Singapore Telecom Australia Investments Pty Ltd v Commissioner of Taxation - [2024] FCAFC 29

FEDERAL COURT OF AUSTRALIA
Singapore Telecom Australia Investments Pty Ltd v Commissioner of Taxation [2024] FCAFC 29

Appeal from: Singapore Telecom Australia Investments Pty Ltd v Commissioner of Taxation [2021] FCA 1597; and Singapore Telecom Australia Investments Pty Ltd v Commissioner of Taxation (No 2) [2022] FCA 260

File number: VID 198 of 2022

Judgment of: WIGNEY, BANKS-SMITH AND COLVIN JJ

Date of judgment: 8 March 2024

Catchwords: TAXATION - cross-border transfer pricing and arm's length consideration provisions - whether primary judge erred in formulating the reliable hypothesis required to apply Subdivision 815-A of the Income Tax Assessment Act 1997 (Cth) and Division 13 of the Income Tax Assessment Act 1936 (Cth) - whether primary judge erred in finding that moving to a fixed base interest rate for the last three years of the loan term was not commercially justified - whether primary judge erred in finding that the capitalisation of interest should be on an annual basis - whether primary judge erred in concluding that loan amendment was irrational - whether primary judge erred in his conclusion as to the legal effect of determinations made by the Commissioner - whether primary judge erred in failing to consider losses arising before the relevant assessment years - matters raised by notice of contention did not arise - appeal dismissed

Legislation:
Income Tax Assessment Act 1936 (Cth) ss 177D, 177F, 136AA, 136AD, 136AF, Division 13

Income Tax Assessment Act 1997 (Cth) ss 815-5, 815‑10, 815‑15, 815-30, 815-35, Subdivision 815‑A, Divisions 815B-815D

Cases cited:
Bosanac v Commissioner of Taxation [2019] FCAFC 116; (2019) 267 FCR 169

Channel Pastoral Holdings Pty Ltd v Commissioner of Taxation [2015] FCAFC 57; (2015) 232 FCR 162

Chevron Australia Holdings Pty Ltd v Commissioner of Taxation [2017] FCAFC 62; (2017) 251 FCR 40

Commissioner of Taxation v Glencore Investment Pty Ltd [2020] FCAFC 187; (2020) 281 FCR 219

Commissioner of Taxation v Hart [2004] HCA 26; (2004) 217 CLR 216

Commissioner of Taxation v SNF (Australia) Pty Ltd [2011] FCAFC 74; (2011) 193 FCR 149

SNF (Australia) Pty Ltd v Commissioner of Taxation [2010] FCA 635

WR Carpenter Holdings Pty Ltd v Commissioner of Taxation [2008] HCA 33; (2008) 237 CLR 198

Zappia v Commissioner of Taxation [2017] FCAFC 185

Division: General Division

Registry: Victoria

National Practice Area: Taxation

Number of paragraphs: 311

Date of hearing: 17-20 April 2023

Counsel for the Appellant: Mr JW De Wijn AM KC with Mr C Peadon and Mr L Currie

Solicitor for the Appellant: PricewaterhouseCoopers

Counsel for the Respondent: Ms C Burnett SC with Mr M Sherman and Ms A Lyons

Solicitor for the Respondent: Australian Government Solicitor

ORDERS

VID 198 of 2022

BETWEEN:
SINGAPORE TELECOM AUSTRALIA INVESTMENTS PTY LTD

Appellant

AND:
COMMISSIONER OF TAXATION

Respondent

ORDER MADE BY:

WIGNEY, BANKS-SMITH AND COLVIN JJ

DATE OF ORDER:

8 MARCH 2024

THE COURT ORDERS THAT:
1.The appeal is dismissed.
2.The appellant pay the respondent's costs to be assessed if not agreed.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT
THE COURT:

On 28 June 2002, Singapore Telecom Australia Investments Pty Ltd (STAI) acquired all of the shares in a company that came to be named SingTel Optus Pty Ltd (SOPL). The vendor of the shares was Singtel Australia Investments Limited (SAI). Both SAI and STAI were wholly owned subsidiaries of Singapore Telecommunications Limited (SingTel). SOPL operated the Optus telecommunications business in Australia.
Funds to purchase the shares in SOPL were provided by SAI. The instrument recording the terms of the vendor finance was termed a Loan Note Issuance Agreement (LNIA). An amount of $5.2 billion was advanced under the terms of the LNIA.
The LNIA had some unusual terms. In particular, it contained a mechanism by which the payment of interest was not required until a 'variation notice' had been issued by SAI. The effect of that mechanism was that SAI could determine precisely when, over the 10 year term of the LNIA, STAI was required to pay interest and in what amount. It was intended to operate in a manner that would ensure that the liability to pay interest corresponded with the periods when STAI was earning sufficient profits to be able to meet the interest expense. The ability of SAI to determine the timing of the interest obligations of STAI had particular significance in circumstances where, in the first few years of the loan term, STAI was not expected to earn profits because SOPL was committed to undertaking substantial capital investment and it was not until after it had done so that profits were expected to flow to its shareholder, STAI. However, under the terms of the LNIA as originally agreed, the liability to pay interest still accrued. It was just the timing of the obligation to make payment that could be deferred by use of the 'variation notice' procedure.
Although it was STAI that needed to be able to defer repayment of interest until it had sufficient cash flow to make repayments, it was SAI that had the power to effect deferral through the issue of a variation notice. However, as has been explained, the arrangements were put in place between two wholly owned subsidiaries of SingTel in respect of the acquisition of shares in SOPL.
The interest rate payable under the LNIA was the one year bank bill swap rate from time to time plus 1%. That is to say, the rate payable was to be adjusted each year by reference to the bank bill swap rate at that time plus 1%. It was then to remain fixed for the next year. It was then to be reset again by reference to the then current bank bill swap rate plus 1%. The formula for calculation of interest included a further factor that was designed to require STAI to pay the 10% withholding tax applicable by reason that interest was to be remitted to SAI, a company incorporated in the British Virgin Islands. However, for present purposes that aspect of the interest formula assumes little significance.
STAI could repay the loan notes issued under the LNIA at any time. The LNIA also provided that SAI could at any time require STAI to redeem the loan notes issued under the terms of the LNIA. In effect, the whole of the borrowing could be repaid voluntarily by STAI or could be required to be repaid by STAI at any time during the 10 year term. Therefore, it provided no security of ongoing funding for STAI nor any security of return at the agreed interest rate for SAI.
The LNIA was amended on three occasions. Of present significance are the second and third amendments. They were made on 31 March 2003 and 30 March 2009 respectively.
By the time of the second amendment, STAI had not paid interest nor was any interest due to be paid because SAI had not issued any variation notices under the LNIA. Even so, under the accounting standards applicable to the preparation of accounts for SingTel on a consolidated group basis, SingTel would have been required to account for accrued liabilities arising from the LNIA. Those accrued liabilities would then fall due for payment when variation notices were issued by SAI. In the meantime, it appeared that withholding tax would be payable in respect of the accrued liabilities. On the evidence, it was those prospects that prompted the second amendment to the LNIA.
Broadly speaking, the second amendment did three things. First, it forgave the accrued obligation to pay interest for the period from the commencement of the LNIA until the amendment. In that respect, it was common ground that the second amendment relieved STAI of an accrued obligation to pay an amount of approximately $286 million. Second, it introduced a profitability benchmark (with retroactive effect) with the consequence that there could be no liability for interest (and hence no withholding tax liability) until the benchmark was met. Third, it added a further factor of 4.552% of the principal debt to the formula for the interest calculation. This factor was said to have been calculated on the basis of an expectation as to when the benchmark would be met. The additional factor was designed to equate the overall interest to be paid over the term of the LNIA to the equivalent economic value of the interest that would have been payable if the amendment had not been made (namely interest over the 10 year term at the agreed rate of the one‑year bank bill swap rate plus 1%). However, the equivalence was dependent upon the benchmark being met at the date that was used for the purposes of making the calculation. At various points in the submissions the additional 4.552% was referred to as an interest premium. The use of the term 'premium' is somewhat inconsistent with the notion of equivalence that was used to determine the amount. Nevertheless, these reasons will also use that terminology.
The second amendment had considerable significance for the timing of the accrual of any obligation on the part of STAI to pay interest under the LNIA as well as the timing of the obligation to pay that interest. Whereas under the original LNIA, an agreed rate of interest (which varied according to the bank bill swap rate) applied from the outset of the term of the LNIA with the timing of the obligation to pay that interest dependent upon the issue of a variation notice, the LNIA as amended by the second amendment deferred the timing of any obligation to pay interest until the point in time when the benchmark was met. At that time the bank bill swap rate would still determine the base rate of interest but both the margin of 1% and the premium of 4.552% would be added to reflect the fact that interest was only being paid once the benchmark was met. It represented the interest that would have been paid before the benchmark was met if an interest liability had accrued at that time (as had been the case under the original terms of the LNIA).
