Minerva Financial Group Pty Ltd v Commissioner of Taxation
[2022] FCA 1092
•16 September 2022
FEDERAL COURT OF AUSTRALIA
Minerva Financial Group Pty Ltd v Commissioner of Taxation [2022] FCA 1092
File number(s): VID 446 of 2020 Judgment of: O'CALLAGHAN J Date of judgment: 16 September 2022 Catchwords: TAXATION – Income Tax Assessment Act 1936 (Cth) Part IVA – where applicant taxpayer appealed under s 14ZZ of the Taxation Administration Act 1953 (Cth) from an objection decision made by the Commissioner of Taxation against amended assessments – where applicant did not dispute that it had entered into or carried out a “scheme” within the meaning of s 177A of the Income Tax Assessment Act 1936 (Cth) – where applicant did not dispute that it had obtained a tax benefit within the meaning of s 177C of the Income Tax Assessment Act 1936 (Cth) – where three schemes alleged by the Commissioner of Taxation – whether a reasonable person would conclude that applicant entered into or carried out one or more of the schemes for the dominant purpose of enabling it to obtain a tax benefit in connection with the scheme within the meaning of s 177D of the Income Tax Assessment Act 1936 (Cth) Legislation: Evidence Act 1995 (Cth) s 136
Income Tax Assessment Act 1936 (Cth) Part IVA ss 177A, 177A(1), 177A(5), 177C, 177C(1), 177C(1)(a), 177C(1)(c), 177CB, 177D, 177D(2), 177F, 177F(1), 177F(1)(a), 177F(2), 177F(3), 177F(3)(a)
Income Tax Assessment Act 1997 (Cth) ss 6‑5, Part 3‑90
Taxation Administration Act 1953 (Cth) ss 14ZZ, Schedule 1, Part 4‑25, Division 280, s 280‑170
Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Act 2013 (Cth) Schedule 1, s 10
Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Bill 2013 (Cth)
Cases cited: British American Tobacco Australia Services Ltd v Commissioner of Taxation (2010) 189 FCR 151
Commissioner of Taxation v Ashwick (Qld) No 127 Pty Ltd (2011) 192 FCR 325
Commissioner of Taxation v Cassaniti (2018) 266 FCR 385
Commissioner of Taxation v Consolidated Press Holdings Ltd (2001) 207 CLR 235
Commissioner of Taxation v Hart (2004) 217 CLR 216
Commissioner of Taxation v Macquarie Bank Ltd (2013) 210 FCR 164
Commissioner of Taxation v News Australia Holdings Pty Ltd [2010] FCAFC 78; (2010) 79 ATR 461
Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404
Corporate Initiatives Pty Ltd v Commissioner of Taxation (2005) 142 FCR 279
Eastern Nitrogen Ltd v Commissioner of Taxation (2001) 108 FCR 27
Hancock Family Memorial Foundation Limited v Porteous [1999] WASC 55; (1999) 151 FLR 191
Jones v Dunkel (1959) 101 CLR 298
Metal Manufactures Ltd v Commissioner of Taxation [1999] FCA 1712; (1999) 43 ATR 375
Mills v Commissioner of Taxation (2012) 250 CLR 171
Noza Holdings Pty Ltd v Commissioner of Taxation [2011] FCA 46; (2011) 82 ATR 338
Vincent v Commissioner of Taxation (2002) 124 FCR 350
Division: General Division Registry: Victoria National Practice Area: Taxation Number of paragraphs: 594 Date of hearing: 29‑30 November, 1‑3, 6‑10 December 2021, 22‑23 March 2022 Counsel for the Applicant: Mr EF Wheelahan QC with Ms M Clarebrough Solicitor for the Applicant: Arnold Bloch Leibler Counsel for the Respondent: Mr P Looney QC with Ms ML Baker and Ms AR Wilson Solicitor for the Respondent: Australian Government Solicitor ORDERS
VID 446 of 2020 BETWEEN: MINERVA FINANCIAL GROUP PTY LTD
Applicant
AND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
Respondent
ORDER MADE BY:
O'CALLAGHAN J
DATE OF ORDER:
16 SEPTEMBER 2022
THE COURT ORDERS THAT:
1.On or before 7 October 2022, the parties are to confer and submit to the Court a joint proposal, or if they are unable to agree, separate proposals for the further conduct of this proceeding, including the determination of the question of costs of the proceeding, and any other orders to give effect to these reasons.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
O’CALLAGHAN J:
INTRODUCTION
[1]
PROCEDURAL HISTORY
[18]
THE FACTS
[24]
The relevant entities
[32]
Securitisation and securitisation trusts
[42]
LF’s sources of income
[62]
Capital raising, proposed restructure and proposed public offering of shares
[69]
Income flow from the securitisation trusts
[138]
MHT’s income and distributions
[138]
MFGT’s income and distributions
[153]
LF’s revenue in the relevant years
[164]
Intercompany loans
[172]
MHT and LF
[174]
MHT and MFGT
[179]
Division 7A
[211]
2012
[216]
2013
[219]
2014
[222]
2015
[226]
Cash transferred from LF to shareholders Jupiter, Vesta, and Juno
[230]
LF and MFGT
[236]
The Commissioner’s diagram
[237]
Net effect of the loan offsets used to discharge the MHT and MFGT unpaid present entitlements
[238]
Liberty’s source of funding
[241]
THE STATUTORY PROVISIONS
[252]
THE SCHEMES ALLEGED
[278]
The first scheme
[284]
The second scheme
[290]
The third scheme
[297]
THE EXPERT EVIDENCE
[305]
THE COMPETING FINDINGS CONTENDED FOR BY THE PARTIES
[351]
The first scheme
[353]
Abandonment of IPO
[355]
Interest free, unwritten loans, not repaid in cash
[385]
Transition to RIUs being held by MHT
[388]
Consolidation relevant to minimising CGT
[388]
Failure to establish avoidance of stamp duty and CGT generally
[394]
Lack of evidence regarding the commercial benefits of the stapled structure
[406]
Reasons for adopting the stapled structure
[406]
Unfranked cash distributions
[410]
Borrowing flexibility
[430]
Acquisitions
[449]
The second scheme
[451]
The steps that gave Jupiter/Vesta the entitlement to MFGT’s distributable income
[459]
LF’s loans from MHT, “cash flow”, and credit rating
[466]
LF’s capital adequacy ratio
[482]
Capital injections and Good Hill borrowing
[490]
NAB limit and policy of not declaring dividends
[495]
Exercise of discretion regarding the distribution of MHT’s net income
[498]
The third scheme
[521]
FIRST SCHEME – S 177D FACTORS CONSIDERED
[523]
The first factor: the manner in which the first scheme was entered into or carried out
[523]
The second factor: the form and substance of the first scheme
[531]
The third factor: the time at which the first scheme was entered into and the length of the period during which it was carried out
[535]
The fourth factor: the result in relation to the operation of the ITAA36 that, but for Part IVA, would be achieved by the first scheme
[539]
The fifth factor: any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result from the first scheme
[543]
The sixth factor: any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the first scheme
[545]
The seventh factor: any other consequence for the relevant taxpayer … of the first scheme having been entered into or carried out
[549]
The eighth factor: the nature of any connection between the relevant taxpayer and any person referred to in the sixth factor
[551]
Conclusion about the first scheme
[556]
SECOND SCHEME – S 177D FACTORS CONSIDERED
[557]
The first factor: the manner in which the second scheme was entered into or carried out
[557]
The second factor: the form and substance of the second scheme
[566]
The third factor: the time at which the second scheme was entered into and the length of the period during which it was carried out
[569]
The fourth factor: the result in relation to the operation of the ITAA36 that, but for Part IVA, would be achieved by the second scheme
[573]
The fifth factor: any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result from the second scheme
[576]
The sixth factor: any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the second scheme
[577]
The seventh factor: any other consequence for the relevant taxpayer … of the second scheme having been entered into or carried out
[578]
The eighth factor: the nature of any connection between the relevant taxpayer and any person referred to in the sixth factor
[579]
Conclusion about the second scheme
[580]
THIRD SCHEME – S 177D FACTORS CONSIDERED
[581]
The first factor: the manner in which the third scheme was entered into or carried out
[581]
The second factor: the form and substance of the third scheme
[582]
The third factor: the time at which the third scheme was entered into and the length of the period during which it was carried out
[585]
The fourth factor: the result in relation to the operation of the ITAA36 that, but for Part IVA, would be achieved by the third scheme
[586]
The fifth factor: any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result from the third scheme
[589]
The sixth factor: any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the third scheme
[590]
The seventh factor: any other consequence for the relevant taxpayer … of the third scheme having been entered into or carried out
[591]
The eighth factor: the nature of any connection between the relevant taxpayer and any person referred to in the sixth factor
[592]
Conclusion about the third scheme
[593]
DISPOSITION
[594]
INTRODUCTION
Minerva Financial Group Pty Ltd (MFG or the applicant) is a member of the group of companies and trusts which carries on the financial services business known as “Liberty Financial” (Liberty or Liberty group). Liberty is a “non‑bank” provider of financial services. That means that it is not an authorised deposit‑taking institution. It obtains capital through a process called securitisation, which involves the pooling of loan receivables and related securities (usually mortgages) into securitisation trusts, in order to fund loans it arranges for customers.
MFG appeals under s 14ZZ of the Taxation Administration Act 1953 (Cth) (TAA) from an objection decision made by the Commissioner of Taxation, the respondent (the Commissioner), dated 14 May 2020 against amended assessments for the income years ended 30 June 2012 to 30 June 2015 (the relevant years). It concerns the application of Part IVA of the Income Tax Assessment Act 1936 (Cth) (ITAA36) to income which the Commissioner contends would have been, or might reasonably be expected to have been, included in the applicant’s assessable income in its capacity as the head of a tax consolidated group in the relevant years, if one of the three schemes identified by the Commissioner in his further amended appeal statement dated 25 November 2021 had not been carried out.
The Commissioner has made determinations under s 177F of the ITAA36, the effect of which is to cancel the tax benefits obtained in connection with the identified schemes by including in the applicant’s assessable income in each of the relevant years an amount equal to the omitted income in that year. The power to make a determination under s 177F arises where Part IVA applies to a scheme in connection with which a tax benefit has been obtained (or would be obtained but for a determination made under s 177F). Part IVA relevantly applies to a scheme if it would be concluded, having regard to the matters set out in s 177D, that a person who entered into or carried out the scheme, or any part of the scheme, did so for the dominant purpose of enabling the taxpayer (or the relevant taxpayer and another or other taxpayers) to obtain a tax benefit in connection with that scheme.
