then the Chief Executive Officer of IEL. Mr Eggert was responsible for overseeing the central treasury function of IEL and its subsidiaries and for ensuring that all companies in the IEL Group had sufficient cash and standby facilities to meet its financial obligations. One of his principal responsibilities was to manage IEL’s relationship with its external lenders and to negotiate the terms of facilities granted to IEL by those lenders.

In July 1990, Mr Eggert was appointed to the board of IEL and became the Finance Director of IEL. In that capacity, he was responsible for managing the cash flows and dividend flows from IEL and its subsidiaries, including Woolworths. He was also responsible for the formulation and implementation of financial policies and controls relating to all of IEL’s financial activities. His areas of responsibility included taxation affairs and ensuring compliance with taxation laws.
Mr Eggert ceased employment with IEL in December 1992. However, he continued to be involved with the IEL Group in a consultancy role for a further six months. He worked with the chief executives of three of IEL’s major businesses, assisting to prepare those businesses for sale.
Mr Ross Daniels joined IEL in early 1974 as its Management Accountant. From 1982 to 1994, Mr Daniels held various company directorships and carried out various management and accounting roles within the IEL Group. He ceased to be an employee of IEL on 30 June 1994 but was retained as a consultant several months later. From late 1994 to approximately the end of 1996, Mr Daniels assisted with the liquidation of companies in the IEL Group. He was also involved in the sale of assets of the IEL Group. Since 1996, the role of Mr Daniels in the IEL Group has been limited to dealing with ongoing disputes with the Commissioner.
Mr Daniels was primarily responsible for the Spassked Structure and its implementation. The Taypayers relied on two affidavits sworn in the Current Proceedings by Mr Daniels. The Commissioner did not require Mr Daniels for cross-examination on those affidavits, although he was available for cross-examination. Mr Daniels also gave evidence in the Earlier Proceeding and was cross-examined on behalf of the Commissioner in the Earlier Proceeding. The affidavit evidence of Mr Daniels in the Current Proceedings is substantially to the same effect as his affidavit evidence in the Earlier Proceeding. The transcript of the cross-examination of Mr Daniels in the Earlier Proceeding was tendered in the Current Proceedings by the Commissioner and admitted without objection.
The Taxpayers contend that the evidence given by Mr Daniels in the Earlier Proceeding is consistent with his affidavit evidence in the Current Proceedings and with the evidence of the other witnesses called by the Taxpayers in the Current Proceedings. Accordingly, the Taxpayers say, if the Commissioner suggests that there is any inconsistency between the evidence given by Mr Daniels in the Earlier Proceeding and his affidavit evidence in the Current Proceedings, it was incumbent upon the Commissioner to put the suggested inconsistency to him in cross-examination, thereby giving him the opportunity to explain any perceived inconsistency.
The Commissioner contends that the purposes and expectations held with respect to the borrowings by Spassked from IEF, as acknowledged by Mr Daniels in his oral evidence in the Earlier Proceeding, can be relied upon by the Commissioner in the Current Proceedings. The Commissioner says that the affidavit evidence in the Current Proceedings does not detract from the acknowledgments given by Mr Daniels in the course of his evidence in the Earlier Proceeding and that those acknowledgments were reflected in the findings made in the Earlier Proceeding, which were confirmed by the First Full Court. The Commissioner says that, in those circumstances, it was not necessary to cross-examine Mr Daniels in the Current Proceedings.
Mr Graham Libbesson was, at relevant times, a partner of the chartered accounting firm now known as Pannell Kerr Forster (PKF), formerly known as Bowie Wilson Miles & Co. Throughout the 1980s and 1990s, PKF was the tax agent for, and provided advice to, the IEL Group. From 1983 to 1999, Mr Libbesson had regular meetings with Messrs Daniels and other officers of the IEL Group. During that period, Mr Libbesson attended meetings at IEL’s offices approximately once a week. During the course of those meetings, Mr Libbesson provided advice in relation to a range of tax issues or factual issues relating to tax issues. In relation to significant issues or transactions, the IEL Group often sought tax advice from external tax advisers. Mr Libbesson was often involved to ensure that external tax advice was sought when required and that the advisers were adequately briefed as to the relevant facts.
Mr Robert Wright is a certified practising accountant. From 1974 to 1980, he was employed as an accountant by Tooth. In 1980 he was appointed Chief Financial Officer of Tooth. In 1985, Mr Wright ceased to be Chief Financial Officer of Tooth and in September 1985 he was appointed a director of Tooth, although he continued to be a full time employee of Metro Meat (Holdings) Limited, which was owned by Adsteam and Tooth. Mr Wright remained as a director of Tooth until November 1995. He was a director of DJL from February 1990 to November 1995 and of Adsteam from August 1991 to November 1995. He was a director of Dextran from May 1990, of IEL from November 1989, of Spassked from June 1991 and from GIH from June 1991. He ceased to be a director of all four companies in November 1995.
Mr David Ryan is a certified practising accountant. His involvement with the IEL Group began in 1982 in his capacity as an executive of Bankers Trust Australia Limited (Bankers Trust). As Bankers Trust was a lender to IEL, Mr Ryan had occasion to deal with IEL personnel in relation to the borrowings by the IEL Group. From May 1992, Mr Ryan was employed by IEL as General Manager (Special Projects). From that time, he was, in effect, the in-house investment banking adviser to the Adsteam Group. He had responsibility for resolving issues relating to liabilities of the Adsteam Group, other than to external lenders. Mr Ryan was also responsible for implementing the IEL business plans. In June 1994, Mr Ryan became a director of Dextran and, in December 1995, following the resignation of Mr Wright, Mr Ryan became the Chief Operating Officer of the Ultimate Parent Companies and IEL. He continued to oversee the sales of assets by the companies in the Adsteam Group, including the IEL Group.
Mr Michael Kent was appointed secretary of Adsteam in 1980 and became finance director of Adsteam in 1983. In November 1983, he became a director of Tooth and, in May 1985, he became a director of DJL. In June 1988, he became a director of Dextran. Mr Kent resigned as a director of Adsteam, Tooth, DJL, Dextran and IEL in November 1991.
