• The impact of this case on ATO policy is discussed in Decision Impact Statement: Trustee of the WT & A Norman Superannuation Fund & the Trustee of Mary A Norman Superannuation Fund and Commissioner of Taxation (2014/6023 & 2014/6090).

TRUSTEES OF THE WT & A NORMAN SUPERANNUATION FUND & ANOR v FC of T

Members:
FD O'Loughlin SM

Tribunal:
Administrative Appeals Tribunal, Melbourne

MEDIA NEUTRAL CITATION: [2015] AATA 914

Decision date: 27 November 2015

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FD O'Loughlin (Senior Member)

1. The principal question for resolution in this matter is whether s 177EA of the 1936 Assessment Act^[1] Income Tax Assessment Act 1936 (Cth) applies to what are known as Dividend Washing transactions entered before s 207-157 of the 1997 Assessment Act^[2] Income Tax Assessment Act 1997 (Cth) was enacted and operative.

2. Between May 2012 and February 2013, in what were believed to be arrangements entered in legitimate pursuit of dividend income, and on advice from their share brokers Ord Minnett,^[3] Ord Minnett Limited the Applicant trustees entered several transactions that have become known as Dividend Washing transactions.

• (a) The Applicant trustees of the WT & A Norman Superannuation Fund sold shares in the ASX^[4] Australian Stock Exchange listed companies WBC,^[5] Westpac Banking Corporation NAB,^[6] National Australia Bank Limited CBA,^[7] Commonwealth Bank of Australia Limited TLS,^[8] Telstra Corporation Limited and SUN,^[9] Suncorp Metway Limited ex-dividend on the ordinary market and, on the same day, repurchased the same number of shares in the same companies cum-dividend at a higher price on a different market.
• (b) The Applicant trustees of the M A Norman Superannuation Fund sold shares in the ASX listed companies WBC, NAB and CBA, also ex-dividend on the ordinary market and, on the same day, also repurchased the same number of shares in the same companies cum-dividend at a higher price on a different market.

3. One of the effects of the transactions entered was that the Applicant trustees received two dividends for the shares they held in the respective companies while only holding one parcel of shares at any time. The economics of the transactions were such that without the franking credits/imputation benefits attached to the additional dividends received, the transactions cost the Applicants' money and/or asset value.

4. The Commissioner has applied Part IVA and has denied the additional imputation benefit. The present applications arise because the Applicant trustees dispute what the Commissioner has done.

5. The secondary question for resolution concerns the Part IVA determination process; namely, whether it was legitimate for the Commissioner to make his s 177EA(5) determinations in connection with his consideration of the Applicant trustees' objections to the earlier assessments.

FACTS

6. The following facts which are not disputed are taken substantially form the Commissioner's submissions:

• (a) in the WT & A Norman Superannuation Fund application, the Applicants are the trustees and beneficiaries of a self-managed superannuation fund known as the WT & A Norman Superannuation Fund;
• (b) in the Mary A Norman Superannuation Fund application, the Applicants are the trustees of a self-managed superannuation fund known as the Mary A Norman Superannuation Fund and Mary Norman is also a beneficiary of that Fund;
• (c) in their capacities as trustees of those Funds the Applicants held shares listed on the ASX;
• (d) in 2012 and 2013 the ASX had two markets, an ordinary market and what was known as the ASX Special Market. The ASX Special Market permitted purchases of shares on a cum-dividend basis on the date that those shares began to trade on the ordinary market on an ex-dividend basis and for a few days after that ordinary market ex-dividend date;
• (e) on the recommendation of their broker, Ord Minnett, during the 2012 and 2013 Years^[10] A Year being a 12 month period ending on 30 June. the Applicants ordered their broker to sell shares ex-dividend on the ordinary market of the ASX and to buy the same number of shares in the same companies on the same day cum-dividend on the ASX Special Market in the transactions set out in Table 1 in the Annexure;
• (f) in each of the relevant transactions:
  • (i) the Applicants' broker, Ord Minnett, made the initiating recommendation;
  • (ii) instructions to execute buy and sell transactions were given to Ord Minnett at the same time;
  • (iii) the same number of shares in the relevant company were both sold and purchased;
  • (iv) the sales and purchases of the one company's shares occurred on the same date; and
  • (v) the sales of shares were on an ex-dividend basis and were made via the ordinary ASX market and the purchases of the shares were on a cum-dividend basis and were made via the ASX Special Market.

