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FC of T v NEWS AUSTRALIA HOLDINGS PTY LTD

Judges:
Stone J
Jessup J
Jagot J

Court:
Full Federal Court, Sydney

MEDIA NEUTRAL CITATION: [2010] FCAFC 78

Judgment date: 30 June 2010

Stone, Jessup and Jagot JJ

Background

1. In this appeal the Commissioner of Taxation ( the Commissioner ) contends that a decision of the Administrative Appeals Tribunal ( the Tribunal ) of 29 September 2009 (
News Australia Holdings Pty Limited and Commissioner of Taxation[2009] AATA 750) is vitiated by three errors of law.

2. The Tribunal set aside the Commissioner's decision to disallow an objection by News Australia Holdings Pty Limited ( News Australia ) to the cancellation of a tax benefit under Pt IVA of the Income Tax Assessment Act 1936 (Cth) and substituted a decision pursuant to s 177F(1)(c) of that Act "not to determine that the capital loss of approximately $1.5 billion in issue in this case was not incurred by the taxpayer". The tax benefit arose from a global corporate restructure of the media conglomerate headed by News Corporation Inc of which News Australia is a member. The Tribunal's decision followed from its conclusion that, taking into account the matters specified in s 177D(b) of the Act, the statutory condition to which the application of Pt IVA is subject ("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…") was not satisfied.

3. The three errors of law on which the Commissioner relied as vitiating the Tribunal's decision are as follows:

  • (1) The Tribunal impermissibly took into account the actual or subjective motives of News Australia (and other persons) in applying s 177D(b) of the Act (referred to as the "no tax, no tax risk" requirement).
  • (2) In applying s 177D(b) of the Act the Tribunal found and took into account that the "buy-back element of the Scheme was decided upon for UK tax reasons" (at [89]) when there was no evidence to support that finding and UK tax consideration were irrelevant to s 177D(b).
  • (3) The Tribunal failed to consider the form and substance of the scheme as required by s 177D(b)(ii) of the Act by not taking into account the receipt by News Corporation Inc of the NPAL Note received by it from News Australia and the subscription by News Corporation Inc to the equity capital of New NPAL of the NPAL Note, and the subsequent merger of New NPAL and News Publishing Australia Limited.

4. To assess these alleged errors of law further details about the statutory provisions and the transactions in question are required. Recourse to the Tribunal's decision is sufficient for this purpose.

5. As the Tribunal said in [57] of its reasons:

  • "[57] Part IVA of the Act applies to a scheme where the following matters are satisfied:
    • (a) there is a 'scheme' as defined in s 177A(1);
    • (b) a 'tax benefit', as defined in s 177C, is obtained by a taxpayer in connection with the scheme; and
    • (c) having regard to the eight matters in s 177D(b), 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."

6. Section 177D(b), the key provision of the Act, is as follows:

This Part applies to any scheme … 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)."

7. The Tribunal identified the relevant transactions in [5]-[56] of its reasons. The transactions involved six corporations forming part of the News Group, namely (at [5]):

  • • The News Corporation Limited ("News Corp Australia"), now named News Holdings Limited - an Australian-incorporated company which, prior to the transactions, was the ultimate holding company of the News Group;
  • • News Corporation Inc ("News Corp US") - the company that is now the global holding company for the Group;
  • • News Limited ("News Australia") - the company that holds the Australian assets;
  • • News Publishing Australia Limited ("News Publishing") - despite its name, the company holding most of the US assets;
  • • News Corp Investments Limited ("News Corp UK") - the company holding most of the UK assets; and
  • • The applicant, News Australia Holdings Pty Limited (referred to as "News Australia Holdings", and formerly named Carlholt Pty Limited ("Carlholt")).

8. News Publishing Australia Limited is also identified as NPAL. This is relevant when considering the Commissioner's third ground of challenge to the Tribunal's decision.

9. The transactions effected a "global corporate restructure" (at [2]) by which the News Group's ultimate holding company would be relocated from Australia to the United States. Through 2004-2005 transactions were entered into effecting this relocation. The first stage of the restructure was called the "Flip". The Tribunal described the steps involved in the Flip at [12]:

  • "(a) News Corp Australia would issue 100 redeemable ordinary shares in itself to News Corp US;
  • (b) News Corp US would issue shares in itself to News Corp Australia shareholders in exchange for all the News Corp Australia shares, at a ratio of one News Corp US share to two News Corp Australia shares;
  • (c) News Corp Australia would cancel all its issued shares, other than the 100 shares owned by News Corp US;
  • (d) News Corp Australia, now wholly owned by News Corp US, would issue to Carlholt the same number of shares in itself as were to be cancelled in step (c) (referred to as 'mirror shares'); in consideration, Carlholt would issue a note for the market value of the shares to News Corp US."

10. The structure resulting from the Flip "was described as a 'sandwich' structure, with two Australian companies, Carlholt and News Corp Australia, sitting between two US companies, News Corp US and News Publishing" (at [14]).

