BBlood Enterprises Pty Ltd & Anor v FC of T

Judges:
Thawley J

Court:
Federal Court of Australia

MEDIA NEUTRAL CITATION: [2022] FCA 1112

Judgment date: 19 September 2022

Thawley J

OVERVIEW

1. These proceedings concern a buy-back of shares, carried out in the 2014 income year, by a company with retained earnings (IP Co) buying back shares held in it by the trustee (IP Trustee) of a discretionary trust (IP Trust). The proceeds of the buy-back (about $10 million) paid by IP Co to IP Trustee were deemed by s 159GZZZP of the Income Tax Assessment Act 1936 (Cth) ( ITAA 1936 ) to be a dividend for tax purposes. However, the share buy-back dividend constituted corpus of the trust for trust purposes. The deemed dividend was fully franked. Although it had never before received income, the IP Trust also received income in the 2014 year of about $300,000. A newly introduced corporate beneficiary (BE Co) was made presently entitled to the trust income of $300,000. The consequence of BE Co being presently entitled to the trust income was that it was assessed on the trust's net income,

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which included the share buy-back dividend. The tax payable by BE Co in relation to the share buy-back dividend was wholly offset by the franking credits attached to the deemed dividend. The trustee was not liable to pay income tax because all of the trust income had been distributed.

2. The respondent ( Commissioner ) issued:

(a) to the IP Trustee: an assessment (or, on the applicants' submission, an amended assessment) dated 11 August 2020, taxing the IP Trustee in respect of the relevant trust income on the basis that s 100A of the ITAA 1936 deemed the beneficiary not to be presently entitled to that income;
(b) to BE Co: an amended assessment dated 15 August 2019, on the basis that s 207-150(1) of the Income Tax Assessment Act 1997 (Cth) ( ITAA 1997 ) disentitled BE Co from claiming a tax offset in respect of the franking credits because the deemed (share buy-back) dividend was made a part of a "dividend stripping operation" as defined in s 207-155 of the ITAA 1997.

3. The Commissioner relied primarily on the 11 August 2020 assessment and only alternatively on the 15 August 2019 assessment. There were four principal issues:

(1) First, whether the Commissioner was authorised to issue the assessment dated 11 August 2020 to the IP Trustee. If the Commissioner was not authorised to issue the assessment, then the second and third issues do not arise.
(2) Secondly, whether s 100A of the ITAA 1936 caused BE Co not to be presently entitled to some or all of the income of the IP Trust for the income year ended 30 June 2014.
(3) Thirdly, if s 100A applied then whether s 207-35(6) of the ITAA 1997 increased the trustee's liability to tax under s 99A of the ITAA 1936 and, if so, by how much.
(4) Fourthly, whether that part of the share buy-back purchase price paid to the IP Trustee that was deemed to be a dividend was a distribution "made as part of a dividend stripping operation" as defined in s 207-155 of the ITAA 1997.

4. The applicants contended and bore the onus of establishing that:

(1) The assessment dated 11 August 2020 was excessive because it was an amended assessment issued outside of the limited amendment period and the Commissioner did not otherwise have power to issue it.
(2) If the Commissioner was authorised to issue the 11 August 2020 assessment, s 100A of the ITAA 1936 did not apply to deem BE Co not to be presently entitled to any of the trust income.
(3) If s 100A of the ITAA 1936 did apply, it did not cause the IP Trustee to be taxable to the extent to which the Commissioner contended.
(4) In relation to the Commissioner's alternative reliance on the assessment issued to BE Co on the basis of s 207-150 of the ITAA 1997, the deemed dividend was not part of a "dividend stripping operation" within the meaning of s 207-155.

5. When the buy-back occurred, relevant participants were clients of the accounting company, Fordham Business Advisers Pty Ltd. A further six private groups that were then clients of Fordham implemented what were said to be similar arrangements in the 2014 year. Proceedings relating to five of those groups have been stayed pending the outcome of these proceedings: VID 109-111, VID113 and VID 115 of 2020 and VID 246 and 248-251 of 2021. Proceedings relating to the sixth group, which were to be heard together with these proceedings, settled shortly before the hearing commenced: VID 122 of 2020 and VID 245 of 2021.

6. For the reasons which follow, the Court has concluded:

(1) The assessment dated 11 August 2020 issued to the IP Trustee was an original assessment. It was not excessive on the contended basis that it was an amended assessment issued outside of the limited amendment period.
(2) Section 100A of the ITAA 1936 applied to deem BE Co not to be presently entitled to the trust income.
(3) The IP Trustee was taxable to the extent to which the Commissioner contends.
(4) If s 100A of the ITAA 1936 did not apply, s 207-150 of the ITAA 1997 did apply, because the deemed dividend was

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part of a "dividend stripping operation" as defined by s 207-155.

7. The four issues are dealt with in turn after setting out the relevant facts.

FACTS

General background

8. Mr Brian Blood runs a car dealership known as the "Blood Motor Group" with two business partners: his brother, Mr Sean Blood, and Mr Darron Muir. Mr Brian Blood is married to Mrs Fiona Blood. The Blood Motor Group is owned by entities that are part of Mr Blood's family group (the "Brian Blood group") or the family groups of his business partners. The Brian Blood group consists of companies that are wholly owned by Mr Blood, Mrs Blood, another member of his family group, or a combination thereof and trusts of which Mr Blood, Mrs Blood or another member of Mr Blood's family is a discretionary object.

9. Mrs Blood was the sole director of Illuka Park Pty Ltd ( IP Co ) and B&F Investments Pty Ltd ( B&F Investments ). Mr Blood was the secretary of each. Mrs Blood was also both the sole director and secretary of BBlood Enterprises Pty Ltd ( BE Co ), after it was incorporated on 25 March 2014. Mrs Blood left the decisions in relation to managing the family group to Mr Blood. She signed documents relating to the buy-back transaction described below without asking any questions about them.

10. Mr Blood started taking advice from Fordham in 1999. He has always relied heavily on Fordham's advice. Mr Blood dealt primarily with Mr David Buckley. Mr Blood followed Mr Buckley's advice.

11. IP Co was a "General Beneficiary" of the B & F Investments Trust ( B&F Investments Trust ). Before the share buy-back on 25 June 2014, IP Co was owned as to 99% (99 shares) by IP Trustee and as to 1% (1 share) by Mrs Blood.

12. The B&F Investments Trust owned 40% of the shares in one of the head companies of the four tax consolidated groups that comprised the Blood Motor Group. It received distributions from other trusts that owned shares in the other head companies of the tax consolidated groups that comprised the Blood Motor Group.

13. In the period leading up to the 2014 year, the B&F Investments Trust received significant distributions, sourced from profits of the Blood Motor Group. In turn, the B&F Investments Trust distributed most of its income to IP Co. Distributions from the B&F Investments Trust largely accounted for IP Co's retained earnings, which were $7,421,721.92 as at 30 June 2013.

14. The Illuka Park Trust ( IP Trust ) was a discretionary trust established by a deed of settlement dated 15 February 2010 ( IP Trust Deed ). Clause 4(a) of the IP Trust Deed conferred on the trustee, in respect of each accounting period, the discretion to pay, apply or set aside the whole or any part of the trust's income for such charitable purposes and/or for the benefit of all or any one or more of the General Beneficiaries, in such proportions and in such manner as the trustee deemed fit. Until the IP Trust Deed was amended on 13 June 2014, "income" was defined in cl 1(a) as follows:

" income " means the net income of the Trust Fund for an Accounting Period calculated in accordance with section 95(1) of the 1936 Act as amended or substituted from time to time and the calculation of income shall include, to the extent allowable, any taxation credits available to the Trustee including but not limited to:

(i) dividend imputation credits;

(ii) foreign tax credits;

(iii) prescribed payment credits; and

(iv) input tax credits,

and " income " on a day other than the last day of an Accounting Period shall be calculated as if that day was the last day of the Accounting Period provided however that the Trustee may determine for any Accounting Period or any other period that the income shall be otherwise determined;

15. Mr and Mrs Blood were "Primary Beneficiaries" of the IP Trust. The "General Beneficiaries" included Mr and Mrs Blood, as Primary Beneficiaries, and any corporation of which either of them was a member or director.

16. B&F Investments was the trustee of the IP Trust. In that capacity, B&F Investments is referred to as IP Trustee . The IP Trustee could, at any time and from time to time, by deed, and with the written consent of the "Appointor",

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vary the IP Trust Deed. Mr and Mrs Blood were appointors of the IP Trust, along with Mr Buckley.

17. BE Co was incorporated on 25 March 2014. Upon its incorporation, BE Co automatically became a "General Beneficiary" of the IP Trust.

The Illuka Park steps

18. In the second half of 2013 (but before 11 October 2013), Mr Buckley spoke to Mr Blood about a potential transaction involving a share buy-back.

19. The Commissioner identified the following six steps as comprising the " Illuka Park steps ". They were implemented over approximately a three-month period:

20. First, the B&F Investments Trust distributed its income for the period ended 31 March 2014 by a resolution which made:

• IP Trust presently entitled to $123,237.66 of the B&F Investment Trust's income; and
• IP Co presently entitled to the remaining $2,999,496.10 of the B&F Investment Trust's income (which was left outstanding as an unpaid present entitlement ( UPE ) owing to IP Co).

21. As regards the distribution to the IP Trust, this was the first time the IP Trust had received income. Until 31 March 2014, the trust property of the IP Trust was limited to $10 of cash on hand in respect of the initial settlement sum, and the shares in IP Co. The 99 shares held in IP Co were recognised with a carrying value of $99, which was offset by a loan of $99 owing to Mr Blood.

22. As regards the distribution to IP Co, Mr Buckley agreed in cross-examination that this was done at a time when the Illuka Park steps as a whole were contemplated and in order to extract a greater amount of retained earnings using the buy-back strategy: T106.

23. Secondly, the IP Trust received further income by way of franked dividends from IP Co, on 31 March 2014 ($121,739) and 30 April 2014 ($59,400). Accordingly, together with the distribution of $123,238 from the B&F Investments Trust, the IP Trust received income of $304,377.

24. Thirdly, the IP Trust Deed was varied on 13 June 2014 to change the definition of "income". The Deed of Variation amended the IP Trust Deed so as to delete the existing definition of "income" and replace it with the following definition (cl 2.1 of the Deed of Variation):

" income " of the Trust Fund in respect of an Accounting Period shall mean:

(i) the income of the Trust Fund determined by the Trustee according to ordinary concepts; or

(ii) such other definition determined by the Trustee in writing on or before the end of the relevant Accounting Period,

less those outgoings, expenses, charges, provisions and payments that the Trustee determines in its absolute discretion, is properly referable to the derivation of that income having regard to the provisions of the Deed and the nature of the income,

25. Fourthly, on 25 June 2014, IP Co bought back all of the shares in it held by IP Trust. The buy-back was effected as follows:

(1) by an offer to IP Trustee and notifications to shareholders dated 10 June 2014, signed by Mrs Blood as secretary of IP Co. Mr Andrew Wright of Maddocks lodged the required notice with the Australian Securities & Investment Commission ( ASIC );
(2) by circulating resolution made on 25 June 2014 approving the buy-back, signed by Mrs Blood as sole director of IP Trustee and in her personal capacity as the holder of 1 share in IP Co;
(3) by a share buy-back agreement ( Share Buy-Back Agreement ) dated 25 June 2014, signed by Mrs Blood as sole director and secretary of both IP Co and IP Trustee;
(4) by payment by IP Co of the purchase price for the shares in accordance with cl 4.2 of the Share Buy-Back Agreement, namely by crediting IP Trust's at-call loan account (the Buy-Back Loan ).

26. IP Co debited $99 of the purchase price to share capital and the remaining $10,189,770 to retained earnings. This gave rise to a deemed

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dividend (the Share Buy-Back Dividend ) for income tax purposes pursuant to s 159GZZZP of the ITAA 1936.

27. Fifthly, IP Co allocated a franking credit of $4,367,002 (the Franking Credit ) to the Share Buy-Back Dividend.

28. Sixthly, by resolution dated 30 June 2014, IP Trustee distributed to BE Co all of IP Trust's "income" for the year ended 30 June 2014.

IP Trust's income distributed to BE Co

29. By reason of the matter referred to at [24] above, the amount of IP Trust's income fell to be determined in accordance with ordinary concepts. It was not in dispute that the Share Buy-Back Dividend was a capital receipt according to ordinary concepts. The distribution to BE Co of all of IP Trust's income therefore did not include the Share Buy-Back Dividend. Determined in accordance with the resolution of 30 June 2014, IP Trust's income for the 2014 year was $304,376.97, consisting of: the distribution made by the B&F Investments Trust on 31 March 2014 ($123,237.66); the dividend paid by IP Co on 31 March 2014 ($121,739); and the dividend paid by IP Co on 30 April 2014 ($59,400). The distribution to BE Co of IP Trust's income (totalling $304,376.97) was not paid and therefore remained outstanding as a UPE as at 30 June 2014.

IP Co's retained earnings

30. Between 30 June 2013 (when they were $7,421,721.92) and 30 June 2014, IP Co's retained earnings increased to over $10 million by:

• the distribution from the B&F Investments Trust on 31 March 2014, increasing IP Co's retained earnings by $2,999,496.10;
• interest receipts ($194,049.16), net of expenses ($157,223.67), increasing IP Co's retained earnings by a further $36,825.49;

and reduced by $10,445,175 to $12,868.51:

• the 31 March 2014 dividend ($122,969.00), 30 April 2014 dividend ($60,000.00), and the Share Buy-Back Dividend ($10,189,671), reducing IP Co's retained earnings by $10,372,640; and
• a further dividend on 29 June 2014 ($72,535), declared to IP Co's then sole shareholder, Mrs Blood.

Tax consequences of the steps taken in connection with the share buy-back

31. The result of the steps taken in connection with the share buy-back was that the proceeds of the buy-back were deemed by s 159GZZZP of the ITAA 1936 to be a dividend for tax purposes but for non-tax purposes were corpus of the IP Trust. The IP Trust had income ($304,376.97) to which a beneficiary (BE Co) was made presently entitled in full. Because a beneficiary was made presently entitled the beneficiary was assessed on the trust's "net income" (which included the Share Buy-Back Dividend) in accordance with s 97 in Div 6 of the ITAA 1936.

32. The Commissioner referred to the steps taken as giving rise, absent the operation of anti-avoidance provisions, to the following " tax result ":

(a) IP Trust received "ordinary" income and capital (the Share Buy-Back Dividend);
(b) IP Trust distributed its ordinary income to BE Co;
(c) BE Co received none of the benefit of the Share Buy-Back Dividend. Despite this, by the operation of s 97 of the ITAA 1936 and Subdivision 207-B of the ITAA 1997, BE Co became liable to tax in respect of the whole of the net income of IP Trust, comprising both the ordinary income and the Share Buy-Back Dividend. However, it paid no additional tax as a result, because the Share Buy-Back Dividend was fully franked. Accordingly, the tax payable on the Share Buy-Back Dividend was wholly offset by the Franking Credit;
(d) IP Trust retained the amount of the Share Buy-Back Dividend as corpus of the trust. However, it was not liable to pay tax under s 99A of the ITAA 1936 in respect of the Share Buy-Back Dividend, because it had distributed all of its (trust) income;
(e) IP Co's (Buyback Co) retained earnings were thus paid out and retained in IP Trust without payment by any person of any additional tax.

33. At various places in his submissions, the Commissioner stated that "the tax result relied on creating a mismatch between (trust) income

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and (tax) net income". This submission is correct, although it should be recognised that it is the ordinary operation of the law in this area that there may not be identity between the entity that bears the tax on a trust's net income and the entity that receives the funds to which that amount relates. That is an ordinary result of the scheme of Div 6 - see:
Zeta Force Pty Ltd v Commissioner of Taxation (1998) 84 FCR 70 at 78D;
Federal Commissioner of Taxation v Bamford [2010] HCA 10; 240 CLR 481 at [43]-[46].

ISSUE 1: THE 11 AUGUST 2020 ASSESSMENT

34. The assessment the subject of the s 100A proceedings was issued to the IP Trustee on 11 August 2020. The applicants contended that this assessment was in fact an amended assessment that was issued outside the period permitted by s 170(1) of the ITAA 1936 and that the assessment was excessive for that reason.

35. This submission was based on the contention that the Commissioner had already made an assessment of the trustee's liability to tax in May 2015 and "gave the trustee notice of the assessment by placing a document on the ATO portal". For this submission, the applicants relied on webpages depicted in screenshots made by Mr Cahir of Fordham almost five years later on 15 April 2020. These screenshots were said to reveal that an earlier (original) assessment had been made.

36. It was common ground that, if there was an assessment made in May 2015 it was an assessment made under s 169 of the ITAA 1936, when the IP Trustee lodged its trust tax return - see:
Whitby Land Company Pty Ltd (Trustee) v Deputy Commissioner of Taxation [2017] FCA 28, 104 ATR 784 at [81]-[83].

37. Section 169 of the ITAA 1936 provides:

169 Assessments on all persons liable to tax

Where under this Act any person is liable to pay tax (including a nil liability), the Commissioner may make an assessment of the amount of such tax (or an assessment that no tax is payable).

38. The Commissioner contended that:

(1) the screenshots did not establish the making of an earlier assessment; and
(2) even if they did, the 11 August 2020 Notice gave effect to s 100A and was therefore authorised by s 170(10) of the ITAA 1936.

39. It is necessary first to describe when and how the screenshots were made and what they contain. On 15 April 2020, Mr Cahir accessed the Australian Tax Office ( ATO ) online portal and selected the entry for "The Trustee of the Illuka Park Trust". He then:

• clicked on the 'tab' labelled "Lodgments";
• clicked on the 'sub-tab' labelled "History"
• clicked on the 'drop-down arrow' next to the entry "2013-14 Trust"; and
• took a screenshot.

40. This screenshot ( the First Screenshot ) included:

41. As can be seen, this screenshot contains the word "Assessment". It does not refer to "tax payable".

42. Mr Cahir next clicked on the "view details" link contained in the screenshot depicted above. This opened a new webpage which contained information which was, it is to

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be inferred, taken and reproduced from the relevant tax return which had been lodged. It does not contain the word "assessment". The first part of the screenshot ( the Second Screenshot ) included:

43. The Second Screenshot continued and provided a significant amount of other information not ordinarily found on a notice of assessment. One of the pages of the Second Screenshot contained a note which stated:

Due to internal processes some originally provided detail may have been summarised or changed. Refer to the original return to see the full details. The Commissioner rounds down certain small amounts that may be owed or may be refunded on the account. There may be transactions on the account where this has occurred.

44. The applicants emphasised, in the part of the screenshot reproduced above, the words "ATO initiated" and "Is any tax payable by the trustee … N". The applicants submitted that "the proper inference available from the face of each document is that it is exactly what it describes itself as: an 'Assessment' made on the date indicated". The applicants also relied on the fact that the Commissioner later, namely on 20 December 2018, wrote to the IP trustee's accountants requesting an extension of time to amend assessments. This was submitted to be consistent with documents on the

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ATO portal being, or at least the Commissioner believing that they were, notices of assessment.

45. The Commissioner relied upon an equivalent screenshot to the First Screenshot, made by Mr Cahir on 10 August 2021, almost a year after the 11 August 2020 notice of assessment was issued. By this time, the equivalent webpage of the ATO portal referred to an "Assessment issue date" of 11 August 2021 and contained a link to a "Notice of assessment".

46. The Commissioner noted that s 169 of the ITAA 1936 provides a discretion whether to make an assessment that no tax is payable: "[w]here under this Act any person is liable to pay tax (including a nil liability), the Commissioner may make an assessment of the amount of such tax (or an assessment that no tax is payable)". This language is to be contrasted with s 166, which contemplates that the Commissioner "must" make an assessment. The Commissioner further noted that, in May 2015, his practice was (as it remains) not to issue a nil assessment under s 169 to a trustee to reflect the position as returned in the relevant trust tax return: Practice Statement Law Administration PS LA 2015/2 Trustee assessments (issued on 19 February 2015), at point 1.

47. An "assessment" is not made unless and until a notice of assessment is served on the taxpayer. In
Batagol v Commissioner of Taxation [1963] HCA 51; 109 CLR 243 at 251-252, Kitto J (with whom Menzies J agreed) stated (footnotes omitted):

The word "assessment" is defined in s. 6 to mean, unless the contrary intention appears, the ascertainment of the amount of taxable income and of the tax payable thereon. There is nothing in s. 170 to show the contrary intention. But the definition is not sufficient by itself to answer the question before us, because "ascertainment" is a word the force of which depends upon the context. It is here used in an Act under which the service of a notice of assessment is the levying of the tax. Assessment in the sense of mere calculation produces no legal effect. No step that the Commissioner may take, even to the point of satisfying himself of the amount of the taxable income and of the tax thereon, has under the Act any legal significance. But if the Commissioner, having gone through the process of calculation, serves on the taxpayer a notice that he has assessed the taxable income and the tax at specified amounts, the tax becomes by force of the Act due and payable on the date specified in the notice or (if no date is specified) on the thirtieth day after the service of the notice: s. 204. Thus, and thus only, there is brought about an "ascertainment" of the taxable income and of the tax, in the sense that thereafter it is possible to say what could not have been said before: that amounts have been fixed so that they are to be taken for all purposes (except those of appeal: see s 177) to be the result flowing from the application of the Act in the particular case. The respective amounts of the taxable income and the tax have been rendered certain. The word "ascertainment" being understood in this sense, the definition of "assessment" means, in my opinion, the completion of the process by which the provisions of the Act relating to liability to tax are given concrete application in a particular case with the consequence that a specified amount of money will become due and payable as the proper tax in that case. The idea coincides with that which Isaacs J expressed in Federal Commissioner of Taxation v Hoffnung & Co Ltd in relation to war-time profits tax when he said: "If an assessment definitive in character is made, it assumes that, so far as can there be seen, a fixed and certain sum is definitely due, neither more nor less. In short, it ascertains a precise indebtedness of the taxpayer to the Crown". On this construction of the Act nothing done in the Commissioner's office can amount to more than steps which will form part of an assessment if, but only if, they lead to and are followed by the service of a notice of assessment.

See also at 255-256 (Owen J; Menzies J agreeing).

48. The reasoning of Kitto J in Batagol was endorsed by Mason and Wilson JJ in
FJ Bloeman Pty Ltd v Federal Commissioner of Taxation (1981) 147 CLR 360 at 371, and in
Deputy Commissioner of Taxation v Richard Walter Pty Ltd (1995) 183 CLR 168 by Mason CJ at 182; by Brennan J at 191-2; and by McHugh J at 236. By way of example, Mason CJ observed at 182:

It is only after the Commissioner, having gone through the process of calculation, serves a notice of assessment on the taxpayer that there is brought about an ascertainment of the taxable income and the tax payable for the purposes of s 166 so that, to use the words of Kitto J in Batagol v FCT, "they are to be taken for all purposes (except those of appeal: see s 177) to be the result flowing from the application of the Act in the particular case".

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49. In summary, notwithstanding the language of s 174 (set out in full at [52] below) which requires a notice to be issued "after any assessment is made", there cannot be an assessment within the meaning of the definition of "assessment" in s 6(1) or within the meaning of s 170 without service of the notice of assessment fixing the taxpayer's taxable income and the tax payable thereon. The word "assessment" in s 174 is used in a different sense to its meaning in s 6(1).

50. The Commissioner submitted that the notice of assessment must bring to the attention of the person on whom it is served that the assessment to which it relates is an assessment of that person to tax:
Federal Commissioner of Taxation v Prestige Motors Pty Ltd [1994] HCA 39; 181 CLR 1 at 14 (Mason CJ and Brennan, Deane, Gaudron and McHugh JJ). That submission should be accepted if, by it, what the Commissioner means is that the document served is sufficient to bring to the attention of the person on whom it is served the fact that the assessment to which it relates is an assessment of that person to tax. If the submission was intended to go further and suggest that the person on whom the assessment is served must subjectively realise that an assessment to tax has been made, then the submission cannot be accepted. A notice of assessment can be validly served on a person who cannot or does not understand the notice of assessment or who is ignorant of the fact of service or who evades service, for example, by refusing to check mail or email.

51. The applicants submitted that "[p]lacing the information in a user-accessible form on the ATO portal was the giving of notice in accordance with s 174 [of the ITAA 1936]" and that "[i]f necessary, s 9(1) of the Electronic Transactions Act 1999 [(Cth ( ET Act )] deems service to have occurred".

52. Section 174 of the ITAA 1936 relevantly provided:

174 Notice of assessment

(1) As soon as conveniently may be after any assessment is made, the Commissioner shall serve notice thereof in writing by post or otherwise upon the person liable to pay the tax.

…

(3) In subsection (1), tax includes additional tax under Part VII.

