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FC of T v FUTURIS CORPORATION LTD

Judges:
Kenny J
Stone J
Logan J

Court:
Full Federal Court, Adelaide

MEDIA NEUTRAL CITATION: [2012] FCAFC 32

Judgment date: 19 March 2012

Kenny, Stone and Logan JJ

Introduction

1. In 1997 the respondent, Futuris Corporation Limited ( Futuris ) decided to dispose of its Building Products Division and to do so by a public float of its wholly owned subsidiary, Walshville Holdings Pty Limited ( Walshville ). Before that could happen it was necessary to transfer parts of the Building Products Division that were held by other companies in the Futuris Group to Walshville. Some of the steps by which this was achieved resulted in an increase in the cost base and the indexed cost base of Futuris' shares in Walshville. This reduced Futuris' assessable capital gain on the disposal of its shares in Walshville. The Commissioner claims that in this way Futuris obtained, or would have obtained but for the operation of Part IVA of the Income Tax Assessment Act 1936 (Cth) ( ITAA 1936 ), a tax benefit in connection with a scheme to which that Part applies.

2. On 12 November 2004 the Commissioner of Taxation issued Futuris with an amended assessment for the year of income ending on 30 June 1998. The amended assessment added the sum of $82,950,090 to the assessable income of Futuris which brought its total assessable income to $188,988,223. Futuris lodged an objection and, by letter dated 4 April 2005, the Commissioner notified Futuris that it disallowed its objection to the amended assessment. By way of penalty, the Commissioner also assessed Futuris with additional tax of $1,493,101.62 being 5% of the amount by which the tax assessed by the Commissioner exceeds the amount that Futuris claimed was payable. Futuris appealed to this Court against the Commissioner's appealable objection decision.

3. On 31 August 2010 the primary judge delivered reasons for judgment and gave the parties leave to make submissions as to the appropriate form of orders:
Futuris Corporation Limited ACN 004 336 636 v Commissioner of Taxation 2010 ATC 20-206; (2010) 80 ATR 330. By orders made on 10 September 2010 his Honour allowed the appeal, set aside the Commissioner's objection decision and remitted the matter to the Commissioner "to allow the applicant's objection by excluding the amount of $82,950,090 from taxable income and excising the additional tax assessed by way of penalty". With the exception of certain reserved costs, the Commissioner was ordered to pay Futuris' costs to be taxed or agreed.

4. The Commissioner now appeals from his Honour's judgment. For completeness we note that before the primary judge Futuris challenged two amended assessments issued by the Commissioner. The Commissioner conceded that the earlier of the two amended assessments, issued on 27 November 2002, was excessive; consequently the appeal against the Commissioner's disallowance of the objection was allowed. The present appeal concerns only the later of the two amended assessments, namely that issued on 12 November 2004.

The decision of the primary judge

5. Before the primary judge the Commissioner claimed that the respondent obtained a tax benefit in connection with a scheme within ss 177C(1)(a) and 177D(a) of the ITAA 1936 and that the persons who entered into the scheme did so for that purpose.

6. His Honour decided that the respondent did not obtain a tax benefit of $82,950,090 in connection with such a scheme and therefore the assessment was excessive. Although this conclusion dictated that the Commissioner must fail, his Honour went on to consider the question of purpose in case his conclusion as to benefit was wrong. His Honour held that if, contrary to his view, the applicant had obtained a benefit, then it was obtained in connection with a scheme entered into or carried out for the dominant purpose of enabling Futuris to obtain a tax benefit within s 177D(b).

The facts

7. The facts as found by the primary judge and which underlie the present appeal are not in dispute however they are complex. They involve a number of companies in the Futuris Group, some of which, in the period with which this appeal is concerned, changed their names. To avoid confusion the primary judge referred to the companies by the names they bore prior to 3 September. We propose to do the same. In addition to Walshville, the companies involved in the relevant transactions are Vockbay Pty Limited ( Vockbay ), Bristile Limited ( Bristile ) and Bristile Operations Pty Limited ( Bristile Operations ).

8. In simplified terms the transaction that has caught the Commissioner's attention is the disposal by Futuris of its shares in Walshville by way of a public float of the company. The Walshville share sale generated a net capital gain. The net capital gain was reduced as the result of a series of acts and transactions carried out by Futuris and others on 2 September 1997 by which the cost base of the Walshville shares was increased to $82,950,090. The issue was whether Pt IVA of the ITAA 1936 applies to include a tax benefit in the amount of $82,950,090 in the assessable income of Futuris for the income year ended 30 June 1998.

9. The Commissioner submitted that the amount of $82,950,090 was additional net capital gain which would have accrued to Futuris on disposal of its shares in Bristile had it not been for the scheme identified by the Commissioner. Before the primary judge the Commissioner relied on s 14ZZO of the Taxation Administration Act 1953 (Cth) and consequently Futuris bore the onus of establishing that the Commissioner's assessment was excessive.

10. Before any steps relevant to this appeal occurred Bristile was owned as to 37% by Futuris and as to 63% by Vockbay, a wholly owned subsidiary of Futuris. The market value of the Vockbay shares held by Futuris was $146,527,654. At the time the indexed cost base of Futuris' shares in Bristile was $5,677,350 and their market value was $66,754,674. Futuris also held 100% of the shares in Walshville. Those shares had a market value of $17,042,912. Walshville and Bristile together owned the companies that formed the Building Products Division of the Futuris Group.

11. Lawrence John Clark was the company secretary of Futuris from September 1992 to July 2000. In his affidavit of 6 March 2009, Mr Clark outlined the background to the transactions that are relevant to this appeal. He described the steps by which Futuris, by the end of 1993, acquired, through Vockbay, full control of Bristile and said:

"By the end of 1996, Futuris was considering disposing of its Building Products Division. At that time, the activities of the Building Products Division were carried on by Bristile and Walshville and entities owned by them."

12. Mr Clark referred to SBC Warburg's advice in April 1997 that the then current market conditions provided "an excellent opportunity for Futuris to consider a divestment strategy (either in whole or in part) for its Building Products Group". The recommended divestment strategy was an initial public offering ( IPO ) of Walshville which would still allow for trade sale offers to be received prior to proceeding with the IPO. SBC Warburg recommended that Futuris retain a shareholding of 25-30% "in order to demonstrate its faith in the forecasts and the investment case and therefore maximise the IPO price".

