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FC of T v STARR & ANOR

Judges:
Spender J
Siopis J
Gilmour J

Court:
Full Federal Court, Perth

MEDIA NEUTRAL CITATION: [2007] FCAFC 204

Judgment date: 21 December 2007

Spender, Siopis and Gilmour JJ

1. In June 1996, each of Mr Starr and Mr Hopkins invested in a cattle breeding project known as the Active Cattle Management Project (ACM Project). It was operated in Tamworth in New South Wales, and comprised the breeding and managing of stud cattle for third party investors. The breeding programme

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involved the creation of cattle embryo by artificial insemination and the transfer of the embryos to recipient cows. Each investor was required to pay an annual fee in respect of expenses incurred in carrying out the breeding programme. These expenses included the lease of the recipient cow, embryo costs, agistment costs and management fees. For the income year 1996, Mr Starr lodged an income tax return in which he claimed a deduction in respect of "primary production losses" of $35,832 arising from his investment in the project. Mr Hopkins lodged an income tax return for the same period in which he claimed a deduction of $23,888 on the same basis.

2. The appellant (the Commissioner) issued amended assessments which disallowed the deductions claimed in each of the respondents' tax returns for the 1996 income year and included an amount of additional tax payable by way of penalty.

3. Each of Mr Starr and Mr Hopkins objected to the amended assessments. By a letter dated 6 March 2003, the Commissioner disallowed the objections. The Commissioner found that the claimed deductions for the losses in relation to the ACM Project were not allowable because they were of a capital nature. The Commissioner also refused to make any remission in respect of the penalty included in each taxpayer's amended assessment. The Commissioner advised that the additional tax was payable as a penalty under s 226L of the Income Tax Assessment Act 1936 (Cth) (the Act). The additional tax imposed by way of penalty in respect of Mr Hopkins was based upon 50% of the tax shortfall and 10% in respect of Mr Starr. Mr Starr was more favourably treated because he had in August 1999, at the invitation of the Commissioner, voluntarily disclosed his claim for deductions in relation to the ACM Project and requested that the Commissioner amend his assessment.

4. On 14 May 2003, each of the respondents applied to the Administrative Appeals Tribunal (the Tribunal) for a review of the Commissioner's objection decision stating that the amended assessment was "excessive in relation to penalties only". The taxpayers' contention was that s 226L has no application to them because the scheme comprising the ACM Project contracts referred to in [14] below was not a "tax avoidance scheme" within the meaning of s 226L because the contracts had not been entered into or carried out for the sole or dominant purpose of enabling a person to pay no tax or less tax. The Tribunal rejected each of the taxpayer's application for review. Each of the taxpayers appealed to the Federal Court. French J upheld their appeal. The Commissioner has appealed to this Court from that decision.

5. The major issue which arises on this appeal is, whether on the proper construction of s 226L, the determination of the "purpose" for which a scheme was "entered into or carried out", is to be made by reference to the actual or subjective purpose of the parties to the scheme; or whether that purpose can be attributed to the parties on the basis of objective criteria.

Statutory background

6. Section 226L of the Act provides:

Subject to this Part, if:

  • (a) a taxpayer has a tax shortfall for a year; and
  • (b) the shortfall or part of it was caused by the taxpayer in a taxation statement treating an income tax law as applying in relation to a scheme in a particular way; and
  • (c) the scheme was a tax avoidance scheme within the meaning of subsection 224(1); and
  • (d) none of the scheme sections applies in relation to the scheme;

  • the taxpayer is liable to pay, by way of penalty, additional tax equal to:

  • (e) if, when the statement was made, it was reasonably arguable that the way in which the application of the law was treated was correct - 25% of the amount of the shortfall or part; or
  • (f) in any other case - 50% of the amount of the shortfall or part.

7. There are terms used in s 226L which are defined in s 222A(1) of the Act:

" 'income tax law' means a law under which the extent of liability for income tax is worked out;

'scheme section' means sections 224, 225, 226 or 226AA;

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'tax shortfall' , in relation to a taxpayer and a year, means the amount, if any, by which the taxpayer's statement tax for that year at the time at which it was lowest is less than the taxpayer's proper tax for that year;

'statement tax' , in relation to a taxpayer, a year and a time, means the tax that would have been payable by the taxpayer in respect of that year if it were assessed at that time on the basis of taxation statements by the taxpayer after allowing the credits claimed by the taxpayer."

