CASE 2/2002

Members:
RNJ Purvis QC

Tribunal:
Administrative Appeals Tribunal

MEDIA NEUTRAL CITATION: [2002] AATA 653

Decision date: 2 August 2002

RNJ Purvis QC (Deputy President)

The applications

1. These are applications made by RAL, TP/ L and LP/L (``the Applicants'' TP/L and LP/L, when considered together are hereinafter referred to as ``the Partners'') seeking review by the Tribunal of rulings by the Commissioner of Taxation (``the Commissioner'') in a private binding ruling made under the provisions of Part IVAA of the Taxation Administration Act 1953 (``the TAA'') concerning proposed investment in a film.

2. By consent of the parties the applications were heard together, the issues in each of them being the same. The rulings as sought by the Applicants were and as now relevant are:

• whether their investments would qualify for deductibility under the provisions of Division 10B - Industrial property - of the Income Tax Assessment Act 1936 (``the 1936 Act'');
• whether fees to be prepaid in respect of ``management services'' would be deductable under section 8-1 of the Income Tax Assessment Act 1997 (``the 1997 Act'') and over the years ending 31 December 2001 to 31 December 2006 in accordance with section 82KZMD of the 1936 Act;
• whether the provisions of Part IVA of the 1936 Act would apply to cancel any tax benefit.

3. More specifically and as stated in the Notice of Private Ruling the relevant questions raised were:

``...

4. Is the partnership entitled to deductions under subsection 124M(1) of Division 10B of Part III of the 1936 Act for the consideration paid under the Assignment Agreement per film to the producer as follows:

(a) 50 per cent of the consideration for the year ended 31 December 2001; and

(b) 50 per cent of the consideration for the year ended 31 December 2002.

...

6. Is the amount payable by the partnership to the manager a deductable outgoing of the partnership under section 8-1 of the 1997 Act and is the fee deductable over the years ending 31 December 2001 to 31 December 2006 inclusive in accordance with section 82KZMD of the 1936 Act?

...

9. Does Part IVA of the 1936 Act have any application in the contemplated circumstances to the transaction participants?''

4. On the 5 July 2001 the Commissioner ruled that the investments would not be deductible under Division 10B of the 1936 Act, the prepaid fees would not be deductible under section 8-1 of the 1997 Act and that the provisions of Part IVA of the 1936 Act would apply so as to deny the availability of deductions otherwise allowable consequent upon the investment arrangements.

5. On 25 September 2001 the Applicants objected to the ruling contending as now relevant that (T27, p 622):

``1. In the circumstances disclosed in the materials on which the ruling was made, the partnership referred to in the ruling satisfied the conditions prescribed in Div 10B of Part III of the Income Tax Assessment Act 1936 (`the 1936 Act') for entitlement to a deduction for half of the consideration paid under the Assignment Agreement in each of the years ended 31 December 2001 and 2002.

2. The partnership became the owner of the relevant unit of industrial property for the purposes of Div 10B.

3. The partnership and the Studio were dealing with each other at arm's length in

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relation to the assignment and there is no basis on which the Commissioner could properly conclude otherwise.

4. The value of the unit of industrial property was not less than the consideration for its acquisition.

5. The distribution agreement was not for the purposes of Div 10B a disposal of the unit of industrial property.

6. The parties to the distribution agreement dealt with each other at arm's length and there is no basis on which the Commissioner could properly conclude otherwise.

7. The whole of the amounts contemplated as receivable by the partnership under the deed of covenant were for Div 10B purposes amounts to be included in the assessable income of the partnership.

8. The amount payable to the manager by the partnership is incurred by the partnership in gaining or producing assessable income, or necessarily incurred by it in carrying on a business for that purpose, and is deductible to the partnership under section 8-1 of the Income Tax Assessment Act 1997 (`the 1997 Act').

9. Section 82KZMD of the 1936 Act applies to the management fee.

...

12. There is no basis in the materials on which the Commissioner was requested to make the ruling for a conclusion by the Commissioner that he was or would be empowered to or should exercise the power to make a determination under sec 177F to deny any deduction to the partnership under Div 10B, or to deny to the partners any deduction or include any amount in the assessable income of the partners.

13. Having regard to the matters specified in section 177D(b), it would not be concluded that it was the dominant purpose, of any party to any scheme which could be identified in relation to any tax benefit said to accrue to the partnership or the partners from the events and circumstances referred to in the ruling, to secure to the partnership or the partners a tax benefit.

14. The Commissioner should have ruled that the way in which the Acts apply to the arrangement the subject of the ruling is such that no sec 177F determination could be made to the prejudice of the partnership or the partners.

...''

6. The Commissioner disallowed the objection on 19 November 2001. It is the objection decision that is now before the Tribunal. In the reasons for decision on the objection, the Commissioner stated in relation to the above contentions of the Applicants (T28 page 629-635):

``...

2. The Partnership became the owner of the relevant unit of industrial property for the purposes of Div 10B.

We do not agree. In our view, the transaction documents have the effect of ensuring that the partnership is never the `owner' of a unit of industrial property, as defined in subsection 124K(1).

From the time of the assignment agreement and throughout the period of the distribution agreement, the distributor has the exclusive right, with respect to the film, to do all of the acts in the nature of copyright as specified in section 86 of the Copyright Act 1968.

The transaction documents simultaneously transfer the rights from [CCP Productions Inc] (`the assignor') to the partnership and dispose of them to [TCF] (`the distributor'). There is never a period of time during which the partnership possesses the rights. It is immaterial whether the legal title rests with the partnership. The effect of the transaction documents is that the assignor does not surrender effective possession or control of the `rights' in respect of the film given the relationship between the assignor and the distributor. Rather, having regard to the `back to back' nature of the assignment and distribution agreements, and the integrated nature of the various other agreements, the overall effect of the arrangement is to ensure that the rights in respect of the film remain at all times with the assignor or its associates.

Furthermore, the assignment is conditional on the assignee (i.e. the partnership) entering into the distribution agreement.

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Possession implies custody or control. Title implies the right to use and the right to exclude the use of others. In our view the partnership has neither effective possession of, nor title to, the film.

3. The partnership and the Studio were dealing with each other at arm's length in relation to the assignment and there is no basis on which the Commissioner could properly conclude otherwise.

The integrated nature of the various transactions and agreements entered into in connection with these arrangements and the terms of the agreements indicate that the parties to the arrangements are not dealing at arm's length in relation to the acquisition of copyright by the partnership and the licensing of the copyright under the distribution agreement.

We do not accept that the assignor and the partnership are dealing at arm's length in relation to an assignment of film copyright where the assignor agrees to:

• guarantee by way of a security deposit, or by other arrangements having a similar effect to a security deposit, the payment of the minimum income to, and the loan repayment obligations of, the partners; and

• purchase the partners for a nominal sum at a specified time pursuant to a put option granted to [RAL] which owns the partners.

Because of the availability of the guarantee and the put option, there cannot be true bargaining in relation to the acquisition price under the assignment agreement and the profit sharing formula under the distribution agreement.

4. The value of the unit of industrial property was not less than the consideration for its acquisition.

As the parties to the assignment of the unit of industrial property by the assignor are not dealing at arm's length in relation to the assignment, the cost of the unit of industrial property to the partnership for the purposes of Division 10B `shall be taken to be the cost of the unit [to the assignor] or the value of the unit at the time of the purchase [by the partnership] whichever is the less.' We say that the `value of the unit to the partnership is the value of the rights possessed by the partnership as the owner of this copyright in the circumstances where the partnership is obliged to deal with those rights at all times thereafter in accordance with the arrangements entered into.

In our view the cost of the unit of industrial property for the purposes of subsection 124R(3), and therefore for the purposes of calculating its residual value under section 124S, would be substantially less than the amount allocated under the assignment agreement. This value should be based on the value to the partnership of its interest in the distribution agreement rather than the cost of production to the assignor plus a percentage mark up.

The guarantees and put option have substantial value, but no part of the payment by the partnership is allocated to them. However, it is reasonable to attribute a substantial portion of the amount payable under the assignment agreement to other elements of the arrangements including the value of the guarantees and the put option.

5. The Distribution Agreement was not for the purposes of Div 10B a disposal of the unit of industrial property.

Refer `Response to Issue 4' (T26 page 612) in the ruling dated 5 July 2001.

6. The parties to the Distribution Agreement dealt with each other at arm's length and there is no basis on which the Commissioner could properly conclude otherwise.

See response to ground 3 of objection above.

8. The amount payable to the manager by the partnership is incurred by the partnership in gaining or producing assessable income, or necessarily incurred by it in carrying on a business for that purpose, and is deductible to the partnership under section 8-1 of the Income Tax Assessment Act 1997.

9. Section 82KZMD of the 1936 Act applies to the management fee.

Refer `Response to Issue 6' in the ruling dated 5 July 2001. (T26 page 613)

...

12. There is no basis in the materials on which the Commissioner was requested to make the ruling for a conclusion by the

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Commissioner that he was or would be empowered to or should exercise the power to make a determination under sec 177F to deny any deduction to the partnership under Division 10B, or to deny to the partners any deduction or include any amount in the assessable income of the partners.

13. Having regard to the matters specified in section 177D(b), it would not be concluded that it was the dominant purpose of any party to any scheme which could be identified in relation to any tax benefit said to accrue to the partnership or the partners from the events and circumstances referred to in the ruling to secure to the partnership or the partners a tax benefit.

14. The Commissioner should have ruled that the way in which the Acts apply to the arrangement the subject of the ruling is such that no sec 177F determination could be made to the prejudice of the partnership or the partners.

Part IVA applies where there is a `scheme' (section 177A) and a `tax benefit' (section 177C), and where it is concluded that the scheme is entered into or carried out by a person or persons for the sole or dominant purpose of enabling the relevant taxpayer to obtain the tax benefit (section 177D).

