Macquarie Finance Ltd v Commissioner of Taxation

[2005] FCAFC 205

FEDERAL COURT OF AUSTRALIA

Macquarie Finance Limited v Commissioner of Taxation [2005] FCAFC 205

INCOME TAX – deductions – interest payments – whether incurred in gaining or producing assessable income – whether necessarily incurred in business for gaining or producing assessable income – whether of a capital nature - role of purpose of expenditure in characterisation – objective purpose – subjective purpose – corporate purpose –– interest on debenture notes issued as part of capital raising for corporate group – issued by one member of corporate group together with preference shares in parent company – stapled securities – dividends not payable on preference shares while interest paid on notes to noteholders – power of parent company to redirect interest to itself and pay dividends to security holders in lieu – interest payments not deductible – whether tax avoidance provisions of Pt IVA apply

Australian Banking Act 1959 (Cth)
Income Tax Assessment Act 1997 (Cth) s 8-1
Income Tax Act 1936 (Cth) s 82L, 177A, 177C, 177D, 177F

Macquarie Finance Ltd v Commissioner of Taxation (2004) 210 ALR 508 affirmed

Amalgamated Zinc (De Bavay’s) Ltd v Federal Commissioner of Taxation (1935) 54 CLR 295 cited
Australian & New Zealand Savings Bank Ltd v Federal Commissioner of Taxation (1993) 42 FCR 535 cited
Australian National Hotels Ltd v Federal Commissioner of Taxation (1998) 19 FCR 234 cited
BP Australia Ltd v Commissioner of Taxation of the Commonwealth of Australia [1966] AC 224 applied
British Insulated and Helsby Cables Ltd v Atherton [1926] AC 205 cited
City Link Melbourne Ltd v Federal Commissioner of Taxation (2004) 211 ALR 207 considered
Coles Myer Finance Ltd v Federal Commissioner of Taxation (1993) 176 CLR 640 cited
Commissioners of Inland Revenue v Blott [1921] 2 AC 171 cited
Eastern Nitrogen Ltd v Federal Commissioner of Taxation (2001) 108 FCR 27 applied
Federal Commissioner of Taxation v Broken Hill Pty Co Ltd (2000) 179 ALR 593 cited
Federal Commissioner of Taxation v Citibank Ltd (1993) 44 FCR 434 cited
Federal Commissioner of Taxation v Consolidated Press Holdings Ltd (2001) 207 CLR 235 cited
Federal Commissioner of Taxation v Firth (2002) 120 FCR 450 cited
Federal Commissioner of Taxation v Hart (2004) 217 CLR 216 applied
Federal Commissioner of Taxation v Ilbery (1981) 38 ALR 172 cited
Federal Commissioner of Taxation v Phillips (1978) 20 ALR 607 cited
Federal Commissioner of Taxation v Radilo Enterprises Pty Ltd (1997) 97 ATC 4151 cited
Federal Commissioner of Taxation v Riverside Road Lodge Pty Ltd(In Liq) (1990) 23 FCR 305 cited
Federal Commissioner of Taxation v Roberts & Smith (1992) 37 FCR 246 cited
Federal Commissioner of Taxation v Snowden & Wilson Pty Ltd (1958) 99 CLR 431 cited
Federal Commissioner of Taxation v South Australian Battery Makers Pty Ltd (1978) 140 CLR 645 considered
Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404 applied
Federal Commissioner of Taxation v Midland Railway Co of Western Australia Ltd (1952) 85 CLR 306 applied
Fletcher v Federal Commissioner of Taxation (1991) 173 CLR 1 cited
GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1990) 170 CLR 124 cited
Hallstroms Pty Ltd v Federal Commissioner of Taxation (1946) 72 CLR 634 cited
Herald and Weekly Times Ltd v Federal Commissioner of Taxation (1932) 48 CLR 113 cited
John v Federal Commissioner of Taxation (1989) 166 CLR 417 cited
Jupiters Ltd v Federal Commissioner of Taxation (2002) 118 FCR 163 cited
Lunney & Hayley v Federal Commissioner of Taxation (1958) 100 CLR 478 cited
Magna Alloys and Research Pty Ltd v Federal Commissioner of Taxation (1980) 33 ALR 213 cited
Mullens Investment Pty Ltd v Federal Commissioner of Taxation (1976) 135 CLR 290 cited
Robert G Nall Ltd v Federal Commissioner of Taxation (1937) 57 CLR 695 cited
Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47 cited
Steele v Deputy Commissioner of Taxation (1999) 197 CLR 459 cited
Sun Newspapers Ltd & Associated Newspapers v Federal Commissioner of Taxation (1938) 61 CLR 337 cited
Texas Co (Australasia) Ltd v Federal Commissioner of Taxation (1940) 63 CLR 382 cited
Ure v Federal Commissioner of Taxation (1981) 34 ALR 237 cited
Vincent v Federal Commissioner of Taxation (2002) 124 FCR 350 cited
W Neville & Co Ltd v Federal Commissioner of Taxation (1937) 56 CLR 290 cited

Maurice Cashmere, ‘Part IVA after Hart’, (2004) 33 AT Rev 131
RW Parsons, Income Taxation in Australia, Law Book Company (1985)

MACQUARIE FINANCE LIMITED v COMMISSIONER OF TAXATION
NSD 1439 OF 2004

FRENCH, HELY & GYLES JJ
16 SEPTEMBER 2005
SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD 1439 OF 2004

On Appeal from a Single Judge of the Federal Court of Australia

BETWEEN:	MACQUARIE FINANCE LTD (ACN 001 214 964) APPELLANT
AND:	COMMISSIONER OF TAXATION RESPONDENT
JUDGES:	FRENCH, HELY & GYLES JJ
DATE OF ORDER:	16 SEPTEMBER 2005
WHERE MADE:	SYDNEY

THE COURT ORDERS THAT:

1.        The appeal be dismissed.

2.        The appellant pay the respondent’s costs of the appeal.

Note:   Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD 1439 OF 2004

On Appeal from a Single Judge of the Federal Court of Australia

BETWEEN:	MACQUARIE FINANCE LTD (ACN 001 214 964) APPELLANT
AND:	COMMISSIONER OF TAXATION RESPONDENT

JUDGES:	FRENCH, HELY & GYLES JJ
DATE:	16 SEPTEMBER 2005
PLACE:	SYDNEY

REASONS FOR JUDGMENT

French J:
Introduction

1. In 1999 Macquarie Bank Ltd (MBL) and its subsidiary, Macquarie Finance Ltd (MFL) made a public offer of composite securities known as Macquarie Income Securities.  Each security comprised a Debenture Note issued by MFL and a Preference Share issued by MBL.  The object of the issue of the securities was to raise additional capital for MBL.  It was a further object that the capital so raised would fall within the category known as Tier 1 capital for the purposes of the minimum capital requirements prescribed by the Australia Prudential Regulation Authority (APRA).  The greater the proportion of Tier 1 capital in a company, the greater the amount which it could, consistently with those requirements, raise by way of borrowing.

2. The rights and obligations relating to the creation and issue of the securities were derived from three key documents being a Trust Deed, a Subscription Agreement and a Procurement Agreement.  Their effect was that the securities were ‘stapled’ in the sense that an MFL note could not be transferred by a holder without the transfer of the corresponding Preference Share in MBL.  Interest was payable on the notes for the benefit of noteholders.  While interest was payable on the notes, dividends were not payable on the Preference Shares.  However, by a mechanism which is explained in the reasons, MBL could require that interest cease to be paid by MFL to the noteholders and that it be redirected to MBL.  In that event, MBL would pay corresponding dividends on the Preference Shares.

3. The picture that emerged was of a trinity of agreements interacting in a rather complex way.  One of their purposes was to secure Tier 1 capital at a low cost relative to other forms of capital raising.  A diagram to aid understanding of the arrangements is Annexure A to these reasons.

4. The issue proceeded on 30 September 1999 raising a first tranche of $200 million and in November 1999 a second tranche also in that amount.  In each case a sum of $200 million was paid by the underwriter Deutsche Bank AG in respect of both the Notes issue and the Preference Shares issue.  However under the terms of the Procurement Agreement MBL remitted a sum of $200 million to the underwriter in each case so that the net capital raised was $200 million on the Notes issue in September 1999 and the same amount on the Notes issue in November 1999.  The money raised on the Notes was on-lent by MFL to Macquarie Leasing Pty Ltd, a subsidiary of MBL, for use in its plant and equipment leasing business.  MFL earned $28,433, by way of interest from Macquarie Leasing, in the year of income ended 30 September 2000.  It paid $27,933,226 by way of interest for the benefit of the  noteholders in that year.  MFL claimed the interest so paid as a deduction on the basis that it was incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for that purpose.  The Commissioner disallowed the deduction.  An appeal to Hill J at first instance was dismissed: Macquarie Finance Ltd v Commissioner of Taxation (2004) 210 ALR 508. His Honour held that the interest payments were, in the circumstances of this case, of a capital nature. His Honour also held that, even if the payments were deductible, Pt IVA of the Income Tax Assessment Act 1936 (Cth) (the 1936 Act) would operate to disallow the tax benefit otherwise obtained.

5. MFL appealed against his Honour’s decision.  For the reasons set out below I am of the opinion that the appeal should be dismissed.  In my opinion the interest payments made by MFL were not incurred in gaining or producing assessable income and were of a capital nature.  Having so concluded it was unnecessary to consider the application of Pt IVA.  However had the payment been deductible under s 8-1 of the Income Tax Assessment Act 1997 (Cth) (the 1997 Act) then, it is my opinion, for the reasons set out in the judgment of Hely J, that Pt IVA would not have applied to disallow the deduction. 

6. In summary, I am of the opinion that the payments made are not deductible and that Pt IVA would not have applied to disallow the deduction if they were deductible.  Hely J is of the opinion that the payments made were deductible and that Pt IVA did not apply to disallow the deduction.  He would have allowed the appeal.  Gyles J is of the opinion that the payments were not deductible and that Pt IVA would have applied to disallow any deduction had they been deductible.  In the result, Gyles J and I are agreed that the payments were not deductible and that the appeal should be dismissed with costs.

   Factual Background – Macquarie Income Securities – A Capital Raising Mechanism for Macquarie Bank Ltd

7. MBL described itself in its 1999 annual review as a provider of financial services.  It is an investment bank which acts as a financial intermediary, accepts deposits, issues securities and makes advances and investments.  Those services are provided by a number of subsidiaries.  Their activities are carried on through operating groups described variously as asset and infrastructure, treasury and commodities, corporate finance, equities, banking and property and investment services.  One of the subsidiaries is MFL.  MBL is a licensed trading bank under the Australian Banking Act 1959 (Cth).  It is subject to the supervisory authority of the Australian Prudential Regulation Authority (APRA).

8. In June 1999 officers of the MBL group gave consideration to ways and means of raising additional long term funding through increasing capital and/or borrowings in order to meet its anticipated business needs. Their consideration was stimulated by a proposal, developed within the group, for its acquisition of the Australian banking business and assets of Bankers Trust (BTIB) from Deutsche Bank AG.  Although that acquisition, which was expected to cost about $100 million, could have been funded from MBL’s existing resources, its projected requirements, including those arising by reason of the acquisition, indicated a need to increase the funds available to them by up to $4 billion.

9. The fund raising had to be conducted within the regulatory framework, including minimum capital requirements prescribed by APRA.  Its requirements reflect those adopted by a number of national regulators around the world and established by the Basle Committee of Banking Supervision of the Bank of International Settlements.  The Reserve Bank of Australia is a shareholder of that Bank.  Under the agreement, bank regulators have established three categories of capital for banks designated Tier 1, Tier 2 (Upper) and Tier 2 (Lower).  It is a requirement that Tier 2 capital could not exceed Tier 1 capital and together they must make up at least 8% of the total risk weighted assets of the bank or institution.

10. Where Tier 1 or Tier 2 capital is increased the amount of money that the bank can borrow and invest or advance to creditors is increased by a multiple according to the category of the capital increase.  So where a bank, with $13 million of Tier 1 capital and debt liabilities of $87 million, doubles its Tier 1 capital to $26 million it can borrow a total of $174 million providing total assets of $200 million.  It can, by raising $13 million in equity, create a further $100 million of assets in investments and advances by borrowing a further $87 million.

