Merchant & Anor v FC of T

Judges:
Thawley J

Court:
Federal Court of Australia

MEDIA NEUTRAL CITATION: [2024] FCA 498

Judgment date: 14 May 2024

Thawley J

1 OVERVIEW

Factual background

1. In 1973, Mr Merchant co-founded the business which became Billabong. Billabong Holdings Australia Limited was later formed and changed its name to Billabong Limited ( BBG ). BBG was listed on the Australian Securities Exchange ( ASX ) on 11 August 2000.

2. Through related entities, Mr Merchant remained a shareholder in BBG during the events which are centrally relevant to these reasons for decision. At the time of those events, Mr Merchant wanted to maintain a significant interest in BBG. His interests in BBG were ultimately purchased by the time BBG was delisted from the ASX in August 2018.

3. Mr Merchant was the director and controlling mind of a number of Australian corporate entities, referred to in these reasons as the Merchant Group . The main entities of relevance for present purposes are described in the following diagram: [ CCH note: diagram not reproduced]

4. As depicted in the diagram, the Merchant Family Trust ( MFT ) (Gordon Merchant No 2 Pty Ltd ( GM2 ) as trustee for the MFT) held all the shares in what was, when it was acquired in 2010, a start-up company. The company is now called Plantic Technologies Ltd. Plantic relied on the Merchant Group for funding from the time it was acquired by the MFT until the time the MFT sold its shares in Plantic on 2 March 2015. Between 2011 and 2015, three entities in which Mr Merchant held all the shares lent about $55 million to Plantic: GSM Pty Ltd lent about $50 million; Tironui Pty Ltd lent a little over $4 million; and the Angourie Trust ( Kahuna Pty Ltd as trustee for the Angourie Trust) lent a little under $1 million (the Plantic Loans ).

5. Mr Merchant became increasingly unhappy about the level of funding Plantic required. By May 2014, if not earlier, he was considering the sale of Plantic. By June 2014, Sealed Air Corporation (a US company) had expressed interest in acquiring Plantic. Ernst & Young ( EY ), which had acted as Mr Merchant and the Merchant Group's accountants for a number of years, was consulted about the structure of a sale to Sealed Air and provided advice. It was anticipated that the sale might result in a substantial capital gain in the MFT. EY's advice included that the preferable structure of a future sale of Plantic from Mr Merchant's perspective was for:

(a) the MFT to sell its shares in Plantic rather than for Plantic to sell its assets;
(b) the relevant Merchant Group entities to forgive the Plantic Loans of about $55 million; and
(c) the Gordon Merchant Superannuation Fund ( GMSF ) (GSM Superannuation Pty Ltd ( GSMS ) as trustee for the GMSF) to acquire from the MFT a substantial number of the MFT's high cost shares in BBG, with the result that the MFT would crystallise a significant capital loss.

6. On 4 September 2014, the MFT sold 10,344,828 shares in BBG (the BBG Shares ) to the GMSF for $5,844,827.82 (the BBG Share Sale ). The result was that the MFT crystallised a capital loss of $56,561,940.

7. The potential sale to Sealed Air did not eventuate. On 15 October 2014, a representative of Kuraray Co Ltd, a Japanese company which had earlier expressed an interest in Plantic,

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indicated that he and others were going to recommend to the Kuraray board that they should start due diligence to acquire Plantic. Negotiations with Kuraray were successful and, by a Share Sale Agreement exchanged on 31 March 2015 ( SSA ), the MFT sold all of its shares in Plantic to Kuraray.

8. On 2 April 2015, as a condition precedent to the completion of the SSA, the Plantic Loans of $55 million were forgiven by GSM, Tironui and Kahuna as trustee for Angourie under a Deed of Forgiveness. Completion of the SSA occurred on that day.

9. The MFT's capital gain on the sale of its shares in Plantic to Kuraray was around $85 million. The capital proceeds included a cash payment of about $60 million, a working capital adjustment and future payments, including what have been referred to as " Milestone Amounts " and " Earn-Out Amounts ", which were valued in the accounts at the time at around $51 million (the Future Payment Rights ). The acquisition costs were around $24 million and the cost base in the Plantic shares included amounts paid to lawyers and the payout of employee options, costing a little over $2 million. The capital proceeds were calculated to be about $111 million and the cost base was about $26 million, resulting in a capital gain of about $85 million.

10. The preceding transactions - particularly the debt forgiveness and the crystallising of the MFT's capital loss - piqued the interest of the Commissioner of Taxation, resulting in an audit of the affairs of Mr Merchant and the Merchant Group. After the audit, the Commissioner issued two sets of "Reasons for Decision" on 20 July 2020.

11. One concerned the " BBG Share Sale Scheme ". The Commissioner considered that, for the purposes of s 177D(1) in Part IVA of the Income Tax Assessment Act 1936 (Cth) ( ITAA 1936 ), it would be concluded that a person entered into or carried out a scheme, or part of it, for the dominant purpose of enabling GSM to obtain a tax benefit, GSM being the only presently entitled beneficiary of the MFT. In summary, the Commissioner took the view that the predominant reason why the GMSF acquired the BBG Shares from the MFT on 4 September 2014 was to crystallise a capital loss in the MFT which could be applied against the capital gain from the MFT's anticipated sale of its shares in Plantic, resulting in a reduction in GSM's assessable income. The Commissioner considered that the BBG Share Sale was analogous to a 'wash sale' given that the BBG Shares would remain in the Merchant Group of which Mr Merchant was the ultimate owner.

12. The Commissioner made a determination under s 177F(1)(c) of the ITAA 1936 that the amount of $56,561,940, referable to a capital loss incurred by the MFT in the year ended 30 June 2015, was not incurred by the MFT in relation to that financial year (the s 177D Determination ). As a consequence of this:

(a) the MFT's net income increased from $5,482,423 to $28,111,179 to reflect the net capital gain (at the 50% discount) of $22,628,756;
(b) an amended assessment dated 24 July 2020 was issued to GSM (the GSM Amended Assessment ), increasing GSM's tax payable by $12,877,000.90 (because GSM was the beneficiary with a 100% present entitlement to the income of the MFT in the 2015 year): CB695; and
(c) although no amount of the net capital gain was assessed to the MFT, a penalty assessment issued to the MFT on 27 July 2020, which assessed it as liable to a penalty of $6,438,500.45 being 50% of the scheme shortfall amount, pursuant to Division 284-C of Sch 1 of the Taxation Administration Act 1953 (Cth) ( TAA 1953 ): CB788.

13. The second transaction concerned the "GSM and Tironui Debt Forgiveness Scheme". The Commissioner considered that the forgiveness of debts by two of the three lenders - GSM and Tironui - were schemes having substantially the effect of schemes by way of or in the nature of dividend stripping within the meaning of s 177E(1)(a)(ii) in Part IVA. No consideration was provided for the forgiveness of debt such that the forgiveness had the effect of:

(a) reducing the undistributed profits of GSM and Tironui; and
(b) converting the Plantic Loans to equity, thereby increasing the value of Plantic's shares and the consideration paid by Kuraray for those shares.

14.

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The Commissioner made a determination under s 177F(1)(a) of the ITAA 1936, that the debts forgiven by GSM and Tironui be included in Mr Merchant's assessable income in the 2015 income year as dividends (the s 177E Determination ).

15. To give effect to the s 177E Determination, on 27 July 2020, the Commissioner issued an amended assessment to Mr Merchant (the Merchant Amended Assessment ) in relation to the 2015 year. This increased Mr Merchant's assessable income by $54,407,000 (being the tax benefit considered by the Commissioner to have been obtained from the release and forgiveness of the Plantic Loans) with the result that Mr Merchant's tax liability increased to $30,570,438.12, comprising an increase in tax payable and a shortfall interest charge: CB696.

16. Mr Merchant, the MFT and GSM lodged a joint objection on 22 September 2020 objecting to each of the assessments: CB790. The objections were disallowed on 27 July 2021: CB797; CB798; CB5. In deciding the objections, the Commissioner concluded:

(a) that the MFT had obtained a tax benefit from the BBG Share Sale Scheme, and that the MFT and the GMSF entered into the scheme for the dominant purpose of obtaining a tax benefit such that s 177D(1) applied, with the consequence that the Commissioner was entitled to make a determination under s 177F(1)(c) cancelling the capital loss: CB798; and
(b) in respect of Mr Merchant, that the GSM and Tironui Debt Forgiveness Schemes had the substantial effect of a dividend stripping scheme, attracting the operation of s 177E of the ITAA 1936: CB797 at [59].

17. It is necessary to say something briefly about two further matters.

18. First, in each of the 2017 and 2018 years, the MFT's right to receive certain components of the Milestone Amounts under the SSA expired. When Mr Merchant submitted his returns for each of those years, the expiry of those rights was treated by him as a capital loss of the MFT. The Commissioner accepted this position as correct and issued a notice of assessment:

(a) on 22 May 2018, in respect of the 2017 income year, for $1,019,505.61; and
(b) on 9 April 2019, in respect of the 2018 income year, for $418,558.79.

19. On 24 September 2019, Mr Merchant lodged an objection to both of those assessments, on the basis that the relevant transaction ought to have been treated as a financial arrangement for the purposes of Division 230 of the Income Tax Administration Act 1997 (Cth) ( ITAA 1997) (the TOFA Provisions ). In summary, Mr Merchant contended that the Milestone Amounts and Earn-Out Amounts payable under the SSA were each separate "financial arrangements" within the meaning of the TOFA Provisions with the result that gains and losses were to be recognised on revenue account rather than on capital account. The Commissioner took, and maintains, the view that the TOFA Provisions do not apply, both because the relevant arrangements are not "financial arrangements" within the relevant definitions and because a statutory exception applies.

20. The Commissioner disallowed this objection on 10 September 2021 (the TOFA Objection Decision ).

21. Secondly, on 21 July 2020, the Commissioner - as regulator under the Superannuation Industry (Supervision) Act 1993 (Cth) ( SISA ) - made a decision under ss 126A(2) and 126A(3) of the SISA to disqualify Mr Merchant from acting as a trustee or responsible officer of corporate trustees of superannuation entities ( Disqualification Decision ).

22. Mr Merchant was a director of GSMS, being the trustee of the GSMF at all material times, including at the time of the BBG Share Sale on 4 September 2014. In summary, the Commissioner has taken the view that:

(a) GSMS (as trustee of the GMSF), in using the GMSF's resources to acquire the BBG Shares from the MFT on 4 September 2014, contravened:
- (i) the requirement to comply with operating standards under s 34(1) of the SISA, in particular to give effect to the investment strategy formulated under sub-reg 4.09(2) of the Superannuation
  
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  Industry (Supervision) Regulations 1994 (Cth) ( SISR );
- (ii) the sole purpose rule in s 62(1) of the SISA; and
- (iii) section 65(1) of the SISA, by using the resources of the fund to give financial assistance to a member of the fund or his relatives.
(b) The contraventions were serious and made at the direction of the guiding mind and responsible officer of GSMS, namely Mr Merchant.

The related proceedings

23. The events summarised above have ultimately resulted in proceedings in this Court, in the Administrative Appeals Tribunal ( AAT ) and in the Supreme Court of Queensland. There are three proceedings in this Court, each of which is a proceeding under Part IVC of the TAA 1953 in which the relevant person or entity appeals the decision of the Commissioner to disallow an objection to an assessment and each of which is the subject of these reasons for decision:

(1) GSM Pty Ltd v Commissioner of Taxation (NSD 908/2021): GSM's appeal from the objection decision which relates to the assessment arising from the cancelling of the capital loss in the MFT in reliance on s 177D(1) applying in respect of a person who entered into or carried out a scheme (the s 177D Proceeding );
(2) Gordon Merchant v Commissioner of Taxation (NSD 907/2021): Mr Merchant's appeal from the objection decision which relates to the assessment arising from the Commissioner's conclusion that s 177E(1)(a)(ii) applied (the 177E Proceeding ); and
(3) Gordon Merchant v Commissioner of Taxation (NSD 1161/2021): Mr Merchant's appeal concerning the applicability of the TOFA Provisions (the TOFA Proceeding ).

24. There are three proceedings in the AAT:

(1) Gordon Merchant No 2 Pty Ltd as trustee for Merchant Family Trust v Commissioner of Taxation (AAT Case 2021/6296): The Commissioner issued a notice of assessment of scheme shortfall penalties to GM2 as trustee of the MFT for 50% of a scheme shortfall of $12,877,000.90, being $6,438,500.45. This proceeding is GM2's application for "review" of the Commissioner's disallowance of its objection.
(2) Gordon Merchant v Commissioner of Taxation (AAT Case 2021/6294): The Commissioner issued a notice of assessment of scheme shortfall penalties to Mr Merchant in connection with the s 177E assessment. Mr Merchant was assessed as having a scheme shortfall of $26,659,429.97 and was assessed to a 25% penalty, being $6,664,857.24. This proceeding is Mr Merchant's application for "review" of the Commissioner's disallowance of his objection.
(3) Gordon Merchant v Commissioner of Taxation (AAT Case 2020/6932): This is Mr Merchant's application for review of the Disqualification Decision.

25. The proceedings in the Supreme Court of Queensland concern the advice given by EY. Those proceedings have been stayed until 40 days after judgment is delivered in these proceedings and a decision is made in the AAT proceedings:
Merchant v Ernst & Young (a firm) [2023] QSC 259.

Evidence, submissions and definitions

26. Each of the parties to the Federal Court proceedings and the AAT proceedings wanted the proceedings to be heard together with evidence in the Federal Court proceedings being evidence in the AAT proceedings and (subject to limited exceptions) vice versa.

27. This approach was followed, it being conducive both to a significant reduction in costs for the parties and to the more expeditious determination of the various proceedings.

28. The documentary evidence was almost entirely contained in Exhibit 1, being the Court Book. The references in these reasons to "CB" followed by a number are a reference to the relevant tab number of the Court Book.

29. Subject to two qualifications, the evidence from witnesses was given by affidavit. The first qualification is that the Court Book contained two statutory declarations, one from Mr Merchant and one from Ms Paull: CB442 and CB443. The second qualification is that the

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Court Book contained transcripts of various interviews conducted by the Commissioner pursuant to s 353-10 of Sch 1 to the TAA 1953. The references in these reasons to the relevant affidavits are provided by stating the name of the deponent and the relevant paragraph number of the affidavit.

30. Only two lay witnesses were ultimately required for cross-examination: Mr Merchant and Mr McGrath.

31. In these reasons, the following references are adopted:

• "AOS" is a reference to the applicants' written opening submissions;
• "ROS" is a reference to the respondent's written opening submissions;
• "AOCS" is a reference to the applicants' written outline of oral closing submissions;
• "T" is a reference to the transcript;
• "NA" is a reference to the relevant notice of appeal;
• "AFAAS" is a reference to the applicants' further amended appeal statement, lodged on 19 March 2024; and
• "RAJAS" is a reference to the respondent's amended joint appeal statement, lodged on 15 March 2024.

32. These reasons concern the three Federal Court proceedings.

2 THE PRINCIPAL PEOPLE INVOLVED IN RELEVANT EVENTS

Mr Merchant

33. As noted earlier, Mr Merchant was the founder of the Billabong business and the owner of the Merchant Group. His involvement in the relevant events is addressed in detail below. Mr Merchant was cross-examined. His recall of the detail of the relevant events during cross-examination was not good. This was in stark contrast to his detailed affidavit and his statutory declaration.

Ms Paull

34. Mr Merchant was assisted for many years in the day-to-day management of various entities in the Merchant Group, including the GMSF, by Ms Colette Paull. Ms Paull initially did part-time bookkeeping work, but her role expanded and she became a close and trusted colleague and friend of Mr Merchant. At the time of the relevant events, Mr Merchant and Ms Paull spoke regularly, typically on a daily basis.

35. Ms Paull held a power of attorney for Mr Merchant. Ms Paull implemented decisions on her own behalf and often on behalf of Mr Merchant for the GMSF. She typically signed GSMS and GMSF documents as Mr Merchant's attorney. Ms Paull died on 6 August 2021.

Mr McGrath

36. Mr Luke McGrath, through his corporate vehicle, was Mr Merchant's investment adviser from about 2005. The main entity engaged in investment activities was the MFT. Mr McGrath did not advise Mr Merchant on his investment in BBG, because Mr Merchant was "better placed to decide whether to invest in BBG": CB442 at [9]. Nor did Mr McGrath provide investment advice in relation to the GMSF's investments, although - as will be seen below - Mr McGrath made suggestions from time to time in relation to what the GMSF might do.

Ms Lyons

37. Ms Sue Lyons assisted Ms Paull in daily management of the accounts of the Merchant Group. She was employed by the MFT. Although Ms Lyons signed an affidavit for the purposes of the proceedings, she was not called to give evidence. Her affidavit did not form part of the Court Book, although the various annexures to her affidavit were included. Mr Merchant gave evidence that he had meetings either quarterly or half yearly with Ms Lyons, and that Ms Paull was at these meetings, at times also with EY: T63 - 64.

Mr Burgess

38. Mr Ian Burgess was a tax partner at EY. He was the Merchant Group's tax agent and the GMSF's auditor for a number of years. Mr Merchant did not often speak directly to Mr Burgess about the Merchant Group's affairs. Ms Paull and Mr McGrath had discussions (and other communications) with Mr Burgess about the Merchant Group's affairs. Mr Burgess did not give evidence in the proceedings, but his absence is readily explained by the Queensland Supreme Court proceedings.

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Mr Morris

39. Mr Brendan Morris was the Chief Executive Officer of Plantic. Plantic is based in Altona, Victoria. It manufactures and distributes packaging materials that are a plant-based substitute for plastic, involving the extrusion of resin from high-amylose corn starch: Morris at [7]. Plantic was incorporated in July 2001. It acquired the intellectual property in the technology for its manufacturing process from a research group funded by the Australian government: Morris at [8]; Merchant at [70].

40. As described below, the MFT ultimately came to hold all of the shares in Plantic.

3 THE FACTS

41. What follows is a chronological outline of all of the facts. A number of these facts are repeated later in these reasons, and in some cases expanded upon, where particularly relevant to an issue. This results in some repetition, but it is convenient before addressing the legal issues to understand the facts in some detail and chronologically.

Billabong: 1973 to 2000

42. Mr Merchant and his then spouse Rena started a business manufacturing surf-wear in 1973. It began with them making around 20 pairs of boardshorts per week on their kitchen table. It grew to become the globally recognised surf-wear brand, Billabong.

43. There were significant changes in the ownership of the Billabong business over the years. Initially, Mr Merchant and Rena each owned half of the business. In June 1999, the majority of Rena's interests were acquired by outside investors (the Perrin family), but a small part was sold to Mr Merchant so that Mr Merchant maintained overall control. BBG was listed on the ASX in August 2000. Immediately after BBG was listed, the Merchant Group (through the MFT and GSM) owned approximately 23% of the issued capital in BBG. Mr Merchant remained on the board as a non-executive director. Ms Paull was also a director until January 2014: T57.

The MFT acquires further shares in BBG: 2004

44. In September 2004, the MFT and GSM acquired further shares in BBG, resulting in the Merchant Group holding approximately 25% of the issued capital. By the end of the 2005 income year, it held approximately 21%. There were only two other shareholders who held over 10% of the issued capital.

The MFT acquires 14% of Plantic

45. The MFT acquired 14% of the issued capital in Plantic on 31 March 2005 and Mr Merchant was appointed a director: Merchant at [72]. The Plantic business came to Mr Merchant's attention by way of his investment advisor, Mr McGrath. Mr Merchant had been looking for his next project after he had ceased day to day involvement in BBG: Merchant at [70]. When Mr Merchant became involved with Plantic, it was in the process of commercialising its technology: Morris at [8].

46. Over time, Plantic developed a number of different products and also developed different techniques to manufacture those products in a more cost effective way: Morris at [9]. It was researching and developing various types of products that could be manufactured using the technology, building the plant and equipment required to produce the products at scale, and developing relationships with customers and others in the packaging industry, with a view to increasing its sales revenue so as to become profitable.

The MFT sells BBG shares: 2006

47. On 1 March 2006, the MFT sold 13,403,000 BBG shares for about $200 million, leaving the Merchant Group with approximately 15% of the issued capital in BBG. Mr Merchant remained the largest shareholder. The proceeds were invested by the MFT over time.

48. Mr Merchant said that he was "reprimanded" in connection with this sale by BBG's chairman: Merchant at [75]. The chairman was not happy that Mr Merchant had not told the chairman that he intended to sell the shares before he did so. Mr Merchant stated that this made him cautious about BBG management and about board members selling BBG shares.

The GMSF established on 30 June 2006

49. The GMSF was established on 30 June 2006: CB30.

The GFC and its consequences

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50. The BBG share price was generally on a downward trend from around 2007. The GFC negatively affected BBG, leading to reduced retail sales. In the 2009 year, underlying net profit after tax was down 9.2% compared to the 2008 year. Dividends ceased to be paid from 2012. Mr Merchant's evidence included:

[105] The years after the GFC were difficult for BBG … [B]roadly, BBG's retail operations in various countries were not performing. Consumer buying had slowed and at the end of 2011, the company reviewed its capital structure. Based on that review, the company decided to implement a number of strategies. Following the announcement of the capital structure review, BBG received proposals to purchase its issued capital. There were a number of trading halts placed on BBG during 2012. BBG also stopped paying dividends in 2012 …
[106] I continued to buy BBG shares through entities in the Merchant Group after BBG stopped paying dividends because I believed that BBG would be successful again. I have always seen BBG as a personal venture of mine and I have always believed in the Billabong brand. This belief was based on my knowledge of the business as a member of the Board and from my involvement with the business since founding it in 1973.
[107] BBG had been very successful in the past and, even when the business declined, I considered that this was due to the strategic direction that the company had taken - and in particular the focus on acquiring additional retail operations. The business had moved too far away from being a wholesale business and did not have expertise in retail to succeed in the retail industry. I believed that BBG's poor financial results were due to mismanagement by key staff. I wanted to retain a controlling stake in the company to prevent mismanagement in the future. I believed that if the necessary changes in the management approach were taken it was likely that BBG would become successful again.

The GMSF in 2008 and 2009

51. The assets of the GMSF were primarily sourced from a significant roll over of funds in the 2008 and 2009 financial years from a super fund in which Mr Merchant was previously a member, in addition to his ongoing concessional and non-concessional contributions: CB33 and CB39.

52. In the financial year ended 30 June 2009, the GMSF acquired a factory at Yamba which was at all relevant times the GMSF's only real property asset and which was recorded in the GMSF's 2009 Financial Statements as having a value of $1,154,202: CB39.

53. The remaining and predominant assets of the GMSF were: (a) "investment in foreign fund", with a value of $4,573,926; and (b) "cash at bank" of $12,188,934. As at 30 June 2009, the net assets available to pay benefits was $17,879,735: CB39.

The pension paid to Mr Merchant

54. On 1 July 2009, the GMSF commenced an account based superannuation income stream for payment of a pension to Mr Merchant, who was then aged 66 and stated to be retired. A letter to Mr Merchant dated 3 November 2009, signed by Ms Paull for herself and as Mr Merchant's attorney, confirmed that the minimum income stream payment for the year ended 30 June 2010 was $458,750: CB 780 at page 37.

55. Various resolutions to commute the income stream pension and to start a new income stream pension were made in respect of the 2010, 2011 and 2012 financial years: CB780 at pages 32 and 38. Mr Merchant received a pension of at least $450,000 from the year ended 30 June 2010. In the year ended 30 June 2013, he received a pension of $470,500, leaving a total benefit balance of $10,116,862: CB149 at page 8. One of the consequences of the BBG Share Sale was that the GMSF made a decision to cease the pension from 1 July 2015 and for the fund to go back into the accumulation phase.

Acquisition of 100% of Plantic: November 2010

56. In November 2010, the MFT acquired all of the remaining shares in Plantic under a scheme of arrangement, paying GB£6.83 million (around A$10.3 million): Merchant at

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[72], [84] to [85]. Together with the cost of the MFT's 14% acquisition in 2005, the total cost base of the shares in Plantic owned by the MFT was $24,159,245.35: CB265; CB430.

57. From this time until the shares in Plantic were sold on 2 April 2015, Mr Merchant, Ms Paull and Mr McGrath were directors of Plantic: CB438. Mr Morris was its CEO and its CFO and company secretary was Mr Daryl Hoy: Morris at [6], [23].

58. Plantic experienced various technical challenges in establishing the manufacturing process for its products. A frequent topic of discussion at its board meetings was Plantic's lack of profitability. Early funding from government grants had substantially reduced, and the income it was making from sales was not enough to make it profitable: Morris at [10], [20], [28]; Merchant at [88].

59. Obtaining funding from banks was difficult as a result of Plantic's lack of profits and the fact that its assets consisted mainly of intellectual property and bespoke machinery: Morris at [28], [60] to [62]. Between November 2010 and April 2015, the Merchant Group provided the Plantic Loans totalling about $55.2 million: Morris at [19]; Merchant at [88].

60. In order for the directors to declare that Plantic was solvent, the MFT was required to provide 'comfort letters' which confirmed that the MFT would "ensure sufficient additional funds are provided to Plantic … to enable it to meet financial obligations incurred in the ordinary course …"; that it would "not require repayment of any amounts owing by Plantic … during the 12 months following the signing of the financial statements, except in so far as the funds of Plantic … permit repayment"; and that the MFT "or related entities have the financial capability to provide the above noted financial support": CB56; CB87; CB145.

61. Plantic was looking to secure new customers to build its revenue and to reduce its costs, but it was not yet profitable: Morris at [28]. From at least early 2011, Plantic was exploring commercial relationships with a number of different overseas entities: Morris at [28] to [31]; Merchant at [98]. Amongst other things, there was discussion of a joint venture in Brazil with Braskem SA (a Brazilian company) from around July 2011, and of a non-exclusive distribution agreement in the United States with Multivac , Inc (a US company) from around May 2011: Merchant at [100] to [103], [123].

Consideration to acquisition of BBG shares by GMSF: 2011

62. On 23 December 2011, Mr McGrath wrote an email to Mr Merchant which stated (CB69):

With the BBG share price as it is I was thinking that you might like to consider transferring some of GM No 2's BBG shares to your Super Fund??

