Mills v Commissioner of Taxation [2012] HCATrans 185

[2012] HCATrans 185

[2012] HCATrans 185

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney   No S9 of 2012

B e t w e e n -

ANDREW VINCENT MILLS

Applicant

and

COMMISSIONER OF TAXATION

Respondent

Application for special leave to appeal

FRENCH CJ
HEYDON J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 17 AUGUST 2012, AT 9.30 AM

Copyright in the High Court of Australia

MR A.H. SLATER, QC:   If the Court pleases, I appear with my friends MR D.F.C. THOMAS and MR G.S. ANTIPAS, for the applicant.  (instructed by Freehills)

MR N.J. WILLIAMS, SC:   May it please the Court, I appear with MR J.O. HMELNITSKY, for the respondent.  (instructed by Australian Government Solicitor)

FRENCH CJ:   Yes, Mr Slater.

MR SLATER:   Your Honours, this application raises the question of whether a bank which issued securities to raise capital required in its business, and on paying of penalty complied with a requirement to frank the distributions on those securities, did so with such a purpose of conferring franking benefits on the recipients of the distributions as to attract an anti‑avoidance provision which cancelled the franking benefits.

FRENCH CJ:   I suppose what will concern us in this application is whether or not this Court is being invited simply to re-characterise relevant circumstances, or whether there are identified issues of construction and principle?

MR SLATER:   In our submission, your Honour, there are issues of construction and principle.  The issue is of general importance, both to income tax and to the raising of corporate capital, which we submit attract the attention of the Court are first, as to the scope of the criterion, a purpose not being an incidental purpose, which is the central test in the anti‑avoidance provision, section 177EA, which has yet to attract the scrutiny of this Court and is also a criterion which is adopted in a range of other anti-avoidance provisions, both in the income tax statutes and in other fiscal statutes.

FRENCH CJ:   How does the conceptual structure of 177EA differ from that of 177D, apart from the addition of the relevant circumstances?

MR SLATER:   In two respects.  The first is that the criterion is set at not being dominant purpose but rather merely non‑incidental purpose.  The second, which the majority in the Full Court found to be the case, but which we contest as to whether, in applying section 177EA, one has regard to alternative circumstances in the manner indicated by this Court in Hart’s Case.  Perhaps in the third respect, your Honour, and this is the other matter which we submit as a matter of general importance and that is this, that the application raises the question whether a general anti-avoidance provision such as section 177EA should be so widely construed as to effectively negate the operation of what might be called a structural feature of the tax legislation, that is the franking provisions.

In our submission, the conclusion which the Full Court reached is so wide ranging that it would, unconstrained, effectively negate those provisions and the respondent has effectively recognised as much since the decision in the attitude he has taken to it.  So in a manner which I endeavour to indicate to your Honours, the respondent subsequent to the decision has acted in the fashion which does not support the reasoning of the Full Court, but rather supports the argument which the respondent unsuccessfully advanced in the Full Court.

Your Honours, if the anti-avoidance provision is properly as widely construed as the majority in the Full Court suggested, it has significant consequences for the manner in which large corporations raise capital, and in particular, for the manner in which banks raise capital.  Shortly after the decision, one commentator put it this way, “A landmark court case threatens to limit the capital raising operations available to banks, and to strangle their ability to raise cost effective funds to meet looming Basel III requirements”.

Your Honours, the factual context is relatively straightforward.  There was a capital raising by the Commonwealth Bank.  The applicant was a holder of securities issued by the Bank.  Their full title is “Perpetual, exchangeable re-saleable listed securities”, but they are universally referred to by the acronym PERLS, which perhaps casts the wrong impression.  They qualify as Tier 1 capital under prudential standards, and they comprised a no par value preference share stapled to a $200 note.  It was not in contest that the dominant purpose of the Bank in issuing the securities was to raise Tier 1 capital.  In order to qualify as Tier 1 capital, the securities were required to meet some specified criteria.

FRENCH CJ:   These are in the APRA standards?