7. The financial details of the sales and purchases listed in Table 1 in the Annexure are not disputed. With the exception of the details listed for the 8 November 2012 ANZ shares transactions, these details are accepted and form the basis of the analysis shown in Tables 2 and 3 in the Annexure. The Table 1 details for the 8 November 2012 ANZ shares transactions appear so irrational that it is unlikely they are correct. It is more likely that the correct details, although not known, are in line with the trend for each of the other Dividend Washing transactions entered into by the Applicant trustees. Accordingly the details pertaining to the 8 November 2012 ANZ shares transactions are shaded and Tables 2 and 3 do not include the equivalent analysis of these transactions.

8. On 20 October 2014, and as part of the process of determining the objections to the assessments that have led to the present applications, the Commissioner determined under paragraph 177EA(5)(b) that no imputation benefit arose in respect of the franked distributions received on each of the shares purchased on the ASX Special Market during the 2013 Year. The Commissioner did not make any determination under s 177EA(5)(a) to debit the relevant companies' franking accounts.

9. Mr Norman was a trustee of both Superannuation Funds. His evidence was that:

• (a) the investment strategy for both of the Funds was to maximise the financial return from their investments and to do so by maximising the dividends the Funds received;
• (b) all investments were in shares in companies listed on the ASX;
• (c) after initial strategies focusing on a mix of assets with a view to both long term gain and immediate income, a view was taken that immediate income was a better strategy as the dividends received increased the value of the Funds in a more reliable manner;
• (d) Ord Minnett suggested an arrangement of selling some shares held on an ex-dividend basis and purchasing shares in the same companies on a cum-dividend basis;
• (e) he understood the result of the arrangement proposed was that a double dividend was received while for capital gains purposes, the value of the shares kept up with inflation;
• (f) between May 2012 and February 2013, 11 such transactions were carried out on behalf of the WT & A Norman Superannuation Fund and four such transactions were carried out on behalf of the Mary A Norman Superannuation Fund and he stopped doing so upon learning that the ATO^[11] Australian Taxation Office considered the practice unacceptable;
• (g) he was horrified, taken aback, disturbed that there was a suggestion that [the Funds] had entered into the transactions to obtain franking credits;
• (h) the Funds were chasing dividends and the franking credits were no more than incidental …. to [the Funds'] purpose of obtaining dividends; and
• (i) the franking credits that were received were considered part of the dividends received.

LEGISLATION

10. The relevant parts of ss 6(1) and 177EA of the 1936 Assessment Act and 204-30(7) & (8) of the 1997 Assessment Act that need to be considered in the context of the principal question for resolution in the present applications are:

S 6(1)

"dividend" includes:

• (a) any distribution made by a company to any of its shareholders, whether in money or other property; and
• (b) any amount credited by a company to any of its shareholders as shareholders;

  but does not include:

….

S 177EA

Creation of franking debit or cancellation of franking credits

(1) In this section, unless the contrary intention appears:

"relevant circumstances" has a meaning affected by subsection (17).

"relevant taxpayer" has the meaning given by subsection (3).

"scheme for a disposition" , in relation to membership interests or an interest in membership interests, has a meaning affected by subsection (14).

…..

Application of section

(3) This section applies if:

• (a) there is a scheme for a disposition of membership interests, or an interest in membership interests, in a corporate tax entity; and
• (b) either:
  • (i) a frankable distribution has been paid, or is payable or expected to be payable, to a person in respect of the membership interests; or
  • (ii) …..; and
• (c) the distribution was, or is expected to be, a franked distribution or a distribution franked with an exempting credit; and
• (d) except for this section, the person (the relevant taxpayer ) would receive, or could reasonably be expected to receive, imputation benefits as a result of the distribution; and
• (e) having regard to the relevant circumstances of the scheme, 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 a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling the relevant taxpayer to obtain an imputation benefit.

Bare acquisition of membership interests or interest in membership interests

(4) It is not to be concluded for the purposes of paragraph (3)(e) that a person entered into or carried out a scheme for a purpose mentioned in that paragraph merely because the person acquired membership interests, or an interest in membership interests, in the entity.

Commissioner to determine franking debit or deny franking credit

(5) The Commissioner may make, in writing, either of the following determinations:

• (a) if the corporate tax entity is a party to the scheme, a determination that a franking debit or exempting debit of the entity arises in respect of each distribution made to the relevant taxpayer or that flows indirectly to the relevant taxpayer;
• (b) a determination that no imputation benefit is to arise in respect of a distribution or a specified part of a distribution that is made, or that flows indirectly, to the relevant taxpayer.

A determination does not form part of an assessment.

Notice of determination

(6) If the Commissioner makes a determination under subsection (5), the Commissioner must:

• (a) in respect of a determination made under paragraph (5)(a)--serve notice in writing of the determination on the corporate tax entity; or
• (b) in respect of a determination made under paragraph (5)(b)--serve notice in writing of the determination on the relevant taxpayer.