The use of the benchmark mechanism gave rise to another timing issue. It arose because the premium of 4.552% would only result in the total interest under the LNIA being equivalent to the application of the rate of interest that had originally been agreed if two assumptions came to be satisfied in the events which subsequently occurred. The first assumption was that the benchmark was met on the expected date which had been used to calculate the premium. The second assumption was that the interest continued to be calculated according to the original rate plus the premium for the balance of the term of the LNIA. If the benchmark was met at an earlier date (or there was some subsequent agreed change to the way the interest rate was determined) then there would be no economic equivalence with the amount as originally agreed. Indeed, if the benchmark was not met during the term of the LNIA (a possibility which was accepted by STAI's main expert to exist as at the time of the second amendment) then there would be no interest payable at all.
In the result, the benchmark was met earlier and also the LNIA was subsequently further amended by the third amendment so that the base interest rate was fixed. Each of those events resulted in considerably more interest being paid by STAI in respect of the funds advanced under the LNIA than would have been the case if the original rate had applied over the whole of the term. Therefore, in two respects, the premise for economic equivalence was not met in the circumstances as they unfolded.
As to the third amendment, it introduced the fixed rate. It replaced the original variable rate (to which the premium of 4.552% was added) with a fixed rate for the balance of the loan term. It produced an overall fixed rate of interest of 13.2575% for the balance of the term of the LNIA. As has been observed, in the events which occurred, the fixed rate resulted in more interest being payable than would have been the case if the variable rate had continued to apply as the base rate.
The financial years of the SingTel entities including STAI commenced on 1 April each year. Therefore, the taxation liabilities of STAI were determined according to the position in each of those years.
The Commissioner made determinations both under the cross-border transfer pricing provisions in Subdivision 815-A of the Income Tax Assessment Act 1997 (Cth) (ITAA97) and under the arm's length consideration provisions of Division 13 of the Income Tax Assessment Act 1936 (Cth) (ITAA36) and then issued notices of amended assessment for STAI for the financial years ending March 2011, 2012 and 2013 (being the final years in the 10 year term of the LNIA). The effect of the amendments was to disallow substantial deductions for interest payments under the LNIA in those years.
STAI objected to the assessments. The Commissioner disallowed the objections. STAI brought an appeal pursuant to Part IVC of the Taxation Administration Act 1953 (Cth) against the Commissioner's objection decisions. The appeal was unsuccessful: Singapore Telecom Australia Investments Pty Ltd v Commissioner of Taxation [2021] FCA 1597 (PJ). STAI now brings an appeal against the decision of the primary judge.
STAI articulated its appeal on the basis of some 49 separate appeal grounds. However, the written and oral submissions in support of the appeal were developed in terms that were grouped under seven alleged errors (each said to relate to a group of appeal grounds). The case for STAI on the appeal was put by reference to the seven alleged errors. It was not advanced by reference to the individual appeal grounds in any meaningful sense. The Commissioner responded on the same basis and also relied upon a notice of contention.
Before considering the particular matters raised by the grounds and contentions, it is necessary to consider four matters by way of introduction, namely:
(1)the statutory context;
(2)the history concerning the relevant taxation assessments;
(3)the nature of the expert evidence before the primary judge; and
(4)the reasoning pathway of the primary judge.
The statutory context
As has been indicated, the Commissioner pursued alternate statutory pathways as the foundation for disallowing the objections, being Subdivision 815-A of ITAA97 and Division 13 of ITAA36. It will be necessary to deal with both of them noting that the primary judge approached the issues in the case principally through the framework of Subdivision 815‑A.
If Subdivision 815-A applies to support the Commissioner's position (with the consequence that STAI fails in its attempt to demonstrate that the assessments are excessive) then the only significance of considering whether Division 13 applies is for the purposes of liability to penalties. If Subdivision 815-A does not apply to support the Commissioner's position (with the consequence that STAI succeeds in demonstrating that the assessments are excessive to the extent that they rely on those provisions) then it is necessary to consider whether Division 13 applies in determining whether the assessments were excessive.
The Court is concerned with the statutory provisions as they applied at the relevant time. In that regard, up until 1 July 2004, only Division 13 applied. Then for tax years starting between 1 July 2004 and 28 June 2013, both Division 13 and Subdivision 815-A applied. Then those provisions ceased to operate and Divisions 815-B to 815-D of the ITAA97 were the provisions that applied to transfer pricing. In the following reasoning, reference is made to the provisions as they applied during the term of the LNIA.
The relevant provisions in Subdivision 815-A
Subdivision 815-A operates by empowering the Commissioner to make a determination 'for the purpose of negating a transfer pricing benefit an entity gets': s 815-10(1). As to such a benefit, s 815-15(1) provides:
An entity gets a transfer pricing benefit if:
(a)the entity is an Australian resident; and
(b)the requirements in the *associated enterprises article for the application of that article to the entity are met; and
(c)an amount of profits which, but for the conditions mentioned in the article, might have been expected to accrue to the entity, has, by reason of those conditions, not so accrued; and
(d)had that amount of profits so accrued to the entity:
(i)the amount of the taxable income of the entity for an income year would be greater than its actual amount; or
(ii)the amount of a tax loss of the entity for an income year would be less than its actual amount; or
(iii)the amount of a net capital loss of the entity for an income year would be less than its actual amount.
The amount of the transfer pricing benefit is the difference between the amounts mentioned in subparagraph (d)(i), (ii) or (iii) (as the case requires).
In terms of overall structure, the provision identifies four circumstances that must exist for an entity to get a transfer pricing benefit and the amount of the transfer pricing benefit is an amount for an income tax year (being an amount of taxable income, an amount of a tax loss or an amount of net capital loss). It is that income year amount which may be negated by the Commissioner making a determination to that effect.
Turning then to the provisions of s 815-15(1) and the way in which each of the four circumstances may apply to SAI and STAI in the present case.
As to the first circumstance specified in (a), it was common ground that STAI was an Australian resident.
As to the next circumstance, it can be seen that (b) incorporates by reference 'the requirements in the associated enterprises article for the application of that article'.
It is common ground that the relevant associated enterprises article for present purposes is Article 6 of the Agreement between Australia and Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, and the protocols to that agreement. It is expressed in the following terms:
(1) Where-
(a)an enterprise of one of the Contracting States participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State; or
(b)the same person participates directly or indirectly in the management, control or capital of an enterprise of one of the Contracting States and an enterprise of the other Contracting State,
and in either case conditions operate between the two enterprises in their commercial or financial relations which differ from those which might be expected to operate between independent enterprises dealing wholly independently with one another, then any profits which, but for those conditions, might have been expected to accrue to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.
There are two 'requirements' stated in Article 6 for its application. First, there must be the requisite degree of management, control or capital as specified in (a) or (b). In the present case it was common ground that this first requirement was met as between SAI and STAI. Second, there must be conditions that operate between the two enterprises in their commercial or financial relations which differ from those which might be expected to operate between independent enterprises dealing wholly independently with one another. In these reasons, these conditions are referred to as the Non-Independence Conditions.
It is important to bear in mind that the Non-Independence Conditions are not confined to any agreed terms which govern the dealings between the two entities, whether by formal agreement or by understanding. Rather, they encompass all of those conditions which operate in the commercial and financial relations between SAI and STAI. It includes their relevant commercial and financial characteristics as separate entities and the way in which those characteristics affect the relations between them. In this respect, s 815-15(1) applies in a different way to Division 13 of ITAA36. The latter applies where (a) there was a supply of property; (b) the parties were not dealing at arm's length in relation to the supply; and (c) the consideration received or given by the taxpayer was less than arm's length consideration (see below). Therefore, Division 13 focusses much more closely upon whether there was non‑arm's length consideration received or given by the taxpaying in a particular dealing.