MR SLATER:   Yes, your Honour, and the compliance with those criteria had the inevitable result that although in legal form the securities were substantially debt for tax purposes, they were treated as equity and distributions on them were treated as dividends.  In commercial terms, the securities were equivalent to preference shares.  They ranked behind debt and ahead of ordinary shares.  They delivered a preferential income yield of a specified rate, and they conferred no interest in surplus profits or assets.

FRENCH CJ:   There was no accumulation of either?

MR SLATER:   No.  That was a requirement of Tier 1 capital, that there be no constraint.  The income yield had two significant characteristics.  One was that it was at a defined floating rate, referable to the Bank bill swap rate, and the other was that there was a promise that the distributions would be franked, and a further promise that if for some reason they were not franked the yield to the security holder would be maintained by grossing them up.

FRENCH CJ:   There was a percentage rate, was there not, as four‑point something versus six-point something, depending upon whether you got the benefit of the franking or not?

MR SLATER:   Yes.  I think it was expressed rather that if the franking was not available then the securities were grossed up by a fraction referable to the current franking credit rate.  The bank was both able and required to frank distributions because for tax purposes the securities were treated as equity, and not as debt.  Effectively, the bank was compelled to frank the distributions, because it would be penalised if it did not.  It had franked its other distributions and it intended to go on doing so.  If it did not frank the distributions on the PERLS, then the franking account would be debited, although the holders received no franking credits.

Can I just show your Honours that very briefly?  If your Honours were to go to the supplementary bundle of materials under tab 2, there are relevant extracts from the 1997 Assessment Act, and your Honours will see at page 9 of those materials under tab 2 “section 200-30 Benchmark rule”:

(1)All frankable distributions made within a particular period must be franked to the same extent.  This is the benchmark rule.

I should say, your Honour, that that section is part of a guide or explanation rather than the operative provision.  The operative provisions are over the page on page 11 and the benchmark rule itself appears at the bottom, section 203-5:

(1)       A corporate tax entity must frank all frankable distributions made within a particular period at a franking percentage set as the benchmark for that period.  This is the benchmark rule.

Then if I could take your Honours over to page 14, section 203-50:

(1)       If an entity makes a *frankable distribution in breach of the *benchmark rule –

then, paragraph (b) of subsection (1) –

a *franking debit arises in the entity’s *franking account if the franking percentage for the distribution is less than the entity’s benchmark franking percentage –

and there is a diagram on the next page showing how it works.  The other provision there that perhaps I should draw your Honours’ attention to is on page 16 in section 203-55, which provides a power to permit a departure from the benchmark rule.  Subsection (2) says:

Because the *benchmark rule is an integral part of the imputation system, the Commissioner’s powers under this section may only be exercised in extraordinary circumstances.

Your Honours, the effect of the bank not franking distributions would be that the holders of the securities would not receive franking credits, but the investors in other capital would be deprived of those franking credits.  So that effectively, in accordance with the basic scheme of the franking provisions, the bank was both able and compelled to frank these distributions.  That is the primary basis on which we say that the franking was an incidental purpose of the issue of the securities.

Your Honours, there is one further matter of factual context to which I should draw your Honours’ attention, and that is that the Tier 1 requirement was that the notes be issued from an overseas branch.  The bank issued these notes ‑ ‑ ‑

FRENCH CJ:   This is New Zealand, is it?

MR SLATER:   ‑ ‑ ‑ from the New Zealand branch, and the consequence was that it obtained a tax deduction in New Zealand.  That circumstance was the principal subject of the respondent’s submissions in the Federal Court.  It is our submission that what happens in New Zealand is immaterial when it comes to considering the operation of the Australian Act.

Your Honours, the contest in the appeal is whether these factual circumstances justify the conclusion that a purpose, not being an incidental purpose, of the transaction was to confer imputation benefits on the applicant and other investors.  The relevant provision is subsection (3), and your Honours will see that at page 73 of the appeal book.  If I could tell your Honours this, paragraphs (a) to (d) are satisfied in all cases where securities are issued carrying a franked distribution.  It is only paragraph (e) which determines the matter in the ordinary case, and that is the non‑incidental purpose test criterion.