This would give you extra money for GM No 2 and is allowable under the share trading window up till next Friday the 30^th of December - see attached

The only thing you would need to do is to get Ted's OK for a transfer as it would be over 1 million shares, but as it is just going from one entity to another that you control there is no possible issue

Say for example the share price was $1.90 next week, depending on the cash in the Super Fund and allowing for keeping some cash there, if you were able to transfer say 6 million BBG shares that could release $11.4 M to GM No 2.

I would need to check with Colette as to how many you could actually do depending on the cash available but that is the idea.

There would be no capital gains tax payable by GM No 2 and it is a simple and easy way to get cash out of your Super Fund

And if the BBG share price increases over the next couple of years and you wanted to sell some there would be no capital gains tax payable in the Super Fund

What do you think???

63. Mr Merchant responded on 28 December 2011 at 6:23am saying (CB69):

Luke just thinking about putting this into Super, how do I access the money in my Super, isn't there all sorts of restrictions on funds once it goes into my Super?

64. On 28 December 2011 at 7:18am, Mr McGrath wrote an email to Mr Merchant stating (CB69):

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Colette came back when I sent the email and thought the idea of transferring the shares was OK and Ian Burgess your Partner at Ernst and Young thought it was OK as well

You would only be transferring the shares from GM No 2 to your Super Fund so you are not actually disposing or buying any more shares just changing the ownership of part of the shares that you own

Allan McDonald did the same thing back in March this year - see attached

On the Super side the Super Fund is also just buying the shares at market value and therefore is just paying for the shares at that price so the Super Fund ends up with assets that it owns for the cash paid so there are no issues around realising money from the Fund to do that

I will contact Colette after 9 am our time once the market has opened and see if she can contact Ted to see what his reaction is and get back to you

65. On 28 December 2011 at 9:03am, Mr McGrath wrote an email to Ms Paull, which included (CB70):

Gordon has asked if you can ring Ted to see if he is OK with the idea of transferring the shares from GM No 2 to Gordon's Super Fund

The number to be transferred depends on the amount of cash in the Super Fund but needs to allow for cash liquidity in the Super Fund so I would suggest keeping a minimum of $4 M cash in the Fund.

So if there was say $16M in the Fund then I would suggest only using $12M for share purchases

So if the share price is say $1.85 then transferring 6.5 Million shares at that price would be $12.025M from the Fund but the number of shares transferred would need to go down or up to ensure that $4M cash is held in the Fund

…

I am sorry to do this to you today but Gordon has only come back to me this morning

66. Mr Merchant said he was concerned with funding Plantic at this time, that the dividend flow from BBG was reducing, and that his interest in buying BBG shares continued: Merchant at [110] to [115]. In his affidavit at [115], Mr Merchant stated:

I understood, based on Luke's email to me on 28 December 2011, that transferring BBG shares from MFT to GMSF was permitted under the restrictions that applied to self-managed superannuation funds, provided that the shares were transferred for market value.

67. Mr Merchant stated in his affidavit that he did not know why he did not proceed, but that it was likely that it was because he could meet Plantic's funding needs from other sources: Merchant at [116]. This evidence was not supported by evidence of Plantic's funding needs at the time or by evidence that those needs were met from other sources. To the extent Mr Merchant sought to imply in his affidavit that Mr McGrath's email was concerned with funding Plantic, something which is not mentioned in the email, I do not accept that this was the predominant reason for Mr McGrath's inquiry.

68. On 13 January 2012, Ms Lyons sent an email to Mr Cowley at MinterEllison in relation to a "future transfer of BBG shares" from the MFT to the GMSF: CB74. The email included:

Colette mentioned that she had discussed with you the possibility of having some of the BBG shares owned in the Merchant Family Trust transferred to Gordon's superannuation fund. This was not done in the last trading window, but Colette mentioned that it is possible that it will happen in the next window. Therefore, we would like to get the paperwork drafted now, so that it is ready to go later - all we have [sic] to insert the correct numbers and dates.

I did a draft in Dec, which I now attach for your review …

69. The attachments to this email indicate that what was being considered in December was an acquisition of 4,500,000 shares for $7,987,500.

GMSF acquired BBG shares: 29 February 2012

70. On 17 February 2012, BBG announced a number of dealings following a strategic capital structure review which had been announced on 19 December 2011: Merchant at [125].

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71. An ASX announcement on 17 February 2012, stated that the review had resulted in the following initiatives (CB79):

• the partial sale of Nixon Inc.;
• a review of the Group's retail network with a view to closing loss-making stores and stores performing below expectations;
• a cost-cutting program; and
• a reduced dividend and fully underwritten dividend reinvestment plan.

72. On 20 February 2012, BBG announced that it had received a proposal from TPG Capital to acquire all of the shares in BBG for $3.00 per share under a scheme of arrangement: CB80. Mr Merchant stated in his affidavit that he thought that the offer did not reflect BBG's value, which he believed, based on a valuation the board organised, to be over $5.00 per share: Merchant at [127]. No valuation was in evidence.

73. An ASX announcement from BBG on 28 February 2012 included (CB82):

The Board and its advisers have now had further discussions with TPG to give TPG the opportunity to increase its non-binding indicative price of $3.00 per share to better reflect the value of the company. In those discussions, TPG was also made aware of the attached letter, received by the company after market close yesterday, from the lawyers of Billabong's Non-Executive Director and major shareholder, Gordon Merchant, and Non-Executive Director Colette Paull, advising that Mr Merchant and Ms Paull 'do not support Billabong taking any steps to assist or facilitate a proposal by TPG Capital, including allowing TPG Capital to commence due diligence on Billabong, even if the price TPG Capital offered was $4.00 per share' which Mr Merchant and Ms Paull 'consider would still represent a discount on the true value of Billabong shares'.

74. On 29 February 2012, the GMSF acquired 2,523,600 shares in BBG for $7.89 million (approximately $3.13 per share) in an on-market purchase: Merchant at [119]; CB537. By 30 June 2012 (the opening balance at 1 July 2012), those shares were recorded in the GMSF financial statements at $2,712,870: CB590 at page 3. By 30 June 2013, they were recorded in the GMSF financial statements at $378,540: CB149; CB559; CB590.

75. Mr Merchant stated in cross-examination that he did not receive any advice from EY in relation to this transaction: T75.21.

76. This transaction was addressed in statutory declarations prepared by Ms Paull and Mr Merchant in the context of an audit conducted by the Commissioner into the affairs of the GMSF.

77. In her statutory declaration at [15] to [19], Ms Paull stated that she had discussions with Mr Merchant before the GMSF acquired shares in BBG in February 2012: CB443. She stated:

15. In February 2012, GMSF acquired 2,523,600 BBG shares on market (2012 shares). GMSF [sic] paid approximately $7.89 million for these shares.
16. Before GMSF purchased the 2012 shares, Gordon and I discussed investing GMSF's cash in assets that generated more wealth for GMSF. Gordon and I agreed that it would be good to try to invest the cash in other growth assets, rather than just having cash in GMSF. I can't remember how long we had been having these discussions, but it had been for a number of years before GMSF purchased the 2012 shares.
17. During these discussions before February 2012, Gordon suggested that GMSF purchase BBG shares. At that stage, the BBG share price had been decreasing for some time and Gordon and I discussed the share price and BBG's performance regularly.
18. Gordon said words to me to the effect that:
- (a) he believed that BBG's performance would improve and the share price would
  
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  increase;
- (b) he wanted to buy BBG shares because he saw them as a good investment - the share price was low and he was confident that BBG would improve over time; and
- (c) he wanted to hold BBG shares for a long time.
19. At the same time, there were a lot of good offers for BBG shares - for example, they were offering two shares for every one purchased.

78. In his statutory declaration made on 17 October 2019, Mr Merchant stated (CB442):

Investing in BBG

10. I have always (through various entities in the Merchant Group) been a significant shareholder of BBG.

11. I discussed buying BBG shares with Colette on a number of different occasions. Different entities in the Merchant Group owned BBG shares, including MFT and GMSF.

12. BBG started to decline in around 2010 - I believe that BBG was affected around this time from the global financial crisis.

13. Throughout this time, I continued to purchase BBG shares in the Merchant Group. I always believed that:

(a) BBG would improve and trade out of its difficulties;

(b) as a founder, it was important for me to show the public that I believed that BBG would improve and trade out of its difficulties;

(c) my investment in BBG was a long-term investment; and

(d) BBG would return to paying dividends and I would make a good return on my investment in BBG.

14. Colette and I regularly discussed BBG and me wanting to purchase BBG shares. Whenever I wanted to purchase BBG shares, I spoke to Colette about it.

15. In February 2012, GSMF purchased around 2.5 million BBG shares for approximately $7.89 million. At that stage, the BBG share price had been decreasing. I believed that:

(a) the share price had taken into account BBG's trading difficulties, so the BBG shares were good value;

(b) the BBG share price would increase;

(c) as a founder, it was important for me to show the public that I believed that BBG would improve;

(d) my investment in BBG was a long-term investment;

(e) I wanted to continue to own (through my various entities) a sufficient number shares that gave me some control - this was around 12% to 15% of the shares in BBG; and

(f) BBG would return to paying dividends and I would make a good return on my investment in BBG.

79. In cross-examination, Mr Merchant denied that this purchase had anything to do with him wishing to retain his position as a substantial shareholder in BBG: T78.3. I do not accept this evidence as accurate. It is inconsistent with [15(e)] of his statutory declaration. Mr Merchant acted consistently over this period to maintain his position as a substantial shareholder in BBG. The GMSF had cash available to make the purchase and Mr Merchant wanted to maintain the Merchant Group's relative shareholding position in BBG.

GMSF formulates and adopts an investment strategy: 15 March 2012

80. On 15 March 2012, Ms Paull (on her own behalf and as Mr Merchant's attorney) signed a resolution of the directors of the GMSF: CB84. The resolutions were said to have been made at a meeting on 16 February 2012 at which Ms Paull and Mr Merchant were "present (on phone)". The resolution refers to sub-reg 4.09 of the SISR. The following was set out next to the heading "Investment Objectives & Strategy":

IT WAS RESOLVED that the primary investment objective of the Fund will be to achieve an after tax rate of return which is at above the rate of inflation.

The strategy is to invest assets as follows:

> 0 - 40% in Shares in Listed Companies;

> 0 - 20% in Shares in Unlisted Companies;

> 0 - 10% in Units in Listed Unit Trusts;

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> 0% in Units in Unlisted Unit Trusts;

> 0 - 10% in Managed Funds;

> 0% in Property;

> 0 - 5% in Loans;

> 0 - 50% in Shares in Unlisted Hybrid Funds;

> 0 - 100% in Cash ie Bank Bills/ Term Deposits etc

> 0 - 20% in Fixed interest;

> 0% in other investments

81. Attached to the resolution was a document dated 15 March 2012, signed by Ms Paull for herself and as Mr Merchant's attorney, which was headed "Investment Strategy" (the 2012 Investment Strategy Document or 2012 ISD ). It stated:

Investment Objectives

Effective from 16 February 2012 the investment objectives of the Fund are as follows:

> to earn an investment rate of return above the inflation rate on the assets under its control;

> to invest so as to have a very low expectation of a negative return in any 12 month period;

> to hold assets in such a form to enable the trustee to discharge the Fund's liabilities as and when they fall due and to discharge the member's benefits in a manner that satisfies the member.

Investment Strategy

In order to achieve the investment objectives of the Fund, the investment strategy of the Fund is as follows:

> To maintain asset class holdings in the following ranges:

Investment (%)

Shares in Listed Companies 0 - 40

Shares in Unlisted Companies 0 - 20

Units in Listed Unit Trusts 0 - 10

Units in Unlisted Unit Trusts 0

Managed Funds 0 - 10

Property 0

Loans 0 - 5

Shares in Unlisted Hybrid Funds 0 - 50

Fixed Interest 0 - 20

Cash ie Bank Bills/Term Deposits etc 0 - 100

> To pursue a high growth strategy in order to provide strong returns with diversification of risk. Diversification of risk will be achieved by ensuring the portfolio maintains an exposure to most main investment sectors. At this stage the focus will be mainly through investments in shares in listed companies, and fixed interest and cash. Also, consideration will be given to investments in shares in unlisted companies, units in listed trusts, and managed funds where appropriate.

The Trustee will take into account the following factors when acquiring, selling or replacing assets:

(i) the marketability of the asset, including costs of realisation;

(ii) the risk involved in making, holding and realising, and the likely return from the asset;

(iii) anticipated liquidity requirements;

(iv) the Fund's ability to discharge its existing and prospective liabilities; and

(v) if the Fund should hold a contract of insurance that provides insurance cover for one or more members of the Fund.

Where appropriate, the Trustee will consult with their financial advisers in relation to the purchase and disposal of investments.

Short term cash flow requirements for the ongoing administration of the Fund and member payment requirements will be met via returns on investments, contributions received and the holding of cash amounts. Investments in equities can also be easily realised to cover cash flow requirements, both in the short term for ongoing administration costs, and in the long term to meet member payment requirements.

In determining the above strategy, the Trustee has taken into consideration all the

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circumstances surrounding the Fund and the Fund's investment objectives. The Trustee has also considered the risk and likely return of the investments, the adequacy of the diversification, the Fund's expected cash flow requirements and the Fund's ability to meet its existing and prospective liabilities.

The Trustee will continue to monitor the appropriateness of the investment strategy adopted. Depending on the Trustee's view of the financial markets, the Trustee may vary the investment strategies in order to ensure the Investment Objectives of the Fund will be met.

This Investment Strategy has been adopted.

82. Mr Merchant gave evidence that he did not recall seeing the 2012 ISD at or before the time it was signed. He stated that he did recall discussing the GMSF's investments with Ms Paull from time to time and he understood that Ms Paull sought advice from EY about GMSF matters: Merchant at [121], [122].

83. Although the minutes record Mr Merchant as being present at the meeting, by phone, his evidence in cross-examination was that he could not recall whether he was at the meeting or not: T75.36-41.

84. As Mr Merchant noted in his evidence, the resolution included a strategy to invest in assets including 0% in property which did not reflect the fact that, by 30 June 2012, a factory in Yamba comprised approximately 9% of the GMSF's assets: Merchant at [121].

85. As noted above, the resolution also included a strategy which provided for investment of up to 40% of the GMSF's assets in listed securities.

The MFT acquires further BBG shares in June 2012

86. In June 2012, Mr Merchant became aware that BBG was going to announce a non-renounceable entitlement offer.

87. On 19 June 2012, Ms Paull sent Mr Merchant an email about the paperwork for an increase to the limit of a margin loan the MFT had with NAB ( NAB Margin Loan ) to $25 million: CB91. I infer that the immediate desire for the increase to the facility limit was for Mr Merchant to acquire more shares in BBG. Mr Merchant replied to Ms Paull's email stating:

How much is it for? Not sure I'll need it but it would be nice to have there in reserve. I was figuring to put in 22mil which should leave at around 13+% which I think is just enough to retain control. I'll have [to] check this.

So with the 15mil and the 11mil that Luke is getting I should have 26 all up. I wanted to leave some for you to use. But I don't want to give up control

88. Mr Merchant stated, and I accept, that his reference to "around 13+%" and retaining "control" was a reference to the Merchant Group's interest in BBG: Merchant at [133]. The reference to the amount of "11mil that Luke is getting" was, I infer, a reference to amounts that would be obtained from the sale of investments in respect of which Mr McGrath was the adviser. The MFT General Ledger for the year end 30 June 2021 indicates that a number of shares (or assets) were sold from 19 June 2012 to 25 June 2012: CB836 at page 11.

89. On 21 June 2012, BBG announced a non-renounceable entitlement offer: CB100; Merchant at [131]. The MFT General Ledger shows that, on 25 June 2012, an amount of $23 million was received by the MFT drawing down on its overdraft. The balance went from $465,325.72 on 15 June 2012 to $31,086,318.47 on 25 June 2012. On 27 June 2012, $30 million was drawn out of the MFT to acquire 29,411,765 shares in BBG: Merchant at [135], [136], [139]; CB91.

90. The GMSF did not take up an entitlement in the offer: Merchant at [135]. The GMSF General Ledger for the year end 30 June 2013 records that the GMSF acquired BBG shares by four payments totalling $2,176,000 on 13 and 16 July 2012 and received a refund in relation to those shares on 2 August 2012: CB590. Mr Merchant was taken to these entries but it did not assist his recollection about why the GMSF did not acquire shares: T80-81.

Consideration given to accessing cash from the GMSF: July 2012

91. On 20 July 2012, Mr McGrath sent an email to Mr Burgess which relevantly stated (CB106):

Gordon just rang about getting some of the cash out of the Super Fund when the

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redemption of the MSSits money comes through at the end of September / beginning of October

It should be around US$7.4m or so and I was wondering if it was possible for Gordon to retire from a position at that point and turn the Fund into pension phase and withdraw a lump sum?

The idea would be to pay down part of the margin loan with NAB with the proceeds

Could you please advise your thoughts?

92. Mr Merchant stated that he did not recall the conversation referred to by Mr McGrath in this email: Merchant at [144].

93. The reference to "MSSits" is a reference to the Macquarie Special Situations Fund ( MSSF ): Merchant at [144]. Mr Burgess replied the same day stating:

Luke, there are no restrictions on Gordon accessing the funds in the super given he is over age 65. He could take it either as a tax free lump sum or tax free pension - I think we did start him on a pension so that would probably be the form) - another option which might be preferable and which I have discussed with Sue is to have the fund acquire some of the BBG shares from MFT (fund is able to acquire these as listed shares) - in this way the 'value' stays protected in the concessionally taxed super environment. I will give you a call to discuss a little later.

94. Mr Merchant stated that he did not recall any discussion with Mr McGrath about Mr Burgess' response: Merchant at [144].

Plantic negotiations: July and August 2012

95. In July 2012, Winpak Ltd and Bemis Company, Inc expressed interest in the possibility of equity participation in Plantic: Merchant at [145]. In August 2012, Kuraray expressed interest in potential cooperation with Plantic: Merchant at [146]. By January 2013, discussions with Bemis turned to potential exclusive technology license agreements: Merchant at [166].

Consideration to GMSF acquiring BBG shares: October 2012

96. In around October 2012, Mr Merchant became aware that a consortium involving a former BBG director, Mr Paul Naude, was looking to announce an offer to acquire BBG shares: Merchant at [159]. TPG had earlier (on 24 July 2012) announced a proposal to acquire all of BBG's shares for $1.45 per share. Mr Merchant gave evidence that he did not believe that this correctly reflected BBG's value: Merchant at [153].

97. On 14 October 2012 at 4.51pm Mr Merchant emailed Ms Paull asking: "Do you know if I'm able to buy BBG shares using funds in my super fund?": CB115. Ms Paull replied at 9.36pm stating:

Yes, you can, and you have around $2 mil that you could use, we have to keep some in there.

The $15 mil won't be in the account until early November.

Our trading window looks like it will be open until December, so that might still be o.k. but you wouldn't want to use it all for BBG shares as it wouldn't leave you any if things go pear shaped.

98. The reference to "the $15 mil" was to an amount that the GMSF and the MFT were due to receive from an investment in the MSSF: Merchant at [157].

99. On 15 October 2012, Mr Merchant replied to the effect that he was thinking of spending around $4 million, and Ms Paull replied stating: "We should be able to come up with the $4 mil ok".

100. Mr Merchant's statutory declaration of 17 October 2019 included (CB442):

16. On or around 15 October 2012, I sent an email to Colette asking whether she knew if I could buy BBG shares using the funds in GMSF …
17. I know that there are specific rules that apply to self-managed superannuation funds. When I asked Colette about buying shares using funds that GMSF held, I wanted to make sure that I wouldn't breach any of the superannuation rules if GMSF purchased BBG shares. At the same time, I knew that GMSF had cash that it could use to invest. I thought that BBG was a suitable investment for GMSF.
18. I believe that Colette then spoke to Ian about GMSF buying BBG shares.

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101. On 18 and 19 October 2012, the MFT acquired 900,058 BBG shares for a total of $753,895.21: Merchant at [161]; CB116. Mr Merchant could not recall why more BBG shares were not purchased. The expected return from the MSSF had not then been received. The purchase was funded by a $3 million draw down on the NAB Margin Loan (the balance of which was used to fund Plantic in the sum of $1.55 million and to pay MFT's other expenses): Merchant at [162].

102. On 5 November 2012, the GMSF received $6,201,885.26 by way of proceeds of sale from the MSSF: CB590 at page 1. An amount of $6,100,000 was transferred to a different account of the GMSF and the amount remained in the GMSF until it was used in the BBG Share Sale on 4 September 2014.

Plantic negotiations: January to May 2013

103. By January or February 2013, Kuraray had indicated that it may be interested in acquiring Plantic: CB128; Merchant at [168]. By March 2013, Kuraray had signed a letter of intent expressing its interest in "possible cooperation and alliance between Kuraray and Plantic such as 100% acquisition of or partial capital contribution in Plantic, joint venture, licensing arrangement and so on": CB136; Merchant at [170] to [176].

104. By 17 April 2013, Kuraray had indicated it might consider buying the Plantic business at $60-$100 million: CB139. There were also discussions about selling a license to Braskem and about an exclusive North American license to Winpak, both of which might affect Kuraray if it acquired the business: CB139. By 19 April 2013, Kuraray had indicated it did not have approval to make an offer for a 100% acquisition of Plantic. It was, however, interested in Plantic's business and opportunities to cooperate: Merchant at [176]; CB140.

105. In May 2013, negotiations with Multivac were put on hold whilst negotiations with Winpak, Bemis, Braskem and Kuraray progressed: Merchant at [177]. In June 2013, Plantic and Braskem had discussed the rough terms of a proposed licensing agreement: Merchant at [178].

The GMSF as at 30 June 2013

106. The GMSF financial statements for the year ended 30 June 2013 record that:

(a) an income stream based pension of $470,500 was paid to Mr Merchant, leaving a total benefit balance of $10,116,862: CB149 at page 8.
(b) the GMSF investments comprised: BBG shares recorded at a value of $378,540; a "Flaik (SSIWDI Pty LTD) loan" of $547,341; the Yamba factory valued at $1,154,202 and cash of $8,187,967: CB149 at page 4.

107. The cash balance of $8,147,463 included the proceeds of disposal of the MSSF investment: CB149 at page 4; CB590.

Plantic negotiations: June 2013 to December 2013

108. Between June 2013 and December 2013, Kuraray discussed a license agreement for Japan and South Korea, and ultimately a distribution agreement for that area. This was entered into in December 2013: Merchant at [179].

109. The negotiations with Bemis and Winpak proved difficult due to Plantic pressing for the companies to pay an upfront license fee: Merchant at [181]. Nonetheless, by September 2013, Plantic was close to finalising a license agreement with Winpak that would include an upfront license fee, expected to be $1.5 million: Merchant at [182].

110. By November 2013, the Plantic board had resolved not to pursue a relationship with Winpak or Bemis, and to re-engage with Multivac: Merchant at [185].

111. By November 2013, Sealed Air had expressed interest in potentially acquiring Plantic: Merchant at [186]. Mr Merchant was told that Sealed Air's representative had indicated that "if Plantic went down the path of signing individual distribution and manufacturing agreements especially in North America that Sealed Air would not be interested in talking to Plantic": CB163.

112. In an email on 5 November 2013, Mr Merchant stated: "I do not want us to get sidetracked again by another we might want to buy the company scenario. If someone wants to buy us especially an opposing brand they need

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to make us an unconditional offer and until then it's business as usual": CB163.

113. By December 2013, the Plantic team were growing frustrated with Braskem's delays, but Braskem was asking for more time: Merchant at [187]; CB497 at page 1116. Plantic and Sealed Air had signed a confidentiality agreement to facilitate discussions, but Mr Merchant told the Plantic board that he "agreed to proceed with caution and that [the] objective should be to hear what Sealed Air had to say and not give up Plantic information at this stage": CB497 at page 1117.

BBG renounceable rights issue: September 2013 to March 2014

114. On 19 September 2013, BBG entered into agreements with Centerbridge Partners, LP and Oaktree Capital Management, LP entities ( Centerbridge/Oaktree ) for them to provide long term finance to BBG: Merchant at [189], [190]. In summary, under the agreement:

• BBG would borrow $386 million from Centerbridge/Oaktree;
• a $135 million equity placement would be issued to Centerbridge/Oaktree;
• a $50 million renounceable rights issue would be available to BBG shareholders other than Centerbridge/Oaktree;
• BBG would use the proceeds from the equity placement and renounceable rights issue to repay part of the loan from Centerbridge/Oaktree; and
• 29.6 million options would be issued to Centerbridge/Oaktree.

115. The equity placement and rights issue would dilute Mr Merchant's shareholding in BBG so he decided to acquire BBG shares under the renounceable rights issue to reduce the extent of dilution of his shareholding: Merchant at [191]. As can be seen from the following communications, consideration was given to the GMSF acquiring shares in BBG through the entitlements of other Merchant Group entities, but this ultimately did not proceed because Mr Burgess considered that such a course raised tax issues.

116. On 25 November 2013, Ms Lyons emailed Ms Paull attaching some calculations: CB165. The email included:

1. Approx. cash in the bank now is $8,059,826.79 - this excludes super and Foundation and Rocky group.
2. Perhaps you could buy some of the BBG shares in the super fund? This would mean that there was more $ to access for the purchase. Might not work - depends on the terms of the purchase available.
3. Cash balance stays in the black until Nov next year - balance then approx. $1.2M only.
4. Plantic commitments up to Dec 2013 only. Assumed no cash required by them after that date.
5. The interest on the NAB loan is listed right at the bottom of the sheet - this is not included in the cashflow as the interest is just capitalised to the loan at the moment. The NAB loan is currently at around $10.911M and this continues to increase with interest charged.
6. I have assumed approx. $500K per month for drawings for Gordon. While this amount might differ from month to month, the annual total is based on the last 2 years drawings.
7. I have included estimated costs for the following based on 2013 figures but have just projected them at an equal amount per month:
- a. Helicopter costs
- b. Angourie property costs
- c. Neil's fee
- d. Administration costs of all entities
- e. Motor vehicle costs
8. The income in the form of dividends has been included based on 2013 amounts and I have included them with the timing the same as for 2013.
9. I have not included any interest income on the foreign bank accounts.
10. I have not included any income or capital calls on the property trust investments (like MREEF and SREEF etc), as these are unknown to me. Not sure if Luke would know any other info.