8. It was common ground that each of the income tax returns lodged by Mr Starr and Mr Hopkins for the year ended 30 June 1996 comprised the "taxation statement" referred to in s 226L(b), and that the conditions referred to in s 226L(a), (b) and (d) applied in this case. It was only the construction of s 226L(c) that was in issue. That subsection referred to "a tax avoidance scheme" within the meaning of s 224(1) of the Act, which applied the following definition in s 224(2):

"In subsection (1), ' tax avoidance scheme ' means a scheme within the meaning of Part IVA that was entered into or carried out for the sole or dominant purpose of enabling a person to pay no tax or less tax."

9. It was also common ground that the reference in s 224(2) to "scheme within the meaning of Part IVA" is a reference to the following definition of scheme in s 177A - the opening interpretation section in Pt IVA:

" 'scheme' means:

  • (a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and
  • (b) any scheme, plan, proposal, action, course of action or course of conduct."

10. It is also necessary to refer to s 177D of Pt IVA of the Act. This section identifies schemes to which Pt IVA applied. Section 177D provides:

"This Part applies to any scheme that has been, or is entered into after 27 May 1981, and to any scheme that has been or is carried out or commenced to be carried out after that date (other than a scheme that was entered into on or before that date), whether the scheme has been or is entered into or carried out in Australia or outside Australia or partly in Australia and partly outside Australia, where -

  • (a) a taxpayer (in this section referred to as the 'relevant taxpayer' ) has obtained, or would but for section 177F obtain, a tax benefit in connection with the scheme; and
  • (b) having regard to -
    • (i) the manner in which the scheme was entered into or carried out;
    • (ii) the form and substance of the scheme;
    • (iii) the time at which the scheme was entered into and the length of the period during which the scheme was carried out;
    • (iv) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme;
    • (v) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme;
    • (vi) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature), with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;
    • (vii) any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out; and
    • (viii) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi),

  • it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme or of enabling the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer or is the other taxpayer or one of the other taxpayers)."

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11. Section 227(3) of the Act provides for the discretionary remitter, by the Commissioner, of the whole or any part of the additional tax payable by a person under a provision of Pt VII.

12. Finally, it should be mentioned that s 224 and s 226L are included along with a number of other sections, in Pt VII of the Act. Part VII of the Act does not apply to any statements or schemes entered into in relation to the 2000-2001 income year or any later year of income.

The application for review before the Tribunal

13. As previously mentioned, the applications made by Mr Hopkins and Mr Starr were for the review of the Commissioner's decision of 6 March 2003 in relation to penalty only. The applications for review were heard at the same time.

14. It was common cause that the investment in the ACM Project by each of the two taxpayers occurred by the entry of each of the two taxpayers into three contracts. These contracts were:

  • (a) a Livestock Management and Services Agreement with Active Cattle Management Pty Limited;
  • (b) a Livestock Lease Agreement with Viking Investments Pty Limited pursuant to which the investor would lease recipient cows for the purposes of embryonic transfer of embryo cattle; and
  • (c) a Loan Agreement with T.E.I. Finance Pty Limited which provided the taxpayers with financial accommodation to borrow a portion of the management fees.

15. The payments that were made by Mr Starr and Mr Hopkins in respect of which the deductions were claimed, were made pursuant to obligations undertaken under these agreements. It was also common cause that these contracts comprised the relevant "scheme" within the meaning of s 224(2) of the Act.

16. In his statement of facts and contentions each of Mr Starr and Mr Hopkins respectively stated:

"The Scheme was not a tax avoidance scheme within the meaning of sub-section 224(2) of the ITAA36 because:

  • (i) Neither the sole nor the dominant purpose of the promoters of the Scheme in entering into or carrying out the Scheme was to enable the Applicant or any other person to pay no or less tax.
  • (ii) Neither the sole nor the dominant purpose of the Applicant in entering into or carrying out the Scheme was to enable the Applicant or any other person to pay no or less tax."