In our submission, the reasons and conclusions of the dissenting judge in the Full Court, Justice Edmonds, are to be preferred.  His Honour’s reasons, in essence, were that the securities were issued for the principal purpose of raising Tier 1 capital.  They are not issued in furtherance of either of the principal mischiefs to which section 177EA was directed, those being franking credit trading or franking credit streaming, and while the section is not confined in its operation to dealing with those mischiefs, its further operation falls to be a assessed, in the context of the other provisions of the Act, particularly the scheme of Part 3-6, the imputation provisions.  Your Honours, Justice Edmonds concluded, and we support that conclusion, that when regard is had to that scheme and in particular to the benchmark rule, a purpose of providing franking credits to subscribers is no more than an incidental purpose.

Your Honours, Justice Jessup, in relation to most of the factors identified in subsection (17) reached the same conclusion as Justice Edmonds, and in particular he reached the same conclusion in relation to the relevance of the deduction in New Zealand.  The essential point of departure between the majority and the minority is in the significance ascribed by the majority to the bank’s undertaking to frank the distributions.  His Honour regarded the promise to frank the distributions at the conclusion of his judgment at page 143 of the application book, paragraph 221, as the most helpful circumstance in reaching the conclusion which he reached.

In the essential reasoning on pages 133 to 135, which I will not take your Honours to in depth, the securities were offered as carrying frank distributions and in his Honour’s view, franking was therefore central to the scheme.  It was, as his Honour later put it, a conspicuous aspect of the substance, and his Honour concluded that the circumstance that franking was required by the imputation provisions was not in point because section 177EA was not concerned with alternative courses or counterfactuals and franking was central to the offer, and so in his Honour’s view, not incidental.  Your Honours, in our submission, that reasoning does not address the conflict between the benchmark rule, as applied to this or any other Tier 1 capital, and section 177EA viewed as applying where there was a purpose of franking as required by the benchmark rule.

FRENCH CJ:   You say the purpose was simply raising Tier 1 capital?

MR SLATER:   That was the dominant purpose, and we say ‑ ‑ ‑

FRENCH CJ:   Well, we do not get into dominant purpose, do we?

MR SLATER:   No, I am sorry, your Honour.  I was not trying to pick up the statutory language.  I was just saying it was the bank’s main purpose, and the purpose of franking was incidental to that main purpose because it was something which the bank was required, in the circumstances, to do.  It was not any more than a mere consequence or incidental aspect of the transaction that the distributions would be franked.  That is our primary submission on the merits of the case.  Your Honours, the respondent conceded below and has ‑ ‑ ‑

FRENCH CJ:   Well, really, this has the flavour not so much of construction, but of application with significant consequences for a particular class of capital raising.

MR SLATER:   It does that, your Honour, but it also ‑ ‑ ‑

FRENCH CJ:   I am not saying that that negatives the existence of a ground for special leave.  It just seems to me that that is more the territory you are in.

MR SLATER:   It is inevitably an application of the legislation to this case, and to classes in lower cases.  But it is a significant issue, first because of the widespread implications that it has for capital raising.  That is a general public importance matter, but in statutory construction terms or in significance of relating provisions to each other, what it does is to give the general provision which is intended to be protective, an operation which effectively, in our submission, negates the operation of the imputation provisions, unless the course is taken, as the respondent has taken it, of dispensing with the operation of the section where it suits him.

What the respondent has done since the decision was given, and this appears in the affidavit which the respondent has filed under proceedings which is in the supplementary materials, is to say that where there is not an offshore element, as he calls it – that is, where there is not a deduction obtained in another jurisdiction – he will endorse, he will give a favourable ruling.  Where the offshore element is absent, he will give a favourable ruling.  Where the offshore aspect is present, he will give an unfavourable ruling.  In our submission, disregarding the decision below, it is not supporting the reasoning.  It is recognising, in effect, that the reasoning has gone astray.  In our submission, that also raises a matter of general public importance.