The notice may be included in a notice of assessment.

…..

Effect of determination that no imputation benefit is to arise

(11) If the Commissioner makes a determination under paragraph (5)(b), the determination has effect according to its terms.

….

Meaning of scheme for a disposition

(14) A scheme for a disposition of membership interests or an interest in membership interests includes, but is not limited to, a scheme that involves any of the following:

• (a) issuing the membership interests or creating the interest in membership interests;
• (b) entering into any contract, arrangement, transaction or dealing that changes or otherwise affects the legal or equitable ownership of the membership interests or interest in membership interests;
• …..

When imputation benefit is received

(16) A taxpayer to whom a distribution flows indirectly receives an imputation benefit as a result of the distribution if:

• (a) the taxpayer is entitled to a tax offset under Division 207 of the Income Tax Assessment Act 1997 as a result of the distribution; or
• ….

Meaning of relevant circumstances of scheme

(17) The relevant circumstances of a scheme include the following:

• (a) the extent and duration of the risks of loss, and the opportunities for profit or gain, from holding membership interests, or having interests in membership interests, in the corporate tax entity that are respectively borne by or accrue to the parties to the scheme, and whether there has been any change in those risks and opportunities for the relevant taxpayer or any other party to the scheme (for example, a change resulting from the making of any contract, the granting of any option or the entering into of any arrangement with respect to any membership interests, or interests in membership interests, in the corporate tax entity);
• (b) whether the relevant taxpayer would, in the year of income in which the distribution is made, or if the distribution flows indirectly to the relevant taxpayer, in the year in which the distribution flows indirectly to the relevant taxpayer, derive a greater benefit from franking credits than other entities who hold membership interests, or have interests in membership interests, in the corporate tax entity;
• (c) whether, apart from the scheme, the corporate tax entity would have retained the franking credits or exempting credits or would have used the franking credits or exempting credits to pay a franked distribution to another entity referred to in paragraph (b);
• (d) whether, apart from the scheme, a franked distribution would have flowed indirectly to another entity referred to in paragraph (b);
• (e) if the scheme involves the issue of a non-share equity interest to which section 215-10 of the Income Tax Assessment Act 1997 applies--whether the corporate tax entity has issued, or is likely to issue, equity interests in the corporate tax entity:
  • (i) that are similar, from a commercial point of view, to the non-share equity interest; and
  • (ii) distributions in respect of which are frankable;
• (f) whether any consideration paid or given by or on behalf of, or received by or on behalf of, the relevant taxpayer in connection with the scheme (for example, the amount of any interest on a loan) was calculated by reference to the imputation benefits to be received by the relevant taxpayer;
• (g) whether a deduction is allowable or a capital loss is incurred in connection with a distribution that is made or that flows indirectly under the scheme;
• (ga) whether a distribution that is made or that flows indirectly under the scheme to the relevant taxpayer is sourced, directly or indirectly, from unrealised or untaxed profits;
• (h) whether a distribution that is made or that flows indirectly under the scheme to the relevant taxpayer is equivalent to the receipt by the relevant taxpayer of interest or of an amount in the nature of, or similar to, interest;
• (i) the period for which the relevant taxpayer held membership interests, or had an interest in membership interests, in the corporate tax entity;
• (j) any of the matters referred to in subsection 177D(2). [Formerly s 177D9B0

Meaning of greater benefit from franking credits

(18) The following subsection lists some of the cases in which a taxpayer to whom a distribution flows indirectly receives a greater benefit from franking credits than an entity referred to in paragraph (17)(b). It is not an exhaustive list.

(19) A taxpayer to whom a distribution flows indirectly receives a greater benefit from franking credits than an entity referred to in paragraph (17)(b) if any of the following circumstances exist in relation to that entity in the year of income in which the distribution giving rise to the benefit is made, and not in relation to the taxpayer if:

• (a) the entity is not an Australian resident; or
• (b) the entity would not be entitled to any tax offset under Division 207 of the Income Tax Assessment Act 1997 because of the distribution; or
• (c) the amount of income tax that would be payable by the entity because of the distribution is less than the tax offset to which the entity would be entitled; or
• (d) the entity is a corporate tax entity at the time the distribution is made, but no franking credit arises for the entity as a result of the distribution; or
• (e) the entity is a corporate tax entity at the time the distribution is made, but cannot use franking credits received on the distribution to frank distributions to its own members because:
  • (i) it is not a franking entity; or
  • (ii) it is unable to make frankable distributions.

    Note: Where the distribution is made directly to the taxpayer, see subsections 204-30(7), (8), (9) and (10) of the Income Tax Assessment Act 1997 for a list of circumstances in which the taxpayer will be treated as deriving a greater benefit from franking credits than another entity.