17. Before the Tribunal, Mr Starr relied upon his affidavit and an affidavit sworn by his financial adviser, Mr Kevin Phillip Sleight. Mr Hopkins relied on his affidavit and an affidavit from Mr Rodolfo Delcarlo, who was Mr Hopkins' financial adviser. The tenor of the evidence was that each of the taxpayers had invested in the project for the purpose of making a profit and, although each was aware of the tax benefits to be obtained from such an investment, the obtaining of the tax advantage was not the sole or dominant purpose of the investment. There was no cross-examination of any of the witnesses who gave affidavit evidence. The Commissioner called no witnesses.

18. Each of the taxpayers annexed to his affidavit a copy of the information booklet which described the ACM Project.

19. On the application of the definition of "scheme" to the facts in this case, the question to be determined was whether the three contracts referred to in [14] above, were "entered into or carried out for the sole or dominant purpose of enabling a person to pay no tax or less tax".

20. The Tribunal was referred to the decisions of French J in
Vincent v Federal Commissioner of Taxation 2002 ATC 4490; [2002] FCA 656 and of the Full Court (Hill, Tamberlin and Hely JJ) in
Vincent v Commissioner of Taxation 2002 ATC 4742; (2002) 124 FCR 350, on appeal from the decision of French J. It is necessary to refer in a little detail to these decisions.

21. 

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The Tribunal was referred to the Vincent case because that case was also concerned with the ACM Project. Ms Vincent was also an investor in the project and the Commissioner had disallowed deductions claimed by Ms Vincent in respect of losses associated with the investment in the project. Before French J, the Commissioner contended that Pt IVA of the Act applied to the scheme, or, alternatively, that no deduction was allowable under s 51(1) of the Act for the outgoings claimed by Ms Vincent. French J rejected the Commissioner's contention that the outgoings claimed by Ms Vincent were not deductible under s 51(1) of the Act because they were of a capital nature. However, French J found that the scheme, which comprised the same agreements mutatis mutandis referred to in [14], and the steps and transactions carried out pursuant to those agreements, was a "scheme" to which Pt IVA applied. French J came to that view by the application of the eight factors referred to in s 177D(b) in Pt IVA of the Act. French J observed at [122]:

"In this case I have already found, in connection with the issue of deductibility under s 51(1), that the obtaining of a tax deduction was not Ms Vincent's dominant purpose in entering into the project. That finding however does not obstruct the application of Pt IVA to Ms Vincent's claimed deduction. The purpose which must be found in order to attract the application of Pt IVA under s 177D(b) is that which a reasonable person would conclude was the dominant purpose of one or more of the persons entering into the scheme. That is to say, it is an objective purpose attributed to them."

22. On appeal, the Full Court held that the outgoings claimed were of a capital nature and that they were, therefore, not deductible pursuant to s 51(1) of the Act. The Full Court found that, as no amount was ever an allowable deduction, Pt IVA could have no application. However, the Full Court went on to make some observations about French J's finding in relation to Pt IVA, that the scheme promoter's dominant purpose was the avoidance of tax. The Full Court said at 373, at [100]:

"We may doubt, however, whether we would reach the same conclusion as to the purpose of the promoter in this case. Indeed, we would be inclined to the view that the dominant purpose of the promoter here was to obtain the profits that clearly would have flowed to the various companies associated with him. However, it is not necessary to reach a concluded view on this question."

23. The Tribunal rejected the taxpayers' contention that the scheme was not a tax avoidance scheme for the purpose of s 226L(c) and so rejected their applications for review. In his reasons for decision, the Senior Member of the Tribunal said at [71]:

"[T]he language of s 224(2) of the ITAA, in its terminology, 'that was entered into…' indicated that an examination of the objective facts and circumstances surrounding a Scheme was necessary, and that this tied in with the objective inquiry required in Part IVA." (Original emphasis.)

24. The Senior Member went on to say at [73]:

"[I] was satisfied that the Applicants did not provide any evidence that their involvement in the ACM Scheme was objectively different from the objective facts and circumstances ruled upon by the Federal Court in the case of Mrs Vincent. Accordingly the Applicants have not discharged their onus."