Your Honours, the appeal for which leave is sought raises directly on simple and uncontroversial facts the construction of an important section, section 177EA.  It is important both in its general application and, in particular, in relation to capital raisings, and a criterion being a purpose, not being an incidental purpose, neither of which has attracted the attention of this Court as yet, and both of which are matters for which the intermediate and first instance courts and the public generally would be assisted by the decision of this Court.

The not incidental purpose has increasingly been the criterion of choice in legislative drafting, largely because those responsible for the

drafting have become dissatisfied with the curial interpretation of section 177D.  We have included a variety of instances in our bundle of materials – I will not take your Honours to them, they are referred to in our written submissions.  In our submission, an examination of a concept not incidental is relevant to all of those provisions.  It is not confined to the particular criteria in subsection (17).  It applies more generally and it is a matter of general public importance, and the present contest is relevant to a substantial area of Australian corporate financing as both the affidavits in this application demonstrate. 

Your Honours, the respondent implicitly acknowledges the importance of capital raisings.  He does not support the reasoning of the Full Court.  Rather, he propounds the reasoning which was rejected in the court below.  The reasoning nonetheless stands, and in our submission, it stands wrongly and should be corrected by this Court.  If your Honours please.

FRENCH CJ:   Thank you, Mr Slater.  Yes, Mr Williams.

MR WILLIAMS:   Your Honours, the objects of the imputation system, the purpose of which is to avoid double tax, is set out at page 7 of the application book, from paragraph 8 in the judgment of Justice Emmett, at about point 5 on page 7:

The main object of Part 3-6 is to allow corporate tax entities to pass to their members the benefit of having paid income tax on the profits underlying certain distributions by the entity.

There are then other objects set out, including the second one, no preference to “some members over others”.  Then in paragraph 10 on the same page at about line 25 –

Subdivision 202-C specifies those distributions that can be franked . . . the object of subdivision 202-C is to ensure that only distributions equivalent to realised taxed profits can be franked.

and at the end of the paragraph –

The distribution to the Taxpayer that is in question in this proceeding is a non-share dividend –

Going over the page to page 8, underpinning those principles is – and this is on page 8 from about line 20 – the fundamental dichotomy in Australian tax law between debt interests and equity interests.  At about line 20:

It is important to determine whether an interest is a debt interest or an equity interest because returns on debt interests are not frankable, but may be deductible, while returns on equity interests are not deductible but may be frankable.

Then at about line 45 on the same page:

Thus, the test is intended to operate, for example, to deny deductibility, but allow franking, for interest in relation to a scheme that has the legal form of a loan, if the economic substance of the rights and obligations arising under the relevant scheme gives the interest characteristics that are the same as, or similar to, those of a dividend on an ordinary share, and thereby prevent deductible returns on equity.

Conversely –

to allow a deduction, but not franking, for a dividend –

Here the bank has achieved both.  The bank has not distributed something equivalent to realised tax profits.  The distribution of interest is a deductible expense of the bank, and is the subject of a ruling to that effect in New Zealand.  The economic cost to the bank of raising Tier 1 capital is reduced by that New Zealand interest deduction, and this was a significant matter in the judgment of Justice Jessup, contrary to our friend’s submissions, but I will come to that.

The economic cost of raising the capital is reduced again by the franking credit.  The calculation of that benefit is referred to in the application book at page 24.  This is material that was placed before the board.  Page 24, the documents went to the board at about line 35, set out the position having regard to the Commissioner’s disputation of the availability of credits, and it identifies the economic cost of the relevant securities at line 37 at:

5.86% per annum but if the Bank was unsuccessful, the expected economic cost would be 7.87% per annum.

Now, investors were told much the same thing, but from a different perspective, and the Court can see that at page 114 of the book.  This is set out in the prospectus.  At the foot of page 114, the method of calculation is set out, the prospectus giving the example.  This is a matter that your Honour the Chief Justice raised, and at the top of 115, there is a calculation that goes through the “Bank Bill Swap Rate”, “Plus margin”, with an effective rate of 6.68.  It is reduced by the value of the franking credit in the next step, multiplication by 0.7, giving a distribution rate of 4.67.  Now, this is an archetypal calculation of a benefit by reference to the benefit of the franking credit.