SECT 204.30

(7) The following subsection lists some of the cases in which a * member of an entity * derives a greater benefit from franking credits than another member of the entity. It is not an exhaustive list.

(8) A * member of an entity * derives a greater benefit from franking credits than another member of the entity if any of the following circumstances exist in relation to the other member in the income year in which the distribution giving rise to the benefit is made, and not in relation to the first member:

• (a) the other member is a foreign resident;

CONTENTIONS

11. The Applicants contend:

• (a) first that s 177EA's scope does not extend to Dividend Washing transactions. They contend that the change to the law in 2013 to introduce s 207-157 of the 1997 Assessment Act was required to deal with Dividend Washing transactions. In support the Applicants:
  • (i) refer to a number of explanations accompanying or leading to the introduction of s 207-157 that there were perceived loopholes in the pre-existing law and say that these explanations demonstrate that the law at the time the Superannuation Funds entered the relevant transactions permitted utilisation of franking credits in the manner they had been utilised; and
  • (ii) point to what Gaegler J said in Mills^[12] Mills v Commissioner of Taxation of the Commonwealth of Australia (2012) 250 CLR 171 at 187 [27] French CJ. Hayne, Kiefel and Bell JJ. agreeing. about the rationale for s 177EA and what was said about it in the EM.^[13] Taxation Laws Amendment Bill (No 7) 1997 (Cth), Explanatory Memorandum Omitting citations the Applicants cite:

    The Explanatory Memorandum for s 177EA … explained the section as "a general anti-avoidance rule … to curb the unintended usage of franking credits through dividend streaming and franking credit trading schemes". It went on to explain "dividend streaming" as "the distribution of franking credits to select shareholders" and "franking credit trading schemes" as schemes that "allow franking credits to be inappropriately transferred by, for example, allowing the full value of franking credits to be accessed without bearing the economic risk of holding the shares".; and

• (b) second that s 177EA does not operate in the present circumstances because its terms were not satisfied. In support the Applicants contend:
  • (i) the relevant purposes were to obtain dividends;
  • (ii) franking credits are part of the dividend;
  • (iii) in the Class Ruling CR 2014/90, relating to the TLS share buy-back in 2014, the Commissioner had permitted taxpayers to utilise franking credits in circumstances where they sold shares in TLS at less than prevailing market values where the sales at those values were said to be explicable only by reference to the benefit of franking credits associated with the dividends;
  • (iv) in their particular circumstances, the conditions necessary to form the s 177EA(3)(e) conclusion are not satisfied and the section does not apply.

12. Addressing the s 177EA(17) factors the Applicants contend as follows.

(a)	s 177EA(17)(a)	Both holdings of each parcel of shares in each of the companies was for more than 45 days and the Applicants were the true economic owners of all shares entitled to all dividends and therefore the imputation benefits.
(b)	s 177EA(17)(b)	The Applicants would have enjoyed benefits greater than some entities
(c)	s 177EA(17)(c) to (e)	These factors are not relevant.
(d)	s 177EA(17)(f)	Ord Minnett were instructed to carry out the transactions if the result was positive, it is usual practice to include imputation credits in yield calculations and the TLS buy-back would not have made commercial sense without reference to the imputation credit.
(e)	s 177EA(17)(g)	The Applicants made gains on the sales of the shares in the first step of the transactions entered.
(f)	s 177EA(17)(ga) & (h)	These factors are not applicable
(g)	s 177EA(17)(i)	The shares were held for more than 45 days which is the minimum required.
(h)	s 177EA(17)(j)/s 177D(b)(i), s 177D(2)(a)	The transactions were carried out by broker on the ASX which allowed the two different types of transaction and the shares were not traded ex or cum imputation benefits.
(i)	s 177EA(17)(j)/s 177D(b)(ii) , s 177D(2)(b)	There were changes in ownership of shares on the open market and The transactions were not carried out at arms' length and were entered into to obtain dividends.
		It is assumed that the word not was used in error.
(j)	s 177EA(17)(j)/s 177D(b)(iii) , s 177D(2)(c)	The scheme was carried out at a time that allowed us to receive a dividend on one parcel of shares, sell them and purchase another parcel of shares entitled to a dividend and the period for which each parcel of shares was held exceeded the 45 day minimum required to allow enjoyment of imputation benefits.
(k)	s 177EA(17)(j)/s 177D(b)(iv) , s 177D(2)(d)	An offset is allowed by the 1997 Assessment Act if s 177EA does not apply.
(l)	s 177EA(17)(j)/s 177D(b)(v) , s 177D(2)(e)	The… superannuation funds benefited from the scheme by receiving additional dividends. It was not the intention of the applicants to enter into the transactions in order to obtain the franking credits but to obtain the dividends.
(m)	s 177EA(17)(j)/s 177D(b)(vi) , s 177D(2)(f)	This sub section indicates that legislation is directed towards arm's length transactions where associated persons conspire to achieve a result that would not be available to other persons not involved in the scheme.
		Another assumption is required here that the Applicants meant non arm's length in making this contention. It follows that the Applicants contend that by participating in transactions with arm's length parties through the ASX, consideration of the financial position of other parties is not relevant.
(n)	s 177EA(17)(j)/s 177D(b)(vii) & (viii), s 177D(2)(g) &(h)	The Applicants refer to the two previous matters: ss 177D(b)(v) and (vi), s 177D(2)(e) &(f).