11. In 1999 APRA’s guidelines were set out in successive documents entitled ‘Capital Adequacy of Bank’s Prudential Statement C1’ dated March 1996 and September 1999 respectively.  The 1996 statement included within the description of Tier 1 capital paid up ordinary shares and non-cumulative irredeemable preference shares.  Subject to their compliance with certain conditions Tier 1 capital could also include innovative capital instruments.  These were defined as capital instruments other than ordinary shares and non-cumulative irredeemable preference shares.  To be included in Tier 1 capital such shares and instruments were required to satisfy conditions set out in Attachment 1A of the Prudential Statement.  An instrument would not be eligible for inclusion in Tier 1 capital where it would result in the aggregate amount of innovative capital instruments and non-cumulative irredeemable preference shares exceeding 25% of net Tier 1 capital.  The term ‘net Tier 1 capital’ referred to Tier 1 capital net of non-ordinary shares and other capital instruments.

12. The criteria for Tier 1 capital instruments other than ordinary shares which were set out in Attachment 1A of the Prudential Statement required that such instruments normally take the form of shares unless otherwise agreed with APRA.  They should be treated as equity under Australian Accounting Standards and reported as such in the bank’s published financial statements, absent an alternative treatment agreed with APRA.  The instruments were required to be unsecured and fully paid up.  The proceeds of an issue were to be immediately available to the bank.  Only proceeds actually received from the issue of the instrument were eligible to be included.

13. Officers of MBL considered more than one mechanism for raising the necessary capital between June and September 1999.  The mechanism finally adopted involved the issue of preference shares by MBL and debenture notes by MFL as stapled securities called Macquarie Income Securities (MIS).  They were ‘stapled’ in the sense that the holder of a security could not transfer the preference share without the debenture note and vice versa.  The transactions had the effect that interest was payable by MFL on the moneys raised by the issue of their notes whereas no dividends were payable under the preference shares.  However upon certain events, under the control of MBL, occurring the holders of the securities would cease to receive interest on the notes and would instead receive dividends on their preference shares. 

14. On 30 September 1999 the MBL and MFL boards approved a proposal for raising $400 million by two issues of MIS at $200 million each.  The relevant documents were approved for execution and were executed by the Board on that day.  APRA confirmed on 6 October 1999 that the issue would be treated as Tier 1 capital subject to a revision of the documentation.  The capital raising mechanism adopted by MBL and MFL involved three principal agreements described in the following paragraphs.

15. MBL, MFL and Trustee Company of Australia Ltd (the Trustee) entered into a Trust Deed called the ‘Macquarie Income Securities Trust Deed’ on 30 September 1999.  Under that Deed MFL issued notes to the Trustee to hold on trust for investors defined in the Deed as ‘Holders’.  The notes were direct unsecured debt obligations of MFL.  The Holders would obtain a Holder’s Interest which was defined as the entire beneficial interest in the notes. Each Holder’s Interest was to be ‘stapled’ to one preference share in the capital of MBL in the sense that the Holder’s Interest and the preference shares could only be transferred together.  The Holder’s Interests were to be issued, in the first instance, to the ‘Initial Holder’ which was the underwriter Deutsche Securities Australia Ltd (Deutsche).  The conditions of the notes issued by MFL were set out in Schedule 1 to the Trust Deed.  The terms of the preference shares to be issued by MBL under the arrangement were set out in Annexure A to the Trust Deed.

16. By cl 5.1 of the ‘Conditions of Notes’ in Schedule 1 to the Trust Deed, MFL was to pay interest on each Interest Payment Date (defined in the Schedule).  The amount of interest payable on the notes, together with the aggregate amount of dividends paid on or before the relevant date during the current financial year of MBL on any preference or other shares of MBL, was not to exceed its Distributable Profits.  By cl 2.2 the holder of a note was not a creditor of MFL and had no right to sue for or otherwise claim payment from MFL of moneys owing in respect of the notes.  The relevant creditor/debtor relationship existed between MFL and the Trustee (cl 2.2(a)). 

17. MBL, MFL, the Trustee and Deutsche also entered into a Subscription Agreement dated 30 September 1999.  By that agreement Deutsche undertook to subscribe for two million MIS each comprising a Holder’s Interest in an MFL note and a preference share in the capital of MBL.  It would subscribe in its capacity as underwriter of the issue.  It would pay $200 million to MBL for the shares and $200 million to MFL for the Holder’s Interests.  Upon completion of the public offering in accordance with the prospectus relating to the issue, Deutsche would transfer its securities to investors whose applications had been accepted by it and by MBL and MFL. 

18. MBL and Deutsche entered into a Procurement Agreement on 30 September 1999.  The essence of the agreement, set out in clause G of its recitals, was that:

    ‘In consideration for Deutsche giving a notice to the Trustee directing it to make the Payment Direction in certain circumstances, [MBL] agrees to pay to Deutsche  the Payment Direction Amounts on the terms and conditions of this agreement.’

    It was by virtue of this agreement that the payment of interest to noteholders could be replaced, at MBL’s option, with the payment of dividends on the preference shares ‘stapled’ to those notes.  How it worked is set out below.  It is necessary, in order to understand its operation, to refer first to certain provisions of the Trust Deed.

19. Under the Trust Deed a ‘Payment Direction’ was defined as an ‘irrevocable payment direction by the Trustee to the Issuer [MFL] to pay to the Company [MBL] amounts due to it in respect of the Notes in accordance with clause 4.15’.  Clause 4.15 of the Trust Deed provided:

    ‘4.15The Initial Holder [Deutsche] may, by notice in writing in the form of Schedule 4 signed by a duly authorised officer to the Trustee and the Issuer [MFL] irrevocably authorise and direct the Trustee to direct that:

    (a)the Issuer [MFL] pays all Moneys Owing in relation to Notes issued as a Series specified in the notice which become due after a Payment Direction Event occurs (including, without limitation, any Redemption Amount provable in the winding up of the Issuer [MFL] and the proceeds of any dividend payable in the winding up with respect to Moneys Owing in relation to Notes issued as a Series specified in the notice which become due after the Payment Direction Event occurs); and

    (b)the Company [MBL] pays any moneys payable under the Performance Guarantee in relation to Notes issued as a Series specified in the notice which become due after the Payment Direction Event occurs,

    to or as directed by the Company [MBL].  The notice is irrevocable.’

1. By clause 4.16 of the Trust Deed, when Deutsche gave a Payment Direction Notice under cl 4.15, it was binding upon each subsequent Holder of Holder’s Interests (4.16(a)).  The Trustee would be taken, in the event of such a Notice, to have irrevocably directed MFL to pay MBL, or as directed by it, moneys owing on the issued notes if and after a Payment Direction Event occurred (4.16(b)(i)).  The Trustee would also be taken to have irrevocably directed MBL to pay any moneys payable under the Performance Guarantee in relation to the Notes which became due after the Payment Direction Event.  The latter obligation seems to have required MBL to pay guarantee moneys to or as directed by itself (4.16(b)(ii)).  MFL also agreed to make all such payments in accordance with the Trustee’s direction (4.16(c)).  This meant, in effect, that MFL could be obliged, inter alia, to redirect interest payments on the notes from the noteholders to MBL. The Trustee was irrevocably authorised and directed to act solely in accordance with the directions of MBL in relation to the exercise or non-exercise of any remedies or powers of the Trustee under or in connection with the Notes or any moneys owing which become due after that date or the Performance Guarantee (4.17(a)). 

2. The term ‘Payment Direction Event’ was defined in cl 1.1 of the Trust Deed as follows:

   ‘(a)a Liquidation Event occurs in relation to the Company [MBL] or the Issuer [MFL]; or

   (b)the Company [MBL] or the Issuer [MFL] acknowledges in writing that it is unable to pay its debts within the meaning of the Corporations Law; or

   (c)at any time, the Company [MBL] gives notice in writing to the Trustee stating that it requires all Moneys Owing in respect of the Notes be paid to it as they become due.’

3. Paragraph (c) of the definition of Payment Direction Event was the paragraph of practical significance for the operation of the arrangements between MBL, MFL, Deutsche and the Trustee.  A Payment Direction Notice could be given by Deutsche under clause 4.15 of the Trust Deed.  A Payment Direction was to be by notice in writing to the Trustee.     

4. The Procurement Agreement provided that, in consideration of Deutsche agreeing to give, on the Subscription Date, a notice to the Trustee and MFL in accordance with clause 4.15 of the Trust Deed directing the Trustee to make the Payment Direction in respect of the two million notes issued to it on the Subscription Date, MBL would pay to Deutsche on the same day the Payment Direction Amount in respect of the two million notes issued on that date (cl 2.1).  The Payment Direction Amount was defined in the Procurement Agreement as ‘$100 per note’.  A similar provision related to notes issued to the Trustee on the Completion Date (cl 2.2).  The net outlay by Deutsche under these arrangements would be $200 million. Another $200 million tranche was to be subscribed for and paid on the Completion Date, ie the completion of the subscription process.

5. A Payment Direction Event would have the following effects.  It would:

   1.Enliven the operation of cls 4.15, 4.16 and 4.17 of the Macquarie Income Securities Trust Deed. 

   2.Free MFL of its obligations under the notes to the Trustee and to the holders of the stapled instruments and require the payment of moneys due under the notes to be made to MBL or as directed by it. 

   3.Activate MBL’s obligations to the holders of the stapled instruments with respect to the preference shares as they would then become ‘Dividend Paying’.  This term is defined in cls 1.1 and 4 of Annexure A to the Macquarie Income Securities Trust Deed.

   4.Cause MBL’s guarantee to the Trustee to lapse – see cl 3 of schedule 3 to the Macquarie Income Securities Trust Deed.

6. Prior to the preference shares becoming Dividend Paying on the Dividend Paying Date following the activation of cls 4.15 et al, the holders of the securities, would have, in respect of the preference share component:

   1.        No entitlement to dividends.

   2.        Limited voting rights.

   3.No return on a winding up.  In a sense this was academic.  If MBL were wound up that would constitute a Payment Direction Event (under par (a) of the definition) and as a consequence the preference shares would become ‘Dividend Paying’.  Clauses 4.15, 4.16 and 4.17 of the Macquarie Income Securities Trust Deed would be enlivened.

   4.No entitlement to a return upon a redemption or buy back of the preference share or on a reduction of capital. 

   5.A right to transfer the shares but only together with their Holder’s Interest in the corresponding notes. 

7. In the event that the preference shares became dividend paying:

   1. They would carry an entitlement to dividends at a premium to the Australian Bill Swap Reference Rate which was non-cumulative and would not exceed the after-tax profits of MBL.

   2.They would have limited voting rights.

   3.There would be an entitlement to $100 per preference share on a winding up in preference to ordinary shares but no right to participate in surplus assets.

   4.There would be an entitlement to $100 per preference share on a redemption, buy back or reduction of capital.

   5.There would be a right to transfer the preference share but again, only together with the Holder’s Interest in a note.

8. Under the Macquarie Income Securities Trust Deed, MBL guaranteed to the Trustee, on a subordinated basis, the payment of the interest due by MFL on the notes.  However subsequent to a Payment Direction Event all moneys payable under the guarantee were to be paid to MBL. 

9. There were other deeds entered into on 13 and 14 October 1999 and supplemental condition statements signed on 30 September 1999 and 19 November 1999.  It is not essential to refer to them for present purposes. 

10. Following the execution of the transaction documents on 30 September 1999 MBL received subscription moneys of $200 million for the initial issue to Deutsche of two million preference shares of face value $100 each.  MBL, at the same time, paid the sum of $200 million to Deutsche in consideration of Deutsche giving a Payment Direction Notice to the Trustee and MFL under the Trust Deed and in accordance with the terms of the Procurement Agreement.  MFL raised $200 million from Deutsche in respect of the issue of two million notes each and a further sum of $100.

11. On 19 November 1999 MFL raised another $200 million in respect of the issue of a further two million notes to Deutsche.  MBL received subscription moneys of a further $200 million for the further issue of two million preference shares of face value $100 each to Deutsche.  It paid $200 million to Deutsche in consideration of Deutsche giving a further Payment Direction Notice to the Trustee and MFL.  Thus Deutsche, as initial unit holder, gave two Payment Direction Notices to the Trustee and MFL as contemplated and provided for in the Procurement Agreement.  The giving of those notices bound subsequent holders of the stapled instruments.  It also bound the Trustee and MFL.  The result of Deutsche giving the two Payment Direction Notices was that MBL became entitled, and remained entitled, at its discretion to give a notice to the Trustee so as to trigger a ‘Payment Direction Event’ – see par (c) of the definition of ‘Payment Direction Even’. 