53. In May 2015, the Taxation Administration Regulations 1976 (Cth) provided for certain methods of service. New regulations are now applicable. Under the 1976 Regulations, the Commissioner was authorised, amongst other things, to serve a document on a person for the purposes of the taxation law by: "if the person has given a preferred address for service that is an electronic address - delivering an electronic copy of the document to that address": reg 12F(1)(c). This regulation is apt to permit, for example, service of a notice of assessment by the attaching of a portable document format ( PDF ) to an email. Making something available for access by electronic means, should a person choose to access that thing by those means, is not service, either within the ordinary meaning of the term or under the Taxation Administration Regulations 1976 (Cth).

54. Section 9(1) of the ET Act is concerned with the situation where "a person is required to give information in writing". The section provides circumstances in which the requirement is taken to have been met, namely "if the person gives the information by means of an electronic communication" in the circumstances described in subparagraphs (a) to (d). The applicants relied on subparagraphs (a) and (d): T221.34:

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Division 2-Requirements under laws of the Commonwealth

9 Writing

(1) If, under a law of the Commonwealth, a person is required to give information in writing, that requirement is taken to have been met if the person gives the information by means of an electronic communication, where:

(a) in all cases-at the time the information was given, it was reasonable to expect that the information would be readily accessible so as to be useable for subsequent reference; and

…

(d) if the information is required to be given to a person who is neither a Commonwealth entity nor a person acting on behalf of a Commonwealth entity-the person to whom the information is required to be given consents to the information being given by way of electronic communication.

55. The following definitions, contained in s 5(1), are relevant:

consent includes consent that can reasonably be inferred from the conduct of the person concerned.

…

electronic communication means:

(a) a communication of information in the form of data, text or images by means of guided and/or unguided electromagnetic energy; or

(b) a communication of information in the form of speech by means of guided and/or unguided electromagnetic energy, where the speech is processed at its destination by an automated voice recognition system.

…

information means information in the form of data, text, images or speech.

…

transaction includes:

(a) any transaction in the nature of a contract, agreement or other arrangement; and

(b) any statement, declaration, demand, notice or request, including an offer and the acceptance of an offer, that the parties are required to make or choose to make in connection with the formation or performance of a contract, agreement or other arrangement; and

(c) any transaction of a non-commercial nature.

56. Section 9(1) has no relevant application. The Commissioner did not "give" information to the applicants by "electronic communication". The Commissioner made information available and it was accessed by the applicants' adviser. This is not the giving information within the meaning of s 9(1). Section 9(1) might apply to the sending by the Commissioner of an email with a PDF of a notice of assessment attached. However, that is not this case.

57. This conclusion is fortified by the terms of s 9(1)(a) which focuses on what was reasonable to expect at "the time the information was given". The information was not "given". It was made available for access and the first time it was apparently accessed was about 5 years after it was made available.

58. As to s 9(1)(d), I do not infer from the circumstances that the taxpayers consented to the notice of assessment being given by way of electronic communication. The taxpayers adduced no evidence of any such consent.

59. It is unnecessary in these circumstances to consider the Commissioner's submission that, if s 9(1) of the ET Act did apply, then - in any event - by reason of s 14 of the ET Act the "time of dispatch" would have been 15 April 2020 when Mr Cahir accessed the information. If this submission were correct, then the assessment would not have been made until 15 April 2020, because an assessment is not made until served: Batagol. The consequence would then be that the assessment made on 11 August 2020 was made within the time allowed for amending an original assessment.

60. The webpages were not "served" (s 174 of the ITAA 1936) on the applicants, nor "given" to them within the meaning of s 9(1)

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of the ET Act. An assessment was not made by the uploading of information on the ATO portal. Nor do the screenshots evidence that an assessment was made.

61. It is strictly unnecessary to deal with the Commissioner's alternative contention that, even if there was an original assessment in May 2015, nevertheless item 17 of s 170(10) of the ITAA 1936 authorised the amendment of that original assessment "at any time". Section 170(10) relevantly provided:

170 Amendment of assessments

(10) Nothing in this section prevents the amendment, at any time, of an assessment for the purpose of giving effect to any of the provisions of this Act set out in this table.

Item Provision Brief description

…

17 Section 100A Present entitlement arising from reimbursement agreement

…

62. A literal reading of s 170(10) suggests that an amendment to give effect to s 100A can be made "at any time". However, a relevantly identically worded chapeau (s 170(10AA)) was construed by the Full Court in
Metlife Insurance Ltd v Federal Commissioner of Taxation [2008] FCAFC 167; 170 FCR 584 at [29] as only being intended to allow for amendment "to address new facts after the original assessment". Section 170(10AA) relevantly provided:

170(10AA) Nothing in this section prevents the amendment, at any time, of an assessment for the purpose of giving effect to any of the provisions of the Income Tax Assessment Act 1997 set out in this table.

Item Provision Brief description

…

30 Subsection 104-10(3) or (6)
Subsection 104-25(2)
Subsection 104-45(2)
Subsection 104-90(2)
Subsection 104-110(2)
Subsection 104-205(2)
Subsection 104-225(5)
Subsection 104-230(5) The time of a CGT event is decided by there being a contract entered into

…

63. The underlying circumstances in Metlife concerned s 104-10 of the ITAA 1997 which deals with CGT event A1, namely disposal of a CGT asset. Section 104-10(3) provides that the time of CGT event A1 is the time at which "you enter into the contract for the disposal". The issue which the operation of this provision gives rise to is that it is not until a contract settles that there is actually a disposal, but if the contract does settle then the time of the CGT event is not the time of settlement but the time the contract was entered into. A simple example of the difficulty can be illustrated by assuming a contract entered into in 2010, which settles in 2016. In 2010, there was no CGT event because there was no disposal of the asset; there was only an agreement to dispose of an asset in the future. The actual disposal occurs in 2016. On settlement, there is a disposal of a CGT asset and CGT event A1 occurs. By reason of s 104-10(3), CGT event A1 is deemed to have occurred in 2010 when the contract was entered into. Absent s 170(10AA) of the ITAA 1936, an amendment by the Commissioner in 2016 in relation to the 2010 year would be outside the permissible amendment period.

64. The Full Court considered that the answer to the dispute between the parties in Metlife turned on the phrase "for the purposes

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of giving effect to": at [18]. The Full Court stated:

[21] The timing of the facts of this case is significant, particularly the fact that at the time the original assessment was made (namely 16 July 2001), that assessment had already taken into account the operation of the provision in s 104-10(3). That is, any work which s 104-10(3) had to do in 'backdating' the sale to the time of entry into the contract had been performed by 16 July 2001. To now seek to amend the assessment so as to include as income the policy proceeds would be doing more than giving effect to the operation of s 104-10(3)…

[23] As pointed out by the taxpayer, the mischief to be corrected in respect of item 30 (and the other items listed in the table to s 170(10AA)), is that where a subsequent event 'retrospectively' alters the taxable income of an earlier year, for example by deeming a CGT event to have occurred or a rollover not to have occurred in a past year, the Commissioner may be prevented by the ordinary scheme of s 170 from amending the assessment to give effect to the retrospective operation of the listed sections…

[25] In our view, the provisions set out in the table to s 170(10AA) reinforce our interpretation of the proper construction of s 170(10AA). In each of the examples, power is given to the Commissioner to amend at any time an original assessment where a new fact occurs after that assessment and where certain provisions of the tax legislation would be frustrated if the Commissioner were not able to take the new facts into account by so amending the original assessment…

[27] …Further, it misconceives the nature and extent of the power afforded by s 170(10AA). The words 'for the purpose of giving effect to' were, in our view, chosen deliberately to distinguish between a provision which would give indefinite power to amend an assessment where the entering into, and settling of, a contract for the disposal of a CGT asset occurred at different times, and a provision which was necessary in order simply to effect a 'backdating' provision which would otherwise be entirely frustrated. If Parliament intended to create a provision which did the former, it could quite easily have done so. It would not, in our view, have used the term 'for the purpose of giving effect' to, but could have drafted laws which gave indefinite power to amend assessments which 'concerned' or 'related to' or 'included' the assessments set out in the table to s 170(10AA). 'Giving effect to' a provision cannot mean imbuing that provision with more power that it otherwise would have.

[28] In this case, but for s 170(10AA), s 104-10(3) would be entirely impotent in situations where the settlement of a contract to dispose of a CGT asset occurred more than four years after the making of an assessment - with the potential result that the Commissioner could never make a CGT assessment where a settlement took place more than four years after the tax year in which the original agreement was made. In those circumstances, it is entirely understandable that the legislature chose to enact s 170(10AA), and natural that the words 'for the purpose of giving effect to' were used. There are provisions in the tax legislation which allow for general powers of amendment where there has been an error or oversight; s 170(10AA) is not one of them. It is of some import that the power to amend under s 170(10AA) may be exercised 'at any time'. That power may be contrasted with general powers to amend in, for example, cases of oversight by the Commissioner, where there is usually a time limit of four years.

[29] In our view, s 170(10AA) was not designed to allow for oversight by the Commissioner, but was designed to address new facts after the original assessment, and which could occur at any time, enlivening the operation of s 104-10(3). In situations where the settlement occurs before the making of the assessment, s 170(10AA) will generally have no work to do; this is because s 104-10(3) will already have been taken into account by the Commissioner in his assessment. In other words, where an

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assessment is made at a time when all relevant events have occurred, no mischief arises and no amendment under s 170(10AA) is needed to 'give effect to' the retrospective consequences of the subsequent event.

[30] As we have set out earlier, the Commissioner contended that the power to amend under s 170(10AA) 'at any time' is not limited to situations where an assessment is made between the time of the making of a contract of sale and the completion of that sale. We are unable to agree. For reasons we have already discussed, we consider that the purpose of s 170(10AA) was very much to correct any assessment which does not give effect to, in this case, the date deeming provision in s 104-10(3).

65. Section 170(10) was introduced in 1942 by section 30 of the Income Tax Assessment Act 1942 (Cth). It originally provided:

(10) Nothing in this section shall prevent the amendment, at any time, of an assessment for the purpose of allowing the deduction provided in sub-section (1a) of section seventy-two of this Act.

66. Section 170(10) has since been amended on a number of occasions.

67. Section 170(10AA) was introduced in 1997 by s 247 of sch 1 to the Income Tax (Consequential Amendments) Act 1977 (Cth). Section 170(10AA) adopted the same language as already existed in s 170(10). In enacting s 170(10), the legislature was obviously not cognisant of the construction which would later be given by the Full Court in Metlife to the same words when used in s 170(10AA).

68. The Full Court in Metlife did not apparently consider s 170(10). The reasoning of the Full Court in Metlife is, in substantial respects, not readily translatable to s 170(10) read with the items in the table to that provision. For example, a number of the items in the table to s 170(10), including s 100A, are appropriately characterised as anti-avoidance provisions and do not operate by a statutory "backdating" of a kind referred to in Metlife at [27].

69. In circumstances where the issue does not strictly arise, it is preferable not to express a concluded view about the correct construction of s 170(10). It is sufficient to note that it does not necessarily or obviously follow from the decision and reasoning in Metlife that the opening words of s 170(10) are properly construed in the same way that the opening words of s 170(10AA) were construed by the Full Court in Metlife.

ISSUE 2: SECTION 100A

70. The applicants contended that, if the Commissioner was authorised to issue the 11 August 2020 assessment, that assessment was in any event excessive because s 100A of the ITAA 1936 did not apply to deem BE Co not to be presently entitled to any of the trust income.

The legislation

71. Section 100A(1) of the ITAA 1936 provides:

(1) Where:
- (a) apart from this section, a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate; and
- (b) the present entitlement of the beneficiary to that share or to a part of that share of the income of the trust estate (which share or part, as the case may be, is in this subsection referred to as the relevant trust income) arose out of a reimbursement agreement or arose by reason of any act, transaction or circumstance that occurred in connection with, or as a result of, a reimbursement agreement;

the beneficiary shall, for the purposes of this Act, be deemed not to be, and never to have been, presently entitled to the relevant trust income.

72. The term "reimbursement agreement" is defined in s 100A(7), which provides:

(7) Subject to subsection (8), a reference in this section, in relation to a beneficiary of a trust estate, to a reimbursement agreement shall be read as a reference to an agreement, whether entered into before or after the commencement of this section, that provides for the payment of money or the transfer of property to, or the provision of services or other benefits for, a person or persons other

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than the beneficiary or the beneficiary and another person or other persons.

73. The word "agreement" is defined in s 100A(13). It defines the concept of an "agreement" broadly, but excludes agreements "entered into in the course of ordinary family or commercial dealing". It provides:

(13) In this section:

agreement means any agreement, arrangement or understanding, whether formal or informal, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings, but does not include an agreement, arrangement or understanding entered into in the course of ordinary family or commercial dealing

…

74. Section 100A(8) removes certain types of agreements from what might otherwise fall within the phrase "an agreement" in s 100A(7). It provides:

(8) A reference in subsection (7) to an agreement shall be read as not including a reference to an agreement that was not entered into for the purpose, or for purposes that included the purpose, of securing that a person who, if the agreement had not been entered into, would have been liable to pay income tax in respect of a year of income would not be liable to pay income tax in respect of that year of income or would be liable to pay less income tax in respect of that year of income than that person would have been liable to pay if the agreement had not been entered into.

75. Section 100A(9) provides that, for the purposes of s 100A(8), an agreement shall be taken to have been entered into for a particular purpose if any of the parties to the agreement entered into the agreement for that purpose. It provides:

(9) For the purposes of subsection (8), an agreement shall be taken to have been entered into for a particular purpose, or for purposes that included a particular purpose, if any of the parties to the agreement entered into the agreement for that purpose, or for purposes that included that purpose, as the case may be.

The issues

76. The issues raised by s 100A in its potential application to the present case include:

(1) Issue 2(1): whether there was an agreement, arrangement or understanding and, if so, whether it included the "initiation of" and "planning for" the Illuka Park steps as opposed to the agreement to implement, and implementation, of the transaction;
(2) Issue 2(2): whether the agreement, arrangement or understanding was entered into in the course of ordinary family or commercial dealing;
(3) Issue 2(3): whether a "reimbursement agreement" for the purposes of s 100A requires that the "payment" referred to in s 100A(7) be, in substance, a reimbursement for the relevant beneficiary being made presently entitled to the income of the trust;
(4) Issue 2(4): whether, in the terms of s 100A(8) and (9), any party to the "agreement" entered into the agreement for the purpose, or for purposes that included the purpose, of securing that a person who, if the agreement had not been entered into, would have been liable to pay income tax in respect of a year of income would not be liable to pay income tax in respect of that year of income or would be liable to pay less income tax in respect of that year of income than that person would have been liable to pay if the agreement had not been entered into;
(5) Issue 2(5): whether, in the terms of s 100A(1)(b), any or all of BE Co's present entitlement to income of the IP Trust arose out of the "reimbursement agreement" (if there was one) or arose by reason of any act transaction or circumstance that occurred in connection with, or as a result of the reimbursement agreement.

Issue 2(1): The agreement, arrangement or understanding

The agreement

77. As noted earlier, s 100A(13) defines "agreement" in the following way:

agreement means any agreement, arrangement or understanding, whether formal or informal, whether express or implied and whether or not enforceable, or

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intended to be enforceable, by legal proceedings, but does not include an agreement, arrangement or understanding entered into in the course of ordinary family or commercial dealing.

78. The Illuka Park steps have been described at [19] to [28] above. Although he had relied on it in his appeal statement, the Commissioner did not ultimately rely on the incorporation of BE Co as one of the Illuka Park steps or as part of the "agreement" for the purposes of s 100A.

79. The applicants accepted that there was an "agreement" within the meaning of s 100A(13) that the Illuka Park steps would be undertaken: T11. That concession was properly made. There was an agreement to enter into the Illuka Park steps and an understanding that they would be entered into. Those steps were then implemented. The applicants did not accept that the steps were "causally related to each other" in the sense that it is possible to have an agreement that a number of things occur without any of the steps necessarily being dependent on any other: T11-12.

80. An objective assessment of what occurred, however, makes it clear that the separate transactions constituted a connected series of steps that were intended to operate in conjunction with each other as part of an overall agreement, arrangement or understanding.

81. This conclusion is also supported by documents created at the time of the relevant events. A memorandum dated 17 September 2013, entitled "Share Buy-Back Strategy - Test Case - Geoff Harris Group" sent by Mr Neil Cahir (Fordham) to Mr David Buckley (Fordham) and Leigh Baring (Maddocks) (the 17 September 2013 Memorandum ) described a "proposed Share Buy-Back of Ordinary Shares" comprising substantially the same steps and having substantially the same result as the Illuka Park steps.

82. It was not in dispute that arrangements similar to those implemented by the Brian Blood group were implemented by at least seven "private" groups during the 2014 year. The arrangements were implemented by transaction documents prepared by Maddocks. In relation to each of the seven groups, Maddocks sent to Fordham a letter attaching the original signed and dated copies of the following documents: the Deed of Variation in respect of the relevant Vendor Trust; the Share Buy-Back Agreement effecting the buy-back of shares held by the Vendor Trustee in the relevant Buyback Co; and the Distribution Minute by which income (but not the buy-back proceeds) was distributed to the relevant Beneficiary Co. The letters requested the documents be kept in a safe place. The documents were evidently perceived to form part of one overarching transaction or arrangement by those who prepared them, those who advised in respect of them, and those who entered into them.

83. In conclusion, therefore, I am satisfied that, within the meaning of s 100A(13):

(a) the Illuka Park steps as a whole constituted an overarching "agreement" comprised of a series of connected transactions or steps; and
(b) before the Illuka Park steps were in fact implemented, there was an "agreement" or "understanding" to implement the Illuka Park steps.

Was initiation and planning part of the "agreement"?

84. There was a dispute between the parties as to whether the 'initiation' of and 'planning' for the steps could form part of the "agreement". The Commissioner contended that the initiation of and planning for, and implementation of the Illuka Park steps comprised an "agreement".

85. I have concluded at [83] above that the Illuka Park steps as a whole constituted an overarching "agreement" comprised of a series of connected transactions or steps and that there was an "agreement" or "understanding" to implement the Illuka Park steps. However, I am unable to see how 'initiation', 'planning' or 'implementation' can be said to comprise an "agreement" as opposed, for example, to those things comprising evidence from which it might be inferred that an agreement or understanding came into existence or existed.

86. The contention that 'initiation' and 'planning' could be part of the "agreement" was said to be supported by the reasoning of Hill and Sackville JJ in
Commissioner of Taxation v Prestige Motors Pty Ltd (1998) 82 FCR 195 in what their Honours said over 10 pages from 206G and 216G. Counsel submitted that "the plurality defined the reimbursement agreement in question as including negotiations". It was not otherwise explained how anything said in the 10 pages of reasoning supported the proposition advanced.

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87. Contrary to the Commissioner's submissions, Hill and Sackville JJ in Prestige Motors did not state that negotiations or the initiation of and planning for steps formed part of the "agreement" there in question. The reasoning the Commissioner relied upon for his submission begins with the following sentence of 206G:

The Commissioner contended before the primary judge that the reimbursement agreement comprised negotiations for and agreement on the implementation of a series of steps …

It is not possible to read that sentence as an endorsement that "negotiations" are part of the "agreement", whatever that would mean. It merely records what the Commissioner contended.

88. Their Honours then set out the various submissions which had been made at trial and the primary judge's reasons from 206G to 211B. Their Honours recorded the parties' submissions on appeal from 211B to 215B and set out their reasoning from 215C. On the question of the meaning of "agreement", their Honours stated at 216D to 217A:

The word "agreement" is given the widest definition in s 100A(13). It includes arrangements and understandings. These can be informal, express or implied, and need not be enforceable or even intended to be enforceable. The only exclusion from the definition is "an agreement, arrangement or understanding entered into in the course of ordinary family or commercial dealing''.

Some of the submissions on behalf of Prestige rather suggested that in order for an agreement to be within s 100A it had to be one that was legally enforceable. That is clearly incorrect. So, for example, if there were an arrangement that Cholmondeley would act in accordance with the wishes of the Perron group, that would be an "agreement" within the definition in subs (13). If the understanding required the directors of Cholmondeley to ensure that interest paid to it by RLAV would remain available to the Perron interests, that understanding would be part of the agreement, even though no person had any legal right to enforce it.

In each of the three transactions, there is no doubt that there was an agreement in the sense in which that word is used in s 100A(13). In the case of the RLAV transaction, the elaborate documentation and series of steps outlined earlier in this judgment plainly reflected an understanding or arrangement to which a number of companies and persons were parties. These included RLAV, the liabilities of which were effectively consolidated and rearranged by the documents executed on 23 February 1979 and which subscribed for and on l March 1979 received units in the Trust (using the advance from Century Finance to meet the subscription price). It is clear that the arrangements preceding the execution of the documentation contemplated the participation of Cholmondeley in the transaction, since (as his Honour found) an understanding was in place whereby Cholmondeley's directors would act in accordance with the wishes of the Perron group from time to time and interest payments to Cholmondeley commenced within a short time after completion of the documentation.

89. None of this suggests that 'negotiation', 'initiation' or 'planning' were considered by the court to form part of a relevant "agreement". Their Honours do accept, as have I, that an agreement or understanding to carry out a series of steps is capable of constituting an agreement within the meaning of s 100A(13).

90. There either is or is not an "agreement" (which can include a non-legally binding "understanding") within the meaning of s 100A(13). If the Commissioner contends that there is one, he should identify it. A statement that the "agreement" includes "initiation" and "planning" says nothing about what the contended "agreement" is. Such statements, unaccompanied by an identification of what negotiation, initiation or planning is contended

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to constitute a part of the agreement or understanding, and in what way, is conducive to loose thinking in administering the legislation, and to an increase in cost and delay for the parties, and ultimately to a waste of judicial resources in addressing unnecessary argument.

Issue 2(2): Ordinary family or commercial dealing

91. As noted earlier, s 100A(13) excludes from the definition of "agreement" an "agreement, arrangement or understanding entered into in the course of ordinary family or commercial dealing". The statutory question is whether:

• the agreement was "entered into in the course of ordinary family or commercial dealing"; it is not whether individual steps carried out in implementing the agreement, viewed in isolation, could be characterised as steps "entered into in the course of ordinary family or commercial dealing": Prestige Motors at 221E-F;
• the agreement was "entered into in the course of ordinary family or commercial dealing" not whether the agreement was an "ordinary family or commercial dealing".

92. In analysing the statutory question, it might be relevant to consider whether individual steps were "entered into in the course of an ordinary family or commercial dealing" or were an "ordinary family or commercial dealing". However, the statutory question is different.

93. In amplification of the last point, but expressed in simple terms, it is not sufficient to reason that, because each step in a series of connected transactions is capable of being described individually as "ordinary", therefore the whole agreement is "ordinary".

94. The inquiry about whether the agreement was "entered into in the course of ordinary family or commercial dealing" within the meaning of s 100A(13) is distinct to the inquiry about purpose required by s 100A(8) and (9). That does not mean that one cannot look at the object of what was sought to be achieved by a dealing said to be an ordinary family or commercial dealing in the course of which the agreement was entered into or that one cannot assess whether particular steps were relevant to achieving that object. Nor does it mean one cannot look at whether the agreement or, importantly, particular steps within it, might not in fact be explained by objectives different to the objectives said to be those behind the ordinary family or commercial dealing.

95. A dealing might not be an "ordinary family or commercial dealing" if the dealing, or the agreement which arose out of the dealing, is contrived or artificial or involved more than was required to achieve the relevant objective. The fact that the objective is achieved through numerous transactions, or that the transactions are complex, is not of itself sufficient to show that the dealing is not "ordinary". Many ordinary commercial transactions are effected by an interlocking set of documents that might be characterised as complex. Likewise, agreements entered in the course of a family dealing can be complex.

96. On the other hand, if the dealing, or the agreement which arose out of the dealing, is overly complex, involving more than is needed to achieve the relevant objective, or includes additional steps which are not necessary to achieving the objective, then the dealing might more readily be seen as not being "ordinary".

97. In Prestige Motors, in concluding that the three transactions did not arise out of an ordinary family or commercial dealing, Hill and Sackville JJ (with whom Beaumont J agreed) referred to an absence of:

• "commercial motivation" for one transaction: at 222F-G;
• "commercial justification", leaving "the only explanation for the entry into the agreement as the elimination or reduction of tax liabilities": at 223C; and
• "commercial necessity or justification for the transaction" or "commercial reason to raise capital from outside the group": at 223E-F.

98. The taxpayer bears the onus of establishing that the agreement was entered into in the course of ordinary family or commercial dealing: s 14ZZO(b) of the Taxation Administration Act 1953 (Cth) ( TAA 1953 ); Prestige Motors at 223C-F.