The arrangements described in the ruling dated 5 July 2001 constitute a 'scheme' for the purposes of Part IVA, given the wide definition of `scheme'. Further, tax benefits are obtained by the partners in the partnership through their participation in the scheme.

The `scheme' includes:

• the arrangement whereby [RAL] acquires [TP/L] and [LP/L] (collectively, `the Partners');

• the formation of the partnership between the partners;

• the agreements, undertakings, and courses of action and conduct through which the partnership purports to acquire [ the film] from the assignor and to enter into the distribution agreement with the distributor;

• the payments made by way the partnership for the purchase of copyright, the funding for the purchase of copyright, the facilitation and servicing of the debt, the minimum income and any other income payments, the put option mechanism, the guarantees, and the mechanism whereby assignor or an associate effectively repays the partners' loans.

The parties to the scheme include [RAL], the partners, the partnership, the assignor, the distributor, the promoter, the financier, the facilitator, and any guarantor.

The `tax benefit' to [LP/L] will be the deductions claimed by it under subsection 92(2) for its share of the partnership loss. But for the scheme, the partnership loss would not have arisen and the subsection 92(2) deductions would not be available to the partners.

A second `tax benefit' arises when [RAL] terminates its investment on the exercise of the put option. The share subscription arrangement enables the partners to recoup an amount from an associate of the assignor and the distributor equal to the partners' loan repayment obligations. Had [RAL] invested directly in [the film], any amount payable to it on the realisation of its investment would be assessable income under Division 10B. The mechanisms whereby [RAL] terminates its participation in the scheme deliver an economic benefit of $77M to the partnership and to the [RAL] group of companies in a non-assessable form.

The promotion of the scheme by others or the existence of a commercial purpose does not preclude the application of Part IVA. Part IVA will apply when the sole or dominant purpose under section 177D is to enable the partners to obtain a tax benefit in connection with the scheme.

The effect of the put option is that the investor disposes of its shares in the special purpose company for a nominal sum. The film is thereby effectively returned to the control of the studio (or an associate). This is consistent with our view that neither the special purpose company nor the investor ever possessed any real rights in relation to the film.

Factors in paragraph 177D(b)

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

The facts described in the ruling dated 5 July 2001 are relevant to the manner in which a scheme was entered into or carried out.

The partners, being wholly owned subsidiaries of [RAL], partly finance the deductible Division 10B expenditure through borrowings, and guarantees are provided for amounts which will equal the interest payments and the debt outstanding if there are insufficient profits. To the extent that the deduction sought is in respect of expenditure funded by a loan with the repayment being covered by guarantees, it is in respect of expenditure, which is not at risk.

Payment of the minimum income amounts and repayment of the loan principal are guaranteed by security effectively provided by the assignor. The value of the security is sufficient to cover the loan component of the purchase consideration payable under the assignment agreement and the minimum income payable to the partners.

(ii) The form and substance of the scheme

The scheme involves a number of integrated transactions, which include the assignment agreement between the assignor and the partnership and the distribution agreement between the partnership and the distributor. The assignment agreement and the distribution agreement are for the same period. The distribution agreement grants an exclusive licence to an associate of the assignor. The assignment is conditional on the partnership entering into the distribution agreement.

In substance the assignor, through an associate, retains effective possession of the film at all times. The only real transfers involve a cash payment by [RAL], which passes through the partners and the partnership to the assignor, and the transfer of Division 10B tax deductions from the assignor to the partnership.

The integrated nature of the transaction documents means that the parties to the scheme are not dealing at arm's length in relation to the scheme contracts, agreements and transactions.

In our view the only relevant commercial purpose under these arrangements is the assignor's. When circular flows of funds are eliminated, the assignor is left with a cash benefit equal to [RAL's] equity contribution to the partners. [RAL's] only real economic benefit arises through the income tax deductions available to it.

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

The scheme is entered into and all transaction documents become effective after [the film] was completed. The Division 10B deductions are available at that time. The scheme is carried out over the period during which [RAL] continues to own the shares in the partners.

(iv) The result in relation to the operation of the ITAA 1936 or the ITAA 1997 that, but for Part IVA, would be achieved by the scheme

Deductions would be available to the partners and, through the loss transfer provisions in the ITAA 1997, to [RAL].

(v) Any change in the financial position of the relevant taxpayer that has resulted, or will result, or may reasonably be expected to result, from the scheme

The manner in which the partners are capitalised and the presence of the income and loan guarantees means that their financial position will not change. The minimum income guarantee is designed to cover the partnership's interest obligations. The loan guarantee and the share subscription agreement will satisfy the partnership's loan repayment obligations.

The partnership pays for the acquisition of the film rights but the only real cash realised by the assignor is represented by [RAL's] equity contribution to substantial sum financed through the borrowing.

(vi) Any change in the financial position of any person who has, or has had any connection with the relevant taxpayer, being a change that has resulted, or will result, or may reasonably be expected to result, from the scheme

The assignor receives a profit equal to the amount, which [RAL] pays into the scheme by way of its equity contribution to the partners.

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RAL obtains the benefit of the Division 10B deductions through the group loss transfer provisions and may also obtain a tax deduction or loss on the sale of the shares it holds in the partners on the exercise of the put option.

RAL is not subject to any financial risk when the tax saving and the put option are taken into account. The partners are not subject to any risk because of the guaranteed income, and mechanisms to fund the loan repayment where the partnership receives insufficient income under the distribution agreement formula to repay the loan.

Under the scheme, the tax saving applicable to the transfer of the tax loss exceeds RAL's net outlay, and RAL will profit regardless of how [the film] performs. The partnership is not purchasing a film in order to commercially exploit the film. Rather, RAL participates in the scheme in order to obtain a substantial tax saving.

To the extent that the tax loss transferred to [ RAL] under Subdivision 170-A of the ITAA 1997 is attributable to the equity contributed by [RAL], a further deduction or capital loss on the disposal of the [RAL's] shares in the partners on the exercise of the put option would, in substance, be a second deduction [RAL] in respect of the one amount outlaid.

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

The scheme gives rise to further business opportunities for [RAL] such as the making of the loans to the partners.

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

The partners are wholly owned subsidiaries of [RAL]. [RAL] holds a put option over the shares in the partners enabling it to sell the partners to the distributor.

The partners, [RAL] and the assignor connected through the contractual arrangements in the scheme.''

Summary of relevant facts

7. (1) The parties to the relevant arrangement are RAL, an Australian bank, TP/L and LP/L, companies incorporated in NSW and wholly owned subsidiaries of RAL, TCF a United States corporation and a film marketing and distribution organisation, CCP (``the Studio'') a United States corporation and a wholly owned subsidiary of TCF and SFPL a company incorporated in NSW unrelated to the Applicants and the Studio.

(2) The documentation entered into or to be entered into as detailed on behalf of the Applicants is that on 5 February 2001,

(a) TP/L and LP/L (the Partners) entered into a Partnership Deed pursuant to which they established a partnership for the purpose of acquiring and exploiting the copyright in the film (``the Partnership''). The Partners' respective partnership interests are 1% in the case of TP/L and 99 per cent in the case of LP/L. The Partnership appointed TP/L to act as agent of the Partnership (``the Agent'') in connection with the transaction pursuant to an Agency Appointment Deed executed on the same day.
(b) TP/L and the Studio entered into an Assignment Agreement pursuant to which the Studio agreed to assign the ``Film Assets'' to the Agent for a term of 15 years for a purchase price equal to the consideration as defined in the Assignment Agreement. The consideration or purchase price in the application for a private ruling is estimated to be approximately A$105 million. This amount is equal to the cost of producing the film plus an allocation of indirect costs calculated at 22.5 per cent of the direct cost of producing the film.
(c) The Agent and TCF entered into a Distribution Agreement pursuant to which the Agent on behalf of the Partnership appointed TCF as the distributor of the film for a term of 15 years in consideration for which TCF agreed to pay the Agent a licence fee and to procure the provision by SFPL of the minimum income guarantee as referred to in clauses 2 and 4.1 of the Distribution Agreement. SFPL and the Agent entered into a Facilitator Deed of Covenant pursuant to which SFPL agreed to pay to the Agent the minimum guaranteed income annually over a period of 15 years amounting in aggregate to approximately A$117 million. SFPL's obligation to pay these amounts are to terminate if RAL sells

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its shares in the Partners pursuant to a Deed of Put Option or SFPL subscribes the shares in the Partners pursuant to a Share Subscription Agreement.
(d) TCF, RAL and the Partners entered into a Deed of Put Option pursuant to which TCF granted a Put Option to RAL allowing it to put to TCF all the shares owned by it in the Partners during the period commencing 6 years after the date of acquisition of the film assets and ending on the fifteenth anniversary of that date for an exercise price of A$1,000.00.
(e) The following agreements were also entered into:
- • SFPL and the Partners entered into a Share Subscription Agreement where by SFPL agreed, if requested by either of the Partners, to subscribe for redeemable preference shares in the Partners within the first six years after the acquisition by the Partnership of the Film Assets. These subscription monies, it is stated, are required to be used to discharge the Partners' obligation to repay the loan made by RAL.
- • Studio, TCF, the Partners, RAL and SFPL entered into a Deed of Indemnity pursuant to which certain indemnities were given by Studio and TCF to the Partners in relation to the film and by the Partners to TCF.
- • TCF entered into a Deed of Guarantee in favour of RAL and the Partners pursuant to which TCF agreed to ensure that Studio performs its obligations under the transaction documents.
- • RAL entered into an Investor Deed of Covenant in favour of TCF, Studio and SFPL pursuant to which RAL agreed to ensure that the Partners perform their obligations under the transaction documents.
- • The Agent entered into a Deed of Charge in favour of TCF pursuant to which the Agent gave a charge over the Partnership's assets to secure its obligations to TCF under the Distribution Agreement.
- • The parties entered into a Deed of Escrow pursuant to which the operation and the effect of the transaction documents is made subject to and dependant upon the due fulfilment of the conditions specified in clause 2.1(b) including the obtaining of a favourable private binding ruling from the Respondent.