12. Prior to a Payment Direction Event occurring, the Trustee and the holders of the income securities would have, as against MFL, in respect of their notes, an entitlement to interest on the notes at a premium on the average mid rate for 90 day bank bills.  The entitlement would be non-cumulative and could not exceed the after-tax profits of MBL.  The rights of the Trustee and the holders against MFL were unsecured.  The rights of the Trustee for payment of interest and principal were subordinated to all other creditors of MFL.  The notes were perpetual, not being redeemable at the option of the Trustee or at the option of a noteholder.  MFL had an option to redeem the notes after five years but only with the written approval of APRA.  It could, however, redeem the notes before five years for specified regulatory reasons subject to APRA not objecting to such redemption.  MFL was required to redeem upon the winding up of MFL for $100 per note and accrued interest.  If MFL were wound up that would give rise to a Payment Direction Event.  Clauses 4.15, 4.16 and 4.17 of the Macquarie Income Securities Trust Deed would be enlivened (see cl 4.15(a)).  The amount payable upon the winding up of MFL would be a ‘Redemption Amount’ as that expression is defined in the Macquarie Income Securities Trust Deed.  This amount would not be paid to the holders but rather to MBL.  A holder was not a creditor of MFL and would have no right to sue for interest or principal.  However the Trustee had limited creditor enforcement rights.  If a Payment Direction Event occurred all amounts otherwise payable to the Trustee or a Holder would be payable to MBL.  At the same time the rights attaching to the preference shares would be activated. 

13. As a result of the implementation of the transaction documents MFL received subscription moneys of $200 million for the initial issue of two million notes of face value $100 each to Deutsche.  It received that sum on 30 September 1999.  On 19 November 1999 it received subscription moneys of $200 million for the subsequent issue of two million notes of face value of $100 each to Deutsche. 

14. Deutsche sold to retail investors the preference shares and notes as stapled instruments which it had received under the Subscription Deed on 30 September 1999.  It also on-sold the preference shares and notes which were issued to it on 19 November 1999.        

    The Evolution of the Capital Raising Proposals within the Macquarie Group

15. Key participants in the development of the capital raising proposal involving MIS were the following:

    1.Gregory Ward, the head of the Corporate Affairs Group of MBL and a director of MFL and other MBL subsidiaries.  As Head of Financial Operations for the group he was responsible for managing the capital requirements.

    2.Paul Robertson, Group Treasurer of MBL responsible for the debt side of MBL’s capital.

    3.Paul Donnelly, Executive Director of the Equity Capital Markets Division of MBL.

    Each of these persons gave evidence. Their credit was not attacked although the learned primary judge did not accept all of their evidence about the development of the structure for the issue of the MIS. 

16. In June 1999 retail investors in Australia were showing interest in stock exchange tradeable hybrid perpetual income securities redeemable by the issuer and returning ‘interest’ at rates slightly better than interest on fixed or at call deposits.  Such securities qualified as Tier 1 capital under the minimum capital ratios for banks fixed by the Basle Committee on Banking Supervision of the Bank of International Settlements. 

17. Messrs Ward, Robertson and Donnelly were interested in the possibility of MBL raising money by the issue of securities of that kind.  A debt instrument qualifying as Tier 1 capital would make a larger pool of funds available for investment than by way of equity raising.  The holders of such securities would not have the capital and dividend rights of shareholders.  This form of debt was cheaper than equity.  Advantageously to the borrower the moneys raised on such securities did not have to be repaid in the medium term.  Shareholders in MBL generally earned a return on their equity of 20% to 25%.  Long term subordinated debt instruments were at that time being issued at 100 to 200 basic points over the prevailing bill rate. 

18. The initial structure proposed for capital raising was called a Capital Escrow Security Structure (CES).  It was also referred to by the learned primary judge as MIS, an acronym for Macquarie Income Securities.  It involved a form of perpetual debt trust security. 

19. A memorandum dated 16 June 1999 was prepared by Mr Merven, the director of the Risk Management Division of MBL. He attached it to a letter which he sent to APRA. He sought APRA’s advice on whether a capital raising instrument as described in the memorandum would be classed as Tier 1 capital. The memorandum described a security in the form of an unpaid preference share linked to a fully paid debt security. The shares and the notes would be issued by MBL. The notes would be issued to a trustee and the trustee would in turn issue investors with income units carrying rights to receive interest distributions. The preference shares were not to be redeemable by MBL before the fifth anniversary of their issue. The interest on the notes was to be paid semi-annually in arrears at the same time and at the same rate as dividends payable on the preference shares. The learned primary judge found that the memorandum related to the CES structure. He found that MBL was then considering the capital raising using that structure in the context of the acquisition by MBL of the BTIB business [17]. APRA advised, on 18 June 1999, that the Capital Escrow Securities would qualify for inclusion in the Tier 1 capital of the bank subject to certain qualifications which are not material for present purposes. APRA’s advice was given in the context of guidelines then applicable to capital adequacy requirements. It did release new guidelines changing capital adequacy requirements on 23 June 1999 but never revoked its approval for the CES structure.

20. The CES structure and a Perpetual Loan Note issue were canvassed at about the same time in a memorandum dated 16 June 1999 to Messrs Ward, Robertson and Merven from other members of the Corporate Affairs Group. The CES structure was described in the memorandum as involving an issue by the Bank of a ‘perpetual loan note out of Australia and an unpaid preference share’. The memorandum was directed to a capital raising of $150 million of subordinated debt as part of an overall debt financing package in connection with a possible acquisition. It was varied to satisfy rating agencies. At a meeting held on 18 June 1999 the Board of MBL resolved that the BTIB acquisition be approved, that there be a placement of ordinary shares to $100 million and that $200 million worth of MIS and $150 million of converting preference shares be issued. A $2 billion stand-by funding arrangement with Deutsche was approved. Some changes were made at a Board meeting of 20 June. On 25 June 1999 the Board announced its proposed acquisition of BTIB and the funding arrangements. At that stage the income securities which were to be issued accorded with the CES structure [22].

21. A further memorandum refining the structure of the income securities was circulated by Mr Donnelly to Messrs Ward and Robertson on 13 July 1999. He proposed the issue to investors of preference shares in MBL stapled to income units in the Macquarie Income Securities Trust. The assets of the Trust would be Loan Notes issued by Macquarie. Unit holders would get distributions based on interest payable on the Notes. The distributions would be paid at a floating rate calculated by reference to the 90-day bank bill rate. The proposal was approved by APRA on 15 July at a meeting of APRA representatives with Mr Moss [24].

22. An alternative financing structure was developed between July and late August.  What emerged on 2 September 1999 was a structure designated MIS II.  The learned primary judge described this as ‘a loan issue not involving MFL’.  The details were not clear.  It still involved only MBL.  The terms of issue of the preference shares under the MIS II structure were different from those under the CES structure. 

23. MFL was inserted into the arrangements in a third structure proposed between 2 and 16 September 1999.  Under this proposal, MFL would issue the notes.   MBL would issue the preference shares.  The preference shares were to be issued fully paid, rather than unpaid.  The notes were to be secured by a Debenture Trust Deed.  They would be issued initially to an underwriter.  The proposed underwriter was Deutsche.  Deutsche would then sell to MBL the right, in certain circumstances, to require the Debenture Trustee to pay interest and principal due on the notes to MBL instead of the holders of the notes.  A direction from MBL to make such a payment was the ‘Payment Direction’ referred to in the documents which have already been outlined.  Investors would purchase Deutsche’s rights in the debentures subject to the Payment Direction.  They would also purchase the preference shares from Deutsche.  That was necessarily so because the securities were ‘stapled’.  Upon the payment Deutsche would cease to receive interest on the notes and would instead receive dividends on the shares they held.

24. The provision in this revised structure for fully paid preference shares may have been considered necessary because the proceeds of the income securities issue were to be on-lent from MFL to one of MBL’s subsidiaries, Macquarie Leasing Pty Ltd, to meet its operational and business funding needs.  APRA’s rules put a 30% limit on intra-group loans by banks calculated as a percentage of the bank’s issued capital.  In the case of MBL its intercompany loans were capped at $250 million.  At the time that the capital raising was being considered, Macquarie Leasing had borrowed $325 million from MBL pursuant to specific approval from APRA to do so.  Any further lending from MBL to Macquarie Leasing would breach APRA’s requirements.  The learned primary judge accepted that the APRA guidelines did have the effect of limiting intra-group loans.  At that time MFL, which had acted as a deposit taking intra-group financier since its incorporation, was inactive.  It had not made any transactions since 1992. 

25. Mr Ward said in his affidavit evidence of 1 April 2003 that he selected MFL because it had been operating as a deposit-taking intra-group financier since incorporation in about 1984 although it had ceased accepting deposits from the public in about 1992.  By 1999 it was holding deposits for a small number of corporate research and development syndicates which it on-loaned to its parent company, Macquarie Acceptance Ltd, which was in turn a subsidiary of MBL.  He said:

    ‘MFL had a clean corporate history, which made it easier to review from a due diligence perspective for the purpose of the issue of the MIS prospectus to the public and its structure was to be simplified by transferring all of its issued capital to MBL from MFL’s existing parent.’

26. In cross-examination before his Honour Mr Ward agreed that the shift from capital escrow securities to the final form of the transaction was not something requested or sought by MFL.  The directors of MFL did not ask that it become involved. 

27. The learned primary judge seems to have accepted that MFL was selected to participate in the structure because it was inactive and had a clean balance sheet. 

28. Between 17 and 23 September 1999 a decision was made to proceed with the last described structure.  Mr Donnelly advised Messrs Robertson and Ward on 17 September 1999 that the issue of MIS would be cheaper than the nearest equivalent security namely converting preference shares.  He recommended that the MIS proposal should be pursued.  Mr Robertson wrote to the Board on 23 September 1999 outlining the structure ultimately adopted and the background to it.  Deutsche agreed to underwrite the issue and there were meetings with APRA seeking approval for the amount of $250 million to be included in MBL Tier 1 capital and any additional amount in Tier 2 capital.  APRA had given its approval by 27 September 1999.  The recommendation to adopt a new structure was approved by the Boards of MFL and MBL on 30 September 1999.

29. The public issue, which closed on 15 November 1999, was oversubscribed by $200 million yielding total proceeds of $400 million.  MFL on-lent this to Macquarie Leasing for use in its plant and equipment leasing business.  MFL earned $28,433,226 in the year of income by way of interest from Macquarie Leasing.  It paid $27,833,226 to the Trustee for on-payment for the noteholders in the same year. 

    The Issues for Decision by the Learned Primary Judge

1. The learned primary judge identified three issues for decision:

   1.Whether the amount of ‘interest’ incurred by MFL was an allowable deduction under s 8-1 of the 1997 Act.

   2.Whether the ‘interest’ if otherwise an allowable deduction under s 8-1 of the 1997 Act, it is not deductible because of the application of s 82R(3) of the 1936 Act.

   3.Whether the provisions of Part IVA of the 1936 Act operated to disallow to MFL the deduction for ‘interest’.

   The Reasons for Decision of the Learned Primary Judge

2. After setting out the factual background outlined above his Honour dealt with the issues for decision which he had identified. 

3. On the issue of deductibility under s 8-1, the Commissioner submitted to his Honour that the ‘interest’ earned by MFL was not deductible as it did not fall within either of the two positive limbs of s 8-1 of the 1997 Act.  That is to say it was not incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing that income.  Alternatively, it fell within the exclusion in subs 8-1(2) as a loss or outgoing of a capital nature. 

4. His Honour set out a number of general propositions which, omitting reference to authority, can be paraphrased as follows:

   1.Interest will ordinarily be an allowable deduction under s 8-1 if incurred in the course of an income producing activity or business.

   2.Interest is ordinarily a recurrent or periodic payment securing ‘the use of borrower money during the term of the loan’.  There may nevertheless be circumstances in which interest will be seen as unrelated to the raising or maintenance of the borrowing and thus, perhaps, on capital account.

   3.The question of deductibility is not determined by reference to the label which the parties attach to the outgoing. 