In 2007 and 2008, the Liberty group implemented a series of steps in anticipation of it conducting an initial public offering (IPO) of “stapled securities” in the applicant and a trust (Minerva Financial Group Trust (MFGT)). Those steps included a decision to establish all future securitisation trusts under a holding trust (Minerva Holding Trust (MHT)), rather than under the main operating company in the Liberty group, namely Liberty Financial Pty Ltd (LF), as had been done in the past.
The planned 2007 IPO did not proceed, for a variety of reasons, including because of a downturn in global financial markets. The Commissioner submitted that the establishing of securitisation trusts under MHT and not LF “had the effect of removing income that would have been derived within the ‘corporate silo’, relevantly comprising … [LF], and its parent company, being the [a]pplicant, and instead having that income flow through the newly established ‘trust silo’ comprising [MHT] and MFGT, ultimately to the non‑resident owners, first, Jupiter Holdings BV (Jupiter) and, from 12 April 2013, Vesta Funding BV (Vesta)”.
LF and another company in the group, Secure Credit Pty Ltd (Secure Credit) held special units in MHT. The trustee of MHT had a discretion to distribute MHT’s distributable income to those special unitholders and thus, as the Commissioner put it, “re‑direct income back to the corporate silo”.
A simplified diagram of the structure set up in 2007 and 2008 is this:
(Minerva Financial Group Ltd in the above diagram is a reference to the applicant, which was converted from a public company to a private company in 2008.)
On 9 September 2009, but with effect from 1 July 2007, LF became a subsidiary member of the income tax consolidated group that was formed for the purposes of Part 3‑90 of the Income Tax Assessment Act 1997 (Cth) (ITAA97). The applicant was the head company of it.
The effect of the income flowing through the trust silo to the non‑resident owners was that the income was subject to 10% withholding tax, as opposed to the 30% corporate tax rate that would have applied had it continued to have been derived in the corporate silo. The Commissioner gave the following uncontroversial example in his written closing submissions in respect of the 2013 year. In 2013, MHT received $33,648,735 in residual income from the relevant securitisation trusts. Had that amount instead been received by LF directly, then under the single entity rule, it would have been included in the assessable income of the applicant as head company of the consolidated group. In the hands of the applicant, it would have been subject to the corporate tax rate of 30% such that, subject to deductions, tax of $10,094,621 would have been payable. Similarly, had it been received by MHT and then distributed to LF as a special distribution, the same result would have followed. If instead (as occurred) it was distributed by MHT to MFGT, and from there to Jupiter or Vesta, then 10% withholding tax would have been payable, such that the tax bill reduced to $3,364,873.50.
The applicant did not dispute that it obtained a tax benefit in connection with the schemes identified by the Commissioner within the meaning of s 177C in the relevant years.
The Commissioner put the applicant to proof of establishing that, objectively and having regard to the matters set out in s 177D, none of the persons who entered into or carried out the schemes, or any part of the schemes, did so for the dominant purpose, as he put it in submissions, of “diverting assessable income away from the applicant”.
Broadly speaking, the three schemes alleged are:
(1)the first scheme: establishing the corporate and trust silos, and nominating MHT (and not LF) as the residual income unitholder of the securitisation trusts established from 2009, and directing income from the securitisation trusts through MHT;
(2)the second scheme: transferring ownership of MFGT from the applicant to Jupiter in December 2007, and the failure of the applicant, as trustee of MHT, to distribute more than only nominal amounts of MHT’s distributable income to the corporate silo (through the special unitholders, each of which was a subsidiary member of the tax consolidated group of which the applicant was head company) in the relevant years, instead distributing the majority of income to the trust silo; and
(3)the third scheme: this scheme is similar to the second scheme, except that it does not involve the transfer of ownership of MFGT from the applicant to Jupiter.
The Commissioner submitted that:
Central to each scheme is the fact that MHT became the holder of the [residual income units] in the Securitisation Trusts established from 2009, such that an income stream that would have been distributed to LF, and assessable to the [a]pplicant, but for this was now distributed to MHT. With the exception of nominal amounts, the income stream was then distributed by MHT through the trust silo to MFGT and then to the offshore unitholder (Jupiter or Vesta, as the case may be), albeit with the offshore unitholder’s entitlement to the distributions being satisfied by accounting offsets rather than the physical payment of cash. LF, which still required the cash flow from this income stream to perform its functions, including providing subordinated loans to the Securitisation Trusts, then borrowed amounts from MHT. The funds borrowed by LF from MHT effectively can be traced to the [residual income units] held by MHT, being the same source of income that LF previously received directly before the internal restructure implemented by the Liberty Group from late 2007 through to 2011.
Thus, the Liberty Group’s business continued to operate as it had before the restructure, with the only difference being that LF used funds borrowed from MHT to perform its pre‑existing functions, where it had previously used funds from income distributed to it directly by the Securitisation Trusts. Establishing Securitisation Trusts with MHT as the [residual income unit] holder such that LF would not receive the income stream from those Securitisation Trusts and replacing the funds from such income with borrowings had negative consequences for LF’s capital adequacy ratio …
Liberty’s case, to the contrary, and in substance, was that in 2007 and 2008, the decision to establish all future securitisation trusts under MHT, rather than LF, as had been done in the past, was made after receiving advice from capital market advisers to segregate its active operating assets from its passive financial assets with a view to making an IPO of stapled securities, each consisting of a share in a company, holding the active assets, stapled to a unit in a unit trust, holding the passive assets. (They are “‘stapled securities’ in the sense that their conditions of issue … prevent the shares and the [units] being traded separately”. See Mills v Commissioner of Taxation (2012) 250 CLR 171 at 178 [5] (Gageler J, with whom French CJ, Hayne, Kiefel and Bell JJ agreed).) The applicant said that the decision to hold newly formed securitisation trusts in a holding trust, separately from the operating assets of the business, was driven by a desire to optimise the Liberty group’s capital structure and improve access to funding, including by way of an IPO. It also pointed to the fact that it had received consistent advice over the years that an IPO of stapled securities, consisting of a unit in a trust holding the groups passive financial assets and a share in a company holding the group’s active assets, was the optimal way to go to market.
The applicant said that after the IPO planned for July 2007 did not proceed, objectively viewed, it would have been commercially irrational for Liberty not to carry out the steps identified in the schemes relied on by the Commissioner, and that:
(a)establishing new securitisation trusts within the corporate structure would have meant those assets would not have been where they were meant to be when the time came to conduct an IPO;
(b)it would have caused Liberty to incur significant restructuring costs, including stamp duty and capital gains tax (or CGT) in the lead up to an IPO; and
(c)it would have denied Liberty a number of other material commercial benefits for it and its shareholders, including the ability to raise funds externally.
The applicant said that Part IVA does not apply to any of the Commissioner’s three schemes and that the Commissioner was not authorised to make the determinations to include amounts in MFG’s assessable income for the relevant years. It seeks orders that the objection decision be set aside and that the objection be allowed in full.
For the reasons that follow, I will set aside the objection decision in part, and accordingly allow the objection in part.
PROCEDURAL HISTORY
On 23 November 2016 and 11 January 2017, a delegate of the Commissioner made determinations under s 177F(1)(a) of the ITAA36 that the following amounts, being tax benefits referable to amounts that had not been included in the assessable income of the applicant, should be included in the assessable income of the applicant by virtue of s 6‑5 of the ITAA97 in each of the relevant years:
(a)2012 year: $24,836,839 and $806,104.
(b)2013 year: $31,761,081 and $3,138,723.
(c)2014 year: $46,048,587 and $7,875,741.
(d)2015 year: $53,649,735 and $5,341,506.
The Commissioner gave effect to the determinations by issuing to the applicant notices of amended assessment of income tax dated 30 November 2016 and 11 January 2017 in respect of each of the relevant years (collectively, the amended assessments).
The adjustments to the applicant’s taxable income effected by the amended assessments were in summary:
Income Year Pre‑audit taxable income First amendment 30/11/2016 Second amendment 11/01/2017 Amended taxable income Primary tax
payableShortfall interest charge 2012 $8,083,025 $24,836,893 $806,104 $33,726,022 $7,692,899.10 $59,679.97 2013 $5,854,030 $31,761,081 $3,138,723 $40,753,834 $10,469,941.20 $164,402.80 2014 ‑$25,515,244 $46,048,587 $7,875,741 $28,409,084 $8,522,725.20 $260,936.01 2015 ‑$13,844,944 $53,649,735 $5,341,506 $45,146,297 $13,543,889.10 $62,207.87 Total ‑$25,423,133 $156,296,296 $17,162,074 $148,035,237 $40,229,454.60 $547,226.65
On 27 January 2017, the applicant objected against the amended assessments, including the Commissioner’s decision not further to remit the shortfall interest charge imposed under Part 4‑25, Division 280 of Schedule 1 to the TAA in each of the relevant years.
By the objection decision dated 14 May 2020, the Commissioner disallowed the applicant’s objections against the amended assessments. The Commissioner also upheld the decision not further to remit the shortfall interest charge for the 2012 year. However, the applicant did not have the right to object against the remission decision made in respect of shortfall interest charge for the other relevant years under s 280‑170 of Schedule 1 to the TAA, meaning the objection was invalid to that extent.
By notice of appeal dated 6 July 2020, the applicant appealed to this court from the objection decision.
THE FACTS
The applicant adduced the following lay evidence:
(a)affidavit of Sherman Ma affirmed 24 November 2021;
(b)second affidavit of Sherman Ma affirmed 24 November 2021;
(c)affidavit of Suresh Elias Kanapathippillai (known as Mr Pillai) sworn 26 February 2021;
(d)affidavit of Suresh Elias Kanapathippillai sworn 24 November 2021;
(e)affidavit of Peter Riedel affirmed 25 February 2021;
(f)affidavit of Peter Riedel affirmed 24 November 2021; and
(g)affidavit of Peter Riedel affirmed 18 November 2021.
The applicant also relied on the following expert evidence:
(a)expert report of Mozammel Ali dated 19 March 2021; and
(b)supplementary expert report of Mozammel Ali dated 1 October 2021.
The Commissioner relied on an amended expert report of Anthony FitzGerald dated 1 September 2021.
I will deal with the expert evidence later in these reasons.
Mr Ma is an Executive Director and one of the founders of Liberty, and is involved with its operations in Australia and New Zealand. He is a resident of the United States of America. In his first affidavit, Mr Ma gave an overview of how Liberty was established, a description of the securitisation process and Liberty’s sources of funding, an overview of the events between 2004 and 2008 when Liberty explored various funding and growth initiatives (including a planned IPO of stapled securities), and evidence about other funding and growth initiatives that Liberty undertook in parallel with and after the planned IPO, including the eventual IPO in December 2020. In his second affidavit, Mr Ma deposed to what he referred to as “certain factual inaccuracies or assumptions” in Mr FitzGerald’s report, including about Liberty’s corporate debt facility with National Australia Bank Ltd (NAB), the $140 million that MHT borrowed from Good Hill Master Fund LP (Good Hill) in 2019, and Liberty’s successful IPO in 2020.