99. The agreement has been identified at [83] above. The question raised by this issue is whether the applicants have shown that the agreement to implement the Illuka Park steps and

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the agreement comprising the Illuka Park Steps were "entered into in the course of ordinary family or commercial dealing".

100. The agreement comprising the Illuka Park steps as a whole was not an agreement "entered into in the course of ordinary family or commercial dealing". Nor was the agreement to implement the Illuka Park steps. Whether the agreement is viewed as the agreement to enter into the steps, or the steps as a whole, the agreement was unusual. Its complexity was not shown to be necessary to achieving a specific outcome sought to be achieved by a dealing aptly described as "an ordinary family or commercial dealing". It was not explicable, for example, as having been entered into for family succession purposes. Nor was it explicable as having been entered into as part of an ordinary commercial dealing.

101. As I have said, whilst it may be relevant to the statutory inquiry, it is not necessarily persuasive that an individual step can be seen to be "ordinary". Viewed in isolation, the generation of income in IP Co of about $300,000 might be something done in the course of an ordinary family or commercial dealing. Even that is doubtful because this was the first time this had occurred and was accordingly not consistent with the historical behaviour of the parties. Moreover, this component of the Illuka Park steps does not suggest that the agreement to implement the Illuka Park steps or the agreement comprising all of the Illuka Park steps were "ordinary".

102. It might be said that a buy-back is an ordinary commercial transaction. The statutory question, however, is whether the agreement as a whole was entered into in the course of an "ordinary family or commercial dealing". In any event, even viewed in isolation, the applicants did not establish a sensible commercial or family rationale for adopting the buy-back procedure. As is explained further below, the explanations given for the buy-back component of the agreement are unlikely. The buy-back was not conducted for the purpose of simplifying the corporate structure as suggested. Nor was it done for succession planning purposes as suggested.

103. It might be said that the variations to the IP Trust Deed were, viewed in isolation, an ordinary family or commercial transaction. Although relevant, that is not the issue. The issue is whether the agreement as a whole was entered into in the course of a family or commercial dealing.

104. Having examined the agreement as a whole, I am not satisfied that the agreement to implement the Illuka Park steps was an agreement which was entered into in the course of ordinary family or commercial dealing. I am also not satisfied that the agreement comprised of the Illuka Park steps as a whole was an agreement which was entered into in the course of ordinary family or commercial dealing.

Issue 2(3): Must the payment be a "reimbursement"?

105. As noted earlier, s 100A(1)(b) requires that "the present entitlement of the beneficiary [to a share of the income of the trust estate within s 100A(1)(a)] arose out of a reimbursement agreement or arose by reason of any act, transaction or circumstance that occurred in connection with, or as a result of, a reimbursement agreement".

106. The term "reimbursement agreement" is defined in subsection 100A(7), which provides:

(7) Subject to subsection (8), a reference in this section, in relation to a beneficiary of a trust estate, to a reimbursement agreement shall be read as a reference to an agreement, whether entered into before or after the commencement of this section, that provides for the payment of money or the transfer of property to, or the provision of services or other benefits for, a person or persons other than the beneficiary or the beneficiary and another person or other persons.

The applicants' submissions

107. The applicants contended that:

(1) the meaning of the term "reimbursement agreement" required that "the payment of money, transfer of property or provision of services or other benefits referred to in s 100A(7) be, in substance, a reimbursement for the beneficiary being made presently entitled to trust income";
(2) "s 100A was not intended to apply, and does not apply, where the beneficiary (together with its associates) keeps the trust income for its own benefit";

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(3) where the beneficiary keeps the trust income for its own benefit, s 100A does not alter the basic rule that the beneficiary, rather than the trustee, is taxed on the corresponding share of the trust's net income;
(4) s 100A applies where it was thought inappropriate to shift the tax liability away from the trustee for the very reason that, in the words of the explanatory memorandum, the "'beneficiary' retains only a minor portion of the trust income" despite being presently entitled - see: Explanatory Memorandum to the Income Tax Assessment Amendment Bill (No 5) 1978 (Cth) at 5 ( 1978 EM ).

108. The payment relied upon by the Commissioner was the payment of the buy-back proceeds to the trust or, in the terms of the Commissioner's Appeal Statement at [62.1]: "IP Co credited the IP Trust's at call loan account with IP Co".

109. The applicants submitted that:

• the payment (of about $10 million) was not, in any way, a "reimbursement" of the beneficiary's entitlement to trust income (of about $300,000);
• the payment of the buy-back proceeds did not prevent, in any way, the beneficiary enjoying the full benefit of the trust income to which it was entitled; and
• the beneficiary was paid its entitlement (of about $300,000) in cash and used the cash for its own purposes.

110. The applicants continued:

Indeed, here there is no connection at all between the payment and the present entitlement. The payment did not give rise to trust income to which a beneficiary became presently entitled, nor conversely was the payment sourced directly or indirectly from trust income to which a beneficiary was presently entitled. The payment was simply the purchase price paid to the trustee in exchange for its sale of its existing shareholding and the income to which the beneficiary was presently entitled had no relationship with that payment. In no way could it be said that the payment had the effect of recouping or reimbursing the trust or anyone else for the beneficiary's present entitlement.

…

Before subsection (7) is considered there must be an agreement as defined in subsection (13). Subsection (7) builds on that requirement by adding that there must be a payment. It is the payment that turns an 'agreement' into a 'reimbursement agreement'. Hence the two concepts of 'payment' and 'reimbursement' are inextricably linked and, properly construing the section as a whole and in context, the latter gives meaning to the former.

That approach, and the link between 'payment' and 'reimbursement', is supported and given further effect by the requirement in subsection (1) that the present entitlement 'arose out of' the reimbursement agreement. As explained below, that requires a 'but for' analysis. It requires that the present entitlement would not have arisen but for the reimbursement agreement; in other words, but for the payment (being the essence of a reimbursement agreement). That might be expressed by saying, as the explanatory memorandum did, that the present entitlement was conferred 'in return for' the payment [see below]; in other words, and viewed from the perspective of the payment, that the payment was a reimbursement of the present entitlement. The present entitlement and the payment were intended to be the quid pro quo of each other.

111. In support of its contentions, the applicants referred to the following portions of the 1978 EM (applicants' emphasis in bold):

Tax avoidance by trust-stripping arrangements

(Clause 18) [Section 100A]

By this clause it is proposed to overcome certain tax avoidance arrangements designed to enable trading profits and other income derived by trusts to escape tax completely .

…

The particular tax avoidance arrangements rely on a nominal 'beneficiary' being introduced into the trust and being made presently entitled to income of the trust ,

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thus relieving the trustee of any tax liability in respect of the income. However, it is a feature of the arrangements that the introduced beneficiary also escapes tax by one means or another, e.g., as a tax-exempt body or organisation. This 'beneficiary' retains only a minor portion of the trust income , while the group in whose favour the trust in substance exists effectively enjoys the major portion, but in a tax-free form. For example, a corresponding amount may be gifted to form the corpus of a further trust for the group's benefit. [EM at 5]

…

The amendment proposed will look to the existence of an agreement or arrangement that is entered into otherwise than in the course of ordinary family or commercial dealing and under which present entitlement to a share of trust income is conferred on a beneficiary in return for the payment of money or the provision of benefits to some other person, company or trust. [EM at 6]

…

Invariably , the arrangements require this introduced beneficiary to retain only a minor portion of the trust income and to ensure that some other person - the one actually intended to take the benefit - effectively secures enjoyment of the major portion of the trust income but in tax-free form (e.g., by the settlement of a capital sum in another trust estate for the benefit of that person). [EM at 32]

112. The applicants also noted that, soon after its introduction, s 100A was amended in 1981. The explanatory memorandum to the Income Tax Laws Amendment Bill 1981 (Cth) ( 1981 EM ) said of the arrangements to which s 100A applied (at 56; applicants' emphasis):

The arrangements were such that the bulk of the trust income was effectively returned by the introduced beneficiary to the 'real' beneficiary in a non-taxable form, eg, by the receipt of a loan that was never intended to be repaid or by a capital settlement of funds.

113. The applicants submitted:

Both explanatory memoranda clearly and consistently identify the 'mischief' to which s 100A was addressed, being situations in which the beneficiary made presently entitled to trust income does not retain that income (or the majority of it) but instead, through an agreement for a payment, provides the benefit of that income to someone else, such that the present entitlement is 'in return for' (or 'arose out of', to use the language of subsection (1)), and is reimbursed by, the payment.

114. The applicants referred to the decision of Hill J in
Traknew Holdings Pty Ltd v Federal Commissioner of Taxation (1991) 21 ATR 1478 at 1492. His Honour said that s 99B (which was introduced by the same Act as s 100A) could only be understood in its historical context. His Honour raised the possibility of reading down the "extreme width" of the provision "having regard to the obvious legislative purpose in enacting it". His Honour did not ultimately have to resolve that issue.

115. The applicants also referred to
UNSW Global Pty Ltd v Chief Commissioner of State Revenue [2016] NSWSC 1852; 104 ATR 577 at [36]-[38], where White J referred to relevant extrinsic material to identify the type of arrangement to which a particular anti-avoidance provision was directed and observed at [49] (applicants' emphasis; citations omitted):

This is not a case in which a literal construction fails to address the mischief that Parliament was concerned to address, but rather a case in which the literal words used to address that mischief go far beyond the mischief intended to be addressed . To the extent the text of the legislation permits, the provisions should be construed so as not to apply to all arrangements that could fall within their literal terms, but should be construed in accordance with the legislative intent as ascertained from the statutory context, including the juxtaposition of the employment agency contract provisions with the relevant contract provisions, the legislative history, and the extrinsic materials. This may mean that the legal meaning to be given to the provisions differs from their literal meaning.

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Consideration

116. As the applicants observed, in Prestige Motors at 220G-221A, the Full Court stated that the definition of "reimbursement agreement" in s 100A(7) cannot be controlled by the word "reimbursement". Their Honours stated:

Contrary to Prestige's submission (a submission also rejected by the primary judge) the definition of "reimbursement agreement" in s 100A(7) cannot be controlled by the word "reimbursement". It is not helpful to resort to the ordinary meaning of a defined word or expression in construing the definition:
Telstra Corporation Ltd v Australasian Performing Right Association Ltd (1997) 191 CLR 140 at 154-155; 146 ALR 649 at 657, per Dawson and Gaudron JJ. As Rich J said in
Mutual Acceptance Co Ltd v Commissioner of Taxation (Cth) (1944) 69 CLR 389 at 398: "A definition of this kind is not an exercise in philology. It is a mechanical device to save repetition."

117. The applicants submitted that this statement was obiter because no part of the decision in Prestige Motors depended on the question of whether the payment under s 100A(7) must be, in substance, a reimbursement of the trust income. In the three transactions considered by the Court, the payment for the purposes of s 100A(7) was, in the applicants' submission, a reimbursement in the relevant sense.

118. The passage in Prestige Motors at 220G-221A is an example of what is sometimes referred to as the Shin Kobe Maru principle. In
Owners of the Ship "Shin Kobe Maru" v Empire Shipping Company Inc [1994] HCA 54; 181 CLR 404 at 419 the High Court observed (footnote omitted):

The Act's description of a claim falling within s 4(2) as a "proprietary maritime claim" is of no assistance in construing the expression "a claim … relating to … ownership". The use of the word "proprietary" in the term to be defined does not colour the meaning to be given to the definition which follows it. It would be quite circular to construe the words of a definition by reference to the term defined.

119. As the applicants submitted, this is not an inflexible rule of statutory construction. Nor is it one which necessarily trumps other rules of statutory construction. It is, on the other hand, a common drafting device. At least typically, if not usually or almost invariably, the ordinary meaning of the defined word is unlikely to provide real assistance in construing the definition. In
Federal Commissioner of Taxation v Auctus Resources Pty Ltd [2021] FCAFC 39; 284 FCR 294 at [68] and [69] (Thawley J, with whom McKerracher J and Davies J agreed) it was said:

… The end object of the process of statutory construction is to give the words of the particular statute the meaning which the legislature is taken to have intended them to have:
Lacey v Attorney-General (Qld) (2011) 242 CLR 573 at [43];
Certain Lloyd's Underwriters v Cross (2012) 248 CLR 378 at [25]-[26]. The preferred construction is reached through common law and statutory rules of construction, the application of which involves the identification of a statutory purpose from any express statement in the statute, or by inference from the text and structure of the statute and by appropriate reference to extrinsic materials: Lacey at [44]. If the Shin Kobe Maru principle was intended to set down an inflexible rule of statutory construction that it is never permissible to look at the language used in a defined term to construe a definition, then that would conflict with the principle that it is the text and structure as a whole, read in context, from which the meaning of the statute must be ascertained. The process of construction might reveal that the legislature should be taken to have selected the language that it did in the defined term, albeit defined elsewhere, because it was thought to reflect the essence or some important aspect of the intended meaning supplied by the definition. This is the process in fact employed by the plurality in Cunneen. Whilst this might involve circular reasoning, such reasoning is not illogical in this context or indeed inappropriate - see:
Thomas v State of New South Wales (2008) 74 NSWLR 34 at [22];
Singh v Lynch [2020] NSWCA 152 at [128].

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The real question is: what should the legislature be taken as having intended by using the words it did in both the defined term and the definition? The answer may well be that the legislature should be taken to have intended that the definition should not be confined by the terms of the defined term. That was the case in Wacal and Shin Kobe Maru. As a matter of principle, it will not always be the case that the defined term cannot affect the meaning of the definition.

120. In my view, the word "reimbursement" does not limit or control the meaning of the definition by requiring that the payment be as a matter of substance a "reimbursement" of the beneficiary's present entitlement. The phrase "reimbursement agreement" is no more than a convenient label. That is made plain by the language of s 100A(7) and by context and purpose. It is true that some "reimbursement agreements" are aptly described as agreements which involve an element of "reimbursement". It is also true that the label might be apt to describe the kinds of arrangement which were of immediate concern at the time s 100A was introduced. However, the statutory context does not suggest that the label "reimbursement agreement" was intended to limit or control the definition in s 100A(7).

121. Section 100A(7) supplies the definition of "reimbursement agreement" for the purpose of s 100A(1). Section 100A(7) is deliberately broad in its scope. It is intended to capture all agreements within the ordinary meaning of its terms, construed in context. A part of the statutory architecture is that 100A(7) is "[s]ubject to subsection (8)". Subsection 100A(8) excludes all arrangements except those entered into with the requisite 'tax avoidance' purpose. I use the phrase 'tax avoidance' purpose as shorthand for the purpose described in s 100A(8) - see: [129] below. This indicates that s 100A(7) was deliberately broad with s 100A(8) providing restriction. Further, s 100A(13) excludes from the meaning of the word "agreement", those agreements which are entered into in the course of ordinary family or commercial dealing. Because s 100A(7) is broad, the practical issue will often be as to the application of the exclusionary components in s 100A(8) and (13) - see also: Prestige Motors at 219D.

122. Contrary to the applicants' submissions, the terms of s 100A(7) should not be read down so as to be limited to the specific types of mischief which were identified in the 1978 EM as then being of concern. Legislative history and extrinsic materials cannot displace the meaning of the statutory text:
Commissioner of Taxation v Consolidated Media Holdings Ltd [2012] HCA 55; 250 CLR 503 at [39]. What the legislature is presumed to have intended is to be resolved by reference to the text and structure of the statute and appropriate reference to extrinsic material; the presumed intention is not derived primarily from the extrinsic material. If the provision was intended to capture only the kinds of arrangements identified in the 1978 EM, one might have expected a more focussed provision. The broad language of s 100A(7) indicates it was intended to capture all arrangements which fell within its terms, whether or not they were of a type which existed as at the time of the 1978 EM, with exclusionary work to be done by ss 100A(8) and (13). That is precisely what one would expect in this kind of anti-avoidance context.

123. In Prestige Motors at 219G to 220B, Hill and Sackville JJ observed:

… It is clear that the Treasurer's statement of 11 June 1978 and the Explanatory Memorandum accompanying the subsequent Bill identified trust stripping as the avoidance device that had to be counteracted. But it is equally clear that the examples given were intended to be illustrative, and not an exhaustive statement of the transactions that were to be subject to the legislation. This was made explicit in the Treasurer's Second Reading Speech which pointed out that there were several variants of a trust stripping scheme but ''for the most part'' they relied on a nominal beneficiary being introduced into a trust and being made presently entitled to income: Part Deb, HR, 23 November 1978, p 3310.

Examples given in Explanatory Memoranda or second reading speeches of transactions or arrangements intended to be caught by legislation may be very helpful in identifying the mischief to be addressed and

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in construing otherwise ambiguous legislation so that it does apply to the identified transactions or arrangements. But considerable care should be exercised before relying on examples given in this way in order to read down the statutory language. The extrinsic materials in the present case are entirely consistent with the legislation having been framed broadly enough to catch not merely the transactions referred to in those materials, but other arrangements having similar characteristics …

124. The Commissioner noted in his submissions that special leave to appeal the decision in Prestige Motors was refused:
Prestige Motors Pty Ltd as Trustees of the Prestige Toyota Trust v Commissioner of Taxation [1998] HCATrans 279 (Gaudron and McHugh JJ) ( Prestige Motors SLA ). The taxpayer, being the applicant for special leave to appeal, had argued for a construction of s 100A(7) which was said to be consistent with the mischief to which the provision was directed, such that the words "effectively, as a reimbursement or quid pro quo for the present entitlement" should be read into the end of s 100A(7). The applicant for special leave argued that the provision should be read as if it contained additional words:

(7) Subject to subsection (8), a reference in this section, in relation to a beneficiary of a trust estate, to a reimbursement agreement shall be read as a reference to an agreement, whether entered into before or after the commencement of this section, that provides for the payment of money or the transfer of property to, or the provision of services or other benefits for, a person or persons other than the beneficiary or the beneficiary and another person or other persons , effectively, as a reimbursement or quid pro quo for the present entitlement .

125. The reasons for refusing special leave were delivered by Gaudron J:

We are of the view that there is no error involved in the Full Court's construction of section 100A of the Income Tax Assessment Act. Accordingly, special leave is refused.

126. The High Court's reasons for dismissing an application for special leave amount to dicta and do not create binding precedent; they provide "guidance" and can be of "persuasive value" - see:
North Ganalanja Aboriginal Corporation v Queensland [1996] HCA 2; 185 CLR 595 at [643] (McHugh J);
Algama v Minister for Immigration [2001] FCA 1884; 115 FCR 253 at [62] (French, Whitlam and Katz JJ);
X7 v R [2014] NSWCCA 273; 246 A Crim R 402 at [97]. The persuasive value of reasons given on an application for special leave varies depending on the circumstances. In Prestige Motors SLA, the point was critical to the application for special leave and it was the subject of oral debate between the judges hearing the application for special leave and experienced tax counsel. The reasons have persuasive value. In any event, they are consistent with the construction I have come to.

127. It is not necessary for the payment referred to in s 100A(7) to be, in substance, a "reimbursement" in the ordinary meaning of that word for the beneficiary being made presently entitled to the income of the trust.

Issue 2(4): Purpose

The legislation

128. Sections 100A(8) and (9) of the ITAA 1936 provide:

(8) A reference in subsection (7) to an agreement shall be read as not including a reference to an agreement that was not entered into for the purpose, or for purposes that included the purpose, of securing that a person who, if the agreement had not been entered into, would have been liable to pay income tax in respect of a year of income would not be liable to pay income tax in respect of that year of income or would be liable to pay less income tax in respect of that year of income than that person would have been liable to pay if the agreement had not been entered into.
(9) For the purposes of subsection (8), an agreement shall be taken to have been entered into for a particular purpose, or for purposes that included a particular purpose, if any of the parties to the agreement entered into the agreement for that purpose, or for purposes that included that purpose, as the case may be.

129. In the discussion which follows, for the sake of brevity only, I shorten the phrase "purpose, of securing that a person who, if the

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agreement had not been entered into, would have been liable to pay income tax in respect of a year of income would not be liable to pay income tax in respect of that year of income or would be liable to pay less income tax in respect of that year of income than that person would have been liable to pay if the agreement had not been entered into" to the phrase a " 'tax avoidance' purpose ".

Actual purpose

130. The references to purpose in s 100A(8) are a reference to the actual purpose of entering into the relevant agreement. The references to purpose in s 100A(9) are a reference to an actual purpose of one or more of the parties to the agreement in entering into the agreement. As Hill and Sackville JJ observed in Prestige Motors at 217G, s 100A differs from both the former s 260(1) of the ITAA 1936 and Part IVA of the ITAA 1936. It differs in a number of respects. Former s 260(1) was concerned with the purpose or effect of a contract, agreement or arrangement as opposed to a purpose of entering into the relevant agreement. Section 177D(1) in Part IVA requires the determination of the dominant purpose of persons who entered into or carried out the scheme. It requires that purpose to be determined only by reference to the eight criteria identified in s177D(2). The criteria in s 177D(2) do not include any party's actual or subjectively held purpose. It necessarily follows from the fact that purpose is to be determined by reference to a confined set of eight criteria, and that none of those criteria include a person's actual or subjective purpose, that the purpose of a person who entered into or carried out a scheme, as determined in accordance with s 177D(1), may or may not coincide with the actual purpose of that person or any relevant person. Whether or not it does is strictly irrelevant.

131. Section 100A requires that an agreement be entered into for purposes that "included" the requisite tax avoidance purpose - see: s 100A(8) and (9). The existence of another purpose, or other purposes, does not prevent s 100A from being satisfied.

132. Unlike the determination of purpose under s 177D, s 100A does not require that the 'tax avoidance' purpose be the sole or dominant purpose; it is sufficient that it was "a" purpose, even one which could not be said to predominate any other co-existing purpose - see: s 177A(5).

133. Section 100A(8) requires that the agreement be entered into for the relevant 'tax avoidance' purpose. Section 100A(9) operates by deeming ("shall be taken") s 100A(8) to be satisfied if the relevant purpose was "a" purpose of a "party to the agreement". Under s 100A, the actual purpose of entering into an agreement (s 100A(8)), or of a "party to the agreement" in entering into the agreement (s 100A(9)), may be determined by reference to the objective facts and circumstances and by reference to direct evidence from a relevant party as to that party's purpose.

134. The weight to be attributed to a person's evidence about that person's purpose depends on the case, particularly the cogency of the evidence when assessed against the objective circumstances and, if relevant, the fact and consequences of any cross-examination. In
Pascoe v Federal Commissioner of Taxation (1956) 30 ALJR 402 at 403, Fullagar J observed:

Where a person's purpose or object or other state of mind in relation to a given transaction is in issue, the statements of that person in the witness box provide, in a sense, the "best" evidence, but, for obvious reasons, they must, as Cussen, J observed in
Cox v Smail ((1912) VLR 274, at p 283), "be tested most closely, and received with the greatest caution".

135. His Honour was using the word "best" as meaning "most direct" evidence. His Honour was not saying that subjective evidence is the most reliable evidence. The most reliable evidence of a person's actual purpose is often furnished by the objective facts. The objective facts include the financial, taxation and other consequences of the transaction entered into.

136. Contemporaneous documents are often probative of purpose. They are often of greater weight than ex post facto "subjective" evidence about purpose:
Hart v Federal Commissioner of Taxation [2018] FCAFC 61; 261 FCR 406 at [86] (Robertson, Wigney and Steward JJ). This is particularly true where those documents can be seen to have been created in circumstances which indicate that

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they are likely to: (a) record reliably the relevant events as they occurred; or (b) furnish evidence of the real reasons why certain steps were taken. Contemporaneous documents do not always have this character.

Parties to the agreement

137. The reference to the "parties to the agreement" in s 100A(9) must be understood having regard to the operation of the whole section. Section 100A(13) defines "agreement" broadly to include "any arrangement or understanding, whether formal or informal, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings …".

138. In the present case, there was an agreement or understanding to implement the Illuka Park steps - see: [83] above. Subject to one matter (see [140] below), the advisers did not enter into the individual transactions comprising the Illuka Park steps. That does not mean that the advisers were not a party to the agreement or understanding to implement those steps. The understanding of the advisers, Mr and Mrs Blood and the various transaction entities was that the relevant persons and entities would each do what they needed to do in order to implement what had been agreed by carrying out the Illuka Park steps.

139. The concern of s 100A(9) is with the actual purpose of the natural persons reaching the relevant agreement; it is not confined to the purpose of legal entities which later implement the necessary transactions pursuant to such an agreement.

140. As it happens, as appointor, Mr Buckley executed the Deed of Variation which amended the IP Trust Deed on 13 June 2014. Accordingly, Mr Buckley was a "party" to one of the transactions entered into by way of implementation of the "agreement" to carry out the Illuka Park steps.

The 'tax avoidance' purpose

Summary of the applicants' submissions on purpose

141. The applicants contended that s 100A(8) required the posing of an "alternative postulate" or "counterfactual". The applicants submitted that the role of the alternative postulate under s 100A(8) was similar to its role in identifying a tax benefit under Pt IVA, namely identification of the differences between the tax outcome of the scheme and that which "would" have been the tax outcome if the scheme had not been entered into or carried out.