11. The second stage of the restructure was called the "Spin". The Spin, in which "News Corp Australia should transfer News Publishing and News Corp UK to the new US parent", would eliminate this "sandwich" structure (at [14]). The Spin was divided into two steps. As the Tribunal described it the "First Spin took place on 14 March 2005, with News Corp Australia distributing its News Publishing shares and its News Corp UK shares to the applicant, now known as News Australia Holdings" (at [48]). The transactions associated with the Second Spin, which is the subject of this appeal, were more complex. According to the Tribunal at [52]-[55]:

"[52] The Second Spin took place on 8 June 2005. In relation to the off-market buy-back by News Publishing of its shares from News Australia Holdings:

  • (a) since the market value of the News Publishing shares held by News Australia Holdings was at that time $38.74 billion, this was the buy-back consideration and the face value of Note 2;
  • (b) the capital component of the buy-back consideration received by News Australia Holdings, being the amount News Publishing debited to its share capital accounts, was $34.68 billion;
  • (c) the dividend component of the buy-back consideration received by News Australia Holdings, being the difference between the total consideration and the capital component, was $4.07 billion;
  • (d) News Australia Holdings' reduced cost base in the News Publishing shares was $38.67 billion;
  • (e) News Australia Holdings incurred a prima facie capital loss (being the capital component minus the reduced cost base) of approximately $4 billion on the disposal of its News Publishing shares to News Publishing; and
  • (f) this prima facie capital loss was reduced by the Active Foreign Business Asset Percentage (Subdivision 768-G of the 1997 Act) of approximately 63%, leaving News Australia Holdings with a capital loss on disposal of its News Publishing shares of approximately $1.479 billion.

[53] The News Group determined the split of the buy-back purchase price between capital and dividend components by applying the proportion of News Publishing shares owned by News Australia Holdings to News Publishing's share capital account. In other words, since News Australia Holdings owned 70.8785% of News Publishing, the capital component represented a return of 70.8785% of News Publishing's share capital to News Australia Holdings. This was approximately $34.68 billion. The dividend component was the balance of the purchase price, approximately $4.07 billion.

[54] The buy-back consideration, embodied in the value of the News Publishing note, was $38,740,988,280. This was the book value of News Australia Holdings' majority shareholding in News Publishing on the date of the transaction, 8 June 2005, but Mr Rue, the chief financial officer of News Limited in Australia, determined that this was also its market value on that day. That was because, in his view, nothing had occurred, including any material variation in the share price or the operations of the Group, to cause a change in market value since the time that the market value had been determined some months earlier, in the detailed valuation processes undertaken for the purposes of the Flip. We accept this evidence.

[55] After the buy-back, News Australia Holdings distributed the News Publishing note to News Corp US as a reduction of capital, and News Corp US contributed it to equity in New News Publishing. The final step of the Second Spin as regards News Publishing was the merger of New News Publishing and News Publishing. In this merger, News Publishing issued News Publishing shares to News Corp US."

12. In these paragraphs the "News Publishing note" is the NPAL Note referred to in the Commissioner's third ground of appeal.

Tribunal's reasons

13. In a section of its reasons headed "Section 177A(1) - The 'Scheme'", the Tribunal recorded the common position of the parties that the transactions involved in the Second Spin disclosed a "scheme" or "schemes" within the meaning of s 177A(1) of the Act (at [60]). The Tribunal described the scheme or schemes as follows (at [58]-[59]):

"[58] The Commissioner identified two schemes to which Part IVA might apply. The first, identified simply as the "Scheme", comprised the following steps, labelled as steps (g) to (i) in paragraph 37(i) of the Commissioner's Statement of Facts, Issues and Contentions:

  • (g) The off-market share buy-back on 8 June 2005 by News Publishing of all of its shares owned by the applicant at that time (being 70.8785% of the shares in News Publishing). The shares bought back were 5544.497612 Class A ordinary and 1561.0092 Class B redeemable ordinary shares. The consideration for the share buy-back consisted of a promissory note ('the News Publishing Note') issued by News Publishing to the applicant. The News Publishing Note had a face value of A$38,740,988,280;
  • (h) The transfer by the applicant of the News Publishing Note to News Corp US by way of a distribution in satisfaction of a reduction in capital of the applicant on 8 June 2005. The reduction in the capital account of the applicant being in an amount equal to the face value of the News Publishing Note of A$38,740,988,280;
  • (i) The transfer by News Corp US of the News Publishing Note by way of subscription to the equity capital of News Publishing on 8 June 2005. This was achieved by News Corp US contributing the News Publishing Note to its wholly-owned subsidiary, New News Publishing. New News Publishing then merged with and into News Publishing, with News Publishing being the survivor entity. As a result of the merger of News Publishing and New News Publishing, News Publishing credited its capital contribution account in the amount of the value of the New News Publishing assets received (being the News Publishing Note and other assets) for shares.

[59] The second scheme the Commissioner identified was described as the 'Alternative Scheme', and it differed from the Scheme only by the addition of an extra preliminary step, labelled as paragraph (a) and described as 'the decision to undertake steps (g) to (i)' as set out immediately above."

14. In a section of its reasons headed "Section 177C - The 'Tax Benefit'" the Tribunal explained that:

"[61] The next question is whether the applicant obtained 'a tax benefit in connection with a scheme'. The answer depends on whether the applicant incurred a capital loss that either would not have been incurred, or might reasonably be expected not to have been incurred, if the scheme had not been entered into or carried out.

[62] These words require an analysis of what has been referred to in the cases as the 'counterfactual' (for example, Commissioner of Taxation v Lenzo [2008] FCAFC 50 at (2008) 167 FCR 255[106]; at 274), or sometimes as the 'alternative postulate' (Commissioner of Taxation v Hart [2004] HCA 26 at [66]; 217 CLR 216 at 243).