Mr Pillai was first employed by Liberty as a Group Project Manager in 2000, and shortly thereafter took responsibility for its finance, tax, capital markets, and treasury functions. In late 2009, his role changed and he took on responsibility for general business strategy, mergers and acquisitions, and product development. In January 2011, he “took on a customer‑facing role in the commercial lending division of Liberty’s business”. He resigned from Liberty in 2015, and started his own consultancy business. Liberty is now one of his clients. During his time at Liberty, Mr Pillai was variously a director and/or company secretary of a number of companies within the Liberty group. In Mr Pillai’s first affidavit, he gave evidence about Liberty’s short and long‑term funding arrangements, the operation and constitution of securitisation trusts, Liberty’s ongoing need for funding (including portfolio growth, securitisations, and product range growth), “strengthening the funding platform” (which concerned evidence about Liberty’s initial consideration of an IPO in 2004 through to early 2007), the proposed restructure, the decision to postpone the IPO made in 2007, and other initiatives in late 2007 to late 2008 concerning raising capital. He also gave evidence about Liberty’s successful and unsuccessful attempts to acquire other businesses or assets between mid‑2005 and early 2015. In his second affidavit, Mr Pillai gave evidence about why he did not consider that the trustee of MHT should choose to distribute all or substantially all of MHT’s income to the special unitholders, and the transfer of the two units that MFG held in MFGT to Jupiter on 14 December 2007.
Mr Riedel commenced employment with LF in September 2007 and was responsible for accounting and financial reporting. Since that time, his responsibilities have expanded to include the overall management of financial and portfolio performance, and capital management and enterprise risk management of the companies and trusts forming the Liberty business. He is and was responsible for the preparation of LF’s financial statements. His current title is Chief Financial Officer. In his first affidavit, Mr Riedel exhibited various relevant financial statements and other financial documents evidencing LF’s categories of income, its financial performance during the relevant years, the relevant distributions made by MFG as trustee of MHT, intercompany loans, and distributions and loan offsets. In his second affidavit, Mr Riedel exhibited various loan ledgers for certain loan accounts and deposed to the net amounts owing by LF to MHT as at 30 June in the financial years 2009 to 2015. In his third affidavit, Mr Riedel deposed to cash transfers from LF to shareholders. (I note that an unsworn copy of Mr Riedel’s second affidavit affirmed 24 November 2021 was filed before his third affidavit dated 18 November 2021, but was affirmed at a later date.)
The Commissioner objected to some parts of the applicant’s lay affidavit evidence. Most of the objections were resolved on the basis that the evidence would be admitted subject to relevance. In some other instances, where the evidence went to advice given to Liberty by external parties, it was agreed that use of the evidence would be limited to the non‑hearsay purpose contended for by the applicant and not the truth of the asserted contents of the advice pursuant to s 136 of the Evidence Act 1995 (Cth).
The relevant entities
Liberty was established by Mr Ma in 1997 after he developed what is said to be a novel risk management system for determining lending risk and pricing loans. It arranges finance for customers throughout Australia and New Zealand. It started operations in the residential mortgage sector, but over time expanded its offerings to include motor finance loans, commercial loans, business loans, personal loans, investment products, finance broking, real estate listings, and insurance.
MFG was incorporated on 28 February 2007 in preparation for a planned IPO and was, during the relevant years, the head company of the MFG tax consolidated group. That meant that, among other things, MFG’s subsidiaries were treated as part of MFG, and their actions were treated as actions of MFG, because it was, as a result of the consolidation, the only entity recognised for the purposes of working out the income tax liability of the consolidated group. See Part 3‑90 of the ITAA97 and Commissioner of Taxation v Macquarie Bank Ltd (2013) 210 FCR 164 at 187‑190 [91]‑[99] and 200‑203 [139]‑[148] (Middleton and Robertson JJ).
Liberty’s Australian business has at all times involved LF and Secure Funding Pty Ltd (Secure Funding). The former was established in January 1997, the latter in March 1998. Both became members of the MFG tax consolidated group upon its formation.
Secure Funding acted as the trustee of the securitisation trusts, which raised funds from financiers and institutional investors to acquire financial assets (being loan receivables and related securities). It was the lender on record for every loan originated by LF.
LF was and remains the principal operating entity of Liberty’s Australian business. It provided services to Secure Funding (as trustee of the securitisation trusts) as well as to other members of the Liberty group, including loan origination, management, financing, and administration services.
At all material times until 29 June 2007, LF was wholly‑owned by Jupiter, which was incorporated in the Netherlands. Jupiter was, in turn, wholly‑owned by Juno Holdings S.a.r.l (Juno), a company incorporated in the Netherlands Antilles.
On 28 February 2007, Jupiter incorporated MFG, which acted as the holding company for LF as part of the restructure.
On 12 April 2013, Vesta, also incorporated in the Netherlands, acquired the shares in MFG and the units in MFGT from Jupiter. Vesta was wholly‑owned by another Dutch company, Vesta Financial BV.
The ultimate shareholders of the Liberty group were at all relevant times entities associated with investors Messrs Ma, Parseghian and Moh, who are non‑residents of Australia.
The relevant entities, together with their respective name changes over time, were helpfully set out in the Commissioner’s closing submissions, relevantly as follows:
Definition Entity Former name(s) Date of name change Juno Juno Holdings S.a.r.l. Juno Holdings NV
Minerva Holdings NV
7 December 2012
26 November 2008
Jupiter Jupiter Holdings BV Liberty Financial BV 20 November 2007 LF Liberty Financial Pty Ltd ACN 077 248 983 Progressive Funding Pty Ltd 19 February 1997 MFG (the applicant) Minerva Financial Group Pty Ltd
ACN 124 171 759Minerva Financial Group Limited
Minerva Financial Group Pty Ltd
Liberty Financial Group Pty Ltd
19 March 2008
28 October 2016
8 October 2020
MFGT Minerva Financial Group Trust MHT Minerva Holding Trust Minerva Fiduciary Liberty Fiduciary Ltd ACN 119 884 623 Ghan Management Limited
Minerva Fiduciary Ltd
28 February 2007
11 January 2011
Minerva Technology Liberty Financial Group Limited
ACN 125 611 574Minerva Technology Pty Ltd
Liberty Financial Group Pty Ltd
7 October 2020
14 December 2020
Secure Credit Secure Credit Pty Ltd ACN 124 171 768 Minerva Credit Pty Ltd 9 June 2011 Secure Funding Secure Funding Pty Ltd ACN 081 982 872 Liberty Funding Pty Limited 25 October 2006 Vesta Vesta Funding BV Securitisation and securitisation trusts
Since 2002, Liberty has obtained funds to arrange loans to customers through a process called securitisation, using securitisation trusts, which were established under and governed by various documents, being master trust deeds, master origination deeds, master servicer deeds, master management deeds, and master registry agreements. It obtains funds in that way because, unlike banks, it is not permitted to raise funds through deposits.
Liberty’s business continues to be operated in the manner described below, but I will adopt the past tense in the description that follows, because, obviously enough, for the purposes of this proceeding, the relevant question is how the group was structured and operated during the relevant years.
Every securitisation trust was established by a notice of creation of trust executed by Secure Funding as trustee. For every securitisation trust, there was a supplementary terms notice containing details of the unitholders and creditors and other supplementary terms.
The beneficial interest in each securitisation trust was usually constituted by one residual income unit (RIU) and one residual capital unit (RCU), each of which was issued prior to the securitisation trust receiving receivables.
An RIU entitled the holder to receive the balance of the income of the securitisation trust after the trustee had paid interest to the noteholders and/or financiers and fees to service providers (including the fees payable to LF), and the recoupment of any losses.
An RCU entitled the holder to receive the balance of the capital of the securitisation trust after the trustee had paid the principal due to noteholders and financiers, which typically held the highest security ranking.
LF was the holder of the RIUs and RCUs in the securitisation trusts established between 2002 and 15 April 2008.
Since 2002, the securitisation program has operated as follows.
One of LF’s activities was to originate loans through brokers or directly with customers. Secure Funding advanced funds to the customer as the lender on record, and held the interest in the security granted to secure the loan (such as the mortgage over real property).
After Secure Funding made a loan to the customer, the loan was used as collateral to enable Secure Funding to obtain funding in respect of the loan. This was achieved by Secure Funding equitably assigning a pool of loan receivables to a warehouse trust.
Each warehouse trust was a special purpose, bankruptcy‑remote trust and was established once a financier, usually a commercial or investment bank, agreed to provide senior funding to the warehouse trust. Mr Ma deposed that the term “bankruptcy‑remote” was one used by rating agencies and in the debt markets industry to describe “an entity formed so as to minimise the risk of it becoming a debtor in a bankruptcy case, resulting in its obligations to creditors being very secure and clearly defined even if any of its related parties become bankrupt”. The financier provided funding to the warehouse trust by way of a warehouse debt facility and subscribed for a note in the trust. Such facilities were typically provided on terms of 364 or 365 days, following which the facility needed to be renewed.
Senior financiers which provided warehouse debt facilities did not typically lend 100% of the face value of the receivables. That meant that another source of funding was required to provide a loan that was subordinated to the warehouse debt facility. The percentage required to be funded by such subordinated loans varied from financier to financier, and depended upon the nature of the assets against which the facility was secured, ranging from 3% to 15% or more. The subordinated loans were typically provided by LF.
The funding required for LF to provide such subordinated lending was principally sourced from income that it received in its capacity as holder of the RIUs in the securitisation trusts. According to Mr Riedel, investors would like the proposition that LF, as the originator, had a stake in the securitisation trusts by providing subordinated debt to them and therefore had “an economic alignment in the assets of the trust” (a concept which he said was colloquially known as “skin in the game”).
The warehouse trust used the funds raised to acquire loan receivables and related securities.
Secure Funding entered loan contracts with borrowers up to the limit of the relevant warehouse debt facility. Once the value of loan receivables from customers in a warehouse trust approached the facility limit, and in order to be able to continue providing loans to new borrowers, Secure Funding pooled the loans and sold them to a newly established, bankruptcy‑remote trust called a term trust, for which Secure Funding also acted as trustee. This process was effected by Secure Funding, as trustee of the warehouse trust, equitably assigning the loan receivables to the term trust. Warehouse trusts and term trusts are referred to collectively as securitisation trusts.
Term trusts typically have a life of approximately four years, notwithstanding they typically have a legal life of 31 years. They therefore provided a longer‑term source of funding than warehouse trusts.