8. It was further stated on behalf of the Applicants that the Agent proposed to appoint a firm of chartered accountants to manage the business of the Partnership for the first 6 years for a fee of A$500,000.00 payable in advance at the commencement of the transaction. The Partners are to each contribute the relevant funds to the Partnership for the payment of the purchase price in part by equity as to approximately 20 per cent and as to the balance by a loan from RAL as to approximately 80 per cent. The loan from RAL is to be for a term of 6 years, full recourse to the borrower and at a commercial rate of interest. SFPL is to provide a guarantee to RAL of the obligation of each partner to repay the loan. The 6-year term of both the loan and the subscription agreement, which is said to provide a hedge to the Partners in respect of their obligation to repay the principal amount of the loan, was chosen because it is said to be usual for at least 60-70 per cent of the total revenue from a film of this kind to be generated by the end of the sixth year after its initial release.

The review and the transaction documents

9. The Tribunal is to review the Commissioner's decision having regard to the same transaction documents. It is not open to the Tribunal to reconsider or redefine what are the relevant documents that constitute the relevant arrangement, and thus what is the relevant arrangement. It is to the correct or preferable decision to be made on the arrangement that emerges from the transaction documents and information as identified by the Commissioner that the Tribunal is to direct its attention.

10. Part IVAA of the Taxation Administration Act enables the Commissioner when asked to give a private ruling to apply to an applicant for information. Such information may include ``particulars'' of the arrangement to which the ruling would relate that would enable the arrangement to be identified and distinguished from other ``arrangements''. To the extent that such information does identify an arrangement it is a part of the arrangement but not otherwise.

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11. It is for the applicant to specify the relevant facts that constitute the arrangement upon which the ruling is sought (
FC of T v McMahon & Anor 97 ATC 4986 at 4990). The arrangement is then that described in the documents supplied by the applicant relating to the ruling request together with identifying and/ or distinguishing information. It is the facts said by the Commissioner to constitute the arrangement and as identified by the Commissioner in the ruling that is to be considered. As was stated in FC of T v McMahon & Anor (supra) at 4990-4991:

``... What the Tribunal does is to `go over again' the objection decision to consider what it thinks should be the proper answer to the question about the way in which the relevant tax law operated on the identified facts constituting the arrangement:
Comptroller General of Customs v Akai Pty Limited (1994) 50 FCR 511 at 521 and the cases there cited.''

12. The objection decision in this matter was made having regard to what have been described as ``the transaction documents'', and information which constitute the relevant arrangement. As identified by the Commissioner in the ruling they are (T26, pp 605, 606):

Partnership Deed
Agency Appointment Deed
Deed of Escrow
Assignment Agreement
Distribution Agreement
Deed of Indemnity
Deed of Guarantee
Investor Deed of Covenant
Deed of Charge
Facilitator Deed of Covenant
Deed of Put Option
Share Subscription Agreement
Facilitator Administration Deed
Draft Deposit Deed
Minimum Income Bank Guarantee
Loan Agreement
Subscription Bank Guarantee

13. In a letter of 3 April 2002, the Australian Government Solicitor on behalf of the Commissioner stated:

``...

It is the respondent's understanding that the relevant `arrangement' consists of:

(i) the proposed entry into the documents listed in Annexure A to your letter dated 27 February 2002 [being the material above detailed]; and

(ii) the consequences to the parties of the entry into and the giving effect to those documents; and

(iii) all information and documents provided by the Applicant to the Respondent in connection with the application for the ruling.

...''

14. On this application for review, the Applicants are by reason of section 14ZZK of the TAA limited to the grounds stated in the taxation objection to which the decision relates unless the Tribunal orders otherwise (which it has not in the present application) and has the burden of proving that the ruling decision should not have been made or should have been made differently.

Division 10B of the 1936 Act

15. As was submitted on behalf of the Commissioner for the purposes of Division 10B, it is necessary for the Applicants to show that the Partners would be owners of the copyright in the film, that they would use their rights to produce assessable income, and that the cost would not be determined in accordance with section 124R(3).

16. In support of the objection decision, the Respondent contends that the Applicants are required to establish in order to qualify their investment for deductibility under Division 10B, that on the basis of the facts constituting the relevant arrangement,

(a) the Partners would possess the relevant rights as owners in respect of the unit of industrial property the copyright in the film (section 124K(1));
(b) in the year of income in which such rights would be acquired the Partners;
- (i) would use those rights, the unit of industrial property, the copyright of which they were owners or the work to which the copyright relates for the purpose of producing assessable income (section 124L(1))
  
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- (ii) would not cease to be the owners of the copyright;
(c) the rights held by the Partners in the copyright of the film would have a residual value as at the end of the year of income in which the deduction is to be claimed as to 50 per cent of their investment (section 124M(4));
(d) the non-arm's length provisions of section 124R(3) should not apply to determine the cost of the copyright interest for the purpose of determining the residual value pursuant to section 124S;
(e) the provisions of section 124N(1) referable to deductions on the disposal of a unit of industrial property apply in conjunction with section 124T(2), being were the disposal would not be at arm's length, operate to extinguish the deductibility of any amount of ``residual property''.

(A) The Partners as owners of the copyright, a unit of industrial property

17. The Respondent contends that the Partners never became the owners of the copyright in the film (section 124K(1)). The basis upon which they acquired it was such that they did not in fact bring to fruition an acquisition because it was an acquisition conditional upon immediate disposal of the entirety or it was not an acquisition at all. Even be it an acquisition there was a disposal of the entirety of the rights that had been obtained. Indeed what the Applicants acquired was something significantly less then the entirety of the copyright.

18. In order to be the owner, the Partners would need to possess the rights in respect of the copyright as addressed in section 86 of the Copyright Act namely:

``Nature of copyright in cinematograph films

For the purposes of this Act unless the contrary intention appears, copyright, in relation to a cinematograph film, is the exclusive right to all or any of the following acts:

(a) to make a copy of the film;

(b) to cause the film in so far as it consists of visual images to be seen in public, or, in so far as it consists of sounds to be heard in public;

(c) to communicate the film to the public.''

19. The Assignment Agreement between the Studio and TP/L (T6) by clause 2.1 provides for the Studio to sell, assign and transfer the ownership of and full title to the Film Assets to TP/L for the term that is the period of 15 years starting on the settlement date (clause 1.1). The Film Assets are defined as meaning:

``Film Assets means:

(a) the Copyright in the Film in the Territory, but excluding all Derivative Rights; and

(b) only to the extent that those rights and that property are necessary to exploit the Film throughout the Territory, but excluding all Derivative Rights:

(i) all rights comprised in, and other industrial or intellectual property in relation to, the Film; and

(ii) the Film rights; and

(iii) the Physical Materials; and

(iv) (without limiting paragraphs (i), (ii) and (iii)), the assets and rights set out in Schedule 1 to the Distribution Agreement, whether or not those assets or rights:

(A) have been acquired by or created by the Studio before the date of this Agreement; or

(B) are now, or are at any time hereafter, acquired by, created by, assigned to, or licensed to the Studio

...''

20. The assignment is subject to conditions precedent one of which provides that on or prior to the settlement date the Partners will have entered into the Distribution Agreement (T7) with TCF. The Distribution Agreement between TP/L as the Agent and TCF as the distributor provides by clause 2.1:

``Rights for the Territory 2.1:

Subject to Settlement occurring pursuant to the Assignment Agreement, the [Agent] grants to the [distributor]:

(a) the exclusive right and licence to distribute and exploit the Film and trailers thereof and excerpts and clips therefrom throughout the Territory in any and all media, whether now known or

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hereafter devised, created or discovered including, without limitation, the right and licence under copyright to release, exhibit, distribute, perform, broadcast, exploit, market, advertise, issue, reissue and otherwise utilise and use all or any part of the Film and trailers thereof and excerpts and clips therefrom and in any and all languages any or all cut, recut, edited, re-edited, dubbed, re-dubbed and other versions thereof;

(b) in order to enable the [distributor] to perform its obligations under this Agreement, a non-exclusive licence of the copyright in the Film and an exclusive licence of the rights described in Schedule 1; and

(c) the right to possess and use of the Physical Materials in order to prepare for distribution and to distribute the Film as set down in paragraph (a) above and in accordance with this Agreement.''

21. It will be noted that pursuant to clause 2.1 of the Assignment Agreement the duration of the assignment is for the period of 15 years so that on the basis of the copyright having a duration of 50 years under the Copyright Act, it was only the copyright in respect of the first 15 years that was assigned but excluding the derivative rights. The consequence is that the assignment was not that of the entirety of the copyright.

22. Schedule 1 to the Distribution Agreement extends the rights so granted. The ``licence'' granted pursuant to clause 2.1 is to be for the same period as that referred to in the Assignment Agreement, that is 15 years from the settlement date (clause 2.4). Thus it is submitted on behalf of the Respondent, that the provisions in relation to the control of the use of the copyright by TCF under the Distribution Agreement together with the elimination of the possibility of the termination even in the event of breach, give TCF a position that could only be characterised as having a firm control on the copyright. Thus, notwithstanding the reported sale of the copyright, the terms upon which it is sold requires the license back and the terms upon which it is licensed back give control of the copyright. The transaction is conditional upon this pre-requisite being carried into effect.

23. The Respondent maintains that the rights granted under the Distribution Agreement by TP/L to TCF effectively comprise the copyright in the film, that is the exclusive right to do the acts specified in section 86 of the Copyright Act, a right that is not acquired by the Partners because they are required to contract with TCF enabling TCF to do the acts comprising the copyright in the film for the same period and applicable to the same Territory. Thus the copyright cannot vest exclusively, that is to the exclusion of all other persons in the Partners and no relevant rights would be possessed by them.