For present purposes, the second circumstance as expressed in s 815-15(1)(b) is met if the conditions that operate between SAI and STAI are Non-Independence Conditions.
The third circumstance as specified in (c) is that there is 'an amount of profits' which but for the Non-Independence Conditions 'might have been expected to accrue' to STAI but, by reason of the Non-Independence Conditions, has not so accrued. So, there is a 'but for' causative requirement as between the Non-Independence Conditions and the failure to accrue an amount of profits. What must be identified is an amount of profits which might have been expected to accrue to STAI if the Non-Independence Conditions were not present which has not accrued by reason of the Non-Independence Conditions. It invokes a hypothetical concerning the profits that might have been expected to accrue to STAI.
Many of the issues in the appeal concern the nature of the third circumstance and its application in the conditions that pertained as between SAI and STAI.
The fourth circumstance concerns the taxation consequences of the third circumstance. It proceeds on the premise that the third circumstance has been met (namely the amount of profits that might have been expected to accrue but for the Non-Independence Conditions did actually accrue to STAI) and requires one of three taxable outcomes to have occurred in consequence - greater taxable income for an income year, a reduced tax loss for an income year or a reduced net capital loss for an income year. In the present case, the assessments were issued by the Commissioner on the basis that the taxable income of STAI would have been greater in each of the financial years ending 31 March 2011, 2012 and 2013 because the interest expense charged by SAI under the LNIA would have been significantly less but for the Non‑Independence Conditions.
In summary, s 815-15(1) operates by reference to (a) an amount of profits that might have been expected to accrue; (b) that did not accrue; and (c) which had it accrued would have had a particular tax consequence in a particular income year. It describes an entity as getting a 'transfer pricing benefit' if each of those matters pertain. It identifies the amount of the transfer pricing benefit as an amount of taxable income, tax loss or capital loss of the entity that would have received the profits 'for an income year' (see concluding words to s 815-15(1)). That is to say, the amount of the transfer benefit relates to an income year. It is that amount which the Commissioner can negate by making a determination under s 815-30 (see s 815-10). Section 815-30 relevantly provides:
(1) The determinations the Commissioner may make are as follows:
(a)a determination of an amount by which the taxable income of the entity for an income year is increased;
(b)a determination of an amount by which the tax loss of the entity for an income year is decreased;
(c)a determination of an amount by which the net capital loss of the entity for an income year is decreased;
(d)a decrease of a particular amount in particular capital losses of the entity for an income year.
(2)If the Commissioner makes a determination under subsection (1), the determination is taken to be attributable, to the relevant extent, to such of the following as the Commissioner may determine:
(a)an increase of a particular amount in assessable income of the entity for an income year under a particular provision of this Act;
(b)a decrease of a particular amount in particular deductions of the entity for an income year;
(c)an increase of a particular amount in particular capital gains of the entity for an income year;
(3)If the Commissioner makes a determination under subsection (1), the Commissioner must make a determination under subsection (2), unless it is not possible or practicable for the Commissioner to do so.
Therefore, Subdivision 815-A results in a determination that adjusts the taxable income, tax loss or net capital loss, as the case may be, 'for an income year'. It requires the Commissioner to identify the amount of the transfer pricing benefit that pertains to an income year and determine an amount that negates that benefit. The determined amount 'is taken to be attributable' to that income year: s 815-30(2).
The express object of Subdivision 815‑A is to ensure that certain amounts 'are appropriately brought to tax in Australia': s 815-5. It is fundamental to the tax laws that assessment for taxation is imposed in respect of an income year. Generally speaking, amounts are brought to taxation in Australia in accordance with the year of income to which they relate.
Therefore, regard to the scheme of Subdivision 815-A as a whole requires a determination by the Commissioner not only of the amount of profits which, but for the non-arm's length conditions, might have been expected to accrue to the relevant entity, but also the income year in which those profits might have been expected to accrue.
In addition, Subdivision 815‑A includes detailed consequential adjustment provisions which confer authority upon the Commissioner to make further determinations that make consequential adjustments in any income year. Those provisions empower the Commissioner to ensure that the negation of a transfer pricing benefit in one income year does not operate unfairly or unreasonably in respect of any other income year. They are referred to below in dealing with equivalent aspects of Division 13.
The possibility that Non-Independence Conditions might have profit consequences across a period of years does not mean that the amount of profits with which s 815-15 is concerned is an aggregate amount of profits across those income years. Subdivision 815‑A applies with respect to the amounts of profits that correspond with a particular income year. That is, the statute operates in a way that affords significance both to the amount of the profits and the income year in which they accrued.
Take a simple example. A taxpayer enters into a non-arm's length dealing which provides that there will be no interest payable unless the loan amount is still outstanding after three years. Absent Non-Independence Conditions, the interest would have accrued and been payable by equal instalments in each month of the three year term. The interest is a deductible expense. Each year of the loan term corresponds to an income tax year. If interest is incurred because the loan amount is still outstanding, the effect of the agreement is that an amount of profits which but for relevant Non-Independence Conditions might have been expected to accrue in income tax year three is not accrued in that year because the interest expense in that year is three times higher than might have been the case without the Non-Independence Conditions. The Commissioner reaches the view that the greater amount of taxable income that would otherwise have been earned in income tax year three is a transfer pricing benefit and makes a determination negating the transfer pricing benefit.
In such a case, the taxpayer could not contend that there is no basis to make a determination for the purpose of negating a transfer pricing benefit because the interest paid in year three is the same as that which would have been payable over three years if there had been an arm's length dealing. The timing difference has significance for an income tax year and produces a transfer pricing benefit for that year.
Of course, it may be said that it would be unfair and unreasonable for the Commissioner to make a determination that would increase the taxable income in the third year without making an adjustment to years one and two to allow for the deductible interest expense that would have been available in those years if the hypothesis used to make the determination also applied to those years. However, as has been mentioned, Subdivision 815‑A has detailed provisions which confer power upon the Commissioner to make a further determination in respect of those other years if the Commissioner considers it fair and reasonable to do so (and to make consequential adjustments to taxable income in other tax years). The taxpayer may request the Commissioner to make such a determination and has a right to object if dissatisfied. Indeed, the existence of these provisions reinforces the evident structure of Subdivision 815‑A which is concerned with an amount of profits that might have accrued in an income year.
As will emerge, much of the case for STAI sought to ignore the timing effects of the way the LNIA operated (both in its original and amended forms). It sought to demonstrate that, viewed with the benefit of hindsight, over the entire 10 year term of the LNIA the total interest that was in fact paid by STAI was less than the interest that might have been expected to be paid if an arm's length rate had been agreed at the outset. On that basis, it contended that there was no amount of profits which, but for the relevant Non-Independence Conditions as between SAI and STAI, might have been expected to accrue to STAI. It treated the 'amount of profits which … might have been expected to accrue' as being concerned with the profits that accrued from the dealing as a whole (in the present case, the performance of the LNIA over its 10 year term). In consequence, STAI maintained that it was not until the end of the 10 year term of the commercial dealing that the Commissioner could make a determination under Subdivision 815‑A.
For reasons that have been given, this was not the correct approach because it ignored the timing effects of when profits were earned by STAI. It assumed that Subdivision 815-A was concerned only with whether the total interest cost charged over the whole term of the borrowing was less than the total interest cost that might have been charged if the Non‑Independence Conditions did not apply. However, as has been explained, Subdivision 815-A was also concerned with the effect upon taxable income (tax loss and net capital loss) in a particular income year. That is to say, it was concerned with the years in which there was an effect upon taxable income (tax loss and net capital loss) by reason of the Non-Independence Conditions.
This flaw in the case advanced by STAI permeates many of its contentions in the appeal insofar as it concerns Subdivision 815‑A (and, for reasons explained below, is also a flaw that permeates the case as to Division 13). As has been explained, the statutory concept of a 'transfer pricing benefit' includes an assessment as to the effect upon the amount of taxable income for an income year. It requires an assessment as to whether non-arm's length dealings have affected the profits in a particular tax year and consequently the amount of taxable income or loss (or net capital loss) for that year. Consequently, there is no foothold in the legislation for concluding that the making of any determination under Subdivision 815-A had to be deferred until the course of performance of a long-term transaction has concluded. If circumstances exist at any point in the performance of a long-term contract which have produced a transfer pricing benefit for an income year then the Commissioner may make a determination for the purpose of negating that transfer pricing benefit.
STAI sought to rely upon statements by Allsop CJ in Chevron Australia Holdings Pty Ltd v Commissioner of Taxation [2017] FCAFC 62; (2017) 251 FCR 40 at [17] to support its claim that the evaluation as to whether an amount of profits might have accrued but for the non-arm's length conditions must be made retrospectively once it is known how much interest was paid over the whole term of the LNIA. Those statements were made in the context of a consideration of the application of Division 13 which operates in a different manner to Subdivision 815-A (see below). Further, they concerned an instance where no issue arose as to the significance of the timing of interest payments. The issue in Chevron was whether the rate of interest exceeded the arm's length consideration. In determining whether that was the case, the Court had regard to the fact that the borrowing was for a five year term. However, it did not have to consider the accrual or deferment aspects that were fundamental to the way the interest liability was determined under the LNIA. Therefore, the reasoning in Chevron was not directed to answering that question.
STAI also contended that the primary judge had approached the matter on the basis that the relevant profits were those that had been earned over the term of the STAI rather than in the income years. The primary judge did say (PJ[300]):
Further, in circumstances where the LNIA was a 10 year transaction, it is necessary to consider the issues in relation to the whole life of the LNIA, not just the LNIA as it stood during the years ending 31 March 2010, 2011, 2012 and 2013. There does not appear to be any issue between the parties about this. Both parties, in their evidence and submissions, addressed the whole life of the LNIA. Unless one goes back to the beginning of the transaction, that is, when the LNIA was entered into, one cannot sensibly apply the provisions of Subdiv 815-A to the years ending 31 March 2010, 2011, 2012 and 2013.
However, two matters must be noted about that part of his Honour's reasoning. First, it is apparent from the final sentence that his Honour approached the matter on the basis that Subdivision 815-A required application of its provisions to each of the relevant income years. Second, in the reasoning that follows on from PJ[300], the primary judge dealt with the different circumstances that applied in each of three periods that corresponded with when the initial terms of the LNIA applied, when the second amendment applied and when the third amendment applied: see, particularly PJ[302]. His Honour reached particular conclusions about whether the terms that applied in each period differed from those that might be expected on an arm's length basis and the profits that might be expected to accrue but for those non-arm's length conditions in each of those periods: PJ[303]-[344]. His Honour then reached conclusions as to the position in each of the relevant tax years: PJ[345]-[348]. His Honour did not approach the statutory task on the basis contended for by STAI in its submissions on the appeal.
STAI's approach would also give rise to serious practical difficulties for the administration of Subdivision 815-A. First, on STAI's approach, in the case of any long term dealing, the required comparison with the reliable hypothesis could not be undertaken until the end of the term of the dealing. In the present case that period was 10 years, but it may be many more. In consequence, the Commissioner could only make the required determinations for the operations of Subdivision 815-A and Division 13 many years after the income years in question. Issues would arise as to how those provisions would operate to affect taxation liabilities that arose many years previously. Second, as the facts in the present case demonstrate, long term arrangements are susceptible to amendment. It is impractical to determine the application of the provisions with hindsight to the whole term of an agreement when its terms have changed part way through that term. Third, the transitional provisions for the introduction of Subdivision 815-A provide for it to apply 'to income years starting on or after 1 July 2004'. Any long term transaction which straddled that date would be subject to its terms for only part of its term. It is difficult to see how STAI's aggregating, hindsight-based approach could be applied in such a case. Where, as here, there have been changes to the transaction over time, it would be unclear as to the point in time when the assessments to be made as to whether the Non-Independence Conditions are met but for which an amount of profits might have been expected to accrue. Indeed, the use of an income year for the transitional provision supports the construction that has been outlined.
These practical difficulties are further reasons not to accept STAI's construction as to the operation of Subdivision 815-A.
The relevant provisions in Division 13
The relevant operative provision in Division 13 of ITAA36 was s 136AD(3) which provided:
Where:
(a)a taxpayer has acquired property under an international agreement;
(b)the Commissioner, having regard to any connection between any 2 or more of the parties to the agreement or to any other relevant circumstances, is satisfied that the parties to the agreement, or any 2 or more of those parties, were not dealing at arm's length with each other in relation to the acquisition;
(c)the taxpayer gave or agreed to give consideration in respect of the acquisition and the amount of that consideration exceeded the arm's length consideration in respect of the acquisition; and
(d)the Commissioner determines that this subsection should apply in relation to the taxpayer in relation to the acquisition;
then, for all purposes of the application of this Act in relation to the taxpayer, consideration equal to the arm's length consideration in respect of the acquisition shall be deemed to be the consideration given or agreed to be given by the taxpayer in respect of the acquisition.
It was common ground that SAI had supplied property to STAI under an international agreement. Property included services which in turn was defined to include any rights or benefits to be provided or conferred under an agreement for or in relation to the lending of monies. Therefore, the interest terms agreed under the LNIA were 'property' supplied to STAI. It was also common ground that SAI and STAI were not dealing at arm's length with each other.
As to s 136AD(3)(c), the term 'arm's length consideration' was to be construed having regard to the terms of s 136AA(3)(d) which provided:
a reference to the arm's length consideration in respect of the acquisition of property is a reference to the consideration that might reasonably be expected to have been given or agreed to be given in respect of the acquisition if the property had been acquired under an agreement between independent parties dealing at arm's length with each other in relation to the acquisition;
Therefore, the terms of s 136AD(3)(c) were met if the amount of the interest given or agreed under the LNIA exceeded that which might reasonably be expected to have been given or agreed had the interest been paid under an agreement between independent parties dealing at arm's length with each other.
It is common ground that the Commissioner determined that s 136AD should apply in relation to STAI for each of the income years ending 31 March 2011, 2012 and 2013. Separate determinations were made for each of those years. Regard to the determinations makes plain that each one determined an arm's length amount of consideration that was to be substituted for the interest actually paid in that year by STAI for the acquisition of property under an international agreement (namely the procurement of financial accommodation under the terms of the STAI by the issue of notes).
As to those determinations, s 136AD(4) provides:
For the purposes of this section, where, for any reason (including an insufficiency of information available to the Commissioner), it is not possible or not practicable for the Commissioner to ascertain the arm's length consideration in respect of the supply or acquisition of property, the arm's length consideration in respect of the supply or acquisition shall be deemed to be such amount as the Commissioner determines.
An issue arises as to the effect of the provision that the determined consideration shall be deemed to be the consideration 'for all purposes of the application of this Act': see s 136AD(3) (quoted above). It is addressed below. However, what is clear is that the determinations in issue were not in fact based upon some view being taken as to the total consideration that was paid by STAI over the 10 year term of a kind that could only be made once that total amount as actually paid was known. Further, the terms of Division 13 did not require any such determination to be made. They did not require the Commissioner to defer making any such determination until all consideration payable under the terms of LNIA were known. If and when consideration has been given or agreed (see the terms of s 136AD(3)(c) as quoted above) then the determination may be made to substitute arm's length consideration for that which has been given or agreed.