13. Futuris also consulted other advisers including corporate advisory firms Poynton Corporate Limited and Porter Western. It also obtained taxation advice from Arthur Andersen who, among other things, drew attention to the possibility of Pt IVA applying to the transaction. In a letter dated 26 May 1997 to Mr T Davies, a director of Futuris, Arthur Andersen gave detailed advice in relation to the proposed disposal of the Building Products Division. At that stage it was proposed that Futuris would retain 30% of its interest in Walshville. The advice referred to the decision of the High Court in
Federal Commissioner of Taxation v Spotless Services Limited 96 ATC 5201; (1986) 186 CLR 404 and noted that "a transaction which has a general commercial purpose could nevertheless be seen as having been entered into for the dominant purpose of obtaining a tax benefit". According to Arthur Andersen it was "arguable" that the purpose of the restructure was to dispose of the brickmaking division in the most profitable way rather than to obtain a tax benefit however the advice warned that "within the whole transaction, if any step or a combination of steps is capable of standing alone" it might be attacked by the Commissioner.

14. The Arthur Andersen advice raised other aspects of Pt IVA in relation to each of which it said that it was "arguable" that Pt IVA did not apply. In summarising the advice a warning note was sounded:

"On the basis of the above, we consider that a reasonable argument exists to suggest Part IVA should not apply to the brickmaking division transaction or any part of it. However, due to uncertainties that exist in relation to the scope of Part IVA, and in particular the apparent widening of the scope due to recent court decisions, there is still a significant risk that the Commissioner may consider Part IVA does apply."

[Emphasis added]

15. In conclusion the advice was that if the Commissioner were to be successful under Pt IVA "the costs to the Futuris Group could be significant" involving additional tax, interest for late payment and penalties. Arthur Andersen therefore recommended that an opinion be sought from senior counsel experienced in such matters or that a private ruling from the Australian Taxation Office be sought.

16. A memorandum dated 22 August 1997 from the company secretary to the Futuris directors states that it has not been possible to resolve the tax effect of a partial sale of the Building Products Division with the Australian Taxation Office. At a Futuris Board meeting on 30 October 1997 after the float of Walshville (under the name Bristile Ltd) had been completed, it was noted that the decision not to retain any of the Walshville shares had been made for taxation reasons.

17. In the second quarter of 1997 preparations for the IPO proceeded. The proposal, which included Futuris retaining 25-30% of Bristile, was put to the directors of Futuris in a Board paper entitled Futuris Corporation Limited Float of Building Products Division. There were two slightly different versions of the paper, each dated 11 July 1997 and Mr Clark said that he was unsure which version had gone to the Board. A significant difference between the two versions is an additional section at the beginning of one version ( B ) which, under the heading, Rationale for the Float set out a timetable that had been agreed. Version B also refers to the composition of the proposed board of directors as taking into account "the interests of both the underwriters and of management".

18. The rationale for the float referred to "the opportunity that the market now affords" for the disposal of the Building Products Division as well as a possible short term drop in earnings per share as a result of the float. It added:

"Notwithstanding this short term effect management feel … the partial float of the Division to be an essential step to allow funds to be channelled into growth areas, particularly into the Elders range of financial products, and to maintain a conservative level of gearing. The float will also be of assistance if the Group wishes to apply for a banking license [sic] at a future date."

19. The minutes of a meeting of the directors of Futuris held on 31 July 1997 record that, "Following extensive discussion, the Board endorsed the recommended IPO subject to resolution of the taxation position".

20. On 2 September 1997 a number of meetings were held, resolutions were passed and transactions implemented for the purpose of restructuring the Building Products Division of Futuris in preparation for the public float of Walshville. Ultimately the steps taken were:

  • 1. Futuris transfers its shareholding in Bristile to Vockbay for $5,094,495.74. Futuris and Vockbay elect that s 160ZZO of the ITAA 1936 which dealt with roll-over relief applied to the transaction. Vockbay became the sole shareholder in Bristile.
  • 2. Bristile sells its assets for $210m to its new subsidiary, Bristile Operations which had been incorporated on 13 August 1997. At the time the assets had a book value of $64m. Bristile Operations borrows $210m from Bristile to fund the acquisition. The purchase price of $210m yields an accounting profit of $146m to Bristile. Bristile and Bristile Operations elect that s 160ZZO applies in relation to the assets that have been transferred.
  • 3. Bristile distributes the $146m accounting profit by declaring a dividend in that amount in favour of Vockbay which owns 100% of the shares in Bristile. Vockbay declares a dividend in favour of Futuris in the amount of $63m. In each case the dividend is rebatable pursuant to s 46 of the ITAA 1936.
  • 4. Bristile capitalises its $146m debt to Vockbay by issuing 94,193,548 fully paid $0.5 shares in Bristile to Vockbay at a premium of $1.05 per share (94,193,548 × $1.55 = $146,000,000). Vockbay capitalises its debt to Futuris of $63m by issuing 630,000 fully paid $1 shares in Vockbay to Futuris at a premium of $99 per share (630,000 × $100 = $63,000,000). At this point, Futuris provided, by way of loan to Walshville, the funds it required to make the purchase in step 5.
  • 5. Vockbay sells all of its Bristile shares (116,134,148 shares) to Walshville for $97,313,000 which was the book value of the Bristile assets. The book value was $82,950,088 less than their market value at the time of $180,263,088.
  • 6. On 9 October 1997 Walshville made payments to Futuris which included amounts in respect of previous debts owed by Bristile and Walshville as well as part repayment ($47,106,000) of the $97,313,000 lent to it at step 4. The balance of that debt was capitalised when Walshville issued 88,235,285 fully paid shares at a value approximating the balance.
  • 7. Futuris disposed of its shares in Walshville on 9 October 1997 for $150m being $1.70 per share.

Effect of debt capitalisation

21. Capitalising the debts arising from the declaration of dividends by Bristile and Vockbay (as described in step 4) increased the cost base and the indexed cost base of the shares in Bristile held by Vockbay and of the shares in Vockbay held by Futuris by an amount equal to the amount of the respective dividends. Thus the cost base of Vockbay's shares in Bristile rose from $37,881,692 to $183,881,692. The cost base and indexed cost base of the shares held in Vockbay by Futuris rose from $2 to $63,000,002.

22. Because Vockbay sold the Bristile shares at a discount of more than $82m to their market value the value of Futuris' shareholding in Vockbay was commensurately decreased. In the same way the value of Futuris' shareholding in Walshville was commensurately increased.

23. Capitalising the balance of the debt that Walshville owed to Futuris increased the cost base and indexed cost base of Futuris' shares in Walshville to $133,157,090.

Submissions to primary judge

24. Both before the primary judge and in this appeal the Commissioner identified, within the meaning of Pt IVA, both a primary scheme and an alternative scheme. The primary scheme consists of steps 2, 3 and 4 outlined in [20] above. The alternative scheme comprises the same steps with the addition of step 5.