142. The applicants submitted that the role of the "alternative postulate" was to determine the tax outcome, but that it was not directly relevant to determining the purpose of a party. This was explained in the following way:

[C]are should be taken to appreciate the role of alternative postulates in applying subs (8). They are relevant to identifying the tax outcome referred to in subs (8), not directly to the parties' purposes. The purpose referred to in subs (8) is the subjective purpose(s) of a party (see subs (9)). The question of what subjective purpose(s) a party had is simply a question of evidence. That is logically different from the question of determining, once that purpose is or those purposes are identified, whether at least one of them was to secure a tax outcome of the type referred to in subs (8).

143. In support of the argument that s 100A(8) required the identification of an "alternative postulate", the applicants relied on the statement by Hill J in
East Finchley v Federal Commissioner of Taxation [1989] FCA 720; 20 ATR 1623 at 1639, that s 100A(8) "requires the hypothesis to be formulated as to what income tax would become payable if the relevant agreement had not been entered into" (emphasis in original).

144. Justice Hill's observation was referred to with approval by Logan J in
Guardian AIT Pty Ltd v Commissioner of Taxation [2021] FCA 1619; 114 ATR 136 at [158]. I interpolate that, in neither East Finchley nor Guardian was this conclusion part of the ratio.

145. The applicants had a primary and alternative position as to how the "alternative postulate" under s 100A(8) was to be determined.

146. The applicants' primary position was that s 100A(8) required an "annihilation" approach to determination of the "alternative postulate" and that s 100A(8) did not allow for identification of the counterfactual through a process of "reconstruction",

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namely hypothesising what events would have occurred if the agreement had not been entered into.

147. In respect of its "annihilation" approach, the applicants submitted:

The correct approach to determining 'what income tax would become payable if the relevant agreement had not been entered into' is to simply assume the agreement had not been entered into but not to assume that any other transactions or events took place if they did not actually take place. Section 100A is directed at agreements which avoid tax in the sense explained in Newton v FCT as meaning 'to take steps to get out of the reach of a liability which is about to fall on you' [
(1958) 98 CLR 1 at 7] rather than agreements which avoid tax that might have, or might reasonably be expected to have, been payable if some other transaction had been entered into. There is no room for hypotheses based on no more than a reasonable expectation.

148. The applicants submitted that "[t]he word 'would' refers to what would 'as a fact' have happened (ie with certainty) as opposed to the lower standard of a reasonable expectation being the 'most reliable prediction'", referring to the decision of the Full Court in
RCI Pty Ltd v Federal Commissioner of Taxation [2011] FCAFC 104; (2011) 84 ATR 785 at [125]-[127]; [130]-[131]; [138] in relation to the meaning of "tax benefit" in s 177C as it then stood.

149. In this regard, the applicants emphasised the contrast in language between s 100A(8) and s 100A(5), submitting:

The use of 'would' in subsection (8) is in stark contrast to subsection (5) which uses the phrase 'would have been, or could reasonably be expected to have been' and therefore allows a substantially lower degree of certainty. That difference in language within the one provision indicates that the difference was employed deliberately [
Peter Greensill Family Co Pty Ltd (Trustee) v FCT [2021] FCAFC 99 at [55];
CFMEU v Hadgkiss (2007) 169 FCR 151 at [53];
Bayley v R (2013) 43 VR 335 at [47].

150. The applicants alternative position as to how the "alternative postulate" under s 100A(8) was to be determined was that, if s 100A(8) permitted "reconstruction", then the "alternative postulate" is "what would in all certainty have happened [if the "agreement" had not been entered into or carried out]".

151. The applicants submitted that a taxpayer was not required to establish what would have happened: the taxpayer only needed to negate, on the balance of probabilities, the conclusion that a person would in all certainty have paid more tax absent the agreement. According to the applicants, this only requires establishing that there was a realistic possibility that some other transaction would have been entered into which did not involve that person being liable to more tax: if that were established, it could not be said that he or she "would" have been liable to more tax. According to the applicants, if all that can be said is that a person might have had a liability to income tax had the "agreement" not been entered into, that is not a tax outcome of the type referred to in s 100A(8): if a party had a purpose of avoiding a possible tax liability, but not a certain one, that was not a tax avoidance purpose captured by s 100A(8).

152. The applicants submitted that:

(1) s 100A(8) required identification of a person who would have paid more tax if the agreement had not been entered into. If no such person exists then nobody can have entered into the agreement for the requisite purpose of securing a reduction in tax for such a person.
(2) even if "a person" referred to in s 100A(8) does not have to be a specifically identified person, the subsection nevertheless requires a conclusion that someone would have paid tax or more tax. It may be that, in all certainty, somebody would have paid more tax even though the particular person cannot be identified. For example, it might only be possible to say that one person within a particular class, such as beneficiaries of a trust, would have paid more tax.

Consideration

153. The construction of s 100A(8) should not be constrained by the construction of provisions in Part IVA : Reference to "alternative postulates", "counterfactuals", "reconstruction" and "annihilation", and

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drawing analogies between the statutory scheme in s 100A and that in Part IVA, risks distracting attention from the text and scheme of s 100A. It is important to bear in mind the different statutory contexts. Section 100A is contained in Div 6 of Part III and is a specific anti-avoidance provision relevant only to trusts. Part IVA is a general anti-avoidance provision which comes into operation after the taxpayer's claim under other provisions of the tax law is correctly established. Section 100A was introduced by the Income Tax Assessment Amendment Act 1979 (Cth), before Part IVA which was introduced by the Income Tax Laws Amendment Act (No 2) 1981 (Cth). There is a danger in construing s 100A by reference to decisions which did not exist when s 100A was introduced and which concern a later statutory scheme which operates in a materially different way.

154. When first introduced, Part IVA operated by: (a) requiring identification of a specific tax benefit: s 177C and Hart; and (b) then permitting the Commissioner to cancel the identified tax benefit under s 177F. The High Court has referred to the definition of "tax benefit" in s 177C(1) in Part IVA as making it necessary to compare the consequences of the scheme in question with the consequences of what "would have been included, or might reasonably be expected to have been included, in the assessable income of the taxpayer" had the scheme not been carried out. The hypothetical events used as the comparator in this exercise were described by Gummow and Hayne JJ as the "alternative postulate":
Federal Commissioner of Taxation v Hart [2004] HCA 26; 217 CLR 216 ( FCT v Hart ) at [66]. . This language and thinking is not necessarily apposite to s 100A(8).

155. The principal, if not only, object of s 100A(8) and (9) is the identification of whether the agreement was entered into for a 'tax avoidance' purpose. If the relevant 'tax avoidance' purpose is present, and the other requirements of s 100A are satisfied, s 100A(1) switches off the relevant beneficiary's present entitlement. In effect, 100A(1) undoes a present entitlement which arises out of an agreement entered into for a 'tax avoidance' purpose.

156. Section 100A does not operate by a mechanism which makes the identification of a specific amount of tax avoided a necessary component of identifying a 'tax avoidance' purpose.

157. The peculiar operation of Part IVA in requiring quantification of a "tax benefit" which the Commissioner could "cancel" under s 177F was not a feature of tax legislation at the time s 100A was introduced.

158. Statutory context is important. An example is furnished by the decision in
Federal Commissioner of Taxation v Ludekens [2013] FCAFC 100; 214 FCR 149 at [226]-[236] (Allsop CJ, Gilmour and Gordon JJ). In the context of the promoter penalty provisions, the Full Court considered whether it was necessary to 'plead' and prove what the position would have been concerning the tax-related liability of relevant entities if the scheme had not been entered into or carried out. The question arose because of the definition of "scheme benefit" and the language in s 290-65(1) of Sch 1 to the TAA 1953 which inquired into whether the dominant purpose of entering into a scheme was of "getting a scheme benefit".

159. The Full Court emphasised that the central concern of s 290-65(1) was the purpose with which an entity entered into or carried out the scheme: at [227]. A part of the context also included that one or more of the relevant entities may not be known or yet in existence.

160. The Full Court concluded that it was not necessary either to 'plead' or prove an alternative postulate in the way that occurs in relation to Part IVA observing at [229] that this would be incoherent in the particular statutory context. At [234], the Full Court contrasted the position under Part IVA:

The position can be seen to be different when examining the operation of Pt IVA of the ITAA36. The "tax benefits" under s 177C of the ITAA36 for the purposes of Pt IVA are set out in subs (1)(a) to (bb). In those paragraphs, the alternative hypothesis or postulate is clearly expressed. In that context, a scheme has been entered into or carried out, a particular tax-related position reached, and that position is to be compared with the position that would have obtained had the scheme not been entered into or

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carried out. The need for the comparison is express and inheres in the notion of what the section is directed to: a benefit that has been obtained, and that is to be cancelled under s 177F. The cancellation of the tax benefit under s 177F is by reference to the meaning of tax benefit defined in s 177C.

161. The preferable construction of s 100A(8) : The object of s 100A(8) is to bring within the scope of s 100A agreements which are entered into for the purpose of securing that a person pay less tax than the person would have if the agreement had not been entered into. The 'tax avoidance' purpose identified in s 100A(8) is of:

… securing that a person who, if the agreement had not been entered into, would have been liable to pay income tax in respect of a year of income would not be liable to pay income tax in respect of that year of income or would be liable to pay less income tax in respect of that year of income than that person would have been liable to pay if the agreement had not been entered into.

162. This language is broad, focussing simply on the question of whether the purpose was of securing that "a person" in "a year" of income pay either no tax when that person otherwise would have or less tax than that person otherwise would have paid.

163. Section 100A(8) does not expressly or implicitly require identification of what income tax would have been payable or necessarily by whom or in which year. The language and context of s 100A(8) and (9) indicates it is necessary to conclude that more tax would have been payable if the agreement had not been entered into. However, the language and context does not suggest it was intended that, in order to conclude that a 'tax avoidance' purpose existed, it is necessary in every case to identify: (a) with absolute certainty precisely what would have occurred if the agreement had not been entered into; or (b) a specific amount of avoided tax. It may be that those matters can be identified in many or most cases, but that does not mean that the provisions are to be construed as only applying in those circumstances.

164. One would not expect the legislation to require identification of precisely what would have occurred or a specific amount of tax avoided given that it is a trust anti-avoidance measure. It is unlikely that it was intended that, although an avoidance purpose is clear, the operation of s 100A would be defeated by: the fact that it might not be possible to state with certainty the exact amount of tax avoided or by which particular beneficiary; or by the fact that the future events by which the tax advantage will be achieved have not taken place; or by it not being possible to identify with certainty the precise mechanism by which the tax advantage would be achieved in the future; or by it being possible to hypothesise a number of different ways in which the tax advantage might be achieved none of which could be said to be more probable than any of the others.

165. It is unlikely that the legislature intended that s 100A only operate, for example, where a trustee's future exercise of discretion could be accurately predicted or to paraphrase the applicants' submission, where it could be said that the liability definitely would have come home in an identified amount in an identified year. In the context of a discretionary trust for example, where a trustee has very broad discretions, it would often be difficult, if not impossible, to say with certainty what would have occurred were it not for the relevant agreement. In the case of a discretionary trust, the precise amount of income tax avoided would depend on who the discretionary objects were in the future years of income, and the particular characteristics of the discretionary object, which might change from year to year. One characteristic would be the discretionary object's marginal rate in any given year.

166. The legislature should not be presumed by the broad language used in s 100A(8) to have intended a requirement in all cases for the identification of a definite "alternative postulate" pursuant to which an identified amount of tax was avoided, whether through a process of "annihilation" or "reconstruction", before concluding that the relevant purpose was present. The provision operates where the relevant 'tax avoidance' purpose existed. Identification of an exact amount of tax avoided, or the precise mechanism of a likely future avoidance, is not necessary to that task even if it is often possible. Read in context, it is sufficient if it can be said that the

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purpose was one of securing that a person not be liable to income tax or be liable to less income tax, even though it might not be possible to identify precisely who the person was or the year of income in which tax would be avoided or necessarily the precise amount.

167. Additional observations : I should address more specifically three of the applicants' submissions as to the construction of s 100A(8).

168. First, as mentioned, the applicants relied on RCI. The construction given by the Full Court in RCI to the word "would" in s 177C(1)(a), by way of contradistinction to the phrase "might reasonably be expected to have been" is neither determinative, nor particularly probative, of the construction of the word "would" in s 100A(8). The words "might reasonably be expected to have been" are not in s 100A(8). Secondly, as Gummow J stated in
CTC Resources NL v Commissioner of Taxation [1994] FCA 947; 48 FCR 397 at 405, citing
Murphy v Farmer [1988] HCA 31; 165 CLR 19 at 27: "the presumption that a word is used with a uniform meaning in a statute, or even in the one section, readily yields to the context". The word "would" provides a stark example. The word "would" is used in s 100A(8) simply because identification of purpose is determined by reference to something which did not occur (paying more tax). Whether or not it is necessary to identify precisely what would have occurred or the amount of additional tax which would have been paid, as opposed to it being necessary simply to say that more tax would have been paid, is found in the context of the provision as whole, not in the word "would" or in the fact that the legislature has correctly conjugated the conditional tense.

169. By way of example, to ask whether a person "would have been liable to pay more for parking" does not imply that one must identify precisely what the person would have done or precisely how much more the person would have been liable to pay. Consider a person who has parked at a pay by the hour car park to go shopping but left within an hour on an urgent call. The person would not have left so early if he or she had not received the urgent call, but it is not possible to say how much longer the person would have stayed or how much he or she would have had to pay. The question whether the person "would have been liable" to pay more if they had not received the urgent call does not, without further context, require identification of precisely what would have occurred or how much more the person would hypothetically have had to pay.

170. The statutory context of s 177C(1) is the identification of a "tax benefit", being a specific monetary benefit which the Commissioner is entitled to cancel under s 177F. It is the peculiar statutory context which requires calculation of an amount, not the meaning of the word "would" in s 177C(1), or of the phrase "would have", or the use of the conditional tense.

171. As noted earlier, the context in s 100A(8) is not cancellation of any specific amount. It is about identifying whether a 'tax avoidance' purpose is present. In express terms, s 100A(8) requires only that there exist a purpose that a liability for tax be wholly or partially avoided.

172. Secondly, the applicants relied on s 100A(5), which provides:

(5) For the purposes of subsection (1), but without limiting the generality of that subsection, where:
- (a) a reimbursement agreement was entered into at or after the time when a person became a beneficiary of a trust estate (whether the person became a beneficiary of the trust estate before or after the commencement of this section); and
- (b) the amount (in this subsection referred to as the increased amount) of the share of the income of the trust estate to which the beneficiary is presently entitled exceeds the amount (in this subsection referred to as the original amount) of the income of the trust estate to which the beneficiary would have been, or could reasonably be expected to have been, presently entitled if the reimbursement agreement had not been entered into or if an act, transaction or circumstance that occurred in connection with, or as a result of, the reimbursement agreement had not occurred;
  
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the present entitlement of the beneficiary to so much of the increased amount as exceeds the original amount shall be taken to have arisen out of the reimbursement agreement.

173. Sections 100A(8) and 100A(5) are directed to different issues. Section 100A(8) is directed to whether there was a tax avoidance purpose behind the reimbursement agreement. Section s 100A(5) is concerned with preserving a present entitlement where a beneficiary would have or might reasonably be expected to have had a specifically identified present entitlement (referred to as the "original amount") if the reimbursement agreement had not been entered into. It is concerned with the situation where, for example, a beneficiary's present entitlement has been increased by a reimbursement agreement.

174. Section 100A(5) operates for the purpose of, but does not limit, s 100A(1). As a matter of substance, the statutory scheme operates in the following way. If the tax avoidance purpose under s 100A(8) exists, and s 100A(1) otherwise applies, then the present entitlement is switched off. However, if the Commissioner takes the view or a beneficiary establishes that, absent the agreement, the beneficiary would nevertheless have been presently entitled to some identified lesser amount (the "original amount"), then the present entitlement to that specifically identified lesser amount is not switched off.

175. The language employed in s 100A(8) and s 100A(5) is different. Both sections are cast in the conditional tense, but it is the object of the statutory scheme as a whole and the context of each provision in particular, which provide the surest guides to meaning. Contrary to the applicants' submission, the fact that the word "would" is used in both subsections does not imply that s 100A(8) requires the identification of an "alternative postulate" in the way the applicants contend.

176. Thirdly, as to the applicants' reliance upon the observations of Hill J in East Finchley, the relevant passage relied upon was in the following terms (at 1639):

It will be recalled that s 100A(8) requires the purpose of entering into the relevant arrangement to be the reduction of a liability of some person to income tax. It requires the hypothesis to be formulated as to what income tax would become payable if the relevant agreement had not been entered into.

177. The reference in the first sentence to what "will be recalled" is a reference to the fact that his Honour had earlier set out the words of s 100A(8). It is evident that, in the passage set out above, his Honour was simply summarising the effect of the section sufficiently for the particular purpose of addressing the issue which his Honour was considering. That issue was whether or not the beneficiary had to be a party to the relevant reimbursement agreement. The observation made by Hill J was not made in the context of considering whether s 100A(8) required the identification of an "alternative postulate" or the amount of tax avoided such as would be required to cancel under s 177F a tax benefit within the meaning of s 177C.

Application

Onus

178. The applicants accepted that they bore the onus of establishing that s 100A(8) and (9) did not apply. The applicants submitted that the onus would be discharged by establishing that there was a "realistic possibility" that some other transaction would have been entered into which did not immediately cause a person to be liable to more tax. I do not accept this submission.

179. The applicants bear the onus of establishing that the agreement was not entered into for a 'tax avoidance' purpose (s 100A(8)) which also requires establishing that no party to the agreement had the relevant purpose as "a" purpose: s 100A(9). This onus is not discharged simply by being able to point to some other transaction which realistically could have been entered into which would not have immediately caused a person to be liable to more tax.

Resolution

180. The effect of the Illuka Park steps : The effect of the Illuka Park steps, absent the application of s 100A, was as follows:

(1) IP Co transferred its retained profits to the IP Trust.
(2) For trust purposes, the IP Trust received ordinary income (the dividends and a distribution, together totalling $304,376.97)

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and capital (the proceeds of the share buy-back, namely the Share Buy-Back Dividend of $10,189,671).
(3) For tax purposes, the proceeds of the share buy-back were deemed to be a dividend. BE Co did not receive the benefit of the share buy-pack proceeds but was liable to tax in respect of the whole of the net income of the IP Trust, comprising both the ordinary income ($304,376.97) and the Share Buy-Back Dividend ($10,189,671). Under s 4-10 of the ITAA 1997, the amount of income tax owed is calculated after taking into account tax offsets. IP Co allocated the Franking Credit of $4,367,002 to the Share Buy-Back Dividend. The tax which would have been payable on the Share Buy-Back Dividend if there were no franking credits was wholly offset by the Franking Credit.
(4) The IP Trust retained the amount of the Share Buy-Back Dividend as corpus of the trust. It was not liable to pay tax under s 99A of the ITAA 1936 because it had distributed all of its (trust) income.

181. Mr Buckley described the "share buy-back strategy" as involving IP Co buying back shares from IP Trustee, the (trust) income of IP Trust being calculated in such a way that it did not include the proceeds of the share buy-back and the IP Trust distributing income to BE Co. His evidence included:

41. … [T]he second thing that began happening in October or November 2013 was that I began considering a strategy that I describe as the "buy-back strategy".
42. That strategy would involve the following:
- (a) Illuka Park Pty Ltd, which had retained earnings on which it had already paid income tax, would buy back the shares in it that were owned by the trustee of the Illuka Park Trust. I understood that most of the proceeds of that share buy-back would be treated for tax law purposes as a dividend and that that dividend could be franked. It was my understanding that, under this strategy, that dividend for tax law purposes would be franked.
- (b) The income of the Illuka Park Trust would be calculated in such a way that it did not include the proceeds of that share buy-back.
- (c) The Illuka Park Trust would distribute its income to BE Co.
43. My understanding was that the effect of this strategy, if implemented, was that the Illuka Park Trust would be able to retain the proceeds of the share buy-back and not distribute those proceeds but that that trust would still have distributed all of its income and so the trustee of that trust would not be subject to tax at punitive rates under section 99A of the Income Tax Assessment Act 1936.

182. An objective assessment of the agreement and its effects weighs heavily in favour of a conclusion that a person had a purpose of securing that a person pay less tax in a year of income.

183. A consideration of a series of further circumstances, set out next, supports this conclusion as does a consideration of the evidence of Mr Buckley, including the evidence set out at [181] above.

184. The injection of income into the IP Trust : The first time the IP Trust received income was in connection with the agreement to implement the Illuka Park steps. Until 31 March 2014, the trust property of the IP Trust was limited to $10 of cash on hand in respect of the initial settlement sum, and the shares in IP Co. The income which IP Trust received in March and April 2014 totalled $304,376.97:

• IP Co paid franked dividends to IP Trust on 31 March 2014 ($121,739) and 30 April 2014 ($59,400). It had not previously paid dividends to IP Trust.
• B&F Investments Trust distributed its income for the period ended 31 March 2014 by a resolution which made IP Trust presently entitled to $123,237.66 of the B&F Investment Trust's income. The B&F Investments Trust had never before made a distribution to IP Trust. Further, the B&F Investments Trust made an interim distribution, when both before and after the buy-back it only made year-end distributions.

185. As mentioned earlier, the generation of income in the IP Trust was central to creating the mismatch in trust income and (tax) net

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income, but was unusual from the perspective of the historical behaviour of the parties.

186. Mr Buckley accepted that "dividends were declared and credited at a time when the buyback was in contemplation": T107.11-12. When it was suggested to Mr Buckley that "it would have been simpler to deal with those dividends as part of the buyback", his response was: "Could have been. I don't know at the time": T107.18-19.

187. I infer that the dividends were paid by IP Co to the IP Trust in order for the IP Trust to have income to distribute to BE Co, the corporate beneficiary which had been incorporated a week before the first dividend was paid.

188. I infer that the interim distribution by the B&F Investments Trust to the IP Trust, was motivated by the same reason. The distribution was made when the buyback was in contemplation. If the intention was simply to provide income to BE Co, then it would have been simpler for the B&F Investments Trust to make a distribution directly to BE Co. It did not. This was because the real reason for the distribution was its role as part of the Illuka Park steps. It was necessary for IP Trust to receive income in the 2014 income year.

189. I infer that the distribution by the IP Trust (of the amounts received from IP Co and the B&F Investments Trust) to BE Co was contemplated and paid in order to ensure that BE Co would be liable for tax on both the trust income distributed to it and on the trust's net income which included the Share Buy-Back Dividend.

190. The variations to the IP Trust Deed made on 13 June 2014 : As the applicants emphasised in their submissions, the variation of the IP Trust Deed was strictly unnecessary. The IP Trustee already had a discretion to determine how "income" should be defined. However, without the variation, the trustee would need to adopt a definition of income that differed from the "default" definition provided under the IP Trust Deed as it stood before amendment on 13 June 2014. The Deed of Variation ensured that a mismatch between trust income and (tax) net income would arise automatically.

191. In letters to the ATO dated 28 July 2017 and 12 November 2018, Mr Buckley described the Deed of Variation as intended to effect a "standard 'post Bamford' amendment". He gave evidence to the same effect by way of affidavit. In cross-examination, Mr Buckley asserted that the decision to vary the IP Trust Deed was not "crucial" or "necessary" to the buyback, refusing to accept that it was part of what was described by the cross-examiner as "the share buy-back strategy": T130.3-6 and 130.36-37.

192. The "Deed of Variation" and "Share Buy-Back Agreement" bear Maddocks' logo. The "Distribution Minute", distributing the trust income of the IP Trust to BE Co, bears a reference number beginning with the same series of digits as the "Deed of Variation" and "Share Buy-Back Agreement". I infer that the Distribution Minute was prepared by Maddocks and that the documents all relate to the one overarching transaction.

193. I accept the applicants' submission that the Deed of Variation was not critical to the effectiveness of the Illuka Park steps in achieving the tax result referred to at [32] above. However:

(1) It was necessary either: (a) to vary the IP Trust Deed; or (b) for the IP Trustee to take the step of adopting a definition of "income" different to the default position under the unamended IP Trust Deed. If the Trustee was not to do (b), then (a) was necessary.
(2) The contemporaneous documentary evidence shows that the Deed of Variation was part of the suite of transactions entered into to give effect to the buyback strategy. The Deed of Variation was part of a standard set of documents across the series of buyback transactions undertaken for Fordham clients in the 2014 year.
(3) The sequence of events shows that the Deed of Variation was part of the suite of transactions entered into to give effect to the buyback strategy. The Deed of Variation was entered into after the buyback was contemplated and two weeks before the buyback occurred. It was entered into about 4 years after Bamford was decided.

