Mills v Federal Commissioner of Taxation

The High Court of Australia heard an appeal concerning the application of section 177EA of the *Income Tax Assessment Act 1936* (Cth) to a scheme involving the issue of PERLS V notes by the Bank. The Commissioner of Taxation had made a determination under section 177EA that no imputation benefit should arise from the scheme, which the Bank sought to have set aside. The dispute centred on whether the Bank entered into or carried out the scheme for the dominant purpose of enabling taxpayers to obtain an imputation benefit, or whether such a purpose was merely incidental to the Bank's primary objective of raising Tier 1 capital.

The legal issues before the Court were whether the Bank's purpose in issuing the PERLS V notes was to enable taxpayers to obtain imputation benefits, and if so, whether that purpose was incidental to the Bank's purpose of raising Tier 1 capital. The Court was required to consider the "relevant circumstances" under section 177EA(17)(ga), including the fact that the income generated by the capital raised was not taxable in Australia and that distributions on the notes were deductible in New Zealand. The Court also had to determine the meaning of "change in financial position" and the relevance of the scheme resulting in a reduced cost of capital.

The Court reasoned that while the circumstances relating to the non-taxable income and deductibility of distributions in New Zealand were relevant, they did not establish that the Bank's purpose was to enable holders of PERLS V to obtain franking credits. Instead, the Court concluded that the Bank's dominant purpose was to raise Tier 1 capital, and any purpose of enabling taxpayers to obtain imputation benefits was incidental to that primary objective. Applying the objective test under section 177EA(3)(e), the Court found that a reasonable person would conclude that the purpose of obtaining imputation benefits was incidental. Consequently, the jurisdictional fact for the application of section 177EA was not met.

The High Court allowed the appeal with costs, setting aside the orders of the Full Court of the Federal Court. The Court ordered that the objection decision of the Commissioner be set aside and that the Bank's objection against the determination under section 177EA be allowed, with the determination itself being set aside.