A term trust issued notes (which are publicly quoted instruments) of varying classes to institutional investors. The proceeds were used to acquire the loan receivables and related securities from the warehouse trust. The warehouse trust used those funds to repay the warehouse debt facility and the subordinated loan which “refreshed” the short‑term funding capacity for new loan originations.
Where Liberty did not sell notes of all classes in a term trust, LoanNET Pty Ltd (LoanNET), a wholly‑owned subsidiary of LF, could acquire some notes (typically the most junior ones). Mr Riedel deposed that LoanNET purchased those notes in term trusts which did not have a credit rating and which the trustee chose not to sell to external investors. LF provided loans to LoanNET to enable it to acquire the notes.
When a term trust was finalised, LoanNET repaid the loan from LF, and paid LF a dividend equal to the income it had earned from the investment in the term trust.
Some term trusts paid a fee to Liberty Credit Enhancement Company Pty Ltd (Credit Enhancement Co), a wholly‑owned subsidiary of LF. Credit Enhancement Co received cash from most term trusts by way of a guarantee fee until a predetermined maximum balance (described as the “Guarantee Fee Reserve Account Maximum Amount”) held by it was achieved. The guarantee fee was worked out as a percentage of the aggregate amount of all trust notes on the first day of a payment period. Credit Enhancement Co provided a limited guarantee to the relevant term trust to reimburse noteholders should a loss be incurred. The guarantee was secured by funds that Credit Enhancement Co accumulated in a controlled bank account. When a term trust was finalised without loss to noteholders, Credit Enhancement Co retained the balance in the controlled account for its own benefit and paid those funds to LF by way of dividend. The applicant led evidence to the effect that this arrangement provided credit enhancement to noteholders in term trusts; support for the credit rating assigned to a term trust by ratings agencies; and an incentive for LF effectively to carry out the services it provided to the term trusts. The applicant also led evidence to the effect that, to date, no term trust has experienced a loss that has required it to call upon the guarantee. Mr Riedel said that “[t]his credit enhancement feature aligns the interests of LF with investors, provides an additional layer of protection to noteholders, and is an attractive feature compared to other competing investments”.
LF’s sources of income
LF derived income as follows.
First, it derived origination, service, and management fees from the securitisation trusts. As:
(a)originator of the loans to customers, it was entitled to an origination fee of up to 1% of all loan receivables originated by it under the master origination deed;
(b)servicer of the loan receivables, it received a fee of 0.55% per annum of the value of the loan receivables under the master servicer deed; and
(c)manager of the loan receivables, it received a fee that was generally 0.05% per annum of the value of the loan receivables under the master management deed.
Secondly, it derived interest from the subordinated loans provided to warehouse trusts, related party loans, and any notes taken in the term trusts.
Thirdly, it derived dividends from subsidiaries, including:
(a)LoanNET, which derived income from the interest on the junior notes in the term trusts;
(b)Credit Enhancement Co, which derived income from the limited guarantee arrangement with term trusts;
(c)Secure Credit, which performed risk and treasury management services for LF; and
(d)Secure Funding.
Fourthly, it derived management fees charged to other entities in the Liberty group being Secure Funding, Secure Credit, Secure Funding Limited (SFL), and from the 2012 income year, MHT.
Finally, it derived income as the holder of the RIU in the securitisation trusts. LF’s gross income that it derived as the RIU holder is called the “net interest margin”, being the margin between the interest payable by the securitisation trust to its lenders (the financier in the case of a warehouse trust and the noteholders in the case of a term trust) and the interest paid to the securitisation trust by the customers (being the borrowers under each loan).
During the 2002 to 2007 income years, LF’s gross income from RIUs in securitisation trusts was as follows:
Income year Income from RIUs in securitisation trusts % of LF’s gross income 2002 $1,774,000 4.41% 2003 $18,145,000 22.86% 2004 $55,300,000 54.85% 2005 $78,452,000 68.61% 2006 $92,558,000 71.89% 2007 $78,951,000 52.78% Total $325,180,000 Capital raising, proposed restructure and proposed public offering of shares
On 29 April 2004, Minerva Holdings NV (now Juno) entered into a “Strategic Alliance Agreement” with Macquarie Bank Limited (Macquarie). As part of that agreement, Minerva Holdings NV issued Macquarie with an unsecured, interest‑bearing note for USD11.2 million, with an option to exchange it for equity. These funds were loaned to LF, which used them in its business.
Under the Strategic Alliance Agreement, as Mr Pillai deposed, “Macquarie became the preferred provider of services in relation to raising debt capital, securitisation of any assets and investment banking services (including advice on corporate restructures, raising equity and leading an IPO)”. Macquarie also appointed Laurie Cox as a director of LF. Mr Cox was also a director of MFG and Minerva Fiduciary Ltd (Minerva Fiduciary) (now known as Liberty Fiduciary Ltd), and held all three positions until 26 March 2008.
Clause 6 of the Strategic Alliance Agreement enabled Macquarie, and certain other shareholders, to issue a request to commence an “IPO Process”. Clause 6.1(a) provided that “[a]t any time from the day that is 12 months after the Completion Date, Macquarie or any Shareholder other than a Small Shareholder may issue a request to commence an IPO Process (“IPO Notice”) to Minerva and to the other Shareholders other than the Small Shareholders”.
Clause 6.2 provided:
Minerva and the Founding Shareholders must use their respective reasonable endeavours to ensure the Business is operated in a manner that is conducive to a successful IPO (including adoption of appropriate corporate governance policies and practices), utilising the Business as a material asset underlying the basis of the IPO.
Clause 7.6 provided:
Notwithstanding clause 7.5, the parties will procure (to the extent that it is within their capacity to do so and acting reasonably) the IPO Entity and Macquarie to negotiate in good faith the appointment of Macquarie to act as lead manager and underwriter to the proposed IPO, on terms which reflect commercially acceptable practices, to the extent that such agreement to negotiate does not contravene any applicable law or generally accepted good corporate practices. As part of the IPO Process, Macquarie would seek to achieve competitive pricing for the IPO, generate appropriate research and, subject to all applicable law, maintain an after‑market for the listed shares.
Stamp duty and CGT issues were, among many other things, raised at a meeting between, among others, Mr Ma and Mr Pillai with lawyers from Mallesons Stephen Jaques on 15 July 2004. It was described as an “initial strategy and planning session” about different ways that Liberty could access capital. The suggested agenda for that meeting under the heading “Trade sale” contained the following:
•Note potential stamp duty application on transfer of assets from existing entity(s) to Newco (including on value of contracts/goodwill, IP etc.). No stamp duty reconstruction relief available if transfer of dutiable assets to Newco pre trade sale ‑ potentially significant stamp duty costs
•Stamp duty analysis required to determine quantum of duty on any restructure/transfer to Newco prior to trade sale
The agenda also included under the heading “IPO” the following agenda item: “Formulate preferred sell‑down structure (after consideration of tax, stamp duty, GST, regulatory and third party consents)”.
In mid‑2005, Macquarie proposed to Liberty a public capital raising by way of an IPO of stapled securities, which involved establishing a listed fund and a holding company that would issue stapled securities of trust units and company shares to the public. Macquarie also proposed that a company in which Macquarie and Liberty would have an interest would act as the manager of the newly incorporated company and the newly created unit trust, and that the unit trust would be a registered managed investment scheme.
In April 2006, Macquarie provided a draft term sheet, a summary of fees, and engagement letters to act as joint lead manager for the IPO and to provide investment banking services.
In early 2006, Liberty appointed Macquarie and Citigroup to act as joint lead managers for the IPO and established a due diligence committee to evaluate, oversee and coordinate the IPO process.
During 2006 and the first half of 2007, Liberty continued to work towards an IPO of stapled securities to occur in July 2007.
In February 2007, Liberty’s advisors prepared materials for the purposes of marketing the offering to potential investors, and seeking regulatory approvals and consents and input from rating agencies and Liberty’s lenders. For example, Macquarie prepared marketing materials to explain the benefits of the IPO to potential investors. In addition, Baker & McKenzie prepared papers to brief the Australian Securities and Investments Commission (ASIC) and the Australian Securities Exchange (ASX) on the proposed IPO.
On 28 February 2007, the applicant was incorporated in anticipation of it acting as the head company of the corporate side of the stapled group. The shares in MFG were held by Liberty Financial BV (now Jupiter).
Mr Pillai deposed that:
In order for Liberty to undertake an IPO of stapled securities in the manner proposed by Macquarie, it was necessary for Liberty to establish a structure for its business going forward as well as undertake a restructure of parts of is existing business. Part of that restructure involved Liberty transferring its RIUs in the Securitisation Trusts to a newly established unit trust which would issue units to the public as part of the stapled security.
Mr Pillai continued:
During meetings I had with representatives of Baker & McKenzie, Macquarie and Citibank in early 2007, it became apparent that the transfer of the units to [MFGT] would be commercially problematic. The issue was that all income generated by the Securitisation Trusts would be distributed to [MFGT] and then likely distributed to the ultimate investors in the stapled securities. This meant that the total flow through of distributions to stapled security holders could result in yields greater than the 4% to 5% that had been planned. Macquarie and Citibank advised Liberty at the time and I believe that there was no valuation benefit to Liberty in providing investors with a yield in excess of the distribution policy outlined in the IPO prospectus. It would also be difficult to manage the yield from year to year causing fluctuations in stapled security holder returns.
The proposed IPO of stapled securities (in the manner proposed by Macquarie) required that LF would transfer all of its existing RIUs to [MFGT]. This may also have meant that LF would not have had sufficient cashflow to meet its requirements including operational expenses and developing new business.
To resolve these issues, Baker & McKenzie proposed that Liberty should create an interposed unit trust … which would hold the units in the Securitisation Trusts and which would, in turn, issue ordinary units to [MFGT] and a discretionary unit to LF.
Mr Pillai also produced a paper that he prepared for the board of LF, MFG, and Minerva Fiduciary dated 27 April 2007 analysing the restructure as it was then proposed. It included the following observations:
The following paper has been prepared to provide a summary of the restructure of Liberty Financial Pty Ltd (“Liberty”) and its wholly owned subsidiaries (“the Liberty Group”) into a stapled security structure (“the Minerva Group”) which will then be the subject of an initial public offering (“IPO”) and listing. This paper also considers the on‑going legal, tax, and funding considerations for Minerva Financial Group Limited (“Minerva” [now MFG]) and Minerva Fiduciary Pty Ltd (as responsible entity (“RE”) for the Minerva Trust [that is, MFGT]).