117. On 26 November 2013, Ms Paull forwarded that email to Mr Merchant, stating relevantly (CB165):

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Here is the cash flow that Sue has sent to me, i thought i would send it onto you so we were all on The [sic] same page. …

If we need around $10 mil for BBG shares we could use some of the super fund money if we are allowed To [sic] do it that way, we have $8 mil in cash available which we can give to you as you are retired and buy Them that way. Or we can draw down again on the NAB and because its BBG shares again we wont have to Pay [sic] interest if you would prefer to do it that way.

This is just a couple of suggestions we can do other things as well.

118. On 26 November 2013, Mr Merchant replied, stating relevantly:

It would be fantastic if we could use the Super fund to purchase the shares? Can you please find out if this is possible? I know it's a possible tax deduction if we draw the 10 million from the National Bank overdraft but I'm worried about our ability to service that much debt. I'd try and use the Super Fund money as much as we possibly can. Given there is a real chance I'll have a huge tax bill when I sell Plantic or hopefully my shares in Billabong in few years time what does Sue think is the best way to raise the funds is given our current situation. I think Sue's answer would be dependent on how much Plantic and deliver over the next twelve months. Best have Daryl give us a cash flow for the next twelve months regardless. I still think you [sic] Super Fund is the best way to go if we can do it.

119. The Centerbridge/Oaktree equity placement occurred on 6 February 2014. On 13 February 2014, Mr Merchant forwarded to Ms Paull an email he had received discussing whether he was to be an institutional or retail investor in the forthcoming rights issue: CB175. Ms Paull forwarded the email to Mr McGrath on 14 February 2014. Mr McGrath responded the same day and, after setting out the likely timing of the institutional and retail offers, stated (CB175):

The questions that we need answered for Gordon at this stage are 1) can his entitlements under the Institutional / Retail offer for the various entities - GM No2, GSM etc. - be transferred or assigned or preferably issued originally to the Super Fund? - do you want me to double check with Burge that there is no adverse tax consequence of this happening once we find out if it is possible?? 2) will he be provided with exactly the same number of entitlements under the Institutional offer as he would be under the Retail offer?

120. Mr McGrath gave evidence that he raised the possibility of the entitlements under the capital raising offer being transferred to the GMSF on the basis that he thought it was desirable because the GMSF had cash that could be used to buy the shares, and he understood that Mr Merchant wanted to minimise debt: McGrath at [57(c)]. Mr McGrath also gave evidence that his reference to finding out "if it is possible" was intended as a reference to whether the rules of the capital raising allowed the rights issue to be assigned or issued to the GMSF.

121. Earlier on 14 February 2014, Mr McGrath sent an email to Mr Burgess referring to the offer and stating relevantly (CB176):

It would be preferable if the full entitlement across all of Gordon's entities could be taken up by the Super Fund as it has cash available

Colette is checking with BBG on whether the various entities entitlements - GM No 2, GSM etc. - can be transferred or issued in the Super Fund's name and therefore all the entitlements can be taken up there

I just wanted to check that there would be no adverse tax outcomes for the other entities if that happens? The offer this time is renounceable and I am therefore presuming transferable but the offer is being done at 28 cents and the present trading price for BBG shares is about 70 cents

122. Mr Burgess replied the same day stating (CB176):

thanks Luke - has any documentation come out about this yet? if renounceable and given the disparity between the offer price and trading price will investors get any form of payment where they renounce? i guess what i am saying is that there could be some issues for the fund if it is able to get more of

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the low cost shares because of a 'non-arm's length arrangement' with the other entities of Gordon's. understand the preference to do it all via super fund because that is where the cash is …

123. Mr McGrath sent Ms Paull an email on 14 February stating relevantly (CB176):

FYI - Ian asked the same thing as me below re the documentation

So I rang him and we had a talk about different options and one option that is also available is that if there are problems with issuing the share entitlements to the Super Fund or transferring them, or any potential tax situations - which there could also potentially be - that an option would be for the Super Fund to buy some of the bank shares from GM No 2 thus transferring cash to No 2 allowing it to be able to take up its rights.

Burge said that there are enough losses in No 2 so that there should not be any tax payable on a gain by selling the shares down the track

So in summary there are a number of options available that there should be enough flexibility to allow it to happen in the most, or a combination of the most, advantageous ways for Gordon

124. Mr McGrath did not have a specific recollection of his discussion with Mr Burgess as mentioned in that email: McGrath at [58(d)].

125. On 18 February 2014, Mr McGrath sent Ms Paull an email estimating that the effect of the rights being issued was that the Merchant Group's 15.6% stake would go down to 9.75% if all of the Group's rights were taken up: CB180.

126. Consideration continued to be given to whether the GMSF could acquire BBG shares through the entitlement of other Merchant Group entities: CB182; CB186; CB567. Ultimately, however, this did not occur because of various potential taxation issues raised by EY. On 21 February 2014, Mr Burgess sent an email to Ms Simone Mouritz and Ms Megan Kachel of EY referring to various tax issues which might arise if the GMSF purchased BBG shares using the entitlement of other entities and stating that he had discussed the issues with Mr McGrath and that the "end result is that each entity will take up its own entitlement": CB186. It is clear from this email and the subsequent acquisitions, that the GMSF did not acquire any shares in BBG through the entitlements of other Merchant Group entities.

127. The entitlement offer was made by a prospectus dated 26 February 2014.

128. On 31 March 2014 (Merchant at [199]):

• the MFT acquired 24,679,850 BBG shares for approximately $6,910,357;
• GSM acquired 850,873 BBG shares for approximately $238,244; and
• the GMSF acquired 946,350 BBG shares for approximately $264,977 (0.28 cents per share).

129. After the rights issue, the Merchant Group held approximately 10% of the voting power in BBG, and was no longer the largest shareholder: Merchant at [202].

130. Mr Merchant's evidence as to why he (through the Merchant Group entities) acquired the shares included (Merchant at [203]):

At the time, Rider had acquired approximately 10% of BBG's share capital and was pushing to have a seat on the board. Rider had plans to increase the distribution channels that Billabong products were sold through - for example, selling Billabong products through lower-end retailers like Kmart. I disagreed with this plan because I thought this would cheapen the brand. I considered that selling Billabong products at a 'discount' retailer would diminish the value of the brand forever. I disagreed with Rider's plans for BBG and wanted to make sure they did not get a seat on the board. These kinds of considerations are why I felt that I needed to keep acquiring BBG shares.

Multivac distribution agreement and Braskem negotiations: March - May 2014

131. On 18 March 2014, Plantic and Multivac entered into an exclusive distribution agreement: CB197. Under that agreement, Plantic appointed Multivac as exclusive distributor of certain Plantic products in the United States. It provided an "Introductory Period", ending on 30 September 2014, during which either party could terminate at will.

132.

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On 16 April 2014, there was a Plantic board meeting (CB495):

(1) Mr Morris stated that Braskem had indicated it would be ready to sign an agreement in the week commencing 5 May 2014.
(2) Mr Morris confirmed, in response to a question from Mr Jones, that Braskem would be required, within 14 days of signing, to pay USD $4 million and the first instalment of a USD $1.5 million engineering fee. Ms Paull and Mr Merchant "indicated that [Mr Morris] should not be surprised that there might be a further delay when they went to Brazil".
(3) There was discussion about a "Plan B" in the event that the deal with Braskem did not eventuate, recorded in the board minutes as follows:
- • [Mr Morris] indicated that he had spoken to Ingredion about an alternative plan B to Braskem (back up plan), a potential company with extrusion capacity has been identified and a call will be scheduled after Easter to explore the opportunity. Plan was that Plan B would be in place by the end of June 2014;
- • [Mr Merchant] asked if Plantic went with Plan B was there any opportunity for Plantic to distribute in Sth America, [Mr Morris] responded by stating that Plantic currently have three projects in the region - BRF, JBS - biggest meat processor in the world and Marfrig all large in size. Multivac have a subsidiary in Sth America and therefore could be asked to distribute material;
(4) There was also discussion at the meeting about Kuraray, recorded in the board minutes as follows:
- • [Mr Morris] also noted that Kuraray had indicated that they wished to proceed with the Japan and South Korea distribution agreement and would pay first licence fee instalment of $600K by 30 April 2014;
- • In response to [Mr Merchant], [Mr Morris] indicated that Kuraray had not given any indication of volume forecasts and expected the roll out would be relatively slow albeit that the trialling to date has been positive;
- • [Mr Morris] confirmed that Kuraray were visiting Plantic Altona on the 20^th-22^nd May at which discussion would take place on how both Kuraray and Plantic could work together to produce a barrier bottle that could be used in the recycling stream;

133. By May 2014, Mr Merchant was frustrated with the fact that Plantic continued to require funding from him. Mr Merchant considered that Plantic should have been self-funding by this time: Merchant at [207]; CB207.

134. Mr McGrath approached EY to provide taxation advice in relation to an appropriate structure for the sale of Plantic in about May 2014: T156.14. On 5 May 2014, Mr Burgess sent an email to Mr Hoy and Mr Morris, copied to Mr McGrath and two employees of EY, in which he referred to discussions the Friday before: CB573. An attachment to the email included a note which indicated that consideration had been given to an asset sale and a share sale.

135. On 14 May 2014, Mr Merchant emailed Mr Morris to ask if he and Mr McGrath had been able to "pin" Braskem "to a definite time frame for moving forward": CB205. Mr Morris replied stating that he had spoken with a representative of Braskem who had "advised that the final sign off meeting was booked with the CEO and executive team" on Friday, 16 May 2014. Mr Morris stated that the Braskem representative considered that the CEO and executive team "would need a week to get the signatures".

136. Forecasts of the cash funding requirements were sent to Mr Merchant and other Plantic directors on 28 May 2014 for the period June 2014 to December 2014: Merchant at [208]; CB211. These indicated that in the "base/worse case" the funding required for June 2014 to December 2014 was $4.4 million. An email dated 29 May 2014 from Mr Hoy addressed cash funding requirements for the first half of 2015: Merchant at [209]; CB213. The attachment to Mr Hoy's email revealed a "base case" funding requirement of $900,000 and

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a "target case" funding requirement of $300,000.

137. In June 2014, Mr Merchant sold some industrial land in Hawaii "to free up cash to fund Plantic": Merchant at [213]; T92. The proceeds were an amount of about $2.3 million: T92.33.

138. On 16 June 2014, Mr Hoy emailed Ms Paull noting that Plantic had applied for a $4 million working capital facility with NAB secured only against Plantic's assets, but that a response was not expected before 23 June 2014: CB221. He also noted that the Braskem licence fee was still subject to approval and would not be received until late July or August 2014. He stated that Plantic's cash requirements were $500,000 on 23 June 2014 and $600,000 on 14 July 2014. Ms Paull sent instructions to Ms Dawn Cooper, a Merchant Group employee, to make the payments and stated in the email (CB587):

They are trying to get funding, but, don't count on it.

Gordon has sold another block of land in Hawaii, his, industrial block, and is fully aware that his money is going into Plantic.

He hates it but, is now willing to sell it, but, he won't make much on it, that is if he's lucky enough to get what he wants.

139. By June 2014, Mr Merchant wanted to find a buyer for Plantic. At [218] of his affidavit, Mr Merchant stated:

By this time, I was getting cold feet. I didn't believe that I had the assets to continue to fund Plantic until it was profitable by itself. I had no faith in the budgets we were receiving from Plantic. I did not know when Plantic would be profitable on its own, but I knew that it would not be for some time. I wanted to find a buyer for Plantic.

The GMSF as at 30 June 2014

140. The GMSF Financial Statements for 30 June 2014 record that:

• Mr Merchant's total benefit balance was $10,464,744 - see: Member's Statement at CB592 at page 9.
• the GMSF investments comprised: a parcel of BBG shares recorded at a value of $1,734,975; the "Flaik loan" at $347,342 (reduced from $547,341); the Yamba factory at $690,000 (reduced from $1,154,202); and
• cash at bank was $7,855,587.

Negotiations with Sealed Air: June and July 2014

141. On 28 June 2014, Mr Morris sent an email to Mr McGrath (and others) which provided an overview of a meeting he had with Sealed Air representatives in June 2014: CB226. He noted that Sealed Air was aiming to obtain approval to send a non-binding offer by 24 July 2014. Mr Morris stated that Sealed Air had a "target date of the end of September to close". Mr Morris said he felt that Sealed Air were committed, and he had given them the idea that they should move quickly "before someone else gets in".

142. Mr Morris gave a presentation to the Plantic board on 8 July 2014 regarding the potential sale to Sealed Air: CB230. The presentation referred to Sealed Air's valuation range involving an up front payment of US $55 million to $70 million and a 3% royalty for 5 years estimated at US $7.6 million.

143. The minutes for the board meeting on 8 July 2014 included (CB495):

• It was agreed that Plantic would run the current strategic project opportunities in parallel i.e. evaluate option 1 - proceed with Braskem and also Multivac USA or option 2 - evaluate a deal with Sealed Air pending agreement being reached with Sealed Air on price;
• It was noted that 30 September 2014 was a critical deadline, as Plantic could terminate the Multivac USA contract on or before this date, after this date the Multivac USA distribution agreement becomes an exclusive 4 year deal and this would limit access to the USA market. Also it was important to make a decision by 30 Sep as customer momentum was building both in Australia and overseas;
• …
• US$62M-US$78M;
• [Mr Merchant] indicated that this was not sufficient;
• [Mr McGrath] suggested that [Mr Merchant] consider if Sealed Air agreed to an upfront floor price that was between

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US$80M-US$110M that Plantic should allow Sealed Air to commence DD, given that Plantic is confident that it could demonstrate the value of its technology and that a royalty stream could be negotiated that would push the valuation range even higher, as outlined in the papers;
• [Mr Merchant] agreed to this and it was agreed that [Mr Morris] should make contact with Sealed Air, advising of the Boards decision;
• [Mr Morris] undertook to update when he had made contact with Sealed Air. [Mr Morris] noted that Sealed Air currently has proposed a valuation range of

144. Mr McGrath had a discussion with Mr Burgess about structuring a potential sale on 9 July 2014. Mr Burgess advised that he thought a share sale would be the best option, although it would be necessary to determine how to deal with the Plantic Loans: CB261.

145. On 12 July 2014, Sealed Air wrote an email to Mr Morris providing a proposal which was close to their "walk away point": CB233. The email included:

After our discussions over the past few days, I have had a chance to review the situation with Jerome and our Board of Directors. We are prepared to increase our up-front purchase price to $70 million and increase our royalty payment to 3.5% based on new incremental sales generated from this technology for a period of five years. By our internal model, this would add another $13.2 million which brings the total purchase price to $83.2 million. This royalty stream assumes zero for the potential business at Tetra Pak. We understand that initial testing has been positive and therefore the royalty payment has the potential to significantly increase by the extent to which we are successful with the Tetra Pak development. It is easy to envision the royalty stream taking the value north of $90 million as this project adds revenue, thus sharing in the risk and getting a higher valuation. I hope this shows we positively responded to your feedback and are willing to move forward.

This proposal is made in good faith after much discussion and analysis involving the highest level of our corporate management team. The proposed purchase price in combination with the capacity investment required to capitalize on the technology represents a very significant commitment and cash outlay for our company. It is fair to say that we are very close to our walk away point and cannot envision significant increases from here. So the question is, do we have the basis for a deal or should we consider cancelling our travel plans for the initial due diligence plant visits?

146. Mr McGrath forwarded this email to Mr Merchant and recommended to him that he permit Sealed Air to do their due diligence if they provide a non-binding, indicative offer letter: CB233. Mr McGrath's email included:

Over the last few days Brendan has been going back to Sealed Air and we have been gradually pushing them up from their stated position of US$55 to $70M with an implied midpoint value for an up-front payment of US$62.5M plus a 3% royalty over 5 years

As you can see from below they are getting ready to walk

The main thing is that we have now got them to the point to commit to a minimum up-front payment of US$70M plus a 3.5% royalty over 5 years which gives you a value of a minimum of around US$83M or around A$90M plus

My recommendation at this point is to now allow them to conduct their DD if they provide a non-binding, indicative offer letter with a provision in there for increasing the up-front payment and the royalty stream should that be applicable after we conduct detailed negotiations

The main upside for you is in the royalty stream

As we pointed out in the presentation, I am going to push for a 10 year, zero% for the first 2 years, 3% for the next 3 years and then 5% for the next 5 years

On our modelling that could take your overall payment to A$126 million plus

So is this OK with you???

147. On 13 July 2014, Mr McGrath sent an email to Mr Burgess (and others) stating that Mr Merchant "has agreed to move to the next

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phase [of the sale to Sealed Air] and obtain the conditional letter of offer so we need to sort out our end with regard to structure of purchase etc. asap": CB233.

148. On 20 July 2014 at 5:10pm, Mr Merchant sent an email to Mr McGrath enquiring about whether Sealed Air were "still keen to purchase Plantic": CB235. Mr Merchant also referred to a number of shares he held in listed companies and discussed whether adjustments should be made to "increase the dividend return". He inquired about the level of his overdraft facility. On the topic of the sale of Plantic, Mr McGrath responded:

There hasn't been anything to report yet - they are still very keen and have booked their flights to be here on the 28th to the 30th to do their technical due diligence.

Their Executive Committee is meeting on the 24th to give the rubber stamp go ahead and we are expecting the letter of offer straight after that so we have just been sending them a beefed up non-disclosure agreement for their lawyers to look at so that it can all be done on the 25th after their meeting. And we have been preparing the data room info etc. so all background work.

149. Mr McGrath stated that the amount drawn down on the overdraft facility was $21,335,189 and that the interest on that facility was fully deductible. Mr Merchant responded (CB234):

Yikes I didn't realize our draw down was that much "ouch". Well the first thing I'd do with any assets from selling shares is to bring that down as much as possible. Great that Sealed Air are still there.

150. On 21 July 2014, Mr McGrath sent an email to Mr Merchant reporting that Sealed Air had "decided to do an Executive Committee Circular Resolution by email to approve moving to a formal Letter of Offer": CB236. Mr Merchant replied asking "if we were to sell Plantic what would the tax implications be for me?" Mr McGrath replied that day stating (emphasis added):

EY have modelled it and the way to go would be a share purchase by Sealed Air of Plantic shares and not an asset purchase.

By doing that and by transferring some of your high cost base BBG shares - remember some of the BBG shares have a $7 cost base from one of the capital raisings and other ones have a $2 cost base etc. - from GM No 2 to your Super Fund you will get a good "loss" on paper so they reckon there will be zero tax payable on a lump sum payment which is very good .

We have tried to cover off on all contingencies over the last few months as them making an offer looked more likely and continue to dot the I's and cross the T's to try and make sure that we have everything covered. Obviously we won't have 100% of everything covered, but big things like potential tax implications to you and other similar things we have done multiple analysis.

I was even with EY last Friday morning so we could model the 3 major ways that Sealed Air could acquire Plantic and the tax implications for them so that we could answer their queries when they do come up in due diligence

So we are all trying our best to cover off on stuff!

151. Mr Merchant replied stating:

Next time you're with someone from EY you might ask them why they never told me about the IRS calculation on time in the US. But I'll forgive them if I don't have to pay any tax on the sale of Plantic. I would have thought with the amount of money put in to Plantic being equal to the sale and without ever showing a profit I shouldn't have to pay tax?

152. Mr McGrath responded stating:

PS The other bit that the ATO takes into account that I didn't mention in the previous email is that they also take into account the value of the royalty stream as a lump sum that gets added to the actual lump sum even though you haven't received anything yet. Typically all one sided to the ATO

But with the royalty stream we have also done modelling around all the risks etc. which diminishes the lump sum value of the royalty stream dramatically

153.

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On 24 July 2014, Sealed Air provided its letter of intent to acquire Plantic for USD $70 million: CB245. It contemplated "an asset or stock sale, as mutually agreed by the parties". It referred to a price of US$70 million plus 3.5% of net revenues for five years. The purchase price was said to be "based upon the understanding that the Buyer is acquiring the Business free and clear of all liens and encumbrances, and that the Company will be cash free and debt free". The offer was conditional upon satisfactory completion of due diligence. The letter provided that Plantic and the MFT would exclusively negotiate with Sealed Air up until 15 September 2014 in relation to a broad range of transactions similar to the kind of transaction it contemplated. The letter also made clear that it did not give rise to a contract or binding sale agreement.

154. On 26 July 2014, Mr McGrath sent an email to Mr Merchant attaching an "Indicative Transaction Timetable": CB244; CB246. The email stated:

Just thought you would like to know that Jerome Peribere the global CEO of Sealed Air has signed the Letter of Intent - see attached

Shows very strong determination to do a deal

I have also attached the draft timetable for what has to be achieved over the next 6 weeks

They now have a team of 25 people working on the deal and we have 4………..

I think I know which group will spend less money on this process!

155. The attached timetable contemplated a closing on 15 September 2014. Mr Merchant agreed in cross-examination that he signed the letter of intent (T95.39), that Sealed Air had access to the data room, and that there were appropriate confidentiality agreements in place: T96.9-11.

156. On 5 August 2014, Mr Morris sent an email to the Plantic board with an update on the progress of discussions with Sealed Air: CB251. His email included the following:

A major issue was raised on Wednesday night last week. The purpose of the call convened by Sealed Air was to raise a concern expressed by their European manager around the selling price being too high for the European market - the M&A Manager was up front in saying this issue if unresolved could impact either on the price offered by Sealed Air or the broader deal. We decided together not to open the data room until this was resolved, and I was pleased with the integrity shown by the Sealed Air team in raising this issue and saying we should hold off on the data room until it was clarified.

Tom Black and I then did a call with the sales and marketing people on the project team on Friday afternoon and introduced Plantic and our material …

About an hour after the call Sealed Air advised that they wished to proceed so I guess we were able to explain satisfactory the product and our market focus.

There is an enormous amount of information to be provided, and Sealed Air have 40 people working on the project. Daryl, Nick McCaffrey, Nick Oakley and I are working to complete the data room. Daryl and the Nicks are doing a great job putting everything together.

Other business

In a predictable twist, the Braskem board has now fully approved the Plantic project and I am getting calls nearly every day from Braskem saying when can we meet to finalise the contracts and sign. I am stalling and will keep them going until we have final closure either way with Sealed Air.

Further negotiations and EY consideration of tax outcomes: August to September 2014

157. The tax consequences of the potential sale continued to be considered by Mr Merchant's advisors. There were also negotiations between Sealed Air and Mr Merchant's advisors about the tax consequences, for each side, of the various possible ways of structuring the deal.

158. On 11 August 2014, Mr Burgess of EY sent an email to Mr McGrath which included (CB252):

On a related matter, further to our discussions regarding the best way to deal with the loans from Gordon's

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entities to Plantic - we are thinking that it is going to be best to make it a requirement under the SPA that all loans from associated entities are waived or forgiven. That is, essentially the vendor pays the full 'business value' to MFT and MFT/related entities agree to write off any amounts owing by Plantic. Will give you a call to discuss further.

159. On 15 August 2014, Mr Joseph Pace of MinterEllison emailed Mr Burgess asking whether the loans to Plantic were documented: CB253. Mr Burgess responded:

Joe - the loans are mainly from GSM Pty Ltd and Tirinui Pty Ltd to Plantic - loan agreements were prepared at the time and I understand were put to the board but when I chased it down a couple of weeks ago it seems they may never have been signed - this is being followed up with Colette and I will find out the status later today and come back to you. I am not sure whether it impacts the way we respond to the query but from a sale structuring perspective we are thinking the optimum approach will be [to] have a requirement under the SPA that all of Gordon's entities waive any amounts owing to them i.e. MFT gets paid full acquisition price on basis all loans owed by Plantic are forgiven. Was planning on discussing this on the call Tuesday am re SPA (has this time been set yet?) but could have a discussion today if that is preferable …

160. On 19 August 2014, Sealed Air's solicitors sent MinterEllison the initial working draft of the share purchase agreement: CB259. Amongst other things, this contemplated that the MFT would deliver, at completion, evidence that related party debts had been "repaid or discharged in full": CB259 at page 28, cl 5.2(c)(ii).

161. On 21 August 2014 at 5:36am, Mr Burgess sent an email to Ms Lyons (copied to others including Ms Paull and Mr McGrath) which included (CB260):

Hi Sue, we have been working with the Plantic team on the possible sale and have now prepared some calculations of the tax impact for Gordon on a sale of business vs sale of shares using two possible sale consideration amounts (attached). We would appreciate your review of the following aspects of the calculations in particular:

• The share sale assumes that all loans from Gordon's entities to Plantic will be forgiven (i.e the purchaser will acquire the company unencumbered other than trade payables). The calculations assume the loans total $46.3m - is this still a reasonably accurate figure?

• The share sale assumes that Gordon's super fund will acquire as many BBG shares from MFT in the current year as is reasonably possible - the calculations assume there is $6m of cash in the fund available to acquire the shares - is this still a reasonable assumption?

• At the current share price this assumes approximately 10.3m BBG shares could be sold to the fund. We have identified the highest cost base shares as having a total cost base of around $57.4m (MFT Capital Loss tabs in attached workbook) - can you please review this to see whether it agrees with your understanding (please give Meagan a call if any questions).

The share sale is showing as the better option basically because the debt forgiveness on the loans reduces top up tax payable by Gordon on getting cash out of GSM P/L and increases the capital gain to MFT by the same amount, which because of the capital losses is a 'deferred tax cost' (i.e. increase tax on future capital gains) rather than current tax cost. The benefit of this deferral depends on how long til MFT/ Angourie makes other taxable capital gains - while the higher end sale consideration ($100m assuming value of $25m on the earnout) uses all the current losses, we understand there is likely to be a further significant capital loss once one of the European private equity investments is liquidated such that this deferral should be significant.

Because of the above there are perhaps some slightly increased risks around a share sale given the debt forgiveness issues (e.g. commercial debt forgiveness rules, deemed dividend rules, direct and indirect value shifting rules) and sale of BBG shares which crystalise capital losses ('wash' sale

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issues). However, on balance we think these are manageable particularly given a forgiveness of related party debt is a common aspect of a share sale transaction and there are real commercial consequences of the super fund acquiring the shares (i.e. it is fully exposed to future share price movements/dividend policy). We propose to provide a letter of advice to you outlining the issues and our conclusions in this regard.