It may be observed that Division 13 operates in a different way to Subdivision 815‑A. Division 13 is concerned with ascertaining the arm's length consideration in respect of the relevant dealing (in the present case the acquisition of finance services) and substituting the arm's length consideration for the actual consideration, thereby affecting the computation of any taxation payable by reason of the amount of that consideration. Its focus is upon adjusting the consideration actually given or agreed. It can make that adjustment in respect of the agreed consideration (to the extent that the fact of agreement is relevant for taxation purposes, such as when it affects accruals) or consideration that has been given, that is performed (to the extent that it is relevant for taxation purposes). In the latter case, the determination takes the time at which the consideration was given and replaces the amount with arm's length consideration for that time. Conceptually, it may require regard to all of the terms of the relevant international agreement in determining the arm's length consideration to be ascertained (or determined by the Commissioner and deemed to be the consideration in a case where s 136AD(4) is applied) and substituted at that time. However, it does not require anything more than the fact that consideration has been agreed or given for property that has been acquired under an international agreement. The determination adjusts that consideration to arm's length consideration.
The same is the case where the arm's length consideration 'received or receivable' is less than the arm's length consideration (s 136AD(1)) or no consideration is 'received or receivable' (s 136AD(2)) thereby resulting in less income to the Australian taxpayer. Those provisions also apply to deem the consideration 'received or receivable' to be the arm's length consideration (or an amount which the Commissioner determines if it is not possible or practicable to ascertain the arm's length consideration). In consequence, for tax purposes, the consideration that is received or receivable at a particular time is replaced by the arm's length consideration. Otherwise, tax is payable based upon the facts as they have occurred, including when the consideration is received or receivable. Accordingly, the determination will have consequences for the income year to which the consideration relates.
No aspect of Division 13 involves some form of adjustment or allowance as between income years as part of the replacement of the arm's length consideration. Nor does it involve some form of evaluation of the consideration agreed or given (received or receivable) over the whole term of an agreement (in the present case the LNIA).
The above analysis is consistent with the reasoning in WR Carpenter Holdings Pty Ltd v Commissioner of Taxation [2008] HCA 33; (2008) 237 CLR 198, noting that the High Court was there concerned with the provisions in Division 13 that apply to instances where Australian taxpayers are assessed on the basis that they have received insufficient consideration (rather than, as in the present case, where they are said to have paid excessive consideration): see reasoning at [23]-[27], [34]. In that case, the High Court approached the provisions of Division 13 on the basis that they require a decision to be made as to a year of income and may result in inclusion of income or disallowance of deductions where, in the Commissioner's opinion 'it is fair and reasonable' that the amount not be included or the deduction be allowed in that year of income (being a reference to the power of the Commissioner by a further determination to adjust the consequences of a determination substituting arm's length consideration). However, as the High Court emphasised, the power conferred upon the Commissioner to deal with those timing consequences is by a further determination. It is by the exercise of that separate statutory power that unfair or unreasonable consequences of a determination as to the arm's length consideration may be ameliorated. It is a power that a taxpayer can request the Commissioner to exercise and in respect of which the taxpayer can appeal. That is to say, the focus is upon substituting arm's length consideration for the actual consideration at the time it was agreed or given with any consequential determination as to what is fair and reasonable to be dealt with by way of further adjustment to be made separately.
In that regard, s 136AF(1), relevantly provided as follows:
Where, by reason of the application of section 136AD in relation to the supply or acquisition of property by a taxpayer, an amount is included in the assessable income of the taxpayer of a year of income or a deduction is not allowable or is not, in part, allowable, to the taxpayer in respect of a year of income, the Commissioner may, in relation to any taxpayer (in this subsection referred to as the relevant taxpayer):
…
(b) if, in the opinion of the Commissioner:
(i)an amount would have been allowed or would be allowable to the relevant taxpayer as a deduction in relation to a year of income if the property had been supplied or acquired, as the case may be, under an agreement between independent parties dealing at arm's length with each other in relation to the supply or acquisition, being an amount that was not allowed or would not, but for this subsection, be allowable, as the case may be, as a deduction to the relevant taxpayer in relation to that year of income; and
(ii)it is fair and reasonable that that amount or a part of that amount should be allowable as a deduction to the relevant taxpayer in relation to that year of income;
determine that that amount or that part of that amount, as the case may be, should have been allowed or shall be allowable, as the case may be, as a deduction to the relevant taxpayer in relation to that year of income;
and the Commissioner shall take such action as the Commissioner considers necessary to give effect to any such determination.
As has been mentioned, Subdivision 815-A has a similar structure whereby a determination may be made which negates a pricing benefit, but the Commissioner may, by further determination, adjust the consequences of that determination if the Commissioner considers that 'it is fair and reasonable' that the relevant amount in the income year be so adjusted: s 815‑35. However, as has been explained, Subdivision 815-A operates in a different manner. It is concerned with the amount of profits that have accrued to an entity in an income year by reason of Non-Independence Conditions and determining the taxable income, tax loss or net capital loss in that income year. Its focus is upon adjusting the taxation consequences to negate the taxation benefit in that income year.
As observed by Allsop CJ in Chevron at [15] in considering the terms of Division 13, 'the concept of the consideration that might reasonably be expected to have been given or agreed to be given had the agreement been reached between independent parties dealing at arm's length involves a suppressed premise or assumption that, in the real world, commercial parties could (and so would) enter into such a transaction such that an arm's length consideration can be hypothesised'. That is to say, it is not concerned with considering whether taxation should be imposed on the basis of a different transaction with different timing consequences and, therefore, effects in different income years. Similarly, as has been explained, Subdivision 815‑A is concerned with how an arm's length dealing may have affected the profits (and consequently the taxable income, tax loss or net capital loss) in an income year.
STAI sought to rely upon statements concerning the application of the provisions in Division 13 that were made by Middleton J in SNF (Australia) Pty Ltd v Commissioner of Taxation [2010] FCA 635 at [53]-[54] (said to have been approved on appeal). At that point, his Honour was dealing with a submission by the Commissioner to the effect that the taxpayer could not succeed in demonstrating that the prices paid were arm's length prices on the basis that the prices paid by the taxpayer did not exceed prices paid by unrelated parties in similar circumstances 'if the taxpayer paid prices that generated losses year after year'. As to that submission, Middleton J reasoned as follows:
… If losses occurred over many years, this may give rise to a close examination as to whether the prices for the acquisition of the goods were inflated. However, if after analysis and evaluation looking at the evidence and submissions made by the parties, the Court comes to the view that the prices were equivalent to or lower than the arm's length consideration, sustained loses even over a substantial period are not otherwise determinative against the taxpayer in applying Div 13. As I have indicated, genuine losses may be sustained for many reasons, and not necessarily because the transfer prices of the goods were artificially inflated. In any event, the sole enquiry is to consider the arm's length consideration, assuming (as in this proceeding) the other objective criteria in s 136AD are satisfied.
His Honour was there concerned with the evidentiary significance of the fact that prices were set at a level that resulted in sustained losses over many years. His Honour was not concerned with whether the determination as to whether particular consideration that was relevant to the assessment of taxation in a particular income year was arm's length consideration had to be undertaken over some form of extended period. The reasoning is not directed to the timing issue that arises in the present case.
Relevance of differences between Subdivision 815-A and Division 13
Both STAI and the Commissioner approached the appeal on the basis that there was no identified reason why Division 13 did not apply if it was determined that Subdivision 815-A applied, and vice versa. Reference was made to the theoretical possibility of a different outcome in a different factual circumstance by reason of the difference in the statutory concepts. However, neither party identified how such a difference might arise in the present case.
For the most part, the submissions for STAI were presented through the lens of Subdivision 815-A. However, those submissions were presented on the basis that even though Subdivision 815-A and Division 13 impose different tests 'the object of each is the same and [STAI] will in either case succeed if the amount of interest actually paid over the 10-year period was equal to or less than that which might be expected to have been paid between independent parties in similar circumstances'. Accordingly, STAI advanced its 10 year analysis as the basis for why the assessments were excessive irrespective of whether it was the determinations under Subdivision 815-A or Division 13 that were relied upon. As has been explained, that approach was fundamentally flawed.
The history of the relevant tax assessments
For present purposes, the relevant history of the tax assessments the subject of the appeals that were dismissed by the primary judge may be shortly stated.
The course of events commenced with the making of determinations by the Commissioner in October 2016 relating to STAI in respect of the 2010, 2011, 2012 and 2013 tax years. The primary judge set out examples of the determinations made by the Commissioner under Subdivision 815‑A and Division 13 at PJ[102]-[103]. It is sufficient to note at this point that each of the determinations under Subdivision 815‑A specified an increase in the taxable income for a particular income tax year and each of the determinations under Division 13 determined the arm's length consideration in respect of acquisition of property (that is the interest payable in respect of the loan provided under the LNIA) for a particular income tax year (on the express basis that it was not practicable for the Commissioner to ascertain the arm's length consideration).
On 28 October 2016, the Commissioner issued notices of amended assessments for each of the 2011, 2012 and 2013 tax years. There was no amended assessment issued for the 2010 tax year because the determinations for that year brought to account carry forward losses and did not result in STAI having taxable income because it remained in a loss position for that year.
In December 2016, STAI lodged objections against the amended assessments.
In September 2019, the Commissioner disallowed STAI's objections. STAI appealed to this Court. On the appeal, STAI carried the burden of demonstrating that the amended assessments were excessive or otherwise incorrect. The Commissioner did not have to justify the assessments nor the process by which they were issued. The Court was required to address a particular question and does so on the basis of material received in the statutory appeal. The Commissioner was required to respond to the case as advanced by the taxpayer. As to these matters: see Bosanac v Commissioner of Taxation [2019] FCAFC 116; (2019) 267 FCR 169 at [47]‑[48].
Before the primary judge, the Commissioner advanced an affirmative answer to STAI's appeal which involved three alternatives. STAI maintained that each of the alternatives departed from the reasons that had been given for disallowing the objections. The Commissioner did not dispute that proposition but maintained that the question on appeal was whether the amended assessments were excessive, not whether there had been deliberative error in the basis for the issue of the amended assessments or the reasons for disallowing STAI's objections.
STAI maintains that before the primary judge the Commissioner could not depart from the reasoning that provided the foundation for each of the determinations. It will be necessary in due course to consider this aspect of the grounds advanced by STAI in the present appeal.
The nature of the expert evidence relied upon by STAI before the primary judge
As has been mentioned, before the primary judge STAI contended that its actual cost of borrowing over the whole 10 year term was significantly less than that which a party in STAI's position might be expected to have paid to an independent party acting wholly independently so as to achieve the same cash flow advantages as STAI actually achieved. It relied upon expert evidence to support a contention that the 'effective credit spread' determined by reference to the amount of interest that STAI actually paid over the term of the LNIA was lower than the credit spread that might reasonably be expected to have been agreed in an arm's length debt capital markets transaction between independent parties at the time of entry into the LNIA. The primary judge summarised STAI's case in those terms at PJ[16] being terms that were not criticised on appeal.
The Commissioner's case before the primary judge involved three alternative scenarios or models. For each of those alternatives there were said to be three periods of relevance, namely (a) when the initial terms of the LNIA applied; (b) when the LNIA as amended by the second amendment applied; and (c) when the LNIA as amended by the third amendment applied. (No party contended that the first amendment materially altered the position as between SAI and STAI).
The Commissioner's position was that in order to apply each of Subdivision 815-A and Division 13 it was necessary to look at the circumstances at the relevant time, being when the amount of profits did not accrue (by reason of the commercial and financial relations between the parties), in the case of Subdivision 815-A, or when the consideration was agreed or given, in the case of Division 13. On the Commissioner's case, there was no transfer pricing benefit (for the purposes of Subdivision 815-A) and the consideration was nil (for the purposes of Division 13) in the first of the three periods because no interest was paid at that time. As to the time when interest accrued and was paid in each of the second and third periods, the relevant amount was the difference between the interest that was actually paid in the income year and the amount that would have been incurred for that period if the interest for that income year had been determined by adjusting for the effect of the Non-Independence Conditions (in the case of Subdivision 815-A) or on an arm's length basis (in the case of Division 13). For the purposes of the Commissioner's approach, it appeared that the amount may have been incurred in an income year on an accruals basis or on the basis of the amount paid in that year, whichever was applicable.
As to the way in which that arm's length basis should be determined, the Commissioner had three alternatives. They were described as (a) the without bridge model (which had both a 'with' and 'without' guarantee calculation); (b) a no amendment model (which assumed that the original LNIA terms remained in place over the life of the financing); and (c) a no third amendment model (which assumed that after 31 March 2003 the LNIA as amended by the terms of the second amendment continued to apply and there was no third amendment to the LNIA). The alternatives were described by the primary judge at PJ[292]. On the no third amendment model, the assessments would be excessive only in part.
The terminology 'without bridge' was adopted because the expert evidence relied upon by the Commissioner had included an analysis based upon STAI initially obtaining short term or bridging finance before replacing that borrowing with long term debt. Criticism of that approach was accepted and further calculations were undertaken on a 'without bridge' approach. It was those 'without bridge' calculations that were relied upon before the primary judge as the basis for the Commissioner's principal case.
Before the primary judge, STAI and the Commissioner each relied upon expert evidence. Broadly speaking, the expert evidence addressed two matters. First, the appropriate credit rating to be applied to STAI as the borrower. Second, the interest that STAI would have been required to pay if it had raised the $5.2 billion amount at the time of entry into the LNIA. The credit rating was one of the inputs used by the experts in undertaking an analysis of a hypothetical debt capital market borrowing by STAI.
As to the credit rating, evidence was given by Dr Chambers (for STAI) and Mr Weiss (for the Commissioner). The primary judge preferred the analysis of Dr Chambers: PJ[223]-[228]. No issue arises in the appeal as to that part of the reasoning by the primary judge.
As to the debt capital market analysis, STAI relied upon the evidence of Mr Chigas. The Commissioner relied upon evidence given by Mr Johnson. They expressed different views concerning the credit spreads that would be likely to have applied if STAI had borrowed the $5.2 billion in the debt capital market by a US bond issue.
Mr Chigas prepared a report in which he presented his opinion as to the 'effective credit spread' represented by the actual borrowings and payments made by STAI over the whole term of the LNIA. Relevantly for present purposes, the effective credit spread is a measure of the difference in yield (interest paid to the lender) between a benchmark debt instrument on the US debt capital market and another transaction (in the present case, the LNIA).
Mr Chigas calculated the effective credit spread on the actual borrowings and actual payments over the whole 10 year term of the borrowing based on when interest payments were actually made by STAI as being 'approximately 144 bps [basis points]'. One basis point is equivalent to 0.01%.
The manner in which he undertook that calculation was described by the primary judge in terms that were not disputed in the appeal: PJ[247]-[257]. The calculated 'effective credit spread' was not a market based figure. Rather, it was a figure that was derived from the actual payments that had been made by STAI over the life of the STAI. Conceptually it involved the derivation of a credit spread figure that was equivalent to the margin above a base rate represented by the interest payments actually made by STAI under the terms of the LNIA.