   4.There must be a borrowing before what is paid can be regarded as interest.  That presupposes that the lender is entitled to a return of the money lent.

   5.The necessary conditions for deductibility are to be found within the terms of s 8-1.  It is not necessary to the deductibility of a perpetual debenture that the transaction be  characterised as a loan or a borrowing and the amount paid to debenture holders as ‘interest’.

   6.An outgoing, to be deductible, must be ‘incidental and relevant’ to the gaining or production of assessable income or the business the purpose of which is the gaining or production of assessable income.  There must be a sufficient connection between the outgoing on the one hand and the gaining or producing of assessable income or the business as the case may be. 

   His Honour found that there was no need in the present case, to distinguish between the first limb of s 8-1 relating to ‘gaining or producing assessable income’ and the second limb relating to expenditure ‘in carrying on a business’.  MFL was carrying on a business.  The question was whether the outgoing for ‘interest’ was incurred in, that is to say ‘in the course of’ either its income producing activity or its business.

5. The Commissioner submitted that the role of MFL did not arise out of any business activity which it carried on.  The insertion of MFL into the arrangements followed a change in their structure and the need to find a company other than MBL to be the ‘borrower’.  As to that his Honour observed that the issue of the notes to Deutsche was intended as part of an arrangement that MFL would use funds borrowed through Deutsche from the public to make loans to subsidiary companies of the MBL group and particularly Macquarie Leasing.  It would do so at an interest rate in excess of the ‘interest’ which MFL incurred.  The subjective purpose of the parties did not differ from the objective purpose to be ascertained from the terms of the transaction.  It could be said that from MFL’s perspective it entered into the transaction intending to use the ‘borrowed’ funds in its business of lending at interest to companies of the MBL group.  The intention was demonstrated by the actual use made of the funds.  The fact that the interests of MBL were served was not fatal to characterisation of the ‘interest’ paid by MFL as an allowable deduction.    He based these observations, however, upon the stated premise that attention was directed only to that part of the transaction relating to the notes issued to Deutsche.  The income securities comprised both notes and preference shares stapled in the sense that they could not be transferred separately.  This composite character raised more complicated questions which were better considered when determining whether the ‘interest’ paid by MFL was capital in nature.

6. His Honour set out some uncontroversial principles relevant to the capital/revenue characterisation question.  In so doing he appears to have proceeded upon the premise, without any explicit finding, that the interest fell within the first and second limbs of s 8-1 and, unless of a capital character, would have been deductible.

7. The propositions set out by his Honour were:

   1.It is necessary in determining whether an outgoing is deductible to consider its essential character.

   2.The question whether a loss or outgoing is on capital account must be considered ‘from a practical and business point of view’ and by reference to ‘what the expenditure is calculated to affect’.  This approach does not exclude from consideration the legal rights obtained by the incurring of the loss or outgoing.

   3.The classic exposition of capital is set out in three tests formulated by Dixon J in Sun Newspapers Ltd & Associated Newspapers v Federal Commissioner of Taxation (1938) 61 CLR 337 at 363:

   ‘There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward …or by making a final provision or payment so as to secure future use or enjoyment.’

   His Honour also quoted from the judgment of Dixon J at 359:

   ‘The distinction between expenditure and outgoings on revenue account and on capital account corresponds with the distinction between the business entity, structure or organization set up or established for the earning of profit and the process by which such an organization operates to obtain regular returns by means of regular outlay, the difference between the outlay and returns representing profit or loss.  The business structure or entity or organization may assume any of an almost infinite variety of shapes and it may be difficult to comprehend under one description all the forms in which it may be manifested.’

8. His Honour observed that under the Australian income tax system a deduction is not available for dividends paid by a taxpayer company on its share capital.  A rationale for that rule is that dividends are a distribution or division of profit after that profit has been ascertained so they cannot be treated as part of the cost of earning or deriving that profit.  A declaration of a dividend is subsequent to the relevant business activity.  The rule can also be explained by the proposition that a dividend is part of the cost of the fixed capital of the business so it is related to the business entity or the structure rather than the process by which it operates. 

9. His Honour saw some significance for the present case in the rationale for the non-deductibility of share dividends.  He said (at [56]):

   ‘What distinguishes the present case from a case where “interest” is payable on a loan or for that matter on perpetual or irredeemable debentures is the connexion between the note issue and the preference share issue and in particular the effect of the procurement agreement and payment direction.’

   His Honour referred to those aspects of the arrangements whereby Deutsche subscribed for the preference shares and the notes and MBL immediately paid Deutsche an amount equal to that which Deutsche had paid for the shares.  They had the result that under certain specified events (Payment Direction Events) the principal and interest under the notes was payable to MBL and not Deutsche or its successors in title.  The consolidated accounting for the Macquarie group left the shares as capital but eliminated the notes although, in his Honour’s opinion, not much turned upon the way consolidation applied to the preparation of  group accounts. 

10. MFL submitted to his Honour that the stapling of the notes to the preference shares and the fact that the issue of income securities advantaged MBL and the group generally did not justify departure from a juristic analysis of the advantages secured by the issue of the notes by MFL.  Until the Payment Direction was made, what was payable by MFL was interest and the holders of the securities received interest and nothing else.  The Payment Direction might never be given.

11. In his Honour’s opinion the submissions of MFL ignored the relationship between the notes and preference shares brought about by the Procurement Agreement.  They also ignored the fact that no dividend was payable on the MBL shares while ‘interest’ was payable to the notes’ holders.  The so called interest which MFL was obliged to pay was not ‘in a practical business sense’ consideration paid by MFL for the noteholder (Deutsche or its successors) being kept out of the funds advanced by Deutsche and used to subscribe for the notes.  The noteholders might never obtain repayment of the funds advanced.  They might be left to look for their rights as shareholders in MBL.

12. His Honour said (at [61]):

    ‘Although if the stapled securities are looked at individually the legal rights of MFL to the holders of the notes may be seen to have the character of interest, that seems to me to ignore the composite nature of the security and the direction of Dixon J to look at what the interest is paid for from a practical and business like point of view.  It seems to me to give undue weight to form and to disregard the substance of the transaction to characterise what is said to be “interest” as the price of the notes only.  From a juristic point of view it is not irrelevant that under the Macquarie Income Securities Trust Deed, the principal is not redeemable at the option of the Trustee Company or at the option of the holder of the note, that the holder of the notes is not a creditor of MFL and has no right to sue for interest or principal arrears.  The trustee also has limited creditor enforcement rights.  It is not insignificant either that the issue of the income securities was related to the capital adequacy requirements of MBL seen in the context of MBL’s acquisition of the BTIB business.  Nor does it assist MFL that interest payments on the notes were dependent upon there being distributable profits of MBL.  In saying this it must be accepted that the “interest” was payable not by MBL but by MFL, although obviously a note holder was, as a consequence of the structure adopted, in fact a shareholder of MBL.’

13. His Honour referred to Australian National Hotels Ltd v Federal Commissioner of Taxation (1998) 19 FCR 234 and the joint judgment of Bowen CJ and Burchett J in that case as providing support for treating the MFL ‘interest’ as on capital account. In that case their Honours held premiums on policies of insurance against exchange losses were allowable deductions under s 51(1). They said, inter alia, that (at 240):

    ‘… there is a special feature of loan capital, which flows from the ephemeral nature of a loan.  The cost of securing and retaining the use of the capital sum for the business, that is to say, the interest payable in respect of the loan, will be a revenue item.  It creates no enduring advantage, but on the contrary is a periodic outgoing related to the continuance of the use by the business of the borrowed capital during the term of the loan.’

    His Honour placed significance upon the reference in the joint judgment to ‘the ephemeral nature’ of a loan.  In the present case the close relationship between the notes and the preference shares as well as the fact that MBL could ensure the loan was never repayable but that an investor was left only with MFL preference shares, could be seen to produce a different result (at [63]):

    ‘The present case is not concerned with the cost of acquiring or maintaining a loan of an ephemeral character, but rather with the cost of a capital raising which so far as MBL is concerned is the cost of a permanent injection of capital.  The circumstance that the capital is in the present conditions used to make loans to Macquarie Leasing is not determinative.’

14. Because the case before him was argued on an all or nothing basis, his Honour did not consider the question whether any relevant apportionment could be made on the basis that the ‘interest’ amount payable by MFL was in truth consideration for both the loan to MFL and the provision of capital to MBL.  In the event he found the ‘interest’ paid by MFL not deductible.

15. His Honour dealt with a number of other submissions made on behalf of MFL and his observations in respect of those submissions may be summarised briefly:

    1.The payment of interest by MFL was capped by reference to the profits of MBL if the notes were considered separately.  But the correct analysis was to look at the two issues as a composite transaction.

    2.The noteholders were not shareholders in MFL and the interest paid was not a distribution of MFL’s profits or those of MBL.  The real question was not whether the so-called ‘interest’ was a dividend, but whether it was on capital account.

    3.There is no doctrine that the law allows taxation by commercial equivalence – Mullens Investment Pty Ltd v Federal Commissioner of Taxation (1976) 135 CLR 290 at 301. The question to be determined was whether the so-called interest was on capital account and secured an enduring benefit.

    4.While the accounting treatment of the ‘interest’ in the consolidated accounts of the group was not determinative of the issue of deductibility, it was not irrelevant.

    5.Mr Ward’s view that the notes might be restructured or redeemed after a review within five to 10 years, if commercially appropriate to do so, was not relevant to whether the moneys paid by MBL were interest. 

    6.The fact that the ‘interest’ did not reduce the amount owing on the notes was of no relevance.

    7.Although moneys obtained from bill transactions can be treated as circulating capital of a finance company, that expression says nothing about the deductibility of the ‘interest’.

16. Having determined that the interest was not deductible under s 8-1 because of its capital character under s 8-1(2), his Honour then turned to the second issue, namely the application of s 82L of the 1936 Act. This depended upon whether the MIS were convertible notes. He took the view that there was little he needed to say on that issue.

17. The Commissioner submitted that on the proper construction of the terms of the Macquarie Income Securities Trust Deed the ‘amount of the loan’ to MFL could be converted into shares in the capital of MBL. If either of these submissions, which relied upon the definition of the expression ‘convertible note’ in s 82L of the 1936 Act, were correct then deductibility would be disallowed because of failure to comply with s 82SA(1)(d) of the 1936 Act.

18. His Honour held that at no time was there a note which was to be or could be converted into shares of MBL.  Deutsche was issued with fully paid shares in that company from the outset.  The rights attaching to them could vary depending on what happened to the note in MFL but the change in rights involved no conversion into shares.  Nor was there any right in the noteholders to have preference shares allotted to them.  The shares had already been allotted.  His Honour concluded that the provisions of Div IIIA of the 1936 Act had no application and that any interest otherwise deductible would not be denied deductibility under that Division. 

19. His Honour then considered Part IVA of the 1936 Act. Because he had found that the interest payable on the notes was not deductible to MFL, the anti-avoidance provisions of the 1936 Act in Part IVA had no application.  Nevertheless, in the event that he was wrong on the deductibility issue his Honour considered whether Part IVA would apply to disallow a deduction for the ‘interest’ paid by MFL. 

20. The first question which his Honour addressed for the purposes of Part IVA was whether there was a ‘scheme’ as defined in s 177A(1) of the 1936 Act. The definition of ‘scheme’ can include a course of conduct or ‘an action’. The Commissioner formulated the relevant scheme in different ways but his Honour focussed only upon the first. That formulation, as described by his Honour, was ‘the whole of the steps entered into by MBL and MFL in issuing the preference shares and the notes including the giving of the Payment Direction pursuant to the Procurement Agreement’ [75]. His Honour was of the view that unless the Commissioner could succeed by reference to all of the steps taken, it was difficult to see that he could succeed by reference to only some of those steps which were reflected in the second and third formulations of the scheme proposed.

21. His Honour identified the relevant tax benefit, purportedly cancelled, by the application of Part IVA and the Commissioner’s notice of cancellation as ‘the deduction for “interest” which on the assumptions [made] for the purpose of considering Part IVA is allowable to MFL’.  He found that if the scheme involving the issue of MIS had not been entered into or carried out, MBL would have needed to raise some sort of capital to satisfy the capital adequacy requirements of APRA.  There were a number of mechanisms for raising capital including equity raising and the structures canvassed by Mr Donnelly in the course of the development of the capital raising arrangements.  The CES (or MIS) and MIS II structures each involved an interest component although neither involved MFL as a party.  Only MIS III had MFL as a party and only MIS III involved a tax deduction for interest being obtained by MFL.