Mr Trevor Thiele became Group Financial Controller of Adsteam in June 1987. He continued in that role until March 1992. He reported to Mr Kent until Mr Kent’s resignation in November 1991. On 21 November 1989, Mr Thiele was appointed as a director of IEL. Mr Thiele was also appointed as a director of major operating subsidiaries of IEL, as a representative of the Adsteam Group.
As Group Financial Controller of Adsteam, Mr Thiele’s responsibilities included ensuring that the reported profit of Adsteam was as high as possible, within the constraints of applicable accounting standards. In his role as Group Financial Controller of Adsteam, Mr Thiele communicated regularly with his counterparts in Tooth and DJL, to address finance issues affecting the Adsteam Group as a whole. After the takeover of IEL by Dextran, the meetings included representatives of IEL.
THE DETAILED FACTS
In order to explain the circumstances that gave rise to the dispute between the Commissioner and the Taxpayers, it is necessary to say something about the position of IEL before the takeover by Dextran. It will be necessary to explain the operation of the Spassked Structure and the concatenation of circumstances that led to financial difficulties for the Adsteam Group and the IEL Group. In particular, it will be necessary to consider the position of Spassked as a dividend trap together with the consequences of that position, and the process of liquidation that was begun following the financial difficulties.
IEL Before the Takeover
The main focus of head office staff of the IEL Group from the mid-1970s until the takeover by Dextran was in supporting or facilitating ongoing investments or acquisitions by IEL. Investments were decided upon by a team within IEL (the Investment Team). The Investment Team met regularly from 1974 until 1990 to discuss investments and investment strategy. Head office staff were responsible for financing and structuring the companies that were to be used for investments being considered by the Investment Team. From about 1976, Mr Daniels became involved in that process, and from the early 1980s, Mr Daniels became principally responsible for that investment support function. Mr Daniels was also involved in the process of calculating the fund of profits available from which dividends could be paid to IEL’s shareholders.
In 1983, the Deputy Managing Director of the IEL Group, Mr Goward, formalised the administrative process that backed up the investment process by instituting regular administration and planning meetings of those involved (the Administration Team). Mr Daniels was a member of the Administration Team, together with Mr Goward and the IEL Group Company Secretary, the Planning and Administration Manager, the Financial Controller, the Treasurer and the Financial Accountant. The focus of the Administration Team was on supporting the Investment Team.
In the late 1970s, Mr Daniels also became involved in the tax matters of the IEL Group. Over the following years, he developed an understanding of the basic elements of Australian corporate law. When he first became involved, the IEL Group’s tax affairs were relatively straightforward and tax matters took up only a minor part of his time. However, as the IEL Group expanded in the late 1970s and early to mid 1980s, it became apparent to Mr Daniels that he had neither the time nor the expertise to manage corporate tax issues for a group of the size and complexity that the IEL Group had become.
In March 1984, Mr Stephen Latham, a chartered accountant, was employed by the IEL Group. Mr Latham originally assisted Mr Daniels and gradually assumed management of the tax affairs of the IEL Group. Initially, Mr Latham reported to Mr Daniels and thereafter consulted with him regularly about the tax affairs of the IEL Group. Mr Latham’s role broadened into one of assisting Mr Daniels with managing the more complex management accounting and planning issues and the development of structured finance proposals. In June 1987, Mr Greg Cottam, a chartered accountant, joined IEL as another tax manager. Both Mr Cottam and Mr Latham continued to consult with Mr Daniels regularly on taxation matters, particularly where such matters were likely to impinge upon the corporate or financial structure of the IEL Group.
From about 1985, Mr Daniels conducted biannual meetings with the other members of the Administration Team. The meetings generally coincided with the preparation of accounts for IEL and its subsidiaries in May and December of each calendar year to coincide with the statutory year end and half yearly accounts. The matters discussed at the meetings included the equity and debt structure of each company, as well as the ability of each company to pay a dividend.
Following the introduction into the Assessment Act in 1984 of the company tax loss grouping provisions, the commercial value of tax losses assumed a greater significance, since losses could be transferred between wholly owned companies within a corporate group. From 1984 onwards, where a company in the IEL Group had tax losses in any year, those losses were transferred, where possible, to other companies in the IEL Group. Priority was given to the transfer of tax losses out of those companies that were expected to receive dividends in the following year, so as to reduce what was perceived as a wastage of tax losses in that company upon the receipt of a dividend. That was a primary consideration in the dividend recommendation process in which Mr Daniels was involved.
Following the introduction of the dividend imputation system into the Assessment Act in 1987, companies that paid franked dividends were rated more highly by shareholders than those that did not. Accordingly, Mr Daniels considered that it was essential that IEL have access to a stream of franked dividends from its operating subsidiaries, which it could pass on to its shareholders.
The interaction of those two reforms, being the tax loss grouping provisions and the dividend imputation system, caused a change in IEL’s financing policy. Thereafter, there was a preference for intra-group equity funding, because the funding of group companies with equity, rather than with debt, improved the flow of franked dividends up to IEL and decreased what was perceived as a wastage of tax losses. That involved reducing the number of dividend traps within the IEL Group. Another advantage of funding a subsidiary with equity rather than with debt was that the need for the subsidiary to make good any accumulated losses from prior years, in order to pay a dividend, was reduced.