This construction is not in aid of the New Zealand revenue.  The construction for which the Commissioner contends is to preserve the integrity of the Australian imputation system to give effect to its objects.  Justice Jessup, contrary to our friend’s submissions, placed strong reliance on the New Zealand aspects, and the Court can see that from page 141 of the book.  His Honour did not adopt the primary judge’s construction of paragraph (ga) but nevertheless at page 141 of the book gave significant emphasis from about line 5 to the New Zealand aspect.  The appellant contended:

It was wrong to, the appellant contended, for his Honour to have, in effect, assimilated the advantage of tax deductibility in New Zealand to the benefits which the Bank presumptively derived . . . I would not accept that criticism . . . While in point of form the scheme involved distributions which were frankable, but not deductible, under Australian law, in point of substance it involved an outlay which reduced the figure by reference to which the Bank’s income tax obligations would be calculated in New Zealand.  That was a benefit for the Bank, and none the less so because the deduction arose otherwise than under Australian law.  I am disposed to the view that the situation . . . is an exemplar of what the legislature had in mind when it posited a distinction between “form” and “substance” –

His Honour then took much the same point into account further down the same page, from about line 40, having regard to the 177D(b)(iv) factor, the result in relation to the operation of the Act.  His Honour had regard to much the same point there.  His Honour, on the following page referred to the Commissioner’s reliance which had in fact occurred at both levels on subparagraph (vi):

a beneficial change in the financial position of the Bank –

Justice Jessup was not disposed to take account of the New Zealand position under that head, but had already done so under two other heads, and placed considerable significance on those matters.

FRENCH CJ:   It is a point of some importance, is it not, as to whether that is a legitimate approach?  In other words, the debate about the relevance of the New Zealand position itself may be of some significance, may it not?

MR WILLIAMS:   Justice Jessup dealt with that ‑ ‑ ‑

FRENCH CJ:   I was talking about it in the context of whether this warrants the grant of special leave.

MR WILLIAMS:   Yes.  At page 128 to 129, Justice Jessup dealt with that in terms that, in our respectful submission, are entirely unobjectionable.  At the foot of 128:

It would be wrong to commence with an a priori view that that circumstance could never be relevant.  That tax deductibility was a reality in the scheme which the primary Judge had to consider.  It could not be ignored.  Whether it properly contributed to the drawing of an inference . . . was a question for consideration in the context –

and that was, of course, followed by the primary judge and again by Justice Jessup.  With respect, that has to be so.  There can be no a priori rule, and there can be no question of law arising in this respect.

Could I deal with the two points of general or public importance that the applicant relies on?  First, the applicant contends that the Commissioner has not been applying the Full Court decision.  That is not so.  If the Court goes to the joint bundle of authorities, behind tab 7 is an affidavit by Ms Leslie, page 27 of the book.  In paragraphs 2 and 3, the deponent refers to a consultative group, the “National Tax Liaison Group”, and a subcommittee for finance and investment that discuss matters such as treatment of hybrid securities.  She refers at the top of the following page to a note that was sent out following this decision, and no doubt in light of some of the more alarmist commentary that circulated, to which our friends have referred, and upon which they place reliance.  That is at page 36 entirely orthodox, in our submission, at about point 3:

The application of s.177EA depends on the particular circumstances –

There is then a reference to the emphasis in the Full Court in the majority on paragraph (f) –

However, it is clear that the decision depends on a consideration of the entirety of the relevant matters, of which the matters going to paragraph (f) are but part.  The particular conclusion in Mills took into account, among other things . . . the availability of a tax deduction in New Zealand.  The existence of circumstances satisfying paragraph 177EA(17)(f) may justify, but does not in itself, and without regard to other matters, require a conclusion adverse to a taxpayer.

Then in the middle of the following paragraph:

if the decision stands it will not result in a significant change to his practices.

Then in the final paragraph:

the mere presence of matters going to paragraph 177EA(17)(f) alone would not ordinarily require the conclusion –

FRENCH CJ:   Does the Commissioner’s approach to administration of the law, which may change from time to time, inform the question of whether special leave should be granted?