194.

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As mentioned, the Deed of Variation had the result that it became unnecessary for the IP Trustee to take the step of adopting a definition of "income" different to the default position. I infer that it was considered to be preferable, in the context of carrying out the Illuka Park steps, to vary the IP Trust Deed rather than for the IP Trustee to take the step of adopting a definition of "income" different to the default position.

195. The incorporation of a new corporate beneficiary of the IP Trust : I am cognisant that this was not relied upon as one of the Illuka Park steps - see [78] above. It is nevertheless a part of the circumstances. BE Co was incorporated on 25 March 2014. Upon its incorporation, BE Co automatically became a "General Beneficiary" of the IP Trust. The establishment of BE Co as a new corporate beneficiary had been decided upon as necessary in a meeting between Mr Baring, Mr Buckley and Ms Rogers (née Bourns) in mid-February 2014. One reason it was considered necessary for a new corporate beneficiary was, I infer, because it was then planned to distribute all of the income of the IP Trust to the new corporate beneficiary. A corporate beneficiary (as opposed to a beneficiary with a marginal rate of tax higher than 30%) was required so that no 'additional tax' or 'top-up tax' would be payable. By reason of the terms of the IP Trust Deed as varied by the Deed of Variation, the income of the IP Trust would be the trust's income according to ordinary concepts ($304,376.97) - see: [24] above. Accordingly, the income of the trust would not include the Share Buy-Back Dividend. The Share Buy-Back Dividend would be capital for trust purposes, but income (a deemed dividend) for the purposes of s 95 of the ITAA 1936. The new corporate beneficiary would be liable to tax in respect of the whole of the net income of IP Trust, comprising both the ordinary income ($304,376.97) and the Share Buy-Back Dividend ($10,189,671). IP Co allocated the Franking Credit ($4,367,002) to the Share Buy-Back Dividend. The tax payable on the Share Buy-Back Dividend was wholly offset by the Franking Credit. BE Co would pay no "additional tax" over the corporate rate. Indeed BE Co would pay no tax because the Share Buy-Back Dividend was fully franked. Under s 4-10 of the ITAA 1997, the amount of income tax owed is calculated after taking into account tax offsets.

196. The decision to buy back shares (and the explanations given for the buy-back) : It is to be inferred from the objective facts (and consistently with Mr Buckley's evidence) that the architects of the Illuka Park steps considered that IP Co should distribute IP Co's retained earnings to IP Trust by means of a buy-back rather than a dividend precisely so that the mismatch would arise.

197. If the object of the Illuka Park steps was to move retained earnings into a trust rather than a company, then the simplest method of achieving that object was for IP Co to pay dividends to IP Trust, consistently with the smaller dividends which it had just paid.

198. Mrs Blood signed a " statement of material information under sections 257D(2) and 257G of the Corporations Act 2001" dated 10 June 2014. The statement of material information included the following:

3. Reasons for the Buy-Back

The reasons for the share buy-back is to simplify the share capital structure of the Company [IP Co] by having an individual own the shares rather than the trustee of a discretionary trust. This will enable more simple estate planning measures to be put in place.

199. A similar explanation was included in a letter dated 28 July 2017 sent by Mr Buckley to the ATO. His letter stated:

• The buyback simplifies the group's structure by removing the [IP Trust] as a shareholder of [IP Co];
• It enables easier succession planning as all of the shares are owned by an individual, and therefore can be dealt with via a Last Will & Testament;

200. These explanations are unlikely:

(1) The buyback was part of a series of transactions which could not be described as simplifying the group's structure. A new trust (the Brian Blood Family Settlement) was created, a new company (BE Co) was established, and the main corporate beneficiary (BE Co) was substituted for another (IP Co): T102.23-31. I

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am not satisfied that there was a desire to simplify the group's structure or a concern that it was overly complex which motivated the Illuka Park steps.
(2) After the share buy-back transaction, IP Co had negligible net assets. As noted above, IP Co's retained earnings were $7,421,721.92 as at 30 June 2013. The retained earnings were increased by $2,999,496.10 by the distribution from the B&F Investments Trust on 31 March 2014 and were then reduced by various dividends including the Share Buy-Back Dividend ($10,189,671). Ultimately, its retained earnings were $12,868.51.
(3) Because IP Co had negligible assets after the share buy-back, there was no real benefit in removing the IP Trustee as a shareholder. In any event, there was no evidence of other steps being taken to simplify the group structure.
(4) There was no real benefit for "succession planning" in having an individual, rather than a trustee, hold the shares in IP Co. In his letter to the ATO dated 12 November 2018, Mr Buckley stated that "[o]ver time [IP Co] will collect its assets, pay out its liabilities, declare dividends to clear any retained earnings, and deregister once the company has a nil balance sheet". The bulk of IP Co's retained earnings were distributed to IP Trust, where they remained.

201. Mr Buckley acknowledged in cross-examination that the reasons expressed in the statement of material information could not explain the share buy-back transaction: T100.45 to 101.14. Mr Buckley accepted that a buy-back was chosen because it would produce a deemed dividend which would not form part of trust income and which would therefore enable a capital sum to stay in the IP Trust without the IP Trustee paying tax under s 99A: T127.1-8, 133.16-27 and 134.9-16.

202. In re-examination, Mr Buckley was asked if he considered liquidating IP Co: T137.5. He answered:

Well, I was aware of a liquidation because I've done them in the past, or one in the past where by I got the same result, or the liquidator got the same result. But the issue with that was - well, too expensive for starters, a long, long time to wait, and we - we weren't winding up a trading company. There was no commercial reason to actually wind it up from a liquidation point of view.

203. Mr Buckley went on to say that the tax result for the IP Trust would have been identical in such a situation. In its closing submissions, by reference to this evidence, the applicants submitted:

The transaction was effectively a simpler, and cheaper, alternative to a liquidation. It left the company, IP Co, with only 1 share on issue (instead of 100) and nominal net assets.

204. Apart from Mr Buckley's evidence in re-examination there was no previous suggestion that the parties considered the possibility of liquidating IP Co. It was not mentioned in any of the three affidavits sworn by Mr Buckley or the three affidavits sworn by Mr Blood or in any contemporaneous document. In any event, Mr Buckley's evidence was that "[t]here was no commercial reason to actually wind it [IP Co] up from a liquidation point of view". The share buy-back was not undertaken as a cheap alternative to a liquidation.

205. Succession planning and the buy-back : It was suggested by Mr Blood and Mr Buckley that "succession planning" was a part of the reason for undertaking the Illuka Park steps. In his affidavit, Mr Blood stated that he was told by Mr Baring that the structure he would recommend would "help to make sure" that Mr and Mrs Blood's assets would be evenly split between their three children after they died. He also stated that he thought the share buy-back transaction would make it easier for his group to make investments in the future and to help the "the succession planning structure".

206. Mr Buckley explained in an affidavit:

My understanding is that the Brian Blood Family Settlement and BE Co were set up in response to concerns that Brian had about how he could direct his entity's assets to his children when he and Fiona died. While my staff and I assisted in establishing those entities and I was involved in discussions concerning their establishment, I was not involved in the design of that

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structure or recommendation that it be set up. Rather, I understand, that the structure was a product of recommendations by Brian's solicitors including Coulter Roache in Geelong and Leigh Baring at Maddocks who I know has provided Brian (and the Blood Group) with tax advice from time to time.

…

My understanding of the Brian Blood Family Settlement was that it was a good vehicle for Brian and his family to grow their wealth into the future. I understood that Brian and his family could accumulate wealth in that trust, with Brian and Fiona during their lifetimes having a wide discretion as to how that wealth would be applied, but also having the comfort that after their passing their children would each in economic effect have one third of the wealth that Brian and Fiona had accumulated during their lifetimes.

Based on that understanding, I formed the view that it would be a good idea for assets to be transferred to the Brian Blood Family Settlement or to BE Co, which was wholly owned by the Brian Blood Family Settlement. I described this as the "succession planning strategy".

207. It is difficult to see how the share buy-back transaction facilitated or furthered succession planning. It resulted in the vast majority of IP Co's retained earnings being accumulated to corpus by the IP Trustee. After IP Co's retained earnings were distributed to IP Trust, they could either be accumulated to corpus by IP Trust (in accordance with the "share buy-back strategy") or distributed by IP Trust to the Brian Blood Family Settlement or BE Co (in accordance with the so-called "succession planning strategy"). In cross-examination, Mr Buckley accepted that "the buyback strategy was clearly not part of the family succession strategy, at least in 2014": T97.34-35.

208. The object of entering into the share buy-back was not to move the bulk of retained earnings into the Brian Blood Family Settlement or BE Co. That did not happen. BE Co's financial position was unaffected by the buy-back, because its tax liability in respect of the Share Buy-Back Dividend was offset by the Franking Credit. If the object was to move retained earnings into BE Co, then this could have been achieved by IP Co paying the retained earnings by way of dividends to IP Trust. If it had done so, these would have been distributed to BE Co by IP Trust in accordance with its resolution of 30 June 2014. The only income in fact distributed to BE Co by that resolution was the trust income of $304,376.97. The only reason that amount was the whole of the trust income was because of the Deed of Variation, which operated such that the default position was that the Share Buy-Back Dividend fell outside of the definition of "income" in the Trust Deed - see: [24] above. Absent the Deed of Variation, the trustee could have adopted a definition of "income" different to the default position under the unamended IP Trust Deed.

209. The 30 June 2014 distribution of $304,376.97 was not made for a substantial purpose of succession planning. The predominant purpose of making the distribution was to facilitate the outcome which, but for the operation of s 100A, was achieved.

210. The contemporaneous documents indicate that the share buy-back transaction was progressed before any family succession planning. Maddocks' invoice to Blood Auto Group Pty Ltd dated 29 November 2013 contains numerous entries relating to the share buy-back transaction, but no reference to the establishment of the Brian Blood Family Settlement or BE Co.

211. The requirement for a new corporate beneficiary (BE Co) was first mentioned in an email of 4 March 2014 which indicated it was recommended in mid-February 2014. The Brian Blood Family Settlement was established on 19 March 2014. BE Co was incorporated on 25 March 2014.

212. Moving IP Co's retained earning into a trust and strengthening IP Trust's balance sheet : In his letter to the ATO dated 28 July 2017, Mr Buckley asserted that the buy-back "strengthens the balance sheet of [IP Trust] as the gain is a realised capital profit and is recorded as such in the financial statements of the trust". That is true, but it does not explain the Illuka Park steps as a whole. In any event, the effect of the buy-back was that the IP Trust exchanged its shares in IP Co, which had

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significant retained earnings which could be paid to IP Trust by dividend, for an unsecured loan owing by IP Co. IP Trust remained at risk should IP Co incur liabilities. There was no reasonable explanation as to why recording IP Co's retained earnings as a "realised capital profit" was more beneficial than those earnings constituting an unrealised profit in respect of IP Trust's shareholding.

213. In his letter to the ATO dated 28 July 2017, Mr Buckley stated that the buy-back "will give rise over time to a pool of funds that will be available for investment in a more appropriate investment entity (ie a trust compared to a company)". In his affidavit, Mr Buckley stated:

I formed the view that the "buy-back strategy" would benefit Brian and his entities because it would allow a pool of funds to be established in the Illuka Park Trust. That would allow for any future investment to be made in a trust rather than a company. I was, and still am, of the view that a discretionary trust is a much better vehicle compared to a company to acquire passive growth assets. Not only is it possible to access the 50% CGT discount through a trust, it is relatively easy to distribute unrealised gains compared to a company.

214. These statements show that Mr Buckley considered that it was preferable for IP Co's retained earnings to be distributed to IP Trust and accumulated to corpus for investment purposes. If the objective had been to facilitate access to the CGT discount in respect of capital gains made by the IP Trust on future investments, then IP Co could simply have paid a dividend to IP Trustee. In any event, the IP Trust did not make significant new investments in subsequent years. I refer below to certain transactions in which debts owed by Mr Blood and trusts associated with him were assigned to IP Trust in satisfaction of the Buy-Back Loan.

215. The advisers brought the strategy to the Brian Blood group for reasons which included a purpose of securing that less tax be paid in relation to the distribution of company profits : The suggestion that the advisors generally, and Mr Buckley in particular, recommended and implemented the buy-back strategy without regard to its tax advantages is inconsistent with the contemporaneous documents and the objective facts, including the effect of the Illuka Part steps. The asserted objectives - transferring the retained earnings into a trust for advantages which included access to the CGT discount on future investments - could have been achieved more simply without the share buy-back transaction. For example, IP Co could have paid a dividend to the IP Trust.

216. The "Share Buy-Back Strategy" originated with the advisers rather than with Mr Blood or any entity within his group or with any of the other groups which entered into equivalent transactions. The "Share Buy-Back Strategy" did not originate as a consequence of Mr Blood or his group seeking advice. The "Share Buy-Back Strategy" was brought to Mr Blood and his group by the advisers.

217. The documents evidencing the genesis of the structure do not indicate that the scheme was devised for succession planning purposes or structural simplification. The documents do not suggest a particular concern about either of those matters at a time when the "Share Buy-Back Strategy" was brought to Mr Blood for his consideration.

218. In his affidavit, Mr Blood confirmed that the "potential transaction" was suggested to him by Mr Buckley in the second half of 2013, but before 11 October 2013. A similar, if not materially identical, arrangement was set out in the 17 September 2013 Memorandum entitled "Share Buy-Back Strategy - Test Case - Geoff Harris Group". This was sent by Mr Cahir (Fordham) to Mr Buckley and Mr Baring. It described a "proposed Share Buy-Back of Ordinary Shares" comprising substantially the same steps and having substantially the same result as the Illuka Park steps. The 17 September 2013 Memorandum included:

In general terms, under a Share Buy-back, any amount returned to the shareholders in excess of the issued cost of the ordinary shares bought back constitutes a frankable Dividend for income tax purposes.

Under Common Law, for accounting purposes however, this excess component is not considered a dividend. Therefore if the trust receiving a buy-back dividend has a Trust Income definition calculated in accordance with ordinary accounting

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principles, then this excess component is treated as received on capital account and does not form part of Trust Income.

219. Section 3 of the memorandum set out what were perceived to be the favourable tax outcomes of the distribution by way of share buy-back, which included a consideration of the potential Div 7A ITAA 1936 consequences. I infer from the memorandum that one objective behind the strategy was to enable a company's retained earnings to be extracted without additional tax being paid.

220. The 17 September 2013 Memorandum was followed by correspondence between Mr Baring, David Buckley and Mr Cahir concerning the tax consequences of the proposed transactions, including the Div 7A implications. Mr Baring sent an email on 19 September 2013 with the subject "Subdivision EA", in which Mr Baring wrote: "Just confirming the conclusion we came to the other day". The balance of the text of the email is redacted. I infer that the reference in the email to "Subdivision EA" is to Subdiv EA of Div 7A in Part III of the ITAA 1936, consistently with Mr Buckley's understanding: T119.15-18. Mr Buckley's evidence was that he regarded avoiding deemed dividends under Div 7A as "a basic part of tax planning" and an "expectation" of his clients: T117.10-14.

221. In relation to Div 7A specifically, I conclude that the advisers considered the operation of Div 7A in connection with the scheme. It is likely that the advisers considered how IP Co's retained earnings which were to be transferred to the IP Trust might be accessed without triggering a tax liability under Div 7A. On balance, it likely that the advisers reached the conclusion that, if the Illuka Park steps were implemented, it would be easier to extract what had been IP Co's retained earnings in a way which did not trigger a liability under Div 7A. I note, in particular, that s 109L(1) provides that ss 109C and 109D do not apply to a payment of an amount included in assessable income. The proceeds of the share buy-back were a deemed dividend, included in assessable income. I do not accept the applicants' submission that the consideration given to Div 7A by some of the advisers was peculiar to the Harris group. This is objectively unlikely, particularly in circumstances where Mr Buckley considered avoiding deemed dividends under Div 7A to be a basic part of tax planning.

222. In cross-examination, Mr Buckley accepted that Mr Harris, the controller of the Harris group, had not asked Fordham to consider the strategy; the Harris group was simply a "live example" for Mr Buckley to consider the strategy's tax consequences and then propose the strategy to his clients if he were satisfied about them: T135.31-136.9. The interrelated series of steps were implemented by at least seven private groups (during the 2014 year) that were then clients of Fordham.

223. Mr Buckley accepted that he met with Mr Blood and his brother in October 2013, and later with Mr Harris and his business partners, to propose the strategy to them: T136.11-18. As has been mentioned, it was not in dispute that seven groups implemented the strategy in the 2014 year.

224. Mr Baring : Mr Baring was not called to give evidence. Given that much of what Mr Baring might have said could properly have been the subject of a claim for legal professional privilege, I draw no adverse inference from the absence of his evidence.

225. Mr Baring advised in respect of the transactions so far as concerned the Brian Blood group. The transactions entered into by the remaining groups were implemented by documents prepared by Maddocks. The applicants submitted that, while Maddocks was involved in implementing the transactions, its role was to provide legal advice and to draft the necessary documents. The probabilities favour that the Illuka Park steps would not have been implemented and the agreement to implement them would not have been reached, without the legal advisers having given advice. The "understanding" to implement the Illuka Park steps was an understanding to which Mr Baring was also a party.

226. For the reasons given at [198] to [201] above, I do not accept the reasons put forward for the buy-back in the "statement of material information under sections 257D(2) and 257G of the Corporations Act 2001" as a correct account of the reasons for the buy-back or as a complete account of those reasons. Mr Buckley denied having reviewed the document, but

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accepted it could not explain the buy-back. I infer that the document was prepared and reviewed by Maddocks. The statement of material information bears a footer which is consistent with it being prepared by Maddocks. Mr Andrew Wright of Maddocks lodged the "Notice of intention to carry out a share buy-back" with ASIC on 10 June 2014 and informed Mr Baring of that fact by an email sent on 11 June 2014.

227. To the extent it is to be inferred that Mr Baring either prepared or reviewed the statement of material information (about which I reach no conclusion), I do not accept that the document reflects a complete explanation of his purposes as a party to the understanding to implement the Illuka Park steps. Indeed, the document does not contain the principal purposes for which the buy-back was conducted.

228. It is obvious, as has been pointed out, that the scheme was intended to secure a tax advantage for a person in a year of income and, more specifically, for the purposes identified at [182] above. The evidence does not disclose whose brainchild the buy-back strategy was, but it is naïve to think an experienced lawyer advising in tax would not have perceived the purpose underlying the otherwise unusual series of transactions in respect of which advice was being sought. Mr Baring's role in giving advice presumably included maximising the probability of the objectives being achieved, even if some of those objectives might only be achieved in later years of income.

229. Mr Buckley : Mr Buckley gave evidence and was cross-examined. It was submitted by the applicants that Mr Buckley thought that:

• the effect of the buy-back transaction would be for funds to be transferred to and retained by the Illuka Park Trust to establish a "pool of funds" held by that trust so that the trustee of that trust could use those funds to make future investments;
• a discretionary trust was a better vehicle for passive growth assets than a company, referring in particular to the CGT discount and the ease of distributing unrealised gains as advantages of a discretionary trust.

230. I am satisfied that one of Mr Buckley's purposes in agreeing to implement, and assisting in the implementation of, the Illuka Park steps was to secure a transfer of IP Co's retained earnings to the IP Trust without that trust paying tax and in a way which would facilitate discretionary objects of the IP Trust accessing the retained earnings at some future time in a manner which would secure the outcome that no or less additional tax would be paid that would have been paid if the Illuka Park steps had not been carried out.

231. Mr and Mrs Blood : I infer that the advice of Mr Baring and Mr Buckley was communicated to Mr Blood. Leaving aside Mr Baring's role as appointor, Mr Blood was de facto controller of the relevant entities which would carry out the Illuka Park steps. I consider it likely that he understood the basics of the Illuka Park steps and that his purposes included a purpose of securing that a person pay less tax in a year of income in the manner envisaged by s 100A(8).

232. Mrs Blood was the sole director of IP Co, B&F Investments and BE Co. She signed most of the key documents, including the Share Buy-Back Agreement and Distribution Minute. She did not give evidence. Mr Blood's evidence was that Mrs Blood "always left all decisions in relation to managing my family group to me" and that he would take the documents to Mrs Blood and would ask her to sign them.

233. Mr Buckley's evidence was that: he "never dealt with [Mrs Blood] professionally"; Mrs Blood "never attended meetings with me in which we discussed strategic planning or financial or tax issues"; he "received all instructions from, had all discussions with and gave all of my recommendations to Brian"; and it was his "understanding that Brian controlled each of those entities". Mrs Blood was a party to the agreement to enter into the Illuka Park steps. However, in the circumstances just described, her subjective purposes will not take the matter further than the purposes of Mr Blood and the advisers.

234. It was submitted that Mr Blood did not think that the buy-back transaction would either increase or reduce the amount of income tax that anyone would be liable to pay and that he thought that the buy-back transaction would: (a) make it easier for investments to be made in the future by the entities associated with Mr Blood;

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and (b) help with the "succession planning structure" of the Brian Blood Family Settlement and BE Co.

235. The applicants noted that it was not directly put to Mr Blood that he intended to secure any reduction or elimination of tax by entering into the agreement. It is true that Mr Blood was not directly cross-examined on this matter. Nevertheless, it was plain from the evidence and opening submissions which had been filed that this was in issue. The circumstances included that the Illuka Park steps comprised a transaction which had been brought to Mr Blood and the principal focus of attention was on the purpose of the advisers and the purpose as exposed by the objective circumstances. Mr Blood had given evidence that he had a limited understanding of the detail of the Illuka Park steps. In the circumstances of this case, fairness did not require this particular matter to be put to Mr Blood.

236. Mr Blood's evidence was that the share buy-back transaction was recommended to him by Mr Buckley, who was his main contact at Fordham. He did not understand the details of the transaction and "relied heavily on Fordham Group's recommendation" that IP Co undertake the transaction. He "asked Fiona to sign the documents" based on "the recommendation of Fordham Group".

237. I accept Mr Blood's evidence that he did not understand the detail of the Illuka Park steps, including precisely how the Illuka Park steps would achieve an advantageous outcome in terms of tax. Nevertheless, he is likely to have understood that the steps were intended to achieve the outcome that: (a) the IP Trust would not pay tax in the 2014 year; (b) the tax payable by BE Co in relation to the Share Buy Back Dividend would be wholly offset by the franking credits; and (c) the retained earnings could be accessed or distributed in the 2014 or a subsequent income year in a way which meant that he and others would not be subject to additional tax, or would be subject to less tax, than would be the case if those retained earnings had been accessed in some other way, for example, by those retained earnings being distributed from IP Co to IP Trust by way of dividends.

238. The applicants accepted that, in appropriate circumstances, an advisor's purpose can be attributed to a party to a transaction, referring to
Federal Commissioner of Taxation v Bidencope [1978] HCA 23; 140 CLR 533 at 547;
Federal Commissioner of Taxation v Consolidated Press Holdings Ltd [2001] HCA 32; 207 CLR 235 at [95]. It is unnecessary to consider the conclusions in those cases or the potential application of what was said in them to the present case because: (a) I have concluded on the balance of probabilities that Mr Blood (and therefore the entities entering into the relevant transactions) in fact had the relevant purpose as "a" purpose (s 100A(9)), despite not understanding the detail of the transactions; and (b) the advisers had the relevant purpose as "a" purpose and they were a party to the agreement or understanding to implement the Illuka Park steps.

239. Conclusion : The Illuka Park steps were implemented in order to achieve the tax result identified at [32] above. The decision to have IP Co distribute the retained earnings by conducting a share buy-back was intended to create a situation where the trust income and the net income of the trust were different. The Illuka Park steps as a whole, and the choice of distributing the retained earnings by a share buy-back in particular, was intended to transfer IP Co's retained earnings to the IP Trust in a way which (absent the application of s 100A) secured that:

(a) the IP Trust would not pay tax on the distribution in the 2014 (or any) year;
(b) there would be no tax payable by BE Co in relation to the Share Buy Back Dividend, because the tax which would otherwise be payable would be wholly offset by the Franking Credit; and
(c) the retained earnings, which would form corpus of the IP Trust, might be accessed or distributed in the 2014 or a subsequent income year in a way which reduced or avoided the payment of 'additional tax' or 'top-up tax'.

240. I conclude that the purpose just identified was the purpose of Mr Baring and Mr Buckley. It is likely that the purpose was explained to, and understood and adopted by,

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Mr Blood. Mr Blood was the de facto controller of each of the relevant corporate entities.