24. As it was submitted on behalf of the Respondent, looking to the provisions of clause 2.1 and Schedule 1, one concludes that there is in effect nothing left that could be done with the interest in the copyright by the Partners. The intention of the agreement was that the Partners would cede to TCF complete control of the use of the copyright and the terms of clause 2.1 and Schedule 1 are consistent with this view, notwithstanding that clause 2.2 seeks to deny that there has been a transfer of copyright or any part of it. Clause 2.2 is inconsistent with the clause 6.1, which makes provision ``... In order to enable the Distributor to effectuate the purposes of this clause 6, the Agent hereby grants to the Distributor, one per cent (1%) interest in the undivided Copyright...''. As has already been noted, the licence under clause 2.1 is granted for a period of 15 years, precisely the period of the assignment.

25. It is thus contended on behalf of the Respondent that not only does TCF wish to have a sale of the copyright in circumstances where there is a licensing back to it of the entirety of the rights that they purported to sell for the precise period for which the sale took place, but TCF is not to the extent that it can achieve it exposed to a risk that those rights may be taken away from it even if it breached obligations under the Distribution Agreement. There is a desire on the part of TCF not to part with control of the rights to the extent that they are legally capable of achieving that end.

26. As has already been indicated earlier in these reasons, the Applicants contend that the Partners became the owner as a result of entering into the Assignment Agreement and paying the purchase price. The Partners then possess the rights with respect to copyright in the film. The Distribution Agreement, it is said, is not an assignment of copyright in the film but a licence of something less than all of the rights comprised in the copyright. The Copyright Act,

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it is also said, expressly contemplates an exclusive licence as being one which authorises the licensee to the exclusion of all other persons ``to do things'' and yet retains the concept of their being concurrently the owner of the copyright. This does not equate to the licensee being the owner, bearing in mind also that the owner is an owner of something which subsists as copyright for periods of time and in respect of a range of rights so that each period and range is itself a copyright which has an owner and may concurrently have an exclusive licensee (transcript p 53). The Copyright Act section 101(1) clearly contemplates that there can be both an owner and a licensee. The legislative scheme contemplates that there can be an owner and an exclusive licensee. In this context it is significant to notice the difference between the remedies available to an owner and an exclusive licensee. The remedies under section 115 for injunction, damages and account of profits are remedies which are concurrent between the owner and the licensee but the remedy for conversion or detinue is one which is available to the exclusive licensee except as against the owner (section 119(b)), and the owner does not have those rights where there is an exclusive licence (section 119(c)). The owner is to be joined with an exclusive licensee in any proceedings for remedies under section 115 except interlocutory proceedings. The legislative scheme is thus not one which contemplates that an exclusive licence operates as an assignment, it clearly contemplates that there is an owner and an exclusive licensee.

27. It is thus said on behalf of the Applicants that the assignment is of part only of the rights given by section 86 and of part only of the term given by section 94. It is also said to be an assignment for part only of the Territory in relation to which copyright subsists. An owner, it is said, remains an owner when an exclusive licence is granted. An owner might bring an action for damages and account of profits and injunction notwithstanding the grant of an exclusive licence. A licensee on the other hand may only bring an action for conversion. The above, it is submitted, provides a context which is entirely inconsistent with the proposition that the grant of an exclusive licence effects either expressly for the purposes of the Copyright Act or ``in some de facto sense'' an assignment of the copyright (transcript p 57). Thus an owner and an exclusive licensee of the same copyright for the same period can coexist and by granting an exclusive licence one does not cease to be the owner.

28. The Tribunal is persuaded by the submissions made on behalf of the Respondent. It does not consider that the Applicants have discharged the onus resting upon them. The Distribution Agreement has the practical effect of transferring the rights vested in the Partners under the Assignment Agreement. Whilst it is true to say that an owner and an exclusive licensee can coexist, it is to the factual situation that Division 10B directs attention. It is to the factual situation as seen in the arrangement that the Tribunal is to direct its attention in reaching a decision as to whether the answer given by the Respondent to the question raised in the application for a ruling is the correct or preferable one.

29. The determination of the licence fee was based on a formula derived from the degree of success of other productions. It was a calculation of what might be obtained by way of return by reference to what was said to be comparable films. However, the Partners by reason of the arrangement are at risk in relation to only 20 per cent of the funds provided for the acquisition. Whilst nominally the purchase price was A$1 million, they were guaranteed to get back 80 per cent of that amount, they thus risking out of their own funds 20 per cent of the nominated purchase price. When the compulsory engagement of TCF to distribute the film is taken into account, and the extent to which TCF benefits from a surplus arising after payment of all costs, as opposed to the extent to which the Partners benefit, it is seen that the Partners have a limited interest in the film. The result of the formula which has been applied is consistent with a view that in commercial terms the Partners' contribution is so limited. Thus, what has occurred is that a partnership has been formed, an amount equal 20 per cent of the ``value'' of the copyright has been contributed whereby they acquire an interest in circumstances where they have to licence it back to TCF, cede control to TCF in circumstances where they get a guaranteed return of 80 per cent of the nominal purchase price, their true commercial interest being no more than 20 per cent of the initial funding. The arrangement however, has been so structured that they seek a deduction for an amount equal to 100 per cent of the contended value of the

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copyright. The basis upon which the Partners benefit commercially is confirmatory that they have a limited interest in the commercial success of the film. The Partners purportedly acquire but then give control of the entirety of their rights back to TCF. The Partners are reduced to an economic position where they have entitlements to receive payments, guaranteed minimum payments but they cannot use the copyright in any way themselves. There is not a reversion to the Partners of the copyright on account of the Distribution Agreement expiring at exactly the same point in time, as does their copyright. As was submitted on behalf of the Respondent,

``So at the end of the day what the Partners have agreed to get is just payments of money not sourced from the actual exploitation of the copyright at all... the consequences of the complex interaction of the assignment agreement conditional upon entry into the distribution agreement [is]... firstly that the better view is that the condition requiring immediate disposal has the consequence that the Partners never in fact acquired the exclusive rights that constitute the section 86 copyright. It's a purported acquisition but it is on entirely a conditional basis and the conditions are such that they never possessed the capacity to enjoy, exploit or control the section 86 rights.''

The Respondent alternatively submits that if the Partners do acquire copyright rights then they immediately disposed of them.

``... the arrangements under the distribution agreement would have the consequence that... The contractual arrangement authorises [ TCF] to do not an act but all acts that by virtue of the Act the owner of the copyright would have the right to do... what we have is a very deliberate and contemplated disposition to [TCF] of all of the rights of ownership and enjoyment for the entire period for which the copyright subsists... what the Copyright Act contemplates in terms of exclusive licensing is something less than investing in the licensee absolutely every right that as an owner you could ever exercise or enjoy in respect of that copyright... the intention of the documentation here is that there will be nothing reserved to the owner, their position is reduced to a purely economic one of doing nothing other then sitting back and receiving payments...''

(transcript pp 104-106)

30. The Tribunal agrees and adopts the submissions made on behalf of the Respondent to the effect that the provisions of the exclusive licensing provisions of the Copyright Act contemplate an arrangement which will be something less than an effective disposal of the entirety of the rights invested in the owner of the copyright. In the present application, the intention of the parties is to effect a transfer to TCF of the totality of the rights that would otherwise be exercisable or enjoyable by the copyright owner in circumstances where under what is said to be a licence, the possibility of termination is expressly excluded. The intention of the parties was to invest in TCF all of the interests that the Partners would otherwise have in the enjoyment and use of the copyright and control over it for the entire period of which the copyright would subsist. Whilst the Applicants may have become the owners of the copyright, they did not use the copyright as required by section 124(M). They disposed of it, bringing a cessation of ownership as contemplated by section 124(M). This being so there is no entitlement to the deduction.

(B) Use in the year of income for the purpose of reducing assessable income

31. If the Distribution Agreement should operate as an assignment of a copyright in the film from the Partners to TCF - assuming for this purpose that the Partners did become the owner of the copyright in the film, that is, possessed of the relevant rights as owner - then the Partners divested themselves of the rights of ownership without having used them for the purpose of producing assessable income.

32. The Partners by the Distribution Agreement purport to grant to TCF ``the exclusive right and licence to distribute and exploit the Film...'', but specify that the grant ``excludes any grant of an interest in and does not amount to a transfer of any part of, the Copyright''. The Respondent maintains that this belies the true nature of the agreement and that it is a matter of construing the agreement in order to determine the true intent of the parties, that is whether it was intended that there should be a transfer or assignment of all the relevant rights implicit in ownership or merely a grant of entitlement to exploit the work.

33. The right and licence granted is an exclusive right to do the acts specified in the

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agreement. Each of the rights constituting the copyright in the film is said to be the subject of the grant to TCF. The rights granted are the very same rights as those conferred by the Copyright Act in the owner.

34. Schedule 1 clauses 1, 3(b), 8, 9, 10, 12, 14, 15 and 16 of the Distribution Agreement encompass and confer on TCF the right or rights inter alia to make a copy of the film, to cause the film to be seen and heard in public and to communicate the film to the public. These rights encompass the very rights that are conferred by statute as being in the nature of copyright and lend support to the character of the agreement being one of assignment not mere licence. As was stated by Smithers J in
Nomad Films International Pty Limited v Export Development Grants Board (1986) 11 FCR 67 at 82:

``... A licence is something, which authorises the licensee to perform certain acts. But the agreement under consideration confers something different, namely the exclusive right to do the acts in question. This is repetitive of s. 86. It certainly describes a situation in which, to the limited extent specified the owner of copyright is conferring upon the licensee the very rights, which constitute his copyright. If one adds to this the positive indication contained in clause 8(a)(iii) of the agreement, one is forced to the conclusion that the agreement should be interpreted as effectuating an assignment.''

35. The Distribution Agreement in Part VI paragraph C in Schedule 2 provides:

``[TCF] shall have the unlimited right at any time to sell, transfer, assign, and pledge or hypothecate its right, title and interest in the Picture and the negative and copyright thereof to any Party. Any such sale, transfer or assignment shall be subject to the Licensor's rights hereunder and [TCF] shall not be relieved of its obligations here under.''