22. His Honour accepted that if capital raising were not to be pursued through some form of preference share issue it was inevitable that if there were to be a borrower some company in the group would have to pay ‘interest’.  It would be desirable from the Macquarie Group’s perspective that interest payable should be a tax deduction because it would affect the cost of the finance.  There was, however, no obvious reason why MFL was inserted into the scheme as against any other company in the group.  If there were any particular reason for its choice, it would seem to be because it was virtually dormant.  The corporate name ‘Macquarie Finance Ltd’ was desirable for a public issue.  It had undertaken some financing transactions in the past. 

23. His Honour considered what might reasonably be expected to have happened had the scheme not been entered into or carried out.  MFL would not have obtained any tax deduction albeit some other company might have.  MFL was not critical to the scheme at all, although it may well have been critical to any alternative scheme that some company pay interest.  In his Honour’s view, posited on the hypothesis of the deductibility of the ‘interest’ on the notes,  there was a tax benefit to MFL.

24. His Honour had regard to the eight factors required to be considered under s 177D(b) in determining the dominant purpose of MFL or some person, whether or not MFL, who entered into or carried out the scheme. In that connection he gave close consideration to the judgment of the High Court in Federal Commissioner of Taxation v Hart (2004) 217 CLR 216.

1. His Honour posed the question for decision thus (at [110]):

   ‘Ultimately, it seems to me that what is to be considered in the present case is whether, having regard to the eight factors in s 177D(b) it would be concluded that the dominant purpose of some person who entered into or carried out the scheme with the particular features I have mentioned was the obtaining for MFL of tax deductions for the ‘interest’ or whether it would be concluded that the dominant purpose of all persons who entered into or carried out the scheme with those particular features was the obtaining of Tier 1 capital.’

2. His Honour observed that a strict application of a view taken by Gummow and Hayne JJ in Hart might be thought to exclude the raising of Tier 1 capital as a purpose, this being a subjective matter.  However, he did not think it could be excluded both because that was not the approach adopted by Gleeson CJ and McHugh J, and perhaps Callinan J, and because, in any event, the need for capital could be seen to be objectively determined.

3. His Honour considered the manner in which the scheme was entered into.  He held that it took its form because of the ability of MFL to obtain a taxation deduction.  The Procurement Agreement and Payment Direction were explicable only by reference to have both the benefits of a share capital raising and the allowance of an interest deduction.  MFL’s participation was influenced by the desire to ensure a tax deduction to a company in the group, a deduction that would be unavailable had there been a share issue. He found that the obtaining of Tier 1 capital was a significant purpose of MBL.  The tax deductibility of interest payable by MFL was likewise important.  Debt financing was cheaper and a more flexible way of raising finance for the group.  This advantage was only partly attributable to the tax deductibility of the interest. 

4. The question his Honour then posed in relation to the first of the eight factors was whether the tax purpose or the commercial capital raising purpose was predominant in adopting the arrangement which was in fact entered into and having the particular features he had noted.  His Honour found the question very difficult but concluded that what might be called the tax purpose predominated, although only marginally. 

5. The second factor was the form and substance of the transaction.  Its substance was the raising of share capital.  Its form was a combination of debt and equity capital raising.  The difference between the two could be accounted for by the availability of the tax deduction to MFL.  As a matter of form there was a capital raising of $400 million and a debt raising of the same amount.  As a matter of substance, the real cost to the group after the Procurement Agreement and payment from MBL to Deutsche was only $400 million.  He acknowledged that there was a commercial advantage in terms of cost of finance and flexibility to be taken into account in weighing up which purpose predominated.  Although the conclusion to be reached involved a question of judgment, again he thought it was the tax purpose which predominated. 

6. The third factor, the timing of the transaction, had little part to play.  Its timing and the period during which the scheme was carried out were consequences of commercial factors unaffected by taxation matters. 

7. The fourth factor required consideration of the taxation result.  That pointed to taxation as the dominant purpose of MBL and MFL and those directing those companies.

8. On the fifth factor, changes in the financial position of MFL resulting in the scheme, his Honour found that the matters arising under that heading were either neutral or favourable to a conclusion of a non-tax purpose.  He found the three remaining factors to be either neutral or not suggesting a conclusion that the dominant purpose of the scheme was the obtaining of a deduction for interest.  He concluded:

   ‘It follows, therefore, that if, contrary to my view, the “interest” payable on the notes was an allowable deduction to MFL in the year of income, then that deduction constituted a tax benefit which MFL obtained from a scheme to which the provisions of Part IVA applied and in respect of which the Commissioner was entitled to make a determination under s 177F disallowing to MFL the deduction. I might add that I reach this conclusion with some reluctance. I doubt if the legislature would have regard to the present “scheme” as involving the application of Part IVA when the Part was enacted in 1981. However, it seems to me that the approach of the High Court in Hart requires me to reach the conclusion I have.’

   Grounds of Appeal and the Issues in the Appeal

9. There were some six grounds of appeal and a notice of contention filed by the Commissioner.  They raised the following three issues (as defined in the Commissioner’s outline of submissions):

   1.Whether the ‘interest’ incurred by MFL in favour of the holders of the stapled instruments in respect of the year of income ended 30 September 2000 was incurred by MFL in gaining or producing its assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing its assessable income within the first or second positive limbs of ss 8-1(1)(a) and (b) of the 1997 Act.

   2.Whether the outgoings are denied deductibility under s 8-1 on the basis that they fell within the capital exception in s 8-2(a).

   3.Alternatively to 1 and 2 above, whether the provisions of Part IVA of the 1936 Act operate to disallow the deductions of the outgoings incurred by MFL.

   The Deductibility Issue – Statutory Framework

10. Section 8-1 of the 1997 Act provides:

    ‘(1)     You can deduct from your assessable income any loss or outgoing to the extent that:

    (a)it is incurred in gaining or producing your assessable income; or

    (b)it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

    (2)      However you cannot deduct a loss or outgoing under this section to the extent:

    (a)      it is a loss or outgoing of capital, or of a capital nature;

    …

    (d)      a provision of this Act prevents you from deducting it.’

    The Deductibility of the ‘Interest’ paid by MFL under s 8-1(1) and 8-1(2) – The Contentions

11. MFL supported his Honour’s finding of deductibility under s 8-1 but challenged his conclusion that the interest was an outgoing of capital or of a capital nature.  Its principal submissions may be summarised thus:

    1.Deductibility under s 8-1(1) turns on whether the outgoing was incurred by MFL in gaining or producing assessable income or in carrying on a business to that end.  This requirement is met.  The obligation to effect the outgoing was incurred in raising funds deployed directly by MFL in earning interest income.

    2.In determining whether the outgoing was of a capital character, for the purposes of s 8-1(2), a legal or juristic analysis must be applied rather than a commercial view.  On such an analysis the outgoings incurred by MFL obtained for it, under the instruments binding on it and the transactions it entered into, no more than the use of the proceeds of issue of the notes.  The outgoings served only the period to which they related and yielded a periodical return commensurate with their amount. 

    3.The learned primary judge erred in having regard not to the rights and obligations of MFL under the transaction but to a perception of a ‘practical and business point of view’ taking into account the advantage obtained by MBL.

12. The Commissioner submitted that his Honour erred in finding deductibility under s 8-1(1) but supported his conclusion that the interest payments made by MFL were outgoings of capital or of a capital nature under s 8-1(2).  The Commissioner’s principal propositions were as follows:

    1.MFL’s liability for the interest in the relevant year of income arose from the transaction documents.  The purpose of that liability can be ascertained from them. 

    2.Although MFL is a separate taxpayer, its activities are to be examined in the context of the role it played in the affairs of the MBL group of companies.

    3.The purpose of a taxpayer in incurring an obligation to make an outgoing can be determinative of the deductibility of the outgoing.

    4.MFL’s paramount objective purpose was not to raise money in order to on-lend it to a sister MBL company in order to derive assessable income.  Rather its purpose was to procure advantages to MBL. 

    5.The advantages MFL procured for MBL were not merely ‘incidentally’ derived by MBL.  The procuring of those advantages was the purpose of MFL in entering into the transaction and were to be pursued even if the outgoings of MFL were not deductible. 

    6.In support of the characterisation of MFL’s outgoings as capital the Commissioner submitted that by virtue of the transaction documents, MFL acquired an asset of an enduring nature in the form of the right as against Deutsche and subsequent Holders of the stapled instruments to the retention and continued use (in perpetuity) of the money raised by it from Deutsche.

    7.The funds raised by MFL under the Transaction Documents were lent by it to a related MBL company, namely Macquarie Leasing.

    8.MFL’s participation in the Transaction Documents was a device adopted by MBL to overcome the APRA imposed limitation on the level of inter-group loans by MBL.  MFL became a party to the documents at the behest of, and for the purposes of, MBL.

    9.MFL secured as against Deutsche and subsequent Holders of the stapled instruments the retention and use in perpetuity of the funds raised by it from Deutsche whether or not it discharged its covenant to pay interest.  The non-payment of the obligation to pay the outgoings cannot be enforced by the Holders of the stapled instruments.  The Trustee may enforce payment by MFL but that right is subject to the right of MBL to trigger a Payment Direction Event.  The Trustee may only require repayment by MFL under the Transaction Documents subject to MBL’s legal right to require payment to itself of $400 million under the Payment Direction.

    10.MFL’s obligation to pay the outgoings to the Holders of the stapled instruments did not secure the continued use or retention of the money.  The obligation incurred by MFL could be said to have been the price paid for the acquisition of funds by MFL from Deutsche but that obligation did not secure the retention of those funds as against Deutsche and the subsequent holders of the instruments.

    Deductibility of MFL Interest Payments under s 8-1(1) of the 1997 Act

13. On the contentions advanced by the Commissioner the purpose for which MFL paid ‘interest’ to the Trustee for the noteholders is central to the characterisation of that outgoing under s 8-1(1) of the 1997 Act.   The role of purpose in ascertaining deductibility under s 8-1 and its statutory ancestor, s 51 of the 1936 Act, is the subject of a considerable body of case law which yields a variety of approaches.  In that context it is useful briefly to retrace the legislative history and some of the judicial exegesis.  

14. Section 8-1 of the 1997 Act reflects the language of s 51(1) of the 1936 Act. That section had its statutory ancestry in s 23(1)(a) of the Income Tax Assessment Act 1922 (Cth) which provided for the deductibility of:

    ‘All losses and outgoings (not being in the nature of losses and outgoings of capital) including commission, discount, travelling expenses, interest and expenses actually incurred in gaining or producing the assessable income ...’

    It was to be read subject to s 25(e) which excluded from the class of deductible expenses:

    ‘money not wholly and exclusively laid out or expended for the production of assessable income.’

    Those provisions reflected those of ss 18(a) and 20(e) of the Income Tax Assessment Act 1915 (Cth) save for the exclusion of capital losses. The provisions of the 1915 Act were modelled on the British Income Tax Acts and similar sections in the Income Tax laws of the various States of Australia.

15. The drafting of the 1936 Act to include expenses necessarily incurred in carrying on a business and the exclusion of the disallowance principle in s 25(e) of the 1922 Act was foreshadowed in the Third Report of the Royal Commission on Taxation 1934.  At par 554 of that Royal Commission Report it was said:

    ‘The problem, therefore, is to draft sections relating both to the allowance and disallowance of deductions which will make it clear that the taxpayer is entitled to claim any expenditure properly incurred by him in the production of his income, whether derived from a trade or otherwise, without at the same time opening the door so wide as to permit the allowance of deductions for which there is no justification.  This might, perhaps, be accomplished by means of a section under which the taxpayer would be allowed as deductions all losses and outgoings incurred in gaining or producing the assessable income, or in carrying on a business for the purpose of gaining or producing such income; with a proviso or limiting section excluding the right to deduct any losses or outgoings of capital, or losses or outgoings incurred in relation to the gaining or production of income exempt from tax.’