241. For these reasons, I am satisfied that the purpose of entering into the agreement (s 100A(8)) and a purpose of each of IP Co, IP Trustee, BE Co, the advisers and Mr Blood (s 100A(9)) included a purpose of securing the result that a person who, if the agreement had not been entered into, would have been liable to pay income tax in respect of a year of income, would not be liable to pay income tax in respect of that year of income or would be liable to pay less income tax in respect of that year of income than that person would have been liable to pay if the agreement had not been entered into.

242. The applicants have not discharged the onus of establishing that there was not a purpose covered by s 100A(8).

The applicants' contentions about what would have occurred

243. If the construction I have earlier given to s 100A(8) and (9) is wrong and purpose must be determined in this particular case by reference to a definite alternative postulate in the way contended by the applicants, I would still conclude that the relevant purpose existed. For the reasons which follow:

(1) I am not satisfied that the hypotheses as to what would have occurred are as identified by the applicants; and
(2) I am satisfied that IP Co would have paid to IP Trust a dividend in the amount of the Share Buy-Back Dividend in the 2014 year if the agreement to enter into the Illuka Park steps had not been entered into or carried out.

244. The applicants submitted that:

(a) on both the applicants' "annihilation" and "reconstruction" approach, if the agreement identified by the Commissioner had not been entered into, then nobody would have paid any additional tax: the retained earnings of IP Co would simply have remained in IP Co with no tax liability;
(b) on the applicants' "reconstruction" approach another realistic possibility is that IP Co would have paid a franked dividend to IP Trust, which the IP Trust would then have distributed to BE Co.

245. Both of these hypotheses would leave the retained earnings in a company rather than a trust, being the very thing which Mr Buckley considered disadvantageous. Mr Buckley was adamant that a trust was a better investment vehicle than a company, because of the tax advantages associated with investing through a trust: T125.20-27, 126.41-44 and 127.10-14. He considered it highly desirable, if not critical, that the retained earnings be put into a trust: T128.45-129.21. Mr Buckley described the disadvantages of using a company as "quite huge": T126.39.

246. Retained earnings remaining in IP Co : I do not accept the applicants' contention that IP Co would not have distributed its retained earnings to IP Trust by way of dividend.

247. First, and this reason is of itself sufficient, Mr Buckley considered that the IP Trust was a better investment vehicle because of the aforementioned advantages which the trust structure brought. An ordinary commercial transaction which would be entered into in order to move retained earnings from a company into a trust which owned shares in the company would be for the company to pay dividends. On the facts of this case, where franking credits were available, it is likely that fully franked dividends would have been paid.

248. To the extent that the income from those dividends was distributed to beneficiaries, those distributions would have resulted in additional tax being paid above the corporate rate given that relevant discretionary objects are likely to have had a marginal rate above 30%. If the income from those dividends was not distributed, then additional tax would have been payable by the trustee. It was suggested that the retained earnings would not have been paid by dividend to IP Trust because of these potential additional tax liabilities. However, there is nothing unusual about 'additional tax' or 'top-up tax' being paid by recipients of company distributions. The payment of tax on the distribution of company profits (and the obtaining of a tax offset in respect of tax paid on those profits by the company, represented by franking credits) reflects the ordinary intended operation of Australia's imputation system. In simple terms, the imputation system operates to prevent what might be

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thought to be an undesirable form of double taxation: if a company is taxed on its profit at 30% and the shareholder receives a distribution of that taxed profit, the shareholder should only pay tax at a level which takes account of the fact that 30% tax has already been paid on the profits underlying the distribution.

249. Secondly, the retained earnings distributed by IP Co to the IP Trust on the share buy-back in the 2014 year were used in transactions which benefitted Mr Blood and trusts associated with him. This fortifies the conclusion which I have reached in any event that the retained earnings would not have been retained by IP Co because of the desire to move those retained earnings into a trust structure.

250. There was a debate between the parties as to whether these events demonstrated that the buy-back proceeds (IP Co's retained earnings) were accessed in a tax advantageous way (in particular by avoiding the operation of Div 7A). The applicants submitted that the Commissioner should not be permitted to raise such an argument, it not having been sufficiently raised in the Commissioner's Appeal Statement. It is not necessary to resolve that debate. I refer to these events only for their relevance to the conclusion I otherwise reach that IP Co would not have done nothing but for the agreement and would have paid its retained earnings to IP Trust by way of dividend.

251. As noted earlier, IP Co owed $10,249,071.00 to the IP Trust after the buy-back and the dividends of 31 March 2014 and 30 April 2014. On 1 July 2014, IP Co repaid $2,999,496.10 of that amount. It did so by assigning to the IP Trust a UPE owing to IP Co from the B&F Investments Trust which arose on B&F Investments Trust's 31 March 2014 distribution to IP Co.

252. During the year ended 30 June 2015, B & F Investments Trust made cash payments on behalf of:

• Mr Blood such that Mr Blood owed B & F Investments $720,738.14 at 30 June 2015. Mr Blood thought the two largest payments may have paid off a farm loan: T82.5-32.
• B & F Investments Trust No 3 such that B & F Investments Trust No 3 owed B & F Investments $350,492.75 at 30 June 2015; and
• B & F Investments Trust No 4 such that B & F Investments Trust No 4 owed B&F Investments $358,750.00 at 30 June 2015.

253. On 1 July 2015, B&F Investments Trust repaid $1,431,225.89 of the $2,999,496.10 UPE then owing to IP Trust by assigning each of those debts to the IP Trust. The result of these transactions was that: IP Co's assets reduced by $1,431,225.89; the balance of the Buy-Back Loan reduced by $1,431,225.89; payments were made for the benefit of Mr Blood and trusts associated with him, in the amount of $1,431,225.89; and the IP Trust acquired debts of $1,431,225.89 owed by Mr Blood and the two trusts.

254. The applicants submitted that "IP Co's retained earnings were not accessed by Mr Blood or the two B&F Investments Trusts Nos 3 and 4" on the basis that the source of the funds loaned by the B&F Investments Trust was from that trust's profits. The point, however, is that those loans were assigned to the IP Trust with the result that the loans were, in substance, ultimately funded out of the retained earnings of IP Co which had been distributed to the IP Trust. The IP Trust did not apparently receive any interest income in respect of the debts owed to it in the years ended 30 June 2015, 2016 or 2017. The IP Trust continued to recognise the debts owing by Mr Blood and the two trusts as "Loans Unsecured" in its balance sheet as at 30 June 2017.

255. B&F Investments Trust had entered into what were said to be Div 7A complying loan agreements with Mr Blood and the trustees of the B&F Investments No 3 and No 4 Trusts on 30 June 2015. It is not necessary to resolve whether these loan agreements applied to the IP Trust's arrangements (as contended by the applicants) and I do not do so given the way this issue arose in cross-examination and without the issue having been clearly identified in the Commissioner's Appeal Statement as an issue in the proceedings. The IP Trust was not expressly a party to the loan agreements just mentioned. The evidence did not otherwise establish that the IP Trust had entered into, or been a party to, relevant complying Div 7A loan agreements. Nevertheless, as I

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have said, this issue was not clearly identified as one to be resolved in the proceedings.

256. I do not conclude from the events described in [249] to [255] above that the Illuka Park steps were entered into for a purpose which included avoiding the operation of Div 7A. However, for the reasons discussed earlier, I infer from other evidence that the operation of Div 7A was considered by the advisers in the context of taking the share buy-back strategy to Mr Blood and in reaching the understanding that the parties would each do what was necessary to implement the Illuka Park steps.

257. Rather, the events described in [249] to [255] above support the conclusion I reach in any event that, were it not for the agreement, IP Co would not have simply done nothing.

258. In conclusion, if the agreement had not been entered into or carried out, IP Co would have paid its retained earnings to the IP Trust in the ordinary way, namely by paying dividends to its shareholders. No point was made by the parties of the fact that Mrs Blood held one share in IP Co. There were substantial benefits associated with moving IP Co's retained earnings into IP Trust. As Mr Buckley acknowledged, one of the reasons for doing so was that beneficiaries of the IP Trust could take the benefit, to the extent entitled, of access to the CGT discount in respect of capital gains made by the IP Trust on future investments.

259. Dividend to IP Co with distribution to BE Co : I do not accept that IP Co would have paid fully franked dividends to IP Trust with IP Trust then distributing the amount to BE Co. This would not have achieved Mr Buckley's objective of moving the retained earnings into a trust. It would have moved the retained earnings through a trust into a new corporate structure.

260. Further contentions if retained earnings distributed : The applicants submitted that, even if the retained earnings would have been distributed to the IP Trust or otherwise extracted in the 2014 year or some future year, it could not be said that a person would be liable to pay additional income tax on those earnings. The applicants submitted:

(1) The funds might have been paid by way of franked dividends ultimately distributed to individuals whose marginal rates of tax were below the corporate tax rate, resulting in no additional liability to income tax because of the tax offset from the franking credits.
(2) The funds might have been paid by way of franked dividends ultimately distributed to non-resident individuals, who would not be liable to either withholding tax or income tax - see: ss 128B(3)(ga) and 128D of the ITAA 1936.
(3) The funds might have been distributed (via the relevant trust) to a charity or other exempt entity. It was submitted that this "prospect" was "far from fanciful".
(4) The funds might have been paid by way of dividends ultimately distributed to entities with losses or deductions (eg for a contribution to a complying superannuation fund).
(5) The funds might have been lent to a related operating company for it to use in its own activities. Such a loan would not have given rise to any deemed dividends under Div 7A - see: s 109K.

261. The evidence did not establish any of these scenarios as realistic possibilities. In any event, however, the existence of such possibilities does not negative the conclusion that a purpose of the Illuka Park steps was to achieve the outcomes earlier described.

262. The applicants noted that the Commissioner's argument involved not only the proposition that (a) the retained earnings distributed to the IP Trust by way of the buy-back would one day be distributed to an individual, but also that (b) the individual would not be subject to additional tax on that distribution.

263. At to proposition (a), there is every reason to expect that Mr Blood and members of his family were or would be likely to benefit as discretionary objects of the IP Trust.

264. As to proposition (b), the applicants pointed to a number of ways in which capital distributions from the trust might be taxed in the future. Examples include:

(1) the potential operation of Div 7A of the ITAA 1936;
(2) s 99B of the ITAA 1936 which is headed 'Receipt of trust income not previously subject to tax' and which, despite

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that heading, can apply to corpus distributions - see: s 99B(2)(a);
(3) CGT event E4 in s 104-70 of the ITAA 1997 which happens when a capital distribution is made from a trust in the circumstances there set out;
(4) s 109XA of the ITAA 1936 which extends Div 7A to certain payments, loans and debt forgiveness made by trusts.

265. It may be accepted that there are ways in which the retained earnings transferred to the IP Trust as corpus could be distributed or accessed in a way which would attract further tax, but establishing that possibility does not establish that a purpose was not as identified earlier.

266. As I have sought to explain, the purpose of the share buy-back strategy and the understanding to carry out the Illuka Park steps is obvious. The purpose was to facilitate the extraction of IP Co's retained earnings without any person being liable to tax on the distribution of those profits in the 2014 year and with the object of facilitating access to those profits in later years without further tax becoming payable or with less tax being payable. The main point of the Illuka Park steps was to facilitate access to IP Co's retained earnings without payment by any person of additional tax (or payment of less tax) on the distribution (in simple terms, tax above 30%) in circumstances where accessing those profits in the ordinary way (dividends to the shareholders and distribution of the dividend income to discretionary objects) was likely to have triggered a liability to such tax. It is not to the point that one could devise a way of accessing the retained earnings which had been transferred to the IP Trust in a way which might trigger a tax liability. The probabilities do not favour the transferred retained earnings being accessed in such a way.

Issue 2(5): Whether BE Co's present entitlement arose out of the reimbursement agreement

267. As noted earlier, s 100A(1)(b) of the ITAA 1936 requires that:

… the present entitlement of the beneficiary [to a share of the income of the trust estate within s 100A(1)(a)] arose out of a reimbursement agreement or arose by reason of any act, transaction or circumstance that occurred in connection with, or as a result of, a reimbursement agreement.

268. The parties agreed that s 100A(1)(b) sets up a "but for" test of causation, referring to
Idlecroft Pty Ltd v Federal Commissioner of Taxation [2005] FCAFC 141; 144 FCR 501 at [44] (Ryan, Tamberlin and Kiefel JJ). There is a risk of oversimplification in approaching the application of s 100A(1)(b) by describing it simply as imposing a "but for" test of causation, and determining the issue posed by s 100A(1)(b) by reference to that test rather than applying s 100A(1)(b) according to its terms. I do not read Idlecroft at [44] as adopting such an approach. Section 100A(1)(b) contains a number of components, not all of which necessarily imply the same type or quality of connection between the relevant events. The particular order of events might also be relevant. The first part of the section is satisfied if the present entitlement "arose out of a reimbursement agreement"; the second part is satisfied if the present entitlement "arose by reason of any act, transaction or circumstance that occurred in connection with, or as a result of, a reimbursement agreement".

269. The Commissioner submitted that it should be concluded that the present entitlement of BE Co arose out of the agreement comprising the Illuka Park steps, or arose by reason of an act, transaction or circumstance that occurred in connection with, or as a result of, that agreement. This submission must be accepted.

270. The Illuka Park steps which the parties agreed to undertake included the step of making a resolution on 30 June 2014 to distribute the (trust) income of IP Trust to BE Co. The resolution was central to creating the mismatch between trust income and net income on which the tax result depended. In these circumstances, it is clear that BE Co's present entitlement "arose out of the reimbursement agreement", namely the agreement to implement the Illuka Park steps, and that it arose out of a transaction entered into "in connection with" and "as a result of" that agreement.

271. More indirectly, the agreement included steps which ensured that IP Trust had (trust)

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income for distribution in the 2014 year. The receipt by IP Trust of (trust) income was also integral to creating the necessary mismatch between trust income and net income. It ensured that the IP Trust had income to which BE Co could be made presently entitled which, in turn, ensured that BE Co would include the amount of the Share Buy-Back Dividend and Franking Credit in its assessable income. Were it not for the distribution made by the B&F Investments Trust and the dividends paid by IP Co to IP Trustee, the IP Trust would have lacked (trust) income to which BE Co could be made presently entitled.

272. The applicants submitted that, in applying the "but for" test of causation imposed by s 100A(1)(b), s 100A(5) indicated that a reasonable expectation is relevant. The applicants submitted that, if the agreement had not been entered into, the IP Trust would have (or at least could reasonably be expected to have) distributed the same amount of income to the same beneficiary as actually received that income, namely BE Co, or a greater amount.

273. This submission demonstrates the danger in departing from the statutory language. Section 100A(1)(b) does not pose the question whether, "but for" the reimbursement agreement, it "could reasonably be expected" that the beneficiary would have been presently entitled to the same share of trust income or some greater amount. Section 100A(5) uses the phrase "could reasonably be expected". Where it applies, s 100A(5) fixes an amount to which a beneficiary is deemed to be presently entitled if, absent the reimbursement agreement, the beneficiary would, or could reasonably be expected to have had, a particular lower present entitlement - see also: 1978 EM at page 35; [174] to [175] above. Section 100A(5) expressly does not "limit the generality" of s 100A(1).

ISSUE 3: SECTION 207-35(6)

274. This issue only arises if s 100A of the ITAA 1936 applies, as I have concluded it does. Both parties ultimately agreed that the words of s 207-35(6) of the ITAA 1997, read literally, do not achieve the legislature's presumed intended objective and that something had gone wrong in the drafting of the provision: T213.39.

275. Subsection 207-35(5) provides:

(5) Subsection (6) applies if:
- (a) a *franked distribution is made, or *flows indirectly, to the trustee of a trust in an income year; and
- (b) the assessable income of the trust for that year includes an amount (the franking credit amount ) that is all or a part of the additional amount of assessable income included under subsection (1) in relation to the distribution; and
- (c) disregarding Division 6E of Part III of the Income Tax Assessment Act 1936, the trustee of the trust is liable to be assessed (and pay tax) in respect of an amount (the assessable amount ) under section 98, 99 or 99A of that Act in relation to the trust.

276. There was no issue between the parties that, if s 100A applied in relation to BE Co's present entitlement to a share of the income of the IP Trust, s 207-35(5) was satisfied with the result that s 207-35(6) applies. Subsection 207-35(6) provides (emphasis added):

(6) Despite any provisions in Division 6 of Part III of the Income Tax Assessment Act 1936, for the purposes of that Division, increase the assessable amount by so much of the franking credit amount as is equal to :
- (a) … [not presently relevant] …
- (b) if the trustee of the trust is liable to be assessed (and pay tax) under section 99 or 99A of that Act-the sum of:
  - (i) the trustee's share of the franking credit on the distribution; and
  - (ii) the amount mentioned in section 207-37.

277. It is paragraph (b) which is relevant to the present circumstances.

278. The respondent submitted that s 207-35(6) increases the "assessable amount" in respect of which IP Trustee is liable to be assessed under s 99A of the ITAA 1936, by the sum of:

(1) the IP Trustee's share of the Share Buy-Back Dividend (under s 207-55 of the ITAA 1997) - being the whole of the Share Buy-Back

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Dividend; and
(2) the IP Trustee's share of the Franking Credit on the Share Buy-Back Dividend (under s 207-57 of the ITAA 1997) - being the whole of the Franking Credit.

279. In its written opening, the applicants contended that:

(1) s 207-35(6) should be construed literally as increasing the "assessable amount" only by the amount of the Franking Credit (and not also by the amount of the Share Buy-Back Dividend), due to the words of limitation in the chapeau: "so much of the franking credit amount as is equal to …"; and
(2) increasing the "assessable amount" (defined in s 207-35(5)(c)) does not increase the amount in respect of which IP Trustee is liable to be assessed under s 99A. Subsection 207-35(6)(b) operates to increase the "assessable amount", being the amount that would be assessed under s 99A if Division 6E did not apply and applies despite the provisions of Div 6 and "for the purposes of that Division".

280. As noted, by the time of oral closing submissions, the applicant accepted that something had gone wrong in the drafting of the provision.

281. What the legislature in fact intended is obvious from the statutory context. Where the trustee of a trust is liable to be assessed under s 99A (or the other provisions mentioned in s 207-35(5)(c)), s 207-35(6) was intended to require the amount assessed to be increased by so much of the "franking credit amount" as was equal to the "trustee's share of the franking credit" and the "amount mentioned in section 207-37". In the present case:

(a) the "franking credit amount" is the amount of the Franking Credit. The "franking credit amount" is the additional amount of assessable income under s 207-35(1). Subsection 207-35(1) includes in the assessable income of the trust the amount of the franking credit.
(b) the trustee's (IP Trustee's) share of the franking credit is the amount of the Franking Credit, because s 100A extinguishes BE Co's present entitlement to (trust) income of the IP Trust, making IP Trustee liable to be assessed, and pay tax, on the entire net income of the IP Trust; and
(c) the amount mentioned in s 207-37 is the amount of the Share Buy-Back Dividend. The amount mentioned in s 207-37 is, subject to any adjustment required under s 207-37(3), the product of (a) the amount of the franked distribution (reduced by directly relevant deductions); and (b) the trustee's share of the franked distribution within the meaning of s 207-55, divided by the amount of the franked distribution. Thus, where there are no directly relevant deductions and the trustee's share of the franked distribution is equal to the amount of the franked distribution, the amount mentioned in s 207-37 is the amount of the franked distribution.

282. Subsection 207-35(6) could not sensibly have been intended, consistently with the statutory scheme, to limit the increase in the assessable income only to the "trustee's share of the franking credit".

283. This is made clear by s 207-35(4)(b)(i) in which an equivalent drafting error was not made. Section 207-35(3) and (4) provide (emphasis added):

(3) Subsection (4) applies if:
- (a) a *franked distribution is made, or *flows indirectly, to a partnership or the trustee of a trust in an income year; and
- (b) the assessable income of the partnership or trust for that year includes an amount (the franking credit amount ) that is all or a part of the additional amount of assessable income included under subsection (1) in relation to the distribution; and
- (c) the distribution flows indirectly to an entity that is a partner in the partnership, or a beneficiary or the trustee of the trust; and
- (d) disregarding Division 6E of Part III of the Income Tax Assessment Act 1936, the entity has an amount of assessable income for that year that is attributable to all or a part of the distribution.
(4) Despite any provisions in Divisions 5 and 6 of Part III of the Income Tax Assessment Act 1936, the entity's assessable income for that year also includes:
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  (a) in the case of an entity that is a partner in a partnership- so much of the franking credit amount as is equal to the entity's *share of the *franking credit on the distribution; and
- (b) in the case of an entity that is a beneficiary of a trust:
  - (i) so much of the franking credit amount as is equal to the entity's share of the franking credit on the distribution; and
  - (ii) the amount mentioned in section 207-37.

284. Sections 207-35(5) and (6) apply to the trustee of a trust. Sections 207-35(3) and (4)(b) apply to the beneficiary of the trust. Subsections (3) and (4)(b) apply to include in the beneficiary's assessable income both the beneficiary's share of the franking credit amount and the amount mentioned in s 207-37. This is achieved because the words "so much of the franking credit amount" appear in subsection (4)(b)(i), rather than in the chapeau. Those words therefore do not affect subsection (4)(b)(ii), which brings to account "the amount mentioned in s 207-37". Accordingly, where a franked distribution flows indirectly to the beneficiary of a trust, the beneficiary's share of the franking credit and the beneficiary's share of the franked distribution are brought to account. This is confirmed by the example to s 207-35(4):

Example: A franked distribution of $70 is made to the trustee of a trust in an income year. The trust also has $100 of assessable income from other sources. Under subsection (1), the trust's assessable income includes an additional amount of $30 (which is the franking credit on the distribution). The trust has a net income of $200 for that income year.

There are 2 beneficiaries of the trust, P and Q, who are presently entitled to the trust's income. Under the trust deed, P is entitled to all of the franked distribution and Q is entitled to all other income.

The distribution flows indirectly to P (as P has a share of the trust's net income that is covered by paragraph 97(1)(a) and has a share of the distribution under section 207-55 equal to 100% of the distribution).

Under this subsection, P's assessable income includes $70 (the amount mentioned in section 207-37 (attributable franked distribution)) and also includes the full amount of the franking credit (as P's share of the franking credit on the distribution is $30 under section 207-57). Q's assessable income does not include any of the amount of the franked distribution or the franking credit.

285. The fact that something has gone wrong in the drafting of s 207-35(6) is also made clear by its terms. It is at best mischievous, and at worst a nonsense, to require a person to increase something by "so much of X" as is equal to the sum of X and Y.

286. If the target of a legislative provision is clear, the court's duty is to ensure that it is hit rather than to stand by and solemnly record that it has been missed:
Kingston v Keprose (1987) 11 NSWLR 404 at 424 citing Lord Diplock in "The Courts As Legislators", The Lawyer and Justice, (1978) at 274;
Newcastle City Council v GIO General Ltd [1997] HCA 53; 191 CLR 85 at 113. The difficulties in, and constraints on, construing legislation where the legislation is perceived to have missed its intended target were considered by the High Court in
Taylor v Owners - Strata Plan No 11564 [2014] HCA 9; 253 CLR 531 at [60]. Reference was made by the majority to four "conditions" which are often referred to in this context as at least relevant to the question whether a court can construe a provision as if it contained additional words to give effect to its evident purpose: at [18], [22]-[25], [39]-[40]. The "conditions" are, in summary:

(1) the precise purpose of the provision can be identified - see: Taylor at [22];
(2) there has been an inadvertent failure to deal with an eventuality that must be dealt with if the provision is to achieve its purpose - see: Taylor at [23];
(3) the words that Parliament would have included can be clearly identified - see: Taylor at [24];
(4) the words that might be read into the text are consistent with the wording otherwise adopted - see: Taylor at [25].

287. The first three "conditions" are intended to reflect the three conditions

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identified by Lord Diplock in
Wentworth Securities Ltd v Jones [1980] AC 74.

288. The fourth "condition" is intended to reflect a "condition" adopted by McColl JA in the Court of Appeal decision the subject of the appeal in Taylor, which her Honour took from Dawson J's statement of the relevant principles in
Mill v Meeking [1990] HCA 6; 169 CLR 214 at 235 - see:
Taylor v Owners - Strata Plan No 11564 [2013] NSWCA 55; 83 NSWLR 1 at [40]; Taylor at [25].

289. The High Court accepted that Lord Diplock's three conditions should be treated as prerequisites and, accordingly, necessary. The High Court did not decide whether Lord Diplock's three conditions are always, or even usually, "necessary and sufficient": at [39]. The High Court endorsed the fourth condition as at least relevant.