This paper has been divided into five distinct parts dealing with various discrete issues or components of the restructure as follows:
1.Analysis of the restructure steps required to transfer the businesses of the Liberty Group to the Minerva Group companies comprising Minerva and the Minerva Trust (“the Corporate Restructure”);
2.Analysis of the specific restructure steps required to effect the transfer of the existing Liberty funding program (comprised of securitisation and warehouse trusts and Secure Funding Pty Ltd (“Secure Funding”)) to the Minerva Group (“the Funding Restructure”);
3.Analysis of the Liberty‑specific issues resulting from the above restructure steps and any transitional matters;
4.Analysis of the legal considerations affecting the stapled structure, focusing on a summary of the key legal documents and an overview of the ASIC and ASX waivers that have been requested; and
5.Analysis of the funding considerations for the Minerva Group structure and implications for distribution policy.
…
1. PROPOSED CORPORATION RESTRUCTURE STEPS
1.1 Corporate Restructure Overview
…
•Step 5a ‑ Establishment of the Holding Trust and transfer of financial assets: Liberty will establish a trust (“Holding Trust”) and will sell its financial assets to Holding Trust in return for (i) two discretionary units, (ii) “normal” fixed units and (iii) promissory notes. The value of the fixed units will be 1/10th of the value of the financial assets sold to the Holding Trust and the value of the promissory notes will be 9/10th of the value of the financial assets. Based on the financial assets being valued at $300m, the fixed units will be valued at $30m and the promissory notes valued at $270m.
…
5. FUNDING & CAPITAL MANAGEMENT ISSUES
This section provides a detailed explanation of the “holding trust” structure and the role it [plays] within the Minerva Group from a cashflow management perspective. The Board has previously sought confirmation that the holding trust structure is appropriate from a legal, tax and accounting standpoint.
These confirmations will form part of the opinions currently being prepared and listed in Schedule 2.
5.1 Background
Management have prepared an analysis of the implications of the proposed structure on cashflow management within the Minerva Group. This involved superimposing the operating cashflows for Liberty for the financial year ended 30 June 2007 on the proposed stapled structure. The results of this analysis were as follows:
•Minerva would have [received] $22.8m of fee income (being the servicer and [manager] fees charged to the various securitisation and warehouse trusts and Secure Funding);
•Minerva (through Liberty Credit Enhancement Pty Ltd) would have received a further $28m of cash by way of the guarantee fee paid by the various securitisation and warehouse trusts. These amounts are used to fund reserves for the benefit of securitised noteholders and are only available when the underlying securitisation trust is paid in full. For the purpose of this analysis we have assumed that 50% of this cash will be available to meet Minerva’s day‑to‑day requirements during the period of analysis; and
•Minerva would have been required to meet $85.7m of cash outgoings composed predominantly of commissions paid to Introducers of $30m, wages and other staff expenses of $26m, interest expense of $4.5m, securitisation expenses of $4m and other operating expenses such as rent.
Based on the above there is a prima facie cash difference of $48.9m. Under the existing structure, this would have been met by residual income distributions from the various securitisation and warehouse trusts which totalled $89m. Under the proposed structure, the Holding Trust enables the group to achieve a similar result.
5.2 The role of the Holding Trust
The primary operational purpose of the Holding Trust is to act as an efficient aggregation mechanism for cash within any financial year. Every month the various securitised and warehouse trusts will make distributions of income to the Holding Trust and some or all of these amounts may be required to meet Minerva’s monthly outgoings.
As cash is required, the trustee of the Holding Trust would make a determination to issue a discretionary distribution to Minerva to ensure that it can meet its commercial obligations. Any cash not required will continue to be retained within the Holding Trust to meet future cash requirements of Minerva or to satisfy the Minerva Trust’s distribution policy. Based on the analysis conducted using FY 06 cashflows this would mean that $48.9m would be distributed to Minerva to allow it to meet its expenses and at year end, $40.1m would have been held within the Holding Trust.
5.3 Distribution Policy
Management are currently working with Macquarie Bank and Citibank to finalise the distribution policy for the Minerva Group. Preliminary indications suggest that an unfranked distribution yield of 4% is acceptable to the market. The current analysis proceeds on this basis.
Based on the above structure, at year‑end the Directors of the RE will be in a position [to] assess the available cash held within Holding Trust. The Directors of Minerva will also be in a position to assess Minerva’s cash requirements for (i) the next few months and (ii) medium to long‑term capital requirements.
Based on these two assessments, as well as the proposed distribution policy, the RE of Holding Trust will be able to distribute income to the Minerva Trust to meet its obligations to security holders. Therefore, based on a market value of $700m, a 4% distribution policy will require Holding Trust to distribute $28m to the Minerva Trust. This amount will in turn be distributed to unitholders.
The remaining $12.1m within Holding Trust can either be distributed to Minerva (where it will be subject to tax at the corporate tax rate) or retained within the Holding Trust (where it will be subject to tax at the top marginal rate). Alternatively, if the cash is not required within the structure the Directors could opt to pay a higher distribution yield.
The Directors of the RE and Minerva can, of course, determine to change the distribution policy (for example, to increase the yield, or to retain more cash within the group to fund future growth initiatives). Ultimately, these decisions will translate into a determination to distribute a greater or lesser amount of income from the Holding Trust to the Minerva Trust at the point that the distribution policy is set.
On 25 May 2007, Minerva Technology Pty Ltd (Minerva Technology) was incorporated as a wholly‑owned subsidiary of LF.
On 31 May 2007, MFGT was settled. Minerva Fiduciary (now known as Liberty Fiduciary Ltd) was the trustee. Two units were issued to the applicant. MFGT was to be the “head trust” in the stapled structure and its units were to be stapled to the shares in MFG.
Clause 24 of MFGT’s Constitution, contained in a deed poll dated 14 June 2007, relevantly provided:
24Duration of the Trust
Initial Settlement
24.1The Trust commences when the Responsible Entity’s [being Minerva Fiduciary] nominee [MFG] subscribes A$2.00 for 2 Units in the Trust (the Initial Units).
24.2The Responsible Entity’s nominee must be issued with the Initial Units in return for that payment.
24.3The Initial Units are automatically withdrawn and cancelled upon issue of the first Units under the first [disclosure document issued in respect of, among other things, an issue of units on any stock exchange] in accordance with clause 7.1(a).
…
On 27 June 2007, a draft “plan of reorganisation” (comprising a “Proposed Restructure Steps” PowerPoint presentation, a “Restructure Step Plan”, and a document list) was circulated to the directors of LF in preparation for a board meeting to take place on 29 June 2007.
On 29 June 2007, the directors of LF met. The minutes of that meeting relevantly recorded as follows:
1. Restructure
The Chairman noted that the Proposed Restructure Steps PowerPoint presentation and Restructure Step Plan and Documents List were previously distributed to Directors.
Laurie Cox informed the meeting that Macquarie Bank is unable to support the restructure in its present form. Macquarie Bank cannot support the restructure because the IPO has been de‑linked from the restructure and they have not done due diligence on the restructure itself and that Macquarie Bank is not across the detail of the restructure.
The Managing Director noted that the restructure steps must take place if the Company is going to proceed with the IPO. The Chairman informed the meeting that the issue for the Directors is whether or not the Board proceed with the IPO having heard Macquarie’s concerns.
The Chairman asked whether the views of the shareholder of the Company are known. It was noted that the Company has received a written resolution of Minerva Holdings NV as the sole shareholder of Liberty Financial BV, which is the sole shareholder of the Company, authorising all of the steps of the restructure to proceed.
The Chairman noted that the documents previously circulated to the Directors with the Notice of Meeting were the Proposed Restructure Steps PowerPoint presentation and Restructure Step Plan and Documents List. The Chairman outlined the content of the documents, more particularly Steps 1, 2 and 3 of the Proposed Restructure Steps as:
(a) the Company entering into a Deed of Termination in respect of a licence of certain intellectual property from Liberty Financial B.V.;
(b) the Company registering a transfer of all its issued capital to Minerva Financial Group Limited; and
(c) the Company electing to form part of a consolidated tax group with Minerva Financial Group Limited and other entities
(each referred to as an “Eligible Transaction”).
2. Approval of Restructure
The Chairman proposed the resolution that the Board approve the restructure (as set out in Proposed Restructure Steps), approve each Eligible Transaction and approve each document relating to the restructure and each Eligible Transaction, together with such amendments, alterations, deletions and additions to any document, transaction or Eligible Transaction as the committee of the Board established for this purpose may consider necessary.
Laurie Cox voted against the resolution. All other Directors voted in favour of the resolution.
3. Appointment of Committee of the Board
The Chairman proposed the resolution that the Board appoint a committee of the Board to effect the resolution set out in item 2 above …
Laurie Cox voted against the resolution. All other Directors voted in favour of the resolution.
4. Other Business
It was noted that it is intended that the Offer Document be lodged on either 10 July 2007 or 11 July 2007.
…
On the same day, Juno assigned its intellectual property to Minerva Technology; the applicant acquired all of the shares in LF from Jupiter, by providing $700 million in consideration for the shares in the form of three notes issued by the applicant to Jupiter on 29 June 2007; and the applicant acquired all of the shares in Secure Funding.
The election to form part of a consolidated tax group with Minerva Financial Group Limited (now MFG) and other entities referred to in the minutes was in fact made on 9 September 2009. According to the “Notification of formation of an income tax consolidated group” lodged with the Australian Taxation Office on that date, the consolidation was to have retrospective effect from 1 July 2007 and MFG was to be the head company.
As is apparent from the minutes of the 29 June 2007 board meeting, Macquarie did not agree to support the restructure. The steps taken by the Liberty group on 29 June 2007 triggered a dispute with Macquarie which culminated in Macquarie bringing court proceedings against Juno. As a result, the assignment of intellectual property from Juno to Minerva Technology on 29 June 2007 was ultimately treated as if it never occurred.
The structure of the Liberty group following these events, as at 29 June 2007, is set out in the following diagram, which was included in the Commissioner’s closing submissions. The Commissioner dubbed this “Restructure I”:
(As the Commissioner noted, the diagram does not include all entities, including some securitisation trusts, that fall within the group structure.)
Mr Pillai deposed that when Liberty was planning to transfer the units in the securitisation trusts from LF to MHT in readiness for an IPO in 2007, Minerva Holdings BV sought advice from Mr JD Merralls AM QC in relation to a series of questions about possible liability for stamp duty, including in Queensland, the Northern Territory and South Australia, “arising from the transfer of various interests and business assets in the Liberty Financial group in Australia … [which] transfers will occur in the course of the reconstruction of the group to make an Initial Public Offering of stapled securities comprising shares in a new public company and units of a public unit trust”.
Part of the instructions given to Mr Merralls included “that a key part of the proposed reconstruction of the group will be the transfer of the Residual Income Units and the Residual Capital Units in the present securitisation Trusts and Warehouse Trusts and subordinated debt securities and loans from Liberty Financial to the trustee of a new trust (“the Holding Trust”) to be held upon trust for the trustee of another new trust (“the Public Trust”) which will be a unit trust in which the units are stapled to shares in a new public company”.