162. Mr McGrath replied to this email at 6:37am on 21 August 2014, stating (CB260):

Another thing to take into account is that BBG reports its full year results on the 28^th of this month and the Directors dealing window opens on the 2^nd of September so I would think either way that it would be beneficial to transfer the BBG shares soon after the window opens if Gordon agrees

163. In his affidavit, Mr McGrath stated (McGrath at [111]):

When I said 'either way it would be beneficial to transfer the BBG shares soon after the window opens', I meant that, regardless of whether the proposed sale to Sealed Air was an asset sale or a share sale, it would be beneficial for the BBG shares to be transferred to GMSF. In saying this, I had in mind

(a) that there was only a limited window in which Gordon could deal with BBG shares;

(b) what I understood to be Gordon's strong desire to minimise debt; and

(c) what I understood to be the need to free up cash for the Merchant Group consistent with my discussions with Colette mentioned above.

164. Mr Burgess sent a further email on 21 August 2014 at 6:47am, attaching "a draft of the tax calculations to discuss later today": CB262.

165. This email attached three documents, called "summary of tax calculations" (CB263), "sale of business calc" (CB264) and "sale of share calc" (CB265). The "summary of tax calculations" was as follows (CB263): [ CCH note: diagram not reproduced]

166. The calculations in relation to a sale of Plantic's business considered alternatives on the basis that the business would be sold at $75 million or $100 million: CB264. The analysis shows that it would not have been necessary to use capital losses from a sale of BBG shares if the Plantic business was sold for $75 million. However, if the business was sold for $100 million, the analysis was that the best tax result would be achieved if the MFT realised a capital loss of $51,426,942 from the sale by the MFT of BBG shares to the GMSF, and then applied about $30.3 million of that loss to offset the capital gain on the windup of Plantic, following the sale of its business.

167. The calculation of the gain on a sale of Plantic's shares was as follows (the heading of the second column is erroneous in that it should also refer to a "share sale"): [ CCH note: diagram not reproduced]

168. The calculations show that EY had estimated that the number of BBG shares that the GMSF could acquire with available cash of $6 million, being 10.3 million shares, would give rise to a capital loss on those shares of $51,426,942 in the MFT.

169. It is clear from these calculations that, whether the sale of shares in Plantic occurred at $75 million or $100 million, it was desirable for the BBG Share Sale to occur. It was also desirable for the BBG Share Sale to occur if the sale was a sale of Plantic's business, because it was only if the business was sold at the lowest end of the range that the capital loss would not be required. EY had consistently been advising that it was preferable for Mr Merchant that the transaction occur by way of share sale.

170. In his email of 21 August 2014, Mr McGrath said it was desirable for the MFT to sell the BBG Shares to the GMSF regardless of whether the sale of Plantic was structured as a share sale or as a business sale. This was because it would generate a capital loss and be likely to reduce the amount of tax payable. I do not accept that Mr McGrath had in mind the things stated in his affidavit at [111], in particular that he had in mind that the BBG Share Sale would "free up cash".

171. On 21 August 2014 at 5:50pm, Mr Burgess sent an email to Mr McGrath stating (CB261; emphasis added):

I appreciate you sharing with me your concerns and while I understand I am unlikely to change your position on the

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matter I did want to set my thoughts out after reflecting on it a bit further …

I value my relationship with both you and Colette and am obviously concerned about the impact your concerns will have on that …

Cheers ian

- In mid May Brendan was trying to get a deal together and to get the price up to something acceptable by getting SA to either value the Aust tax losses or to reduce the tax rate in their model on the basis they would not pay tax in the US because either they already in significant tax losses or they would get deductions for IP - at that point he and I had a call with the SA people including the US tax manager to address those 2 issues - my recollection is the US tax guy said they would get a deduction for the IP on the basis the US tax rules allow for a tax consolidation push down in the same way the Australian rules do - however they said that was their entitlement and didn't think they had to factor it into the tax rate in the model i.e. they weren't interested in exploring the issue further so neither did we.

- I then got the email from you on 9 July saying Gordon had agreed to start a proper sale price with a minimum amount on the table - I do recall our conversation on 9 July, when I was in the Sydney office briefly while on holidays, where we discussed the structuring issues for the txn - I said I thought a share sale was likely to be best for Gordon and we would need to think through issues around how to deal with the loans as there was 3 broad ways of dealing with them - while I don't recall the specifics I accept I may well have said as a general proposition that there should be no difference for a purchaser between an asset purchase and share sale because of the tax consolidation rules which allow you to push down the PP to underlying assets. I don't think in the context that was wrong or that it was reasonable at that point to consider in detail all the possible outcomes for the purchaser based on what they may want to do with the assets in the future.

- On 13 July you told me via email that Gordon had given the go ahead and we need to sort out our end regarding the structure - I took that to mean (reasonably I think) that we needed to pin down what was best sale structure for Gordon including dealing with the loan issue. At that point until Tuesday 19 August we were doing a lot of work to determine the optimum position for Gordon (in particular around the possible loan forgiveness as this is what gives Gordon the big benefit from a share sale) as well as pulling together Tax DD materials and responses to questions, issues around employee option plans etc. |

- Given the above, we had not, I think quite reasonably, undertaken any further consideration of the purchaser's position if they were to implement at their choice a restructure post acquisition. So yes, when the issue was flagged by SA for the first time on the 19 August call I wasn't in a position to determine whether it was a valid concern but instead immediately considered the issue with our R&D/tax consol experts and identified a number of ways around it which I raised on our 20 August call - the first of those being whether it could be argued that the IP being paid for was generated post July 11. Because of the urgency of getting the deal done I also started some calculations to determine a more precise tax differential of the two options in case it comes down to a negotiation with SA. So while we knew a share sale was best for Gordon because of the ability to realise capital losses on BBG shares, we hadn't at that stage calculated the exact amount which we proceeded to do.

172. On 23 August 2014, Mr Burgess sent an email to Mr Morris, Mr McGrath and Ms Paull: CB267. It provided an update on a call Mr Burgess had with Deloitte, who were advising Sealed Air. It referred to their discussion about Deloitte's concern about R&D issues that would arise if the transaction were structured as a share sale. It went on to state:

We also explained to Julian why an asset sale gives us a substantial (circa $15m) extra tax cost - I think he now understands there is quite clearly an issue for us versus a

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potential risk for them. We agreed post call with Julian to try and organise a call with everyone on Monday after Claire has spoken to the Deloitte Sydney person so she can give an update on where that got to.

173. On 27 August 2014, Mr Burgess sent an email to MinterEllison in relation to Sealed Air's draft share purchase agreement: CB612. The email included:

As discussed, have listed below a couple of the 'easy' tax changes for you to make to the SPA before circulating the next draft to the group …

3. A key aspect of the transaction that delivers a favourable outcome to Gordon is that the amounts owed by Plantic to his related entities are waived/forgiven - it would be good to make this clearer in Clause 5.2(c) - the clause as currently drafted covers all amounts owing to/from and therefore talks about 'repaid in full or discharged' - therefore I think we need to insert a separate sub paragraph to specifically deal with the waiver (and then will need to draft the appropriate deeds of release which we will need to provide to them by completion).

174. On 28 August 2014 at 5:00pm, Mr Burgess sent an email to his counterpart at Deloitte, stating (CB611 at page 91):

Julian, I refer to our call earlier this week on this issue. You raised the prospect of proceeding with a share sale but with the Vendor providing an indemnity in the SPA for any tax payable by SA on transfer of IP offshore if SA couldn't get a favourable PBR from the ATO post completion. This was discussed with the Vendor's representatives following that call and as predicted was not considered to be an acceptable way forward. We also looked into the timing for a priority PBR process pre completion but it seems clear that this could not be achieved within the proposed timeframe for the deal. Can you please advise whether there has been any update in thinking on this issue from your side? …

175. On 28 August 2014 at 9:16pm, Mr Burgess sent an email to Mr McGrath and Ms Paull stating (CB269):

I think we are all on the same page that a share sale gives the best outcome for Gordon and we should push for that. However, at some stage I would like to take you through some options we have considered to manage the tax cost to Gordon if you had to do an asset sale - that is, if you are deep in negotiation next week trying to get the transaction across the line and it appears that an asset sale might be the only way to get that done, that you have an understanding of what the fall back positions might be for Gordon to help make the judgement on price etc.

176. On 29 August 2014, there was a conference call in which Sealed Air raised certain issues arising in their due diligence: CB279. One of the matters noted was that Plantic was to provide a mark up of the proposed sale agreement.

177. On 2 September 2014, the MFT was approved to refinance the NAB Margin Loan to a new facility with CBA (the CBA Facility ), having an approved credit limit of $35 million: CB280.

178. On 3 September 2014 at 11:16am, Mr Burgess sent an email to Mr McGrath and Ms Paull, referring to his earlier email of 28 August 2014 at 9:16pm: CB269. It stated:

Further to my earlier note below, attached is a paper which outlines the options to manage the tax costs for Gordon if Plantic did an asset sale rather than a share sale. The paper confirms that a share sale is the easiest and most tax effective option for Gordon. However, I think it also shows that if the 'cost' of getting Sealed Air to accept a share sale is much more than $2m-$3m, then it might be better to agree to an asset sale and aim for an increase in the sale price to compensate Gordon for his increased costs. For example, if SA come back and say they want a reduction in sale price of $5m to compensate for the extra tax costs they think they will incur on a share purchase (even if that is part of an overall increase in sale price over the current 70mUSD because of other factors such as quality of product etc) then it would appear to be better to accept an asset sale and ask for a $5m increase in the price to compensate for

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Gordon's extra tax cost (i.e. an improvement in price of $10m for an upfront tax cost to Gordon of $2m as per the best options in attached slides).

179. The email attached a document headed "Project Maize - Summary of Sale Options and Tax Outcomes": CB270. The document stated that its purpose was to "illustrate the tax implications of the different alternatives for disposing of Plantic Technologies Limited" but did "not constitute advice in relation to any scenario". It stated that its analysis was based on the following assumptions:

• Regardless of the form that the deal takes, consideration for the disposal will be an upfront payment of AU$75M, plus deferred consideration contingent on the quantum of future sales of product by Sealed Air.
• We have assumed that AU$25M will be received from the earn out right. We have also assumed that this is the market value of the rights at the date of sale. However, it may be that a much lower value of the earn out can be supported at sale date because of the contingent nature of the right. Where this would make an impact on the option under consideration we have highlighted this (in particular, the 'Business Sale 5' scenario).
• The value of the loans to Plantic from GSM Pty Ltd (GSM) and Tironui Pty Ltd (Tironui) at the time of the transaction is $50M.
• The Merchant Family Trust's (MFT) cost base in Plantic is $24M.
• The issued capital in Plantic is $76M.
• As at 30 June 2014, Plantic has group losses of $20M and transferred losses of $58M with an available fraction of 0.840.
• MFT has $10M capital losses at 30 June 2013. MFT will sell Billabong International Limited (BBG) shares to the Gordon Merchant Superannuation Fund (GMSF) during the 2015 year and realise further capital losses of $60M.

180. The document considered the tax outcomes of six scenarios - one share sale scenario and five asset sale scenarios in a "Summary of Tax Outcomes".

181. The share sale option involved no tax being payable, an outcome which was based on the assumption that "extra capital losses" would be used. The document stated in respect of the share sale scenario: "Best outcome and least complex option". The other scenarios involved tax being payable in amounts ranging from $1 million to $15 million and, of those, two (indicated by the two asterisks) involved "further top up tax" being payable in the future.

182. The "Summary of Tax Outcomes" was as follows (CB270 at page 3): [ CCH note: diagram not reproduced]

183. The paper summarised the "Share Sale and Loan Forgiveness" in the following way: [ CCH note: diagram not reproduced]

184. The 'Summary' on the right hand side states:

> Debt forgiveness gives a higher capital gain (and therefore use of more capital losses) but a reduction in top-up tax payable i.e. reduce current tax but potentially increase future taxes if would otherwise be able to use capital losses.
> Risk of anti-avoidance provisions applying to this tax benefit mitigated because occurs as normal part of commercial sale process with an arms length party.

The BBG Share Sale: 4 September 2014

185. On 3 September 2014 at 12.52pm, Mr Merchant sent an email to Ms Tracey Wood at BBG, stating (CB282):

This email is to advise that as of Monday 2^nd of September I have transferred 10,344,828 BBG shares from Gordon Merchant No 2 Pty Ltd to my superannuation fund GSM Superannuation Pty Ltd.

186. On 4 September 2014, Mr Merchant and Ms Paull signed a standard transfer form, effecting the transfer of 10,344,828 BBG shares from the MFT to the GMSF for consideration of $5,844,827.82 (56.5 cents per share) with a "date of transfer" stated to be 2 September 2014 (CB284). The consideration of $5,844,827.82 was credited to the MFT on 5 September 2014: CB689 at page 3.

187. Mr Merchant's affidavit included:

[231] At some point in August or September 2014, I decided to transfer BBG shares from MFT to GMSF to free up some cash that I could use to fund Plantic.

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[232] I knew I would need to continue funding Plantic if the sale to Sealed Air did not go through and as I say above, I had the impression that Sealed Air was raising a number of issues to drive down the price. I did not expect the deal with Sealed Air would complete. Sealed Air were raising a number of issues and I thought they were raising these so I would accept a lower price than US$70 million.
…
[243] I transferred the BBG shares to GMSF on 2 September 2014 because I needed to free up cash as soon as possible to continue funding Plantic.
…
[247] As stated above, in August and September 2014 I also believed that BBG shares were a good investment for GMSF. I thought that the share price had been discounted by the market to take into account BBG's difficulties, so BBG shares were good value and would increase in value in the future.
[248] At around the time that GMSF acquired the BBG shares from MFT, GMSF was earning modest interest on the cash it held in its bank accounts. I considered the BBG shares were a better investment than continuing to hold the cash in a bank account.

188. Mr Merchant also gave detailed evidence in his affidavit about why other funding options for Plantic were not pursued: Merchant at [233] to [238] and [251] to [254].

189. I do not accept that the BBG Share Sale was undertaken for the purpose of funding Plantic or the MFT more generally. I conclude that Mr Merchant's participation in the BBG Share Sale transaction was undertaken because it was recommended to him by EY as part of what EY considered desirable for the structure of the anticipated sale of shares in Plantic, in particular because the BBG Share Sale would crystallise a capital loss which could be used against the capital gain which was anticipated to be higher by reason of the proposed forgiveness of the Plantic Loans.

190. Mr Merchant's evidence in cross-examination included the following. Mr Merchant stated that he had no recollection of Mr McGrath suggesting that he should transfer the BBG Shares from the MFT to the GMSF whether or not Plantic was to be sold under an asset sale or a share sale. His evidence included (T98.1-5):

Do you recall Luke McGrath asking whether you will agree to a transfer of the BBG shares from MFT to the super fund whether or not Plantic is going to be sold under an asset sale structure or under a share sale structure?---No. No.

No recollection?---No. Not of that. No, no. Not that I recall.

191. Mr Merchant gave evidence that he was not aware that the sale of the BBG Shares by the MFT to the GMSF would crystallise a large capital loss. His evidence included (T100.40-44):

Were you aware, Mr Merchant, that when you signed that transfer from MFT to the superfund - - -?---Yes.

- - - that the effect of that transaction for MFT was to crystallise a very large capital loss in MFT?---No.

192. I do not accept this evidence as accurate. Mr Merchant must have known that the BBG Share Sale was going to result in a large capital loss in the MFT. He had been told as much by Mr McGrath who was conveying to him the EY advice about how best to structure the proposed sale to Plantic. Indeed, in his affidavit, Mr Merchant stated:

[239] I also considered the tax consequences of the assets I sold to raise cash to fund Plantic - for example, I would have made large capital gains if I sold some of my Macquarie shares which I have owned for a number of years and had purchased over time. I also understood from Luke's email on 21 July 2014 that transferring the BBG shares from MFT to GMSF would result in MFT suffering a capital loss rather than making a capital gain.

193. His evidence in cross-examination included the following:

At T98.7-13:

Do you have any recollection of ever being asked to agree to the transfer of the BBG

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shares from MFT to the super fund in September, August/September 2014?---I think I would have. It - I did it so I guess I was.

You did it but you have no recollection of being asked to do it?---I probably was at the time. - I - I don't recall.

At T98.37 - 99.8:

Do you have any recollection of being advised that the first day upon which any transfer of shares could occur between MFT and the super fund was on 2 September 2014?---Again, I don't recall it but I - but I may have - may have been.

Do you have any recollection on 3 September of receiving a detailed advice from Ernst Young on the taxation consequences of a sale of Plantic, either by asset sale or by share sale?---Was - was that addressed to me?

I beg your pardon?---Was it addressed to me?

Was it directed to you?---No. Was it addressed to me? There's an email you're referring to that's addressed to me.

I'm asking you if you have any recollection of this?---I - I - I didn't have very little to do with any of how this was constructed.

Nothing to do with any of it?---Very little. I left Ernst & Young to do what they thought was best.

At T101.16-28:

So, Mr Merchant, is it fair to suggest to you that in respect of the BBG share transfer, you simply did whatever was asked of you to do?---Whatevers I was directed to do, yes, I did.

So this was one decision that you undertook - - -?---Mmm.

- - - on the direction from others?---Yes. Well - - -

And in respect of the dividends?---It sounds like it's from - how I did it from Ernst & Young.

Right. And in respect of the forgiveness of the GSM loan, is it fair to say that you simply did what you were instructed to do?---I would say yes.

194. In giving the answer at T101.17 set out above, Mr Merchant emphasised the word "directed" as if to correct the word "asked" which had been used in the question.

195. Mr Merchant's statutory declaration of 17 October 2019 addressed the BBG Share Sale at [23] to [30]: CB442. This is set out and addressed later, when addressing the s 177D Proceeding.

196. In around October 2014, Mr McGrath arranged for the sale of some $14 million worth of the MFT's shares in Macquarie and Sydney Airports: T142. The funds were used to pay down the margin loan.

Sealed Air and Kuraray negotiations post-BBG Sale

197. Negotiations with Sealed Air continued. On 19 September 2014, Mr Morris sent an email to Mr McGrath and others reporting on a call he had with a representative of Sealed Air: CB287. It identified that there were seven or eight key issues that "impacted negatively" but that the parties would continue to talk.

198. On 25 September 2014, Plantic and Multivac agreed to amend the definition of the "Introduction Period Expiry Date" to 31 December 2014: AOS[158]. The effect of this was to allow more time for Plantic to negotiate a sale before having to make a decision about whether to continue the Multivac distribution agreement.

199. On 15 October 2014, Mr Morris sent an email to Mr McGrath, Mr Merchant and Ms Paull, reporting on a conversation he had had with a representative of Kuraray. Mr Morris stated that "they are going to recommend to the board that they start due diligence to acquire Plantic"; that "if they didn't get approval then they would discuss the licence for the resin but he said Kuraray's preference was to buy Plantic 100%": CB297.

200. On 9 November 2014, Mr Morris sent an email to Mr Burgess stating (CB634):

We have reengaged with Sealed Air with a revised deal. They would preferred to do an asset sale to avoid this tax issue. Could you please let me know what it would look like for Gordon for both an asset sale and a share sale…

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[The email set out certain numbers for a proposed deal]

I will give you a call tomorrow to discuss. Clearly Sealed Air wont to do an asset sale and now that the numbers are different will the impact for Gordon still be the same, and I guess the follow [sic] of money might allow to do some structuring for example, can the royalty flow to an different GM entity etc.

201. On 10 November 2014, Mr Burgess emailed to Mr Morris a PDF which was called "Summary of tax on sale alternative": CB634. It compared three different scenarios, each with three different total sale prices. The three scenarios were described as "Share sale [price] - related party loans forgiven"; "Asset sale 1 [price] - repayment of loans and dividends paid"; and "Asset sale 2 [price] - Plantic lends sale proceeds to MFT".

202. Later on 10 November 2014, an employee of EY sent an updated version of those calculations: CB634. The updated version differentiated between 'Current Tax Cost' and 'Future Tax Cost'. The total current and future tax costs were between $6.321 million and $16.121 million for the share sale scenario; $9.48 million and $22.511 million for the asset sale 1 scenario; and $9.48 million and $22.511 million for the asset sale 2 scenario.

203. On 11 November 2014, Mr Burgess sent Mr Morris an email which included (CB634):

Further to our discussion about this yesterday evening, a point I wanted to make but not sure if I did adequately was that if we have to do an asset sale, we are going to want to value the 'earnout/royalty' at an amount equal to our best estimate of the extra proceeds we are likely to receive over the 10 year period. Assuming this is a relatively high amount (e.g. somewhere between the $20m and $40m earnout values used in the attached calculation), it will mean the higher up front tax cost on the summary ($3m-$4.5m) is the one that needs to be factored into a decision on whether to accept an asset sale v share sale. This approach is needed to reduce the risk of higher taxes in future which would arise under the asset sale approach if subsequent earnout payments received exceed the value adopted up front.

The reason higher taxes are likely to be payable in the future if earnout payments received exceed the upfront value adoption is that the ability to use the balance of Plantic's tax losses will reduce over time. This is because the interest free loans from GSM to Plantic (approx. $49m) will likely have to remain on foot post the transaction and the 'interest free' benefit will continue to erode the 'available fraction' applicable to the bundle of 'transferred losses' (approx. $58m of the $78m current losses) in subsequent years.

To help illustrate this point, we have added to the attached summary another table with an estimate of the taxes payable for each of the 3 'earnout valuation scenarios' used in the original calculations (i.e. nil, $20m, $40m) if the future royalty/earnout payments are $0, $1m, $2m, $3m, $4m or $5m a year for the 10 years (i.e. actual payments of between $0 and $50m). What this shows for example, is that if $30m was received in total over the 10 years and an upfront value of $20m was adopted there would be an extra $1.9m tax to pay, whereas if a nil value was adopted up front for the 'earnout' there would be $8.9m to pay in future (so the extra tax paid upfront between those 2 scenarios of $1.5m 'saves' $7m longer term). If the value adopted up front exceeds the amount of royalty payments actually received over the 10 year period, a capital loss equal to the difference is likely to arise to Plantic - however this is not likely to be particularly valuable in the circumstances.

204. On 13 November 2014, Mr Morris emailed Mr Merchant, Ms Paull and Mr McGrath with an update: CB307. He stated:

Sealed Air : Increased their offer slightly guaranteeing an additional $5m by way of milestone payment on the first Plantic sheet line they build in the USA and a working capital adjustment.

Kuraray has told me verbally that the Group President has approved a bid of $65m plus a 5% royalty year for years 4-10, subject to Due Diligence. I do not have an

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offer in writing yet, they had said I would have it today but an executive is away and we will not get the formal letter until next Thursday. I have asked for an email confirmation. They have appointed the team leader and are putting together the DD team. We will put the confidentiality agreement in place over the next few days and we expect DD to start following their formal letter.

Braskem : Braskem was told on Tuesday night that we would be delaying signing the project as an offer had been received and it was being considered. Manoel advised me following meetings with the Polymer President and M&A that Braskem may be interested in acquiring Plantic too. He did flag that timing would be an issue. We have given them guidance today of >$70m plus a royalty, so this might rule them out, but let's see what happens. They are very keen for the project to continue and have talked about a potential minority investment in Plantic but I told them today that this would not be of interest. Manoel tentatively booked a video conference for Tuesday morning our time with Luke and I. I don't believe they will be a participant in the process given the price and timing.

Our plan is to run both Sealed Air and Kuraray in parallel.

A comparison of the two options is below, I have assumed the sheet sales will be lower under Kuraray than Sealed Air given it will most likely be Plantic/Multivac/Kuraray selling.

205. The comparison referred to was as follows: [ CCH note: diagram not reproduced]

206. On 23 November 2014, Mr Mark Donzella of Sealed Air emailed Mr Morris "a summary analysis of the tax impact of potential stock versus asset deal structures": CB635. The attached analysis showed an "Asset Purchase as having a positive tax cash flow with a present value of $5.205.7 million, a 'Stock Purchase - Move IP to US & UK'" as having a negative tax cash flow with a present value of $3.194 million, and "Stock Purchase - Leave IP in AUS" as having a negative tax cash flow with a present value of $10.873 million.

207. On 24 November 2014, Mr Morris emailed Mr Burgess stating (CB741 at page 100):

Luke has asked that you put a paper together for him and Colette to discuss. Luke and Colette are together tomorrow afternoon so that may wish [sic] to have a call with you then.

I am going to suggest to Seal Air that they apply for ruling and delay the sale process to give Kuraray more time, and it is also likely they will wont [sic] the same clearance potentially.

A copy of questions from me:

• if Kuraray or Sealed Air refuse to do the debt forgiveness wont their be the same level of top up tax?

• With the debt forgiveness is there a cash tax benefit in the GM entity forgiving the loan should that be considered too?

Can you include the tax position also with Kuraray. The comparisons of the proposals (with our best estimate of the royalty stream) is below: [ CCH note: diagram not reproduced]

208. On 25 November 2014, Mr Burgess emailed Mr Morris a paper entitled "Project Maize - Tax Discussion Paper [Draft] - Share Sale versus Asset Sale": CB636. Its stated purpose was "to summarise the different tax costs associated with a share sale versus an asset sale and to provide a broad outline of the issues for both the vendor (i.e. the Merchant Group) and for the purchaser under each option". The summary section stated (emphasis added):

The tax costs to the Merchant group have been estimated having regard to the immediate tax costs on sale plus the future tax costs of accessing the sale proceeds from current structures and the future tax cost of using capital losses now which would otherwise be available to offset future capital gains.

An asset sale results in higher upfront tax costs and higher overall tax costs for the Merchant group as compared to a share sale transaction which incorporates a 'forgiveness' by the Merchant group entities of loans made to Plantic. The

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additional tax cost ranges from $3.2m (nil earn out payments) to $6.4m (earn out rights valued at $40m) - see table on following page. Higher tax costs arise under an asset sale where the actual earnout payments exceed the value adopted up front. For this reason, the upfront value adopted should be as high as can be supported. If the purchaser did not agree to a debt forgiveness as part of a share sale (i.e. instead paid less for the shares and injected further capital into Plantic to enable it to repay the loans), the tax costs associated with a share sale would be much higher .