13. Although not cited by the Applicants some further remarks of Gaegler J in Mills ought be referred to. Continuing from the end of the quote above, again omitting citations, his honour said:

A Supplementary Explanatory Memorandum described the section as a "catch-all" provision, the object of which was to protect Pt 3-6 of the ITAA 1997 from "abuse of the imputation system through schemes which circumvent the basic rules for the franking of dividends … not otherwise prevented by those basic rules". Further statements in the Explanatory Memorandum and the Supplementary Explanatory Memorandum are significant because they bear directly on the construction of the parenthesised words in s 177EA(3)(e). The Explanatory Memorandum stated: "[a] purpose is an incidental purpose when it occurs fortuitously or in subordinate conjunction with another purpose, or merely follows another purpose as its natural incident". The Supplementary Explanatory Memorandum went on to explain that the parenthesised words were "inserted for more abundant caution" in that a reference to a "purpose" of a scheme "is usually understood to include any main or substantial purpose" of the scheme and the parenthesised words "clarify that this is the intended meaning here". It added: "[a] purpose will be an incidental purpose when it occurs fortuitously or in subordinate conjunction with one of the main or substantial purposes of the scheme, or merely follows that purpose as its natural incident". Relevantly to the construction of s 177EA(3)(e), the Explanatory Memorandum also stated: "[c]ircumstances … relevant in determining whether any person has the requisite purpose … are not limited to … the factors listed in [s 177EA(19)]".^[14] Mills above at p 187 [27].

14. The Commissioner contends that:

• (a) s 207-157 is not a code that deals with Dividend Washing transactions to the exclusion of s 177EA and that if its terms are satisfied s 177EA can apply.
• (b) the Applicants' circumstances are such that s 177EA can apply;
• (c) there are both broad and narrow schemes that meet the s 177EA(14) meaning of a scheme for a disposition of membership interests. First, he contends the arrangements globally of the Applicants' plan, proposal, course of action or course of conduct of selling shares in a relevant company on or immediately after the ex-dividend date and buying the same number of cum-dividend shares at or about the same time on the ASX Special Market was a scheme for a disposition of membership interests within s 177EA(14). This is so because, the Commissioner contends, it involved an arrangement, transaction or dealing that changed or otherwise affected the legal or equitable ownership of the membership interests (being the shares in the relevant companies). Second, and in addition, the Commissioner identifies each sale and matched purchase transaction of selling and buying shares on a particular date in a particular company as a scheme with the effect that there are 15 separate schemes comprising each issue of instructions to sell and buy shares in a relevant company, and the subsequent completion of the sale and purchase contracts. Each set of steps involved transactions which affected the legal or equitable ownership of the membership interests. Third, the Commissioner relies on each purchase transaction as a scheme for a disposition of membership interests;
• (d) the Dividend Washing transactions were only economically profitable to the Applicants if receipt of the additional franking credit on the second dividend is recognised. He refers to the 14 May 2012 transactions involving 3,202 WBC shares as illustrative. He says:
  • (i) on 14 May 2012 the Applicants sold 3,202 WBC shares for $70,529 ex-dividend. The Applicants held those shares for at least 45 days before 14 May 2012 as they were purchased on 2 July 2009;
  • (ii) also on 14 May 2012 the Applicants purchased 3,202 WBC shares for $73,184 on a cum-dividend basis on the ASX Special Market;
  • (iii) as a result :
    • (A) the Applicants received cash dividends totalling $5,250 with franking credits of $2,250;
    • (B) the Applicants made a gross capital gain of $9,651, being the difference between the cost of the purchase of the securities on 2 July 2009 and the proceeds received for the shares sold on an ex-dividend basis. (The Funds treated the capital gains as exempt income, presumably because they are in pension phase.);
    • (C) in order to obtain additional dividends of $2,625 with additional franking credits of $1,125 the Applicants incurred a cost of $2,655 (a net loss, disregarding the franking credits, of $30);
    • (D) with the additional franking credits the trade resulted in a gain of $1,095; and
    • (E) after undertaking the above trade the Applicants still held the same number of shares in WBC, that is, 3,202 shares.
• (e) paragraphs (a), (b), (f) and (i) of s 177EA(17) all point towards the Applicants having possessed the requisite purpose. In addition, paragraphs (i), (ii), (iii), (iv), (v) and (vi) of s 177D(b) [paragraphs (a), (b), (c), (d), (e) and (f) of s 177D(2)] all point towards the requisite purpose of obtaining imputation benefits.