25. Commencing at [67] of his reasons, the primary judge dealt in turn with each of the following submissions put by Futuris:

  • 1. The clear scheme of the Act is that the cost base of the Walshville shares was to be determined in accordance with the specific anti-avoidance provisions of Division 19A of Part IIIA of the Act.
  • 2. The scheme and the alternative scheme were not schemes within the meaning of Part IVA of the Act because neither was capable of giving rise to a tax benefit.
  • 3. There was no tax benefit within the meaning of Part IVA because any benefit did not arise in connection with the scheme or the alternative scheme.
  • 4. There was no tax benefit in connection with a scheme within Part IVA because it could not be predicated that any amount might reasonably be expected to have been included in the assessable income of the applicant if the scheme or the alternative scheme had not been carried out.
  • 5. If a tax benefit was obtained by the applicant in connection with the scheme, or the alternative scheme, the amount of the tax benefit was no more than $19,950,090 because the scheme resulted in the inclusion of $63 million in assessable income.
  • 6. If a tax benefit was obtained by the applicant in connection with the scheme, it could not be concluded that any person entered into or carried out the scheme for the dominant purpose of obtaining that tax benefit.

Interaction between anti-avoidance provisions of Division 19A and Pt IVA

26. Neither party has taken issue with the primary judge's analysis and findings in relation to Division 19A. It is not strictly necessary to discuss this aspect of his Honour's reasons however, in so far as it illuminates the discussion of Pt IVA and the construction of ss 177D and 177C, it may be helpful to outline it briefly.

27. His Honour discussed the legislative intent behind Division 19A with reference to the Explanatory Memorandum to the Taxation Laws Amendment Bill (No 6) 1990 (Cth) which contained examples of the kinds of transactions addressed by the Division. He said at [73] that what the anti-avoidance provisions of Division 19A do is "to reduce the cost base of shares and loans in one wholly owned subsidiary and increase it in another wholly owned subsidiary". The primary judge quoted the following comments made by the Minister in the Second Reading Speech in the House of Representatives on the Bill for the Taxation Laws Amendment Act 1991 (Cth):

"The Bill also proposes a number of technical measures to ensure that no artificial timing advantages are obtained by shareholders in a company as a result of the transfer of an asset to another group company for reduced consideration. At present, such asset transfers between 100 per cent commonly owned company groups can result in the early realisation of capital losses or reduced capital gains on the disposal of shares in the transferor company. Advantages can also arise in some cases in respect of loans made to the transferor company.

The Government believes that no taxpayer should obtain tax advantages by reason of an internal reorganisation of a company group's affairs, as a result of which assets are transferred within the group. To prevent this, the Bill proposes a series of cost base adjustments to shares or loans held, directly and indirectly, in the respective companies, that is, the transferor and transferee of the asset. The adjustments are intended to reflect changes in the value of shares or loans held within the group following the transfer of assets from one group company to another.

These provisions will apply only where actual consideration paid for the transfer of an asset is less than its indexed cost base or, if less, its market value. In other words, companies will be able to avoid the need to make any cost base adjustments by ensuring that consideration equal to the indexed cost base of an asset is paid for its transfer."

28. The primary judge found, at [76], that in the circumstances before him Division 19A of Part IIIA of the ITAA 1936 had the following effect:

  • • it increased the cost base and indexed cost base of the Walshville shares held by Futuris by $82,950,088;
  • • it reduced the cost base and indexed cost base of the Vockbay shares held by Futuris from $63,000,002 to $0; and
  • • it reduced the cost base and indexed cost base of the loan from Futuris to Vockbay by $19,950,086.

29. The primary judge rejected the submission made for Futuris that Division 19A qualifies the operation of the anti-avoidance provisions of Pt IVA such that,

"to give effect to the legislative scheme it should be concluded that [Futuris] did not obtain a "tax benefit" in circumstances where the specific anti-avoidance provisions of Division 19A operated in the manner in which the legislative scheme intended that they should operate. Alternatively, it should not be concluded that [Futuris], which was subject to the operation of that specific anti-avoidance provision, entered into or carried out a scheme with the dominant purpose of obtaining a tax benefit."

30. His Honour referred to s 177C(1) of Pt IVA which deals with obtaining a tax benefit in connection with a scheme. In so far as is relevant s 177C(1) provides:

  • "(1) Subject to this section, a reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to -
    • (a) an amount not being included in the assessable income of the taxpayer of a year of income where that amount would have been included, or might reasonably be expected to be included, in the assessable income of the taxpayer of that year of income if the scheme had not been entered into or carried out;
    • …

    and, for the purposes of this Part, the amount of the tax benefit shall be taken to be -

  • (c) in a case to which paragraph (a) applies - the amount referred to in that paragraph; …"

31. The primary judge observed (a) that there is no express provision in Division 19A that qualifies the operation of Pt IVA; and (b) that he could not see how the above provision could be read down "so as to exclude from its operation an amount which was, or was part of, a "transfer" of the cost base of an investment pursuant to Division 19A". His Honour added, at [81]:

"It is even harder to see how that could be the case where the scheme, or the alternative scheme, did not include the disposition (in this case the sale by [Futuris] of its shares in Walshville) which operated to increase the applicant's cost base in respect of its investment in Walshville. In fact, the scheme (as distinct from the alternative scheme) did not even include the transfer of the Bristile shares from Vockbay to Walshville. The scheme consisted of the transactions which had the effect of increasing the aggregate cost base of the shares in Bristile held by Vockbay, and the shares in Vockbay held by [Futuris]. Section 177C(1)(a) does not call for a consideration of the provision or provisions of the Act which operated to produce the alleged tax benefit."

32. In rejecting Futuris' submission, the primary judge also relied on the "clear statement of legislative intent" in s 177B(1) and the fact that, under s 177F(3), (5), (6) and (7) the Commissioner has the power to make adjustments to alleviate unfair and unreasonable consequences of applying Pt IVA. This, his Honour observed, suggests that Pt IVA is to be given a wide operation. For similar reasons the primary judge also rejected Futuris' submission that s 177D(b) should be read down where the alleged tax benefit arises under Division 19A.

Tax benefit

33. In its second and third submissions Futuris claimed that Pt IVA could not apply because neither the primary nor the alternative scheme was capable of giving rise to a benefit and because any benefit that did accrue did not arise in connection with a scheme. In addressing these submissions the primary judge also considered the submission that the Commissioner is obliged to identify the alternative postulate or counterfactual which he thinks is appropriate.

34. The tax benefit identified by the Commissioner is the sum of $82,950,090 that the Commissioner contends should have been included in the assessable income of Futuris for the year of income ended 30 June 1998. The trial judge accepted that the alleged benefit only arose on the sale by Futuris of its shares in Walshville and that this did not occur within any of the steps that, according to the Commissioner, comprised either the primary or the alternative scheme. His Honour did not accept that the benefit had to arise within the confines of a Pt IVA scheme. He said at [95], in a passage with which we agree:

"The phrase 'in connection with' is a phrase of wide import:
Minister for Immigration and Multicultural Affairs v Singh (2000) 98 FCR 469 at 477;
Burswood Management Limited v Attorney-General (Cth) (1990) 23 FCR 144 at 146. No doubt the precise breadth of the phrase is to be determined by having regard to the statutory context in which it appears. Having regard to the terms of s 177C(1)(a) and s 177D I see no reason not to give the phrase a broad operation, and I think the respondent is right in his submission that if the alleged tax benefit would not have arisen but for the scheme then that is a sufficient connection between the scheme and the alleged tax benefit for the purposes of s 177C(1)(a)."