In Nomad Films International Pty Limited v Export Development Grants Board (supra) at page 81 it was stated:

``A licensee does not have the right to dispose of the copyright in respect of which he is a mere licensee exclusive or otherwise. If there are to be proceeds from the disposal of copyright in the script it can only be because the licensee may lawfully dispose of it. And that can only be if the licensee owns the copyright.''

36. There is a marked similarity between the provisions of the agreement and the legal position as detailed in Nomad Films International Pty Limited v Export Development Grants Board (supra). The Tribunal adopts, with respect, the position so detailed.

37. As well as those aforementioned, the Distribution Agreement confers upon TCF other rights akin to rights of ownership, including the right to copyright in the name, or rights in and to underlying material and the screenplay, the royalty of re-write, to publish, administer and exploit all original music, the worldwide right to sell or licence to sell a soundtrack album containing the music of the film, the right to select, designate or change the title of the film and register, protect or acquire rights or consents in conjunction with such title the ownership of the prints and physical properties and the exclusive right to their possession and control and to destroy them and the right to make alterations and cuts to the film as the distributor requires (Schedule 1 clauses 3, 2, and 14). Additional to the matters already detailed above, it is apparent from the arrangement that,

(a) no provision for the Partners to terminate the agreement as the result of any act of insolvency of TCF or breach of contract by TCF is contained in the Distribution Agreement which might be expected if there were a mere grant of licence as distinct from an assignment;
(b) the grant to TCF under the Distribution Agreement was an act to be performed on the same date and as an express condition of the Assignment Agreement becoming effective;
(c) the assignment is to be for the defined period after which the ``Film Assets'' revert to the Studio or its nominee. The Studio is a wholly owned subsidiary of TCF.

38. The Respondent maintains that consistent with what was said in
Wilson v Weiss Art Pty Ltd (1995) 31 IPR 423 at 432 namely,

``Ultimately, the question whether there has been an assignment... will depend upon whether the writing or the terms of the assignment reached reflects or reflect an

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intention on the part of the assignor to effect an assignment of, or to agree to, assign copyright. In reaching a conclusion upon the intention the commercial significance of the transaction to the parties will, no doubt form part of the surrounding circumstances to be considered...''

the rights of TCF in the copyright of the film were not intended to be the rights of a mere licensee.

39. From all of the above ``surrounding circumstances'' the Tribunal concludes that the TCF ``group of companies'' intended to retain control and possession of the relevant copyright, the rights of TCF not to be only those of a licensee. The Distribution Agreement operates to confer on TCF rights in respect of the film which are the same as or consistent with the rights conferred by the Copyright Act on an owner. The agreement has the effect of disposing of the Partners' rights as owner in the copyright (assuming that they became the owners) without they having used the copyright for the purpose of producing assessable income.

40. Further, if the Distribution Agreement and the other elements of the arrangement do in fact constituted an assignment of copyright to TCF there would be a cessation of ownership within the meaning of section 124M(4), so as to disallow a deduction in each of the two years in which the same is sought.

41. The Tribunal is satisfied that there has not been a relevant use of the copyright in the year of income by the Partners for the purpose of producing assessable income and the onus in this respect has not been discharged by the Applicants. Further, there has been a relevant cessation of ownership disallowing a deduction in each of the two relevant years.

(C) Application of arm's length provision

42. Section 124R(3) of the 1936 Act relates to the purchase of a unit of industrial property and the determining of cost for the purpose of ascertaining residual value within the meaning of the section and provides that:

``124R(3) [Person purchasing unit at a capital cost] Where, in the case of an owner referred to in paragraph 124L(1)(b):

(a) the Commissioner is satisfied, having regard to any connection between the owner and the person from whom the unit of industrial property concerned was purchased or to any other relevant circumstance, that the owner and that person were not dealing with each other at arm's length in relation to the purchase; and

(b) the expenditure of a capital nature incurred by the owner on the purchase of the unit of industrial property:

(i) exceeds the amount that was the cost of the unit to the last preceding owner of the unit; or

(ii) does not exceed the amount that was the cost of the unit to the last preceding owner of the unit but exceeds the value of the unit at the time of the purchase,

the cost of the unit to the owner for the purposes of this Division shall be taken to be the cost of the unit to the last preceding owner of the unit or the value of the unit at the time of the purchase, whichever is the less.''

43. The section thus not only relates to the purchase of a unit but to the determining of costs for the purpose of ascertaining residual value within the meaning of the section.

44. The Respondent raises in this respect two aspects of concern namely,

(1) whether the Applicants can discharge the onus of proving that the Tribunal should not be satisfied having regard to any connection between the Applicants and the Studio or any other relevant circumstances that they are not dealing with each other at arm's length in relation to the purchase (section 124R(3)(a)), and
(2) whether the amount of consideration payable by the Partners on the purchase of the copyright exceeds the amount that was the cost of the copyright to the studio or if it does not exceed the cost that it exceeds the value of the copyright at the time of the purchase (section 124R(3)(b)).

(1) Dealing at arm's length in relation to the purchase or assignment of the copyright

45. In this connection it is necessary for there to be an analysis of the relationship and the dealing between the Studio and the Partners and,

• the capacity of the Studio to influence or control or dictate to the Partners (see
Barnsdall v FC of T 88 ATC 4565 at 4568;
Granby Pty Ltd v FC of T 95 ATC 4240 at

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4244;
Collis v FC of T 96 ATC 4831 at 4837);
• the nature of the relevant dealing (
Elmslie & Ors v FC of T 93 ATC 4964 at 4977; (1993) 26 ATR 611 at 627);
• whether the outcome of the relevant dealing is a matter of real bargaining (
The Trustee for the Estate of the late AW Furse No 5 Will Trust v FC of T 91 ATC 4007 at 4015);
• where the parties are prima facie at arm's length, whether they were not independently acting in their own commercial interests, that is did not apply their separate minds and wills to the bargaining process (
Collis v FC of T 96 ATC 4831 at 4837).

46. The position as disclosed by the arrangement is that the price payable for the ``Film Assets'' being 122.5 per cent of the total cost of production of the film (estimated to be A$105 million or A$101.5 million) is based on an ``analysis of market value of the film prior to initial theatrical release'' carried out by Kagan World Media Inc. Such analysis states (T24 p 597-598):

``(e) Analysis of Market Value of the Film prior to Initial Theatrical Release

Our experience indicates that the direct cost of the Film together with an allocation of studio overhead in the range of 15% - 25% of cost is a customary and conservative means of measuring the market value of the Film prior to theatrical release. As we have indicated above, revenue streams subsequent to theatrical release can be predicted to the amount of revenue generated from theatrical release. However, it is very difficult to predict the theatrical performance prior to release as any such prediction is inherently uncertain, and therefore, valuing a Film based on production cost is an appropriate measure. Film Studios have the incentive to produce films as inexpensively as possible, as the more revenue generated per dollar of cost, the more the Film will be profitable. In addition high cost movies are generally undertaken on the basis that they will generate still higher revenues. This is consistent with accepting the value of the film to be the direct cost of production plus an allocation of studio overhead.''

47. The Commissioner maintains that the above implies, that assuming the amount payable is to be calculated in accord with industry practice, then this is distinct from a valuation peculiar to the film itself, suggesting that the Partners had no choice or there was no real bargaining. Further, having in mind that,

- the Partners acquire copyright in the film throughout the world but do not acquire any derivative rights in relation to the copyright and,
- the ``Film Assets'' to be acquired extend only to the rights and property necessary to exploit the film including rights in other industrial or intellectual property in relation to the film, the film rights (T6/84) and physical materials (T6/85) and the assets and rights in Schedule 1 to the Distribution Agreement,

no provision has been made in the formula for the exclusion of the above rights.

Reliance on the above analysis is then said to be inappropriate because it relates to something different to the rights to be acquired by the Partners.

48. The Commissioner also maintains and relies upon the arrangement disclosing that consequent upon the integrated nature of the transactions (clause 5 of the Assignment Agreement) precedent to transfer of the copyright and the overall arrangement,

- the TCF group of companies is as above discussed intended to retain effective possession and control of the copyright; and
- approximately 80 per cent of the cost payable for the Film Assets (the Partners to borrow approximately 80 per cent of such cost) is guaranteed return to the Partners by TCF, this achieved by way of the guaranteed minimum income (Facilitated Deed of Covenant clause 2) or as the result of the exercise of ``exit rights'' (including Deed of Put Option T9/159; Share Subscription Agreement T10) as a result of which the Partners are to receive sufficient moneys to discharge any purchase related loan. It is submitted that on the basis of the above mentioned agreements entered into by the parties, the conclusion appropriate to be drawn is that they do not represent arm's length dealings at least in so far as the specification of the assignment consider- ation is concerned.

49. On behalf of the Applicants, it is said that the Partnership and Studio were and are arm's

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length parties, the Partners being subsidiaries of RAL and Studio being a subsidiary of TCF. They dealt with each other, it is said, at arm's length in relation to the Assignment Agreement in that,

- the provisions of the Assignment Agreement and the Distribution Agreement including the terms relating to the licence fee were the subject of real bargaining;
- the cost of producing the film is warranted by Studio;
- the method of calculating the purchase price is in accord with industry practice; and
- the Partners had a reasonable expectation of deriving a commercial return from the transaction.

50. It is undoubtedly the task of the Tribunal to have regard to the facts stated in the application and conclude whether it is satisfied that within the meaning of section 124R(3) the parties are and/or were dealing with each other at arm's length in relation to the relevant transfer. It is open to the Commissioner and hence the Tribunal to make its own finding as to the relationship. So far as connection is concerned between the relevant parties, there is no ownership control, income or other equity connecting TP/L and LP/L and the Studio. It is true that the parties are differently owned. Neither has an interest in the other. They did however come together to undertake the agreement and it is open to the Tribunal to look to the agreement, the substance of it in the present context. As earlier mentioned Kagan World Media does indicate the way in which the cost was arrived at, that is certified direct costs plus a mark up to cover indirect costs. It is also true that the matter was being dealt with in advance of the release of the film and thus an objective mechanism needed to be put in place.