[63] The parties do not agree on an alternative postulate. On the one hand, the Commissioner contends that if the Scheme or the Alternative Scheme had not been entered into or carried out, it is reasonable to expect that the applicant would have transferred or distributed its shares in News Publishing to News Corp US in return for a reduction of capital. The applicant, on the other hand, says that the Commissioner's alternative postulate is not a reasonable one because it does not satisfy the 'no tax, no tax risk' condition that the Group imposed on the Reincorporation. It cites the words of the High Court in Commissioner of Taxation v Peabody [1994] HCA 43 at [31]; 181 CLR 359 at 385:

'A reasonable expectation requires more than a possibility. It involves a prediction as to events which would have taken place if the relevant scheme had not been entered into or carried out and the prediction must be sufficiently reliable for it to be regarded as reasonable'

[64] The applicant says that if the Scheme had not been entered into (for example, if the applicant had not received an ATO ruling confirming that Part IVA would not apply to include a capital gain in its assessable income), then the Group would not have entered into an alternative transaction. It would have stopped after the First Spin, it would have tolerated the inefficiencies of the 'sandwich' structure and it would have waited for some other way to elevate News Publishing to News Corp US without triggering a taxable gain. In other words, the applicant's alternative postulate is to do nothing after the First Spin.

[65] Despite the disagreement between the parties as to the alternative postulate, it is common ground that the applicant obtained a tax benefit in connection with the scheme, no matter how the scheme is formulated - whether as the Scheme, or as the Alternative Scheme (see [58] and [59] above). Nevertheless, that disagreement as to the alternative postulate will assume some significance when we come to consider the matters in s 177D(b)."

15. The Tribunal moved to the topic of s 177D(b) of the Act, identifying the applicable principles in orthodox terms as follows:

"[67] The question in s 177D is whether, having regard to the eight matters in paragraph (b), and only those matters, 'it would be concluded' that the dominant purpose of the taxpayer's entry into the transaction was to obtain a tax benefit. In that context, the following propositions have been established:

  • (a) The fact that a particular commercial transaction is chosen from a number of possible alternative courses of action because of tax benefits associated with its adoption does not of itself mean that there must be an affirmative answer to the question posed by s 177D (Hart, at [15]; 217 CLR 216 at 227, per Gleeson CJ and McHugh J);
  • (b) Equally, the existence of a rational commercial objective does not mandate a negative answer to the question (Federal Commissioner of Taxation v Spotless Services Ltd [1996] HCA 34; (1996) 186 CLR 404 at 416, per Brennan CJ, Dawson, Toohey, Gaudron, Gummow and Kirby JJ);
  • (c) There is no room in the enquiry under s 177D for a consideration of the subjective purpose or motivation of a particular person, because that is not one of the eight matters specified (Commissioner of Taxation v Sleight [2004] FCAFC 94 at [67]; (2004) 136 FCR 211 at 229-230, per Hill J; Hart, at [65]; 217 CLR at 243, per Gummow and Hayne JJ); and
  • (d) Some of the eight matters may point one way, others may point in the opposite direction, and some may be neutral: it is the evaluation of these matters, alone or in combination, some for, some against, that s 177D requires in order to reach the conclusion to which s 177D refers (Peabody v Commissioner of Taxation [1993] FCA 74; (1993) 40 FCR 531 at 543, per Hill J)."

16. The Tribunal dealt with the s 177D(b) question in [68]-[115] of its reasons. Leaving aside certain paragraphs at the heart of the issues in this appeal, the Tribunal generally reasoned as follows in a section of its reasons headed "Consideration" (at [68]-[83]):

  • (1) "… it is impossible to ignore that the scheme related to a complex reconstruction of a very large and complicated company structure … Because it was intended to move very substantial assets from an Australian corporation to a related US corporation, it is not surprising that the process was both complex and complicated and that mechanisms other than transfers were considered for parts of the process" (at [68]).
  • (2) "The Commissioner's counterfactual highlights a direct transfer by the applicant to News Corp US of its shares in News Publishing. A transfer seems simple and achieves the desired result" (at [70]). However, "[w]hether the counterfactual would yield a capital gain or loss for the applicant depends, in part, on the exchange rate between the Australian and US dollars. The result was accordingly subject to variation with movements in the exchange rate" (at [74]). Evidence about exchange rate movements disclosed that at "the extremes, there would have been a gain in the billions (1 January 2003: 0.5537) or a substantial loss approximating $350 million (29 December 2006: 0.7632)" (at [76]).
  • (3) "Taking into account that a decision to proceed by way of buy-back had been taken in principle in 2003, these calculations tend against the suggestion that that decision would have been taken for the dominant purpose of obtaining a tax benefit. A dominant purpose would more likely have been the avoidance of a capricious and uncertain outcome" (at [77]).

17. Thereafter the Tribunal dealt with each of the eight matters in s 177D(b) of the Act (at [84]-[104]). The Tribunal next dealt with "An Overall Assessment of the Eight Matters" under that heading in [105]-[115] of its reasons. At [105]-[106] in particular the Tribunal concluded:

"[105] The dominant purpose, concluded in accordance with Part IVA, for the whole reconstruction was the transfer of the head company of the News Group from Australia to the US. This purpose included the avoidance of a sandwich structure in which US and UK assets, although ultimately owned by the US head company, were owned through an Australian subsidiary. We are concerned, however, with that part of the reconstruction which the Commissioner has proffered as the relevant scheme. The scheme is confined to the elimination of the sandwich structure. It is that scheme, and more particularly, that part of it called the Second Spin, which we must examine. It is entirely possible that part of a wider transaction which has been identified as a relevant scheme might fall within Part IVA although the wider transaction would not. We must accordingly ask ourselves whether the means by which the Second Spin was effected fell within Part IVA and, in doing so, we must look to the likely alternatives. The Commissioner has identified a direct transfer or distribution coupled with a reduction of capital as the most likely relevant alternative. Accordingly, we must particularly address that.