Mr Chigas then expressed the opinion that a borrowing by STAI (allowing for its circumstances and the nature of its business) in a debt capital market transaction with deferred and capitalised interest over 10 years would have been expected to be concluded on the basis of a credit spread of 400 bps.
A significant part of this further analysis by Mr Chigas concerned the degree of uplift in the credit quality of STAI, if any, that would have been allowed by lenders in the debt capital market for the implicit support available to STAI by reason that both STAI and SAI were ultimately 100% owned by SingTel, a Singapore-resident publicly listed company. An issue also arose as to whether a company in the position of SAI acting independently in financing its acquisition of shares in SOPL would have sought a guarantee from its parent in order to enhance its credit rating so as to take advantage of the lower interest rates at which a parent like SingTel could access funds - and, if so, whether a company like SingTel, acting rationally, would have provided such a guarantee (and whether it would have charged a fee for doing so).
Mr Chigas gave an alternative spread of 205 to 215 if it was assumed that STAI had gone to the debt capital market to raise funds with the support of a parent guarantee from SingTel with no guarantee fee, and 300 to 360 bps with the support of a parent guarantee with a guarantee fee payable. The difference between the two figures represented his assessment of the likely guarantee fee.
The primary judge described these aspects of Mr Chigas' analysis in terms that were not disputed in the appeal: PJ[258]-[267].
One of the inputs into the analysis undertaken by Mr Chigas to determine what he described as the effective credit spread for the total interest actually paid by STAI over the term of the LNIA was an interest rate of 5.6143% which was used as the base rate for the period from 1 April 2009 until the end of the term of the loan. For the period prior to that Mr Chigas used the bank bill swap rate (reset annually as contemplated by the initial terms of the LNIA) as the base rate. As to the use of the fixed rate of 5.6143% (rather than the one year bank bill swap rate), the primary judge explained the position concerning its use in the following terms (at PJ[254]):
Senior counsel for STAI said that the figure of 5.6143% came from an Australian Taxation Office schedule of calculations, and that it was a base rate that STAI had agreed to use. Senior counsel for the Commissioner then said that it is a figure which the Commissioner had accepted as a fixed rate from 1 April 2009. I therefore proceed on the basis that there is no issue about Mr Chigas's use of this figure in his calculations.
The circumstances relating to the rate of 5.6143% and its significance, if any, for the appeal were the subject of competing submissions. Those matters are addressed below when dealing with those submissions.
Finally, in considering the hypothetical interest rate that would have been agreed, Mr Chigas proceeded on the basis that the hypothetical dealing would have had the characteristics of the LNIA as amended by the second amendment: PJ[236]. It was on that basis that Mr Chigas concluded that the overall structure of the LNIA is consistent with a bond issued in the debt capital market: PJ[237]. That is to say, in broad terms, he equated the LNIA (as amended by the second amendment) with a bond issue.
Mr Johnson undertook an analysis which was based upon his opinion as to the financing arrangements that were likely to have been put in place if STAI had raised its finance on an arm's length basis, but still in circumstances where it was ultimately a subsidiary of SingTel. In his view, STAI could have borrowed initially on a short-term or bridging basis on attractive terms from Australian financiers, deferring any long-term borrowing. In his opinion, such a course would have been followed where short term funding could have been obtained at lower cost from Australian financiers at the time and STAI would have expected to obtain more favourable terms for long term debt funding by reason of its then expected improvement in its financial position.
As to that long term borrowing, Mr Johnson expressed the opinion that, based upon the support of SingTel and the opinion of Mr Weiss as to the strength of SingTel's credit rating, it could have been arranged in the debt capital market on more favourable interest terms than the interest rate originally agreed under the terms of the LNIA. As to the credit rating analysis, as has been noted, the primary judge preferred the evidence of Mr Chigas over that of Mr Weiss.
Further, Mr Johnson's opinion was that STAI would have taken a 50/50 fixed and floating position at the time of the second amendment and, therefore, would not have been interested in considering whether to fix the interest rate at the time of the third amendment during the Global Financial Crisis.
Mr Johnson, like Mr Chigas, expressed a view as to the extent of the additional profits that should have accrued to STAI over the 10 year term of the borrowing had it borrowed on the terms outlined in his opinion rather than the actual terms of the STAI as amended by the second and third amendments.
However, Mr Johnson also produced further calculations that were deployed by the Commissioner in submissions. They corresponded to the three alternative cases advanced by the Commissioner before the primary judge (as described above), namely (a) the without bridge model (with and without SingTel guarantee); (b) the no amendment model; and (c) the no third amendment model. Though the term model was used to describe each alternative, Mr Johnson simply produced the calculations. The three alternatives were then advanced by the Commissioner by way of submissions based upon the evidence more generally.
The reasoning pathway of the primary judge
The primary judge described the primary case advanced by STAI in the following terms:
(1)'The financial position of STAI in June 2002 was that the $5.2 billion borrowing had to take into account the fact that, due to the capital expenditure programme SOPL had embarked upon, its cash flow was not expected to be sufficient to meet interest payments and other expenditure for the short to medium term': PJ[157(a)].
(2)The LNIA (as amended) provided a mechanism by which to defer interest payments by STAI until funds were expected to be available and did so in a manner suited to the parent and subsidiary relationship between SAI and STAI as the parties to the LNIA: PJ[157(b)].
(3)The correct and reasonable comparator for the terms of the LNIA was a commercial loan taken out in June 2002 'under which interest could be deferred and capitalised to suit the borrower's expected cash flows': PJ[157(c)].
(4)'No amount of profits might have been expected to accrue to STAI' in the relevant years 'because the interest rate which might be expected to be payable for a loan such as this might be expected to be no less that the effective interest rate under the LNIA': PJ[157(d)].
(5)'…the most economical, and likely only, source of debt in the amount of $5.2 billion for a term of 10 years for a party in the position of STAI was the [United States debt capital market] in the form of a new issue transaction with a USD:AUD Cross Currency Interest Rate Swap (CCIRS)': PJ[158(a)].
(6)'The terms and economic effect of the LNIA…are substantially similar and of similar commercial effect to the terms that would be expected in a [debt capital market] transaction between independent parties where the borrower sought to defer interest payments to suit its expected cash flow': PJ[158(b)].
(7)'STAI's primary case is that the actual cost of the borrowing to STAI under the LNIA was not greater (in fact, it was significantly less) than the cost that a party in STAI's position might be expected to have paid to an independent party acting wholly independently so as to achieve the same case flow advantages which STAI actually achieved': PJ[158(c)].
The primary judge found that the principal difficulty with STAI's case was the difference between the actual transaction and the debt capital market transaction by way of bond issue that was used by STAI's expert to reach the conclusion that STAI's borrowing cost was significantly less than might be expected to have been incurred through an arm's length dealing: PJ[17]. His Honour found that the terms of the hypothetical bond issue 'departs too far from the actual transaction and the characteristics of the parties to that transaction': PJ[17], [343].
His Honour also found that there was a further difficulty with STAI's approach because it was undertaken with hindsight rather than by considering what parties in the position of SAI and STAI, dealing independently with each other, might be expected to have agreed at the outset and at the time of each relevant amendment to the LNIA: PJ[17], [343].
In the result, the primary judge found that the commercial and financial operations that pertained as between STAI and SAI (that is the Non-Independence Conditions) differed from those which may be expected to operate between independent enterprises dealing wholly independently with each other: PJ[18(a)]. His Honour also found that it was a reliable hypothesis that independent parties in their position would have agreed to a variable interest rate for the borrowing at the same rate as was actually agreed by the terms of the LNIA. However, they would not have agreed to the variations to the interest rate that were agreed at the time of the second and third amendments to the terms of financing: PJ[18(b)]. Based on those ultimate findings, his Honour concluded that for each of the taxation years in issue, but for the conditions which differed from those expected to operate between independent enterprises dealing independently, an amount of profits that would have accrued to STAI did not so accrue.
That is to say, ultimately, the primary judge accepted the second alternative advanced by the Commissioner being the 'no amendment' model: PJ[355].
Based upon those conclusions, his Honour found that 'STAI has not demonstrated that the amended assessments are excessive': PJ[19], see also PJ[355].
After recounting the history and directing attention to the key legislative provisions, the primary judge considered the applicable principles as they had emerged from two judgments of this Court, namely Chevron and Commissioner of Taxation v Glencore Investment Pty Ltd [2020] FCAFC 187; (2020) 281 FCR 219. His Honour emphasised passages in those authorities concerning the approach to be taken in formulating a hypothetical to be used for undertaking the required comparison between the actual circumstances and those which have the requisite arm's length characteristics. His Honour also referred to passages concerned with the formulation of the amount of the substituted arm's length consideration for the purposes of Division 13 and the amount of profits that might have been expected to accrue for the purposes of Subdivision 815-A.
After a consideration of those two decisions his Honour summarised some key propositions that emerge from them relating to Subdivision 815-A. Those propositions, which were not meaningfully disputed in the appeal, were to the following effect (at PJ[156], noting that the following excludes the source of each of the propositions as recorded by the primary judge):
(1)in relation to s 815-15(1)(b) and whether (in the language of the relevant Treaty) the 'commercial and financial relations' between the two enterprises 'differ from those that might be expected to operate between independent enterprises dealing wholly independently with one another', the identification of those conditions permits a broad and wide-ranging inquiry into relations existing between the enterprises concerned;
(2)in relation to the causal test in s 815-15(1)(c) and whether, but for the differing conditions, an amount of profits might have been expected to accrue to the taxpaying entity, the test 'is a flexible comparative analysis that gives weight, but not irredeemable flexibility, to the form of transaction actually entered into between the associated enterprises';
(3)the form of the transaction 'may, to a degree, be altered if it is necessary to do so to permit the transaction to be analysed through the lens of mutually independent parties';
(4)the required comparison 'will generally require that the parties in the hypothetical will generally have the characteristics and attributes of the actual enterprises in question' but where 'the conditions operating between them were between independent enterprises dealing wholly independently with each other'; and
(5)the non-price terms of a transaction may be the subject of substitution in the comparative analysis required by s 815-15(1)(c).
In respect of the expert evidence of Mr Chigas, the primary judge made the following findings of relevance to the appeal:
(1)Mr Chigas was asked to identify any conditions which operated between SAI and STAI 'in respect of the LNIA' which differed from those which might be expected to operate between independent enterprises dealing at arm's length in substantially similar circumstances, which was an approach which did not conform to the statutory test under Subdivision 815-A. Instead, the statutory test required the identification of conditions that operated between the two enterprises 'in their commercial or financial relations' which was a broader enquiry: PJ[233]-[234].
(2)Mr Chigas undertook a comparison between the terms of LNIA and the terms of a debt capital market bond issue but did so by reference to 'the LNIA as amended by the Second Amendment, as distinct from the LNIA as originally entered into' (original emphasis): PJ[235]-[236].
(3)Mr Chigas accepted that under the original LNIA interest could be deferred and capitalised whereas under the LNIA as amended by the second amendment the obligation to pay interest was contingent on reaching the benchmark. As to that difference, Mr Chigas accepted in relation to a bond issue to raise $5.2 billion 'he would not expect to see the lender being prepared to accept interest on a contingency or related to the financial performance of the issuer': PJ[243]-[244].
(4)Mr Chigas accepted that he had not addressed the question whether an arm's length borrower in the position of STAI would be expected to agree, at the time of the second amendment, to pay a premium amount of 4.552% for the deferral of interest: PJ[245].
(5)As to the third amendment which substituted a fixed rate, Mr Chigas accepted that at the time the fixed rate was agreed 'the 1 year [bank bill swap] rate [being the rate used as the benchmark to calculate the credit spread] was dropping quite significantly': PJ[246].
(6)Mr Chigas' analysis could be summarised as follows (see PJ[263]):
(a)the effective rate under the actual LNIA was a credit spread of 144 bps;
(b)a [debt capital market] transaction with a parent guarantee from SingTel, with no guarantee fee payable by STAI, would have had a credit spread of 205 to 215 bps;
(c)a [debt capital market] transaction with a parent guarantee from SingTel, with a guarantee fee payable by STAI, would have had a total credit spread of 300 to 360 bps; and
(d)a [debt capital market] transaction with no parent guarantee would have had a credit spread of 400 bps.
(original emphasis)
(7)Mr Chigas concluded that the interest rate condition (whereby the obligation to pay interest was conditional upon reaching a benchmark) would not have produced a different spread if there was an operating guarantee provided by SOPL and that a 400 bps spread (without a parent guarantee) 'is reasonable for the market conditions at the time and assuming a BBB-/Baa3 credit rating': PJ[265];
(8)The analysis by Mr Chigas produced a result whereby the difference between the interest incurred under the LNIA and the interest under what he identified as the 'market scenario' (a credit spread of 400 bps) was approximately $2.8 billion: PJ[267].
The primary judge recorded that by a joint report prepared by Mr Chigas and Mr Johnson, a number of matters were agreed. They included the following (see PJ[290]):
(1)that the provisions 'that gave [STAI] the ability to require payment of interest earned at any time of its choosing [until the second amendment, thereafter once a benchmark event has occurred] has not been observed by [either expert] in a debt capital markets transaction';
(2)that 'STAI's most economic and likely only source for the quantum of $5.2 billion of third-party, long term funds would have been a US [debt capital market] new issue transaction coupled with a CCIRS; and
(3)'Optus or STAI could have raised the equivalent of $5.2 billion in the US [debt capital market] without a SingTel Guarantee'.
The primary judge characterised the approach of Mr Chigas as one which priced the LNIA as if it were a debt capital market bond issue by STAI in June 2002 and then compared this 'arm's length price' with the actual effective price of the LNIA. Having done so, Mr Chigas concluded that the interest actually paid under the LNIA was less than the 'arm's length price': PJ[295].
The primary judge made three important findings concerning Mr Chigas' evidence. First, his comparison of conditions only addressed conditions in the LNIA as distinct from conditions operating between STAI and SAI 'in their commercial or financial relations': PJ[296(a)]. This was significant for his Honour's conclusion that the analysis failed to account for the fact that the LNIA recorded the terms of a very large vendor financing provided to a subsidiary of SingTel to acquire the shareholding in SOPL.
Second, his Honour had difficulty in accepting the view expressed by Mr Chigas that the overall structure of the LNIA was consistent with a bond issued in the debt capital market: PJ[296(b)]. In particular, his Honour had 'difficulty in accepting that the Benchmark concept and the associated clauses are consistent with a [debt capital market] bond issue. Further, the terms of the LNIA regarding the giving of Variation Notices do not appear to be consistent with a [debt capital market] bond issue'. As to these matters, the primary judge found that they 'created significant uncertainty for the parties, which is unlikely to have been agreed in a [debt capital market] bond issue'. This too was significant for any comparison that may be made between the overall interest paid under the terms of the LNIA and the terms of a bond issue on the basis that the timing of those payments was disregarded. A significant feature of the LNIA, as originally agreed, was that it allowed considerable flexibility as to when interest payments may be made of a kind that the primary judge did not accept allowed for comparison with a debt capital market bond issue.
Third, his Honour found that 'by addressing the LNIA, as amended, Mr Chigas has not directly addressed whether the changes effected by the Second Amendment might be expected to have been made if the parties were independent' (original emphasis): PJ[296(c)]. In that regard, his Honour gave the example that Mr Chigas 'has not directly considered whether an independent SAI might be expected to have agreed to have relieve an independent STAI of the obligation to pay approximately $286 million in accrued interest'.
As to the application of Subdivision 815-A, the primary judge reasoned in the following way.
There were conditions that operated between SAI and STAI at the time of entry into the LNIA and throughout the term of the LNIA which differed from those that might be expected to operate between independent enterprises dealing wholly independently with each other: PJ[301]-[316]. As part of that reasoning, his Honour observed that the Commissioner did not suggest that the interest rate that was applicable under the original terms of the LNIA was other than arm's length consideration: PJ[308].