51. The Tribunal is persuaded by the submissions made on behalf of the Commissioner, that looking at the factual matters set out in the arrangement, the parties were not at arm's length and were not dealing at arm's length. Whilst it is true that the price to be paid was for a film that had not at that time been released, the formula used for the purpose of calculating the price did not take into the consideration the rights that were being transferred or sold to the Partners. The ``Film Assets'' acquired extended only to rights and property necessary to exploit the film, effective possession and control of the copyright being retained by the TCF group of companies. The guaranteed return to the Partners by TCF is also a factor that is appropriate for building in to any price structure.

(2) Cost of the unit to the Studio section 124R(3)(b)

52. For the arm's length disqualification to apply, it is necessary that either the cost of the copyright to the Partners shall exceed the cost to the Studio (as the Partners are required to pay 122.5 per cent of the cost of production this prerequisite must be met) or the cost to the Partners does not exceed the cost to the Studio but is in excess of its value at purchase. For the reasons advanced under (1) above, it is said that the value would be considerably less than 122.5 per cent of the cost of production.

53. As earlier mentioned, the formula adopted by the parties referable to the cost assumes that the producer had direct costs for the entire film yet the assignment is only that of the copyright for 15 years and excludes the derivative rights. Thus it is inappropriate to superimpose upon direct costs an estimated figure in respect of indirect costs and it would also be necessary to take into account the nature of the rights being acquired.

54. The Applicants say that the material comprising the arrangement does not contain a basis on which it can be said that the relevant cost or value is considerably less than 122.5 per cent of the cost of production. It is said that the cost of production is warranted by the Studio and the amount reflects the Studio overhead within the normal industry range. The direct costs are said to be certified and the mark up to cover indirect costs is said to be both customary and conservative. On behalf of the Applicants, it is maintained that the ``objectives standard'' said to have been used by the parties ``is to be taken as fact'' it is part of the fact ``which comprises the arrangement upon which the ruling is to be made'' (transcript p 66).

55. The Tribunal is satisfied that on the basis of the facts contained in the arrangement, the stipulated cost of the unit, its value to the Partners, would be considerably less then 122.5 per cent of the cost of production. The cost to the Partners is in excess of its value at purchase.

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(D) Residual value sections 124M(1), 124N(1), 124S(1) and 124(T)(2)

56. As above discussed it is said by the Commissioner that the parties to the assignment of the copyright did and would not act at arm's length with one another. For the same reasons, it is said that the Partners and TCF would not be dealing with each other at arm's length in relation to the disposition of the copyright to TCF. Thus, the Partners would be regarded as having received by way of a consideration on disposal on amount equivalent to its value at the time of disposal which value would equate the ``residual value'' (section124S) which would entail a determination of cost as per section 124R(3). There would then be no difference between the determined residual value and the consideration to be received.

57. The Applicants maintain that the purchase price is not less than either the cost of the copyright or its market value.

58. For the reasons hereinbefore set forth and as they more particularly relate to the existence or otherwise of an arm's length transaction, the Tribunal is satisfied that there would be no difference between the determined residual value and the consideration to be received.

Management fees section 8-1

59. A management agreement was not amongst the transaction documents. The request for a ruling however stated:

``Appointment of manager

The agent will appoint a manager (the `manager') for the business for six years. The manager will be paid a fee by the partnership. If the transaction continues beyond six years then fees for the manager will be negotiated for that additional period. (T3/17).

Under `Outline of Transactional Documents' it is stated:

`...

(11) The partnership appoints [a firm of chartered accountants] to manage the transaction (Management Deed) this document has not yet been finalised.'

(T3/26)

and further under a subheading `Discussion of the Income Tax Treatments' it is stated:

`(f)... The amount of $500,000 payable by the Partnership to the manager will be a deductable outgoing of the Partnership under section 8-1 of the 1997 Act and that the fee will be deductable over the years ended 31 December 2001 to 31 December 2006 inclusive in accordance with section 82KZMD of the 1936 Act.

The management fees being necessarily incurred by the Partnership in producing assessable income should be allowed as a deduction under section 8-1 of the 1997 Act in determining that taxable income of the Partnership.

That payment is not capital in nature merely because it is paid in one lump sum. Rather it is a prepayment in advance for services to be performed over a period of years.

We note that the size of the management fees is no bar to their deductibility; it is not for the Commissioner to say how much a taxpayer should spend on management services in earning his assessable income. The fee is determined on an arm's length basis.

S 82KZMD of the 1936 Act governs the timing of the deductibility.

The eligible service period is six years and the application of the formula within the section should mean that one sixth of $500,000 would be allowed as a deduction under section 8-1 of the 1997 Act in each year commencing with the year in which the $500,000 is paid and the following five years.'''

(T3, p 39-40)

60. The business to be conducted by the Partners under the partnership deed (T4/49) is not defined but the purpose of the partnership is stated as being:

``Purpose 2.2 The Partnership is and has been created for the sole purpose of

(a) acquiring and holding the Partnership Assets;

(b) carrying on business in relation to the Partnership Assets and as contemplated by the Transaction Documents; and

(c) deriving income and other returns from the Partnership Assets.''

(T4/56)

61. Partnership assets is interpreted to mean:

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``Partnership Assets mean:

(a) all present and future right, title and interest of the Partners or the Agent on behalf of the Partners in the Film;

(b) all other right, title and interest of the Partners or the Agent on behalf of the Partners under the Transaction Documents;

(c) any other property, assets, rights, revenues or power acquired by the Partners or the Agent on behalf of the Partners in respect of the Film at any time or existing or accruing at any time under the Transaction Documents;

(d) any other assets which the Partners at any time agree should form part of the Partnership Assets.''

(T4/54)

62. If, as the Commissioner contends, the Distribution Agreement would entail an assignment of the Partners' interest in the copyright - with which contention the Tribunal agrees - there would be no sole purpose remaining and no business to be managed on behalf of the Partners. Hence the incurring of a management fee could not be in gaining or producing assessable income (section 8-1) or incurred in carrying on a business for such purpose. There not being any other relevant material disclosed by the arrangement, the onus resting on the Applicants, it is said, has not been discharged.

63. The Applicants contend that there is not an assignment of the Partners' interest in the copyright and that there will be business to be so managed and for which assessable income will be derived. The management fee is said to be payable for services to be performed over 6 years in managing the affairs of the Partners and is within one or other of the positive limbs of section 8-1(1). The management fee is said to be payable for services to be performed by the firm of chartered accountants in managing the affairs of the Partners which are directed to the deriving of assessable income from the exploitation of the film in the form of a licence fee payable by TCF and the minimum guaranteed return payable by SFPL. This in the context of the Information Memorandum provided by the accountants to the Partners (T29/636) which is said to indicate prospects of significant returns from the licence fee in addition to the guaranteed minimum return. There is then, it is said, a clear and genuine relationship between the expenditure on the management fee and the production of assessable income. The Partnership derives income either from the Distribution Agreement or by way of the guaranteed amount. It is further said, that even if the Applicants divest themselves entirely of the copyright by way of granting the exclusive licence, the Distribution Agreement would operate and the income guarantee would operate and the Applicants would still receive assessable income under the arrangement, the expenditure incurred in management fees being incurred in gaining that income (transcript p 71).

64. Alternatively, it is submitted on behalf of the Applicants that there is a sufficient connection between the management fee and the business operations of the Partners, the fees being payments for services to be performed for the purpose of guaranteeing assessable income by way of exploiting the film.

65. As has already been indicated in these reasons, there is no management agreement in the transaction documents. The terms and conditions upon which the amount of $500,000 is to be paid are not apparent and the nature of the services to be provided in return for the payment is also not apparent. There is no factual basis stated upon which the money is to be expended. It appears to the Tribunal that the position might well have been one where the Commissioner was unable to give a ruling on the information provided and an indication might have been given to this effect. However, the Tribunal is satisfied that the position taken by the Commissioner is consistent with the facts as limited as they are contained in the arrangement. The Tribunal is satisfied that there was an assignment of the Partners' interest in the copyright to the extent as has already been discussed and that there was no sole purpose remaining and no business to be managed by or on behalf of the Partners.

Part IVA ``SCHEMES TO REDUCE INCOME TAX''

66. As already indicated in these reasons and in light of the findings that have earlier been made by the Tribunal, the decision on the objection to the answers given by the Commissioner to the questions raised by the Applicants is to be affirmed. However, the Commissioner did maintain that in the event of the submissions as to Division 10B and section 8-1 not being accepted by the Tribunal, the

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deduction or tax benefits sought by the Applicants should be denied as being integral to a scheme within the meaning of Part IVA. In light of the submissions made by and on behalf of the Applicants and the Respondent as to Part IVA, it is appropriate for the Tribunal to deal with them and indicate the position taken by it.

67. The prerequisites to a denial pursuant to Part IVA are the identification of a relevant scheme (section 177A(1)) of the tax benefit sought to be obtained (section 177C(1)) and a decision being made as to whether it can be objectively concluded that one or more of the persons who entered into or carried out the scheme or any part of it did so for the dominant purpose of enabling the taxpayer to obtain the tax benefit in connection with the scheme.

68. It is not necessary for the Commissioner to include every aspect of the arrangement in the relevant scheme. He may do so but is open to the Commissioner to seek to rely upon a narrower scheme within an identified wider scheme (vis the arrangement). A relevant scheme may be constituted by some or all of the factors entailed in the arrangement in respect of which the ruling is made provided it is capable of standing of its own without being robbed of all practical meaning and does not rely upon facts not comprised in the arrangement (
FC of T v Peabody 94 ATC 4663 at 4669-4670, 4670 and 4670-4671; (1993-1994) 181 CLR 359 at 382, 383 and 384).