[106] When we take into account the matters we have discussed above and evaluate them in accordance with the eight factors in s 177D(b) we are drawn, at least, to the conclusion that the dominant purpose would not be concluded to be one of enabling the obtaining of a tax benefit whether that relevant tax benefit be an amount not being included in assessable income (s 177(1)(a)) or the incurring of a capital loss (s 177C(1)(ba)). Our conclusion is the same whether the counterfactual or alternative postulate addressed is the Commissioner's alternative of transfer or distribution, or the applicant's alternative of doing nothing."

First alleged error - the no tax, no tax risk requirement

18. As the Tribunal noted in [67(c)] of its reasons "[t]here is no room in the enquiry under s 177D for a consideration of the subjective purpose or motivation of a particular person, because that is not one of the eight matters specified" in s 177D(b). News Australia accepted this as a correct statement of law both before the Tribunal and in this appeal.

19. The Commissioner contended that the Tribunal, despite identifying the correct principle, nevertheless departed from that principle in its consideration and thereby committed a material error of law. According to the Commissioner, the Tribunal accepted evidence from various witnesses for News Australia that the News Group's position about the restructuring was "no tax, no tax risk". This, said the Commissioner, was to take into account the News Group's subjective purpose for the scheme which is irrelevant. The Commissioner submitted that this factor, thereafter, "permeates the Tribunal's reasons" (referring, in particular, to the reasons at [79], [80], [85], [90], [107], [108] and [111]).

20. For the reasons given below, we do not accept the Commissioner's submission that by having regard to News Group's "no tax, no tax risk" position, the Tribunal erred in law. To the extent that the Tribunal did take this position into account, it did so on the basis of objectively ascertainable evidence.

21. The Tribunal first identified the "no tax, no tax risk" requirement of the News Group in [10] of its reasons:

"The proposed relocation of the head company to the US and the consequent reorganisation of subsidiaries would take place only on condition that the transactions did not create a risk that a material tax liability would arise in any jurisdiction. This condition played an important part in the development of the steps that would be undertaken. It also motivated the News Group's request for tax rulings in the US and in Australia in relation to relevant transactions once the detail of the plan was finalised. As Mr Nallen put it, 'If we didn't obtain a successful ruling on which we could rely, as I said earlier, we would not have gone ahead with the transaction'".

22. The Tribunal also referred to the News Group's purposes in [15]-[17] when explaining the advice that triggered the share buy-back transactions in preference to the payment of a dividend by News Publishing as follows:

"[16] However, in March 2003, Morris Zelkha, a tax adviser to the News Group based in Deloitte's UK office, advised that a dividend paid by News Publishing would be taxable to News Publishing's minority shareholder, News Corp UK, in the UK, despite being exempt to the majority shareholder in Australia. A tax liability arising from a dividend payment of this type would not, of course, meet the Group's requirement that the Spin avoid the triggering of a material tax liability in any jurisdiction. For that reason, that part of the plan could not go ahead. Instead, Mr Zelkha suggested that a redemption by News Publishing of its shares held by News Corp Australia may be an alternative worth exploring …

[17] The form of redemption suggested by Mr Zelkha was a share buy-back. This would be acceptable for UK purposes. As far as the Australian position was concerned, Division 16K of the Act would apply, such that the consideration paid by the company to the shareholders (in the context of an off-market share buy-back) would be deemed partly a dividend and partly a return of capital."

23. The same requirement (no tax, no tax risk) is referred to in [63] of the Tribunal's reasons in the context of the Commissioner's alternative postulate, quoted above.

24. After identifying the correct principles, including that the section leaves no room for consideration of a person's subjective purposes or motivations (at [67(c)]), the Tribunal said this (at [79]-[80]):

[79] A significant matter which must be addressed in the present case is the News Group's determination that the restructuring should not involve any adverse taxation consequences. It may be understandable that a conglomerate in the position of News Group would not want a restructuring to have adverse tax consequences. After all, the proposal was neutral so far as its income earning business operations were concerned except to the extent to which the restructuring itself might lead to those operations becoming more profitable. That consideration is, however, irrelevant to the question before us. If any scheme implemented as part of the restructuring would be entered into to obtain a tax benefit the powers under Part IVA are attracted however normal the underlying reasoning might be.

[80] It does not follow, however, that merely because a taxpayer takes taxation considerations into account in selecting one form of transaction over another, any tax benefit which results from the choice will be within Part IVA. The test is concerned with the dominant purpose, or 'the ruling, prevailing, or most influential purpose' Federal Commissioner of Taxation v Spotless Services Ltd [1996] HCA 34; at 416. A condition that a transaction be carried out in a way that does not involve adverse tax consequences need not be the dominant purpose for the transaction as carried out or even for its preferment over an alternative which would have adverse tax consequences.