35. In considering the submission that the Commissioner was obliged to identify an alternative postulate or counterfactual and had failed to do so, his Honour referred to the particulars provided by the Commissioner in support of his assertion as to the additional amount that should have been included in the assessable income of Futuris. Futuris had applied for additional particulars including as to the manner in which the disposal of the Building Products Division would have been implemented had the scheme or schemes identified by the Commissioner not been entered into. The application was refused:
Futuris Corporation Limited (ACN 004 336 636) v Commissioner of Taxation 2009 ATC 20-115; (2009) 75 ATR 365. The primary judge in rejecting the submission, relied on the following comments made at [34]-[35] by Mansfield J in refusing that application:

"It would be nonsensical for the Commissioner to 'suggest' a possible series of transactions that the applicant might have undertaken which might have led to the relevant amount being included in the assessable income, because such suggestion could only be a matter of conjecture and, if disproved, would leave the Court no better informed and having come no further to answer the question of whether Part IVA of the ITAA 1936 applies. It is for the applicant, who bears the onus, to establish the series of transactions or arrangements which, it contends, would have or might reasonably be expected to have been entered into or carried out and which would have or might reasonably be expected to have resulted in the relevant amount being obtained as a tax benefit regardless of the scheme.

In addition, as was acknowledged in the course of submissions, it is not enough for the applicant to disprove any alternative postulate put up by the respondent (assuming the scheme is shown to exist as asserted by the respondent). If it is to succeed on its application, it must also adduce evidence which satisfies the Court that it had an alternative postulate which it would have been able to implement and which would have resulted in the same taxable position as if the scheme which (arguendo) has been set aside had remained in place, or which would have resulted in some other taxable position."

36. Central to the related questions of whether the taxpayer has obtained a tax benefit and whether that benefit has been obtained "in connection with" the scheme or schemes, is the requirement that the taxpayer carries the burden of showing that the Commissioner's amended assessment is excessive. The primary judge clearly had this requirement in mind when, at [110] of his reasons, he said:

"[I]n order to show that no tax benefit was obtained in connection with the scheme or the alternative scheme identified by the respondent, the applicant must show that it would have undertaken or might reasonably be expected to have undertaken a particular activity in lieu of the scheme and that that activity would or might reasonably be expected to have resulted in a net capital gain of no more than $9,789,250 being included in its assessable income for the year ended 30 June 1998."

37. The primary judge observed that although there was no direct evidence as to what, as a matter of reasonable expectation, Futuris would have done there was evidence that the alternative of floating Bristile was discussed and "had advanced to the point of the preparation of a draft prospectus". The draft prospectus was annexed to Mr Clark's affidavit. His Honour considered three alternative postulates all of which involved the disposal of the Building Products Division by an IPO. The alternatives put forward by Futuris were based on an expert report it commissioned from Johan Simon Duivenvoorde a chartered accountant and partner in Deloitte Touche Tohmatsu who specialises in corporate finance. The primary judge declined to draw any adverse inference from the fact that although the Commissioner engaged experts to consider Mr Duivenvoorde's report, he did not call a witness to contradict Mr Duivenvoorde's evidence. His Honour said that as he accepted that evidence, subject to some qualifications with which he agreed on cross-examination, it was not necessary to do so.

38. The qualifications to which the primary judge referred were summarised by his Honour at [55]:

"First, Mr Duivenvoorde said that he was asked to consider the matter on the basis that the applicant had decided to dispose of its Building Products Division and he was asked to consider how the applicant might go about implementing that decision. Secondly, Mr Duivenvoorde agreed that the level of return to the applicant group and the profitability of the structure chosen would be an important factor. Thirdly, he agreed that in considering the two alternatives he had not had any regard to the return to the applicant. He agreed that, in considering the return to the applicant, the tax consequences would be an important consideration and those tax consequences would include other members of the applicant group as well as the applicant. He agreed that in referring to the two alternatives he had not discussed the tax consequences of the structures to Vockbay or other members of the applicant group."

39. These qualifications, though accepted by his Honour, were ultimately not sufficient to persuade his Honour to reject Mr Duivenvoorde's opinion of the alternative postulates he considered. They were:

  • (1) Presumed Counterfactual - a float of Walshville involving transactions which did take place but not including the steps comprising the scheme identified by the Commissioner.
  • (2) Counterfactual 1 - a float of Bristile involving the following steps:
    • (i) Futuris transfers to Vockbay its 37% holding in Bristile at cost. Vockbay would then hold 100% of Bristile. The parties would take advantage of the roll-over relief provisions;
    • (ii) Walshville transfers the Prestige entities to Bristile for $40 million (market value) which is borrowed from Walshville and later repaid by external debt. Walshville realises a capital gain of $19.9 million;
    • (iii) To achieve a debt/equity ratio of $100 million/$150 million (that is the same debt/equity ratio as was adopted in the actual float of Walshville), Bristile sells building assets to a new company and pays a cash dividend of $30.3 million to Vockbay financed by external bank debt;
    • (iv) Bristile issues a prospectus to the public offering 150 million shares at $1.00 per share. Once the $150 million has been raised Bristile buys back the shares held by Vockbay for $150 million.
  • (3) Counterfactual 2 - a float of Walshville involving the following steps:
    • (i) Futuris transfers to Vockbay its 37% holding in Bristile at cost. Vockbay would then hold 100% of Bristile. The parties would take advantage of the roll-over relief provisions;
    • (ii) Vockbay sells its shares in Bristile for $182 million. It realises a capital gain of $142.3 million;
    • (iii) Futuris subscribes for shares in Walshville in the amount of $133 million;
    • (iv) Futuris sells its Walshville shares for $150 million and realises a capital gain of $10 million.

40. In his report Mr Duivenvoorde said that if the steps identified by the Commissioner had not been implemented then the most likely approach to disposal of the Building Products Division would have been Counterfactual 1. His reasons were set out fully in his report and are further discussed below at [75]. In comparison with Counterfactual 2 it was less costly to implement, more attractive to the market, and had more favourable taxation, profitability and contractual consequences. Before the primary judge Futuris submitted that the approach in Counterfactual 1 would have resulted in capital gains to the Futuris Group of $95.7m whereas Counterfactual 2 would have yielded capital gains to the group of $152.3m.