Mr Merralls’ written opinion dated 2 July 2007 was in evidence. He advised that stamp duty would be payable in Queensland, the Northern Territory and South Australia if the units were to be transferred in the way contemplated in his instructions. Mr Pillai gave evidence that he recalled that around the time that the advice was given, approximately 20% of Liberty’s loan book related to assets in Queensland and that he also recalled the stamp duty exposure in that state would have been approximately $40 million.
I should interpolate that the applicant submitted, by reference to audited financial statements of LF for the 2007 financial year and an undisputed summary of the relevant statutory provisions applicable, based on the duty rates applicable in 2007 in Queensland and the Northern Territory, that if a transfer of the units in the securitisation trusts from LF to MHT had occurred in those jurisdictions at that time the stamp duty payable would have been $35,973,305 and $1,585,494, in the case of Queensland and the Northern Territory respectively. (South Australia was not included because the value of any dutiable property (unsecured debts) in that jurisdiction at that time was minimal.)
In the course of July or August 2007, Liberty decided to postpone the IPO. The factors contributing to that decision included:
(a)a downturn in global financial markets (later referred to as the global financial crisis or “GFC”);
(b)feedback received from potential investors that the market did not support the IPO with an external management structure; and
(c)the dispute with Macquarie.
Mr Ma explained in his affidavit that the phrase “external management structure” refers to the use of a management company which was not to be owned by the investors in the stapled group.
On 12 July 2007, Mr Ma wrote an email to a number of other directors of the Liberty group, including as follows:
The four investment banks have completed their pre‑sounding of investors. Feedback has been consistent with strong concerns around the manager arrangements, but otherwise positive on the company and its prospects. Based on our discussions with 3 of the 4 banks, it would seem the value impact of the manager arrangements significantly outweighs its benefits. We are awaiting feedback from the JLMs [joint lead managers] on likely valuation if the manager is removed. Once we receive this information, we should be able to quickly form a view as to whether we redraft and lodge the offer documentation and commence a formal roadshow.
Mr Ma deposed that he received a letter from Citigroup and Macquarie dated 16 July 2007 in which they confirmed advice given at a meeting on 11 July 2007 that “having regard to the feedback received from the analyst investor education process conducted by the Joint Lead Managers and Co‑Lead Managers, the market does not support an IPO of Minerva Financial Group under the current external management structure”. The letter also responded to Mr Ma’s request that Citigroup and Macquarie consider the price earnings multiple at which they anticipated a successful IPO could be undertaken. This was referred to as the “Bookbuild Range”. Having identified the Bookbuild Range at which they believed a successful IPO could be achieved, the letter continued:
In addition to the assumptions you have asked us to make, we note that in arriving at the Bookbuild Range we have assumed:
•there being no material changes to the structure of the IPO or material changes to the Prospectus other than to effect the internalisation of the management structure;
•there being no material adverse change, or a development involving a prospective material adverse change, in the reasonable opinion of the JLMs [joint lead managers], in relation to Minerva’s current business or any businesses or assets acquired between the date of this letter and the IPO; and
•no material adverse change in financial market conditions, including any material underperformance in the share price of RAMS post listing.
On 25 July 2007, the directors of MFG and Minerva Fiduciary met and resolved to have further discussions with Macquarie before deciding whether or not to proceed with the IPO. The minutes of that meeting relevantly recorded:
The Managing Director [Mr Ma] updated the Board on the steps required for the IPO. The first three steps of the restructure occurred as at 29 June 2007.
Further, the Minerva Trust [MFGT] has been established but has no assets. The remaining steps include but are not limited to the transfer [of] the securitisation units into the Trust (which would incur stamp duty), issue of discretionary unit by the Trust to Minerva Financial and the licensing of technology to various companies.
Due to the impasse with Macquarie Bank and market feedback, the contemplated IPO may be postponed. Although Minerva Financial owes consideration for the purchase of Liberty Financial Pty Ltd, it may be necessary for it to meet this obligation through the issuance of securities in the Minerva Group.
The current structure is sustainable for a short period of time as originally anticipated. A full analysis is needed if the present structure was to become permanent and, in particular, assessment of the implications for Minerva Group to proceed without an external manager.
The Managing Director outlined the following options going forward: (1) maintain the status quo but proceed with the stapled structure; (2) proceed with an IPO but internalise the manager; or (3) seek an investment by a private equity company. This was followed by a general discussion about the reasons for the IPO, the motivations of shareholders and market perceptions about any future IPO.
It was agreed to await the outcome of current discussions with Macquarie Bank in its capacity as Joint Lead Manager and principal before deciding on how to proceed.
The board of directors of LF, including Mr Ma, met on 9 August 2007. Mr Pillai attended as a guest. The minutes of that meeting recorded that the Chairman, Mr Richard Longes, “noted the need to complete all the steps for Project Claremont, other than the IPO, management company and stapling structure. Also, the existing securitisation trusts will not be transferred to [MFGT] and any new securitisation trusts will be established under [MFGT]”. (Project Claremont was the name given in 2004 to the potential public capital raising.) The minutes also recorded that Mr Pillai was asked to prepare, by 24 August 2007, a paper outlining the steps needed to complete the restructure.
On 18 September 2007, Baker & McKenzie (external legal advisers to the Liberty group) sent to Mr Pillai, among others, a revised version of the proposed restructure in the form of a PowerPoint presentation. The slide entitled “Step 11 – IPO” had had added to it the words “this step will no longer occur”.
On 21 September 2007, based on the Baker & McKenzie document and tax advice from KPMG about the tax implications of forming a consolidated tax group, Mr Pillai wrote a confidential memorandum to the directors of MFG, Minerva Fiduciary, and LF, including Mr Ma, entitled “Draft Summary of Revised Restructure”, relevantly as follows:
3. Additional steps to effect the final corporate structure
Completion of the restructure requires that:
•The convertible notes to be converted to ordinary equity in Minerva and the promissory note issued by Minerva to Liberty Financial BV be redeemed in exchange for ordinary shares in Minerva. The conversion and redemption will be on the basis that the value of the ordinary shares should not have a value greater than the face value of the notes;
•The sale of $2 of units in the Minerva Trust [MFGT] to Liberty Financial BV for the same value;
•The consolidation of Minerva and its subsidiaries which would have the benefit of facilitating intra‑group transactions (e.g., dividends within subsidiaries); and
•The conversion of the [sic] Minerva Financial Group Limited into a Pty Ltd until such time market conditions warrant the consideration of a public listing.
Mr Pillai spoke to his paper at a board meeting of MFG, Minerva Fiduciary, and LF on 25 September 2007. Mr Pillai deposed that at that meeting, he explained to the board that one of the benefits of forming a tax consolidated group was that the tax cost bases of LF’s units in the securitisation trusts would be increased, which would reduce the CGT cost of transferring the units to the holding trust when the transfer of those units became necessary. He further deposed that he recommended that any new securitisation trusts should be established with units held by the holding trust. He also deposed that that recommendation was given on the basis of his understanding that “an IPO was not imminent but that Liberty wanted to be IPO ready”.
As recorded in the minutes, at that meeting, the directors of all three entities resolved to proceed with the conversion of the notes into equity, transfer the two units in MFGT to Jupiter (at the time, Liberty Financial BV), and convert MFG into a proprietary limited company. The minutes recorded that Mr Cox abstained from voting in relation to the conversion of the notes and the transfer of the units in MFGT. (The decision to transfer the two units MFG held in MFGT to Jupiter was given effect on 14 December 2007.) As for consolidation, the minutes recorded that consolidation was possible, but “more analysis” was required before making that decision, “particularly in relation to including the Trust as part of any such consolidated group”.
On 19 November 2007, an article appeared in “The Australian” newspaper which included the following:
Liberty Financial management will take another look at floating the mortgage lender in the 2008 financial year but managing director Sherman Ma says there is no urgency.
“We have continuously looked at options,” Mr Ma said. “This year again we looked at another option … but we never made a decision to list.”
But Mr Ma said it would have a look at an Australian Securities Exchange listing this financial year. “We owe it to our shareholders to do that – they own the company.”
Mr Ma gave the following evidence in his first affidavit about what he was quoted as saying in that article, as follows:
Liberty had not abandoned the IPO altogether but had postponed it due to the market disruption and uncertainty caused by events leading up to the GFC. While it was not known at that time when another attempt would be made, I considered and discussed with the other directors and with senior management on many occasions that there would likely be a public offering at some time in the future. [He then produced the article.]
MHT was part of the original Plan which had been developed by various advisors in order to ensure that Liberty optimised its capital structure and that it could grow and attract funding from diverse sources. For this reason, I believed it was important to implement as many steps of the Plan as possible to ensure that Liberty would be in position to attempt another equity capital raising once market conditions improved. Based on the reasons set out above, I therefore considered that it was important for Liberty to establish MHT despite having decided to defer the IPO.
Mr Ma was cross‑examined in relation to the article, as follows:
COUNSEL:… tell me if you get to page 6498 … ?
MR MA:Yes. I have 6498. It’s an article in The Australian.
COUNSEL:You see there, on the second line, you are quoted as having said, this article being as at 19 November 2007 – you are quoted as having said:
This year, again, we looked at another option, but we never made a decision to list.
That was – you said that in about November 2007?
MR MA:I trust the journalist to have quoted me correctly.
COUNSEL:And it was correct you had never made a decision to list?
MR MA:Yes. In my mind, a decision to list is to actually list.
COUNSEL:Sorry. My question was you had never made a decision to list?
MR MA:I made a decision to pursue a listing.
COUNSEL:But never made the decision that that would be the path you would necessarily take?
MR MA:No. My decision was I would like to list as the first preference, but the market conditions did not allow me to make a decision to list.
COUNSEL:But, in fact, you were – at the time you were pursuing the possibility of listing, you were also pursuing other equity and capital options?
MR MA:Yes. Investing – “considering” might be the word I would say is more accurate as to my mindset at the time.
COUNSEL:“Considering”. And raising for the consideration of the board, also, the possibility of considering those options?
MR MA:Yes. As the listing was uncertain.
On 10 December 2007, Mr Pillai wrote a confidential memorandum to the directors of MFG, Minerva Fiduciary, and LF, including Mr Ma, entitled “Update on Revised Restructure Plan”, relevantly as follows:
Update on Revised Restructure Plan
The following memorandum sets out further information in relation to the revised restructure plan that was tabled at the Board meeting on 21 September 2007 (a copy of which is attached as an appendix to this memo).