The structure of the IEL Group did not readily support the flow of dividends up to IEL, even though IEL was still able to pay dividends. In any given year, there were inevitably companies in the IEL Group that incurred accounting losses. Typically, such companies were the intermediate holding companies, which were profitable and able to pay dividends. Such accounting losses usually arose because the holding company had borrowed to acquire equity in, or lend money to, the subsidiary, which used the funds to acquire income producing assets. Where the underlying assets had not yet produced sufficient income to service the loans or to pay dividends, the intermediate holding company would sustain a loss represented by interest on the borrowings. Consequently, the intermediate holding company’s financial statements and accounts showed it as having a net asset deficiency, meaning that it had no fund of profits available from which to declare a dividend. Such intermediate holding companies were therefore dividend traps.
In early 1987, Mr Daniels and the other members of the Administration Team turned their attention to planning for the introduction of the dividend imputation system. IEL announced to its shareholders that it was its intention to pay franked dividends to those shareholders who wanted to receive franked dividends. However, any franking credits associated with fully or partially franked dividends received by a loss making intermediate holding company would be trapped within the loss making company. Mr Daniels and the other members of the Administration Team were concerned to minimise the incidence of such dividend traps in order to ensure that both franked and unfranked dividends could be passed up to IEL to enable it to meet its operating expenses and to pay dividends.
Mr Daniels also understood that, for tax purposes, dividends received by a company had to be applied, first, to offset tax losses incurred or carried forward in a given year. He perceived that the payment of a dividend into a company with available tax losses would result in the wastage of the tax loss, which would reduce the wealth of shareholders of the company. He regarded it as part of his role to endeavour to reduce the incidence of such occurrences. As prior year losses were to be transferred out to other companies in the IEL Group, Mr Daniels’ principal concern was with the wastage of current year losses. Because of the operation of the dividend rebate under s 46 of the Assessment Act, dividends received by companies that did not have tax losses were tax free. However, where the recipient of a dividend had available tax losses, the losses had to be offset against dividend income that would otherwise be rebatable, with the effect that, although the company did not have any liability to pay tax in respect of the dividend, the benefit of the s 46 rebate was lost.
The Spassked Structure Dividend Trap
In making decisions about the declaration of dividends within the IEL Group, the fact that a recipient company had losses available to it that could be transferred to other companies in the IEL Group was an important consideration, because the losses had a value and the payment of a dividend to such a company would destroy the value of those losses. The concept of the Spassked Structure emanated from the introduction of the tax loss grouping provisions and the dividend imputation system during the 1980s. An important objective of the Spassked Structure was to prevent lower companies in the corporate structure from being dividend traps, such that the companies beneath GIH should be able to enjoy the full rebate that attached to dividends received by them. That would be achieved by ensuring that those companies did not, at the same time as receiving rebate on dividends, incur interest to IEF. Thus, one of the aims of the Spassked Structure was to relieve companies lower down in the structure of that problem. Spassked was to become the major dividend trap.
The Spassked Structure enabled the IEL Group to distribute franked dividends up to IEL without being subsumed in a dividend trap, to maximise the value of the losses available by transferring them to other members of the IEL Group and to distribute unfranked dividends up to GIH without being subsumed in a dividend trap. They were the three major considerations that were materiel in implementing the Spassked Structure. Other matters were considered but were not regarded as critical.
Mr Daniels expected that, while Spassked remained a dividend trap, no dividends, whether franked or unfranked, would be distributed to it by GIH. He said that he envisaged that Spassked would derive dividend income but that that would only occur once Spassked had ceased to be a dividend trap. That would not occur whilst Spassked had tax losses of any material amount that could be transferred to other members of the IEL Group. Mr Daniels said that he envisaged that Spassked would commence to derive income once it had ceased to be a dividend trap and once it had transferred out all of its carry forward losses. Mr Daniels also said that he envisaged that the investments within the Spassked Group would be profitable to such an extent that the trading surpluses would be sufficient, within a fair period of time, to enable the debt to be repaid and to enable dividends to flow. He envisaged that Spassked would, at some stage, repay the debt to IEF. He said that, the most likely scenario would be that there would be an accumulation of funds in GIH and the debt would be repaid by a combination of those funds or dividends or both, at a point in time when there was an amount sufficient to repay the debt.
Mr Daniels agreed, in cross-examination in the Earlier Proceeding, that, until Spassked ceased to accrue capitalised interest, it would be a dividend trap and that, in order for it to cease to be a dividend trap, either IEF had to stop charging interest or Spassked had to repay its debt to IEF. He accepted that, so long as the debt existed and Spassked was incurring capitalised interest, GIH would not have distributed funds to Spassked by way of dividend. Mr Daniels also agreed that a substantial dividend would not have been paid to Spassked while Spassked still had losses that were available to be transferred within the IEL Group. He said that it was his expectation that Spassked would derive dividend income once it ceased to have losses available to transfer. He accepted that the Spassked Structure, as initially conceived, had as an integral part both the borrowing of funds by Spassked and the capitalisation of interest and that there was nothing as originally conceived that committed the IEL Group as to how or when the Spassked Structure would be wound down. He agreed that, because of the circumstances, it was impossible to make a firm prediction as to when the capitalised interest would be paid.