290. The present case is different to the statutory construction issue summarised in Taylor at [18], the subject of the four "conditions". What is involved here is not the addition of words, but the moving of words from a place which has the effect of defeating the evident statutory object to a place where those words would ensure the statutory target is hit. Notwithstanding, the "conditions" (framed differently to apply to the present circumstances) provide a useful framework for analysing whether it is permissible to construe the legislation as it was evidently intended or whether the process of construction is one which requires too much surgery or is "too much at variance with the language in fact used by the legislature" so as to render the construction impermissible: Taylor at [38]. The considerations I take into account are whether:

(1) the precise intended purpose of the provision can be identified with certainty;
(2) there has been an inadvertent drafting error;
(3) the words that the legislature would have used (or the place where those words should in fact appear) can be clearly identified;
(4) the words that would have been used are (or the placement of them is) consistent with the wording (or structure) otherwise adopted.

291. As to (1), I have set out at [281] above the identification of the precise purpose of s 207-35(6). As to (2), I am satisfied that the drafter and the legislature inadvertently made an error. As to (3), I am satisfied that the legislature would have enacted the provision in the following way had it not made the drafting error (strike through and underlining added):

(6) Despite any provisions in Division 6 of Part III of the Income Tax Assessment Act 1936, for the purposes of that Division, increase the assessable amount by ~~so much of the franking credit amount as is equal to~~ :
- (a) … [not presently relevant] …
- (b) if the trustee of the trust is liable to be assessed (and pay tax) under section 99 or 99A of that Act-the sum of:
  - (i) so much of the franking credit amount as is equal to the trustee's share of the franking credit on the distribution; and
  - (ii) the amount mentioned in section 207-37.

292. As to (4), the wording just indicated is consistent with the wording otherwise adopted by the drafter. So too is the re-placement of the wording - see: s 207-35(4)(b). The wording is, accordingly, not too much at variance with the language in fact used or incongruous or unreasonable or in any disconformity with the statutory scheme. It may be that the drafting of the provision in this way would have resulted in cosmetic and inconsequential changes to other provisions, but this does not provide an impediment to the correct construction of s 207-35(6). The consequence is that, properly construed, the effect of s 207-35(6) is as set out at [291] above.

ISSUE 4: DIVIDEND STRIPPING

The issue

293. As noted earlier, in its income tax return for the 2014 year, BE Co included the amount of the Share Buy-Back Dividend and the Franking Credit in its assessable income under s 207-35(4)(b) of the ITAA 1997 and claimed a tax offset equal to the Franking Credit under s 207-45.

294. The Commissioner issued to BE Co a notice of amended assessment for the 2014 year, dated 15 August 2019. The amended assessment was based on treating s 207-150(1)(g) as disentitling BE Co to the tax offset. The Commissioner relied on the

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amended assessment in the alternative to his primary case that s 100A of the ITAA 1936 applied - as to which see:
Deputy Commissioner of Taxation v Richard Walter Pty Limited [1995] HCA 23; 183 CLR 168 at 188 (Mason CJ), 201-202 (Brennan J), 214 (Deane and Gaudron JJ) and 216-217 (Dawson J);
Whitby Land Company Pty Ltd (Trustee) v Deputy Commissioner of Taxation [2017] FCA 28 at [80]-[93] (Jagot J).

295. Subsection 207-150(1) of the ITAA 1997 relevantly includes:

270-150 Distribution that flows indirectly to an entity

Whole of share of distribution manipulated

(1) If a *franked distribution *flows indirectly to an entity in an income year in one or more of the following circumstances:

…

(e) the distribution is made as part of a *dividend stripping operation;

…

then, for the purposes of this Act:

…

(g) the entity is not entitled to a *tax offset under this Division because of the distribution; and …

296. Section 207-155 provides:

207-55 When is a distribution made as part of a dividend stripping operation?

A distribution made to a *member of a *corporate tax entity is taken to be made as part of a dividend stripping operation if, and only if, the making of the distribution arose out of, or was made in the course of, a *scheme that:

(a) was by way of, or in the nature of, dividend stripping; or

(b) had substantially the effect of a scheme by way of, or in the nature of, dividend stripping.

297. This provision was inserted by the New Business Tax System (Imputation) Act 2002 (Cth). Paragraph (a) is often referred to as the 'first limb' of 207-55 and paragraph (b) as the 'second limb'.

298. The "scheme" relied upon by the Commissioner as one falling within s 207-55 was constituted by the Illuka Park steps set out at [19] to [28] above. The scheme involved a distribution (the Share Buy-Back Dividend) made to a member (the IP Trust) of a corporate tax entity (IP Co). The making of the Share Buy-Back Dividend and its subsequent treatment were central features of the scheme. The critical question is whether the scheme falls within either the first or second limb of s 207-155.

History and principles

299. There is no definition of "dividend stripping" in either the ITAA 1936 or ITAA 1997. In Investment and Merchant
Finance Corporation Limited v Federal Commissioner of Taxation [1970] HCA 1; 120 CLR 177, the taxpayer acquired 21 of 30 ordinary shares in a company, Macgrenor, for a total outlay of £86,504. Macgrenor then declared a dividend which absorbed all of its accumulated profits and the taxpayer received £81,900 by way of dividend. This dividend was in effect tax free because it was rebatable by virtue of s 46 of the ITAA 1936. In the next financial year, the taxpayer sold its shares for £21 and claimed a deduction for the loss on the sale of the shares. The loss claimed was £82,931 (the amount written off on a revaluation of the shares). As a matter of substance, the taxpayer acknowledged that each of the above steps was taken in the course of a "dividend stripping operation": at 185.

300. Windeyer J stated at 179 that the term "dividend stripping operation" had become well known in English revenue law and referred to the following definition in Halsbury's Laws of England, 3^rd edition, vol 20 at 201:

Dividend stripping is a term applied to a device by which a financial concern obtained control of a company having accumulated profits by the purchase of the company's shares, arranged for those profits to be distributed to the concern by way of dividend, showed a loss on the subsequent sale of shares of the company, and obtained repayment of the tax deemed to have been deducted in arriving at the figure of profits distributed as dividend.

301.

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Indeed the term had become so well known that it featured in the second edition of Fowler's Modern English Usage (1965) under the heading "Bond washing and dividend stripping". This included:

Most of us are familiar with these terms, but few know much more about them than that they are devices for the legal avoidance of taxation. In the course of the duel provoked by them between the tax avoider and the legislature they have developed a protean variety of detail, but their essence remains the same.

302. After setting out this passage from Fowler's, Windeyer J stated that "[t]he duel has, in the United Kingdom, been a running fight in which taxpayers have adopted one ingenious and complicated tactic after another": at 179.

303. Windeyer J's decision was overturned on appeal in
Investment and Merchant Finance Corporation Limited v Federal Commissioner of Taxation [1971] HCA 35; 125 CLR 249 (Barwick CJ, McTiernan, Menzies and Walsh JJ), but his Honour's analysis of what constituted dividend stripping was not criticised. The term was not then used in Australian legislation and the case, accordingly, did not turn on whether or not the taxpayer's activities fell within in any statutory definition of "dividend stripping".

304. The term "dividend stripping" first appeared in Australia's tax legislation in s 46A of ITAA 1936, which was inserted by the Income Tax Assessment Act (No 3) 1972 (Cth). Section 46A was enacted to limit the rebates of tax on dividends received by a share trading company as a result of dividend stripping operations. In the explanatory memorandum to the Income Tax Assessment Bill 1972 (Cth) ( 1972 EM ), the Treasurer stated:

In its simplest form, a dividend-stripping operation involves the purchase by a share trading company of shares in another company which has accumulated profits. A payment of a dividend is then made to the share-trading company which, in effect, wholly or substantially recoups its outlay on purchase of the shares that are then resold for a reduced price or are retained at a reduced value for income tax purposes.

Although, in a commercial sense, the share-trading company may make an overall profit on the transaction, no part of the deduction allowable for the cost price of the shares can be set off against dividend income to determine the part of the dividends included in taxable income on which the rebate is allowable. The result is that, while the dividends are effectively freed from tax by the rebate, the deduction allowed for the cost of acquiring the shares is applied against non-dividend income which thereby escapes full tax.

305. Section 46A operated where, in the language of s 46A(1), the payment of a dividend:

… arose out of, or was made in the course of, a transaction, operation undertaking, scheme or arrangement that the Commissioner is satisfied was by way of dividend stripping.

306. Unlike s 207-155 of the ITAA 1997 or s 177E of the ITAA 1936, s 46A(3) provided for matters which the Commissioner had to take into account in forming an opinion as to whether a dividend arose out of a dividend stripping operation. In relation to s 46A(3), the 1972 EM stated that it:

will state matters which, in a case otherwise potentially within the scope of the section, the Commissioner is required to consider when forming an opinion as to whether a dividend arises out of an operation that constitutes dividend stripping. In broad terms, these matters are -

(a) whether, in effect, the receipt of dividends on the shares amounts to a recoupment of the price paid for the shares;

(b) whether the value of the shares is substantially reduced after acquisition by the shareholder and, if so, whether the reduction is wholly or mainly attributable to dividends received;

(c) whether there are special conditions associated with the shareholder's dividend rights which virtually fix the amount that he is to receive as dividends; and

(d) any other relevant matters.

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The sub-section thus directs the Commissioner to consider features common to dividend stripping as the term is ordinarily understood. These features do not exist in normal commercial transactions, eg, in the purchase in the ordinary way of shares cum div and the subsequent sale of those shares.

307. In
Federal Commissioner of Taxation v Patcorp Investments Limited [1976] HCA 67; 140 CLR 247 at 300, Gibbs J recorded the Commissioner's reference in argument to four cases "in which arrangements, which might be described as dividend stripping operations, were struck down by s 260". The cases were:
Bell v Federal Commissioner of Taxation [1953] HCA 99; 87 CLR 548;
Newton v Federal Commissioner of Taxation (1958) 98 CLR 1 (Privy Council);
Hancock v Federal Commissioner of Taxation (1961) 108 CLR 258;
Federal Commissioner of Taxation v Ellers Motor Sales Pty Ltd [1972] HCA 17; 128 CLR 602. His Honour stated:

Those were all cases in which the arrangement had the purpose of giving the character of capital to what, apart from the arrangement, would have been received as income and thus of avoiding liability for tax on the amounts received.

308. The term "dividend stripping" has also been used in former provisions including ss 36A, 46B, 160APP(6) and 160APHA of the ITAA 1936.

309. In addition to s 207-155, the term is now also to be found in ss 52A(3)(e) and 177E of the ITAA 1936. Section 177E of the ITAA 1936 is, and has been contained, in Part IVA since it was introduced into the ITAA 1936 by the Income Tax Laws Amendment Act (No 2) 1981 (Cth). Section 177E was described in the explanatory memorandum to the Income Tax Laws Amendment Bill (No 2) 1981 as being "… a self-contained code, within the framework of Pt IVA, designed to apply to schemes of a dividend stripping kind which would otherwise effectively place company profits in the hands of shareholders in a tax-free form". The explanatory memorandum included the following observations with respect to the distinction between schemes that are in fact by way of or in the nature of dividend stripping ('first limb' schemes) and those having substantially the same effect as such schemes ('second limb' schemes):

Paragraph (a) [of what became s 177E(1)] sets out the initial and key test that there be a scheme that in fact is either [(i)] one by way of or in the nature of dividend stripping or [(ii)] one having substantially the effect of such a scheme. Schemes within the category of being, or being in the nature of, dividend stripping schemes would be ones where a company (the 'stripper') purchases the shares in a target company that has accumulated profits that are represented by cash or other readily-realisable assets, pays the former shareholders a capital sum that reflects those profits and then draws off the profits by having paid to it a dividend (or a liquidation distribution) from the target company.

In the category of schemes having substantially the same effect would fall schemes in which the profits of the target company are not stripped from it by a formal dividend payment but by way of such transactions as the making of irrecoverable loans to entities that are associates of the stripper, or the use of the profits to purchase near-worthless assets from such associates.

310. Section 177E was considered by Hill J in
CPH Property Pty Ltd v Federal Commissioner of Taxation (1998) 88 FCR 21 at 47. His Honour said the following about the "essential character" of dividend stripping:

Clearly it involves a company which is pregnant with accumulated profits out of which a dividend would reasonably be likely to be declared or has already been declared or where the company is about to receive profits in the future out of which a dividend would reasonably be likely to be declared. In each case the result would be that shareholders would become liable to pay tax on those dividends. It involves the readying up of that company for sale, either by converting its assets into cash or purchasing back operating assets so that the substantial assets of the target company are cash or loans back. (The fact that steps had been taken before contacting a stripper would hardly, however, remove the transaction

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from the category of dividend stripping.) It involves the sale, or allotment of shares in the target company to the stripper. It involves the subsequent payment of a dividend to the stripper by the target company or a deemed dividend of the kind referred to in s 47 of the Act, so as to recoup the stripper for the outlay for the shares. As presently advised I see no reason why the fact that the consideration for the sale of shares in that target company is not cash but an allotment of shares necessarily excludes, as the applicants suggest, the scheme from being in the nature of dividend stripping.

311. The Full Court in
Federal Commissioner of Taxation v Consolidated Press Holdings Ltd (No 1) [1999] FCA 1199; 91 FCR 524 at [136] (French, Sackville and Sundberg JJ) ( CPH FFC ) stated that the four cases referred to by Gibbs J in Patcorp had the following five characteristics in common:

• a target company, which had substantial undistributed profits creating a potential tax liability either for the company or its shareholders;
• the sale or allotment of shares in the target company to another party (a company in three cases and individuals resident in the then Territory of New Guinea in Bell);
• the payment of a dividend to the purchaser or allottee of the shares out of the target company's profits;
• the purchaser escaping Australian income tax on the dividend so declared (whether by reason of a s 46 rebate, an offsetting loss on the sale of the shares, or the fact that the shareholders were resident outside Australia); and
• the vendor shareholders receiving a capital sum for their shares in an amount the same as or very close to the dividends paid to the purchasers (there being no capital gains tax at the relevant times).

312. At [137], the Full Court identified a sixth characteristic, stating of each of the schemes that:

they were carefully planned, with all the parties acting in concert, for the predominant if not the sole purpose of the vendor shareholders, in particular, avoiding tax on a distribution of dividends by the target company.

313. The Full Court stated at [156] and [157] in relation to the 'first limb' that:

[156] … The use of the words "by way of or in the nature of"' suggests that variations from the paradigm will not necessarily result in the scheme being excluded from the first limb, provided it retains the central characteristics of a dividend stripping scheme.

[157] Since the legislation does not identify those central characteristics, it is necessary to look to the decided cases preceding the 1981 Act and to the extrinsic materials accompanying the relevant legislation. We have identified what we would see as the central characteristics of a dividend stripping scheme, by reference to the High Court decisions discussed in Patcorp. The six characteristics so identified are set out in [136] and [137]. They are similar to those identified by the primary Judge as comprising the "essential character" of a dividend stripping operation.

314. The Full Court held that, in order for a scheme to fall within the 'first limb' of s 177E(1)(a), it had to be one of which it could be said, objectively, that had the dominant (although not necessarily exclusive) purpose of avoiding tax: at [174]. The scheme did not have the dominant purpose of avoiding tax and was therefore not within the 'first limb': at [175]-[178], [186]. Essentially the same reasoning led to the same conclusion with respect to the 'second limb': at [184], [186].

315. The High Court, in
Federal Commissioner of Taxation v Consolidated Press Holdings Ltd [2001] HCA 32; 207 CLR 235 at [132] and [132] ( CPH HC ), upheld the Full Court's conclusion that the 'first limb' of s 177E requires the existence of a dominant tax avoidance purpose. The High Court implicitly endorsed Hill J's approach to determining purpose, namely to ask what conclusion an objective observer would reach as to why the scheme had taken place: at [125]. The applicants submitted that this confirmed that it was "objective purpose" rather than "subjective purpose" which is required. As I understand what is required in

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terms of this aspect of s 177E(1)(a), it is the identification of actual purpose. One analytical tool available in reaching a view about a person's actual purpose is to ask what would be concluded (by an objective neutral person) about purpose from the objective facts and circumstances. I do not read the High Court as intending to exclude evidence from a taxpayer about the taxpayer's (subjective) reasons for doing what the taxpayer did. Nor do I read the High Court as concluding that it is anything other than an actual tax avoidance purpose that is relevant.

316. Whilst a number of the characteristics which were common to dividend stripping schemes were absent, it was the absence of a taxation purpose behind the particular scheme, which principally led to the High Court to uphold the Full Court's decision. The Court observed at [133]:

… A number of the characteristics common to schemes that have been regarded as typical dividend stripping schemes were absent. Above all, there was an absence of the particular taxation purpose which is the hallmark of such a scheme, and which is the reason why such schemes were intended to be covered by Pt IVA of the Act.

317. As to the 'second limb' of s 177E, in subparagraph (1)(a)(ii), the High Court concluded that the term "dividend stripping" must have the same meaning as in the first limb in subparagraph (i) and that the reference to "effect" does "not require the element of purpose to be discarded": at [138]. Endorsing observations of the Full Court in CPH FFC, the High Court observed at [139] and [140]:

[139] As the Full Court pointed out, a clue to the understanding of s 177E(1)(a)(ii) is to be found in the second of the two paragraphs in the Explanatory Memorandum last quoted above.

[140] The Explanatory Memorandum had earlier referred, in connection with sub-par (i), to dividends or deemed dividends which, by reason of s 47(1) of the Act, would include distributions to shareholders by a liquidator to the extent to which they represented income, other than income applied to replace paid-up capital. What sub-par (ii) was aimed at was a scheme that would be within sub-par (i) except for the fact that the distribution by the target company was not by way of a dividend or deemed dividend. Dividend stripping does not lose its connotation of tax avoidance purpose. But a scheme may have substantially the effect of a scheme by way of or in the nature of dividend stripping even though some means other than a dividend or deemed dividend is employed to make the distribution.

318. What the Full Court had stated in CPH FFC at [182] was:

Having regard to the Explanatory Memorandum, it can be seen that the second limb of s 177E(1)(a) is intended to catch schemes by way of or in the nature of dividend stripping, where the distribution by the target company takes a form other than a formal dividend or a deemed dividend. The reference to 'having substantially the effect of' a dividend stripping scheme is to a scheme that would be within the first limb, except for the fact that the distribution by the target company is not by way of a dividend or deemed dividend. If the distribution has substantially the effect of a dividend or deemed dividend, it will be within the second limb.

319. The identification of "common characteristics" of dividend stripping operations made by the Full Court in CPH FFC was referred to with apparent approval by the Full Court in
Lawrence v Federal Commissioner of Taxation [2009] FCAFC 29; 175 FCR 277 at [42] and [43] ( Lawrence FFC ). At [45], the Full Court in Lawrence FFC cited with approval what the Full Court had said in CPH FFC at [156], namely:

The terms of the first limb of s 177E(1)(a) suggest that a scheme may fall within its scope, even though not all the elements of a standard dividend stripping scheme are present. The use of the words 'by way of or in the nature of' suggests that variations from the paradigm will not necessarily result in the scheme being excluded from the first limb, provided it retains the central characteristics of a dividend stripping scheme.

320. On appeal in Lawrence FFC (and at trial), the appellant relied on these passages in

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submitting that a scheme would not fall within the second limb of s 177E(1)(a) unless it would have fallen within the first limb of s 177E(1)(a) but for the fact that the profits of the target company were not distributed by way of dividend but by some other means - see: Lawrence FFC at [40] and [50]. This argument was rejected, both at trial and on appeal. The Full Court at [51] endorsed the following observations of the trial judge in
Lawrence v Commissioner of Taxation [2008] FCA 1497; 70 ATR 376 at [80] to [82]:

[80] If read as though they purported to stand as exhaustive statements of the reach of s 177E(1)(a)(ii), the words of the High Court judgment, and of the Explanatory Memorandum, do provide support for the submission made on behalf of the applicant. However, I do not so read those words. In the case of the Explanatory Memorandum, the relevant paragraph is expressed as though providing examples or indications only, and not as though definitive. I do not read the paragraph as indicating a legislative intention that there always need be a separate person or entity, into whose hands the relevant shareholding has first passed. Indeed, the reference to the purchase of near-worthless assets, as an alternative to a formal dividend payment, amply accommodates a situation in which the target company itself purchases such assets from associates of its existing shareholders. In the present case, Plaster Plus … purchased 'B' Class shares in Netscar …, the consideration for which provided Netscar … with capital of equivalent value. Plaster Plus … then consented to changes in the constitution of Netscar …, the manifest effect of which was to render their own shareholdings 'near worthless'. Although I would not construe s 177E through the prism of the fact situation in the present case, that situation does provide an example of a way in which profits of a company may be placed into the hands of an associate of the taxpayer in a tax-free form. That s 177E(1)(a)(ii) should be construed so as to cover examples of this kind is consistent with the operation of the section as explained in the paragraph of the Explanatory Memorandum set out in par 78 above.

[81] In the case of the judgment in Consolidated Press (HC), their Honours' concern was to lay out their reasons for holding that the presence of a tax-avoidance purpose was a requirement of subpar (ii), no less than of subpar (i). That was why a scheme which produced a substantial consequence which was in any respect the same as a consequence of dividend stripping would not ipso facto fall within subpar (ii). When they pointed out that the subparagraph was 'aimed at' a scheme that would be within subpar (i) save for the fact that the distribution was not by way of dividend, their Honours were, in my respectful view, stressing that the difference between subpar (i) and subpar (ii) lay in the means adopted to distribute the profits of the target company. It followed that the requirement of a tax-avoidance purpose, being basic to the idea of dividend stripping in any form, existed equally under subpar (ii).

[82] I do not think that the High Court's words - 'except for the fact that the distribution by the target company was not by way of a dividend or deemed dividend' - should be pressed into service to justify the conclusion that a scheme will never fall within subpar (ii) unless it involves the transfer of shares in the target company to a person or entity separate from the original shareholders. That would be to extend the meaning of those words beyond anything that their Honours had in contemplation. Structurally, the scheme in the present case is quite different from that which was before the High Court in Consolidated Press (HC). I think, with respect, that their Honours would be surprised to be told that they had, in that case, ruled that a scheme which involved the stripping of profits out of a target company and the placement of a corresponding capital sum into the assets of a trust for the original shareholder and his family could never be held to have the effect referred to in subpar (ii) for the sole reason that the shareholding in the target company had not changed hands.

321.

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The Full Court added at [52]:

(1) What the Full Court and the High Court said in Consolidated Press in the passages relied upon by the appellant is clearly obiter. Consolidated Press was a first limb case - the distribution of profits was in the case of both CPIL(UK) and CPHIL(UK), by way of dividend. The only reason the second limb of s 177E(1)(a) was considered by the Full Court and the High Court was because of the primary judge's reasoning that the second limb did not require the presence of a tax avoidance purpose. As indicated in [46] above, even that aspect of the primary judge's reasoning was obiter because he had decided the case at first instance in relation to the shareholders of both companies on the basis that the formation of the Commissioner's opinion under s 177E(1)(b) had miscarried.
(2) Having regard to the terms of the second limb of s 177E(1)(a) and the extrinsic material referred to in [27] above, the Plaster Plus transactions (and the Zinkris transactions) are paradigm examples of a scheme to which the second limb was intended to apply.
(3) Finally, the appellant's argument that acceptance of the construction and application of the second limb adopted by the primary judge and this Court would render the first limb otiose, does not withstand scrutiny. The first limb is concerned with schemes which are by way of or in the nature of dividend stripping; the second limb is concerned with other schemes, that is, schemes that are not by way of or in the nature of dividend stripping but which are schemes having substantially the same effect. A scheme falling within the second limb may not, as in this case, fall within the first limb. On the other hand, a scheme falling within the first limb will never fall within the second limb.

322. As to the operation of the 'second limb', the Full Court stated at [41]:

Sub-paragraph (ii) of para (a) of s 177E(1) is concerned with the effect of a scheme; whether a scheme had substantially the effect of a scheme by way of or in the nature of dividend stripping. Clearly, it is referring to a scheme which does not qualify as a scheme by way of or in the nature of dividend stripping within sub-para (i). On the other hand, it predicates a knowledge of the effect of a scheme by way of or in the nature of dividend striping; otherwise, one would not be able to determine whether the scheme in question met the test of substantially having the same effect. That might suggest that, under sub-para (ii), one is not concerned with what is a scheme by way of or in the nature of dividend stripping, only its effect. But that would be a mistake because at least one of the indicia identified by the courts as being common to transactions characterised as dividend stripping schemes looks to the effect of the scheme - the vendor shareholders receiving a capital sum for their shares the same as, or very close to, the dividends paid to the purchasers.

323. The effect of the two schemes in Lawrence, which resulted in the conclusion that the schemes fell within s 177E(1)(a)(ii), were that profits which were held for distribution by companies in which the appellant was the only shareholder were effectively converted into capital sums held by another company (an associate of the shareholder) on trust for a class of discretionary beneficiaries which was confined to the appellant and members of his family: Lawrence at [2]. The profits of the company were placed into the hands of the associate in a tax-free form: Lawrence FFC at [52]; Lawrence at [80]. It was not necessary for a conclusion that the 'second limb' applied that what was effectively a transfer of profit occur by way of a dividend or distribution of company property. It was not necessary for there to be a transfer of shares in the target company to a person or entity separate from the original shareholders. It was sufficient that the effect of the scheme was to diminish the value of the companies' property for the benefit of the shareholder or his associates with the purpose of avoiding tax.