ANALYSIS

15. Dealing first with the Applicants' s 177EA scope argument, nothing in s 207-157 suggests that it is an exclusive code to deal with Dividend Washing transactions. That being the case, there is nothing in the context of the legislation that would limit the reach of s 177EA to exclude transactions otherwise within its terms by reason of the existence of s 207-157. Accordingly the proper conclusion to reach is that the amendments made to the law in 2013 that introduced s 207-157 do not mean that the existing s 177EA rules might not apply in our appropriate case. The EM^[15] Explanatory Memorandum, Tax and Superannuation Laws Amendment (2014 Measures No 2) Bill 2014 confirms this.^[16] At paragraphs [3.22], [3.27], [3.31], [3.75], [3.81], [3.86]

16. The Applicants' s 177EA scope argument fails.

17. The Applicants' contention that the franking credits form part of a dividend, which forms an important limb of their s 177EA operation contention, misunderstands what a dividend is. The parts of the definition of dividend that need to be addressed in the present matter are noted above.

18. Here, the only distribution of money or property is the cash dividend, so paragraph (a) is not satisfied in relation to franking credits/imputation credits. Also, in the present circumstances the only amount credited to shareholders in the relevant sense is the monetary amount of the dividend paid. If any entries were posted in the companies' accounts concerning the franking credits/imputation credits, the postings would have been debits to franking accounts: paragraph (b) is not satisfied in relation to franking credits/imputation credits. Accordingly the franking credits/imputation credits are not part of the dividends received so as to support the proposition that the purpose of entering into the scheme was to obtain the dividends.

19. Reliance on the TLS buy-back, which also forms an important limb of the Applicants' s 177EA operation arguments, is misplaced. Where s 177EA applies, in some circumstances the Commissioner has a choice or discretion: s 177EA(5). If the relevant corporate entity is a party to the scheme, the Commissioner can debit the dividend paying company's franking account or he can deny imputation benefits for shareholders. In the TLS buy-back case, in Class Ruling 2014/90 the Commissioner said that he would exercise his s 177EA(5) discretion in such a way that would not deny imputation benefits to shareholders.

20. Having come to the view that s 177EA applied to the TLS buy-back, and having indicated that he will exercise his discretion but not in a way that denies imputation benefits for shareholders, it is apparent that the Commissioner made a determination that caused TLS franking account to be debited in the buy-back. Effectively TLS has born any implications of Part IVA applying to its scheme. That is not readily apparent on the face of the ruling. In the hearing of the present applications the Commissioner confirmed that manner in which he exercised the s 177EA(5) discretion in connection with the TLS buy-back.

21. The TLS buy-back is not, therefore, an illustration of s 177A not being applicable to the present circumstances.

22. The Applicants' contentions that their subjective intentions were to receive greater dividends, another limb of their s 177EA operation arguments, takes the wrong approach to how the requisite intentions are to be determined. They may well have had the subjective intentions as contended, and the asserted understanding of what constitutes a dividend addressed above, is not inconsistent with that view.

23. However, Part IVA proceeds on a basis that relevant intentions are to be determined objectively and by reference to prescribed factors: in the present case those set out in s 177EA(17) and (by force of s 177EA(17)(j), s 177D(b)(i) to (viii) and s 177D(2)(a) to (h) factors.

24. A finding that there was the requisite purpose of obtaining an imputation benefit by applying the process required by the statute does not necessarily mean that that was also the subjective intention of those involved in the arrangements, nor does it necessarily mean that their evidence is not honest. The present case is an illustration of that.

25. Turning then to the conditions necessary for s 177EA to be applied, five threshold conditions need to be satisfied:

• (a) there is a scheme for a disposition of membership interests in the relevant companies;
• (b) a frankable distribution has been paid, is payable or expected to be payable, to a person in respect of the membership interests;
• (c) the distribution was, or is expected to be, a franked;
• (d) absent s 177EA applying the relevant taxpayer would receive, or could reasonably be expected to receive, imputation benefits as a result of the distribution; and
• (e) the more than incidental purpose of the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme was to enable the relevant taxpayer to obtain an imputation benefit.