The appeal to the Federal Court

25. As mentioned earlier, the taxpayers appealed to the Federal Court, and French J allowed the appeal and set aside the decisions of the Tribunal dismissing the taxpayers' applications for review. He also set aside the decision of the Commissioner on 6 May 2003, disallowing the objections lodged by the taxpayers, and allowed each of their objections.

26. In his reasons for decision, French J distinguished between actual purpose and attributed purpose. He referred to a number of authorities dealing with the construction of the word "purpose" when used in a statute. One such authority was the case of
News Ltd v South Sydney District Rugby League Football Club Ltd (2003) 215 CLR 563 (News) which dealt with the construction to be accorded to the "purpose" referred to in s 4D of the Trade Practices Act 1974 (Cth) (the TPA). The High

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Court held that "purpose" was to be assessed by reference to subjective considerations.

27. French J said at [42]:

"In my opinion these authorities are consistent with the proposition that the law should generally be construed according to the ordinary meaning of the words it uses having regard to their context and legislative purpose. Where a mental state is referred to it should be construed as an actual mental state unless the context indicates a constructive or attributed mental state."

28. French J noted the difference between the language used in s 177D of the Act and that used in the definition of "tax avoidance scheme" in s 224(2). French J said that the inquiry called for under s 177D, differed from the inquiry mandated by s 224(2) and that it was important not to be distracted by s 177D. The inquiry under s 177D is concerned with what "would be concluded" about the purpose of those entering into a scheme having regard to the eight factors referred to in s 177D(b).

29. French J also contrasted the difference between the language of the former s 260 of the Act, which referred to an impugned contract, arrangement or understanding having "the purpose or effect" of avoiding or evading tax, and the language of s 224(2) which referred to the purpose for which a "scheme" was "entered into" or "carried out". French J said that it had been held that s 260 called for an objective approach to assessing purpose. However, the use of the words "entered into" or "carried out" suggested that the provision was formulated on the apparent assumption that the relevant inquiry was to be into the existence of an actual rather than an attributed purpose.

30. French J observed at [50]:

"In my opinion the word 'purpose' in the definition of 'tax avoidance' in s 224(2) should be taken, like 'purpose' in s 4D of the Trade Practices Act, to have referred to the purpose of those who entered into the relevant scheme. In this case the purpose is that of the taxpayers, Messrs Starr and Hopkins, and possibly also those of their advisers. The uncontested evidence of all of them was that their purpose in entering into the scheme was to obtain a commercial return. While tax benefits were relevant, they were not the sole or dominant purpose."

31. Further, French J observed that s 226L was a penalty provision and that if the purpose was to promote compliance with tax laws, it may be expected to deal with actual conduct and actual purpose. French J said that it was difficult to see why, if two constructions of s 224(2) were available, a construction should be adopted which would permit the imposition of a penalty by reference to a purpose which the taxpayer never had. French J went on to say at [52]-[54]:

"Of course, purpose could be assessed even under s 224(2) by reference to objective factors. It may also be that the statements of individual taxpayers about their purposes relevant to the imposition of penalty would be given little weight. But the relative weight and extent of subjective and objective evidence relative to that determination will be an accident of the particular proceedings in which the question arises. In this case the evidence of the taxpayers and the advisors was unchallenged.

In my opinion, the Tribunal erred in law in excluding consideration of the stated purposes of Messrs Starr and Hopkins. Their statements were not contested. They were not inherently improbable. The Tribunal came to a contrary conclusion evidently based upon that reached by the Federal Court in Vincent 124 FCR 350 about the application of Pt IVA.

It seems that in this case the Tribunal reached its conclusions about the relevant purpose upon the apparent assumption that the statements of the taxpayers, Messrs Starr and Hopkins, were irrelevant. In my opinion, however, there is no point in remitting these matters to the Tribunal as the evidence about the taxpayers' actual purposes in entering the schemes was not contested by the Commissioner. In the circumstances, the decisions of the Tribunal will be set aside and the objections allowed. The parties will be given liberty to apply for any necessary consequential orders."

The appeal to the Full Court

32. The Commissioner contended that the characterisation of the scheme as a "tax avoidance scheme" for the purpose of s 226L(c) was to be made by reference to the objective facts and circumstances of the entry into or carrying out of a particular scheme, without regard to the "asserted" mental state of the taxpayer. In other words, the actual purpose of the taxpayers in entering into the "scheme" was irrelevant to the characterisation of the scheme for the purposes of s 226L(c).