69. The tax benefits here sought are the deductibility under Division 10B of the purchase price of the copyright of the film and the management fee under section 8- 1, which items would not have been allowable to the Partners if the scheme had not been entered into or carried out.

70. In order to assess the existence or otherwise of the dominant purpose, it is necessary to have regard to section 177D(b) and the eight matters they detailed.

71. The assessment is to be objective and may have regard to the context and surrounding circumstances of the scheme (
FC of T v Consolidated Press Holdings Ltd & Anor 2001 ATC 4343 at 4360; [2001] HCA 32 at 95-96; (2001) 179 ALR 625). It is the enabling of the taxpayer to obtain the tax benefit even be it the operation of the section is not dependent upon the taxpayer having the relevant dominant purpose. The dominant purpose of others than the taxpayer who entered into or carried out the scheme may be taken into account. Thus, the purpose of professional advisers maybe attributed to the party who accepts or acts upon or proposes to act upon the advice so given. The question to be asked is whether the relevant purpose the ``ruling, prevailing, or most influential purpose'' of the scheme would be to enable to Partners to obtain the benefit of a tax deduction or putting it another way whether the dominant purpose was to achieve a result whereby there was included in the allowable deductions an amount that might reasonably be expected to not have been included if the scheme was not entered into or carried out. Or putting it yet another way, whether viewed objectively it was the obtaining of the tax benefit which directed the taxpayers in taking steps they otherwise would not have taken but for the entering into of the scheme (
FC of T v Spotless Services Limited & Anor 96 ATC 5201 at 5206, 5210; (1996) 186 CLR 404 at 416, 422). Consistent with the above, the presence of a commercial objective and the pursuit of the commercial gain in the course of carrying on a business, even be it the overall transaction is commercial does not necessarily mean that the scheme, even be it only a part of the transaction, would not be one within the meaning of Part IVA (
FC of T v Consolidated Press Holdings Ltd & Anor 2001 ATC 4343 at 4360; [2001] HCA 32 at 96).

72. It was submitted on behalf of the Commissioner that the perceived commercial footing of the transaction is to be seen against the Facilitated Deed of Covenant that guarantees 80 per cent of the outlay being returned to the Partners. In the circumstances of the arrangement, where there is an outlay of approximately A$105 million, the Partners receiving back 80 per cent of it and obtaining a tax deduction for approximately A$32 million, there is what was described as ``a degree of insulation against the ultimate commercial success or failure of the arrangement'' (transcript p 121). The insulation it was submitted ``is heavily dependent upon the obtaining of a taxation deduction. Indeed not only is entry into the distribution agreement a condition precedent to the whole transaction going ahead... but the obtaining of the taxation ruling is a condition precedent to the transaction going ahead''. The making of the transaction conditional upon the obtaining of a favourable taxation ruling assist in making it apparent that

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the economics of the transaction are entirely dependant upon the obtaining of the taxation deduction under Division 10B. It is a critical element of the entire transaction. The commercial decision, it is submitted, would be not to proceed with the transaction absent the deductibility.

73. The objection decision having been made, it is for the Applicants to show that the ruling should not have been so made or should have been made differently.

- The case stated by the Applicants
The question for the Tribunal is, whether there is a scheme which is identifiable, whether that scheme yields a tax benefit and whether one of the parties to that scheme has objectively speaking and having regard to the eight matters identified in section 177D(b) a dominant purpose of securing a tax benefit for the Partners. The scheme must be the same scheme for all purposes within Part IVA. It is to be the same scheme which yields the tax benefit as a scheme to which the person who has relied upon section 177D purposes has the designated purpose and it must be the dominant purpose of that person in relation to that scheme. That is the Tribunal is to take the whole scheme or the whole part of the scheme to which the relevant person is a party and determine that scheme or that party's whole participation is one dominantly directed at obtaining a tax benefit.

74. It was said that looking at the form and substance, the Applicants have outlayed a substantial capital sum in exchange for an income stream hoped and expected to arise from a successful promotion of the film. The tax consequences of that are in effect little more than incidental (transcript p 81). In reviewing the decision of the Commissioner, the Tribunal is to take the eight items referred to in the section together and form an overall view objectively as to what the dominant purpose is. In the present instance, the dominant purpose of the parties in entering into the transaction was to exchange a capital sum for the prospect of a substantial revenue stream underwriting that with the guarantee of a minimum income stream.

75. The Applicants say that the persons who entered into or carried out the scheme were the Applicants, TCF, Studio, SFPL and the accountants. Before the Tribunal can make a determination under Part IVA, the Tribunal must be able to conclude and so conclude that it appears from the objective facts comprised in the arrangement that one or more of the persons had the dominant purpose of obtaining the tax benefits alleged. The Tribunal is not entitled to take into account a perception of the subjective purpose of the party to whom the disqualifying purpose is attributed. The purpose, as has already been indicated, is to be objectively ascertained and the facts from which it is ascertained must be derived from the arrangement as specified in the ruling. The Tribunal agrees with this statement of the legislative prescription. The dominant purpose of each of the parties in the arrangement is to be gleaned from the terms of the arrangement, the subject of the ruling.

76. It is submitted that TCF was simply selling its copyright for a present lump sum thereby recovering its outlay yet retaining a measure of control over the way in which the film was utilised and sharing in the revenue from the distribution of the film. Nothing in these circumstances would suggest that TCF had any purpose let alone any dominant purpose of providing a tax benefit to TP/L or LP/L. So far as TCF was concerned it was simply a case of exchanging present cash for future revenue and thereby reducing in part its risk associated with ownership of the film (transcript p 77). So far as TCF is concerned, the consequences of entering into the transaction were that it was taxable on the sales proceeds. It was not taxable on the part of the revenue share, which accrued to TP/L and LP/L by reason of their ownership of the copyright. There is no basis, it was submitted, in these circumstances for supposing that there was any relevant purpose on the part TCF to provide a tax benefit for TP/L or LP/L. All the circumstances indicate, looking at the matter objectively, that the purpose of TCF was to advance its interests, not advance the interests of others (transcript p 78). Thus, it is said that the dominant purpose of Studio was to obtain the purchase price. The dominant purpose of the accountants was to obtain a management fee. Although there were tax benefits for the Partners without those tax benefits, the scheme made perfect commercial sense in that:

• the film had prospects of commercial success when the Assignment Agreement and associated documents were entered into.

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It was estimated by the accountants that there was a 50 per cent chance that returns of over A$220 million would be achieved giving a pre-tax yield in excess of 15 per cent per annum;
• the film was to be marketed to potential investors in a manner which focused on the commercial potential of the film with a detailed assessment of the commercial risks and opportunities for return based on a comparison with other films produced by TCF;
• the provisions of the Assignment Agreement and the Distribution Agreement including the terms relating to the licence fee were the subject of real bargaining;
• the cost of producing the film was guaranteed by Studio; and
• the method of calculating the purchase price was in accord with industry practice by an independent expert.

77. As has already been indicated in these reasons, the Tribunal does not accept the existence of a ``real bargaining'' situation and has made its observations in relation to the calculation of the purchase price.

78. Consideration of the manner in which the scheme was entered into or carried out requires an analysis of the way in which and the method or procedure by which the relevant scheme was established (
FC of T v Spotless Services Limited & Anor 96 ATC 5201 at 5209; (1996) 186 CLR 404 at 420). It was submitted on the behalf of the Commissioner that as to the manner in which the scheme is to be entered into, the overall arrangements were and are designed and engineered so that the Studio as a subsidiary of TCF would transfer to the Partners the global rights of ownership in the copyright in the film for a period of 15 years but with TCF retaining effective control and possession of that copyright. The Partners were to be paid a consideration equal to 122.5 per cent of production cost of the film but with 80 per cent of the funds so expended return to them by TCF regardless of the film's earnings from distribution and exploitation. This return was in the form of a minimum guaranteed income and the provision of a guaranteed exit exercisable under the Put Option Deed including the provisional funds by TCF to repay all loan amounts outstanding in respect of borrowings by the Partners to fund the acquisition of the copyright interest. Further, the Partners had obtained full recourse from their holding company RAL for 80 per cent of the consideration payable for the copyright but they would not have exposure in respect of that borrowing by reason of the amounts of the guaranteed minimum income payable and the repayments due under the loan agreement being structured to coincide, the Partners' ability to pay being fully protected by TCF through the exit rights arrangements (the Put Option Deed) and the repayment of the loans to RAL being fully guaranteed by TCF.

79. The funding obtained from RAL is to be the whole of the consideration payable, which will be effected through the taking up of shareholding and the obtaining of loan money, the real contribution being in fact the equity contribution, this on account of the guaranteed return to it of the borrowed funds. The minimum guaranteed income and the amounts payable under the exit rights arrangements are to be payable by SFPL to the Partners. The obligation to pay is guaranteed by TCF or an associate. The funds to make the payments being obtained from TCF.

80. It was further submitted on behalf of the Commissioner that the effect of the overall transactions is that the Partners are to obtain an up-front deduction over two years for the whole of the amount of the purchase price of the copyright in the film. The amount of the deductions is not expected to be reduced to an amount equal to the amount of assessable income derived in the income years in which the deductions are sought and the Applicants' real financial commitment will be limited to 20 per cent of the consideration payable.

81. The Applicants contend that there is nothing in the way in which the arrangement ``or for that matter any part of it'' was entered into or carried out suggesting that any party had a dominant purpose of enabling a tax benefit to be obtained. The arrangement is said to be a commercial transaction entered into by the parties to protect their interest. The fact that the Partners receive a guaranteed minimum return does not imply that any party had a dominant purpose of obtaining a tax benefit. Each partner had borrowed the funds required for their participation. It was a prudent course to hedge their exposure through inter alia the guaranteed return. The amounts to be received in respect of

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the guaranteed return are to be included in the assessable income of the partnership.