16. The exclusion from deductibility created by s 25(e) of the 1922 Act required that the relevant expenditure be ‘wholly and exclusively laid out for the production of assessable income’ (emphasis added).  The word ‘for’ imported a purpose test – Herald and Weekly Times Ltd v Federal Commissioner of Taxation (1932) 48 CLR 113 at 118 (Gavan Duffy CJ and Dixon J), 122 (Starke J) and 123 (Evatt J). Evatt J put it explicitly (at 123):

    ‘The principal relation is expressed by the word “for”, which is indicative of the object or purpose of the taxpayer in incurring the expenses claimed by him as a deduction.’

17. By way of contrast there was no express or necessarily implied purpose test in s 23(1)(a) which pre-figured the formulations in s 51(1) of the 1936 Act and s 8-1 of the 1997 Act in its reference to ‘outgoings ... actually incurred in gaining or producing the assessable income’. The contrast between s 23(1)(a) and s 25(e) in relation to ‘purpose’ was drawn by Dixon J in Amalgamated Zinc (De Bavay’s) Ltd v Federal Commissioner of Taxation (1935) 54 CLR 295 at 309. He said:

    ‘The expression “in gaining or producing” has the force of “in the course of gaining or producing” and looks rather to the scope of the operations or activities and the relevance thereto of the expenditure than to purpose in itself.  Purpose in itself may be the criterion expressed by the word ‘for’ which occurs in the correlative prohibition contained in s 25(e).’

18. In W Neville & Co Ltd v Federal Commissioner of Taxation (1937) 56 CLR 290 Latham CJ, addressing the operation of s 23(1)(a), pointed to the role of purpose (at 301):

    ‘No expenditure, strictly and narrowly considered, in itself actually gains or produces income.  It is an outgoing, not an incoming.  Its character can be determined only in relation to the object which the person making the expenditure has in view.  If the actual object is the conduct of the business on a profitable basis with that due regard to economy which is essential in any well-conducted business, then the expenditure (if not a capital expenditure) is an expenditure incurred in gaining or producing the assessable income.’

19. On the other hand Dixon J, speaking of s 23(1)(a), said (at 305):

    ‘The condition the provision expresses is satisfied if the expenditure was made in the given year or accounting period and is incidental and relevant to the operations or activities regularly carried on for the production of income.’

    The purpose of an outgoing in cases under the 1922 Act was directly relevant to the application of s 25(e) and it is perhaps not surprising that its significance to the application of s 23(1)(a) was not universally emphasised. There were however some comments about ‘purpose’ within the context of s 25(e) which had a wider application and resonate with contemporary questions of the construction of s 8-1 particularly in connection with imputed corporate purposes. In Robert G Nall Ltd v Federal Commissioner of Taxation (1937) 57 CLR 695, Dixon J said (at 711):

    ‘... purpose is an elusive and indefinite criterion.  The purpose of a payment when a deduction is claimed for it becomes an attribute of the transaction rather than a state of mind in some actual person.’

    In relation to imputed corporate purpose he quoted Lord Sumner’s judgment in  Commissioners of Inland Revenue v Blott [1921 2 AC 171 (at 218):

    ‘… the company, in so far as intention is a mental act, was incapable of having any intention at all... The intention, which the final decision assumed, was one of those so-called intentions which the law imputes; it is the legal construction put on something done in fact.’

    Latham CJ in Nall also made some remarks about imputed corporate intention and the need to accommodate the construction of the Act to allow it to be applied to such intentions or purposes.  He said (at 705):

    ‘The existence of a purpose in the mind of some person cannot always be taken as the test in the application of this provision.  The provision must be applied in the case of corporations, and it is impossible to limit the ascertainment of purpose of the case of a corporation to the ascertainment of the actual mental state of some natural person.  The words, therefore, must, I think, be given an interpretation which does not necessarily depend upon the object which some person or persons desire to achieve, though, in a case where natural persons are concerned, the object which they naturally have in their minds may properly be taken into consideration in determining whether a particular expenditure is made for the production of assessable income.’

    On that basis the section was held to contemplate a test which could be applied objectively and independently of subjective states of mind even though, in the case of natural persons an objective criterion might allow consideration of states of mind (at 705-706).

20. In Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47 the Court applied, to the construction of s 51(1) of the 1936 Act, the construction of s 23(1)(a) so far as it required that deductible expenditure be ‘incurred in gaining or producing the assessable income’. The Court said (at 56):

    ‘For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income it must be incidental and relevant to that end.’

    Purpose, however, was not far beneath the surface with the Court saying, in relation to the facts of the particular case, that the contingencies attaching to the consequences of a claimed outgoing ‘... made it impossible to say that it was a purpose of gaining assessable income that would be exempt’ (at 57).

21. The Full Court of the Federal Court in Federal Commissioner of Taxation v Phillips (1978) 20 ALR 607, held payments by a firm of accountants to a unit trust employing the firm’s secretaries and office equipment were deductible under s 51(1). An object of the arrangement in that case was the reduction of income tax by the diversion of profits through the trust to family members of the partners who held units in it. The payments were nevertheless held to have been necessarily incurred in carrying on the accounting business for the purpose of producing assessable income. The fact that the trust’s profits could have accrued to the firm, absent the arrangement, was not to the point. Bowen CJ and Deane J added (at 609):

    ‘Nor, in the absence of any questions involving the effect of s 260 of the Act, is it to the point that the overall re-arrangement had, with taxation and estate planning considerations in view, been effected to achieve, inter alia, those very results.’

    So too, Fisher J (at 618):

    ‘...having opted to use the services of the unit trust, the deductibility of the expenditure depends upon the character of the expenditure and not the circumstances which brought about the situation in which the unit trust scheme was enabled to offer and to make available the services.  It is my opinion that the latter circumstances are not relevant to the question of the complexion of the expenditure.’

1. In applying Part IVA, it is necessary to determine whether a reasonable person would conclude, having regard to the eight factors listed in s 177D(b) that the relevant parties in entering into and carrying out the particular scheme, had as their most influential and prevailing or ruling purpose, and thus their dominant purpose, the obtaining of a tax benefit in connection with the scheme: Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404 at 422 and 423. As Gummow and Hayne JJ noted in Hart (at [66]) to draw a conclusion about purpose from the eight matters identified in s 177D(b) will require consideration of what other possibilities existed.

2. The primary judge gave individual consideration to each of the eight factors, although he was entitled to take all the specified matters into account in forming a ‘global assessment of purpose’: Federal Commissioner of Taxation v Consolidated Press Holdings Ltd (2001) 207 CLR 235 at [94].

3. Before turning to the primary judge’s consideration of the eight matters, two things should be noted. First, the Part IVA enquiry is driven by objective considerations. Evidence of the subjective motives of persons who entered into or carried out the scheme, such as Mr Ward, is irrelevant, nor is it material to enquire whether or not the participants in the scheme would have proceeded with it had they appreciated that a deduction for the interest payments was not available. The conclusion as to purpose is to be drawn from the eight objective matters listed in s 177D(b). The primary judge concluded (at [109] and [112]) that the obtaining of Tier 1 capital was a significant purpose of MBL and that there were commercial attractions associated with debt financing which are only partly attributable to the tax deductibility of interest. There may be room for a difference of opinion as to whether this finding involves impermissible enquiry about why MBL structured the transaction in the way it was (see, in particular, Gummow and Hayne JJ in Hart at [65]).The primary judge concluded, correctly in my view, that the need for capital, and the comparative advantages and disadvantages of debt and equity were matters capable of objective determination. They are matters to which regard may be had if only in relation to par (vii) of s 177D(b). MFL relies upon these matters in support of its submission that the advantage sought by the issue of the MIS was the addition of Tier 1 qualification to the lower cost of funds afforded by a debt security, rather than the addition of deductibility of outgoings to an issue of share capital.

4. Second, a decision to borrow money at interest, rather than to raise equivalent funds by means of a share issue, would, without more, be unlikely to attract the operation of Part  IVA for the same reasons that a decision to lease business premises, rather than to buy them, would be unlikely to attract the operation of the Part notwithstanding that the potential deductibility of the rent may be an important factor in the decision-making process: see Hart at [15].

5. As Lee J said in Eastern Nitrogen Ltd v Commissioner of Taxation (2001) 108 FCR 27 (‘Eastern Nitrogen’) at [18]:

   ‘To show that a business which depends upon financiers to provide the recirculating capital needed for the operation of the business, has obtained that finance at a net cost, after taking into account provisions of the Act, that is less than the net cost of obtaining finance by another method, will not, in itself, show that the dominant, ruling or supervening purpose of the operator of the business is to obtain the tax benefit constituted by the extent to which deductible outgoings incurred in respect of that borrowing will be greater than the deductible outgoings that would have been incurred under another method of obtaining finance.  That is to say, something more must be shown than that the business has obtained finance at best available net cost after-tax before it can be said that a tax benefit has arisen to which s 177C(1)(b) applies.’

   (i)        The manner in which the scheme was entered into or carried out

6. The primary judge made the following finding in relation to the first factor:

   ‘111.    The first factor to be considered is the manner in which the scheme was entered into.  Clearly the scheme took the form it did (its shape) because of the ability of MFL to obtain a taxation deduction.  That deduction would only be available if funds were the subject of a loan at interest to a company which used the funds borrowed in making loans to other group companies at interest.  A capital raising by MBL say of preference shares would not produce any deduction to any taxpayer and obviously therefore, none for MFL.  Even if it were possible for there to be a raising of Tier 1 capital by MBL in such a way as would give MBL a tax deduction for interest that would not be a deduction available to MFL.  The manner in which the scheme was entered into (that is to say, its form or shape) was thus here dictated by the desire to have the substance of a share offer to the public which qualified as Tier 1 capital, without the constraints of a share issue and, obviously, no interest to be available by way of deduction.  The procurement agreement and payment direction were explicable only by reference to the desire to have both the benefits of a share capital raising and the allowance of an interest deduction.  The participation of MFL was clearly influenced by the desire to ensure a tax deduction to a company in the group, a deduction that would be unavailable had there been a share issue.

   112.     It is clear from the fact that three alternative proposals were considered by staff of MBL that the raising of additional Tier 1 capital could have been achieved in a number of different ways.  Despite a suggestion to the contrary I would find that it was commercially desirable, perhaps even necessary that the MBL group increase its Tier 1 capital.  Perhaps it was not essential to do so just for the purpose of the acquisition of BTIB but the acquisition even if completed by capital available rendered it necessary for additional capital to be raised.  The obtaining of Tier 1 capital was clearly a purpose of MBL and a significant purpose.  Tax deductibility for interest payable by MFL was likewise important to the group.  It is important to note here, however, that debt financing was a cheaper as well as more flexible way of raising finance for the group.  That this was so was only partly attributable to the tax deductibility of interest.  The question then is whether the tax purpose or the commercial capital raising purpose was the predominant purpose in adopting the arrangement in fact entered into and having the particular features I have noted.  I find the question very difficult.  However, in my view what may be called the tax purpose (that is to say the interest deduction to MFL, being the relevant tax benefit) predominates here, although only marginally.

   113.     Among the factors which reinforce the conclusion I have reached is that whether MFL would ever be under a need to repay the lenders was a matter within the control of its parent company MBL.  MBL likewise had no obligation to pay dividends on the preference shares so long as interest was payable on the notes.  Interest payable was limited to there being profits in MBL available.’

7. It was open to MBL or to MFL to raise $200 million per tranche by either a debt instrument or a share issue in that amount. Instead, a hybrid instrument was issued, the purpose and effect of which was found by the primary judge to enable MBL to have the benefits of a share capital raising and to enable MFL to have the benefits of a perpetual debt issue, including tax deductibility of interest, lower cost of funds and greater flexibility in relation to the management of the monies raised.

8. The particular features of the scheme identified by the primary judge involve an element of artifice or contrivance, inasmuch as of the $400 million apparently raised in each tranche, only $200 million remained outstanding in the form of a debt instrument carrying interest.  It was necessary that this amount remain outstanding if a deduction for the interest payments was to be obtained.  The $200 million raised by the share issue was immediately returned to Deutsche in return for the payment direction, which effectively enabled MBL to switch an investor who subscribed for a MIS from debt to equity at the will of MBL.

9. It would thus be concluded from the manner in which the scheme was structured or carried out that at least a reason for MFL’s entry into the scheme structured in that way was for the purpose of enabling MFL to obtain a tax benefit in connection with the scheme.  However, this is not a case, as was found to be the case in Hart, in which the manner in which the scheme was formulated and implemented is explicable only by the tax consequences.  The primary judge found that, tax deductions apart, debt financing was a cheaper and more flexible way of raising funds than equity.  The commercial benefits to MBL and its subsidiaries from adopting the MIS structure and so from the issue of notes by MFL, were not explicable only by the taxation consequences of debt financing.