33. The Commissioner relied upon the following observations made by Gibbs and Mason JJ in the case of
Federal Commissioner of Taxation v Lutovi Investments Pty Ltd 78 ATC 4708; (1978) 140 CLR 434 at 445 (Lutovi):

The question then is whether the purpose or purposes of the arrangement into which the directors entered on 6th December 1971 answered the description contained in para (b) of s 44(2D). First, it is apparent that the paragraph speaks of the objective purpose of the agreement. It is in contrast to the subjective purpose of one of the continuing shareholders with which s 80B(5) is concerned (see
Federal Commissioner of Taxation v Students World (Australia) Pty Ltd cf s 260 where it is "the purpose and effect" that is referred to).

34. The relevant provision, namely, s 44(2D)(b) of the Act which the High Court was required to construe, read as follows:

  • "(b) the share was issued in pursuance of or as part of, an agreement or arrangement…that had the purpose or purposes that included the purpose, of enabling the company…by a reduction in the paid up value, of that share or of any other share in the company,…to pay…any money or other property other than shares in the company." (Emphasis added.)

35. In our view, these observations of Gibbs and Mason JJ do not support the contention advanced by the Commissioner.

36. First, the language in s 44(2D)(b) referred to an "agreement that had the purpose or purposes". Gibbs and Mason JJ recognised this language as being similar in nature to the language used in s 260 of the Act. However, the language of s 44(2D)(b) and of the former s 260 which, as French J observed, had called for an objective inquiry, is significantly different to that used in s 224(2). Section 224(2) refers to the purpose for which an agreement was "entered into" or "carried out". Accordingly, the observations of Gibbs and Mason JJ as to the objective purpose, called for by s 44(2D)(b) are, in our view, not germane to the language used in s 224(2) of the Act.

37. Secondly, Gibbs and Mason JJ contrasted the objective purpose called for by s 44(2D)(b), with "the subjective purpose…with which s 80B(5) is concerned" and referred to the case of
Federal Commissioner of Taxation v Students World (Australia) Pty Ltd 78 ATC 4040; (1978) 138 CLR 251 (Students World).

38. In Students World, the High Court was required to determine whether the purpose referred to in the following provision of the Act, namely, s 80B(5)(c) of the Act, referred to a subjective or objective purpose:

  • "(c) the contract, agreement or arrangement was entered into…for the purpose, or for purposes that included the purpose, of enabling the company to take…a loss that the company had incurred in a year before the year in which the contract, agreement or arrangement was entered into." (Emphasis added.)

39. The High Court determined that the provision called for purpose to be assessed by a subjective inquiry.

40. At 274 Aickin J observed:

"I do not think that the context of the whole of this sub-section permits the word 'purpose' to be construed as meaning the same as the words 'purpose or effect' in s 260 of the Act. It seems to me to be clear that par (c), dealing with a contract, agreement or arrangement, refers to the subjective purpose of the continuing shareholder and not with the objective effect of that which is done. It speaks not of the purpose of the contract, agreement or arrangement but of the purpose of entering into it, which must be the purpose of the person doing the relevant act." (Emphasis added.)

41. Mason J made observations to similar effect at 266.

42. 

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In our view, the observations in Lutovi and Students World support the construction given to s 224(2) by French J. In particular, the distinction referred to by Aickin J is the very distinction relied upon by French J in concluding that the use of the words "entered into" or "carried out" in s 224(2) called for an inquiry to be made of the actual purpose of the person referred to.

43. The Commissioner also relied upon observations made by a number of the judges of the High Court in the News case. In that case, the High Court had to consider whether a term in an understanding reached between News Limited and the Australian Rugby Football League Ltd to limit the number of teams eligible to participate in league competition contained an "exclusionary provision" within the meaning of the TPA and so contravened s 45 of the TPA. Section 4D(1) of the TPA provided that a provision in such an understanding was an exclusionary provision if the "provision has the purpose" of preventing, restricting or limiting the supply of goods and services by any or all of the parties to the contract.