STAI challenged the finding by the primary judge that there did not appear to be any commercial rationale for the second amendment: PJ[312], [338]. Precisely why the challenge had any significance for the overall case advanced by STAI was not apparent. It was not relevant to STAI's principal claim which compared the interest actually paid over the 10 year term to a hypothetical capital raising in the US debt capital market. It was not suggested that the Commissioner's 'no amendment' case as upheld by the primary judge should be adjusted in some way to include the second amendment.
In any event, for the following reasons, the submission was no more than unfounded assertion without any support in the evidence.
The separate findings by the primary judge for the purposes of Subdivision 815-A as to the respects in which the LNIA as amended by the second amendment resulted in conditions operating between SAI and STAI which differed from those which might be expected to operate between independent enterprises dealing wholly independently with each other (see PJ[309]-[314]) are not challenged. The conditions that differed from independent circumstances included (a) the amendment had the effect that approximately $286 million in interest that had accrued was treated as not accrued; and (b) the benchmark structure. The same conclusion was adopted by the primary judge for the purposes of the arm's length analysis required by Division 13.
Nevertheless, the submission advanced by STAI was that the agreement to defer the accrual of interest by conditioning the accrual of interest upon the benchmarks was a 'reasonable allocation of risk to and conferral of commensurate potential benefits on each party that independent parties might be expected to have agreed'.
As has been explained, the benchmark mechanism exposed SAI to the possibility that substantially less interest would be paid. It also replaced SAI's accrued entitlement to approximately $286 million in interest with a repayment structure burdened with that uncertainty. To the extent that there was the possibility of upside to SAI if the benchmark was met earlier than anticipated, there is no evidence of any analysis of the risk of more or less interest being payable. There is no evidence at all that the second amendment was introduced to reflect some form of risk sharing as between SAI and STAI or that the interest rate was set on that basis. On the contrary, the evidence is that the benchmark was introduced as a mechanism by which to defer the accrual of interest based upon the Initial Rate that had been agreed in the LNIA with the consequence that the liability would not need to be reported and the payment of withholding tax could be deferred.
Further, as has been explained, the premium was calculated on the basis of economic equivalence. That is to say, there was no change to the interest rate commensurate with the risk that was introduced into the dealing. In any event, the LNIA was a financing arrangement, not some form of quasi-equity. There was no evidence that suggested that an arrangement of the kind created by the second amendment was one which a financier dealing at arm's length would have countenanced (let alone a vendor who had sold shares in SOPL on the basis of vendor financing). As to STAI's need to defer interest in the early years of the indebtedness, the LNIA already allowed for deferral and capitalisation of interest. What the second amendment did was remove any accrual of interest.
No error has been demonstrated in the finding by the primary judge.
Alleged Error (6): Did the primary judge err in his conclusion as to the legal effect of the determinations by the Commissioner?
STAI contended that it was not open to the Commissioner to defend the appeal in respect of the assessments on a basis which is inconsistent with 'the postulates founding the determination'. The quoted terminology is taken from Channel Pastoral Holdings Pty Ltd v Commissioner of Taxation [2015] FCAFC 57; (2015) 232 FCR 162 at [11] (Allsop CJ).
It was submitted by STAI that the assessments by the Commissioner in the present case were made on the basis of a hypothesis that independent parties in the position of STAI and SAI might be expected to have agreed to fix the base rate with effect from 1 April 2009 (and would have done so at the rate of 5.6143%) and that interest would have accrued semi-annually. As has been noted, the primary judge rejected the third amendment by which the base rate was fixed as a transaction that formed part of the hypothesis. Instead, his Honour used a hypothesis in which the interest rate was determined annually on the basis of the bank bill swap rate plus 1% over the whole of the term of the LNIA. His Honour also found that it was appropriate to adopt annual rests for the purposes of determining the interest that would have accrued in the relevant income years.
STAI contended that the primary judge should have concluded that these foundations for the determinations on which the assessments were based were inconsistent with the case advanced by the Commissioner before the primary judge and accepted by him. It was said that, for that reason, the primary judge should have found that the 'no amendment' case advanced by the Commissioner was inconsistent with the postulate that founded the determinations 'with the result that the assessments are excessive'.
Channel Pastoral concerned the interaction between the general anti-avoidance provision in Part IVA of the ITAA36 and the provisions in Part 3-90 of the ITAA97 that allow for companies to be taxed on a consolidated basis. The anti-avoidance provisions operate where it is shown that having regard to eight specified matters it would be concluded that one or more of those who entered into or carried out a scheme did so for the purpose of enabling a taxpayer to obtain a benefit in connection with the scheme: s 177D of ITAA36; and Commissioner of Taxation v Hart [2004] HCA 26; (2004) 217 CLR 216. It requires a view to be formed as to the tax liability that would have arisen but for the scheme. If, having regard to the eight matters, it would be concluded that a tax benefit was obtained then the Commissioner has power to make a determination that cancels the tax benefit: s 177F.
Consolidation for tax purposes occurs when the head company of a group of companies makes a choice in writing to consolidate. When a subsidiary becomes a member of a consolidated group then the tax cost setting for its assets reflects the cost to the group of acquiring the entity.
On the facts in Channel Pastoral, Channel Cattle Co Pty Ltd (CCC) owned two cattle stations. The shares in CCC were sold to Channel Pastoral for about $61 million. Channel Pastoral as the holding company of CCC then elected to form a consolidated group with CCC as a subsidiary entity. CCC then sold the two cattle stations, including associated stock and other assets for $70 million.
One effect of the choice to consolidate was that the tax cost of the assets of CCC was reset to the costs to Channel Pastoral of those assets, being the figure of approximately $61 million. The reset increased the tax cost of those assets considerably. Assuming the anti-avoidance scheme provisions did not apply, the tax effect of the sale of the assets by CCC for Channel Pastoral as head entity of the consolidated group was, amongst other things, that on a consolidated basis there was (a) a capital loss on the sale of the land; (b) the derivation of assessable income from the sale of trading stock (of about $25.5 million); and (c) a deduction of about $23 million by application of the tax cost setting amount of the trading stock. The sale did not give rise to any tax consequences for CCC as a subsidiary.
The Commissioner claimed that if there had been no change to the ownership structure of CCC and the choice to consolidate had not occurred then (a) Channel Pastoral would not have made a capital loss on the sale of the land; (b) CCC would have made an assessable net capital gain of about $33.7 million on the sale of the land; and (c) there would have been no entitlement to a deduction for the trading stock with the consequence that CCC would have derived considerable assessable income from the sale of the trading stock.
The Commissioner made determinations pursuant to s 177F of the ITAA36 on the basis of a tax benefit that compared the tax position that actually pertained with what would have been the case if CCC had not been a consolidated subsidiary of Channel Pastoral for tax purposes.
In consequence, an issue arose as to how a determination pursuant to s 177F in respect of CCC (made on the basis that CCC was not a subsidiary entity of a consolidated group) might be given effect in circumstances where the liability to tax could only fall upon Channel Pastoral as the head entity of the consolidated group. In short, in determining the extent of a liability to taxation that depended on the postulate that the subsidiary was consolidated, could a determination be made by the Commissioner under s 177F that there was a scheme where the nature of the scheme depended upon what would have been the tax consequence if a subsidiary was not consolidated?
By majority (Edmonds and Gordon JJ, Allsop CJ agreeing), it was determined that the nature of the scheme by which a tax benefit was said to have been obtained had to be one which postulated a liability to tax of the kind that would arise if the tax benefit was cancelled. So, because the liability to taxation was required to be assessed on a consolidated basis, the tax benefit had to be one that was obtained in circumstances where the relevant liability to taxation was imposed on a consolidated basis. It followed that the determinations by the Commissioner were not valid to the extent that they relied upon a tax benefit which assumed that taxation would otherwise be imposed on a non-consolidated basis.
STAI relied upon the following passage from the reasons of Allsop CJ (at [11]) to support a contention that the use by the Commissioner of semi-annual rests for the calculation of interest and a fixed rate of interest from 1 April 2009 were postulates in the sense identified in Channel Pastoral:
Put simply in terms of the facts here, the tax benefit was obtained by CCC by its joining the group; had CCC not joined the group it, CCC, would have had assessable income and assessable net capital gain; in these circumstances, [Channel Pastoral] cannot be assessed by reference to those tax consequences because to do so accepts that CCC did join the group. In other words, one cannot 'give effect' to a determination by assessing someone whose only relationship with the taxpayer in the determination is denied by a postulate in connection with the scheme not being entered into and founding the determination.
The submission advanced by STAI relied upon the statement in the final sentence (quoted above) concerning whether a determination could be given effect by denying a postulate that founded the determination. The submission fails to have regard to the context in which the statement was made, particularly the sense in which the term 'postulate' was being used. The 'postulate' being referred to is the postulate upon which tax would be imposed but for the actions said to constitute the scheme. The reasoning in Channel Pastoral is not authority for the proposition advanced by STAI. It did not state a broad proposition that once a determination is made under s 177F then the Commissioner is bound to adhere to the reasoning upon which the determination was based for the purposes of any statutory appeal to this Court in which liability to tax is said to depend upon the determination. A proposition of that kind would be counter to well established authority that, on an appeal to this Court, the Commissioner does not need to demonstrate the correctness of the analysis by which the disputed assessment was made. As was explained by Pagone J (Robertson and Bromwich JJ agreeing) in Zappia v Commissioner of Taxation [2017] FCAFC 185 at [3]:
Proof of the amount upon which tax was to be levied is not established by showing error by the Commissioner in the evidentiary, factual or legal basis of assessment ... Statements made by the Commissioner in an objection decision do not establish the facts upon which tax was to be levied and do not bind the Commissioner, or the operation of the taxing provisions, except (perhaps) where the parties in proceedings have agreed to the facts for the purposes of the proceedings. The recital of facts found in an objection decision are not themselves the facts they purport to recite and their recitation does not bind the Commissioner, or the operation of the taxing statute, where a taxpayer is required to discharge the burden imposed by s 14ZZO to prove that an assessment is excessive. That can be done only by establishing the facts upon which the liability depends.
(citations omitted)
Regard to the reasoning of Allsop CJ (and Edmonds and Gordon JJ) shows that the focus in Channel Pastoral was upon the need for the alleged tax benefit to be derived from a scheme the existence of which contemplated the postulates upon which the tax liability would be imposed but for the scheme. It was concerned with the counterfactual against which an assessment was to be made as to whether there was a tax benefit. To the extent that there were postulates for the tax liability that was said to arise if the tax benefit had not been delivered by the alleged scheme (relevantly in Channel Pastoral the postulate that the taxpayer was a subsidiary of a consolidated group for tax purposes) then those postulates had to form part of the counterfactual which provided the basis for a determination based upon the existence of a tax benefit from the scheme.
The liability of STAI to taxation did not depend upon any particular approach to the calculation of interest. As the primary judge correctly found (PJ[353]):
While it may be accepted that there are differences between, on the one hand, the approach taken in the [analysis to support the determination] and, on the other, the approach taken by the Commissioner [in the proceedings], the fundamental point is that the determinations under Subdiv 815-A proceeded on the basis that STAI obtained a 'transfer pricing benefit' and the case presented by the Commissioner in this proceeding is consistent with that. Likewise, the determinations under Div 13 proceeded on the basis that STAI gave or agreed to give consideration that exceeded the arm's length consideration, and the case presented by the Commissioner in this proceeding is consistent with that. I consider Channel Pastoral to be distinguishable. In that case, the Court was dealing with the situation where the relevant counterfactual sought to be relied on by the Commissioner would not have resulted in the head company of the tax consolidated group obtaining a tax benefit. For the reasons already given, the present case is not comparable.
The contention advanced for STAI wholly misconceives the reasoning in Channel Pastoral and must be rejected.
The relevant determinations were not founded upon any postulate as to the liability of STAI for taxation. They were the exercise of statutory power by which the Commissioner could:
(1)in the case of Division 13, determine that a provision applied where, amongst other things, the taxpayer 'gave or agreed to give consideration in respect of the acquisition [of property under an international agreement] and the amount of that consideration exceeded the arm's length consideration in respect of the acquisition'. If it is determined to apply then consideration equal to the arm's length consideration (or an amount determined by the Commissioner if it was not possible or practicable to ascertain the arm's length consideration) was deemed to be the consideration given; and
(2)in the case of Subdivision 815-A, if there was a 'transfer pricing benefit' then the Commissioner may make a determination negating a transfer pricing benefit that an entity gets which determination is 'attributable' to the income, deductions, capital gains or capital losses for an income year.
Alleged Error (7): Did the primary judge err in failing to have regard to losses arising in the years before the relevant years of assessment?
By separate reasons, the primary judge determined the final form of orders to be made based upon his Honour's principal reasons: Singapore Telecom Australia Investments Pty Ltd v Commissioner of Taxation (No 2) [2022] FCA 260 (PJ2). At that stage, STAI submitted that the extent of the deduction to be allowed in the income years the subject of the relevant assessments was required to bring to account arm's length deductions that would have occurred on the basis of the hypothesis found by the primary judge. Those deductions would have occurred in each of the 10 year term of the LNIA. In respect of some of those years it was said that the deductions would have exceeded the actual deductions claimed by STAI. On that basis, STAI contended that there would be carried forward losses based upon the hypothetical that should be brought to bear.
STAI submitted that, on the basis of the hypothetical, those losses would be carried forward such that the deduction to be disallowed in the year ending 31 March 2011 would be $285,360,830 and not $475,004,109 as per the amended assessment for that year that was the subject of the appeal: PJ2[13]-[14]. It claimed that, on the findings of the primary judge, it had been demonstrated that the assessment for the year ending 31 March 2011 was excessive to the extent of the difference between those two figures, namely $189,643,279: PJ2[15].
The primary judge rejected that contention and determined that the appropriate order was for the appeal against all of the relevant objection decisions to be dismissed with costs.
In the event that STAI's present appeal was unsuccessful as to the other grounds, then it advanced an additional case challenging the decision by the primary judge not to uphold its contentions as to the amended assessment for the year ending 31 March 2011.
As to Division 13, STAI relied upon the terms of s 136AD(3) (already quoted above). In particular, it relied upon the concluding words of the provision which expressed the consequence of the Commissioner making a determination under s 136AD(3), as had occurred in the present case. For ease of reference the terms of that part of the provision are reproduced below:
… for all purposes of the application of this Act in relation to the taxpayer, consideration equal to the arm's length consideration in respect of the acquisition shall be deemed to be consideration given or agreed to be given by the taxpayer in respect of the acquisition.
The relevant determination that was made in the present case was in respect of the year ended 31 March 2011 (it is reproduced at PJ[102]). It was not a determination in respect of the arm's length consideration by way of interest for the financing provided under the international agreement (the LNIA) over the whole of the term of the agreement. The determination specified arm's length consideration for that year.
It may be that the application of the same logic to other income years when interest would have accrued to LNIA based upon the hypothetical would have produced carried forward losses. However, that was not a matter in issue in the proceedings before the primary judge. As has been explained, any alleged respect in which it is said that it is fair and reasonable for such consequences to be reflected in the tax treatment in other years then that was a matter to be raised separately under s 136AF.
Further, the Commissioner was under no obligation to make determinations under s 136AD(3) in respect of every year of the term of the LNIA: see WR Carpenter at [28].
As to Subdivision 815-A, as has been explained, the transfer pricing benefit relates to an income year. It is not the case that the profits which 'might be expected to accrue' are to be assessed over the life of the LNIA. Similarly, any claimed consequential adjustments in other income years are a matter to be separately determined. The Commissioner has power to make such adjustments if the Commissioner considers it fair and reasonable to make the adjustment. No issue arose before the primary judge as to those matters. The proceedings were confined to an appeal as a result of the objections to the assessments for the relevant years not being upheld.