The purchaser has advised that a share sale transaction would result in a $8.4M tax cost for them. This is the tax cost associated with transferring the IP post acquisition of the shares from Plantic to an offshore company based on their interpretation of the Research & Development (R&D) tax clawback provisions. As a result, we understand the purchaser will reduce their offer by $8.4M if required to do a share purchase rather than asset purchase transaction.

We believe there are good grounds to support the position that there should be no tax cost to the purchaser as a result of transferring the IP offshore. The key issues are whether:

The valuable IP being sold is the patents (and rights under pending patent applications) arising from R&D activities conducted post 1 July 2011 (a question of fact); and

Whether the 'CGT asset rules' apply to the transfer of this IP rather them the broader 'R&D results rules' (a question of legislative interpretation).

Given this, the optimum way forward would be for a private binding ruling (PBR) to be sought from the ATO as to its views on these matters. Should a favourable ruling be received, the purchaser should be prepared to move forward with a share sale at the same price (to be confirmed) which would result in a tax saving to the Merchant Group of between $3.2m to $6.4m. If unfavourable, it would be better to proceed with an asset sale and manage the tax costs to the best extent possible.

Based on our understanding of the facts we consider that there is a better than 50% chance of obtaining a favourable ruling. However, the outcome will ultimately depend on the ATO's interpretation of the facts and the relevant tax law. Generally, the ATO will respond to a ruling request within 2 - 3 months, however delays are expected if the submission is made immediately prior to the Christmas period. We expect that the costs to prepare and lodge the ruling request, having regard to the need to obtain agreement from the purchaser as to the facts presented and arguments put forward, to be in the range of $30k to $40k (excluding GST).

209. Under the heading "Key Issues - Vendor", the following was stated:

Share sale and debt forgiveness:

As shown on the previous page, this option provides the most efficient tax outcome for the Merchant Group (i.e. $4.5M tax saving where earnout valued at $20m upfront).

The tax position is heavily dependent on the transaction being structured with a forgiveness by GSM/Tironui of amounts they are owed by Plantic. In this case, 100% of the sale proceeds will be capital proceeds for MFT disposing of the shares. Therefore, there is no up-front tax to pay on the disposal of shares in Plantic due to the level of capital losses in MFT.

Essentially, by forgiving the debts, there is a reduction in retained profits of approximately $50M in GSM/Tironui which reduces the future top-up tax (27.1% based on current tax rates) that would otherwise be payable on these retained profits when paid out as a dividend.

The debt forgiveness does increase the capital gain made by MFT by the $50m (with no capital loss to the parties forgiving the debts). While this gain is able to be offset by current capital losses, this does create a future tax cost assuming MFT expects to derive capital

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gains in future. However this cost is less than the cost of paying a dividend from GSM/Tironui because of the different tax rate on dividends (27.1%) versus discount capital gains (24.5%).

Another advantage of a share sale transaction is there should be no tax impact if the value of earnout assessed up-front differs to actual receipts on the basis that it is all on capital account (i.e. any further gains would be offset by MFT's capital losses, and a loss would be capital loss).

Asset sale:

There will be an up-front tax liability under this scenario as Plantic cannot utilise all of its losses to offset the gain on sale of assets. This is due to the injections of value into Plantic via interest-free loans and trust distributions from the Merchant Group (i.e. the losses are subject to an 'available fraction').

Plantic will also have to repay the loans to GSM/Tironui at some stage. Therefore, a franked dividend will need to be declared in order to access the cash, which will be subject top-up tax [sic]. This top-up tax liability may be deferred by on-lending the funds from Plantic to MFT in the interim, rather than repaying GSM/Tironui immediately - this is possible because Plantic should not have a 'distributable surplus' for Division 7A deemed dividend purposes. So while this option does not eliminate the future top up tax, we think it should be possible to defer the top up tax for a similar period to that outlined above (i.e. the period until sufficient future capital gains are made to otherwise use the capital.

There will be further tax implications under this scenario where the value of the earnout assessed up-front differs to the actual receipts (refer to second table on the page above). Where the value assessed upfront is greater than actual receipts, Plantic will derive a capital loss. However where it is higher, there will be an additional tax cost. This is because the available fraction of the remaining tax losses will be significantly eroded by the fact the interest free loans from GSM and Tironui will need to remain on foot. For this reason, it will be important to value the earnout based on your realistic expectation of the income to be received.

As an example, if the value assigned to the earnout right initially was $nil, an Plantic actually received $20M, then the extra tax cost would be $5.9M. Whereas, if the earnout right was valued at $20M up-front, the extra tax cost is only approximately $1.5M.

210. On 25 November 2014, Mr Burgess emailed Mr Morris stating that someone from EY had spoken to the ATO and that, if a ruling request was lodged within the next two weeks, there was a reasonable prospect of getting a result by the end of January: CB637.

211. On 26 November 2014 at 1:34pm (see also the email sent at 4:41pm), Mr Burgess sent an email to Mr Morris which included (CB637):

Vendor Tax Issues

An asset sale results in higher upfront tax costs and higher overall tax costs for the Merchant group as compared to a share sale transaction which incorporates a 'forgiveness' by the Merchant group entities of loans made to Plantic. The overall additional tax cost of an asset sale is estimated to be in the range of $3.2m (nil earn out payments) to $6.4m (earn out rights of $40m).

These overall higher tax costs arise due to a number of factors. First, the shareholder of Plantic has a significant amount of capital losses available to it. Therefore, on the basis the full purchase price is paid for sale of those shares (i.e. loans made by other Merchant entities to Plantic are waived or forgiven as part of the transaction), no upfront tax costs arise for the Merchant group on a share sale and the sale proceeds are fully accessable to the Merchant group without further tax cost. This transaction does use more of the Group's capital losses and hence there is a future tax cost in terms of capital gains that may be made by the Group in future that would otherwise have been able to be offset against the

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additional capital losses used from this transaction. However, there is a significant deferral of this tax cast.

Under an asset sale arrangement, there would be tax payable up front by Plantic because it is not able to apply all of its tax losses ($78m) to the gain on sale of IP. The reason for this is that many of the losses were transferred into the tax consolidated group and have an 'available fraction' of around 60% due to the interest free loans provided to the Plantic Tax Consolidated group (i.e. losses can only be applied to 60% of the taxable income). The up front tax cost is estimated to range from $1.4m to $4.7m (depending on value of the earnout). In addition, under an asset sale the sale proceeds are not as accessable to the Merchant group. That is, there is a top up tax payable when the loan funding provided to Plantic is repaid and the cash accessed by way of franked dividend paid by the lending companies. There are some avenues available to the Merchant group to defer the 'top up' tax cost, however it will ultimately need to be paid. Finally, the top up tax on a franked dividend (currently 27.1% if the dividend amount) is higher than the future tax costs of discount capital gains (24.5%). That is, the deferred tax cost of the top up tax under an asset sale is slightly higher than the deferred tax cost on future capital gains under the share sale.

212. On 26 November 2014 at 3:46pm, Mr Morris sent an email to Sealed Air, forwarding the email from Mr Burgess summarising the reasons why a higher tax cost would arise for the Merchant Group if the transaction were structured as an asset sale and the process to obtain a ruling from the ATO. Mr Morris' email asked the addressees to "confirm that Sealed Air is willing to support the private ruling and will proceed to negotiation [of] a share agreement, as previously circulated": CB637.

213. On 11 December 2014, Plantic and Multivac agreed to further amend the definition of the "Introduction Period Expiry Date" to 31 March 2015: CB644. The effect of this was to allow more time for Plantic to negotiate before having to make a decision about whether to continue the Multivac distribution agreement.

214. It seems that the draft agreement for the sale of the shares in Plantic to Kuraray was based on the draft agreement for the sale of those shares to Sealed Air: CB645. In any event, with Kuraray, the essential transaction structure was not contentious. The MFT proposed a transaction in the form of a share sale and, according to Mr Morris' evidence, there was "no push back against this from the representatives of Kuraray": Morris at [34].

215. On 26 February 2015, Mr Morris emailed Mr Merchant, Ms Paull, Mr McGrath and Mr Hoy with an update: CB346. Kuraray's board had approved the acquisition of Plantic and their offer would be received the next day. Sealed Air were progressing the finalising of a tax ruling application. Braskem advised they would put in a proposal in 10 days.

216. On 18 March 2015, Mr Burgess emailed to Mr Morris, MinterEllison and others an "updated letter on the debt forgiveness to cover the issues discussed on the call with Deloitte": CB664. The attached draft letter had the stated purpose of documenting the "the income tax implications associated with the proposed forgiveness of loans": CB664.

217. Mr Pace of MinterEllison forwarded this email to Mr McGrath at 7:09am on 19 March 2015: CB664. Mr McGrath forwarded the email to Ms Lyons (copied to Ms Paull) and stated:

Attached is the letter EY have prepared around the debt forgiveness strategy that will be supplied to Kuraray.

Kuraray need to understand why the loans are being repaid etc. as they are actually buying the shares of the company not the assets and need to be comfortable that performing the loan forgiveness will not result in any potential liability when they own the company.

Just wanted you to be aware of this and have a copy so that you were OK with the content.

218. On 19 March 2015 at 12:43pm, Mr Burgess emailed Mr Morris a "final debt forgiveness letter": CB741, at page 168. The final letter considered the application of the commercial debt forgiveness rules, the impact of the debt forgiveness on the available fraction

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of Plantic's transferred losses, and share capital tainting.

219. On 19 March 2015 at 7:21pm, Mr Morris emailed Mr Merchant, Ms Paull, Mr McGrath and another with an update after having "just completed a long day with the Kuraray team": CB357. It noted some key issues were still being debated with Kuraray, one being:

Tax issue for debt forgiveness was a major issue this morning but hopefully the work Luke and Ian are doing with SFG consulting on the valuation should resolve this issue.

220. On 20 March 2015, SFG Consulting issued a letter to Plantic (addressed to Mr Morris) in which SFG Consulting confirmed that it had assessed the market value of the loans owing from Plantic and considered that the loans would have a value at the time of the proposed forgiveness equal to the face value of the loans: CB666. SFG Consulting explained:

That is, we agree with the characterization of the EY letter that:

It is clear that at the time of the forgiveness, the debtor has the capacity to repay the debts. That is, an arm's length purchaser will have entered an agreement to acquire the shares in the company (conditional on the debts being forgiven) for an amount that values the net assets of the company at an amount far in excess of the face value of the loans. Even the upfront cash consideration payable for the shares (approx A$58m) is greater than the face value of the loans.

221. On 20 March 2015 at 7:31pm, Mr Morris again emailed Mr Merchant, Ms Paull, Mr McGrath and another with an update noting that all of the outstanding points had been resolved and "signing is planned for next Wednesday/Thursday with settlement on 1 April": CB357. Next to the "Tax issue" mentioned in the earlier email, an update had been added stating "Valuation completed and tax indemnity once confirmed by Deloittes will be removed". The indemnity does not appear to have been removed.

Plantic Sale agreement: 31 March 2015

222. The SSA was executed on 31 March 2015: CB370. Clause 4.1 of the SSA identified the purchase price for the shares as having three components:

• The first component consisted of the "Initial Purchase Price", subject to a working capital adjustment under cl 4.2. The "Initial Purchase Price" was defined as US$45 million "plus the Target Cash Amount". The "Target Cash Amount" was defined as the cash balance of the Group as notified by the Vendor two business days prior to the completion date.
• The second component of the purchase price consisted of the "Milestone Amounts".
• The third component of the purchase price consisted of the "Earn-Out Amounts".

223. Clause 2.1 provided that completion of the sale must not occur until all conditions were fulfilled or waived. Condition 3 required the vendor to procure the forgiveness of the Plantic Loans. Condition 5 required the vendor to certify, in the form set out in Schedule 12, that the "Warranties" were true and accurate as at completion. Schedule 12 contained a "Warranty Certificate" which confirmed that each of the "Warranties" was true and accurate. Schedule 4 to the SSA was entitled "Warranties". Warranty 11 in Schedule 4 was about "Tax". These included (CB370 at page 88):

11.10 The Vendor is not aware as at the date of this agreement and as at Completion that a Group Company has a share capital account that is tainted under Division 197 of the 1997 Tax Act or former section 160ARDM of the 1936 Tax Act by the transfer of an amount to the share capital account from any of its other accounts, including as a result of the release or forgiveness of debt in Condition 3 of clause 2.1.

…

11.20 No debt (including any debt forgiven or released pursuant to condition 3 of clause 2.1) owed by a Group Company has been, or has been agreed to be, released, waived, forgiven or otherwise extinguished by a

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person which would result in a net forgiven amount in accordance with Division 245 of Schedule 2C of the 1936 Tax Act or Division 245 of the 1997 Tax Act.

224. Clause 11 of the SSA addressed "Warranties by the Vendor".

225. Clause 12 of the SSA was entitled "Tax Indemnity". Clause 12(b) required the vendor to keep the purchaser indemnified against any liability arising out of a "Tax Claim". That term was defined to mean:

Tax Claim means an assessment, notice, amended assessment, demand or other document issued by or action taken by or on behalf of any Tax Authority against any Group Company or the Head Company of a Consolidated Group of which the Group Company or Purchaser is a member, whether before or after the date of this agreement, but only to the extent to which it relates to the activities of a Group Company or such Head Company in a period or part of a period up to and including Completion as a result of which the Group Company or such Head Company, is liable to make a payment for Tax or repay an amount received as a refund for Tax (including but not limited to refundable tax offsets).

226. Clause 12 included:

12. Tax Indemnity

(a) In this clause, references to the Purchaser mean the Purchaser, Group Company or the Head Company of a Consolidated Group of which the Group Company or Purchaser is a member.

(b) The Vendor indemnifies, and must keep indemnified, the Purchaser against any Liability suffered by the Purchaser which arises from any Tax Claim.

(c) Notwithstanding clause 12(b), the Tax Indemnity does not apply to a Tax Claim and the liability of the Vendor in respect of any Tax Subject Claim under this agreement is reduced or extinguished:

(i) to the extent that it arises as a result of any income derived, loss, outgoing or deductions incurred or activities undertaken, or deemed for Tax purposes to have been undertaken, after Completion;

(ii) to the extent that it arises as a result of the transactions contemplated by this agreement (other than in relation to the satisfaction of Condition 2 and Condition 3 of clause 2.1, unless those Conditions have been waived under clause 2.2). For the avoidance of doubt, the Tax Indemnity does not apply to a Tax Claim and the liability of the Vendor in respect of any Tax Subject Claim is reduced or extinguished to the extent that the Tax Claim relates to a liability for Tax under CGT event L5 in relation to the acquisition of Shares by a nominee of the Purchaser;

…

(d) For the avoidance of doubt, the Purchaser is entitled to bring a Claim either on an indemnity basis under this clause 12 or on a contractual basis for breach of a Tax Warranty, or both, provided that the Purchaser is only entitled to payment once in respect of the same loss.

Settlement (and post-settlement) of Plantic sale

227. On 2 April 2015, a Deed of Forgiveness between GSM, Tironui, Angourie and Plantic was executed. It provided that, with effect "from the Effective Time" each of GSM, Tironui and Angourie irrevocably and unconditionally forgives and releases Plantic from all liability under or in respect of the total amount owing (including any outstanding principal and accrued interest) by Plantic to each of those entities. The "Effective Time" was defined to mean immediately prior to Completion. "Completion" was defined to mean "completion of the sale and purchase of all of the shares in Plantic pursuant to a share sale agreement dated on or around the date of this deed between [the MFT and Kuraray]".

228. Completion of the sale occurred on 2 April 2015.

229. On 2 April 2015, the MFT received US$45,558,827.30 from Kuraray as the upfront payment under the SSA.

230. On 17 April 2015, another $10 million was drawn down to purchase $10 million in BBG shares.

231. On 27 April 2015 - after completion of the sale, and before the Merchant Group tax

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returns for the 2015 income year were lodged - Mr Burgess emailed Ms Lyons a "preliminary draft of our letter of advice regarding the transactions with Kuraray". Amongst other things, the draft letter addressed the question of whether the Commissioner would consider that Part IVA applied to the BBG Share Sale, including whether or not it would be regarded to be a "wash sale", and also addressed the forgiveness of loans: CB674.

Decision to cease pension: 30 April 2015

232. On 30 April 2015, discussions occurred at a meeting of the Merchant Group concerning cash flow issues in the GMSF. These discussions included consideration of whether to "make a contribution to the fund in FY15 in order to fund his pension", and a decision was made to make a non-concessional contribution, cash flow permitting, and cease the pension from 1 July 2015 to commute the pension payable from 1 July 2015 to preserve cash reserves: CB675 at pages 2 and 7.

233. On 25 June 2015, the MFT received US$407,115 as a working capital adjustment payment: Merchant at [299].

234. Minutes of a meeting of directors of GSMS held on 25 June 2015, at which Ms Paull and Mr Merchant are recorded as being present, state that Mr Merchant requested the GMSF commute his existing account-based income stream with effect from 1 July 2015 and roll his account balance into accumulation mode: CB716 at pages 285-286. The minutes were signed by Ms Paull for herself and as Mr Merchant's attorney.

235. Mr Merchant made a non-concessional contribution of $180,000 to the GMSF in the year ended 30 June 2015: CB675 at page 7.

236. The amounts that the MFT received in relation to Milestone Amounts and Earn-Out Amounts are:

• on 28 October 2016, the MFT received a payment of US$5 million for the ' Extrusion Coating Milestone '.
• on 30 November 2016, the MFT received a payment of US$3.3 million from Kuraray, being the J&G Foods Milestone.
• on 31 January 2022, the MFT received an Earn-Out Amount totalling US$94,489.

The MFT purchases BBG shares: September 2015

237. In September 2015, the MFT acquired 4.2 million shares in BBG for approximately $2.59 million (58.9 cents per share).

The GMSF formulates a new investment strategy: 19 November 2015

238. On 17 November 2015, Ms Reeves of EY sent an email to Ms Lyons in relation to the finalisation of the audit for the GMSF: CB700. Ms Reeves stated that "the investment strategy for the superannuation fund needs to be updated for the current allocation of investments". Ms Reeves provided an investment strategy template and resolution for the trustee to complete. Ms Reeves provided an investment summary report.

239. On 19 November 2015, Ms Paull (on her own behalf and on behalf of Mr Merchant) signed a resolution of the directors of the Super Fund. The resolution recorded a new investment strategy for the Fund (the 2015 Investment Strategy Document or 2015 ISD ). It was in broadly similar terms to the 2012 ISD, save that the targeted asset allocation was stated as follows:

Investment (%)

Shares in Australian Listed Companies 0 - 80

Shares in International Companies 0 - 20

Shares in Unlisted Companies 0 - 10

Units in Listed Unit Trusts 0

Units in Unlisted Unit Trusts 0

Managed Funds 0 - 10

Property 0 - 20

Artwork/Collectables 0

Fixed Interest 0 - 50

Cash ie Bank Bills/Term Deposits etc 0 - 50

Other 0 - 100

240. Mr Merchant stated that he did not have a recollection of seeing the 2015 ISD at the time it was signed or discussing it with Ms Paull: Merchant at [306].

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4 THE SECTION 177D PROCEEDING

The issue

241. In making the s 177D Determination, the Commissioner identified the BBG Share Sale Scheme in the following way (CB784 at [238]; ROS[131]):

The scheme includes all of the actions and decisions that resulted in the transfer of 10,344,828 BBG shares from MFT to GMSF. This includes Mr Merchant and Ms Paull, as directors of GM2 executing a standard share transfer form to transfer the BBG shares off-market to GMSF for $5.8 million, with a recorded transfer date of 2 September 2014.

242. Having regard to the definition of the scheme, the parties to it include Mr Merchant, the (trustee of) the MFT, and the (trustee of) the GMSF.

243. There is no dispute that:

• the scheme so identified is a scheme within the meaning of that term as defined in s 177A(1) of the ITAA 1936: T13.24;
• the scheme so identified resulted in a tax benefit under section 177CB(2): AFAAS [84]; T13.25; and
• Division 6 of the ITAA 1936 operated such that GSM was properly assessed to 100% of the net income of the MFT.

244. The only issue raised as to whether s 177D of the ITAA 1936 applies is the issue of dominant purpose: whether, on the proper application of Part IVA, it would be concluded under s 177D(1) that a person who entered into or carried out the BBG Share Sale Scheme did so for the dominant purpose of obtaining the tax benefit: AOS[192]; ROS[135]; NA [9(a)(iii)]; T13.35.

245. There is also an issue which goes to the amount of the assessment. GSM contended that the GSM Amended Assessment is excessive because that part of the capital proceeds of the MFT's sale of the Plantic shares associated with the Milestone Amounts and Earnout Amounts, was incorrectly valued for the purposes of s 116-20(1)(b) of the ITAA 1997: NA [9(b)].

Applicable law

246. Section 177D(1) provides:

Scheme for purpose of obtaining a tax benefit

(1) This Part applies to a scheme if it would be concluded (having regard to the matters in subsection (2)) that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of:

(a) enabling a taxpayer (a relevant taxpayer ) to obtain a tax benefit in connection with the scheme; or

(b) enabling the relevant taxpayer and another taxpayer (or other taxpayers) each to obtain a tax benefit in connection with the scheme;
whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer or is the other taxpayer or one of the other taxpayers.

247. Section 177A(4) provides:

(4) A reference in this Part to the carrying out of a scheme by a person shall be read as including a reference to the carrying out of a scheme by a person together with another person or persons.

248. Section 177A(5) operates such that the word "purpose" in s 177D(1) must be understood as "dominant purpose". Where there are a number of purposes, the "dominant purpose" is the "ruling, prevailing or most influential" purpose:
Commissioner of Taxation v Spotless Services Ltd [1996] HCA 34; 186 CLR 404 at 416.

249. Section 177D(2) provides:

Having regard to certain matters

(2) For the purpose of subsection (1), have regard to the following matters:

(a) the manner in which the scheme was entered into or carried out;

(b) the form and substance of the scheme;

(c) the time at which the scheme was entered into and the length of the period during which the scheme was carried out;

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(d) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme;

(e) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme;

(f) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;

(g) any other consequence for the relevant taxpayer, or for any person referred to in paragraph (f), of the scheme having been entered into or carried out;

(h) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in paragraph (f).

250. It is unnecessary to set the principles out at length. It is sufficient to record the following:

(a) Section 177D(1) provides an objective test used to determine actual purpose. It requires a conclusion about the intention of a person who entered into or carried out the scheme or a part of it to be determined objectively by reference to the eight matters in s 177D(2):
Commissioner of Taxation v Hart [2004] HCA 26; 217 CLR 216 at [37];
Commissioner of Taxation v Zoffanies Pty Ltd [2003] FCAFC 236; 132 FCR 523 at [54];
Commissioner of Taxation v Sleight [2004] FCAFC 94; 136 FCR 211 at [67];
Commissioner of Taxation v Guardian AIT [2023] FCAFC 3; 115 ATR 316 at [180].
(b) The purpose the subject of s 177D(1) is the purpose of a person, not the purpose of the scheme: Hart at [63]; Guardian AIT at [179];
Minerva Financial Group Pty Ltd v Commissioner of Taxation [2024] FCAFC 28 at [60(2)].
(c) It is necessary to have regard to each of the eight matters set out in s 177D(2), which are "posited as objective facts": Guardian AIT at [180]. Some matters may point one way and some matters may point another way. While regard must be had to all of the eight matters in s 177D(2), the assessment of purpose may be undertaken globally by directing attention to those of the eight matters in s 177D(2) as are relevant and probative in the circumstances:
Commissioner of Taxation v Consolidated Press Holdings Ltd [2001] HCA 32; 207 CLR 235 at [94] ( CPH HC ); Hart at [58];
Mills v Commissioner of Taxation [2012] HCA 51; 250 CLR 171 at [73]; Minerva at [60(10)].
(d) The drawing of a conclusion about purpose from the eight matters identified in s 177D(2) may require consideration of what other possibilities existed to achieve the same commercial end: Hart at [66]; Minerva at [60(12)].
(e) The fact that a course of action might be a rational commercial decision, whilst relevant, does not necessarily supply the answer to whether a person entered into or carried out the scheme for the dominant purpose of enabling the taxpayer to obtain a tax benefit: Spotless Services at 416; Hart at [64].

251. The Full Court in Minerva at [60(4)] to [60(8)] observed:

(4) The fact that a particular commercial transaction is chosen from a number of possible alternative courses of action because of tax benefits associated with its adoption does not of itself mean that there must be an affirmative answer to the question posed by s 177D: Hart at [15]. The bare fact that a taxpayer pays less tax, if one form of transaction rather than another is made, does not demonstrate that Part IVA applies: Hart at [53].
(5) Even if a particular form of transaction carries a tax benefit, it does not follow that obtaining the tax benefit is the dominant purpose of the taxpayer in entering into the transaction: Hart at [15]. Simply to show that a taxpayer has obtained a tax benefit does not show that Part IVA applies: Hart [53].
(6) Merely because a taxpayer chooses between two forms of transaction based on taxation considerations does not mean that it

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is to be concluded, having regard to the factors listed in s 177D, that the dominant purpose of the taxpayer was to obtain a tax benefit: Hart at [15]. Part IVA does not apply merely because the Commissioner can identify another means of achieving the same or similar outcome which would have resulted in more tax being payable.
(7) However, a transaction may take such a form that a conclusion of the kind described in s 177D is required even though the transaction also advances a wider commercial objective. There is a false dichotomy between rational commercial decisions and obtaining a tax benefit: Hart at [51]. The presence of a discernible commercial end does not determine the answer to the question posed by s 177D: Hart at [64]. The terms of Part IVA do not reference "bona fide commercial reasons" or any equivalent expression: Hart at [47].
(8) There is a distinction between a taxpayer adopting a form of transaction that is influenced by taxation considerations (where the presence of a fiscal objective does not mean that it is to be concluded, having regard to the factors listed in s 177D, that the dominant purpose of the taxpayer was to obtain a tax benefit) and a taxpayer taking steps to maximise after-tax returns in a manner objectively indicating the presence of a dominant purpose to obtain a tax benefit: Hart at [16]-[18];
Commissioner of Taxation v Spotless Services Ltd [1996] HCA 34;
(1996) 186 CLR 404 at 416, 423.