The Commissioner contends that the interest deduction claimed by Spassked in respect of the 1991, 1993 and 1994 Years would not have been allowable, or might reasonably be expected to not have been allowable, to Spassked in the relevant year, if the Spassked Scheme had not been entered into or carried out. The Commissioner says that none of a range of possible alternative structures that might have been entered into or carried out contemplated the incurrence of an interest expense by Spassked. The Commissioner says that the deduction is a tax benefit obtained by Spassked, within the meaning of s 177C of the Assessment Act.
The Commissioner says, further, that, had the Loss Transfer Schemes not been entered into or carried out, each of IEF and QIH would not have, or might reasonably be expected not to have, a deduction allowable equal in value to the tax losses transferred from Spassked pursuant to s 80G of the Assessment Act. The Commissioner says that it is a reasonable expectation that, if the Loss Transfer Schemes had not been entered into, allowable deductions equal to the tax losses received from Spassked would or might not have been allowable to IEF and QTH.
For the purposes of s 177D(b)(v) and s 177D(b)(vi) of the Assessment Act, the Commissioner relies on a report of Mr Stephen McClintock of 22 January 2002 (the McClintock Report). The McClintock Report was in evidence in the Earlier Proceeding and was admitted without objection in the Current Proceedings, together with other evidence relevant to the assumptions upon which the McClintock Report was based.
The McClintock Report is relied upon by the Commissioner as identifying the financial and taxation position that the members of the IEL Group would have been in, but for the implementation of the Spassked Structure. The Commissioner contends that the members of the IEL Group obtained the financial benefit identified in the McClintock Report as a result of entering into or carrying out the Spassked Scheme and the Loss Transfer Schemes.
Mr McClintock was asked to express his opinion on the financial and taxation position of each of the subsidiaries of GIH in the period 1 July 1987 to 30 June 1994 on the assumption that the Spassked Structure did not exist. In expressing his opinion Mr McClintock made certain assumptions that the Taxpayers accept. However, his report was also based on other assumptions that are challenged by the Taxpayers.
The assumptions made in the McClintock report included assumptions that the subsidiaries of GIH themselves would have borrowed, in lieu of Spassked, and would, therefore, have become dividend traps and that the dividends that were in fact credited to the subsidiaries of GIH during the relevant period would have been credited in any event, notwithstanding that they were dividend traps. On the basis of those assumptions, Mr McClintock considered that the net financial benefit to the IEL Group of the Spassked Structure lay in the fact that the Spassked Structure avoided the payment of dividends to dividend traps. He calculated that the financial and taxation benefit to the IEL Group was equal to the value of losses that would have been used, had dividends been paid to subsidiaries that were dividend traps. The total amount of dividends paid into dividend traps in the 1991, 1993 and 1994 Years was $153 million. The financial benefit was, in Mr McClintock’s opinion, $59 Million in the 1991, 1993 and 1994 Years.
The Taxpayers challenge the assumption that dividends would have been paid into dividend traps if the Spassked Structure had not been implemented. The Taxpayers relied on evidence of Mr Cooper and Professor Officer that was given in the Earlier Proceeding and was also admitted without objection in the Current Proceeding. Mr Cooper said that Mr McClintock’s assumptions did not accord with conduct to be expected of directors in the position of the directors of the IEL Group. He gave evidence of other options that would have been available to the directors. Professor Officer said that, if he had been commissioned to advise the IEL Group as to what steps it should take to address and alleviate the problems present at the time of the implementation of the Spassked Structure, he would have recommended a complete restructure of the IEL Group with a view to eliminating or reducing the number of actual or potential dividend traps that would have prevented the free flow of dividends within the IEL Group and that could have resulted in the wastage or a reduction in the value of dividend credits.
Mr Daniels gave evidence that Mr McClintock’s assumptions were wrong. He said that, in each case where Mr McClintock assumed that, but for the Spassked Structure, a subsidiary of GIH that was a dividend trap would have received a dividend, either the relevant dividend trap would have been closed or, to the extent that the subsidiary remained a dividend trap and, to the extent that the companies from which the subsidiary received dividends were under the control of IEL, they would not have paid the dividend at the relevant time.