1. Proposed Final Structure
Shown below is the proposed final structure of the Minerva Financial Group (“Group”) after effecting the various restructure steps set out in the appendix:
The final structure will involve Liberty Financial B.V. (“Liberty BV”) owning 100% of the equity of the [sic] Minerva Financial Group Limited (“Minerva”) which in turn will own 100% of the equity of Liberty Financial Pty Ltd (“Liberty”) and its controlled entities. In addition, Liberty BV will also directly own 100% of the equity in the Minerva Trust [MFGT], which in turns owns the majority of Holding Trust (other than a Special Unit held by Liberty).
This is a departure from the original Claremont plan, as it was originally proposed that the equity in Minerva would be stapled to units in the Minerva Trust and subsequently that Liberty Financial BV would hold a direct interest in stapled securities (rather than a separate holding of shares and units). However, as a public listing is not contemplated in the near future, the stapled structure has not been pursued because this would bring with it (i) additional complexity in relation to day to day management of the structure and (ii) a stapled structure would limit flexibility in relation to any future restructures or acquisitions using scrip for scrip roll over provisions.
2. Executing the Revised Structure
The process of arriving at the above revised structure merely involves finalising certain of the steps that were implemented prior to 30 June 2007 as part of the Claremont process. These steps are:
•Conversion of convertible notes into equity: The sale of Liberty to Minerva prior to 30 June 2007 was effected through the issue of a combination of promissory notes and convertible notes by Minerva to Liberty BV. These instruments included provisions for arm’s length interest to be charged (which means that taxable income is currently being generated in the Netherlands).
It is proposed that the convertible notes be converted into ordinary equity in Minerva and the promissory notes be redeemed for further ordinary equity in Minerva. Based on the opinions received on these steps as part of the Claremont process, these conversions do not give rise to any material consequence in Australia;
•Sale of Minerva Trust: The Minerva Trust currently has $2 of units outstanding. Further, the trust has no assets other than this amount. The sale of the $2 of units currently held by Minerva to Liberty BV will prima facie be a CGT event, but no capital gains tax exposure is expected as there has not been any accretion in the value of the Minerva Trust since it was established; and
•Conversion of Minerva to a Private Company: As a private company, Minerva will be subject to less stringent reporting requirements. The conversion of Minerva to a private company is not expected to give rise to any accounting or tax issues.
The minutes of a concurrent board meeting of MFG, Minerva Fiduciary, and LF held on 10 December 2007 noted under the heading “Restructure Update”:
Laurie Cox excused himself from the meeting due to a conflict of interest arising from Macquarie Bank’s interest.
Suresh Pillai explained that the Minerva Trust will be used for future securitisations. It was noted that the transfer of existing securitisation trusts will incur stamp duty liability. This liability can be reduced by transferring warehouse trusts once the outstanding amount of those trusts is reduced.
It is proposed that finalisation of the restructure is to take place by the end of 2007, with the exception of the conversion of the Minerva Financial Group from a public to private company which has procedural timelines.
Mr Pillai was asked some questions in cross‑examination about his 10 December 2007 memorandum and the board meeting, as follows:
COUNSEL:I think we’re – I think we’re in violent agreement that at this stage, 10 December 2007, that there was to be, my words, the trust silo and the corporate silo in respect of future securitisation trusts being established under the trust silo – that decision had been made?
MR PILLAI:…
COUNSEL:Okay. And as at that date, there was no then contemplated public listing in the foreseeable future?
MR PILLAI:I don’t know what you mean when you say foreseeable future. In –
COUNSEL:Well – ?
MR PILLAI:In December 2007, the market conditions did not look great, but as I said earlier, they did look up a bit in January/February of 2008, so it wasn’t a slam dunk that we could IPO in the next two months, but there was some, albeit slim, optimism.
COUNSEL:Well, there was nothing in the order of the preparation of a plan for IPO as at 10 December 2007 as there had been in June 2007?
MR PILLAI:Absolutely. Like I said, there was slim optimism. We were certainly not talking to the market then.
COUNSEL:And not talking to any bankers about IPO in the next six months?
MR PILLAI:The bankers were always thereabouts. There was I think perhaps a month or two before these minutes an approach by one of the banks to create a consolidated IPO entity, a project by the name of Project Globe, which is referred to in one of my annexures. And that Project Globe did involve some level of going to the market, slightly differently, but still going to the market. So the bankers were talking to us all the way through.
The Commissioner submitted that the first scheme, which involved the transfer of the RIU in the Sirius Trust to MHT in 2008, MHT being nominated as RIU holder for securitisation trusts established from March 2009 onwards, and the transfer of the RIU in the Liberty/SPAN Warehouse Trust 2003‑1 in the 2013 year, were “steps [that] occurred after the IPO that had been planned in mid‑2007 had been abandoned” and that “[t]herefore, the carrying out of [it] cannot be explained by reference to the objectives of undertaking an IPO or by the commercial benefits of an IPO”.
For reasons given above (see [360]), I do not accept that the IPO was abandoned, as the Commissioner alleged. I thus do not accept his submission that the timing of the first scheme points towards a purpose of obtaining a tax benefit.
On the contrary, the timing of the first scheme – that is, those steps described above – was, as I have explained, driven by Liberty’s decision to go to market with an IPO, using a stapled security, and to be “IPO ready”.
I accept the applicant’s submission, to the extent that it relates to the first scheme, that “[t]here is nothing significant in the timing or the length of the period during which the identified schemes were carried out which is suggestive of a dominant purpose to obtain a tax benefit” and that “[t]his factor does not support a conclusion that MFG entered into any one of the schemes for the dominant purpose of obtaining a tax benefit”.
The fourth factor: the result in relation to the operation of the ITAA36 that, but for Part IVA, would be achieved by the first scheme
The Commissioner submitted that “[t]he income tax result of all three schemes posited by the Commissioner is the same”, namely that “residual income from the [s]ecuritisation [t]rusts that would otherwise have been included in [the applicant’s] assessable income … for the relevant years, and which would have been subject to income tax in [its] hands at the corporate rate of 30%, was not included in [its] assessable income” and that this factor points towards a purpose of obtaining a tax benefit.
I disagree. First, it seems to me that such a line of reasoning is impermissible, because it runs head long into what Edmonds J said in Commissioner of Taxation v Ashwick (Qld) No 127 Pty Ltd (2011) 192 FCR 325 at 380 [189], namely that “the fact of a tax consequence … resulting from a given transaction, attracts no inference that the parties to the transaction entered into it or carried it out for the dominant purpose of obtaining that tax consequence”.
In any event, as the applicant submitted, the tax consequences are more extensive. As it submitted, the tax consequences of the first scheme were that:
(a)the residual income of the MHT securitisation trusts was included in the net income of MHT;
(b)the amounts of income distributed by MHT to the special unitholders in the 2013 and 2014 income years were included in MFG’s assessable income;
(c)the amounts of income distributed by MHT to MFGT were included in MFGT’s net income and, in turn, were distributed to Jupiter and Vesta; and
(d)Jupiter and Vesta were subject to withholding tax on the distributions to them, which primarily consisted of interest income.
In my view, this factor is neutral.
The fifth factor: any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result from the first scheme
The Commissioner made the same submission in respect of each of the schemes, as follows:
Due to consolidation, it is convenient to refer to the financial position of both the [a]pplicant and of its subsidiary members, LF and Secure Credit, as part of this factor. As a result of entering [each of the three schemes], the financial position of the [a]pplicant differed because [it] was not required to include MHT’s total net income of $99,027,183 in its assessable income in the relevant years. Rather, [it] was only required to include in its assessable income the special distributions totalling $1.4 million made by MHT to the special unitholders in the relevant years. Although this reduction in the [a]pplicant’s tax liability might be thought to improve [its] financial position, the reduction is secured by denying its subsidiaries, LF and Secure Credit, distributable income from MHT in the relevant years. Rather, the full $99,027,183 was still available to LF in the form of interest‑free cash loans from MHT.
The Commissioner submitted that this factor points towards a purpose of obtaining a tax benefit, but in my view, even taking that submission on its face, it is no more than a neutral factor.
The sixth factor: any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the first scheme
The Commissioner made the same submission in respect of each of the schemes, namely:
Jupiter (and from 12 April 2013, Vesta) was the sole unitholder in MFGT and was made presently entitled to the whole of the distributable income of MFGT in each of the relevant years. Therefore, its financial position could be said to improve as a result of the scheme.
However, the determination to distribute no more than 2% of MHT’s net income to the special unitholders meant that LF required a succession of capital injections in order to support its capital adequacy ratio and these capital injections came from Vesta.
For the reasons set out at [482]‑[494] above, the evidence does not demonstrate that LF required “a succession of capital injections in order to support its capital adequacy ratio”, so the premise of the Commissioner’s submission on this factor falls away.
On the other hand, following the steps taken in 2007 and 2008 for it be IPO ready, LF continued to be profitable. It also derived income from the MHT securitisation trusts by way of service, management and origination fees, and from MHT by way of management fees. See [164]ff above. And although Vesta made a lump sum injection of equity capital of $189 million into LF (see [249] above), Jupiter/Vesta also received substantial income distributions from MFGT in the relevant years. See [156] above.
In my view, this is a neutral factor.
The seventh factor: any other consequence for the relevant taxpayer … of the first scheme having been entered into or carried out
As Middleton and Robertson JJ said in Commissioner of Taxation v Macquarie Bank Ltd (2013) 210 FCR 164 at 239 [283], the use of the word “other” in this criterion suggests that the consequences to be considered under it are those other than fiscal or financial ones (for example, any reputational impact). As their Honours noted, this appears to have been assumed – without ultimately deciding the point – by the Full Court in Eastern Nitrogen Ltd v Commissioner of Taxation (2001) 108 FCR 27 at 49 [113] (Carr J, with whom Lee and Sundberg JJ agreed).
The parties did not refer to that observation in their submissions and proceeded on the basis that fiscal or financial consequences were relevant under this criterion. In light of the decision in Macquarie Bank, and in the absence of any contention that there were consequences of the first scheme that were non‑fiscal or non‑financial, this factor is neutral.
The eighth factor: the nature of any connection between the relevant taxpayer and any person referred to in the sixth factor
The parties made very brief submissions in relation to this factor.
The Commissioner made the same submission in respect of each of the schemes, namely that:
All the entities in the Liberty Group are owned by the same ultimate non‑resident owners. The nature of the connection between the parties is relevant in this case because the relationships between the parties enabled the Liberty Group to use the income that had been diverted from LF as a result of Restructure II, and the subsequent failure by the [a]pplicant as trustee of MHT to distribute income to the special unitholders, to nevertheless fund LF’s business by way of the loans from MHT and LF.
He said that this factor “points towards a purpose of obtaining a tax benefit”.