There is a further conceptual difficulty with STAI's alternative claim. It proceeds on the premise that interest deductions accrued in the earlier income years of the term of the LNIA which could have been claimed in those years thereby producing carry forward losses. However, in fact, no such interest deductions accrued. Even assuming that the hypothetical used to make the determinations for the relevant income years would, if applied to all income years of the term of the LNIA, produce the carried forward losses, the only extent to which the hypothetical has been deployed by the Commissioner is to alter the losses in the relevant income years. Unless and until the separate 'fair and reasonable' powers of the Commissioner are exercised there simply are no carried forward losses because no interest in fact accrued in those earlier years to generate them.
For all those reasons, the alternative claim raised by Alleged Error (7) must be rejected.
The Commissioner's notice of contention
Having regard to the conclusions we have reached in relation to the appeal, the matters raised by the Commissioner's notice of contention do not arise.
As to contention 2, for reasons we have given, if the 'no amendment' case was not accepted on the basis of the reliable hypothesis as identified by the primary judge then there would have been much to commend the conclusion that STAI did not discharge its onus because of the flawed foundation for the 10 year analysis conducted by Mr Chigas (being the only analysis upon which STAI relied). Having regard to the forensic manner in which the case was conducted by STAI, once the primary judge rejected STAI's case as to the reliable hypothesis (depending as it did upon expert evidence as to the interest that would have been paid over the whole term of the LNIA on the basis of hypothetical dealings in the debt capital market), in a case where STAI bore the onus of proving that the assessments were excessive, the primary judge would have been required to conclude that STAI had not demonstrated an arm's length amount of interest in each of the relevant income years.
Otherwise, by reason of the conclusions we have reached in the appeal, it is not necessary to consider the other models the subject of the calculations by Mr Johnson. They were the subject of only brief submissions. They were not the subject of findings by the primary judge. In the circumstances, we do not consider it necessary or appropriate to address them.
Outcome and orders
It follows that the appeal must be dismissed with costs and we will make orders accordingly.