There was no oral evidence in the Current Proceedings from Mr McClintock, Professor Officer or Mr Daniels. Further, the Commissioner did not dispute any of the evidence adduced by the Taxpayers as to what might reasonably be expected to happen if the Spassked Structure had not been implemented. The Taxpayers say that, in those circumstances, the Court should conclude that the financial position of the members of the IEL Group would have been the same in the relevant years if the Spassked Structure had not been implemented. They say that, for the purposes of the comparison required by s 177D, there was relevantly no change in the financial position of any of the loss transferee companies. The non-wastage of tax losses, they say, would have occurred in any event, although the losses may have been located elsewhere in the IEL Group. Mr Daniels’ unchallenged evidence was that the subsidiaries identified in the McClintock Report would either not have remained dividend traps or, if they had, would not have received the dividends.
The Taxpayers say that, in those circumstances, the Spassked Scheme did not give rise to a tax benefit and the losses that the Commissioner has disallowed would have been available to the loss transferees in any event. The Taxpayers also say that the non-wastage of tax losses is, in any event, not a tax benefit. Rather, they say, that is the very thing that the loss transfer provisions facilitated, namely, to ensure that tax losses were not wasted.
The Taxpayers say that the only financial or taxation benefit of the Spassked Structure, if any existed at all, was to place profitable subsidiaries in a position whereby they were able to enjoy the full benefit of the s 46 rebate. The benefit lay in being able to enjoy the rebate. However, to the extent that the Spassked Structure did deliver a benefit to the loss transferees that they might not otherwise have received (namely, to the extent that the Court accepts the Commissioner’s contention that additional losses were available) the amount of any tax benefit cannot exceed the value of those additional losses. Section 177C requires that the tax benefit be calculated by comparing the benefits obtained with the benefits that would otherwise have been available if the relevant scheme had not been entered into. The Taxpayers say that, if that comparison yields any difference at all, which they deny, it could not exceed the amount of the additional losses referred to in the McClintock Report.
The Matters in s 177D(b)
The Commissioner contends that, having regard to the factors listed in s 177D(b) of the Assessment Act, it would be concluded that Spassked, and any other relevant party to the Spassked Scheme, entered into and carried out the Spassked Scheme for the dominant purpose of enabling Spassked to obtain the deductions that it has claimed for interest expenses. The Commissioner says that it can also be concluded that IEF and QTH, and any other relevant parties to the Loss Transfer Schemes, entered into or carried out the Loss Transfer Schemes for the sole or dominant purpose of enabling IEF and QIH, as the case may be, to obtain the deductions arising from the transfer of tax losses by Spassked to them.
The Commissioner contends that the Spassked Scheme was entered into during the period from 30 December 1987 until 28 June 1990 and that it was the sole and dominant purpose of each of the relevant parties to enable Spassked, throughout the currency of the scheme, to make tax losses by incurring deductible interest expenses and not deriving assessable income. The Commissioner also contends that it was the sole or dominant purpose of each of the parties who carried out the Spassked Scheme in each of the 1991, 1993 and 1994 Years to enable Spassked, in each of those years, to make tax losses by incurring deductible interest and deriving assessable income. Finally, in relation to the Loss Transfer Schemes, the Commissioner contends that it was the sole or dominant purpose of each of the relevant parties to those schemes to enable the transferees of tax losses to obtain the benefit of the deductible losses transferred to them. It is convenient to deal separately with each of the eight factors described in s 177D(b).
The manner in which the Schemes were entered into or carried out
The Spassked Structure was devised and implemented by the tax section of IEL, which consisted of Mr Daniels, Mr Latham and Mr Cottam, together with the assistance of external advisers. The Spassked Structure was not documented and the borrowings from IEF were unsecured, being evidenced only by debits and credits in the books of companies in the IEL Group, together with some cheques and promissory notes. The timing of the borrowings and capitalisations and their quantum were determined by Mr Latham and Mr Cottam, who were tax managers of IEL. That is to say, the timing and quantum of the borrowings and the capitalisations were not responsive to decisions made by the investment team, which had responsibility for external investments.