44. As previously mentioned, one of the matters which the High Court had to determine was whether the reference to the purpose in s 4D required the Court to attribute a purpose to the parties to the understanding, or to determine the actual subjective purpose of the parties to the understanding.

45. Also relevant to the construction of s 4D, was s 4F which provided:

  • "(1) For the purposes of this Act:
    • (a) a provision of a contract, arrangement or understanding or of a proposed contract, arrangement or understanding, or a covenant or a proposed convenant, shall be deemed to have had, or to have, a particular purpose if:
      • (i) the provision was included in the contract, arrangement or understanding or is to be included in the proposed contract, arrangement or understanding, or the covenant was required to be given or the proposed covenant is to be required to be given, as the case may be, for that purpose or for purposes that included or include that purpose; and
      • (ii) that purpose was or is a substantial purpose."

    • (Emphasis added.)

46. The High Court concluded the test of "purpose" in s 4D referred to the actual purpose of the parties to the understanding. The majority of the High Court (Kirby J dissenting) approved the approach taken in previous decisions which had applied a subjective test.

47. The observations of some of the judges in News which the Commissioner relied upon, referred to the difficulties that can arise in determining the subjective purpose of the parties to a contract, arrangement or understanding. The observations at 605, at [127] of Kirby J were among those relied upon by the Commissioner:

"The 'arrangements' mentioned in the Act might involve multiple parties are (and, in the case of corporations, multiple officers). They might have been made at different times, having slightly different subjective purposes that it would take many months of court hearings to unravel and then without any certainty of accurate ascertainment. Moreover, a subjective test might effectively allow parties an unwarranted escape from the provisions of the Act, defeating the attainment of its important national purposes. It would not make much sense to allow parties to enter anti-competitive 'arrangements' and then to escape the consequences because their subjective purposes were something other than anti-competitive. Such a construction would defeat attainment of the economic objectives of the Act." (Footnote omitted.)

48. Each of McHugh J and Gummow J also made observations referring to the difficulties associated with the adoption of a subjective test.

49. The Commissioner also drew attention to the fact that McHugh J observed (as noted at [52] below) that if s 4D was being considered for the first time he would prefer an objective test.

50. In our view, the News case does not support the Commissioner's contention. It is clear that the language of s 4F of the TPA which referred to "the purpose" for which a provision was included in the contract arrangement or understanding, significantly

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influenced the majority in their conclusion that s 4D called for an inquiry into the actual purpose of the parties to the understanding. The influence of the language of s 4F is evident from observations made by each of Gummow J and McHugh J.

51. At 585, at [59], Gummow J observed:

"It will be noted that [the trial judge] focused on the subjective reasons of the parties to the contract in which the relevant provision is contained. At first glance, such an approach might appear to conflict with the terms of s 4D(1)(b), which speaks not of human or corporate actors but of the provision itself having the purpose of preventing, restricting or limiting the supply or acquisition of the relevant goods or services. A construction which fixes upon subjective intent also may be difficult to apply to a multipartite contract, arrangement or understanding. However, s 4F of the Act doubtless has a role to play in such circumstances." (Original emphasis.)

52. Gummow J went on to observe at 586, at [62]:

"The operation of s 4F upon provisions stated to have a particular purpose is significant. The phrase 'the provision was included in the contract…for that purpose or for purposes that included or include that purpose' suggests that s 4F requires examination of the purposes of the individuals by whom the provision was included in the contract, arrangement or understanding in question. Moreover, s 4F contemplates that a provision may be included in a contract, arrangement or understanding for a plurality of purposes and, in such circumstances, directs that the relevant purpose must be 'substantial'. This is a further indication that the Act requires examination of the purposes of individuals, the inevitable multiplicity of which may be contrasted with an examination of the 'objective' purpose of an impugned provision. In this way, the introduction of a 'substantial purpose' test avoids difficulties in discerning the relevant purpose of multiple parties to a contract, arrangement or understanding." (Original emphasis; footnote omitted.)

53. McHugh J observed at 580, at [41]:

"If the interpretation of s 4D was being considered for the first time, I would prefer the view that, for the purposes of s 4D, the purpose of an alleged exclusionary provision is to be determined objectively without regard to the mental state of the parties who made the provision. But the subjective interpretation has stood for seventeen years, been approved by the Full Court of the Federal Court and been followed on numerous occasions. Given the terms of s 4F, s 4D is clearly open to the construction that 'purpose' in both sections means the subjective purpose of the makers of the provision."