25. The Commissioner said the statements in [79] disclose legal error. According to the Commissioner the last two sentences of this paragraph cannot be read as referring to the News Group's "determination" in the first sentence. Rather, the Tribunal must be understood as referring to its characterisation of that determination as "understandable" in the second sentence of [79]. This, said the Commissioner, is evident from the phrase "…however normal the underlying reasoning might be". In other words, according to this submission, the Tribunal is not identifying the News Group's subjective determination as irrelevant. It is identifying only that the "normalcy" of that determination is irrelevant. It follows that that the Tribunal treated the News Group's subjective determination as a "significant matter which must be addressed".

26. The Commissioner submitted that this explanation of the reasoning in [79] is supported by other aspects of the Tribunal's decision in which it impermissibly gave weight to the taxpayer's subjective purpose (that is, the references at [80], [85], [90], [107], [108] and [111]). The Commissioner stressed [107]-[108] in particular as supporting this reading of [79]. Those paragraphs are as follows:

"[107] The objective purpose of the Second Spin (using that expression as shorthand for the requirement of s 177D(b) as to what 'would be concluded') was to remove the sandwich structure. We think that the matters we have referred to, including the circumstances in which the original decision to use a buy-back were made, the need to comply with taxation rulings to benefit from them, the need to use a structure capable of permitting a ruling which would achieve near certainty that the reconstruction would remain tax neutral and the associated need to avoid a mechanism which could over a short time change from yielding a capital loss to yielding a capital gain, all suggest that while taxation considerations were very much in the mind of the News Group and its advisers, it would not be concluded that those involved with the scheme employed it for the purpose of obtaining a tax benefit. The objective dominant purpose remained a commercial one. It involved the selection of the transaction as carried out because it better achieved the commercial purpose whether or not it also yielded a tax benefit.

[108] We also note that a restructure of this kind, although the Group had a preference to effect it for the commercial reasons we have outlined, was entirely optional. The Group could have chosen to continue to live with the commercial disadvantages of the previous structure and leave things as they were. Instead, it decided that the restructure should take place, but only on condition that it did not expose any member of the Group to a material tax liability. That is a perfectly rational way to approach an undertaking of this nature. The decision to approach it in this way does not, objectively, point to the arrangement having been entered into with the dominant purpose of obtaining a tax benefit."

27. According to the Commissioner the reasoning in [107] shows that the Tribunal was aware of the need to determine the s 177D(b) question objectively but did not in fact do so. The reference to "the matters we have referred to" in line 3 of [107] must include the "no tax, no tax risk" determination of the News Group identified throughout the Tribunal's reasons and specifically at [79] as a "significant matter". The reference in [108] to the News Group's decision that the restructure "should take place, but only on condition that it did not expose any member of the Group to a material tax liability", the Commissioner submitted, confirms this to be so.

28. It may be acknowledged that the "difference between the actual purpose of a taxpayer, on the one hand, and the purpose which is to be imputed to the taxpayer based upon an exclusive set of criteria, on the other hand, is not without subtlety and has been misunderstood before" (
Commissioner of Taxation v Zoffanies Pty Ltd (2003) 132 FCR 523; [2003] FCAFC 236 at [91]). But this is not a case where the Tribunal correctly identified the relevant legal principle but then failed to apply it. As the Commissioner acknowledged, the Tribunal asked itself the correct question (at [67(c)]). Moreover, when the Tribunal came to answer that question, all of its subsidiary and ultimate findings and conclusions, were also directed to that question. This is apparent from both the structure and the content of the Tribunal's reasons.

29. The Tribunal's comments in [79] of its reasons (extracted at [24] above) address two quite separate issues. The first, (the "significant matter") is the objective intention of the News Group that the restructure should not involve adverse tax consequences. Any such objective intention must be established on the evidence. The second issue is the News Group's subjective intention which, as the Tribunal correctly states, is irrelevant to the question before it.

30. The Commissioner's submissions fail to distinguish between objective and subjective intention. Section 177D(b) of the Act requires a conclusion about a person's objective intention or purpose. That intention must be objectively ascertained by a consideration of the factors listed in s 177D(b) of the Act. It is, however, hardly surprising if objective intention in fact accords with the person's subjective intention. If subjective intention is reflected in objective evidence, no error is made by taking that evidence into account albeit that it is consistent with the person's subjective intention. The Tribunal recognised this distinction when it rejected subjective intention as irrelevant while at the same time recognising that the "no tax, no tax risk" policy of News Group was a significant matter "which must be addressed".

31. By [77] of its reasons the Tribunal had concluded that the Commissioner's alternative postulate was likely to have led to a capricious and uncertain outcome. This tended to suggest that avoiding such a capricious and uncertain outcome was more likely to have been the dominant purpose than obtaining a tax benefit. The reasoning in [79]-[80] follows on from that interim conclusion. The paragraphs have to be read together. When read together they do not support the Commissioner's case that, despite expressly identifying and framing its analysis in terms of the correct legal test, the Tribunal proceeded to do what it instructed itself it could not do.

32. In [79]-[80] the Tribunal is dealing with the fact that the News Group had decided that the restructure was conditional on there being no adverse tax consequences. In [79]-[80] the Tribunal is acknowledging and rejecting a possible method of reasoning that because the News Group had tax considerations in mind it necessarily followed that the dominant purpose was to obtain a tax benefit (thereby triggering the application of Pt IVA). This is because, according to the Tribunal, the subjective purpose of the taxpayer, no matter how normal the avoidance of adverse tax consequences might be, is irrelevant. The taking into account of tax considerations by the taxpayer thus does not dictate the answer to the s 177D(b) question. The s 177D(b) question remains (that is, if "any scheme implemented as part of the restructuring would be entered into to obtain a tax benefit the powers under Part IVA are attracted however normal the underlying reasoning might be"). This is the natural and ordinary meaning of [79]-[80] when read in context. The Commissioner's reading, by contrast, is strained and artificial.