The Spassked Structure and its implementation over the period of time by successive tranches had no impact on the ability of the IEL Group to make external investments. External acquisitions were being made regardless of the Spassked Structure. The capacity to make external acquisitions was dependent upon IEF being in a position to fund the acquisitions and not upon the equity subscribed by Spassked in GIH. The major takeovers during the period of the Spassked Scheme were of the Southern Farmers Group and of Woolworths, which were not funded by equity from GIH but from debt, the source of which was ultimately IEF. Spassked replaced other companies within the IEL Group that were dividend traps and the companies in which GIH invested ceased to be, or to have the potential of being, dividend traps.
The Taxpayers point out that the hypothesis upon which Part IVA is to be considered is that Spassked’s interest expense was deductible under s 51(1), namely, that it was incurred in gaining or producing assessable income. They say that, on that hypothesis, the manner in which the Spassked Structure was implemented is unexceptional. It involved the intra-group recapitalisation of companies with a view to ensuring that Spassked, as an intermediate holding company in a large corporate group, would derive assessable income. The manner in which those arrangements were put in place does not, the Taxpayers say, point to the conclusion that any person’s dominant purpose was to obtain interest deductions for Spassked.
The form and substance of the Schemes
The Commissioner says that the substance of the Spassked Scheme was to maximise the value of tax losses within the IEL Group and to enable dividends to be paid without being subsumed in dividend traps. The form of the Spassked Scheme was consistent with its substance. Thus, Spassked borrowed money at market rates of interest, which was capitalised. The borrowed funds were employed in the acquisition of shares in GIH and, in one instance, in a loan to GIH free of interest. Spassked’s shareholdings in and loans to GIH produced no income for the relevant years of income, save for the payment of dividend on 30 June 1990 and 8 October 1991.
Spassked incurred significant tax losses by reason of the interest expense incurred to IEF without deriving any income in the relevant years. Those losses were transferred to other members of the IEL Group, including IEF and QTH, in order to reduce the taxable income of the transferees.
The funds borrowed by Spassked were channelled to the subsidiaries of GIH by way of equity subscriptions for shares in GIH. Dividends were paid to, and received by, other companies in the IEL Group, which, by reason of the channelling of equity funds through the Spassked Structure, were not dividend traps.
The position of Spassked as an intermediate company within the IEL Group cannot be explained from any external commercial point of view. It incurred interest on inter-company debt when its only asset was shares in GIH, a related company, from which it derived no income. It performed no role in relation to entities external to the IEL Group. The arrangements between the companies in question were inherently variable at the will of the directors of the Ultimate Parent Companies. The arrangements do not reflect the exercise of any business judgment in any relevant sense.
The time at which the Schemes were entered into and the length of the period during which the Schemes were carried out
The Spassked Scheme was devised and implemented following a number of amendments to the Assessment Act. First, s 80G, which permitted the transfer of losses within a group of wholly owned companies, was introduced in respect of the 1985 year of income. Subsequently, the dividend imputation regime was introduced in 1987.
At the time of implementation of the Spassked Structure, there was no plan or commitment as to how or when Spassked might cease to incur interest, which continued to be capitalised. Further, there is nothing about the Spassked Scheme that objectively discloses a time at which it would be wound up or terminated. The Spassked Structure could have continued on indefinitely. The Spassked Scheme continued until at least 1 July 1994, when Spassked ceased to be a dividend trap. Nevertheless, Spassked continued to transfer losses to other members of the IEL Group until 1 July 1997. During the entire period, Spassked derived no dividends, save for the two dividends in June 1990 and October 1991.
The Taxpayers say that the introduction of the dividend imputation system increased the pressure on companies to pay franked dividends to shareholders. That was an important concern that the Spassked Structure was intended to address. Further, the closure of the Spassked dividend trap was identified as an objective as early as the 1991 Year and was pursued over several years until Spassked’s borrowings from IEF were finally repaid by 1 July 1994. The Taxpayers say that those factors point against a conclusion that any person’s dominant purpose was to obtain interest deductions for Spassked.
The result in relation to the operation of the Assessment Act that would be achieved by the Schemes
If the interest expenses constitute allowable deductions, the result would be that Spassked would be entitled to deductions for the whole of the capitalised interest incurred by it in respect of its borrowings from IEF in the 1991, 1993 and 1994 Years. The interest and consequential tax losses of the relevant years would be as follows:

Year

Interest

Tax Loss

1991

$774,746,526

$774,746,571

1993

$465,626,741

$465,626,785

1994

$79,284,023

$77,051,412

The Taxpayers say that, but for the operation of Part IVA, the result was that Spassked incurred interest expense on borrowings that it used to invest in profitable businesses. It alone was entitled to those profits for the benefit of its own shareholders. Those profits have been realised and the proceeds have been lent to Spassked’s ultimate owners, on the express understanding that, in due course, the profits will be distributed by way of dividend, thus repaying the loans. IEF returned the interest expense charged to Spassked as assessable income and, on the hypothesis in question, Spassked was entitled to allowable deductions for its expense in making the profitable investment in GIH. The Taxpayers say that the results are entirely unremarkable.
Any change in the financial position of Spassked that will result from the scheme
Spassked borrowed $3,762,756,243 in total and the interest incurred in relation to those borrowings from 1987 to 1994 was $3,272,715,111. Spassked received only unfranked dividends in the sum of $29,308,093 on 30 June 1990 and $14,654,046 on 8 October 1991. However, during the period of the Spassked scheme, from 30 December 1987 to 30 June 1994, Spassked suffered losses totalling $3,251,952,899. Had the Spassked Scheme not been entered into, Spassked would not have incurred interest to IEF and would not have sustained the losses.
The Taxpayers say there was no relevant change in the financial position of the IEL Group as a result of the implementation of the Spassked Structure. The supposed financial benefit identified in the McClintock Report was the saving or non-wastage of tax losses that were available within the IEL Group anyway and that would have been preserved by various means in any event. They say that, to the extent that the Spassked Structure affected the financial position of Spassked, in that it gave rise to deductions for interest expenses, those effects were balanced by a change in the financial position of IEF, which derived assessable income. Spassked’s financial position improved in line with the fund of profits generated in the subsidiaries of GIH. Finally, to the extent that the Spassked Structure affected the financial position of loss transferees, those transferees would have been entitled to losses in the same amount in any event.
Any change in the financial position of any person who has or has had any connection with Spassked
The financial position of the subsidiaries of GIH improved as a result of the Spassked Scheme. Their exposure to interest bearing inter-company debt was extinguished or reduced. They were able to receive dividends in respect of which they obtained a tax rebate for an amount that was greater than the amount they would have received on dividends had the Spassked Scheme not been entered into. Their taxable income increased but no tax was paid by reason of the availability of the rebate under s 46 of the Assessment Act.
IEL received franked dividends of $33,378,828. IEF returned interest income from Spassked. Whether IEF’s financial position changed as a result of the Spassked Scheme depended upon whether it would have received the same level of interest income from other members of the IEL Group had the Spassked Scheme not been entered into.
The financial position of the transferees of the tax losses improved as a result of the maximising of tax losses in Spassked that were available for transfer to them. During the period from 1987 to 1997, Spassked transferred all of its available tax losses.
The Commissioner contends that the financial impact of the transfer of the tax losses is to be determined by comparing the quantum of tax losses incurred and then grouped by Spassked during the period, with the tax losses that would have been available to companies in the IEL Group on the assumption that they had themselves borrowed money in order to fund acquisitions and receive the dividends that they actually did receive during the period. In general terms, the difference represents the amount of tax losses available to be transferred to other members of the IEL Group, due to the quarantining of rebateable dividend income from the incurrence of interest, which otherwise would have been lost due to the receipt of rebateable dividends. The quantum of tax losses for the period 1980 to 1994 was $326,253,589. The Commissioner contends the actual financial benefit is the tax value of those losses, namely, $126,894,028.