Summary of the applicants' submissions

First limb

324. As to the first limb, the applicants submitted that the second to fifth dot points referred to in CPH FFC extracted at [311] above

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were absent. It was submitted, correctly, that there was no transfer or allotment of shares in IP Co. IP Co simply bought back shares in itself from its shareholder for their market value and the shareholder received a proportionate share of both the company's share capital and profits. The applicants observed that the transaction did not involve a sale and purchase or transfer of shares; it was simply a cancellation of shares, referring to
Coles Myer Ltd v Commissioner of State Revenue (Vic) [1998] 4 VR 728; 39 ATR 163 at 744.18 and 745.10. The applicants submitted that, without a vendor or purchaser, the third, fourth and fifth elements are meaningless and cannot be satisfied, referring to Lawrence FFC at [29]-[30].

325. The applicants also submitted that the required tax avoidance purpose was absent. The applicants submitted that there was no avoidance of tax that would or might have been payable had IP Co paid a dividend to its shareholders. In this regard, the applicants relied on submissions made in relation to s 100A, that - had IP Co paid a 'real' dividend to the IP Trust - then it is likely that the IP Trust would have distributed the dividend to BE Co. If that had occurred, the entity which would then have paid tax on the dividend (BE Co): (a) was the same entity which in fact was liable to pay tax on the deemed dividend; and (b) would have paid tax in the same amount as the amount that the entity was in fact liable to pay.

326. The applicants relied on the observation made by in Lawrence FFC at [30] that the Commissioner was correct not to appeal the primary judge's conclusion concerning the 'first limb'. The Full Court stated:

[29] At [72] his Honour observed that the first characteristic identified in Consolidated Press (FC) was present in the circumstances facing the appellant. However, at [74] his Honour concluded:

I could not hold that the second, third, fourth or fifth of the characteristics identified in Consolidated Press (FC) were, or that any of them was, present in this case. There was no sale or allotment of shares in Plaster Plus or Zinkris. Necessarily, there was no payment of a dividend to the allottee (or, should it matter, to the applicant). Since there was no 'purchaser' of shares, there was necessarily no question of such a person escaping income tax. There were no 'vendor shareholders'. Counsel for the Commissioner urged upon me the purpose of Pt IVA of the 1936 Act, and submitted that what the applicant had done here was well within the scope of the evil to which s 177E is directed. The fact is, however that the Full Court in Consolidated Press (FC) held that a scheme would not be in the nature of dividend stripping unless it retained the central characteristics to which their Honours referred, including those mentioned in this paragraph which were manifestly absent from the transactions entered into by the applicant in relation to Plaster Plus and Zinkris. In the circumstances, I would conclude that the schemes were not by way of or in the nature of dividend stripping, as required by subpar (i) of s 177E(1)(a) of the 1936 Act.

[30] Not surprisingly, no appeal is brought from his Honour's conclusion on the first limb; more relevantly, the Commissioner does not, correctly in our view, put his Honour's conclusion on the first limb in issue by way of notice of contention.

Second limb

327. The applicants referred to what the High Court stated in CPH HC set out above, namely:

What sub-par (ii) [the second limb] was aimed at was a scheme that would be within sub-par (i) [the first limb] except for the fact that the distribution by the target company was not by way of a dividend or deemed dividend. Dividend stripping does not lose its connotation of tax avoidance purpose. But a scheme may have substantially the effect of a scheme by way of or in the nature of dividend stripping even though some means other than a dividend or deemed dividend is employed to make the distribution.

328. The applicants observed that s 207-155 was enacted in 2002, after the High Court had delivered its decision in CPH HC. The

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applicants submitted that, in enacting s 207-155, Parliament is presumed to be aware of the High Court's decision, and that its use of the expression in s 207-55 without apparent attempt to depart from the High Court's formulation, indicated that it did not intend for that language to have a different meaning, referring to
Georgopoulos v Silaforts Painting Pty Ltd [2012] VSCA 179; 37 VR 232 at [40] and
McCallum v National Australia Bank Ltd [2000] NSWCA 218 at [17].

329. The applicants referred to the explanatory memorandum to the New Business Tax System (Imputation) Bill 2002 (Cth) at [5.58], which it contended indicated that Parliament intended to enact s 207-155 with an effect consistent with the High Court's construction:

Schemes having substantially the same effect as dividend stripping schemes include those in which the profits of the target company are not stripped from it by a formal dividend payment, but where irrecoverable loans are made to entities that are associates of the dividend stripper or where the profits are used to purchase assets from such entities at greatly inflated prices.

330. The applicants accepted that, in Lawrence FFC, the Full Court decided that, notwithstanding what the High Court stated in CPH HC, the second limb could apply if the scheme did not involve any transfer or allotment of shares in the target company to the dividend stripper. The applicants submitted, however, that, in doing so, the Full Court confirmed that the second limb only applied where profits of a company are extracted by some means other than a dividend or deemed dividend. The applicants submitted that, if a transaction involves the extraction of profits by way of a dividend or deemed dividend, it is necessarily a 'first limb' case, referring to Lawrence FFC at [52(1)].

331. The applicants submitted that the essential effect of dividend stripping is:

(a) the extraction of profits from a company through some payment of money or transfer of property to a person (the stripper) other than the original shareholder(s) who was not economically exposed to the risks and rewards of share ownership when the company derived the profits; and
(b) the original shareholders of the company, who were exposed to the risks and rewards of share ownership, receiving a capital sum in lieu of a distribution of profits - this sum being described as the "corresponding capital sum", referring to Lawrence FFC at [51], citing Lawrence at [82].

332. The applicants submitted that, on the present facts, these essential effects of dividend stripping were absent:

(a) the transaction involved a distribution of profit by a company to a long-term shareholder and that shareholder retaining that profit;
(b) the transaction did not involve the introduction of a stripper into the affairs of the company;
(c) the transaction did not involve the profit of the company being extracted from it and provided to a stripper or, indeed, anyone other than the long-term shareholder;
(d) the transaction did not involve a stripper providing to the long-term shareholder a "corresponding capital sum";
(e) the requisite tax avoidance purpose was absent.

333. The applicants submitted, consistently with the submissions made in relation to s 100A and the 'first limb' of s 207-155, that the entity which would have paid tax had IP Co paid a 'real' dividend:

(a) was the same entity which in fact was liable to pay tax on the deemed dividend, namely BE Co; and
(b) would have paid tax in the same amount as the amount that the entity was in fact liable to pay.

Summary of the Commissioner's submissions

First limb

334. The Commissioner submitted that the term "dividend stripping" is not a legal term of art with a fixed meaning, but rather an expression which must be understood in the context of the legislative provision that it serves, and which cannot adequately be explained independently of that context, referring to CPH HC at [100] and [132].

335.

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The Commissioner disputed that the term should necessarily be construed in the same way in both s 177E and s 207-155. The Commissioner observed that the presumption that words used in the one statute are used with the same meaning yields readily to context, referring to
Clyne v Deputy Commissioner of Taxation [1981] HCA 40; 150 CLR 1 at 15 (Mason J).

336. The Commissioner submitted that, in CPH HC, the High Court did not attempt to define the precise boundaries of what constitutes "dividend stripping" in the context of s 177E or elsewhere. According to the Commissioner, the High Court did not go as far as suggesting that the characteristics identified by either Hill J or the Full Federal Court defined the ambit of what constituted "dividend stripping". Rather, the High Court merely observed that a number of the characteristics common to "typical" dividend stripping schemes were absent; it was the absence of a taxation purpose which was decisive, referring to CPH HC at [133] (set out above at [316]).

337. As to the Full Court's decision in CPH FFC, the Commissioner submitted that the Full Court did not seek to conduct a broad survey of the cases in which the expression "dividend stripping" had by then been applied and did not express a concluded view on whether departures from the paradigm of a dividend stripping operation, considered independently from the question of purpose, would have prevented the transactions under consideration in that case from falling within the first limb of s 177E(1)(a): CPH FFC at [164].

338. The Commissioner submitted that there was nothing in the consideration of the Full Court in CPH FFC which ruled out dividend stripping in the absence of the purchase of, or allotment of shares to, a third-party stripper. The Commissioner observed that the four cases cited by the Full Federal Court were each decided at a time when Australian companies could not buy-back their own shares.

339. Referring to the common characteristics of a dividend stripping operation set out at [311] above, the Commissioner submitted that it is now possible for the sale of shares, the payment out of retained earnings, and the receipt of a capital sum to be collapsed into the one transaction - that is, a share buy-back. The money received by the vendor shareholder has the character of capital for trust law purposes and the deemed dividend, together with any associated franking credit, can be directed to a newly introduced beneficiary.

340. The Commissioner submitted that the scheme here may properly be regarded as a variation on the paradigm case of dividend stripping, which can be accommodated by that term's protean meaning and, if necessary, by the words "by way of, or in the nature of" in s 207-155(a). The Commissioner submitted that, as a matter of substance, the characteristics of dividend stripping were present because the scheme involved:

• a company, Buyback Co (IP Co), which had substantial undistributed profits creating a potential liability either for the company or its shareholders;
• the sale of shares in that company - albeit to the company itself;
• the making of a distribution out of the company's profits;
• that distribution being deemed, for Australian income tax purposes, to be paid to a newly introduced third party, Beneficiary Co (BE Co);
• the third party escaping the payment of additional tax on the distribution, by virtue of the tax offset associated with the Franking Credit and the third party's own particular tax characteristics (namely, being liable to the corporate tax rate);
• the vendor shareholder (IP Trust) receiving a capital amount (the Share Buy-Back Dividend, which it accumulated to corpus) in an amount the same as the dividend treated for income tax purposes as paid to the third party.

341. According to the Commissioner, the scheme exhibited the "hallmark" of dividend stripping schemes - that is, the particular purpose of avoiding (additional) tax on distribution of profits.

342. As to the observations of the Full Court in Lawrence FFC at [29] and [30], the Commissioner submitted it was open to read the Full Federal Court's reasons as no more than a

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statement that a transaction will not be "by way of or in the nature of dividend stripping" for the purposes of s 177E in circumstances where each of the second to fifth characteristics of a dividend stripping operation is absent, given they were each absent in that case.

Second limb

343. In CPH HC, the High Court stated that the second limb in s 177E was directed to schemes that would be within the first limb "except for the fact that the distribution by the target company was not by way of a dividend or deemed dividend": at [140]. In reaching that conclusion, the High Court placed significant reliance on the explanatory memorandum that accompanied the Income Tax Laws Amendment Bill (No 2) 1981 (Cth). The explanatory memorandum referred to schemes in which the profits of the target company are stripped "by way of such transactions as the making of irrecoverable loans to entities that are associates of the stripper, or the use of the profits to purchase near-worthless assets from such associates": CPH HC at [110] and [139]-[140].

344. The Commissioner submitted that s 207-155(b) must be understood in its context and that the legislative history suggests that s 207-155(b) should not be construed in the same way as the interpretation of s 177E(1)(a)(ii). In particular, s 207-155(b) and its predecessor, former s 160APHA(b), would be otiose if they were construed as being limited to schemes where the distribution by the target company was made otherwise than by way of dividend or deemed dividend.

345. A full imputation system of company taxation was introduced in Australia from 1 July 1987 by the Taxation Laws Amendment (Company Distributions) Act 1987 (Cth). Later in 1987, ss 160APP(6) and 160APHA were inserted into the ITAA 1936 by the Taxation Laws Amendment Act (No 3) 1987 (Cth) to deny franking credits on dividends paid as part of a dividend stripping operation. Former s 160APP(6) stated:

No franking credit arises if the dividend was paid as part of a dividend stripping operation.

346. "Dividend stripping operation" was defined by former s 160APHA in substantially the same terms as the present s 207-155(1)(g), namely:

For the purposes of this Part, a dividend paid to a shareholder in a company shall be taken to be a dividend paid as part of a dividend stripping operation if, and only if, the payment of the dividend arose out of, or was made in the course of, a scheme that:

(a) was by way of or in the nature of dividend stripping; or

(b) had substantially the effect of a scheme by way of or in the nature of dividend stripping.

347. The Commissioner submitted that it is clear, from both its terms and the extrinsic materials, that former s 160APP(6) was intended to apply to schemes that involved the payment of a franked dividend, referring to the explanatory memorandum to the Taxation Laws Amendment Bill (No 3) 1987 (Cth) at 6. The Commissioner noted that, at the time, the definition of "frankable dividend" in former s 160APA included only dividends within the meaning of s 6 of the ITAA 1936 and certain types of deemed dividends. The Commissioner submitted that it follows that the second limb of former s 160APHA would have been otiose if it had applied only to schemes involving neither a dividend nor a deemed dividend - because in such cases there would have been no frankable dividend, and no franking credit for former s 160APP(6) to deny.

348. According to the Commissioner, the legislative context and history therefore suggest that the expression "dividend stripping", when used in the context of former s 160APHA, must have connoted a scheme that involves the making of a franked dividend. Sections 207-145(1)(d), 207-150(1)(e) and 207-155 of the ITAA 1997 were intended to replicate former ss 160APHA and 160APP(6) of the ITAA 1936 - see: explanatory memorandum that accompanied the New Business Tax System (Imputation) Bill 2002 (Cth) at [5.57]. The ITAA 1997 sections apply to dividends and "non-share dividends" (see the definitions of "frankable distribution" in s 202-40 of the ITAA 1997, "distribution" in s 960-120(1) and "non-share distribution in s 974-115); but limiting s 207-155(b) to schemes that involve neither a dividend nor a deemed dividend would

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leave the provision with little work to do. As against this, the Commissioner also observed that the extrinsic materials stated that schemes having substantially the effect of dividend stripping schemes "include" those in which profits are stripped by making irrecoverable loans or purchasing assets at greatly inflated prices - see: explanatory memorandum to the Taxation Laws Amendment Bill (No 3) 1987 (Cth) at 48 and the explanatory memorandum to the New Business Tax System (Imputation) Bill 2002 (Cth) at [5.58]

349. The Commissioner submitted that s 207-155(b) should be construed as referring to a scheme the effect of which is substantially the same as a scheme by way of, or in the nature of, dividend stripping. According to the Commissioner, a scheme would fall within s 207-155(b) if, irrespective of its form, it:

• was undertaken for a dominant purpose of avoiding tax on distribution of profits;
• has the effect of distributing substantial retained earnings from a company, with that company's existing shareholders receiving a payment in a substantially equal amount; and
• has the effect of avoiding the tax that would have been payable by the company's existing shareholders if they had received a dividend.

Consideration

First limb

350. By the time the term "dividend stripping" was first introduced into Australian tax legislation, it had for many years been used to refer to a number of cases, involving a "protean variety of detail", albeit that "their essence remain[ed] the same": Windeyer J quoting Fowler's in Investment and Merchant at 179. It is unlikely that the term was intended, at least by the time of its use in s 207-155 of the ITAA 1997, to refer only to cases where there was present each of the criteria common to the particular dividend stripping operations which had been referred to by the Commissioner in the submissions he had made to the High Court in Patcorp, decided in 1976. Neither the High Court in CPH HC, nor the Full Court in CPH FFC, so concluded in relation to s 177E(1)(a) of the ITAA 1936.

351. At the time Patcorp was decided, a company was prohibited from acquiring its own shares or interests in its own shares - see: former s 129 of the Companies Act 1981 (Cth); Consolidated Media at [25]. An exception to the prohibition against a company acquiring its own shares or interests in its own shares was first created by an amendment to the Companies Code in 1989: s 16 of the Co-operative Scheme Legislation Amendment Act 1989 (Cth); Consolidated Media at [26].

352. Australia did not have a full imputation system when Patcorp was decided. A full imputation system of company taxation was introduced in Australia from 1 July 1987. Section 207-155 is part of the imputation system.

353. At its simplest, a dividend stripping operation is an operation to extract profits from a company in a way intended to avoid or reduce tax which, absent the operation, would have been payable by a person on those profits being distributed by way of dividends. Historically, this was often done by: (a) the original shareholder selling its shares to a new shareholder, say $10m reflecting the accumulated profit in the company; (b) the company paying the new shareholder a dividend (company profits of $10m) in respect of which the new shareholder would not be liable to tax. When a dividend stripping operation is carried out in this way, the original shareholder receives a capital sum rather than taxable dividend income.

354. IP Co had retained earnings. Mr Buckley's advice, which Mr Blood always took, was that IP Co's retained earnings should be moved into a trust structure. Mr Buckley considered a trust to be a better investment vehicle. The distribution of IP Co's profits or retained earnings by dividend would likely create additional tax liabilities in others. By way of example: if IP Co had paid a dividend to the IP Trust and the IP Trust resolved to make Mr Blood presently entitled to the dividend, then Mr Blood would have paid tax on the dividend amount at his marginal rate. The relevant franking credits would have flowed through to Mr Blood and he would have offset the franking credits against the greater amount of tax to which he would

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have been liable. In practical terms, if Mr Blood's marginal rate was 47% he would have paid an additional 17% tax after taking account of the 30% tax paid by the company as reflected in the franking credits. By way of further example: if the IP Trustee had not resolved to make any person presently entitled to the dividend, it would have paid tax under s 99A. In practical terms, the IP Trustee would have paid additional tax in relation to the dividend.

355. IP Co did not declare and pay dividends to its shareholder. Rather, together with others, it agreed to enter into a series of transactions including a share buy-back the end result of which was to transfer the retained earnings to IP Trustee in capital form without any person being liable to pay tax on the distribution of the retained earnings. Immediately before the buy-back, IP Co's retained earnings were increased by about $3 million, by a distribution from B&F Investments made to maximise the amount of retained profits to be extracted through the buy-back strategy: T106. As a matter of substance rather than legal form, the effect of the scheme included:

• a sale of shares by the target company (IP Co), in the legal form of a cancellation of shares, at a price which reflected the company's retained profits;
• the payment out by the target company of substantially all of its profits;
• the liability to tax in respect of the payment out of the retained earnings falling upon a newly introduced corporate beneficiary (BE Co) which would not need to pay tax in respect of the retained earnings;
• the original shareholder (IP Trustee) ultimately taking the benefit of a capital sum, rather than receiving taxable dividend income.

356. Assessing the circumstances and events objectively, but also taking into account the evidence of subjective purpose, the predominant purpose of entering into the scheme was to move the profits of IP Co to its shareholder (IP Trustee) in capital form and without subjecting any person to tax beyond the level of corporate tax already paid on the profits, as reflected in the Franking Credits. Absent the scheme, dividends would have been declared and paid to the IP Trust and additional tax would have been paid. BE Co has not discharged the onus of establishing that the scheme was not undertaken for a tax avoidance purpose. The hallmark feature of tax avoidance necessary for both limbs of s 207-155 permeates the scheme.

357. I accept that the precise mechanism by which the profits were stripped is not the same as the mechanism in cases such as those mentioned in Patcorp. As the cases recognise, however, the mechanisms have tended to change frequently; they have always been "protean". The essence of a dividend stripping operation is present here. I do not regard the decision in Lawrence FFC as requiring a conclusion that the present scheme was not "in the nature of" a dividend stripping operation.

358. It is not a part of the ratio of Lawrence FFC that a dividend stripping operation must contain each of, or even most of, the particular steps which were identified as common to the mechanism of the particular dividend stripping operations to which the Commissioner referred in submissions made in Patcorp, as summarised by the Full Court in CPH FFC at [136] and [137].

359. In my view, the scheme is appropriately described as a scheme which is "in the nature of" dividend stripping within the meaning of s 207-155(a). BE Co has not discharged its onus of establishing the contrary.

Second limb

360. For the reasons just given, the scheme was also one which "had substantially the effect of a scheme by way of, or in the nature of, dividend stripping". However, it is desirable to make some further observations.

361. I do not accept the applicants' submission that a scheme which involves the payment of a (deemed) dividend as part of the stripping operation can never fall within the 'second limb' and can only potentially fall within the 'first limb'. Both CPH FFC and CPH HC referred to the 1972 EM, which included:

In the category of schemes having substantially the same effect would fall schemes in which the profits of the target company are not stripped from it by a formal dividend payment but by way of such transactions as the making of irrecoverable

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loans to entities that are associates of the stripper, or the use of the profits to purchase near-worthless assets from such associates.

362. In CPH HC at [140], the High Court said that what the 'second limb' of s 177E(1)(a) "was aimed at was a scheme that would be within sub-par (i) except for the fact that the distribution by the target company was not by way of a dividend or deemed dividend". The High Court did not hold that the 'second limb' of s 177E(1)(a) could never apply if the scheme involves payment of a dividend. The 1972 EM did not say that either; it merely identified what the drafter of the explanatory memorandum understood at the time as circumstances which would fall within the second limb.

363. The particular mechanism of dividend stripping operations as they existed in 1972 can be accepted to be important in construing provisions concerning dividend stripping, so long as it is recognised that this is only context relevant to the question of the proper construction of the words in the particular statute concerned - see: Consolidated Media at [39]. The relevant provision is s 207-155(b) which appears in a statutory context which is in various ways different to the context of s 177E(1)(a). It should not be assumed that the phrase "dividend stripping" or "dividend stripping operation" was intended by the legislature to have a fixed and static meaning when it was first introduced or that, when used in more recent and different contexts, it is intended to bear precisely the same meaning as it then had, unaffected by the context in which it is used.

364. Soon after the introduction of the full imputation system, ss 160APP(6) and 160APHA were inserted to deny franking credits on dividends paid as part of a dividend stripping operation. Former s 160APP(6) stated that "[n]o franking credit arises if the dividend was paid as part of a dividend stripping operation". It is difficult therefore to presume that the legislature intended that the 'second limb' of the definition in former s 160APHA be restricted to schemes which would have been schemes within the first limb except for the fact that a dividend was not paid.

365. Like former s 160APP(6), s 207-155 is directed to "manipulation" of the imputation system - see: the heading to s 207-150(1). A conclusion that the second limb of s 207-155 would apply only to a scheme that would be within the first limb, except for the fact that the distribution by the target company is not by way of a dividend or deemed dividend, would leave s 207-155(b) without much of the operation it was evidently intended to have: its principal purpose, read with s 207-150(1)(e) and (g), lies in denying an offset in relation to franking credits attached to distributions such as dividends.

366. BE Co has not discharged the onus of establishing that the scheme did not have "substantially the effect" of a scheme in the nature of dividend stripping falling within the 'second limb' of s 207-155.

Conclusion in relation to the alternative assessment

367. If the earlier conclusions about the application of s 100A are incorrect, BE Co has not discharged its onus of establishing that the notice of amended assessment of income tax in respect of the 2014 year was excessive. It has not shown that s 207-150(1)(e) does not apply. The Share Buy-Back Dividend was made as part of a scheme which was "in the nature of" dividend stripping within the meaning of s 207-155(a) and was one which "had substantially the effect of a scheme by way of, or in the nature of, dividend stripping" within the meaning of s 207-155(b).

CONCLUSION

368. Returning to the issues identified at [3] above:

(1) First, the Commissioner was authorised to issue the assessment dated 11 August 2020 to the IP Trustee. Therefore, the second and third issues arise.
(2) Secondly, s 100A caused BE Co not to be presently entitled to the income of the IP Trust for the income year ended 30 June 2014.
(3) Thirdly, s 207-35(6) increased the trustee's liability to tax under s 99A by the amount of the Franking Credit and the amount of the Share Buy-Back Dividend.
(4) Fourthly, the Share Buy-Back Dividend was a distribution "made as part of a dividend stripping operation" as defined in s 207-155. This issue is only relevant in the

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event that Issue 2 is wrongly decided. If Issue 2 is wrongly decided Issue 3 is irrelevant to the outcome.

369. The applications should be dismissed.

THE COURT ORDERS THAT:

1. The application be dismissed.
2. Unless either party applies within 7 days for a different order as to costs, the applicant pay the respondent's costs.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

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BBlood Enterprises Pty Ltd & Anor v FC of T

General background

The Illuka Park steps

IP Trust's income distributed to BE Co

IP Co's retained earnings

Tax consequences of the steps taken in connection with the share buy-back

The legislation

The issues

Issue 2(1): The agreement, arrangement or understanding

Issue 2(2): Ordinary family or commercial dealing

Issue 2(3): Must the payment be a "reimbursement"?

Issue 2(4): Purpose

Issue 2(5): Whether BE Co's present entitlement arose out of the reimbursement agreement

The issue

History and principles

Summary of the applicants' submissions

Summary of the Commissioner's submissions

Consideration

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Item	Provision	Brief description
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17	Section 100A	Present entitlement arising from reimbursement agreement
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