33. These considerations negate the force of the Commissioner's submission that it can hardly be the case that a taxpayer's determination to avoid paying tax or a risk of paying tax could be material to the application of Pt IVA, an anti-avoidance provision. The Tribunal, in [79]-[80] (and thereafter, as explained below), was not saying that because the taxpayer had imposed a "no tax, no tax risk" condition on a corporate restructure it thereby followed that the statutory question posed by s 177D(b) must or should be answered in a particular way. In fact, the Tribunal rejected this form of reasoning as impermissible. Having done so the Tribunal was not thereafter precluded from recognising that the "no tax, no tax risk" condition to the transactions proceeding at all - an objective fact - had objectively demonstrable consequences for both the manner in which the scheme was entered into and carried out and its form and substance. To recognise these matters was not to stray into the subjective territory proscribed by the reasoning in
Commissioner of Taxation v Hart (2004) 217 CLR 216; [2004] HCA 26 at [65].

34. Subsequent references in the Tribunal's reasons also do not support the Commissioner's first contention. The references in [85], [88] and [90] are in answer to the Commissioner's submissions about an alternative postulate. It is unnecessary to determine whether, as News Australia submitted, a subjective purpose of a taxpayer might be taken into account in dealing with an alternative postulate having regard to the terms of s 177C(1)(b) ("a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out"). The Tribunal did not proceed on that basis. The Tribunal did nothing more than address the Commissioner's submissions about the manner in which the scheme was entered into or carried out (s 177D(b)(i)). In light of (amongst other things) the objectively demonstrable fact that the News Group had imposed a condition on the restructure of "no tax, no tax risk", the Tribunal rejected the Commissioner's submissions about the numerous steps, complexity and what was said to be the "contrived" nature of the transactions. This is not the impermissible taking into account of a taxpayer's subjective purpose. Rather, it is to take into account an objectively demonstrable fact when having regard to "the manner in which the scheme was entered into or carried out" as required by s 177D(b)(i) of the Act. The conclusion in [91] makes this plain:

"In summary, we think the manner in which the scheme was entered into or carried out does not point to an objective purpose of obtaining a tax benefit."

35. The same answer is available to the Commissioner's reliance on [98] of the Tribunal's reasons. In that paragraph the Tribunal said:

"The result of the Scheme is a substantial capital loss, capable of being offset against future capital gains. The reason for the capital loss was the particular structure that was chosen, and that, in turn, was a consequence of the imperative to structure the arrangements in a way that would provide taxation certainty to the applicant."

36. The context of this paragraph is what the Tribunal described as the "fourth matter" (that is s 177D(b)(iv) which refers to "the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme"). The Tribunal referred to that matter in order to dismiss (at [99]) News Australia's submission that the remoteness of the tax benefit was a compelling factor in its favour. In [98] the Tribunal is doing nothing more than identifying that the structure of the transactions resulted from the requirement that the News Group imposed on the transactions proceeding at all. The structure of the transactions is the relevant matter (s 177D(b)(ii)). This too is not the impermissible taking into account of a taxpayer's subjective purpose. It is to recognise that an objectively ascertainable fact (the no tax, no tax risk requirement) had objectively ascertainable consequences (a particular transaction structure).

37. In this sense the present case is no different from
Macquarie Finance Ltd v Commissioner of Taxation (2005) 146 FCR 77; [2005] FCAFC 205. In Macquarie Finance Hely J accepted that a finding about why the taxpayer structured the transaction the way it did might leave "room for a difference of opinion as to whether this… involves impermissible inquiry…". Nevertheless, Hely J considered that the reasons for the structure of the transaction, involving the need for capital and the relative benefits of debt and equity, were capable of objective determination and thus did not involve any impermissible inquiry (at [212]). French J (as his Honour then was) also would have agreed with that conclusion if his Honour had found it necessary to determine it (at [112]).

38. The statements in [107]-[108] of the Tribunal's reasons also do not support the Commissioner's position. The opening sentence of [107] confirms the Tribunal's recognition that the s 177D(b) question (would it be concluded that the person who entered into or carried out the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme) is to be answered objectively. The reference thereafter to the "matters we have referred to" does not import any impermissible consideration. Nothing in the earlier part of the Tribunal's reasons strayed outside the statutory remit. The subsequent observations about the tax considerations the News Group undoubtedly had in mind are not used by the Tribunal to answer the s 177D(b) question. The reference explains why that fact (that is, that the News Group undoubtedly did have tax considerations in mind) did not lead the Tribunal to the conclusion that it would be concluded that the scheme was entered into for the purpose of obtaining a tax benefit.

39. The reasoning in [108] is also legitimate. Each of the matters to which the Tribunal referred in that paragraph is objectively ascertainable. The Tribunal's recognition that the News Group decided the restructure "should" take place is a consequence of its acceptance of an objective fact - the restructure was optional. The Tribunal is simply saying that given the objectively ascertainable circumstances within which the decision was made, the fact the decision was made does not, objectively, point to a dominant purpose of obtaining a tax benefit.