41. The Commissioner's case was that had steps 2, 3 and 4 not taken place (as per the Presumed Counterfactual) then, as the primary judge stated at [100]:

"[T]he 'transfer' of the cost base of [Futuris'] investment in Vockbay to [Futuris'] investment in Walshville would not have taken place. In those circumstances, the capital gain made by [Futuris] upon the sale of its shares in Walshville would have been $92,739,342 (that is, the consideration received of $150,000,000 minus a cost base of $50,207,000 and costs of disposal of $7,053,658)."

42. In his Honour's view it was not reasonable to expect that the Presumed Counterfactual would have been entered into. His Honour explained, at [116] to [118]:

"The Presumed Counterfactual involves four steps. First, the applicant transfers its shares in Bristile to Vockbay at cost, that is to say, its 37 per cent shareholding, for $5,094,495.74 and the applicant and Vockbay elect that s 160ZZO (that is, roll-over relief) apply to the disposal. Secondly, Vockbay sells its shares in Bristile to Walshville for $97.3 million giving rise to a capital gain in Vockbay of $142.3 million (that is, market value of $180.2 million - cost base $37,881,000). Thirdly, the applicant subscribes $50,207,000 for capital in Walshville. Finally, the applicant sells all Walshville shares for the sum of $150 million. The sale of the Walshville shares would give rise to a capital gain in the applicant of $92.74 million (that is, $150 million - cost base of $50,207,000 - costs of disposal of $7,053,658). The total capital gains incurred by the applicant group as a result of these transactions would be $235 million, being $142.3 million in Vockbay and $92.74 million in the applicant.

The effect of the Presumed Counterfactual is that there would be two sales: an internal sale of the bulk of the Building Products Division and an external sale of the Division. The effect of the two sales would be a doubling up of capital gains in respect of essentially the same assets. A sale of the Building Products Division on that basis would not be a rational commercial decision.

The 'enterprise value' of the Building Products Division was an amount of $250 million (carrying debt of $100 million, Walshville was sold in the float for $150 million). I do not think that it can be concluded as a matter of reasonable expectation that the applicant would have sold its Building Products Division, worth $250 million, in a manner which would have given rise to capital gains totalling $235 million. It is highly likely that if this was the only option, the applicant would not have disposed of its Building Products Division. The Division was profitable with a good cashflow and the applicant was alive to the capital gains tax implications of the transactions into which it entered."

43. At [119], the primary judge also accepted Mr Duivenvoorde's evidence that relying on roll-over relief to avoid the capital gains consequences of the sale of Vockbay's Bristile shares to Walshville was not feasible because:

"If such relief had been relied on, the capital gain would have been realised in Walshville and, to use the words of Mr Duivenvoorde, '[i]n commercial terms it would not have been possible to float a company on the basis that it incurred a liability to tax in respect of a capital gain of $142.4 million as a direct consequence of being floated'."

44. The primary judge also rejected Counterfactual 2 as not commercially feasible. His Honour said that, for the reasons identified by Mr Duivenvoorde, its implementation would have resulted in a significantly larger capital gain than Counterfactual 1.

45. His Honour had a different opinion in relation to Counterfactual 1. In relation to it his Honour said at [126]:

"I have considered carefully whether [Futuris] has established that, assuming the scheme identified by the respondent had not been entered into or carried out, it would, as a matter of reasonable expectation, have carried out the sale of its Building Products Division by the public float of Bristile in accordance with the steps in Futuris Counterfactual 1. It seems clear that there would have been good commercial reasons for the less valuable assets of the Building Products Division being transferred to the entity holding the significantly more valuable assets (that is, Bristile). It seems clear there would have been good commercial reasons for assets of Bristile to be transferred to a new entity and for the payment of a dividend of $30.3 million to Vockbay. Those reasons were explained by Mr Duivenvoorde in his evidence and, as I have said, Mr Duivenvoorde was not challenged on that aspect of his evidence. No doubt those making a decision on the appropriate structure, assuming the scheme or the alternative scheme was not entered into or carried out, would take into account the tax consequences of alternative structures to both [Futuris] and its subsidiaries. Even so, the commercial reasons point to an alternative structure whereby Walshville transfers the Prestige entities to Bristile and the Bristile shares are sold in a public float."

His Honour continued, stating his conclusion as follows:

"I am satisfied that [Futuris] has established that had the scheme identified by the respondent not been entered into or carried out, it would, as a matter of reasonable expectation, have carried out the sale of its Building Products Division by the public float of Bristile in accordance with the steps in Futuris Counterfactual 1. That leads to the conclusion that there was no tax benefit in connection with the scheme or the alternative scheme within s 177C(1)(a) and the appeal must be upheld."

46. This conclusion was sufficient to dispose of the appeal however the primary judge did consider the other issues raised by Futuris on the assumption that it did obtain a tax benefit. As we have concluded that his Honour was correct in finding that Futuris did not obtain a tax benefit in connection with either the primary scheme or the alternative scheme it is not necessary to consider this aspect of his Honour's judgment or of the appeal.

The appeal

47. In its notice of contention, Futuris raised a number of issues with which we will deal in the context of the Commissioner's grounds of appeal. The Commissioner contends that the primary judge misconstrued s 177D(a) and s 177C(1). He submits that his Honour erred in:

  • • construing the above sections as requiring the formulation and evaluation of a postulate for the sale of the Building Products Division alternative to the transactions that had in fact been carried out and which included the scheme(s) identified by the Commissioner;
  • • comparing the actual transactions that were carried out with alternative ways by which Futuris might have sold the Building Products Division by way of public float;
  • • failing to compare the actual transactions that were carried out with those transactions minus the steps comprising the scheme(s) identified by the Commissioner;
  • • failing to consider each identified scheme in applying s 177D(a) and s 177C(1);
  • • concluding that had the scheme(s) not been carried out that the Presumed Counterfactual would not have occurred as a matter of reasonable expectation;
  • • concluding, in the absence of evidence of any contemporaneous consideration of such a proposal, that had the scheme(s) identified by the Commissioner not been carried out Futuris would have disposed of the Building Products Division by a float of Bristile.

48. It is not in dispute that for Pt IVA to apply there must be three elements: (i) a scheme or schemes within the meaning of s 177A of the ITAA 1936; (ii) a tax benefit within the meaning of, relevantly, s 177C(1)(a); and (iii) the dominant purpose of enabling the relevant taxpayer to obtain a tax benefit. The tax benefit referred to in s 177C(1)(a) is an amount not included in the assessable income of the taxpayer that would have been included, or might reasonably be expected to be included in the taxpayer's assessable income if the scheme has not been entered into or carried out. The dominant purpose must be assessed having regard to the eight matters in s 177D(b).