54. It is apparent from these observations that the High Court was prepared to give effect to the subjective tenor of the language of s 4F, notwithstanding that the High Court had expressly recognised the difficulties associated with the application of a subjective test.

55. The language in s 224(2) which speaks of the purpose for which a scheme was "entered into" or "carried out" carries the same subjective tenor as the language of s 4F of the TPA. The same is true of the language of s 80B(5)(c) with which the High Court was concerned in the Students World case.

56. It follows that, in our view, French J did not err in distinguishing between the language in the Act which refers to the "purpose" of an impugned contract or arrangement, and the purpose for which a contract or arrangement was "entered into" or "carried out'. In so doing, French J gave effect to the approach to the construction of the distinction in that language which had been adopted by the High Court in News and Students World.

57. The Commissioner also relied upon the difference in the language of s 226L(b) and s 226L(c) of the Act as supporting his contention. The Commissioner observed that, whereas there was a specific reference in s 226L(b) to the act of the taxpayer, namely, "treating an income tax law as applying in relation to a scheme in a particular way", there was no reference to the taxpayer, and in particular, no reference to the purpose of the taxpayer, in s 226L(c). The Commissioner submitted that the fact that s 226L(c) referred only to the scheme, indicated that the question of whether a scheme was a

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"tax avoidance scheme" was to be determined objectively.

58. In our view, the "scheme" referred to in s 226L(c) is the "scheme" that is referred to in s 226L(b). In other words, the contract or arrangement which has to be assessed by reference to the definition of "tax avoidance scheme", is the contract or arrangement referred to in s 226L(b), namely, the contract or arrangement in relation to which the taxpayer made the impugned statement in his or her tax return. In the context of this case, the reference to the "scheme" in both s 226L(b) and s 226L(c) is a reference to the contracts entered into by Mr Starr and Mr Hopkins referred to at [14] above. Section 226L(c) does no more than require that the definition of "tax avoidance scheme" in s 224(2) be applied to those contracts. This, in turn, leads to an inquiry as to the purpose for which those contracts were entered into or carried out. In our view, there is nothing in the language and juxtaposition of subpara (b) and subpara (c) in s 226L which provides any assistance in the determination of whether the "purpose" in s 224(2) is to be assessed subjectively or objectively.

59. Further, the Commissioner submitted that the reference to "a person" in the phrase, "the sole or dominant purpose of enabling a person to pay no tax or less tax" in s 224(2), supported his contention. It was said that the use of the word "a person" rather than "the taxpayer" was inconsistent with a construction which treated the taxpayer's actual purpose as relevant. In our view, the use of the word "person" is not inconsistent with s 224(2) calling for an inquiry into the actual purpose of the parties, including that of the taxpayer, in entering into or carrying out the contract comprising the scheme. Insofar as the inquiry is directed to the taxpayer's actual purpose, the word "person" within the phrase "enabling a person to pay no tax or less tax" is capable of comprehending the taxpayer himself or herself. The same is true in relation to an assessment of the purpose of the other party to the contract in question.

60. The Commissioner also contended that the adoption of a subjective test would have anomalous consequences which would militate against such a construction. First, it was said that s 224 was a "scheme section", and the imposition of liability for penalty tax in relation to participation in a tax avoidance scheme would be made by the application of a different test, depending upon which "scheme section" applied. In relation to the "scheme sections" which applied in Pt IVA (namely, s 226 and s 226AA), penalty tax would be payable without regard to the subjective purpose of the parties to the scheme, whereas in circumstances where s 224 applied, the subjective purpose of the parties to the scheme would be relevant in determining whether penalty tax was payable. Secondly, it was also said to be anomalous that the Commissioner was able to apply an anti-avoidance measure referred to in s 224 without having regard to the subjective purpose of the taxpayer, but such purpose would be relevant in respect of a penalty.