82. As far as TP/L and LP/L are concerned, they outlaid their own funds. The consideration for that outlay was the acquisition of a copyright in the film for a term of 15 years. The Partners entered into a licence for the distribution of the film by the TCF group under which the Partners were entitled to receive their appropriate share of the revenue from the distribution (transcript p 78). When looking at the purpose of TP/L and LP/L in entering into the transaction, they made the above mentioned actual cash outlay of A$105 million, this in acquiring copyright. What they obtain is a share of distribution proceeds from TCF pursuant to the Distribution Agreement. The actual financial commitment of the parties, it is said, is for the full amount which is outlaid ``because it is the Partners' funds which are applied to that'' (transcript p 80).

83. As to the form and substance of the scheme, the Commissioner maintains that the Partners will pay ostensibly an amount of 122.5 per cent of the production cost of the film as consideration for their entitlement to ownership of copyright and acquire the exclusive right to do the acts that are in the nature of copyright. The use to which they put the copyright interest is by the grant of the exclusive licence to TCF and thereby qualify, it is said, their investment for deductibility under Division 10B. In return the Partners are to be paid the minimum income amount and a variable licence fee. The scheme is designed to protect the Partners against risk by reason of the exit rights arrangement. Thus it is said in substance:

- the obligation is to pay an amount considerably less, by reason that there is guaranteed to be returned to the Partners an amount not less than 80 per cent of the consideration payable either in the form of the loan guarantee or as the result of the exit right arrangements;
- the acquisition of the copyright interest for the specified period will not secure for the Partners control over the copyright;
- the effective possession and control over the copyright will remain with the TCF group of companies;
- the minimum income to be received by the Partners will be funded by TCF which is not an Australian company;
- the benefit that the Partners would derive from the ownership of the copyright would be the tax deductibility of their investment.

84. The Applicants contend that the form and substance of the scheme are the same in that the Partners make payments under the assignment agreement to acquire copyright in the film and then receive income over a period of up to 15 years from its exploitation. There is a guaranteed income and an undertaking to subscribe for shares and calling upon the undertaking vitiates the guarantee of income. In none of these respects it is submitted, does the form of the transaction differ from its substance. Looking at the form and substance objectively, the Applicants have outlayed a substantial capital sum in exchange for an income stream hoped and expected to arise from the successful promotion of the film. The tax consequences of that are in effect little more than incidental (transcript p 81).

85. The Tribunal is satisfied that the Applicants with reference to form and substance have not discharged the onus resting on them. It is true that their obligation to pay for the acquisition of the copyright is considerably less than the amount initially outlaid because of the guaranteed return of the exit rights arrangement. The acquisition did not secure for them control over the copyright which was to remain with the TCF group of companies and the substantial benefit to be derived by the parties would be the availability of the tax deduction.

86. As to time, the Commissioner maintains that the scheme is one to be entered into after the completion of the film thereby qualifying investment for deductibility under Division 10B and a condition precedent to the implementation of the arrangement is the obtaining of a favourable ruling from the Commissioner on the issues the subject of the present application before the Tribunal (Deed of Escrow clause 2.1 T15/300), with the result in relation to the operation of the Act, that but for Part IVA there would be achieved by the scheme a deduction allowable to the Partners for the whole of the purported commitment of funds and the incurring of the management fee.

87. The Applicants say that the scheme commenced at the latest on 5 February 2001 when the transaction documents were executed and had a term of 15 years. The timing of the commencement of the scheme relates to the

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Applicants' decision to invest in the film and nothing in the timing points to a dominant purpose of obtaining a tax benefit. In purporting to discharge their onus, the Applicants say that the result but for Part IVA that would be achieved by the scheme is

- the Partnership will derive assessable income from guaranteed minimum income payments by SFPL and from payments of the licence fee by TCF over a period of up to 15 years;
- the Partnership will obtain the deductions during first two years for the purchase price under Division 10B and deductions during the first six years for interest on the loan by RAL and the management fee payable to the chartered accountants; and
- early in the life of the Partnership the Partners may incur partnership losses which they would be entitled to transfer to RAL.

88. The tax deductions, it is said, will exceed assessable income in the first two years and thereafter the assessable income could be expected to exceed the tax deductions that would be claimed. This is a consequence of the structure of Division 10B, which involves the acceleration of deductions for capital expenditure in acquiring copyright in Australian films. The obtaining, it is said, of those deductions does not of itself point to a dominant purpose of obtaining the tax benefit alleged. What is being done, it is said by the Applicants, is entirely consistent with the scheme of the Act.

89. It is apparent however that the change in the financial position of the Partners that will result or may reasonably be expected to result from the scheme is that each partner will incur a substantial tax loss in the income years in which deduction will be claimed.

90. The case put by the Applicants in this regard is that the relevant changes in the financial position of the Partners resulting or reasonably expected to result from the scheme entailing a comparison of the financial position of the Applicants before and after they entered into the scheme is that,

(1) LP/L will have approximately $104 million in cash as the result of an equity injection of approximately $21 million from RAL and then later approximately $83 million from RAL;
(2) TP/L will have approximately $1million in cash being the result of an equity injection of approximately $200,000 from RAL and then later approximately $800,000 from RAL;
(3) the Partnership will then have approximately $105 million in cash, that amount being wholly utilised in satisfying the purchase price. The assets of the Partnership would remain the same, cash being converted into ownership of the copyright;
(4) TP/L and LP/L will incur interest on the monies borrowed from RAL to fund the contributions and a management fee to the accountants. These outgoings would be funded by the guaranteed amounts paid by SFPL;
(5) the Partnership would earn revenue in the form of licence fees from TCF;
(6) RAL to acquire an option to put its shares in TP/L and LP/L to TCF;
(7) TP/L and LP/L to acquire a right to require SFPL to subscribe for approximately $80 million in shares;
(8) the Partnership is expected to make a commercial profit from the scheme.

91. Thus, the changes in the financial position were identified as the issue of the capital and the borrowing of the monies. With the monies so raised, the Partners acquired a copyright in the film for 15 years as a consequence of which, it is said, they have the right to receive an income stream. If there is a shortfall then they are entitled to the benefit of the guarantee. They also have the right to issue the shares to SFPL. These it is submitted are the ``real commercial consequences'' (transcript p 86). Thus, it is not the tax consequences which are dominant. None of the above enumerated circumstances would indicate that there was a dominant purpose in RAL of procuring a tax deduction for TP/L or LP/L. The consequence of the arrangement for TCF is that it sells its copyright and receives the capital proceeds ``thereby replenishing its working capital'' (transcript p 87).

92. TCF retains distribution rights under the Distribution Agreement, it retains control over presentation of the film but it gives up a share of income which, it is said, accrues to the owner of the copyright. Looking at the transaction as a whole, the dominant purpose it is submitted on

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behalf of the Applicants, was to invest in a film which ``while risky, had the prospect of making a substantial return for the investor'' (transcript p 88).

93. It is apparent from the factual situation that emerges from the arrangement that as to any change in the financial position of a person who has a relevant connection with the Partners, being a change that will result or may reasonably be expected to result from the scheme that the TCF group of companies will receive the amount of consideration payable after deduction of the amount it is to return to the Partners and the accountants are to receive the management fees of $500,000. The tax loses incurred by the Partners maybe transferred to RAL, to be available to be offset against the assessable income of that company.

94. A relevant connection between the Partners and any other person referred to in the previous paragraphs is that the Partners are wholly owned subsidiaries of RAL and the connection between the RAL group of companies and the TCF group of companies under the relevant arrangement is contractual.

95. The Applicants say that in the context of a relevant connection, consideration is to be given to the same comparison of the financial position as earlier stated but with the person who has the relevant connection with the Partners. There is no person, it is submitted, having a relevant connection with any of the Applicants in the present case. The Tribunal does not accept this submission.

96. Taking each of the Partners separately, section 177D requires a conclusion to be reached to the effect, that having regard to each of the matters in section 177D(b) a party to the scheme entered into or carried out the scheme for the sole or dominant purpose of enabling the partner to obtain the tax benefits identified being deductions under Division 10B for the purchase price and under section 8-1 for the management fee and interest. The observation of the High Court in
FC of T v Spotless Services Limited & Anor 96 ATC 5201 at 5210; (1996) 186 CLR 404 at 422 to the effect that ``without the tax benefit the proposal made no sense'' is applicable. The presence of the tax benefits was a matter taken into account in the parties' decisions to enter into the scheme. Objectively determined the sole or dominant purpose of the relevant persons who entered into or carried out the scheme was to obtain those benefits.

97. The Tribunal having considered each of the prerequisites contained in section 177D is satisfied as to each of them as earlier indicated. The consequence of such satisfaction is that looked at objectively, the obtaining of the tax benefit by way of the deductions for the cost of acquisition of the copyright and the payment of the management fee and the utilisation of tax loses comprise or represent such a significant feature of the arrangement that it does not work without the tax considerations. The obtaining of the deductions was the dominant purpose. The incentive to sell the copyright in the circumstances earlier indicated where the Partners are in the effect contributing an amount of approximately 20 per cent of a stated value together with the other elements of the scheme do not present an arrangement which would be entered into in the absence of the availability of the Division 10B deduction. As was submitted on behalf of the Commissioner, ``tax is very much at the forefront of the arrangement and indeed it has been engineered in a way that has sought to give to the Partners a deduction referable to the value of the entire copyright in circumstances where in commercial reality the Partners are never really acquiring anything like that and in commercial reality they are contributing ultimately to the production of the film something in the vicinity of 20 per cent of its purported cost'' (transcript p 123).

98. The Tribunal is of the opinion that the arrangement earlier identified is such as to attract the provisions of Part IVA and thus warrant the answer given by the Commissioner being affirmed by the Tribunal.

99. For the reasons hereinbefore set forth the objection decision under review is affirmed.

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CASE 2/2002

(A) The Partners as owners of the copyright, a unit of industrial property

(B) Use in the year of income for the purpose of reducing assessable income

(C) Application of arm's length provision

(D) Residual value sections 124M(1), 124N(1), 124S(1) and 124(T)(2)

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