26. The first four of these conditions can be dealt with shortly. In respect of each of the schemes formulated by the Commissioner there was a change of ownership of shares in companies with a franked dividend paid, and absent s 177A operating imputation benefits would have been enjoyed. All of the first four conditions are satisfied.

27. What remains is to determine whether the more than incidental purpose of those who entered into or carried out the scheme was to obtain the imputation benefits. The first and second formulation of the relevant schemes above can be considered together. Because of the outcome reached in relation to those formulations of the relevant scheme, it is not necessary to consider the third formulation of the relevant scheme beyond observing that in isolation of the earlier sales of equivalent numbers of shares on the same day in a different market, merely buying a share cum-dividend seems unlikely to be a course of conduct entered into or carried out with the not incidental purpose of securing enjoyment of the imputation benefits associated with the dividend that would follow the share acquisition. The terms of s 177EA(4) support this view.

28. Having regard to the factors required to determine the more than incidental purpose of those who entered into or carried out the steps comprising the first two formulations of the relevant scheme, three features of the present arrangements are striking:

• (a) at any time the Applicants only had ownership of, and exposure to, one shareholding;
• (b) ignoring the imputation benefits the Applicants cash flow and change of wealth on each integrated transaction was negative, and having regard to those benefits the cash flow was positive; and
• (c) the integrated transactions were entered into and carried out on the same day in different markets such that the different dividend entitlements would be enjoyed.

29. Addressing the factors holistically, any objective assessment of the first two formulations of the relevant scheme must come to the conclusion that the more than incidental purpose of the Trustees was to obtain the imputation benefits the scheme offered.

30. Addressing the factors individually the same result ensues

31. The s 177EA(17)(a) factor requires examination of the extent and duration of the risks of loss, and the opportunities for profit or gain, from holding shares. The contention that the Applicants were the true economic owners of all shares entitled to all dividends and therefore the imputation benefits and that the holdings of each parcel of shares in each of the companies was for more than 45 days fails to look at the scheme holistically. At any one time and the Applicants were the owners of one parcel of shares, exposed to the risks of one parcel of shares but enjoyed two fully franked dividends. This factor supports the conclusion that there was the requisite purpose of securing imputation benefits.

32. The s 177EA(17)(b) factor calls for a comparison of the benefits that flow from receipt of franked dividends as between taxpayers and whether the taxpayer in question would enjoy a greater benefit. The Commissioner contends that that the Applicants ought be regarded as enjoying greater benefits than other taxpayers because it can be assumed that the relevant companies have non-resident shareholders. While the assumption is reasonable, in circumstances where the scheme does not involve the companies that paid the dividends, the extent of weight attached to this factor, if the only foundation for the differing enjoyment of benefits is that some shareholders are non-residents, is questionable. Given the terms of ss 204-30(7) & (8)(a), the conclusion must be reached that there was greater enjoyment of imputation benefits. The Applicants accept they would have enjoyed greater benefits than some other shareholders. The necessary conclusion is that this factor supports a conclusion that the requisite purpose of securing imputation benefits existed, but marginally at best.

33. The Applicant correctly contends that the s 177EA(17)(c) to (e) factors are not relevant. The Commissioner agrees.

34. The s 177EA(17)(f) factor looks to fees or consideration being paid calculated by reference to imputation benefits. There is no evidence of that in the present matter. The Commissioner points to the higher price paid to purchase the cum-dividend shares than the price received for the ex-dividend shares sold and contends that this fact suggests that this factor ought be regarded as suggesting the requisite purpose existed. Not that it changes the outcome, the reasons for the higher price paid for the cum-dividend shares are too speculative for the Commissioner's contention to be accepted. This factor does not suggest the requisite purpose existed.

35. The s 177EA(17)(g) factor looks to whether there are allowable deductions or capital losses in connection with the dividends payable under the scheme. These effects are not apparent. A subsequent sale of the relevant cum-dividend shares is not a part of any formulation of the relevant scheme. The Applicants made capital gains on the share sales as part of the scheme, however these gains arose because the shares had increased in value between the time they were acquired and the time they were sold in entering into or carrying out the scheme. Further, with the Superannuation Funds in pension mode, the existence of capital gains and losses would not be a factor of relevance. This factor does not suggest the requisite purpose existed.

36. The Applicant correctly contends that the s 177EA(17)(ga) and (h) factors are not relevant.

37. The s 177EA(17)(i) factor requires examination of the period for which period for which the relevant taxpayer held shares. While the Applicants' contention that the relevant shares were all held were held for more than 45 days which is the minimum required is true, at any time the Applicants only held one parcel of shares in each company but received two franked dividends. This mismatch suggests that the requisite purpose existed.