252. In an appeal under Part IVC of the TAA 1953, the taxpayer bears the onus of establishing that "the assessment is excessive or otherwise incorrect and what the assessment should have been": s 14ZZO(b)(i). It follows that GSM bears the onus of establishing that s 177D does not apply and, in relation to the value of the Future Payment Rights, what that value is.

Summary of the parties' submissions

253. The parties' opening submissions addressed the purpose of those entering into or carrying out the BBG Share Sale both globally (in particular from the perspective of the MFT and the GMSF) and more specifically by reference to the matters identified in s 177D(2).

254. The applicants submitted that, for the purposes of s 177D(1), "it would be concluded … that" the dominant purpose (AOS[205]):

(a) from the perspective of the MFT: was to convert its BBG shares into cash in order to enable it to continue to assist in meeting the demands on its cash, including the funding needs of Plantic, in a way that did not dilute the Merchant Group's stake in BBG; and
(b) from the perspective of the GMSF: was to acquire a further parcel of BBG shares, which was an asset expected to appreciate in value:.

255. It is convenient first to provide a brief outline of the parties' opening submissions on this issue.

The MFT

256. The applicants submitted that the idea of using the cash in the GMSF to provide cash for the MFT was initiated long before the events of September 2014 and was unrelated to any tax advantage: AOCS[10].

257. The applicants submitted that:

(a) Plantic was reliant on the Merchant Group for funding, a fact supported by the history of Plantic's funding: AOS[207];
(b) Plantic needed funding at the time of the BBG Share Sale: AOS[208];
(c) there was a strain on the MFT's cash (from a number of directions) and it would be advantaged by being able to realise some of the BBG shares to get more cash to provide the level of cash historically held by it: AOCS[9];
(d) the BBG Share Sale realised $5.8 million in cash for the MFT, "which could be used to assist in meeting the demands on its cash, particularly as regards funding Plantic": AOS[206]; and
(e) the timing of the transfer on 4 September 2014 was due to the need for cash and the opening of the trading window for BBG directors which permitted the sale: AOCS[11].

258. The applicants submitted at AOS[208] (footnotes omitted):

The most recent projections that Mr Merchant had received (on 28 and 29 May 2014) were to the effect that he may be

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required to provide funding of $5.3m to Plantic up to the end of the first half of 2015. Although the projected $5.3m was not all required in September 2014, if the BBG Sale was not effected when it was, then there was a real risk that the 'trading window' in which the Family Trust [MFT] could deal with its BBG shares would close, and that it would not open again until March 2015 [referring to s 177D(2)(c)]. Further, Plantic's past projections of funding requirements had understated the funding ultimately required, and so would not be seen as a reliable maximum of the potential future funding requirements. Plantic's need for funding objectively supports a conclusion that the purpose of the BBG Sale was to supply cash to assist in providing such funding.

259. The applicants submitted that (AOS[209]):

(a) to conclude that obtaining cash was the MFT's dominant purpose does not require a conclusion that it was impossible for the MFT to fund Plantic by other means; and
(b) there were sensible commercial explanations for choosing to obtain cash by way of the BBG Share Sale rather than by other means.

260. As to the applicants' case about what would be concluded from the perspective of the MFT, the Commissioner submitted that the main objective of the BBG Share Sale was not to generate $5.8 million in cash and that the obvious point of the transaction, objectively ascertained by reference to the matters in s 177D(2), was to generate a capital loss in the MFT in anticipation of the MFT making capital gains on the sale of its share in Plantic.

261. The Commissioner referred to four matters in particular:

(1) First, at the time of the BBG Share Sale, and having regard to the likely probability of the sale to Sealed Air, it was not objectively likely that the MFT required an injection of cash to be able to fund Plantic: ROS[157].
(2) Secondly, if it were the case that the BBG Share Sale had been effected for the purpose of funding Plantic, it would be expected that there would be contemporaneous records which reflected that as being the MFT's intention: ROS[163].
(3) Thirdly, whilst it is not necessary to conclude that it was impossible for the MFT to fund Plantic without selling the BBG shares in order to conclude that the MFT's dominant purpose was to facilitate that funding, there were other readily available means of funding Plantic: ROS[171].
(4) Fourthly, in any event, there was a real likelihood that the MFT would not need to continue funding Plantic for very long in light of the fact that it was likely that the MFT would soon sell its shares in Plantic: ROS[173] to [174].

The GMSF

262. The applicants submitted that the financial consequence of the sale for the GMSF was that it acquired shares in BBG and thus exposure to its future financial performance, referring to s 177D(2)(e) and (f): AOS[210]. The applicants submitted that it would be concluded that Mr Merchant considered BBG shares to be a good investment at the time: AOS[211]. The applicants noted that Mr Merchant had caused Merchant Group entities to continue to purchase BBG shares on various occasions after its listing and before the BBG Share Sale, including the acquisition of BBG shares by the GMSF in February 2012 (2.523m shares for $7.89 million) and March 2014 (946,350 shares for $264,977): AOS[212]. The applicants submitted at AOS[213]:

The fact that the market price for the shares at the time of the BBG Sale had dropped from its earlier highs does not suggest that the [GMSF] obtaining exposure to the future performance of BBG was not the dominant purpose of the transaction from its perspective. Such an approach would be uncommercial. An investor profits from situations where the market's perception of value of an asset differs from their own (and where their own perception turns out, in time, to be more accurate than the market's). If an investor believes that an asset has a particular value, they make more money from buying it at a lower price than at a higher price. As noted above, the Super Fund had acquired shares in BBG

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after the significant share price drop (i.e. in March 2014).

263. As to the applicants' case that, from the perspective of the GMSF, the dominant purpose was to acquire an asset which was expected to appreciate in value, the Commissioner submitted:

(1) First, if that was the dominant purpose one would expect a contemporaneous record of such an intention and of some consideration of investment options, but there was none: ROS[182].
(2) Secondly, there was a lack of evidence that BBG was considered to be a "good" investment: ROS[188].
(3) Thirdly, the evidence which demonstrated that the sale by the MFT of the BBG Shares was not objectively for the purposes of funding Plantic is probative of the objective intention of the GMSF: ROS[193]. The fact that the MFT was selling the BBG Shares to obtain a capital loss indicates that the GMSF was not participating for the purpose of obtaining an asset that was likely to appreciate: ROS[194].
(4) Fourthly, the acquisition of the BBG Shares was obviously inconsistent with the GMSF's documented investment strategy (the 2012 ISD) and defeated its very purpose: ROS[195].

Applicants' submissions on commercial context and purpose

264. In closing submissions, the applicants submitted that there was "no contrived capital loss"; the loss could have been crystalised by any sale by the MFT to anyone at market price: AOCS[7].

265. The applicants submitted that the commercial purposes served by the sale of the BBG Shares on 4 September 2014 to the GMSF included:

(a) to keep the BBG Shares in the Merchant Group: AOCS[7], [17(b)];
(b) to free up cash for the MFT, in circumstances where there was a strain on the MFT's cash and the idea of using cash in the GMSF to provide cash for the MFT was initiated long before September 2014: AOCS[9] to [9E], [10] to [11A], [17(a), (e), (f)]; and
(c) to give the GMSF the prospect of greater returns than it was then receiving from its cash deposits: AOCS[17(c), (d)].

266. The applicants addressed these matters in closing submissions by way of "overview" in the AOCS, and as part of the "manner" in which the scheme was entered into for the purposes of s 177D(2)(a) - see: AOCS[16] and [17]. For convenience, the applicants' submissions on these three general topics will be addressed before undertaking the analysis required under s 177D.

Consideration

Commercial context and purpose

Keeping BBG shares in the Merchant Group

267. The applicants observed that a part of the context was that Mr Merchant, and members of the Merchant Group, had an "affinity" for holding a substantial parcel of shares in BBG: AOCS[8], [17(b)]. That proposition is to be accepted. Whilst the MFT sold a substantial number of shares in BBG in 2006, Mr Merchant wanted to maintain a substantial shareholding by the Merchant Group in BBG and wanted to retain a position on the BBG Board. From November 2007 until sometime after the sale of the Plantic shares on 2 April 2015, Mr Merchant consistently acquired BBG shares, including in share issues or capital raisings so as not to have the Merchant Group's shareholding diluted - see: Exhibit 2.

268. At the time of the BBG Share Sale on 4 September 2014, Mr Merchant did not want to sell, and would not have sold, BBG shares to unrelated third parties.

The asserted need for, or objective of providing funding to, the MFT

269. A central component of the applicants' case was that the BBG Share Sale was driven, in part, to free up cash for the MFT so that it could meet its expenses. A particular focus of the applicants' written opening submissions and affidavit evidence was on the funding needs of Plantic, which had been a significant drain (of approximately $1 million per month on average) on the MFT's resources since the MFT acquired 100% of Plantic

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in November 2010. The applicants' case as ultimately put in oral opening submissions, and closing submissions, was that funding was needed for the MFT generally. An amendment was made to the appeal statement in this regard during the hearing.

270. As to the MFT's funding needs, the applicants relied on the MFT's general expenditure, drawings for Mr Merchant's private expenditure (of about $500,000 per month), and the continued acquisition of BBG shares at the direction of Mr Merchant. The applicants referred in particular to (at T204):

• general expenses of around $3.2 million in the 2013 financial year (CB555), around $2.2 million in the 2014 financial year (CB192) and around $2.5 million in the 2015 financial year;
• the fact that the MFT expended more than $37 million on acquiring BBG shares between 2012 and 2014;
• drawings for Mr Merchant's private expenditure of about $6 million per year.

271. The applicants emphasised that the MFT's acquisitions of BBG shares were unpredictable because the capital raisings (in which Mr Merchant would always participate) were unpredictable. The amounts required by Plantic were also unpredictable and the forecast cash needs of Plantic had proved to be unreliable.

272. As noted earlier, from the time of the GFC, BBG had suffered financial difficulties and, by April 2012, had stopped paying dividends. There was objectively no real possibility of dividends being paid on BBG shares in the foreseeable future: T120.36-47 (McGrath). The MFT's income from its investments was being used to support Plantic's operations and Mr Merchant's private cash requirements: T126.

273. Mr McGrath accepted that, over the period 2012 to 2014, the operating expenses of the MFT substantially exceeded the income from the shares and unlisted investments that Mr McGrath was managing: T127.16. His evidence included (at T127.16-33):

Yes. So you were aware that, once the Billabong dividends stopped in 2012, there was a significant shortfall in the cash inflows required - in effect - to fund the activities of the trust [the MFT]?---Yes.

Yes. So, by 2014, that shortfall had existed for at least two years?---It existed - - -

For at least two years?---Yes.

Yes. Because the Billabong dividends ceased in April 2012?---Yes.

And we're talking September 2014?---Yes.

Yes. Ultimately, this shortfall had to be met from the realisation from some of the trust's investments that you were managing?---Yes.

Yes. And that is, in fact, what occurred?---Yes.

274. Mr McGrath accepted that, in the two year period from 30 June 2012 to 30 June 2014, a substantial number of investments held by the MFT were sold down: T129.15. These sales were to fund the shortfall of the MFT's operating expenses and also to buy BBG shares: T129.17.

275. As at 30 June 2012, the actual cost of investments held by the MFT was a little over $302 million: CB428 at page 42. As at 30 June 2014, the actual cost of investments held by the MFT was a little under $287 million: CB428 at page 36.

276. The applicants referred to a series of "decisions" which they contended resulted in the BBG Share Sale Scheme: AOCS[17]. These "decisions" included:

(1) an asserted decision to raise cash for the MFT: AOCS[17(a)];
(2) an asserted decision to use the GMSF's cash to buy the BBG shares from the MFT as a means of providing the MFT with cash: AOCS[17(e)].

277. Decision to raise cash for the MFT : In relation to "the decision to raise cash for the MFT", the applicants referred to Ms Paull's s 353-10 interview at CB440 at page 21, line 22-30:

Gordon hates loans. He hates borrowing money. And at that - we had to get a margin loan to help keep our heads above water, so we did that. Then we started selling off assets because Plantic was costing us about a million dollars a month, which is an awful lot of money to keep having to get all the time when you don't have that cash

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hanging around. So we sold a helicopter, we sold land in Hawaii, we were selling everything we could sell, and then we were getting stuck without having to go and get a loan. And that's when we started talking about, "Well, why don't we use the super fund?"

278. The applicants also pointed to historical cash flow issues: AOCS[17(a)]. The applicants referred to an email from Mr McGrath to Ms Paull dated 15 February 2011 (CB55) and McGrath's evidence in relation to that email: McGrath at [41(a)] and [43]. The email related to the Merchant Group's cash flow difficulties being experienced in 2011. Mr McGrath's evidence at [41(a)] and [43] dealt with cash flow issues in 2011 and, in a general way, with Mr Merchant's spending habits.

279. The applicants relied on various emails written in the context of the equity placement and rights issue arising from the arrangements with Centerbridge/Oaktree. One was an email from Mr Merchant to Ms Paull on 26 November 2013: CB165. In this email, Mr Merchant expressed his view that it "would be fantastic if we could use [the GMSF] to purchase the shares" and asked if Ms Paull could find out if this was possible.

280. The applicants referred also to the email from Ms Paull to Mr McGrath on 14 February 2014: CB176. This email is the last in a chain of emails which discussed whether it was possible for the GMSF to have share entitlements of other Merchant Group entities issued to the GMSF or to have those entitlements transferred to the GMSF. Mr Burgess was consulted and he advised against it. Mr Burgess' email on 21 February 2014 to other EY employees recorded that Mr Burgess had told Mr McGrath that "there were a number of risk areas around the … [GMSF] taking up 100% of the entitlement" and that "the end result is that each entity will take up its own entitlement": CB186.

281. The communications the applicants rely upon in late 2013 and early 2014 indicate a desire on the part of Mr Merchant to maintain a substantial shareholding in BBG, and a preference to use the GMSF in the February 2014 capital raising to the extent that was possible, in part because the GMSF had cash available to purchase BBG shares. However, that was not possible because of the associated "risk areas", being tax risks. These emails do not establish that there was a decision to raise cash for the MFT, as opposed to a decision to use cash in the GMSF to maintain a substantial shareholding in BBG. Less still do these emails establish that there was a decision to raise cash for the MFT, by a sale of shares by the MFT to the GMSF, operative in relation to the decision on 4 September 2014 for the MFT to sell the BBG Shares to the GMSF.

282. The applicants relied on the email from Ms Paull sent on 17 June 2014: CB221. This email noted that Mr Merchant had sold a block of land in Hawaii and "is fully aware that his money is going to Plantic". This email indicates that the proceeds of sale of a block of land in Hawaii was likely to be used to fund Plantic. It does not suggest that there was a decision taken about funding Plantic (or raising funds for the MFT) which was in some way connected with the later decision for the MFT to dispose of the BBG Shares to the GMSF.

283. As will be discussed further below, the contemporaneous communications from 5 May 2014 to 4 September 2014 overwhelmingly support the conclusion that the BBG Share Sale was undertaken to crystallise a capital loss in the context of an expected future sale of Plantic.

284. As at 4 September 2014, the proposed sale of Plantic was not certain, but it was progressing well and it was objectively reasonably likely that Plantic would be sold to some entity in the then reasonably foreseeable future.

285. Decision to use the GMSF's cash : As to the "decision to use the [GMSF's] cash to buy the BBG shares from MFT to provide MFT with cash", the applicants relied upon Merchant at [243] and [250]; Mr McGrath's email of 28 December 2011: CB69; and Mr McGrath's email of 20 July 2012: CB106.

286. The applicants also referred to the fact that the decision was made in early September 2014 when the possibility of a sale of Plantic was uncertain and when the form of any such transaction was also uncertain: AOCS[17(f)]. In this regard the applicants referred to: McGrath's email of 21 August 2014: CB260; and Merchant at [243], [244] and [246].

287.

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Mr Merchant asserted in his affidavit at [243] that he "transferred the BBG shares to GMSF on 2 September 2014 because I needed to free up cash as soon as possible to continue funding Plantic". Mr Merchant stated at [250]: "I also believed that transferring the BBG shares to GMSF allowed me to use cash from GMSF to fund Plantic while keeping the BBG shares, and I did not have to dispose of any BBG shares to the market".

288. I do not accept the accuracy of the evidence at [243]. First, as discussed further below, the evidence did not establish that, as at early September 2014, there was a particular need to "free up cash … to continue funding Plantic". The MFT had ample funding available for the anticipated funding needs. The evidence did not suggest that Mr Merchant (or any other person) made an inquiry around that time about the cash levels available to the MFT or that he (or any other person) was told it required funding beyond what was anticipated and available at that time. In cross-examination, Mr Merchant gave the following evidence (T101.9-14):

At the time you made the transfer on 4 September to the superfund, do you recall being advised, at that point in time, as to the cash levels in MFT?---No.

So is it fair to say that at that time, you made no inquiries of Colette Paull or through Colette Paull to Sue Lyons to ascertain what the cash levels of MFT were at that time?---I don't recall. I may have. I don't know.

289. Secondly, as discussed further below, the documents from May 2014 to September 2014, recording EY's advice, indicate that the BBG Share Sale was related to the anticipated sale of Plantic, not to Plantic's funding needs or the needs of the MFT more generally.

290. Thirdly, in cross-examination in relation to the BBG Share Sale (and the forgiveness of loans), Mr Merchant stated that he did what he was "directed" to do (in context, by EY), suggesting the BBG Share Sale was not connected with a claimed desire to free up cash or expose the GMSF to the share price fluctuation of BBG shares. His evidence at T101.16 - 28 (emphasis added to show the emphasis given by Mr Merchant when answering the question):

So, Mr Merchant, is it fair to suggest to you that in respect of the BBG share transfer, you simply did whatever was asked of you to do?---Whatever I was directed to do, yes, I did.

So this was one decision that you undertook - - -?---Mmm.

- - - on the direction from others?---Yes. Well - - -

And in respect of the dividends?---It sounds like it's from - how I did it from Ernst & Young.

Right. And in respect of the forgiveness of the GSM loan, is it fair to say that you simply did what you were instructed to do?---I would say yes.

291. It was submitted that Mr Merchant's evidence about doing what he was "directed" should be understood as relating only to the mechanism of carrying out the BBG Share Sale (and loan forgiveness): T241.41 - 242.5. I do not accept that the evidence should be understood in that way. EY was involved in advising in relation to the structure of the sale of Plantic and the tax implications. The evidence did not establish that EY was involved in advising on the mechanism of implementing its advice in a transactional way. MinterEllison appear to have been retained in relation to the mechanism of effecting the transfer - see, for example: CB284. Mr Merchant did not suggest he was directed by MinterEllison.

292. As to Mr McGrath's emails of 28 December 2011 and 20 July 2012, these do not suggest that the reason for the BBG Share Sale on 4 September 2014, well over two years later, was to provide the MFT with cash.

293. In relation to the funding for the MFT's expenses, the applicants referred to ten "realisation events" in closing submissions: AOCS[9D]. The MFT:

• "sold $11.579m of ASX listed shares between 20 June 2012 and 28 June 2012" (Event 1);
• "sold around $1m of ASX listed shares between 25 and 30 July 2012" (Event 2);
• "realised its MSSF investment on 5 November 2012 for $6.2m" (Event 3);

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• "realised its Arowana investment on 28 May 2013 for $6.8m" (Event 4);
• "sold three properties in Hawaii on 16 August 2013, 19 June 2014 and 17 July 2014 for $2.5m, $2m and $2.5m" (Events 5, 6, and 7);
• "sold some more ASX listed shares on 4 September 2014 for $5.8m" [sold the BBG Shares to the GMSF] ( Event 8 );
• "sold even more ASX listed shares between 18 September 2014 and 30 September 2014 for $13.7m" (Event 9); and
• "sold a helicopter on 27 January 2015 for $3.4m" (Event 10).

294. The applicants submitted that it is objectively reasonable to conclude - from the fact of a significant cashflow shortfall and significant realisation activities being undertaken with the effect of funding the shortfall - that assisting in meeting the shortfall was the purpose of the realisation activities: AOCS[9E]. The applicants submitted that it was common ground that the realisation events numbered 1, 2, 3, 4, 5, 6, 7, 9, and 10 were all undertaken for that purpose; it was only the Event 8 that was said by the Commissioner to be done for a different dominant purpose.

295. The short answer to this submission is that each of the ten transactions referred to by the applicants - except Event 8 - were transactions taken independently of the contemplated sale of Plantic and with unrelated third parties. Except Event 8, the transactions were explicable by, or inferentially undertaken for, a variety of purposes, including: funding Plantic and the MFT's other expenses; because the investments had come to an end; because it was perceived that the proceeds could be better invested elsewhere; or for a combination of these purposes. Having regard to the evidence as a whole, it is clear that the BBG Share Sale was undertaken for the purpose of the sale of Plantic, not for the purpose of funding the MFT. Unlike the other transactions referred to, the BBG Share Sale was a transaction between related parties, albeit at market value. I do not accept that the BBG Share Sale was undertaken for a purpose of funding any cash shortfall in the MFT.

296. As to the funding requirements of Plantic specifically (as opposed to the MFT more generally), the evidence included a "summary presentation" of cash funding requirements for the period June 2014 to December 2014 which had been sent to Mr Merchant and other directors of Plantic's board on 28 May 2014: Merchant at [208]; CB211.

297. The presentation indicated that in the "base/worse case" the funding required for June 2014 to December 2014 was $4.4 million: CB211 at page 5. In the "target case", funding for the period was $3.6 million. The presentation recorded that, if a bank overdraft of $2.5 million was secured, then the additional cash funding from Mr Merchant (or associated entities) was $1.1 million to $1.9 million. The document recorded that funding for the whole of 2015 would be less than $1 million.

298. The presentation referred to: "Bank Overdraft/GM funding" of $500,000 in June 2014; $600,000 in July 2014; $700,000 in August 2014; $900,000 in September 2014; $600,000 in October 2014; $800,000 in November 2014 and $300,000 in December 2014: CB211 at page 8.

299. On 29 May 2014, Mr Hoy sent to Mr Merchant and others a further presentation which addressed cash funding requirements for the first half of 2015: Merchant at [209]; CB213. This revealed a "base case" funding requirement of $900,000 and a "target case" of $300,000. The funding for these would come either from the bank overdraft or cash funding from "GM".

300. On 29 May 2014, the MFT drew down $3 million on the NAB Margin Loan: CB631 at page 3. Mr Merchant explained in his affidavit that this was "to advance to Plantic to meet its funding requirements for the subsequent few months": Merchant at [210]. This replenished the WPC-2183 account from about $34,000 to $3.034 million: CB631 at page 3; CB192 at page 50.

301. Mr Merchant stated that he did not know about the drawdown at the time because Ms Paull "was handling finding cash for funding Plantic": Merchant at [210]. However, given that Mr Merchant spoke to Ms Paull on a daily basis and that he did not like debt and was uncomfortable with the margin facility, it is more likely that he did know about it at the time.

302.

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In the three months from 29 May 2014 until 4 September 2014, the aggregate cash balance of the MFT increased substantially such that, immediately before the BBG Share Sale on 4 September 2014, it exceeded $8 million: $201,118.23 (account 1-1120); $3,178,123.73 (account 1-1130); $4,776,077.50 (account 1-1150): CB689. The MFT's receipts included:

• $2,004,660 on 19 June 2014 (second Hawaiian property): CB192 at page 52; CB826 page 22; CB221; Merchant at [59(b)];
• returns of $1,689,375.46 between 1 and 8 July 2014 from ANZ, Macquarie, Westpac and NAB: CB689 at page 1;
• A$2,518,410.00 on 17 July 2014 (third Hawaiian property): CB192 at page 86; CB826 at page 20; Merchant at [59(c)]; and
• proceeds from the sale of SKI on 14 and 17 July 2014 totalling $1,333,007.30: CB689 at page 1025.

303. In addition to the cash available in the MFT, the MFT had access to $13 million in its new margin loan facility with the CBA. As at 2 September 2014, the $25 million NAB Margin Loan had funds available of $3,497,896.19: CB631. However, on that day, the NAB Margin Loan was replaced with the new CBA Facility of $35 million: Merchant at [251]; CB280. An amount of $21,528,701.62 was drawn down on 8 September 2014 to pay out the NAB Margin Loan, leaving in excess of $13 million available: CB400.

304. Mr McGrath was responsible for arranging the NAB Margin Loan in 2011 (first $15 million and later increased to $25 million) and its replacement by the $35 million CBA Facility in 2014: T131. Mr McGrath's recollection was that the reason for the change from NAB to the CBA was that he was able to negotiate a better interest rate, consistently with his email to Ms Lyons of 11 July 2014: CB231. Mr McGrath accepted in cross-examination that he thought that Ms Paull had most likely asked for there to be an increase to the overdraft facility so as to provide a cash buffer: T138. Given Ms Paull's role in the Merchant Group, I consider this likely.

305. Mr Merchant stated that he did not remember being involved in the decision to apply for the $35 million CBA Facility or being aware that it had been approved: Merchant at [251].

306. Mr Merchant was, at the very least, aware that the margin facility was being transferred from NAB to CBA. On 20 July 2014, Mr McGrath had written an email to Mr Merchant which included (CB234):

The margin facility is just about to be transferred across from NAB to CBA so once that happens and the shares come across with it I will organise to gradually lessen the exposure to Macquarie and sell off the AMP shares and SYD and keep an eye on the price of the QBE shares

307. I do not accept that Mr Merchant was not involved in the decision to apply for the $35 million CBA Facility or that he was unaware that it had been approved. That is inherently unlikely. Mr McGrath had discussed the CBA Facility with Ms Paull and steps had been taken to move from NAB to CBA before 10 July 2014: CB231. I do not accept that this would have occurred without Mr Merchant's knowledge and agreement in circumstances where Mr Merchant was heavily involved in the affairs of the Merchant Group, did not like, or "hated", debt (T131.42), was uncomfortable with the margin loan (T140.16-18), and discussed matters with Ms Paull on a daily basis.

308. The funding requirements which had been forecast on 28 May 2014 for Plantic for the months of June, July and August 2014 had, as at 4 September 2014, proved accurate: CB649 at page 9 ($500,000 in June 2014); CB689 at page 1 ($600,000 in July 2014); CB689 at page 2 ($700,000 in August 2014).