MR WILLIAMS:   It does in circumstances where the applicant brings a case that relies on newspaper articles pointing to the risk of the sky falling in on capital raisings.

FRENCH CJ:   Well, I do not know that they are feeding into our considerations.

MR WILLIAMS:   No.  We meet those by saying, and we can say it by reference to the decision, although predictably the Full Court majority and Justice Emmett gave different emphasis to different elements, found some to be made out but not influential or not made out, and others to be particularly influential, it is inevitable in the application of anti-avoidance provisions.  It is a matter of fact and degree in the application of the whole of the provisions to the same circumstances.  It is especially so in relation to a provision of this kind, but it is so also in relation to 177D(b).  It is relevant in that sense, that it is being administered consistently with the decision of the Full Court and consistently with the approach before, so the suggested element of prejudice to the capital markets cannot be made good.

There are two rulings that follow.  I do not need to take the Court to any of the detail of them, but there are two rulings.  If the Court were to go to page 67, there is a ruling given in paragraph 62 on page 67, a favourable ruling given to an instrument, a convertible preference of share but without a foreign leg, entirely orthodox consistent with the Commissioner’s approach before.  Similarly, there is a favourable ruling at 101 in paragraph 63.  So there is no threat to capital raising ‑ ‑ ‑

FRENCH CJ:   Well, the ruling generates a kind of statutory estoppel, does it not, for so long as it is in operation ‑ ‑ ‑

MR WILLIAMS:   Yes.

FRENCH CJ:    ‑ ‑ ‑ it can be revoked.

MR WILLIAMS:   Well, it cannot be revoked in relation to these class rulings, but they are indicative of an approach to administration which negatives the first suggested ground of leave.  In relation to the second suggested ground of leave, that the non-incidental purpose provisions appear in other parts of the tax statute, the approach that the applicant takes in this respect is inconsistent with the approach they take to the substantive issues in the case.  Each of the non-incidental purpose provisions that the applicant refers to, depend on their context.  The applicant’s main arguments here are that the primary judge and the majority failed to give proper regard to the particular context of the particular operative provisions in the substantive parts of the tax legislation.  Any decision on this provision is unlikely to have any implications for construction and application of those other provisions. 

But moreover, Justice Jessup approached the question of purpose in the manner contended for by the applicant, but merely reached a different conclusion on the facts.  The Court can see that at page 126 of the book.  At the foot of 126, Justice Jessup sets out a quote from the explanatory memorandum upon which the applicant relied.  Then in paragraph 178 on page 127 sets out the argument and summarises it, and then accepted it essentially in 179 as the approach:

The position taken by the appellant has a particular consequence for the way in which the deliberative task . . . must be approached.

But then, having set that out, at page 142 of the book his Honour applies it, at page 142, about point 40 on the page.  His Honour accepts as the starting point the point on which the applicant places great emphasis here that the obligation to frank must be the starting point:

However, the fact that the appellant would most likely have obtained an imputation benefit as the result of a scheme which did nothing except raise Tier 1 capital does not conclude the matter of purpose adversely to the Commissioner –

and then goes on to apply that in paragraph 220.  So there is no division on point of construction, merely a division on its application to the facts.  The view of the dissentient, upon which the applicant places fundamental reliance here, starts with a conclusion that the issue of securities - your Honours can see this at page 72 of the book – was not part of any scheme of tax avoidance.  At page 72 of the book at about line 15:

So much must be conceded, but the appellant’s contention nevertheless remains valid: the issue of the PERLS V securities was not part of any scheme of tax avoidance.

Your Honours, 177EA applies where the prescribed purpose exists, having regard to the defined relevant circumstances.  One applies 177EA to find out whether there is a scheme of tax avoidance.  What his Honour has done here is to start with the view that it was not part of any scheme of tax avoidance, starting with an a priori notion of tax avoidance, reaching a conclusion in that respect and then going through to demonstrate why, having regard to particular circumstances, the scheme was not a tax avoidance scheme of that kind.  But by contrast, the majority in the Full Court and Justice Emmett approached the issue in the correct manner, with respect, examined the relevant circumstances individually and as a whole, and determined that there was a non-incidental purpose of providing imputation benefits, each having regard to the objects of Part 3-6 in reaching their conclusions.  Your Honours, those are our submissions.