10. Had the sum of $200 million per tranche been raised by the Commissioner’s ‘alternative hypothesis’, namely an issue of shares other than fully paid shares, such as further converting preference shares in MBL, then no tax deduction would have been available in relation to dividends declared, but this ‘alternative hypothesis’, on the primary judge’s findings, would not deliver the same commercial benefits to MBL and MFL as were obtained by the MIS issue.  There was evidence from Mr Donnelly in terms of a memorandum of 17 September 1999 that the MIS represented a cheaper form of capital to MBL than converting preference shares, and should therefore be pursued.

11. His Honour’s conclusion (at [111]) that: ‘[T]he procurement agreement and payment direction were explicable only by reference to the desire to have both the benefits of a share capital raising and the allowance of an interest deduction’ is an inaccurate summation of his Honour’s findings on primary facts.  The procurement agreement and the payment direction were explicable by reference to a desire to have both the benefits of a share capital raising, and a debt issue which could be treated as Tier 1 capital, but with the commercial advantages (including, but not limited to, tax deductibility) of a debt raising.

12. Once it was determined that the capital raising was to be by way of debt, rather than by way of a preference share issue alone, then it became inevitable that some company within the MBL Group would have to incur an ‘interest’ liability, and it was obviously desirable that any interest payable should be tax deductible, as that affects the cost of the acquisition of the funds.  Whilst it is true that a factor underlying the participation of MFL in the structure (or, for that matter, any other MBL Group company in substitution for MFL) was the desire to secure a tax deduction that would have been unavailable had there been a share issue, there were additional factors also involved, including the commercial advantages of debt finance, and the ability of MFL (or some other MBL Group company other than MBL) to on-lend the proceeds of the MIS issue to Macquarie Leasing.

13. APRA’s guidelines (set out in Prudential Statement C1) require that if an ‘innovative capital instrument’ is to qualify as Tier 1 capital:

    ‘…

    (vi)The instrument must carry no maturity nor be redeemable at the initiative of the holder … The instrument may, however, be redeemable at the option of the issuing bank …

    (vii)Dividend (interest) payments may be made provided they satisfy the requirements in paragraph 19.’

    Paragraph 19 of APRA’s Prudential Statement C1 provides relevantly that ‘[W]ith regards servicing Tier 1 capital instruments, aggregate dividend (interest) payments in any one year should not exceed the earnings of the bank during that year (ie a bank may not pay dividends from retained earnings).’

14. The factors which his Honour relied upon as reinforcing his conclusion that the tax purpose was predominant do not in fact reinforce that conclusion.  They are simply necessary elements of the scheme if it was to receive APRA’s approval as Tier 1 capital, and do not indicate a predominant taxation purpose, as opposed to the more general purpose of securing all of the commercial advantages associated with debt financing, but by means of an instrument which also qualified as Tier 1 capital.

15. All three of the schemes which MBL had under consideration at this time involved a debt/equity combination. Had MBL proceeded with the CES scheme, MBL would have become liable to pay interest on the notes which, (all other things being equal) would have been deductible in its hands. Whether ‘all other things’ would have been equal is unclear. We were told by counsel for the Commissioner, Mr Pagone QC, that it was his client’s expectation that the CES scheme would not have resulted in a deduction of interest payments because the provisions ‘would fall foul of the convertible note provisions’, although this is not a matter which was explored at first instance or developed in argument by Mr Pagone before us. On the other hand, Mr Slater QC contended that the CES scheme did not involve a convertible note as defined in s 82L of the 1936 Act, and that there is nothing to show (or from which one could conclude) that the MIS structure in its final form was adopted to overcome a perceived non-deductibility of interest under the CES structure. Implementation of the CES scheme was not the preferred ‘alternative hypothesis’ or counter factual of either party at first instance or on appeal, perhaps because there were other perceived difficulties (including stamp duty considerations) in its implementation. It is unhelpful to explore the development of the three schemes under consideration at the time because subjective factors impermissibly intrude into that process, and, for all that is known, implementation of any of them might have attracted the operation of Part IVA. Even if it is assumed that the move from the CES proposal to the issue of the MIS was unrelated to tax considerations, the issue remains whether Part IVA applies to that issue.

    (ii)       The form and substance of the scheme

16. The primary judge expressed his conclusion as follows:

    ‘114.    …  Here the substance of the transaction was a raising of share capital.  The form was a combination of debt and equity capital raising.  The difference between the two can be accounted for, in my opinion, by the availability of the tax deduction to MFL.  That the substance was a capital raising by MBL follows the interrelationship of the rights to interest under the notes and the rights applicable to the preference shares stapled with the notes.  While as a matter of form there was both a capital raising of $400,000,000 and a debt raising of the same amount as a matter of substance the real cost to the group after the procurement agreement and payment thereunder by MBL to Deutsche was only $400,000,000, that amount representing the amount required to be shown as a liability in the consolidated balance sheet of MBL as paid up capital.  Further, it can be seen that in substance (and through its guarantee) MBL really incurred a liability to pay dividends in an amount in effect commensurate with the liability of MFL to pay “interest”.  There was no obligation to pay interest unless MBL had profits just as would be the case had there been a dividend payable by MBL under an alternative arrangement.

    115.     However, again it will be important to note that there is a commercial advantage in both cost of finance and flexibility that must be taken into account in weighing up which purpose predominates.  While the conclusion to be reached involves a question of judgment I think here that it is the tax purpose which predominates.  I should add that unlike Spotless and perhaps, unlike Hart the present is not a case where the commercial purpose can only be achieved if the tax purpose is also achieved.’

17. In my view, the principal reason, objectively apparent, for the adoption of the form which the MIS took was to achieve the economic substance of a debt instrument (including interest deductibility) but which also satisfied Tier 1 capital criteria.  The primary judge acknowledged that there is a commercial advantage in both cost of finance and flexibility by the MIS being structured as a hybrid instrument.

18. The scheme involved the issue of a hybrid instrument such that until the occurrence of a Payment Direction Event MFL was liable to pay interest on a debt instrument, but MBL could, in substance transmogrify the holder’s interest into that of a preference shareholder in MBL. The Commissioner’s submissions placed particular emphasis on the fact that in substance the holders of the MIS received a distribution akin to dividends, and had no entitlement to be repaid principal. But investors were invited to subscribe to a perpetual debt instrument, and consideration of matters of form and substance simply leads to the conclusion already reached that the objectively ascertained purpose of those who participated in the scheme having regard to the s 177D(b) factors was to raise capital by an instrument which had the commercial advantages which flow from debt financing, but with features which would also qualify it as Tier 1 capital.

19. Investors in the MIS did not acquire any right to participate in the profits of MBL (the link to the amount of MBL’s profits was a limitation, not an enlargement, of the interest return on the MIS), nor any right to acquire any ordinary shareholding interest in MBL or in any of its subsidiaries.  In this regard they differed in a material respect from the convertible preference shares issued by MBL as part of the same course of fundraising associated with the BTIB acquisition: while the converting preference shares carried a fixed yield (similar to but expected to be higher than the MIS), they did so only for a period of 5 years, following which they were converted into ordinary shares with an effective cost of capital the same as the existing ordinary capital (on which shareholders expected MBL to earn of the order of 26 per cent).  There was evidence that the MIS represented a cheaper form of capital to MBL than the converting preference shares.

    (iii)      The time at which the scheme was entered into and the length of the period during which the scheme was carried out

20. The primary judge found that the third factor, timing, has little part to play, but if anything the third factor may militate against a conclusion of tax purpose.  The MIS issue was but part of a broader fundraising involving issues of ordinary and converting preference shares and the obtaining of lines of credit, with the best mix being a matter of commercial judgment.

21. The Commissioner submits that the primary judge erred in concluding that timing had ‘little part to play’ for the reason that the decision to adopt the scheme was taken soon after obtaining advice about possible structures.  The primary judge declined to draw the inference that the MIS took the form they did as a result of taxation advice.  It has not been shown that his Honour was in error in this respect.  ‘Taxation is part of the cost of doing business, and business transactions are normally influenced by cost considerations.  Furthermore, even if a particular form of transaction carries a tax benefit, it does not follow that obtaining the tax benefit is the dominant purpose of the taxpayer in entering into the transaction’: Hart at [15].

22. I agree with the primary judge’s assessment of this factor.

    (iv)      The result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme

23. The result, as the primary judge held, is that a deduction is allowable to MFL which would not be allowable if it had not issued the loan notes and incurred the expense on them.  But this conveys little more than that MFL obtained a tax benefit in connection with the scheme.  It has little to say about whether it should be concluded that relevant persons who entered into the scheme did so for the dominant purpose of enabling MFL to obtain a tax benefit.  If, as his Honour suggests at [81], the present scheme had not been implemented, some company in the MBL Group other than MBL may have obtained a tax deduction, that would point against the obtaining of a tax benefit as the predominant purpose of 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 … any connection … with the relevant taxpayer, being a change that has resulted … from the scheme

1. The primary judge found that but for the scheme, MFL would not have had funds available to it to on-lend to Macquarie Leasing, and likewise no interest to pay out on its borrowing or interest to receive from on-lending.  On the other hand, the financial position of MBL changed because it had issued fully paid preference shares.  In his Honour’s view these matters, on balance, are either neutral or favourable to a conclusion of a non-tax purpose.

2. MFL submits that Mr Ward’s report of 9 August 1999 referred to above (which was accepted by the due diligence committee) establishes that the availability of a deduction to MFL for the interest outgoing was not one critical to the implementation of the MIS issue.  Mr Ward’s subjective opinions are not germane to the enquiry for which Part IVA provides.  However, it is clear, as the primary judge found, that MFL derived net taxable income in consequence of the implementation of the scheme which it would otherwise not have derived.  That circumstance suggests that obtaining a tax benefit for MFL was not a dominant purpose of any party in entering into the transaction.

3. Any change in MBL’s financial position which results from the scheme is required to be considered under factor (vi).  The only change in its financial position is that it issued the preference shares comprised in the MIS and applied the proceeds to payment under the Procurement Agreement so that its issued capital increased, and as a net result of the transaction MBL acquired the right to call for payment to it (in lieu of the holders) of both capital and income under the notes.  On the exercise of that right MBL would become liable to pay to the holders of the MIS dividends in an amount equivalent to the interest which they would otherwise have received from MFL.  Whereas MFL is entitled to a deduction for interest payments, there is no corresponding right in MBL to a deduction for dividends paid out of profits.

4. No tax advantage to MBL enured from the transaction.  Its allowable deductions were not enlarged, and its assessable income was not diminished.

5. The Commissioner submits that the conclusions drawn by the primary judge in relation to these factors are erroneous, but apart from reciting acknowledged features of the transactions, the submissions do not disclose any error.

   (vii)     Any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme being entered into or carried out; and

   (viii)     The nature of any connection … between the relevant taxpayer and any person referred to in subparagraph (vi)

6. The primary judge concluded that the remaining matters for consideration were either neutral or did not suggest a conclusion that the dominant purpose of MFL, MBL or any person who entered into or carried out the scheme (for example, Deutsche) was the obtaining by MFL of a deduction for interest. As earlier noted, if the need for capital and the comparative advantages and disadvantages of raising capital by debt or equity in the reality of the Australian financial market place do not fall within any of the earlier paragraphs of s 177D(b), they fall within par (vii).

7. The Commissioner submits that the conclusions drawn by the primary judge in relation to these factors are erroneous, but again, apart from reciting acknowledged features of the transactions, the submissions do not disclose any error.

   Balancing the eight s 177D(b) criteria

8. On the primary judge’s findings, obtaining a tax benefit was not the sole purpose of a participant in the scheme, as other commercial advantages flowed from its adoption and implementation.  There is no suggestion that the other commercial advantages which flowed from debt financing were inconsequential or immaterial.  The question is whether the obtaining of a tax benefit was the dominant purpose of a participant, in the sense in which that term was explained in Spotless.  In Eastern Nitrogen Lee J emphasised (at [20]) that it is important not to elide the question posed by Part IVA, namely what was the dominant purpose of a relevant party in entering the transaction (or scheme), with the enquiry, would the transaction (or scheme) have been entered into ‘but for’ the tax benefit? Maurice Cashmere, in an article entitled ‘Part IVA after Hart’ ((2004) 33 AT Rev pp 131-149) describes, at 138, a ‘but for’ test as ‘inevitably self-determining’.