309. There was ample funding available as at 4 September 2014 to meet the forecast funding requirements of Plantic if the funding needed to be met. The funding would not be required if Plantic was sold, which was strongly desired on the part of Mr Merchant. The additional forecast cash requirements of Plantic up until 30 June 2015 could have been met from existing cash reserves and, to the extent these proved insufficient because of other expenditure of the MFT or for other reasons, could have been met in the same way as the MFT had funded its expenditure over the period 2012 to 2014. That is not to say that any such

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funding requirement had to be funded in that way; it is only to say that - objectively - Plantic's funding did not need to be sourced from the sale of BBG shares by the MFT to the GMSF. There was no expenditure of an unusual or unforeseen nature on the part of Plantic that Mr Merchant pointed to in connection with the assertion in his affidavit at [243], that he "transferred the BBG shares to GMSF on 2 September 2014 because I needed to free up cash as soon as possible to continue funding Plantic".

310. The contemporaneous documents leading up to the BBG Share Sale did not directly link the sale of the BBG Shares to the funding needs of Plantic, or the MFT more generally, or lend any weight to that being a purpose of the transaction, let alone the main purpose of the transaction.

311. As noted above, in relation to the timing of the BBG Share Sale, the applicants referred to Mr McGrath's email of 21 August 2014 in which he stated "either way it would be beneficial to transfer the BBG shares soon after the [trading] window opens". As has also been noted earlier, when Mr McGrath's email is read in the context of the communications with EY at that time, and specifically against EY's email to which he was responding, it is clear that, in his email of 21 August 2014, Mr McGrath was indicating that the GMSF should acquire BBG shares from the MFT so as to crystallise a capital loss in the MFT which would be beneficial whether or not the sale was an asset sale or a sale of shares. I do not accept that Mr McGrath "had in mind" freeing up cash for the Merchant Group as asserted by him in his affidavit at [111] - see [0] above.

312. It might also be noted in this context, that the EY email of 21 August 2014 included (CB260):

Because of the above there are perhaps some slightly increased risks around a share sale given the debt forgiveness issues (e.g. commercial debt forgiveness rules, deemed dividend rules, direct and indirect value shifting rules) and sale of BBG shares which crystalise capital losses ('wash' sale issues). However, on balance we think these are manageable particularly given a forgiveness of related party debt is a common aspect of a share sale transaction and there are real commercial consequences of the super fund acquiring the shares (i.e. it is fully exposed to future share price movements/dividend policy). We propose to provide a letter of advice to you outlining the issues and our conclusions in this regard.

313. There was no suggestion in this email chain that the purpose of the BBG Share Sale was to free up cash for the MFT.

314. In his affidavit at [244], Mr Merchant stated that the timing of the BBG Share Sale was affected by the trading window which opened on 2 September 2014. He stated that he was concerned that it might close sooner than 31 December 2014. He stated:

If the trading window closed it may have meant that MFT could not raise cash to fund Plantic by selling the BBG shares to GMSF until after BBG gave the ASX its half year results in about six months' time.

315. The affidavit was drafted at a time when the applicants' case was focussed more on the BBG Share Sale being effected to fund Plantic's expenses than the MFT's expenses more generally.

316. Having regard to EY's advice in Mr Burgess' 21 August 2014 email, and Mr McGrath's advice that the BBG Share Sale should occur "either way" as soon as the trading window opened, it is clear that the BBG Share Sale was effected for the purposes of structuring the sale of Plantic. I do not accept Mr Merchant's evidence at [244] that the transaction was undertaken so as to "raise cash to fund Plantic". The significance of the trading window is addressed further when considering the eight matters in s 177D(2) and, specifically, the "time" of the scheme.

317. In his affidavit at [246], Mr Merchant emphasised his uncertainty that a deal with Sealed Air would be achieved. Objectively, a deal with Sealed Air was a reasonable prospect. The effect of Mr McGrath's evidence in cross-examination was that the majority, if not all, of Sealed Air's concerns were either met or anticipated to be met. However, even if Mr Merchant had doubts that a deal would be achieved with Sealed Air, Mr Merchant wanted to sell Plantic. The BBG Share Sale was undertaken for the purpose of a future

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sale of Plantic to an interested third party. A sale of Plantic was the desired outcome and it was also objectively likely as at 2 September 2014.

318. The contemporaneous documentary evidence before 4 September 2014 provides no real support for a conclusion that the BBG Share Sale was motivated by either a need on the part of the MFT for funding at that time or a desire to provide it with funding.

319. I do not accept that the BBG Share Sale was undertaken to free up cash for the MFT, in light of the matters referred to above and (to the extent they have not already been referred to):

(a) the lack of documentary evidence in the months immediately before 4 September 2014 suggesting a need for the GMSF's cash to fund Plantic or any other expenses of the MFT;
(b) the amount of cash available to the MFT as at 4 September 2014;
(c) the availability of easy means for the MFT to obtain cash, if it were really necessary, from the sale of assets, consistently with how the MFT had been funded from 2012, including the availability of the CBA Facility;
(d) the documentary evidence from 5 May 2014 onwards which indicates that the BBG Share Sale was suggested by EY in the context of the contemplated sale of Plantic;
(e) Mr McGrath's evidence that EY suggested the BBG Share Sale (T158.25-28), and his statement in his email to Mr Merchant on 21 July 2014 that the BBG Share Sale would provide "a good 'loss' on paper" so that there would be "zero tax payable";
(f) Mr McGrath's advice on 21 August 2014, consistent with the calculations prepared by EY, that the BBG Share Sale was advisable "either way", which I conclude was a reference to whether the anticipated sale was a share sale or an asset sale; and
(g) Mr Merchant's evidence that he undertook the BBG Share Sale because he was "directed" to by EY.

Exposing the GMSF to investment in BBG

320. The applicants submitted that the various "decisions" which were relevant context to the BBG Share Sale included:

(1) the decision by the GMSF to seek to secure exposure to BBG and away from its low earning cash deposits: AOCS[17(c)]; and
(2) the decision to seek to increase holdings in BBG because of the upside potential: AOCS[17(d)].

321. In relation to the alleged "decision" by the GMSF to seek to secure exposure to BBG and away from its low earning cash deposits, the applicants referred to Ms Paull's statutory declaration at [16] to [19]: CB443; Ms Paull's s 353-10 interview: CB440 at page 21 line 5; Merchant at [154]; and emails between Mr Merchant and Ms Paull on 15 October 2012: CB115 - see: AOCS[17(c)].

322. In her statutory declaration at [15] to [19] (it is necessary to refer also to [15]), Ms Paull set out discussions she claims to have had with Mr Merchant before the GMSF acquired shares in BBG in February 2012. She stated (CB443):

15. In February 2012, GMSF acquired 2,523,600 BBG shares on market (2012 shares). GMSF paid approximately $7.89 million for these shares.
16. Before GMSF purchased the 2012 shares, Gordon and I discussed investing GMSF's cash in assets that generated more wealth for GMSF. Gordon and I agreed that it would be good to try to invest the cash in other growth assets, rather than just having cash in GMSF. I can't remember how long we had been having these discussions, but it had been for a number of years before GMSF purchased the 2012 shares.
17. During these discussions before February 2012, Gordon suggested that GMSF purchase BBG shares. At that stage, the BBG share price had been decreasing for some time and Gordon and I discussed the share price and BBG's performance regularly.
18. Gordon said words to me to the effect that:
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  (a) he believed that BBG's performance would improve and the share price would increase;
- (b) he wanted to buy BBG shares because he saw them as a good investment - the share price was low and he was confident that BBG would improve over time; and
- (c) he wanted to hold BBG shares for a long time.
19. At the same time, there were a lot of good offers for BBG shares - for example, they were offering two shares for every one purchased.

323. In her s 353-10 interview, in response to questions about Mr Burgess providing advice, Ms Paull stated (CB440 at page 21 line 5):

Probably more like - Gordon and I had been talking about how to use the money in the super fund to, like, give it an investment, rather than just have money sitting there doing nothing. We'd been talking about that for ages, but we couldn't come up with anything that was very suitable that we liked that was safe. And when Gordon asked, "Is it possible to use the super fund money to buy Billabong shares?" - because Billabong at the time was going very, very well, and it was a great investment, and they were giving you two shares for one and all that sort of thing. All the share offers were coming through. And Gordon had already been purchasing a whole heap of Billabong shares in his own right. And when the offer came up again he wanted to get more, and so that's when we asked Ian the question. Then that - that would've been asked quite a few times, probably by email but - and then by phone or both, you know, a couple of times.

324. In his affidavit at [154], Mr Merchant stated:

In October 2012, I considered using $4 million of available cash in GMSF to purchase BBG shares. I considered it was a good investment because the share price was very low and I expected it would rise again in the future. I had this belief because BBG had taken steps after reviewing its capital structure, including selling part of Nixon Inc. It also had settled on a transformation strategy to deal with the challenging retail conditions (as set out in the chairman's address and CEO address at the 2012 AGM).

325. On 15 October 2012, Mr Merchant inquired whether he could "buy BBG shares using funds" in the GMSF: CB115. The events in October 2012 have been referred to earlier. On 18 and 19 October 2012, the MFT acquired 900,058 BBG shares for a total of $753,895 by drawing down on the NAB Margin Loan on 16 October 2012: Merchant at [161] to [162].

326. The GMSF did not buy shares at this time.

327. In relation to the alleged "decision" to seek to increase holdings in BBG because of the upside potential, the applicants referred to: Ms Paull's statutory declaration at [31] to [32]: CB443; Merchant at [247] to [248]; and the ASX announcement on 28 February 2012: CB82 - see: AOCS[17(d)]

328. In her statutory declaration, Ms Paull stated:

31. Before the end of year meeting for the 2013 income year, Gordon and I had also discussed GMSF buying more BBG shares.

(a) In the 2013 and 2014 income years, GMSF was paying Gordon a pension of around $500,000. Gordon also has substantial assets, through various entities. At around this time, I liked to ensure that I had:

(i) enough accessible cash to invest in Plantic Technologies Limited (Plantic) - around $1 million to $1.4 million a month;

(ii) $1 million accessible cash set aside for Gordon to use on expenses that I didn't know about; and

(iii) sufficient cash to fund any development costs that the Merchant Group was incurring at the time.

(b) From my conversations with Gordon at around the end of the 2013 income year, I understood that he still:

(i) believed that BBG's share price would increase - so he would make a good return on the BBG

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investment;

(ii) wanted to buy BBG shares because he saw them as a good investment;

(iii) believed that BBG would return to paying dividends; and

(iv) wanted to hold BBG shares for a long time.

32. After discussing these issues with Gordon, I agreed that BBG shares was a good investment for GMSF and that the September 2014 Shares in particular, were a good investment for GMSF.

329. The ASX announcement on 28 February 2012 included (CB82):

The Board and its advisers have now had further discussions with TPG to give TPG the opportunity to increase its non-binding indicative price of $3.00 per share to better reflect the value of the company. In those discussions, TPG was also made aware of the attached letter, received by the company after market close yesterday, from the lawyers of Billabong's Non-Executive Director and major shareholder, Gordon Merchant, and Non-Executive Director Colette Paull, advising that Mr Merchant and Ms Paull 'do not support Billabong taking any steps to assist or facilitate a proposal by TPG Capital, including allowing TPG Capital to commence due diligence on Billabong, even if the price TPG Capital offered was $4.00 per share' which Mr Merchant and Ms Paull 'consider would still represent a discount on the true value of Billabong shares'.

330. In his affidavit at [247] and [248], Mr Merchant stated:

[247] As stated above, in August and September 2014 I also believed that BBG shares were a good investment for GMSF. I thought that the share price had been discounted by the market to take into account BBG's difficulties, so BBG shares were good value and would increase in value in the future. By August and September 2014, I was also more actively involved in BBG's business. I was travelling to BBG's factory and head office in Irvine, California each month for around a week. I made suggestions to the designers, pattern makers, marketers and met with sponsored athletes and I reported back to BBG's CEO, Neil Fiske. The fact that I have more involvement in the business gave me greater confidence in BBG's future prospects.

[248] At around the time that GMSF acquired the BBG shares from MFT, GMSF was earning modest interest on the cash it held in its bank accounts. I considered the BBG shares were a better investment than continuing to hold the cash in a bank account.

331. In relation to Ms Paull's statutory declaration, I do not accept that Mr Merchant considered that BBG would return to paying dividends at any time in the then reasonably foreseeable future. There was no objective basis for such a view. For his part, Mr McGrath considered there was no realistic prospect of BBG paying dividends at any time in the then reasonably foreseeable future: T120.36-47. There is no contemporaneous document which suggests that Ms Paull considered that BBG shares were a good investment for the GMSF or that she discussed with Mr Merchant that she considered that an acquisition of the BBG Shares from the MFT on 4 September 2014 was a good investment for the GMSF.

332. Ms Paull's statutory declaration was made after she had her s 353-10 interview and at a time when the Commissioner was considering taking action against Mr Merchant and Ms Paull in relation to their duties concerning the GMSF. Ms Paull was not able to be tested in relation to the content of her statutory declaration.

333. In the face of the contemporaneous documents indicating the tax reasons why the GMSF acquired the BBG Shares from the MFT on 4 September 2014 and the lack of any contemporaneous document lending any real support for the contention that the BBG Shares were acquired because they were considered to be a good investment from the perspective of the GMSF, I cannot accept Ms Paull's statement in [32] of her statutory declaration as accurate.

334. In relation to [247] and [248] of Mr Merchant's affidavit, the documentary evidence before the BBG Share Sale on 4 September 2014 did not reveal any comparison of, or consideration being given to, the advantages or

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disadvantages to the GMSF of cash assets versus BBG shares.

335. In his affidavit at [249], Mr Merchant stated that he reviewed the GMSF's bank statements for September 2014 and identified what he understood to be the interest rates on cash balances. Mr Merchant did not suggest that this was a review he conducted in September 2014. I do not accept that a substantial reason for the transfer of the shares from the MFT to the GMSF was for a purpose of providing a good investment to the GMSF. It was done for the predominant purpose of crystalising a capital loss in the MFT.

336. The applicants did not specifically rely in closing submissions on Mr Merchant's statutory declaration made on 17 October 2019 in relation to the alleged decision to expose the GMSF to BBG shares, at least until after it was raised by the Court in argument. In it, Mr Merchant stated (CB442):

GMSF acquiring the 2014 BBG Shares

23. GMSF purchased 10,344,828 BBG from MFT for approximately $5.84 million on 2 September 2014 ( 2014 BBG Shares ).

24. Before GMSF acquired the 2014 BBG Shares, I spoke to Colette on several occasions about buying BBG shares using GMSF's cash.

(a) I asked Colette to find out, from Ian, whether GMSF could acquire the 2014 BBG Shares.

(b) GMSF acquiring the 2014 BBG Shares was not a transaction I took lightly. I knew that there were various obligations that I had as a director of the Trustee. I wanted to make sure that I wouldn't breach any of the superannuation rules if GMSF purchased 2014 BBG Shares.

25. By September 2014, BBG had stopped paying dividends and the price of BBG shares had declined further. I believed that:

(a) the market had over corrected so the BBG share price was good value;

(b) the BBG share price would increase;

(c) as a founder, it was important for me to show the public that I believed that BBG would improve;

(d) my investment in BBG was a long-term investment; and

(e) BBG would return to paying dividends and I would make a good return on my investment in BBG.

26. I also wanted GMSF to buy the 2014 BBG shares so MFT could use the cash it received to continue to fund Plantic.

27. As a part of responding to the ATO's audit of GMSF, I have reviewed regulation 4.09 of the Superannuation Industry (Supervision) Regulations 1994.

28. I address each of the matters in regulation 4.09 below.

(a) I, together with Colette, formulated, reviewed and gave effect to an investment strategy for GMSF.
I discussed each investment and GMSF's overall investments with Colette.

29. When GMSF acquired the 2014 BBG Shares:

(a) I considered the risk involved in making, holding and realising, and the likely return from the 2014 BBG Shares. Colette and I discussed BBG's performance. I believed that BBG would trade out of any difficulties. Colette and I discussed these issues and came to a conclusion on them.
(b) I had regard to the cashflow requirements and objectives of GMSF. I received a pension from GMSF. At the same time, I wanted GMSF to use its cash to invest in other growth assets.
(c) I considered GMSF's investments as a whole. I was aware that GMSF held a number of ASX listed shares and those were mainly BBG shares.
(d) I considered GMSF's abilities to discharge its existing and prospective liabilities. I received a pension from GMSF. However, my retirement can also be supported by other assets in the Merchant Group if GMSF stopped paying me a pension.
(e) I considered whether GMSF should hold insurance cover for me.

30. Taking all of this into account, I decided, together with Colette, that GMSF should acquire the 2014 BBG Shares.

337.

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To the extent the statutory declaration implies that the BBG Share Sale was Mr Merchant's idea, that proposition cannot be accepted. The proposal to transfer BBG shares from the MFT to the GMSF (ultimately occurring on 4 September 2014) originated from Mr Burgess as something which should occur in connection with the proposed sale of Plantic in order to provide a loss. This was reported to Mr Merchant by Mr McGrath on 21 July 2014: CB236.

338. In his email of 21 August 2014, Mr Burgess advised Ms Paull, Ms Lyons and Mr McGrath that the best structure for the sale of Plantic was a share sale, but noted that the sale of shares by the MFT to the GMSF as part of the structure created some risk because it would crystalise a capital loss in the MFT, giving rise to "wash sale" issues: CB260.

339. There was no contemporaneous evidence to support the proposition that Mr Merchant "formulated, reviewed and gave effect to an investment strategy for GMSF" or that he did the various matters referred to in his statutory declaration at [29]. I do not accept that he did. Mr Merchant's evidence was that he was unaware of the written investment strategy, being the 2012 Investment Strategy Document. The acquisition of the BBG Shares was inconsistent with the 2012 ISD. I do not accept that entering into the BBG Share Sale constituted a formulation or review of the GMSF investment strategy. And it did not give effect to any investment strategy, whether written or not, that had earlier been formulated. The evidence establishes that the predominant reason for entering into the BBG Share Sale was to crystalise a capital loss in the MFT, not for the investment purposes of the GMSF.

340. Mr Merchant's statutory declaration is not consistent with the contemporaneous documentary evidence and it does not sit easily with Mr Merchant's evidence in cross-examination that, in entering into the BBG Share Sale, he did what he was "directed" by EY. I do not accept that Mr Merchant's statutory declaration provides an accurate account of what occurred.

341. As noted above, because of the structure of the applicants' submissions, I have to this point addressed various submissions made by the applicants before addressing each of the matters in s 177D(2) of the ITAA 1936, to which I now turn.

The eight matters in s 177D(2)

342. Some of the facts referred to below are relevant to multiple "matters" or factors in s 177D(2). I have sought to avoid repeating on multiple occasions the facts relevant to multiple factors.

Manner in which the scheme was entered into or carried out - s 177D(2)(a)

343. In Spotless Services at 420, the plurality stated:

In the context in which they appear in par (i), the terms "manner" and "entered into" are not given any restricted meaning. "Manner" includes consideration of the way in which and method or procedure by which the particular scheme in question was established.

344. The scheme was conceived or established, and then carried out, in the context of the anticipated sale of Plantic by the MFT. Although a sale of Plantic's assets was a possibility, a sale of shares was the preferred option and the most likely. It was not certain as at 4 September 2014 that Plantic would be sold, but the sale of Plantic was the desired outcome and a sale to Sealed Air was a reasonable possibility. If a sale to Sealed Air did not occur, Mr Merchant would continue to pursue other avenues for the MFT to sell Plantic and it was reasonably likely that Plantic would be sold. The BBG Share Sale occurred because it was anticipated that Plantic would be sold in the reasonably foreseeable future, probably by 30 June 2015, and because EY had recommended the BBG Share Sale in order to crystallise a capital loss in the MFT in anticipation of a sale. This was desirable whether the sale of Plantic was a sale of assets or a sale of the shares in Plantic.

345. Mr McGrath approached EY to provide taxation advice in relation to an appropriate structure for the sale of Plantic in about May 2014: T156.14.

346. On 12 July 2014, Sealed Air wrote an email to Mr Morris providing a proposal which was close to their "walk away point": CB233. Mr McGrath forwarded this email to Mr

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Merchant and recommended to him that he permit Sealed Air to do their due diligence if they provide a non-binding, indicative letter of offer: CB233.

347. On 13 July 2014, Mr McGrath sent an email to Mr Burgess (and others) stating that Mr Merchant "has agreed to move to the next phase [of the sale to Sealed Air] and obtain the conditional letter of offer so we need to sort out our end with regard to structure of purchase etc asap": CB233.

348. Mr Burgess understood this to mean "that we needed to pin down what was [the] best sale structure for [Mr Merchant] including dealing with the loan issue", being a reference to the Plantic Loans: CB261.

349. On 21 July 2014, Mr Merchant asked Mr McGrath "if we were to sell Plantic what would the tax implications be for me?": CB236. Mr McGrath replied that day stating:

EY have modelled it and the way to go would be a share purchase by Sealed Air of Plantic shares and not an asset purchase.

By doing that and by transferring some of your high cost base BBG shares - remember some of the BBG shares have a $7 cost base from one of the capital raisings and other ones have a $2 cost base etc. - from GM No 2 to your Super Fund you will get a good "loss" on paper so they reckon there will be zero tax payable on a lump sum payment which is very good.

350. In cross-examination, Mr McGrath accepted that the idea of selling BBG shares to crystallise a capital loss was something suggested by EY: T158.28. Mr McGrath considered that EY was recommending that the transaction occur in order to create the capital loss: T159.2. Mr McGrath gave the following evidence (T159.4-12):

Yes. And [by your email of 21 July 2014] you were passing this on to Mr Merchant?---Correct.

Yes. And this is the first time that you were passing this advice on to Mr Merchant?---As far as I'm aware, yes.

Yes?---As far as I can remember, yes?---Yes.

And Ernst & Young had put this forward as a way to reduce the tax payable on a share sale of the Plantic shares?---Yes.

351. Over July and August 2014, EY "were doing a lot of work to determine the optimum position for [Mr Merchant] (in particular around the possible loan forgiveness as this is what gives [Mr Merchant] the big benefit from a share sale)": CB261. By 19 August 2014, EY "knew a share sale was best for [Mr Merchant] because of the ability to realise capital losses on BBG shares": CB261.

352. The MFT transferred the BBG Shares to the GMSF by way of off-market share transfer, with relevant documents being executed on 3 and 4 September 2014. Both before and after the transfer, the BBG Shares were held in trusts which Mr Merchant controlled and of which he was either the sole beneficiary (the GMSF) or one of a number of discretionary objects (the MFT). The transfer did not result in any real economic change in ownership.

353. The BBG Share Sale was not an independent transaction entered into for its own reasons. It was not conceived for investment considerations so far as concerned the GMSF and it was not conceived for providing cash to the MFT. Rather, the BBG Share Sale was connected to the sale of shares in Plantic as one part of a structure which also involved a forgiveness of the Plantic Loans of about $55 million. The forgiveness of the Plantic Loans:

• increased the capital gain to the MFT by the same amount as the Plantic Loans; and
• reduced "top up tax" payable by Mr Merchant on dividends which might otherwise be paid from GSM and Tironui.

354. The increased capital gain to the MFT was a deferred tax cost rather than a current tax cost if the capital gain could be offset by capital losses. The BBG Share Sale was conceived of and recommended because it would crystallise a capital loss.

355. In summary, the manner in which the scheme was entered into indicates that the scheme was connected with the proposed sale of Plantic which, at the time of the BBG Share Sale:

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• was more likely than not to be a sale of shares (rather than a sale of assets);
• was likely to involve a forgiveness of the Plantic Loans which in turn was likely to result in a higher purchase price for the MFT's shares in Plantic; and
• was expected to give rise to significant capital gains in the MFT which were unlikely to be fully offset by available losses absent the BBG Share Sale.

356. The applicants submitted that EY's raising "of the possibility" of the BBG Share Sale at this time "must be understood against the background that for years the possibility of releasing cash from the [GMSF] to the MFT by buying BBG shares had been raised and discussed" and that "the advice was that there was no regulatory problem with such a transaction": AOCS[10A].

357. First, a part of the context is that it was EY that raised the idea of the MFT selling high cost BBG shares to the GMSF in the context of the sale of Plantic. It was not Mr McGrath, or the Merchant Group, that raised with EY that the sale of high cost BBG shares by the MFT to the GMSF was something which was then being contemplated or that there were cash flow issues in the MFT which might be addressed by such a sale.

358. Secondly, it is not accurate to say that the possibility of releasing cash to the MFT by buying BBG shares had been raised and discussed "for years". It was raised by Mr McGrath in his email of 23 December 2011 and it was not ultimately pursued: CB69. The possibility of the GMSF acquiring BBG shares from the MFT was also raised in an email from Mr Burgess to Mr McGrath on 20 July 2012: CB106. The affidavit evidence did not address why the transaction did not proceed or what advice had been received. A purchase by the GMSF of BBG shares from the MFT was not something which was being considered by the Merchant Group at the time of the sale negotiations with Sealed Air independently of that transaction. Even after it was raised by EY, the contemporaneous documents do not establish that the BBG Share Sale was entered into for a purpose of releasing cash to the MFT. Rather, the BBG Share Sale was raised by EY and embraced by the MFT because it would crystallise a capital loss.

359. Thirdly, whether or not Mr Merchant subjectively considered that there were no regulatory issues with a purchase by the GMSF of BBG shares from the MFT, employees and advisers of the MFT had been informed that there were tax risks involved in such a transaction: CB260 (21 August 2014). The structure being recommended was one which, objectively assessed, maximised the benefit to Mr Merchant personally in the context of a proposed commercial sale and was not, objectively assessed, one which was being recommended to benefit the GMSF. Whatever Mr Merchant may have subjectively thought, the MFT entered into the BBG Share Sale having been provided with information which objectively indicated that the proposed transaction may present problems from both a tax and superannuation regulatory perspective.

360. The applicants submitted that the advice that was sought and given by EY, including about tax implications, did not support the dominant purpose required by s 177D: AOCS[12]. This was said to be supported by:

(1) Mr McGrath's email of 21 July 2014 and Mr Merchant's response: CB236;
(2) Mr Burgess's email of 21 August 2014 to Ms Lyons, copying Mr McGrath (read with the underlying calculations at CB263), and Mr McGrath's response: CB260; and
(3) Mr Burgess' email of 3 September 2014 and the accompanying calculation sheets: CB269 and CB270.