49. In this case the primary judge found that the first and third elements were satisfied but not the second. The Commissioner's written submissions argue that this suggests a failure by the primary judge to construe Pt IVA as a whole:

"The error, it is submitted, lies in his Honour's construction and application of the definition of 'tax benefit' in s 177C(i)(a) of the Act and, in particular the inquiry directed by the words:

'Where that amount would have been included or might reasonably be expected to have been included, in the assessable income of the taxpayer … if the scheme has not been entered into or carried out'"

50. As the Commissioner submitted, s 177C(1)(a) and, in particular, the notion of reasonable expectation, creates a link between the scheme and the tax benefit. In this case the primary scheme identified by the Commissioner comprised steps 2, 3 and 4 outlined above at [20]. In brief they were the sale of Bristile assets to Bristile Operations, the declaration of a dividend of $146m to Vockbay, the Vockbay declaration of a dividend in favour of Futuris and the capitalisation of the debts created by the declarations of dividends. It was those steps that attracted the application of Division 19A and thus yielded the tax benefit. Without them the tax benefit would not have been obtained.

51. The fundamental flaw that the Commissioner identifies in the case put by Futuris concerns the paucity of evidence that Futuris adduced to show that it was not reasonable to expect that the tax benefit that it received under the scheme would, in the absence of the scheme, have been included in the company's assessable income. In considering that issue it is necessary to bear in mind the nature of the inquiry that is before the Court.

52. The Commissioner's discretion to cancel a tax benefit only arises where there is a tax benefit that has been obtained in connection with a scheme to which Pt IVA applies. This point was emphasised in
Federal Commissioner of Taxation v Peabody 94 ATC 4663; (1994) 181 CLR 359 at 382 where the High Court said:

"The existence of the discretion is not made to depend upon the Commissioner's opinion or satisfaction that there is a tax benefit or that, if there is a tax benefit, it was obtained in connexion with a Pt IVA scheme. Those are posited as objective facts. The erroneous identification by the Commissioner of a scheme as being one to which Pt IVA applies or a misconception on his part as to the connexion of a tax benefit with such a scheme will result in the wrongful exercise of the discretion conferred by s 177F(1) only in the event that the tax benefit which the Commissioner purports to cancel is not a tax benefit within the meaning of Pt IVA … the question in every case must be whether a tax benefit which the Commissioner has purported to cancel is in fact a tax benefit obtained in connexion with a Pt IVA scheme and so susceptible to cancellation at the discretion of the Commissioner."

53. The starting point here is the identification of a tax benefit within the meaning of s 177C(1)(a). The Commissioner has determined that the amount of $82,950,090 which was not included in the assessable income of Futuris for the 1998 year of income, "would have been included, or might reasonably be expected to have been included" if the scheme(s) identified by the Commissioner had not been carried out.

54. In Peabody, at 385, the High Court held that the reasonable expectation of which s 177C(1)(a) speaks "involves a prediction as to events that 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". In the absence of an alternative postulate, the Commissioner's prediction is that the float of Walshville would have occurred without the steps which comprise the scheme. The Commissioner was not obliged to put forward an alternative postulate:
Federal Commissioner of Taxation v Trail Bros Steel & Plastics Pty Ltd 2010 ATC 20-198; (2010) 186 FCR 410 at [34] per Dowsett and Gordon JJ.

55. In endeavouring to show that the Commissioner's prediction was not "sufficiently reliable for it to be regarded as reasonable" Futuris relied on Mr Duivenvoorde's evidence. The Commissioner did not adduce any evidence and the primary judge rejected, in our view correctly, the invitation by Futuris to draw adverse inferences on that account. The Commissioner was entitled to rely on the inadequacies he perceived in Mr Duivenvoorde's evidence without any obligation to adduce any evidence about transactions to which he was a stranger. As the Commissioner submitted in the appeal, he "identified with precision the schemes on which he relied, and the tax benefit said to have been obtained in connection with the scheme, in a statement of facts issues and contentions and in a respondent's response to the applicant's statement of grounds".

56. The Commissioner also noted that Futuris had unsuccessfully sought an order for further particulars seeking clarification of the Commissioner's case along the lines of his complaint here. In
Futuris Corporation Ltd v Federal Commissioner of Taxation (2009) 75 ATR 365 Mansfield J said at [32]:

"In my view, the applicant is not entitled to the further and better particulars it seeks in relation to whether a 'tax benefit' was obtained. The onus is on the applicant to establish that it would have undertaken or might reasonably be expected to have undertaken a particular activity in lieu of the relevant scheme, and that that activity would or might reasonably be expected to have resulted in a tax benefit similar to the tax benefit obtained by the taxpayer in consequence of the scheme. It is not for the respondent to provide particulars as to what the applicant might have done, had it not entered the scheme. It is not within the Commissioner's knowledge. That is a matter for the applicant to prove."

As the Commissioner pointed out, no application to appeal from his Honour's decision was brought.

57. In seeking to discharge its onus the taxpayer may put forward an alternative postulate to the scheme identified by the Commissioner:
Commissioner of Taxation v Hart 2004 ATC 4599; (2004) 217 CLR 216 at [66]. In
Commissioner of Taxation v Consolidated Press Holdings Ltd (No 1) 2001 ATC 4343; (1999) 91 FCR 524 the Full Federal Court said, at [87]:

"There is no doubt a large range of factual circumstances that may require consideration when hypothesising under s 177C(1), the alternative to a scheme being entered into or carried out. If the scheme is a severable component of a larger array of transactions which have been arranged or executed, the fact that they were arranged or executed can offer support for the hypothesis that they would or might reasonably be expected to have stood absent the scheme. The condition that the scheme be severable assumes that the remaining transactions are commercially and legally possible. If that assumption is falsified, then the hypothesis as to what would or might reasonably be expected to have happened may have to cope with a wider range of possibilities."

58. While the Commissioner did not put forward an alternative postulate the Presumed Counterfactual, comprising as it does, all the steps actually taken other than those identified as part of the primary scheme, is by default the scenario to which the Commissioner referred in submitting that the tax benefit which Futuris obtained in connection with the scheme would have been included in its assessable income without the scheme steps.

59. Futuris does not suggest that the Presumed Counterfactual would be legally impossible nor does it suggest that it would be commercially impossible. Rather the submission is that it would not be commercially feasible and the evidence of Mr Duivenvoorde is sufficient to establish this. The primary judge accepted this and his reasons for holding that it was not a reasonable expectation that Futuris would have proceeded in this way are quoted above at [42].

60. The Commissioner does not dispute that the Presumed Counterfactual would be attended by commercial disadvantages. That of course would be an inevitable result of Futuris' increased liability to capital gains tax. He submitted however that there "was no evidence to suggest that there was an alternative way in which the capital gain that resulted from the balance of the suite of transactions would not have flowed absent the scheme". He also submitted that the Presumed Counterfactual should not have been rejected in the absence of direct evidence refuting it from officers of Futuris who were leading the plans for disposal of the Building Products Division.