40. The Tribunal's reasons in [111], read in context, also do not disclose any illegitimate consideration. That paragraph concerns the counterfactual consideration required by s 177C(1) of the Act, specifically, whether the Commissioner's alternative postulate of a transfer or distribution should be accepted in preference to that of News Australia's alternative that the Second Spin would not have been implemented. In so doing the Tribunal referred to evidence from an officer of the News Group that it would have tolerated the sandwich structure. It also referred to the small gain ($25 million) capable of being offset against existing capital losses ($600 million) and noted that this was "hardly… a disincentive to adopting the alternative of a transfer". The Tribunal continued:

"However, that is not the question. The question is what was the objective purpose for what was done. We do not think this matter is relevant, but, even if it is, it does not affect our conclusion."

41. This last statement must be understood as the Tribunal rejecting both the News Group's (subjective) willingness to tolerate the "sandwich" structure and the (subjective) lack of disincentive, presented by the relative size of the small gain and large loss, as impermissible considerations.

42. Nor is the Commissioner's case supported by the way in which the Tribunal dealt with the tax ruling on Pt IVA. The fact that one arrangement may be capable of obtaining the certainty of a private ruling and another (the alternative postulate) not (to which the Tribunal referred in its reasons at [88], [90] and [102]) is an objective matter relevant to the statutory question.

43. It is apparent from this discussion that the Tribunal identified and applied the correct test.

Second alleged error - UK tax reasons

44. The second ground of appeal relates to the Tribunal's statement in [89] of its reasons that:

"We accept that the buy-back element of the Scheme was decided upon for UK tax reasons."

45. According to the Commissioner there was no evidence to support this finding. The evidence, said the Commissioner, "goes no further than to show that a mechanism involving the payment of a dividend was ruled out for UK tax reasons in 2003. The use of a buy-back structure was first suggested in that context, but in making the choice between a buy-back and a direct transfer of shares, UK tax was not a relevant consideration".

46. We do not accept these submissions. The Tribunal had before it evidence that the original proposal was for the distribution of the capital appreciation portion of the value of News Publishing and News Corp UK to News Corp Australia in the form of dividends (at [15]). However, the UK tax adviser to the News Group, Morris Zelkha, advised that a dividend paid by News Publishing would be taxable in the UK (at [16]). Mr Zelkha suggested that it might be worth exploring a redemption by News Publishing of its shares held by News Corp Australia (at [16]). At [17], the Tribunal said:

"The form of redemption suggested by Mr Zelkha was a share buy-back. This would be acceptable for UK purposes. As far as the Australian position was concerned, Division 16K of the Act would apply, such that the consideration paid by the company to the shareholders (in the context of an off-market share buy-back) would be deemed partly a dividend and partly a return of capital."

47. As News Australia pointed out, given this evidence:

"The UK tax issue is nothing more elaborate than this. The (albeit marginal) importance of the issue is that UK tax considerations were, in fact, the reason why a buy-back was first suggested… UK tax considerations were simply the factor that causally led to the adoption of the buy-back by the News Group."

48. It is well-established that a "no evidence" case cannot be sustained if even some evidence supported the finding. In this case the decision to proceed with the buy-back option was prompted by UK tax considerations. Whether the Tribunal's language ("was decided upon for UK tax reasons") might convey some more substantial causal relationship than this is immaterial. The Tribunal's language should not be parsed in an effort to find legal error. The finding in [89] with which the Commissioner takes issue is supported by the matters to which the Tribunal referred in the immediately preceding paragraph at [88]. Those matters find support in the evidence. In addition to the text of Mr Zelkha's advice (which the Tribunal had before it) Mr Whyte, an Australian tax adviser to the News Group, was cross-examined about this issue. It was put to Mr Whyte that what drove the ultimate decision as to the form of the buy-back proposal were considerations of Australian tax law. Mr Whyte answered "And UK tax laws". When pressed he repeated the relevance of UK tax laws. Read in that context the Tribunal is saying nothing more (or less) than that which News Australia described in its submissions.

49. Nor can it be said that this was an irrelevant consideration. Again, as News Australia submitted, both the fact of receiving advice and its content are able to be objectively determined. The advice received is relevant to the manner in which the scheme was entered into which is a relevant consideration under s 177D(b)(i). The balance of the Commissioner's submissions on this issue, properly analysed, are a complaint that other findings of fact would have been open to the Commissioner on the evidence and should have been made given the weight of the evidence. In particular, the Commissioner's submissions contend that Mr Zelkha's advice did not extend to consideration of the effect on the UK tax position of a transfer of shares to the new US holding company (that is, the Commissioner's alternative postulate). That may be so but it is immaterial. There is no legal error in the Tribunal performing its primary fact finding function in the way it did.

50. In oral submissions the Commissioner also said that, at the least, the Australian tax position was also relevant to the structure ultimately adopted but the Tribunal failed to make that finding. It is true that the Tribunal did not refer to the Australian tax position in [89] of its reasons. But that too is immaterial. In the face of the Tribunal's reasons as a whole it cannot be suggested that the Tribunal failed to consider the News Group's cognisance of the consequences for the Australian tax position. The Tribunal did not err by making findings open to it on the evidence about matters within the scope of permissible statutory considerations (as in [89] of its reasons).