FRENCH CJ:   Yes, thank you, Mr Williams.  Yes, Mr Slater.

MR SLATER:   Your Honours, what is conspicuous about my friend’s submissions is that there is no attempt in them to defend the primary reasoning of the majority in the Full Court.  In the passages to which my friend took your Honours on page 141, he read from the first paragraph and the last paragraph on that page but not from paragraph 215, where the majority judge said:

Frankability of the distributions was a central feature of the securities.  It was a conspicuous aspect of the “substance” –

and over on page 143:

I have found the circumstance referred to in para (f) of subs (17) most helpful in providing a conceptual framework –

What the majority was doing was saying that the circumstance that franking was promised – and it was promised as an essential element of the transaction – was the circumstance which made the section applicable.  If that is so, it is so in respect of every issue of securities on which distributions may be franked, and that will give the section an operation of such width that it would effectively negate the franking provisions.  The Commissioner’s response to that has been, in practical terms, to say “We will rule that the section should not be so applied, except where it has features which do not appeal to us”.  In the document which my friend read to your Honours from on page 36 of the supplementary materials, he read the passage which says:

the mere presence of matters going to paragraph 177EA(17)(f) alone would not ordinarily require the conclusion –

but he did not read the opening part of that sentence –

Where an arrangement does not involve offshore elements . . . the mere presence –

What the Commissioner is doing there is saying “Well, whatever the Federal Court has said, I will take a different criteria.  If it does not have an offshore element, if there is not a deduction outside Australia, I will give it the tick.  If it does have that, then I will not”, whether or not otherwise it meets the criteria in the majority decision.  It is true that the main object of Part 3-6 is to pass the benefit of tax paid, but there is no requirement in Part 3-6 that the tax paid be traced to any particular transaction.  It is simply the overall tax paid by the company. 

Justice Edmonds pointed this out very clearly on page 78 of the appeal book, and for reasons of time, I will not take your Honours to that, but he made it very clear that there is no tracing back to the fund from which the distribution was paid.  The main point in my friend’s submissions is this offshore point, and in our submission, that is not something which should be taken into account in the interpretation of Australian statute.  This Court said that it should not be taken into account in the interpretation of section 177D.  In the same way, in our submission, this Court should say that it does not apply in the interpretation of section 177E.  If your Honours please.

FRENCH CJ:   Thank you, Mr Slater.  Yes, there will be a grant of special leave in this matter.  What is the time estimate?  Would it be more than a day?

MR SLATER:   I would have thought one day, your Honour.

FRENCH CJ:   Now, would you be ready for a hearing in the first week of the October sittings?

MR SLATER:   Yes, your Honour.

FRENCH CJ:   Mr Williams?

MR SLATER:   If your Honour will give us just a moment to consult?

FRENCH CJ:   Yes.

MR WILLIAMS:   Your Honour, might I inquire as to the date of the first week of the sittings?

FRENCH CJ:   Just a minute.  Yes, we are looking at 2, 3 and 4 October.

MR SLATER:   That is suitable to us, your Honour.

MR WILLIAMS:   It is not to me, your Honour.  I am available all of the following weeks.

FRENCH CJ:   All right.

MR SLATER:   I can make any of the following weeks, your Honour.

FRENCH CJ:   Yes, all right.  It is just, in a sense, it is an accident of timing in terms of the availability of five Justices versus six, and we have some other matters in the second week possibly.  Anyway, you will be available for the second week if we can list you then?

MR SLATER:   Yes, your Honour.

FRENCH CJ:   All right.  In that event, I suggest you communicate with the Senior Registrar, because if we list you in October, there will be abridged directions in terms of timeframes, and I think there is a copy available to you or which you can obtain or your solicitors can obtain from the Court for the filing of submissions.

MR SLATER:   May it please the Court.

FRENCH CJ:   Yes, all right, thank you.

AT 10.15 AM THE MATTER WAS CONCLUDED