The applicant submitted that during the relevant years, “MFG, LF, MFGT and MHT were, directly or indirectly, members of the same wholly‑owned group” and “[t]he schemes relied upon by the Commissioner provided real commercial benefits to the group as a whole and generated value for its ultimate shareholders”. It submitted that this factor points away from a dominant purpose of enabling MFG to obtain a tax benefit.
In my view, however, this is a neutral factor.
Conclusion about the first scheme
Having regard to those conclusions in respect of each of the matters set out in s 177D(b), I do not think that a reasonable person would conclude that the applicant entered into or carried out the first scheme for the dominant purpose of enabling it to obtain a tax benefit in connection with the scheme.
SECOND SCHEME – S 177D FACTORS CONSIDERED
The first factor: the manner in which the second scheme was entered into or carried out
It will be recalled that the second scheme comprised (i) the steps that gave Jupiter/Vesta the entitlement to all of MFGT’s distributable income in the relevant years, (ii) the trustee of MHT choosing not to exercise its discretion to distribute its distributable income to one or both special unitholders, and (iii) MHT lending the funds obtained as RIU holder of the MHT securitisation trusts to LF. It is convenient to deal with this factor first in relation to point (i) (which I shall refer to as the “first part” of the second scheme), and then in relation to points (ii) and (iii) (which I shall refer to as the “second part” of the second scheme).
The Commissioner submitted that the manner in which the ownership of MFGT was transferred from the applicant to Jupiter in December 2007 “lack[ed] transparency”. See [459] above. He also submitted that in the absence of any evidence as to the reason for the issue of additional units to Jupiter in the 2011 year, it should be inferred that such evidence would not assist the applicant. See [460] above.
He submitted that this contention went to the first factor of the second scheme, in the Commissioner’s favour.
For the reasons set out under the rubric “The steps that gave Jupiter/Vesta the entitlement to MFGT’s distributable income”, I do not agree that the applicant’s evidence lacked transparency or that I should draw a Jones v Dunkel (1959) 101 CLR 298 inference of some sort.
In my view, the manner in which the steps giving Jupiter the entitlement to all of MFGT’s distributable income were carried out is a neutral factor.
As for the second part of the second scheme, in each of the relevant years, as the Commissioner submitted, the applicant in its capacity as trustee of MHT, had a choice as to whether to direct any or all of MHT’s net income to the special unitholders (LF and Secure Credit), or whether to allow the ordinary unitholder, MFGT, to gain a present entitlement to that income. As I said earlier, the evidence established that the applicant considered its power to distribute MHT’s distributable income in each of the relevant years and made a determination in each of the relevant years regarding the extent to which MHT’s net income should be distributed to the special unitholders. See [140]ff.
The applicant could only proffer one reason why a greater distribution of income from MHT to LF would not be desirable, that is, the so‑called return on equity “metric”. As I also explained, the applicant was unable to provide any evidence as to how the metric was calculated, what assumptions underpinned it, whether or why a lower return on equity metric would not be desirable or how that consideration outweighed the negative consequences of LF not receiving the income. See [502]‑[507].
The applicant was unable to provide any cogent reason, other than the tax benefit, why the decision was taken in each of the relevant years to direct no more than 2% of MHT’s net income to the special unitholders. The applicant submitted that neither LF nor Secure Credit had an “entitlement” to the income from the RIUs and that the power of the trustee of MHT to distribute income to the special unitholders was discretionary. So much, unsurprisingly, was accepted by the Commissioner. But neither factor goes to the relevant question of dominant purpose, objectively viewed.
In those circumstances, I agree with the Commissioner’s submission that, viewed objectively, the exercise of the choice in each of the relevant years (the manner in which the second part of the second scheme was carried out) was driven by the tax benefit of directing income away from LF. Having found that this factor is neutral insofar as it relates to the first part of the second scheme, I agree with the Commissioner’s submission that, objectively, the manner in which the second scheme was entered into is indicative of a dominant purpose of obtaining that tax benefit.
The second factor: the form and substance of the second scheme
In my view, there is no material difference between the form and substance of the second scheme. The substance of it was, as the applicant submitted, that MFGT benefitted from its ownership of ordinary units in MHT by receiving a distribution of MHT’s income. The form was the same.
The Commissioner submitted that, as a matter of substance, the second scheme “did not change the actual flow of cash from the securitisation trusts as compared to the pre‑2008 position” and “[a]ll that changed as a result of the scheme was the form of that cash from being a receipt associated with a distribution of assessable income to [one] associated with a loan”, which “resulted in problems for the Liberty Group as it reduced LF’s retained earnings such that it required capital injections to maintain its capital adequacy ratio”. For the reasons I have given at [482]‑[494], I do not accept the Commissioner’s submissions regarding the impact on LF’s capital adequacy ratio or profitability, and again, the premise of the Commissioner’s submission on this factor falls away.
I accept the applicant’s submission that this factor does not support a conclusion that the applicant entered into the second scheme for the dominant purpose of obtaining a tax benefit.
The third factor: the time at which the second scheme was entered into and the length of the period during which it was carried out
It is again useful to address this factor firstly in relation to the first part of the second scheme. In my view, there is nothing significant in the timing of the first part of the second scheme, that is, the taking of the steps that gave Jupiter/Vesta the entitlement to MFGT’s distributable income, which is suggestive of a dominant purpose to obtain a tax benefit. To that extent, the factor is neutral.
As for the second part of the second scheme, those steps occurred during each of the relevant years. The Commissioner submitted that, because they occurred more than four years after the planned 2007 IPO did not proceed and five years and more away from the IPO that was ultimately undertaken in 2020, they “cannot be explained as being in connection with” either and that “[i]n the absence of any evidence as to the commercial reasons why the [a]pplicant only distributed nominal amounts of income from MHT to the special unitholders, if any, in the relevant years this factor is indicative of the dominant purpose of obtaining a tax benefit”.
The applicant did not make a case that these steps were to be explained by reference to the planned or eventual IPO. It submitted that the second part of the second scheme “principally consists of MHT not doing something – viz. making a distribution of all or substantially all its income to the special unitholders as opposed to the ordinary unitholders” and that “[t]he loans from MHT to LF occurred at the times they did to facilitate cashflow management in circumstances where LF performed a group treasury function”. It submitted that there was therefore “nothing significant in the timing or the length of the period during which the identified schemes were carried out”.
I disagree. It seems to me, for the reasons given above, that the Commissioner is correct to contend that in the absence of any evidence from the applicant as to the commercial reasons why it only distributed nominal amounts of income from MHT to the special unitholders, in the relevant years this factor is indicative of the dominant purpose of obtaining a tax benefit.
The fourth factor: the result in relation to the operation of the ITAA36 that, but for Part IVA, would be achieved by the second scheme
As the applicant submitted, the tax consequences of the second scheme were that:
(a)the amounts of income distributed by MHT to the special unitholders in the 2013 and 2014 income years were included in MFG’s assessable income;
(b)the amounts of income distributed by MHT to MFGT were included in MFGT’s net income and, in turn, were distributed to Jupiter and Vesta; and
(c)Jupiter and Vesta were subject to withholding tax on the distributions to them, which primarily consisted of interest income.
I will not repeat what I said above about the Commissioner’s submission concerning of all three schemes posited by the Commissioner being the same.
In my view, in relation to the second scheme, this factor is neutral.
The fifth factor: any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result from the second scheme
This is a neutral factor. See [543]‑[544] above.
The sixth factor: any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the second scheme
This is a neutral factor. See [545]‑[548] above.
The seventh factor: any other consequence for the relevant taxpayer … of the second scheme having been entered into or carried out
In my view, there are no relevant matters under this factor, and the parties did not advance any, that arise for the second scheme and it is a neutral factor. See also [549]‑[550] above.
The eighth factor: the nature of any connection between the relevant taxpayer and any person referred to in the sixth factor
This is a neutral factor. See [551]‑[555] above.
Conclusion about the second scheme
Having regard to those conclusions in respect of each of the matters set out in s 177D(b), in my view a reasonable person would conclude that the applicant entered into or carried out the second scheme for the dominant purpose of enabling it to obtain a tax benefit in connection with the scheme.
THIRD SCHEME – S 177D FACTORS CONSIDERED
The first factor: the manner in which the third scheme was entered into or carried out
It will be recalled that the third scheme is comprised entirely of steps, matters, things or actions encompassed by the second part of the second scheme, which I have dealt with above. For the reasons given at [562]‑[565], the manner in which the third scheme was entered into or carried out is indicative of a dominant purpose of obtaining a tax benefit.
The second factor: the form and substance of the third scheme
In my view, there is no material difference between the form and substance of the third scheme. Like the second scheme, the substance of it was, as the applicant submitted, that MFGT benefitted from its ownership of ordinary units in MHT by receiving a distribution of MHT’s income. The form was the same.
The Commissioner similarly repeated his submissions in relation to the second scheme.
I accept the applicant’s submission that this factor does not support a conclusion that the applicant entered into the first scheme for the dominant purpose of obtaining a tax benefit. See [566]‑[568] above.
The third factor: the time at which the third scheme was entered into and the length of the period during which it was carried out
This factor is indicative of a dominant purpose of obtaining a tax benefit. See [570]‑[572] above.
The fourth factor: the result in relation to the operation of the ITAA36 that, but for Part IVA, would be achieved by the third scheme
The applicant submitted that the tax consequences of the third scheme were the same as the second scheme, set out at [573] above.
I will not repeat what I said above about the Commissioner’s submission concerning of all three schemes posited by the Commissioner being the same.
In my view, the applicant correctly contended that in relation to the third scheme, this factor is neutral.
The fifth factor: any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result from the third scheme
This is a neutral factor. See [543]‑[544] above.
The sixth factor: any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the third scheme
This is a neutral factor. See [545]‑[548] above.
The seventh factor: any other consequence for the relevant taxpayer … of the third scheme having been entered into or carried out
In my view, there are no relevant matters under this factor that arise for the third scheme and it is a neutral factor. See also [549]‑[550] above.
The eighth factor: the nature of any connection between the relevant taxpayer and any person referred to in the sixth factor
This is a neutral factor. See [551]‑[555] above.
Conclusion about the third scheme
Having regard to those conclusions in respect of each of the matters set out in s 177D(2), in my view a reasonable person would conclude that the applicant entered into or carried out the third scheme for the dominant purpose of enabling it to obtain a tax benefit in connection with the scheme.
DISPOSITION
I will make an order for the parties to confer and submit a joint proposal, or if they are unable to agree, separate proposals for the further conduct of this proceeding, including the determination of the question of costs of the proceeding, and any other orders to give effect to these reasons.
I certify that the preceding five hundred and ninety-four (594) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice O'Callaghan. Associate:
Dated: 16 September 2022
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