61. The only officer of Futuris to give evidence was the company secretary, Mr Clark. His evidence gives the background to the transactions that did take place but does not directly address the Presumed Counterfactual, or indeed Counterfactual 1 or 2. The Commissioner's "no evidence" submission also reflects his view that no weight should be given to Mr Duivenvoorde's evidence. He argues that Mr Duivenvoorde's opinion was mere speculation as to what Futuris "might" have done unsupported by evidence which would have transformed it into a reasonable expectation. The question before the primary judge, it was submitted,

"did not involve consideration of alternative means by which the respondent and its subsidiaries might have sold the [Building Products Division] by way of a public float as if they were operating from a blank slate."

62. This much may be accepted however it must also be accepted that between a blank slate and merely deleting the scheme from the transactions in question there may be many approaches to predicting an alternative scenario that is "sufficiently reliable for it to be regarded as reasonable": Peabody at 385. To put the matter another way, the issue is "whether a tax benefit has been obtained which would not have been obtained without the scheme": GT Pagone, Tax Avoidance in Australia, The Federation Press, 2010 at 52. While it is true that the Commissioner may leave it to the taxpayer to prove the relevant assessment is excessive without himself adducing evidence, it is equally true that the taxpayer may seek to prove, in its own way, that the assessment is excessive. In
Federal Commissioner of Taxation v Trail Bros Steel & Plastic Ltd 2010 ATC 20-198; (2010) 186 FCR 410 (Trail) the Full Federal Court observed that it is the taxpayer who bears the onus to establish that there is no tax benefit in connection with a scheme and added, at [36], that it is a matter for the taxpayer how it does that:

"It may, for example … lead evidence that the taxpayer would have undertaken a particular activity, or adopted a particular course, in lieu of the scheme. It is also conceivable that a taxpayer may not lead positive evidence of an alternative postulate because, for example, the result of any objective enquiry of the alternative postulate is inevitable . In the end, the Court will decide what would have been done, or might reasonably be expected to have been done, in lieu of the scheme having regard to all of the evidence that is led. If a taxpayer has given evidence of what he or she would have done but for entering the scheme, that evidence will be relevant and useful to the extent to which it reveals facts or matters that bear upon the objective determination of the alternative postulate."

[Emphasis added]

63. The Full Court in Trail upheld the decision of the trial judge, Greenwood J, setting aside the decision of the Administrative Appeals Tribunal. Justice Greenwood had held that although the Tribunal had formulated the correct test in respect of s 177C(1)(b) of the ITAA 1936, it had applied a different test:
Commissioner of Taxation v Trail Bros Steel & Plastic Ltd (2009) 75 ATR 916.

64. The problem in Trail arose as a result of legislative amendments that had substantially eliminated the deductibility of payments the taxpayer was contractually bound to make to its employees' superannuation fund. Citing
Federal Commissioner of Taxation v Lenzo 2008 ATC 20-014; (2008) 167 FCR 255, Greenwood J said, at [49] that the applicable test,

"necessarily involves an examination of the particular activity the taxpayer would have undertaken or might reasonably be expected to have undertaken in lieu of the scheme and whether the activity would or might reasonably be expected to have resulted in an allowable deduction of the same kind as that claimed by the taxpayer in the two tax years, under the scheme."

His Honour continued at [50]-[52]:

"There was however no evidence before the Tribunal of that activity. What would or might the taxpayer have reasonably done absent the scheme? Would the taxpayer have paid all the amounts due under the contracts to the two brothers by making the contributions to the superannuation fund? The Tribunal thought not …

What would the taxpayer have otherwise done or might reasonably be expected to have done in the circumstances absent the scheme? Might it have varied the agreements to negotiate new employment contracts containing particular terms which might have given rise to an allowable deduction of the kind claimed in the full amount claimed, and, if so, on what basis or by reference to what steps? …

The question asked by s 177C(1)(b) of the Act however is what activity would the taxpayer have undertaken or might reasonably be expected to have undertaken absent the scheme? Since the deductibility of the payments had been substantially eliminated by the amendments to the Act, it is not unlikely that the employer and the two brothers would have engaged in an activity of seeking to negotiate new employment terms. The new terms may have resulted in steps, events, actions or activities being undertaken by the taxpayer in furtherance of its commercial undertaking that would have given rise to, or might reasonably be expected to have given rise to, a deduction in the hands of the taxpayer of the kind it claimed under the scheme. However, it may not have given rise to such a deduction. The deduction claimed under the scheme must be characterised and a comparison made with the character of the activity said to give rise to, or reasonably expected to give rise to, a deduction of the same kind."

65. In the absence of answers to these questions Greenwood J found, at [54], that there was no evidence by which the Tribunal could test the alternate postulate to determine whether it was "just a possibility or unsupported speculation or, alternatively, sufficiently reliable so as to be regarded as reasonable".

66. In Trail when legislative amendments significantly reduced the deductibility of contractual payments from the assessable income of the employees, the employer, with the consent of the employees concerned, established an employee welfare fund into which it made the payments previously made to the superannuation fund. For reasons it is not necessary to canvass here, the Commissioner claimed that the deductibility thus achieved was a tax benefit obtained in connection with a scheme.

67. The present case may be distinguished from Trail. In Trail, first, the employer was contractually bound to make the superannuation payments and as such the scope for alternative postulates was limited. Secondly, it is clear from the questions posed in the passages extracted from the judgment that the issue was not one of the weight to be given to evidence but that there was no evidence.

68. In the present case there is before the Court the evidence of Mr Duivenvoorde. We do not accept the Commissioner's submission that it should be given no weight. How much weight must be assessed in the context of the other evidence adduced by Futuris. This includes the background to the transactions leading up to the float of Walshville, the advice of its consultants and its own deliberations, plus the significance, if any, of there being no evidence other than that of Mr Clark from officers of Futuris or the Futuris Group.

69. The primary judge's reasons for regarding it as not reasonable to predict that the Presumed Counterfactual would have been entered into are explained above at [42]. The Commissioner submits that no reasonable alternative to the Presumed Counterfactual has been made out and that his Honour's finding lacks an adequate evidentiary foundation:

"The basis of the finding of the primary judge in this connection appears to be his own assessment of the taxation consequences of the 'Presumed Counterfactual' (being a $235 million capital gain) and an inference drawn based upon that assessment of whether, given those taxation consequences, the respondent would have sold the [Building Products Division] in the manner postulated by the 'Presumed Counterfactual'."

70. His Honour's conclusion that the Presumed Counterfactual would have generated a $235m capital gain which would have led Futuris not to proceed with this approach is said to be "no more than speculation or conjecture, unfounded on any objective evidence". With respect, this criticism is unfair. His Honour did not pluck the numbers out of the air. They were calculated on the basis of undisputed facts as to the price of the Bristile shares that Futuris sold to Vockbay; the election by Futuris and Vockbay for the application of roll-over relief; the price at which Vockbay sold Bristile shares to Walshville and the cost base of those shares; and the given cost base and the sale of the Walshville shares. These were not, as Futuris contended, "generalised propositions drawn from ordinary human experience".