9. The primary judge concluded as follows (at [120]):

   ‘It follows, therefore, that if, contrary to my view, the “interest” payable on the notes was an allowable deduction to MFL in the year of income, then that deduction constituted a tax benefit which MFL obtained from a scheme to which the provisions of Part IVA applied and in respect of which the Commissioner was entitled to make a determination under s 177F disallowing to MFL the deduction. I might add that I reach this conclusion with some reluctance. I doubt if the legislature would have regarded the present “scheme” as involving the application of Part IVA when the Part was enacted in 1981. However, it seems to me that the approach of the High Court in Hart requires me to reach the conclusion I have.’

10. With respect to his Honour, I am of a different opinion. In my view, addressing the question posed by his Honour in [110] of his reasons, a reasonable person would conclude, having regard to the eight factors listed in s 177D(b), that the dominant purpose of those engaged in the issue of the MIS on the particular terms on which that issue was made was to secure to the MBL Group all of the commercial advantages associated with debt financing (including, but not limited to tax deductibility of interest) whilst at the same time qualifying as Tier 1 capital.

11. There is force in MFL’s submission that ultimately the Commissioner’s case is that MFL borrowed money, thereby incurring deductible interest, and that if another party (MBL) had done something different (issued shares) MFL would not have incurred the deductible outgoing. The fallacy in this case is that – contrary to the direction in s 177D(b) – it confines attention to the tax consequences of the actual and ‘counterfactual’ transactions and leaves out of account the commercial advantages and consequences obtained and flowing from what was done.

12. The Commissioner was not authorised to make a determination under Part IVA to disallow MFL a deduction for the interest outgoing on the notes.

13. Subject to the qualification that the need for the preference shares to be fully paid was a consequence of APRA’s requirements I have not found it necessary to resolve any alleged factual errors on the part of the primary judge.

    conclusion

14. In my opinion, the appeal should be allowed, and the appropriate consequential orders made.

I certify that the preceding one hundred and thirty-three (133) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Hely.

Associate:

Dated:            16 September 2005

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD 1439 OF 2004

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:	MACQUARIE FINANCE LIMITED (ACN 001 214 964) APPELLANT
AND:	COMMISSIONER OF TAXATION RESPONDENT

JUDGES:	FRENCH, HELY AND GYLES JJ
DATE:	16 SEPTEMBER 2005
PLACE:	SYDNEY

REASONS FOR JUDGMENT

Gyles j

1. The answer to the question as to whether the payments by the appellant, Macquarie Finance Limited (MFL), to holders of what are described as stapled securities in the subject year of income are deductible pursuant to s 8-1 of the Income Tax Assessment Act 1997 (Cth) (the Act) is not easy, as is illustrated by the difference of judicial opinion upon the point.  I agree with the conclusion that the payments are not deductible and would dismiss the appeal. 

2. The reasons of each of French J and Hely J, which I have had the advantage of reading, and those of the primary judge explain the factual background and how the issues arise and refer to the relevant authorities.  I do not need to traverse that ground again except insofar as it is necessary to explain my own conclusions. 

3. I agree with the substance of the reasons of the primary judge with one qualification as to the preferred basis for denying deductibility.  The principal criticisms of the primary judgment were, firstly, that the matter was analysed from the point of view of the investor rather than from that of the taxpayer MFL and, secondly, that the decision was not based upon an analysis of the legal effect of the transaction documents but rather upon the notion of commercial or business equivalence.

4. There is some apparent force in these criticisms.  It was not argued that any part of the transaction was a sham or not of binding effect.  MFL was contractually bound to pay the ‘interest’ by virtue of having issued the notes.  MFL remained contractually bound to make such payments unless and until there was a Payment Direction Event.  The amount of $200 million was lent by MFL to Macquarie Leasing Limited (MLL) at a rate of interest above the ‘interest’ rate payable by virtue of the notes and assessable income was so earned.  That situation did not change during the year in question.  The potential for change upon the occurrence of a Payment Direction Event did not affect the contractual position in the relevant year. 

5. On the other hand, the primary judge was correct in finding that the ‘stapling’ of the preference shares and notes was also a feature of the transaction that could not be ignored.  The investor was both a note holder and the holder of a fully paid preference share at all times and one could not be dealt with without the other.  There was no right to demand repayment.  The rights conferred by the note might be transmogrified into equivalent rights pursuant to the preference share without any action on the part of the investor.  Correspondingly, MFL received the money with no obligation to repay the investor.  It received the permanent advantage of that money unless it was obliged to pay it to its parent company by the unilateral decision of Macquarie Bank Limited (MBL).  In that event, MBL in turn received the permanent advantage of the money.  Payment of the contractual ‘interest’ to the investor from time to time did not secure the continued retention of that amount as against the investor.  It was secured whether or not ‘interest’ was paid.  From the point of view of both the investor and MBL (and its subsidiaries including MFL), the essential characteristics of the rights and liabilities did not alter whether governed by the note or by the preference shares after a Payment Direction Event.  The transaction can be viewed as an affair of capital from start to finish.

6. That conclusion is supported by the circumstance that the transaction resulted in the raising of Tier 1 capital by MBL which was the object of the transaction.  Arrangements that qualify as Tier 1 capital for the purposes of Australian Prudential and Regulatory Authority (APRA)’s capital adequacy standards are in the nature of capital for present purposes, regardless of the label attached to them (Radaich v Smith (1959) 101 CLR 209; Commissioner of Taxation v Krakos Investments Pty Ltd (1995) 61 FCR 489 at 495G–496). APRA’s Prudential Statement C1 – Capital Adequacy of Banks (Statement C1) issued in September 1999 was current at the time of the transactions. The introductory general framework of Statement C1 included the following:

   ‘Minimum Capital Standards

   10.Each Australian bank is expected to maintain a minimum ratio of total capital to risk-weighted assets, on both a consolidated group and stand-alone basis, of 8 per cent (of which at least 4 per cent should be Tier 1 capital).  These levels will be kept under review.

   11.APRA may require a bank to maintain a higher minimum ratio, eg for a newly established bank, or a bank judged to have an excessive concentration of credit risk exposures or significant other risk exposures.

   Definition of Capital

   12.Capital is the cornerstone of a bank’s strength.  The presence of substantial capital re-assures creditors and engenders confidence in a bank.

   13.The essential characteristics of capital are that it should:

   ·     represent a permanent and unrestricted commitment of funds;

   ·     be freely available to absorb losses and thereby enable a bank to keep operating whilst any problems are resolved;

   ·     not impose any unavoidable charge on the earnings of the bank; and

   ·     rank below the claims of depositors and other creditors in the event of the winding-up of a bank.

   14.Capital, for supervisory purposes, is considered in two tiers.  Tier 1 (or core capital) comprises the highest quality elements.  Tier 2 (or supplementary capital) represents other elements which do not satisfy all of the characteristics of Tier 1 capital but which contribute to the overall strength of a bank as a going concern.  A summary of the main elements of capital is given in Attachment I.

   15.A bank’s capital base (or total capital) is the sum of its Tier 1 and Tier 2 capital less any deductions.  At least 50 per cent of a bank’s capital base must be Tier 1 capital.’

7. In my opinion, the reasoning of the primary judge would be unassailable if MBL had issued both the notes and the preference shares.  It would be an affront to reality to regard transactions having the same parties and with the same essential characteristics capable of being switched at will by MBL and ‘stapled’ together as separate transactions.  The question is whether the interposition of MFL alters that conclusion.  In my opinion, it does not.  The preference share and the note must be regarded together as, in effect, a tripartite arrangement between MBL, MFL and the investor (through the Trustee).  The payment received by MFL was part of a wider transaction which could not be said to result in a debt or a loan except in a very special sense.  In my opinion, this conclusion is not to give effect to commercial or business equivalence but rather is the result of properly analysing the effect of the transaction viewed as a whole. 

8. On this analysis, the ‘loan’ by MFL to MLL was a marginally profitable loan of capital by one wholly owned subsidiary of MBL to another.  As I noted in Spassked Pty Ltd v Commissioner of Taxation (2003) 136 FCR 441 at [128], intra group transactions are not the same for all taxation purposes as arm’s length transactions – see also Franklins Selfserve Pty Ltd v Federal Commissioner of Taxation (1970) 125 CLR 52 at 58–59, 66–67.  Further, the immediate destination of moneys received or outlaid does not necessarily equate to the object of the receipt or payment (Ure v Federal Commissioner of Taxation (1981) 34 ALR 237 per Deane and Sheppard JJ at 247–252). Here it can be said that the object of the receipt and payment of the ‘principal’, as reflected by the stapled note and the paid up preference share, was to provide MBL with Tier 1 capital although the intragroup destination was to be MLL.

9. One conclusion, favoured by French J, is that the outgoings were not incurred by MFL in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income and so not deductible pursuant to s 8-1.  Another, favoured by Hill J, is that the outgoings were of a capital nature.  In my opinion, the better view is that favoured by French J, but, whether or not that be correct, I also agree with the opinion of the primary judge.  In either event, the outgoings are not deductible.

10. The primary judge went on to consider the application of Pt IVA of the Income Tax Assessment Act 1936 (Cth) if a different view were taken as to deductibility pursuant to s 8-1 of the Act. There are always dangers in hypothetical determinations and they are exacerbated in this case because it is necessary to know the precise basis upon which the outgoings have been held to be deductible before the application of Pt IVA can be considered.

11. As it happens, I would have agreed with the conclusion of the primary judge as to the application of Pt IVA if that had become necessary and, indeed, would be of the opinion that the reasoning of the primary judge was too favourable to the appellant in some important respects.  I am tempted to take the opportunity to add to the plethora of opinions expressed about the true effect of Commissioner of Taxation v Hart (2004) 217 CLR 216. It seems to me that undue attention to the rear vision mirror has clouded the relatively straightforward issues of statutory construction that were decisively settled by the High Court in Hart consistently with Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404 and Commissioner of Taxation v Consolidated Press Holdings Ltd (2001) 207 CLR 235. I will resist that temptation and shall only state in short form why I would have applied Pt IVA if it had become relevant.

12. The hypothesis to be considered is that the deductibility of the payments would be based upon the separate position of the taxpayer MFL being the recipient of the moneys contributed for the notes and then on lending that money to MLL at interest.  I have expressed the view that if the transaction had taken place with MBL alone then it would be clear enough that the payments of ‘interest’ would not be deductible.  MFL was inserted into the proposed transaction at a very late stage.  On the hypothesis being considered that would be crucial to deductibility.

13. The rationale for, and objective of, the transaction was the raising of Tier 1 capital by MBL.  The APRA requirements are set out in Statement C1 and attachments that are in evidence.  It is critical to appreciate that no debt instrument could qualify as Tier 1 capital and, indeed, would only qualify as Tier 2 (Upper) capital under stringent conditions.  It is apparent from a reading of the relevant parts of Statement C1, including Attachment 1A, that Tier 1 capital is a permanent contribution of funds to the bank and that no payment in respect of it could be deducted on revenue account.  The transaction here only qualified as Tier 1 capital because of the issue of fully paid preference shares by MBL not because of the notes.

14. Any counterfactual for the purposes of Pt IVA must involve the raising of Tier 1 capital by MBL.  It follows from the above that no counterfactual would involve deductibility for payments made by or on behalf of MBL to investors as no debt or loan instrument upon which interest would be paid on revenue account would qualify.  The conclusion that MFL was inserted into the arrangements at a late stage for the purpose of obtaining deductions for payments to investors not otherwise available would be irresistible.

15. The appeal should be dismissed with costs.

I certify that the preceding fifteen (15) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gyles.

Associate:

Dated:            16 September 2005

Counsel for the Appellant:	T F Bathurst QC, A H Slater QC, A J Payne
Solicitor for the Appellant:	Clayton Utz
Counsel for the Respondent:	G T Pagone QC, S J McMillan, J H Momsen
Solicitor for the Respondent:	Australian Government Solicitor
Date of Hearing:	21, 22 February 2005
Date of Judgment:	16 September 2005