38. The s 177D(b)(i), s 177D(2)(a) factor requires examination of the manner in which the scheme was entered into or carried out. The Applicants' contentions that the transactions were carried out by a broker on the ASX which allowed the two different types of transaction and that the shares were not traded ex or cum imputation benefits does not support their case. The fact that there were coupled transactions on the same day at different prices in different markets suggests the transactions were entered into and carried out to secure imputation benefits.

39. The s 177D(b)(ii), s 177D(2)(b) factor requires examination of the form and substance of the scheme. Here the form of the scheme differed from the substance. The form suggests two independent shareholdings and two entitlements to dividends. The substance was a single shareholding and a purchase of imputation benefits. This factor suggests the requisite purpose existed. That there were changes in ownership of shares on the open market and that the transactions were carried out at arms' length does not alter this analysis. This factor supports the conclusion that there was the requisite purpose of securing imputation benefits.

40. The s 177D(b)(iii), s 177D(2)(c) factor requires examination of the time at which the scheme was entered into and the length of the period during which the scheme was carried out. The Applicants correctly observe that the scheme was carried out at a time that allowed us to receive a dividend on one parcel of shares, sell them and purchase another parcel of shares entitled to a dividend. However, that period was one day in the very limited period in which it was possible to deal in two different markets in relation to the one share. This factor suggests that the transactions were entered to exploit the differences in characteristics of the shares able to be traded in the different markets. In isolation this factor may be neutral. When coupled with the s 177D(b)(ii), (iv) and (v)/s 177D(2)(b), (d) and (e) factors, this factor supports the conclusion that there was the requisite purpose of securing imputation benefits. The fact that shares continued to be held for 45 days and this is the minimum requirement for imputation benefits to be enjoyed is not influential. The scheme complained of is the steps that took place in the dealings in the shares and the receipt of dividends as a consequence. The critical timing is the narrow window when it was possible to deal in two different markets.

41. The s 177D(b)(iv), s 177D(2)(d) factor requires examination of the effect of the Assessment Acts apart from the operation of Part IVA. This almost always points to the conclusion that the requisite purpose exists. If there is not a favourable tax outcome that has been enjoyed, it is unlikely there would be a disputed assessment and objection decision.

42. The s 177D(b)(v), s 177D(2)(e) factor requires examination of the financial effect of the scheme for the taxpayer concerned. The Applicants correctly acknowledge that the… superannuation funds benefited from the scheme by receiving additional dividends. This they did. However, as Tables 2 and 3 show, without the imputation benefits the schemes would have made the Funds worse off. Moreover, participation in the scheme can only be rationally explained on a financial basis by the enjoyment of imputation benefits. This factor supports the conclusion that there was the requisite purpose of securing imputation benefits.

43. The s 177D(b)(vi), s 177D(2)(f) factor requires examination of any changes in financial position of other parties in connection with the scheme. It is not apparent that there were any other relevantly affected parties. This factor does not support the conclusion that there was the requisite purpose of securing imputation benefits. The Commissioner contends that this factor does support the conclusion that the requisite purpose securing imputation benefits existed. He does so by pointing to the enhanced benefits enjoyed by members of the Superannuation Funds. This contention is a form of double counting the s 177D(b)(v), s 177D(2)(e) factor because the members only enjoy enhanced benefits because the Applicants as trustees do.

44. The s 177D(b)(vii) and (viii) /s 177D(2)(g) and (h) factors are not relevant in the present circumstances. As such they do not suggest that there was the requisite purpose of securing imputation benefits. The Commissioner agrees.

45. The necessary conclusion is that the more than incidental purpose of the Applicants in entering into and carrying out the transactions that comprised the scheme as formulated in the first and second formulations by the Commissioner was to obtain or enjoy the imputation benefits associated with the second dividends received from each company in each matched set of share sale and share purchase transactions.

46. That leaves for analysis the legitimacy of making the s 177EA(5)(b) determination as part of the objection decision process.

47. Section 169A(3) of the 1936 Assessment Act is in the following terms:

(3) In determining whether an assessment is correct, any determination, opinion or judgment of the Commissioner made, held or formed in connection with the consideration of an objection against the assessment shall be deemed to have been made, held or formed when the assessment was made.

48. The Commissioner can rely on this section to the effect that he can make a valid determination as part of the objection decision making process.^[17] See BHP Billiton Finance Limited v Commissioner of Taxation 2009 ATC ¶20-097 at [165]–[184] Gordon J.

DECISIONS

49. The decisions under review are affirmed.