61. In our view, these consequences, said to be anomalous, do no more than reflect the difference in the nature of the language which Parliament chose to use in relation to schemes to which Pt IVA applies and the definition of "tax avoidance scheme" to be found in s 224 of the Act. The legislature has made it clear that the purpose referred to in s 177D was an attributed purpose. It used the language of "would be concluded" in relation to determining purpose and specified the factors to be taken into account in determining that purpose. However, in s 224, the legislature chose to use different language by referring to the purpose for which the scheme was "entered into" or "carried out". It is significant that before 1984, when s 224(2) was enacted, the High Court had in both Students World and Lutovi, drawn a distinction between the import of the language of the "purpose of a scheme" and the purpose for which a scheme was "entered into" in the context of the Act, when assessing whether purpose was objective or subjective.

62. The Explanatory Memorandum to the Taxation Laws Amendment Bill 1984 (Cth) (which introduced s 224) does not demonstrate a Parliamentary intention that "purpose" in s 224 should be construed in a manner, other than by giving effect to the difference in the language between s 177A and s 224, and applying the distinction recognised by the High Court in Students World and Lutovi. In relation

ATC 5458

to s 224, Pt B of the memorandum does no more than state:

"For the purposes of the application of the section, sub-section 224(2) will define the expression "tax avoidance scheme" as a scheme within the meaning of Part IVA (that is, as defined in section 177A) entered into or carried out for the sole or dominant purpose of enabling a person to reduce a tax liability."

63. Nor, in our view, is it anomalous that Parliament would provide that liability for penalty tax would in some, but not other circumstances, be assessed by reference to subjective considerations. As French J observed, if the purpose of additional penalty tax is to promote compliance with tax laws, it was not surprising that a penalty provision may look to actual purpose. Further, there is, in our view, no necessary inconsistency in a penalty provision requiring an examination of the actual purpose of a taxpayer and an anti-avoidance provision not requiring such an examination. Section 226H of the Act, which deals with recklessness, and s 226J, which deals with intentional disregard of the law, are examples of other penalty provisions which call for an examination of the taxpayer's subjective state of mind.

64. The Commissioner also contended that a construction of s 224(2) which imported subjective considerations, offended a fundamental principle concerning the construction of taxation legislation. It was said that such a test would cause the additional tax to be imposed in an arbitrary fashion because it would not be imposed by reference to ascertainable criteria. Further, said the Commissioner, it would make the application of the Act more difficult and produce arbitrary and capricious results amongst taxpayers in the same scheme.

65. In our view, the argument that the adoption of a subjective test would mean that liability for additional tax would be imposed on other than ascertainable criteria, is not be accepted. Liability to additional tax would be ascertained by reference to the actual purpose of the parties to the scheme. That is an ascertainable question of fact. It is the case of course, that, as Kirby J observed in the passage from News referred to at [46] above, the process of determining the actual purpose of the parties to a scheme has the potential to be more difficult than attributing a purpose to the parties to a scheme objectively, but this does not mean that the actual purpose is not ascertainable. It is also accepted that the administration of the provisions under s 224 and s 226L would require a different approach by the Commissioner than in relation to the scheme sections applying to Pt IVA. However, the difficulties associated with the adoption of a subjective test did not inhibit the High Court in giving effect to the subjective tenor of the language of s 4F of the TPA in News.

66. In our view, French J did not err in concluding that s 224(2) and, therefore, s 226L, imported a subjective test.

67. The Commissioner also contended that even if the test under s 224(2) allowed consideration of the taxpayer's subjective purpose, French J could not reasonably have come to the conclusion that it was not the sole or dominant purpose of the taxpayers in entering into the scheme, to pay no tax or less tax. In our view, it was open to French J to have concluded, on the evidence, that it was not the sole or dominant purpose of the taxpayers in entering into the scheme to pay no tax or less tax. Before the Tribunal, the Commissioner elected neither to lead any evidence nor to cross-examine any of the witnesses, including the taxpayers. In those circumstances, it was reasonably open to French J to conclude that on the evidence that was before the Tribunal, the purpose of the taxpayers was not the impugned purpose. Once one of the parties to the scheme did not have the impugned purpose, that was the end of the inquiry. The fact that French J had determined in Vincent that, on the application of a different test, Pt IVA applied to the scheme entered into by Ms Vincent, is not to the point.

68. It follows that the appeal should be dismissed with costs.


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