71. When it is remembered that the Presumed Counterfactual is simply comprised of the transactions that actually occurred minus the scheme, it can be seen that his Honour had all the information necessary to make the above calculations. There was, of course, other evidence that might have weighed in favour of the opposite conclusion. The survey of the advice received by Futuris was equivocal as to the likelihood of the Commissioner invoking Pt IVA against Futuris. In particular the warning note quoted at [14] above refers to a "significant" risk of the Commissioner considering that Pt IVA applied. It might be argued that, as Futuris proceeded with the float of Washville in the face of this advice, the advantages of the proposal outweighed the risk. The difference is, however, that with the Presumed Counterfactual there would be no risk. The capital gains burden was completely predictable. It is reasonable to expect this to be a material factor in the reluctance of Futuris to proceed with this approach.

72. His Honour's reasons for reaching the opposite conclusion in relation to Counterfactual 1 are quoted at [45] above. The Commissioner repeated his submissions about Mr Duivenvoorde's evidence. In addition he submitted that there could be no reasonable expectation that Futuris would have followed Counterfactual 1 in the absence of (a) any evidence of contemporaneous consideration of the float of Bristile as postulated in Counterfactual 1; (b) any evidence from company officers or employees as to "established commercial parameters for the sale"; and (c) evidence as to whether Counterfactual 1 met those parameters.

73. The primary judge attached some significance to the fact that a draft prospectus for the float of Bristile had been prepared. The draft prospectus was annexed to the affidavit of Mr Clark. The Commissioner submitted that, on examination, the draft prospectus does not support the primary judge's characterisation of it, at [111] as "evidence that in about November 1996 persons within [Futuris] were considering the disposal of the Building Products Division by a public float of Bristile". The Commissioner said:

"Examination of that draft prospectus shows it to relate only to the sale of Bristile (including elements, such as Australian Fine China, that were not part of the [Building Products Division] and not part of the actual transactions subsequently undertaken) with no suggestion that other elements of the [Building Products Division] held in Walshville … were to be transferred to Bristile prior to the float."

74. Considered in isolation this submission has much weight, however, it must be considered in the light of Mr Duivenvoorde's opinion. Mr Duivenvoorde was an independent expert witness who confirmed that he had read the Guidelines for Expert Witnesses in Proceedings in the Federal Court of Australia and agreed to be bound by them. He gave his opinion in accordance with instructions contained in letters dated 3 and 29 June 2009. The letters of instruction outlined the steps that had been taken in disposing of the Building Products Division and the steps which the Commissioner asserted comprised the primary scheme and the alternative scheme. Mr Duivenvoorde was asked to provide his opinion of what might "reasonably be expected would have occurred in selling the building products division if neither of those schemes had been entered into".

75. Mr Duivenvoorde said in his report that in considering what might reasonably be expected he took into account the following key matters: costs of implementation; attractiveness of listed company's financial structure for marketing purposes; the impact on forecast profitability of the listed company; the taxation consequences to the vendor and the listed company; and contractual consequences such as any change of control clauses. Applying these criteria to the alternative postulates, Mr Duivenvoorde concluded that they would be best satisfied by a float of Bristile. At paragraphs 5.2 to 5.3 of his report Mr Duivenvoorde noted the draft prospectus referred to by his Honour and said:

"This indicates that Futuris had contemplated the transfer of the Prestige Entities to the Bristile Entities prior to the floating of Bristile.

To achieve the sale of the Building Products Division the Prestige Entities would have been transferred by Walshville to Bristile."

76. This conclusion might be regarded as mere speculation however, given that disposal of the Building Products Division was the stated goal, it was reasonable for the fact that a float of Bristile had been contemplated to be a factor supporting the conclusion that the disposal might be effected by the transfer of the Prestige Entities and the subsequent float of Bristile.

77. Mr Duivenvoorde analysed the key factors referred to at [75]. He concluded that the cost of implementing a float of Bristile would be lower than for a float of Walshville. Central to this conclusion was that the market value of the Prestige Entities ($40.0m) was considerably lower than the market of the Bristile entities ($210.0m). Consequently the transfer costs (including stamp duty) would be lower than the transfer costs of the Prestige Entities.

78. Mr Duivenvoorde's conclusion was based on the result of calculations using given facts. This was also the case with his conclusion that the financial structure of Bristile would, for the purposes of marketing the float have been equally attractive as that of Walshville because it would have achieved the same as that of Walshville. In paragraphs 5.4 to 5.8 of his report, Mr Duivenvoorde set out the basis of his calculations on this issue. He took into account the fact that Futuris acquired Walshville for $2 for the specific purpose of acquiring the Prestige Entities for which Walshville acted only as a holding company. The price paid by Walshville for the Prestige Entities and the profit that their sale would have yielded for Walshville. He explained the effect of the purchase on Bristile's consolidated financial statements and debt levels and the way in which the debt and equity levels adopted for the Walshville float could have been achieved in a float of Bristile. Finally he described the steps that would have been necessary to achieve these outcomes.

79. There was, of course an element of speculation involved in Mr Duivenvoorde's analysis. But it was not mere speculation. It was a prediction based on given facts, established market values, calculations based on unchallenged financial data, a stated goal and the application of Mr Duivenvoorde's expertise in corporate finance and his experience as a chartered accountant. The definition of 'tax benefit' in s 177C(1)(a) requires that there be a prediction as to what "might reasonably be expected to have been included in the assessable income of the taxpayer". That prediction necessarily involves an opinion as to events and transactions that have not taken place. It must be not just a possibility but "sufficiently reliable for it to be regarded as reasonable": Peabody at 385.

80. The reliability of a prediction might be established by direct evidence of contemporaneous consideration of the alternative postulate; or by evidence from company officers as to established commercial parameters for sale and whether the alternative postulate met those parameters; or evidence from those who were involved in the transactions challenged under Pt IVA. But that is not the only way to establish reliability. To the extent that the Commissioner submits that it is only by such direct evidence that a reliable prediction can be made, we reject that submission. This much was recognised by the Full Federal Court in Trail; see above at [62].

81. Mr Duivenvoorde's evidence was relevant and persuasive. We see no error in the primary judge accepting his evidence. As we have found that the primary judge was correct in concluding that there was no tax benefit in connection with the primary scheme or the alternative scheme within s 177C(1)(a) it is not necessary for us to consider the issues raised in the appeal and in Furturis' notice of contention concerning s 177D(b) and dominant tax purpose.

82. The appeal must be dismissed with costs.


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