Third alleged error - form and substance

51. By s 177D(b)(ii) of the Act "the form and substance of the scheme" must be taken into account in answering the statutory question. The Commissioner's third contention is that in considering this matter the Tribunal had to compare the form and substance of the scheme as a whole. According to the Commissioner the key fact disclosing the difference in the substance and form of the scheme is that the buy-back element was simultaneously negated by the capital contribution of the NPAL Note. As the Commissioner submitted to the Tribunal, the simultaneous transactions and associated resolutions by which they were effected had the effect that "NPAL is in precisely the same economic position following the buy-back" (NPAL being News Publishing Australia Limited, referred to by the Tribunal as News Publishing). The Commissioner's submissions to the Tribunal characterised the transactions and associated resolutions as a "circular flow of steps" or "round robin" so that, by the end of the day of the share buy-back (8 June 2005), News Publishing Australia Limited's share capital, temporarily reduced by the share buy-back, was "immediately replenished by an identical number, type and par value of stock by News Corporation". This, submitted the Commissioner, meant that there was no buy-back in substance, described as a "critical matter" to take into account for the purpose of s 177D(b)(ii).

52. The Tribunal, however, is said to have misunderstood this submission. According to the Commissioner the Tribunal's reasons at [93] disclose this misunderstanding. In that paragraph, instead of addressing the Commissioner's submission, it is said the Tribunal wrongly characterised the Commissioner's case as focusing on part only of the scheme. Further, the Tribunal asked only whether the buy-back was a "real transaction". In the Commissioner's submission it followed that the Tribunal had failed to address a central component the Commissioner's case (and of the statutory scheme). The Tribunal's purported consideration of the relevant consideration thus was no consideration at all (citing
Dranichnikov v Minister for Immigration and Multicultural Affairs (2003) 197 ALR 389; [2003] HCA 26 at [23]-[28],
Commissioner of Taxation v Zoffanies Pty Ltd (2003) 132 FCR 523; [2003] FCAFC 236 at [26], [83]-[85], [87] and
Lafu v Minister for Immigration and Citizenship (2009) 112 ALD 1; [2009] FCAFC 140).

53. The paragraph in question, [93], appears in that part of the Tribunal's reasons headed "The Second Matter - The Form and Substance of the Scheme". The paragraphs in that section are as follows:

"[92] The Commissioner focuses on the allegedly complex nature of the steps involved, but we have already dealt with that issue at [87].

[93] The Commissioner also says that, while there is a share buy-back in form, there is not one in substance because there is only a temporary reduction in the capital of News Publishing, followed on the same day by a complete replenishment, with the exception that it has a new shareholder, News Corp US. Of course, the buy-back is only part of the scheme, and so the Commissioner's complaint is about the form and substance of a part of the scheme, rather than the matter identified in s 177D(b)(ii), which is the form and substance of the scheme itself. Nevertheless, it is clear that, both in form and in substance, News Publishing did undertake a buy-back of its shares from the applicant. The purpose of the buy-back was to remove the applicant as a shareholder of News Publishing. That is exactly what happened. In accordance with the requirements of the Corporations Act 2001, the shares previously owned by the applicant will have been cancelled. After cancellation of those shares, an identical number of new shares were issued to News Corp US. The buy-back was a real transaction, and it was a transaction that needed to occur so that the restructure could proceed in accordance with the Group's commercial objectives.

[94] As far as the form and substance of the scheme overall are concerned, there is no suggestion that the substance of the overall set of transactions was anything other than the elevation of News Publishing to sit directly under News Corp US, and we find that the form by which the transactions were undertaken was designed to achieve that very outcome."

54. Even if this third contention may be determined by reference only to [92]-[94] of the Tribunal's reasons it cannot be accepted. The paragraphs disclose the Tribunal's consideration of the Commissioner's submission in terms. The Tribunal's reference to the buy-back being "only part of the scheme" and "a real transaction" does not disclose any misunderstanding of or failure to consider the Commissioner's case. The buy-back was only part of the scheme. The Tribunal's reference to the transaction being "real" was in the context of the Commissioner's submissions that the transaction steps were "circular" and involved a "round robin". The Tribunal must be inferred to have had those submissions in mind as [81]-[82] of its reasons disclose. These paragraphs are part of the Tribunal's overall consideration, before it dealt individually with each of the nominated eight matters. Accordingly, those paragraphs cannot be disregarded in assessing the validity of the Commissioner's third contention. In any event, despite the heading to [92]-[94] of the Tribunal's decision it is axiomatic that reasons for a decision must be considered as a whole in determining whether the decision is materially affected by legal error. In [81]-[82] the Tribunal said this:

"[81] The Commissioner placed significant reliance on what was described as the circular nature of the steps constituting the scheme. The label 'circular', when applied to a scheme, injects a pejorative element. A good example of circularity warranting disapproval is a 'round robin' of cheques in which the illusion of the making of substantial payments of money is achieved although no money actually changes hands because the person who draws the original cheque almost immediately receives a cheque for the same amount. In reality, nothing happens.

[82] The present scheme, and its steps, are entirely different. The ownership of a very substantial company changes. There are reasons for the movement of the note between the companies concerned."

55. The "note" moving between the companies is the NPAL Note which was the principal foundation of the Commissioner's third contention that the there was in substance no buy-back. In [81]-[82] the Tribunal must be seen to be rejecting the Commissioner's submissions that the scheme was a complex and circular set of steps in which, by reason of the movement of the NPAL Note, there was no buy-back in substance. In so doing the Tribunal did not err by failing to consider either the true import of the Commissioner's submissions or the form and substance of the scheme. The Tribunal simply considered and rejected the Commissioner's case.

Conclusion

56. None of the Commissioner's three alleged errors of law can be sustained on a fair reading of the Tribunal's reasons. It follows that the appeal must be dismissed and the usual costs order made.


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