I certify that the preceding three hundred and eleven (311) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justices Wigney, Banks‑Smith and Colvin.
Associate:
Dated: 8 March 2024

Appeal from:	Singapore Telecom Australia Investments Pty Ltd v Commissioner of Taxation [2021] FCA 1597; and Singapore Telecom Australia Investments Pty Ltd v Commissioner of Taxation (No 2) [2022] FCA 260
File number:	VID 198 of 2022
Judgment of:	WIGNEY, BANKS-SMITH AND COLVIN JJ
Date of judgment:	8 March 2024
Catchwords:	TAXATION - cross-border transfer pricing and arm's length consideration provisions - whether primary judge erred in formulating the reliable hypothesis required to apply Subdivision 815-A of the Income Tax Assessment Act 1997 (Cth) and Division 13 of the Income Tax Assessment Act 1936 (Cth) - whether primary judge erred in finding that moving to a fixed base interest rate for the last three years of the loan term was not commercially justified - whether primary judge erred in finding that the capitalisation of interest should be on an annual basis - whether primary judge erred in concluding that loan amendment was irrational - whether primary judge erred in his conclusion as to the legal effect of determinations made by the Commissioner - whether primary judge erred in failing to consider losses arising before the relevant assessment years - matters raised by notice of contention did not arise - appeal dismissed
Legislation:	Income Tax Assessment Act 1936 (Cth) ss 177D, 177F, 136AA, 136AD, 136AF, Division 13 Income Tax Assessment Act 1997 (Cth) ss 815-5, 815‑10, 815‑15, 815-30, 815-35, Subdivision 815‑A, Divisions 815B-815D
Cases cited:	Bosanac v Commissioner of Taxation [2019] FCAFC 116; (2019) 267 FCR 169 Channel Pastoral Holdings Pty Ltd v Commissioner of Taxation [2015] FCAFC 57; (2015) 232 FCR 162 Chevron Australia Holdings Pty Ltd v Commissioner of Taxation [2017] FCAFC 62; (2017) 251 FCR 40 Commissioner of Taxation v Glencore Investment Pty Ltd [2020] FCAFC 187; (2020) 281 FCR 219 Commissioner of Taxation v Hart [2004] HCA 26; (2004) 217 CLR 216 Commissioner of Taxation v SNF (Australia) Pty Ltd [2011] FCAFC 74; (2011) 193 FCR 149 SNF (Australia) Pty Ltd v Commissioner of Taxation [2010] FCA 635 WR Carpenter Holdings Pty Ltd v Commissioner of Taxation [2008] HCA 33; (2008) 237 CLR 198 Zappia v Commissioner of Taxation [2017] FCAFC 185
Division:	General Division
Registry:	Victoria
National Practice Area:	Taxation
Number of paragraphs:	311
Date of hearing:	17-20 April 2023
Counsel for the Appellant:	Mr JW De Wijn AM KC with Mr C Peadon and Mr L Currie
Solicitor for the Appellant:	PricewaterhouseCoopers
Counsel for the Respondent:	Ms C Burnett SC with Mr M Sherman and Ms A Lyons
Solicitor for the Respondent:	Australian Government Solicitor

ORDER MADE BY:	WIGNEY, BANKS-SMITH AND COLVIN JJ
DATE OF ORDER:	8 MARCH 2024