The Spassked Scheme had no impact on the ability of the IEL Group to make external investments, which would have been made regardless of the Spassked Structure. The capacity of GIH and its subsidiaries to make external acquisitions was dependent upon IEF being in a position to fund the acquisitions and not upon the funds subscribed by Spassked for shares in GIH. The major acquisitions during the period of the Spassked Scheme, being the Southern Farmers Group and Woolworths, were not funded by equity from GIH but from debt, sourced ultimately from IEF.
Any other consequences for Spassked or any person having a connection with Spassked
The Commissioner does not suggest that there were any other non financial consequences for Spassked or for any other person having any connection with Spassked, of the Spassked Scheme having been entered into or carried out.
The nature of any connection
All of the parties to the Spassked Scheme were wholly owned subsidiaries of IEL. Spassked and GIH had common directors during the period, with minimal exceptions, and the same directors constituted the boards of the subsidiaries of the IEL Group who were parties to the Spassked Scheme.
Conclusion as to Part IVA
On the assumption that the interest expenses incurred by Spassked in the 1991, 1993 and 1994 Years would otherwise be allowable deductions, it is certainly arguable that Part IVA would not apply in respect of either the Spassked Scheme or the Loss Transfer Schemes. However, having regard to the conclusion I have reached concerning the deductibility of the interest expenses, it is unnecessary to reach a conclusion in relation to the application of Part IVA.
ADDITIONAL TAX
The Taxpayers also complain about assessments for additional tax. The Taxpayers have adduced all of the evidence relevant to the question of additional tax. However, the Taxpayers and the Commissioner have joined in requesting the Court to defer consideration of issues relating to the imposition of additional tax until the questions as to the deductibility of Spassked’s interest expenses and the transferred tax losses have been determined.
CONCLUSION
The appeals should be dismissed in so far as they challenge the disallowance of the deductions claimed by the Taxpayers in the relevant Years. It will now be necessary to consider the question of the imposition of additional tax, in the light of that conclusion.

I certify that the preceding two hundred and ninety (290) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett.
Associate:
Dated: 20 August 2010

Citation:	IEL Finance Limited ACN 008 556 130 v Commissioner of Taxation [2010] FCA 898
Parties:	IEL FINANCE LIMITED ACN 008 556 130, QUEENSLAND TRADING & HOLDING CO LIMITED ACN 009 658 762 and SPASSKED PTY LIMITED ACN 003 255 847 v COMMISSIONER OF TAXATION
File numbers:	NSD 539 of 2004, NSD 540 of 2004, NSD 543 of 2004; and NSD 94 of 2005
Judge:	EMMETT J
Date of judgment:	20 August 2010
Catchwords:	TAXATION – intention to derive assessable income – allowable deductions – whether interest payments deductable – dividend traps PRACTICE AND PROCEDURE – whether line of argument constitutes an abuse of process
Legislation:	Income Tax Assessment Act 1936 (Cth) ss 46, 51, 79, 80, 177 Taxation Administration Act 1953 (Cth) s 14
Cases cited:	Commissioner of Taxation v Firth (2002) 120 FCR 450 FCT v Consolidated Press Holdings Limited (2001) 207 CLR 235 FCT v Spotless Services Limited (1996) 186 CLR 404 Federal Commissioner of Taxation v Total Holdings (Australia) Pty Ltd (1979) 43 FLR 217 Fletcher v Commissioner of Taxation (1991) 173 CLR 1 Peabody v FCT (1993) 40 FCR 531 Rippon v Chilcotin Pty Limited (2001) 53 NSWLR 198 Ronpibon Tin No Liability v Commissioner of Taxation (1949) 78 CLR 47 Spassked Pty Ltd v Commissioner of Taxation (No 5) [2003] FCA 84 Spassked Pty Ltd and Others v Commissioner of Taxation [2003] FCAFC 282 Spassked Pty Ltd and Others v Federal Commissioner of Taxation (No 2) [2007] FCAFC 205 Steele v Deputy Commissioner of Taxation (1999) 197 CLR 459
Dates of Hearing:	31 May to 2 June 2010, 7 June 2010, 9 to 10 June 2010 and 16 June 2010
Place:	Sydney
Division:	GENERAL DIVISION
Category:	Catchwords
Number of paragraphs:	290
Counsel for the applicant:	T. Bathurst QC, P.M. Fraser and J. Hmelnitsky
Solicitor for the applicant:	Freehills
Counsel for the respondent:	G.J. Davies QC, D. Fagan SC, A. O’Brien and D.M. Harding
Solicitor for the respondent:	Australian Government Solicitor

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION	NSD 539 of 2004

BETWEEN:	IEL FINANCE LIMITED ACN 008 556 130 Applicant
AND:	COMMISSIONER OF TAXATION Respondent

JUDGE:	EMMETT J
DATE OF ORDER:	20 AUGUST 2010
WHERE MADE:	SYDNEY

BETWEEN:	SPASSKED PTY LIMITED ACN 003 255 847 Applicant
AND:	COMMISSIONER OF TAXATION Respondent

BETWEEN:	QUEENSLAND TRADING & HOLDING COMPANY LIMITED ACN 009 658 762 Applicant
AND:	COMMISSIONER OF TAXATION Respondent

BETWEEN:	SPASSKED PTY LIMITED Applicant
AND:	COMMISSIONER OF TAXATION Respondent

JUDGE:	EMMETT J
DATE:	20 AUGUST 2010
PLACE:	SYDNEY

Year	Interest	Tax Loss
1991	$774,746,526	$774,746,571
1993	$465,626,741	$465,626,785
1994	$79,284,023	$77,051,412