361. It was submitted that (AOCS[12]):

(a) these identified the easiest and best tax outcome for Mr Merchant, but also considered the different variations of a possible sale of the assets; and
(b) it was clear that tax considerations and ease of implementation were secondary to achieving the sale.

362. Each of these documents, understood in the context in which they were written, make it plain that the real reason for the BBG Share Sale was to crystallise a capital loss in the MFT which was regarded as beneficial whether

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Plantic was sold by way of asset sale or by way of share sale.

363. The applicants submitted that the tax regime is part of the context in which business activity takes place and the fact that it influences the form a transaction may take does not mean the dominant purpose of the arrangement is to secure the tax benefit, referring to Hart at [15]; Spotless Services at 416; and Minerva at [60(6)], [60(8)] and [65]: AOCS[13]. These propositions are to be accepted. As has been said earlier, it is equally clear that the general anti-avoidance provisions in Part IVA can apply to a scheme which is consistent with an overarching commercial objective.

364. Having regard to the manner in which the scheme was entered into, it would be concluded that Mr Merchant, the MFT, and the GMSF entered into and carried out the BBG Share Sale in order to crystallise a capital loss in the MFT from the sale of those shares. The factor in s 177D(2)(a) weighs in favour of a conclusion that the BBG Share Sale was carried out to obtain the admitted tax benefit.

The form and substance of the scheme - s 177D(2)(b)

365. The factor in s 177D(2)(b) has been said to be concerned with an evaluation of the extent to which the form of the scheme matches the outcome achieved by it: Guardian AIT at [197];
Commissioner of Taxation v Macquarie Bank Limited [2013] FCAFC 13; 210 FCR 164 at [263].

366. The applicants' submissions : The applicants submitted that "[t]he form of the BBG sale was an off-market transfer by MFT of 10,344,828 BBG shares to the [GMSF] in exchange for a payment by the [GMSF] to MFT of $5,844,827.82, being the market price of the shares" such that the substance matched the form: AOCS[20], [21].

367. The applicants noted that the GMSF received the economic interest associated with ownership of the BBG Shares and the MFT received the use of $5.8 million cash. The applicants noted that the capital loss that the MFT suffered was real, not being a consequence of an artificial price set by the parties, but rather a price set by the public trading in BBG shares on the ASX: AOCS[21].

368. Consideration : The form of the BBG Share Sale transaction matched the substance of that transaction.

369. The form of the scheme was an off-market transfer of shares at market value, the substance of which included that Mr Merchant would retain the economic ownership of the BBG Shares, but crystallise a capital loss which could be used to offset significant capital gains which were then anticipated to arise in the MFT.

370. A consideration of this factor weighs in favour of a conclusion that the dominant purpose of the transfer of shares between the MFT and the GMSF was to obtain a tax benefit for the MFT.

Time scheme entered into and the length of the period scheme was carried out: s 177D(2)(c)

371. The applicants' submissions : The applicants submitted that the scheme was entered into in temporal proximity to five things (AOCS[23]):

(1) the MFT running low on cash relative to the level of cash it had historically held, its increasing level of debt, and its potential future requirements;
(2) the opening of the trading window in BBG shares for BBG directors;
(3) the possibility of a sale of Plantic to Sealed Air with a consequential abatement on some of the demands on the MFT's cash - all of which was uncertain and its timing ill-defined;
(4) an increase on the limit of the MFT's margin loan from $25 million to $35 million (in connection with the refinance of the loan from NAB to CBA); and
(5) the EY advice of 3 September 2014 which, while favouring a possibility of a share sale in Plantic should it occur, also considered an asset sale.

372. The applicants submitted that the fact that the sale of the BBG Shares by the MFT to the GMSF had been raised as a means of raising cash for the MFT before the possibility of a sale of the MFT's shares in Plantic to Sealed Air had arisen points against crystallisation of a capital loss being the dominant purpose of the BBG Share Sale: AOS[226]. In this regard, the applicants relied on: Mr McGrath's email

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of 23 December 2011: CB69; Ms Lyons' email of 13 January 2012: CB74; and Mr Merchant's email of 26 November 2013: CB165. The applicants submitted that the fact that a sale of BBG shares by the MFT to the GMSF had not occurred in the past simply reflected the fact that other means of raising cash, with different financial consequences, were available in the past which resulted in them being chosen over the option of selling the BBG shares to the GMSF: AOS[227].

373. The applicants submitted that the uncertainty at the time of the BBG Share Sale about whether a Plantic sale would occur (and occur in the form of a share sale) pointed against a conclusion that the dominant purpose of obtaining a tax benefit: AOS[215].

374. Consideration : Significant resources had been expended on pursuing a sale to Sealed Air and pursuing advice on how to structure such a sale. Mr Merchant had been advised that, if there was a sale, his interests lay in securing a sale of the MFT's shares in Plantic, rather than a sale of the assets. Both forms of sale were available and what was ultimately advisable would depend on price - see, for example: Mr Burgess' email of 3 September 2014 at CB269. It was objectively clear from the advice which the MFT had received from EY (and Mr McGrath) that, irrespective of whether the sale of Plantic was a sale of the assets or the sale of shares, the GMSF should acquire as many high cost BBG shares as it reasonably could from the MFT whilst the BBG share trading window was open.

375. As at 2 to 4 September 2014, Sealed Air was still in its period of exclusivity (which ended on 15 September 2014), during which the MFT could negotiate exclusively with Sealed Air: CB244 at page 4, cl 8. The sale to Sealed Air was progressing reasonably close to the transaction timetable: CB246. The timetable anticipated the signing of a share purchase agreement by 5 September 2014 and completion of that agreement by 15 September 2014. Draft documents had been completed by the solicitors and ongoing steps were being discussed: CB279. The draft documents contemplated a share sale: CB259. Mr McGrath considered that the issues outstanding between the MFT and Sealed Air as at late August early September 2014 were able to be addressed and that the negotiations were still very much on foot: T150.7-154.7. A sale to Sealed Air was a real possibility, even objectively reasonably likely, as at 4 September 2014. The fact that it did not occur should not distract attention from what was objectively likely as at 4 September 2014. In any event, it was likely that Plantic would be sold even if a sale to Sealed Air did not procced. Mr Merchant wanted to sell.

376. The reason the BBG Share Sale went ahead when it did was that the window to sell the BBG Shares opened on 2 September 2014. The trading window was scheduled to close on 31 December 2014, but Mr Merchant considered there was a risk it could close sooner: Merchant at [244(e)]. Mr McGrath had advised Mr Merchant to sell the BBG Shares as soon as possible after the trading window opened on 2 September 2014 - see: CB260. Mr Merchant and Ms Paull signed the transfer form on 4 September 2014, although the transfer was stated to have effect on 2 September 2014.

377. It is true, as the applicants submitted, that another trading window would have been available before the end of the 2015 financial year, namely from towards the end of February 2015 to 30 June 2015 - see: CB482. However, it was objectively likely that Plantic would be sold and there was no real point in not proceeding with the BBG Share Sale at a time when it was known to be possible.

378. On 3 September 2014, EY sent "Project Maize - Summary of Sale Options and Tax Outcomes": CB270. This examined the outcomes for both an asset sale and a share sale, and indicated that a share sale was the best option. This was not the first document examining these issues. It assumed, as one of the steps in the sale of the MFT's shares in Plantic, that the MFT would sell the shares in BBG to the GMSF. As at 2 to 4 September 2014, the MFT anticipated that the Plantic Loans would be forgiven in a sale of Plantic shares (resulting in higher capital proceeds being received by the MFT) and it considered it unlikely that there would be sufficient capital losses in the MFT to set off against the capital gain in the 2015 financial year. Certain additional capital losses were anticipated in relation to an investment described as

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"EDSA", but the timing of these losses was uncertain and it was anticipated that those losses would be used "to eliminate gain on deferred consideration", namely the consideration received by way of earn outs: CB270 at page 4.

379. The timing of the BBG Share Sale weighs in favour of it being concluded that the BBG Share Sale was undertaken to crystallise a capital loss in the MFT, given the circumstances that:

(a) as at 4 September 2014, a sale of Plantic to Sealed Air within the next few weeks was a reasonable prospect;
(b) if the sale to Sealed Air fell through, it was reasonably likely that Plantic would be sold by 30 June 2015;
(c) the trading window to effect the BBG Share Sale opened on 2 September 2014 and was to be open until 31 December 2014, with a risk of closing early;
(d) Mr McGrath had advised Mr Merchant on 21 July 2014 that EY considered that, if Mr Merchant transferred high cost BBG shares from the MFT to the GMSF, that would give rise to "a good 'loss' on paper so [EY] reckon there will be zero tax payable on a lump sum payment": CB236;
(e) EY had prepared its consideration of the best sale structure on the assumption that the GMSF acquired "as many BBG shares from MFT in the current year as is reasonably possible": CB260;
(f) having reviewed EY's advice, Mr McGrath recommended on 21 August 2014 that Mr Merchant transfer the BBG Shares from the MFT to the GMSF, whether the sale of Plantic was an asset sale or a share sale, and that he do so soon after the trading window opened;
(g) EY gave the advice that it did, including that given on 3 September 2014; and
(h) as explained elsewhere, the funding needs of the MFT did not support any particular need for the BBG Share Sale to occur on 4 September 2014, even having regard to the trading window and concern that it might close early.

380. A consideration of this matter weighs in favour of it being concluded that the dominant purpose of the BBG Share Sale was to obtain a tax benefit.

The result that, but for Part IVA, would be achieved by the scheme: s 177D(2)(d)

381. The applicants do not dispute that a tax benefit was obtained from the scheme. As a result of the scheme, neither the discretionary objects nor the trustee of the MFT were liable to be assessed on the capital gain from the sale of the Plantic shares. Absent the scheme, the MFT would not have crystallised the $56.5 million capital loss and would have realised a net capital gain. Although, the losses and gains of the MFT would be passed on, the scheme created a tax benefit which would be realised but for the application of Part IVA.

382. Obviously, the fact that a party obtains a tax benefit from a scheme does not of itself answer the inquiry posited by s 177D: Guardian AIT at [207]. Equally obviously, it does not follow from the fact that a tax benefit is obtained that the obtaining of the tax benefit is therefore the dominant purpose of the taxpayer in entering into the transaction: Hart at [15], [53];
Commissioner of Taxation v Ashwick (Qld) No 127 Pty Ltd [2011] FCA 49; 192 FCR 325 at [189].

383. Where there is a tax benefit which would not have been obtained were it not for the scheme (which the applicants accept is the situation here), a consideration of the matter in s 177D(2)(d) almost invariably weighs in favour of a conclusion that the dominant purpose was to obtain a tax benefit. The matter in s 177D(2)(d) certainly does not weigh against it being concluded that the dominant purpose of the scheme in the present case was the obtaining of a tax benefit.

Change in financial position of the relevant taxpayer: s 177D(2)(e)

384. The matter in s 177D(2)(e) requires consideration of the overall financial impact of the scheme and whether the resulting change in financial position indicates that the dominant purpose of a person entering into or carrying out the scheme was to obtain a tax benefit. In doing so, it is generally necessary to take into account the other possibilities that may have been open to the parties at the relevant time: Macquarie Bank at [211]; Guardian AIT at [211].

385.

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For the MFT, the BBG Share Sale converted shares it held in BBG into cash. However, it also substantially improved the MFT's financial position:

• the BBG Share Sale crystallised $56.5 million in capital losses; and
• those losses could be offset against the expected capital gain from the sale of Plantic, whether that sale was a sale of Plantic shares or Plantic's assets.

386. The scheme thus converted unrealised losses into realised losses, which could then be used to allow the trust corpus to increase without any immediate tax consequences for the MFT or its discretionary objects.

387. If the scheme had not been entered into or carried out, the MFT would have had a substantial capital gain for the year, which would either have been taxable in its hands, or in the hands of the presently entitled beneficiary, GSM.

388. The sale of the BBG Shares resulted in $5.8 million in cash being available to the MFT. Objectively, the MFT was not in a financial position in which it particularly needed an additional $5.8 million in cash at the time.

389. If the BBG Share Sale Scheme had not been carried out, then the MFT could have realised a capital loss by selling sufficient high cost BBG shares on-market to third parties. Mr Merchant did not want to do this. The fact that this possibility existed does not weigh in favour of the dominant purpose not being one of obtaining the (admitted) tax benefit which was obtained. Rather, it tends to emphasise that the point of the sale was to realise a capital loss whilst maintaining the Merchant Group's shareholding in BBG by transferring the shares at market value between members of the Merchant Group.

390. A consideration of the matter in s 177D(2)(e) weighs in favour of a conclusion that the MFT and the GMSF entered into or carrying out the scheme for the dominant purpose of obtaining a tax benefit.

Change in the financial position of others from the scheme: s 177D(2)(f)

391. The Commissioner submitted that there were three parties to be considered in assessing the matter in s 177D(2)(f), stating:

(1) First at ROS[246]: had the BBG Share Sale Scheme not been entered into, GSM would have paid substantial tax on the capital gain that would have been retained by the MFT, assuming that it continued to be the sole beneficiary entitled to income for the year. GSM was consequently sheltered from having to pay tax on a capital gain of approximately $43.5 million, which it would have had to pay out of its assets in the absence of a distribution of the trust corpus to it.
(2) Secondly at ROS[247]: the position of the GMSF was altered, because its cash assets were converted to a non-current asset of the same value. This had, the Commissioner submitted, the significant effect that Mr Merchant's pension needed to be commuted and the fund returned to the accumulation phase, with his financial position maintained by the wider Merchant Group. According to the Commissioner, those facts suggest that the Scheme was directed to the tax purpose identified, given that:
- (a) Mr Merchant was the ultimate owner or beneficiary of all the trusts and parties involved in the transaction; and
- (b) the value of the tax benefit in the hands of the MFT was substantially greater than the immediate benefit of the GMSF continuing to pay a pension to Mr Merchant.
(3) Thirdly at ROS[249]: when considering Mr Merchant's position specifically, his position was prejudiced by the loss of the GMSF's ability to pay a pension to him-but substantially improved by the benefits that accrued to the MFT and GSM.

392. The Commissioner submitted that, as the whole scheme involved transactions between related parties, all controlled and ultimately owned by the same person, it was simple to look through and observe the significant benefits that accrued to Mr Merchant's interests as a whole. Those changes weigh in favour of the scheme being entered into for the sole or dominant purpose of obtaining the tax benefit: ROS[250].

393. The amount of $5,844,827.82 was drawn out of the GMSF's account

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on 4 September 2014 to purchase the BBG Shares. The GMSF retained a cash balance in the account of $1,868,241.18: CB494 at page 3. At the time, the GMSF was paying a pension to Mr Merchant. In the year ended 30 June 2013, this had been $470,500: CB149 at page 8. In the financial year ended 30 June 2015, the GMSF paid Mr Merchant a pension of $523,500.

394. On 30 April 2015, discussions occurred at a meeting of the Merchant Group which included consideration of whether Mr Merchant "should make a contribution to the fund in FY15 in order to fund his pension or, should he stop taking [his] pension for the time being (depending on cash needs of the fund)": CB675 at page 2. The decision was expressed the following way (CB675 at page 7):

- We considered commuting the pension from 1 July 2015 to preserve cash reserves in the Superannuation Fund and advised of the tax implications and agreed to cease from 1 July 2015 as there is minimal tax saving due to lower income in Fund
- Discussed making a non-concessional contribution of $180k before 30 June 2015 to provide additional cash flow to the Fund and agreed it would be made cash flow permitting

395. The minutes of the meeting of GSMS' directors held on 25 June 2015, at which Ms Paull and Mr Merchant are recorded as being present, state that Mr Merchant requested the GMSF to commute his existing account-based income stream with effect from 1 July 2015 and roll his account balance into accumulation mode: CB716 at pages 285-286. The minutes were signed by Ms Paull for herself and as Mr Merchant's attorney.

396. Mr Merchant made a non-concessional contribution of $180,000 to the GMSF in the year ended 30 June 2015: CB675 at page 7.

397. If the BBG Share Sale Scheme had not been entered into, GSM would have paid substantial tax on the capital gain that would have been retained by the MFT, assuming that it continued to be the sole beneficiary entitled to income for the year. Its position was, accordingly, substantially improved by the scheme.

398. The GMSF's position was altered, because its cash assets were converted to a shareholding in BBG of the same value, at least on the day of the transfer. The BBG Shares were a riskier asset than cash. The BBG Shares were unlikely to earn dividend income. The BBG Shares would not be sold by the GMSF, at least in the short to medium term, because Mr Merchant would not countenance a reduction in the Merchant Group shareholding in BBG.

399. The BBG Share Sale Scheme resulted in the cessation of Mr Merchant's pension. The GMSF did not strictly have to cease the pension given it still had about $1.9 million in cash reserves, but it could not have continued to pay the pension it was then paying for very long. The practical consequence of the BBG Share Sale was the need to commute Mr Merchant's pension and return the fund to the accumulation phase, with Mr Merchant's loss of pension being funded elsewhere, presumably by the wider Merchant Group. Mr Merchant's position was improved by the benefits that accrued to the MFT through the BBG Share Sale, despite the loss of pension.

400. A consideration of the matter in s 177D(2)(f) weighs in favour of a conclusion that the MFT and the GMSF entered into or carrying out the scheme for the dominant purpose of obtaining a tax benefit.

Any other consequences of the scheme - s 177D(2)(g)

401. The scheme resulted in the transfer of the BBG Shares from one entity in the Merchant Group (the MFT) to another (the GMSF). This resulted in the GMSF having a heavy investment in BBG shares, contrary to its documented investment strategy. The BBG Shares replaced about 74.4% of the cash assets of the GMSF. The BBG Shares were not paying dividends and there was nothing which would objectively support a conclusion that dividends were likely in the future. The acquisition of the BBG Shares resulted in a decrease in the income to the GMSF which was likely to persist.

402. These considerations weigh in favour of it being concluded that the dominant purpose was one of obtaining a tax benefit.

Connection between the relevant taxpayer and any connected person: s 177D(2)(h)

403. All of the relevant entities entering into and carrying out the scheme were related. Mr

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Merchant was the sole member of the GMSF, a special beneficiary of the MFT, and the sole shareholder of each of the corporate trustees of the MFT and the GMSF. Mr Merchant controlled the relevant entities. The economic owner of the BBG Shares remained the same.

404. The matter in s 177D(2)(h) tends to support a conclusion that the dominant purpose was one of obtaining a tax benefit.

Conclusion on purpose

405. The admitted tax benefit was the capital loss on the sale of the BBG Shares by the MFT to the GMSF. Having regard to the eight matters in s 177D(2), it would be concluded for the purposes of s 177D(1), that the dominant purpose of Mr Merchant, the MFT and the GMSF was to obtain a tax benefit. No matter in s 177D(2) tends against such a conclusion. Each matter in s 177D(2) weighs in favour of such a conclusion, albeit some are of less weight than others.

406. Assessing the matter globally, having regard to those of the eight matters in s 177D(2) which are most pertinent, it would (objectively) be concluded that the dominant purpose of Mr Merchant, the MFT, and the GMSF was to obtain a tax benefit:

• The BBG Share Sale was conceived or established, and then carried out, in the context and for the purposes of the anticipated sale of Plantic by the MFT.
• At the time of the BBG Share Sale, it was contemplated that a future sale of Plantic would involve the forgiveness of the Plantic Loans (or most of them) such that a third party purchaser would pay more for the shares with a consequent increase in capital gain in the MFT.
• The MFT did not have sufficient capital losses to offset a capital gain from a sale of Plantic shares unless the BBG Share Sale occurred.
• The main result of the transfer was to crystallise a capital loss in the MFT.
• The BBG Share Sale occurred at a point in time when Mr Merchant had decided to sell Plantic and a sale of Plantic was reasonably likely. Although a sale was not definite, the window to sell the BBG shares opened on 2 September 2014.
• Objectively assessed, the BBG Share Sale was not required for the purposes of funding the MFT.
• Although the MFT disposed of an asset - the BBG Shares - those shares were transferred to the GMSF such that the shares remained in the Merchant Group and the ultimate economic owner did not change.
• The acquisition of the BBG Shares by the GMSF was inconsistent with the GMSF's documented investment strategy.
• Were it not for the operation of Part IVA, the BBG Share Sale would have resulted in significant improvement in the MFT's financial position.

407. It was not a substantial purpose of the BBG Share Sale to provide funding to the MFT. Even if funding of the MFT (or Plantic) was a purpose behind carrying out the BBG Share Sale, it was at best a subsidiary purpose. That is evident from the matters referred to earlier, including: the genesis of the BBG Share Sale and its importance to the planned structure of the sale of Plantic; the anticipated level of funding that was required for Plantic and the MFT's other expenses; and the funding already available to the MFT.

408. The dominant purpose of each of Mr Merchant, the MFT, and the GMSF in entering into the BBG Share Sale Scheme was one of obtaining a tax benefit for the MFT, being the capital loss obtained by the MFT on the sale of the BBG Shares to the GMSF. It follows that the applicants have not discharged the onus of establishing that the general anti-avoidance provisions in Part IVA do not apply.

The value of the Future Payment Rights

Introduction

409. The MFT's capital gain on the Plantic sale was calculated at $84,885,502, on the basis of:

(a) a cost base of $26,982,963;
(b) capital proceeds totalling $111,868,465, comprised of:
- (i) the upfront payment of $59,803,400;
- (ii) the working capital adjustment of $526,860; and
  
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- (iii) the market value of the Future Payment Rights as at 31 March 2015, being $51,538,205.

410. The Future Payment Rights comprise the Milestone Amounts, the Extrusion Coating Milestone and the Earn-Out Amounts. The nature of these rights is described more fully in Section 6 below, addressing the TOFA Proceeding.

411. The value of the Future Payment Rights was supported by a contemporaneous and independent valuation of Plantic from SFG Consulting dated 1 April 2015: CB492; CB666.

412. The Commissioner assessed the MFT on the basis that the market value of the Future Payment Rights was $51,538,205: CB784 at [87]; CB423; CB673 at page 5.

413. The applicants made no submission in their objection as to the contended value of the Future Payment Rights: CB790 at 73. However, the applicants now challenge the value of the Future Payment Rights as assessed and there was no dispute that it was open to do so.

414. The applicants adduced evidence from Mr Tony Samuel: CB516. His opinion was that the market value of Future Payment Rights was $40.192 million as at 31 March 2015, comprising $22.613 million for the Milestone Amounts and $17.579 million for the Earn-Out Amounts: Samuel at [32].

415. The applicants submit Mr Samuel's opinion should be accepted, with the result that the assessment of the capital proceeds received by the MFT (in turn distributed to GSM) in the 2015 income year is excessive by $11,346,205.

Consideration

416. The applicants relied on an affidavit of Plantic's CEO, Mr Morris. Before the sale of the Plantic shares, Mr Morris prepared a spreadsheet which had three tabs entitled "Summary", "Earn Out" and "ESPO Option detail". He prepared this for the "internal purposes … of calculating the estimated value of Plantic shares for the finalisation of the employee share option plan": Morris at [53].

417. Both SFG Consulting and Mr Samuel relied on Mr Morris' contemporaneous estimates of the probability of future cash flows being received. Mr Morris' evidence was not objected to and he was not cross-examined. I accept his evidence and I accept his assessment of the probabilities.

418. The SFG Consulting valuation dated 1 April 2015 ( SFG report ) is entitled "Valuation of Potential Proceeds from the sale of Plantic Technologies Limited". SFG had been retained to provide "an independent analysis of the valuation of the potential proceeds from the sale of Plantic to Kuraray". The author is not identified, although I am prepared to assume from the terms of the valuation, and the circumstances in which it was sought, that the author has relevant expertise and qualifications that would be required to provide expert valuation evidence. The SFG report is not signed and may only have been in draft: CB673 at page 12 (footnote 19). The SFG report is expressed to be one about "fair value", although I assume, from the circumstances in which the report was obtained, that the term "fair value" was being used as a substitute for "market value".

419. The SFG report adopted a discounted cash flow analysis. It concluded that the "proposed transaction places a value on the company in the order of A$106.3 million to A$120.3 based upon an exchange rate of USD/AUD rate of 0.76, which was the prevailing exchange rate at the time of our preliminary valuation on 18 March 2015": CB666 at page 5.

420. In selecting an appropriate discount rate, the SFG report took into account the uncertainty of the future cash flows, stating that there was "considerable uncertainty" about whether the milestone payments would be achieved and that the earn out payments were "subject to far greater uncertainty than any of the other payments": at [21], [32]. SFG built the risk that the future payments would not be received into its discount rate.

421. SFG assessed the net present value of the cash flows, after discounting for risk, as follows (at [39]):

Payment Type	Lower Bound	Upper Bound
Up-front	61,842,105	61,842,105 ATC 28589
Milestone	26,712,872	28,921,650
Earn out	17,738,131	29,537,219
Total	106,293,110	120,300,975

422. The figure of $51,538,205 is close to the sum of the midpoints of the upper and lower bounds calculated for the Milestone Amounts and Earn-Out Amounts. The midpoint of the Milestone bounds is $27,817,261. The midpoint of the Earn-Out bounds is $23,637,675. The precise midpoint would be $51,454,936.

423. Like SFG, Mr Samuel used a discounted cash flow valuation approach: Samuel at [108] to [110]. He concluded that the market value of the Milestone Amounts was $22.613 million and the market value of the Earn-Out Amounts was $17.579 million: Samuel at [32].

424. The Commissioner did not adduce expert evidence on the topic. He relied on the SFG report. The Commissioner also relied on the fact that SFG's valuation was used in the context of Plantic's employee share option plan. However, little is known about that transaction, including whether it was negotiated as to price or otherwise.

425. Mr Samuel did not agree with SFG's approach of seeking to incorporate the probability of the future cash flows being received into the discount rate (used to discount for business risk). Mr Samuel described SFG's approach as "a poor proxy for doing it the right way": T181.14-22.

426. Mr Samuel built the probability of the amounts being received into the cash flow, before applying the discount rate: T179.34-37. He used a discount rate which captured normal business risks: T178.34.

427. In re-examination, Mr Samuel gave evidence that he considered that SFG's assessment of the discount rate was flawed.

428. It was not put to Mr Samuel's that his opinion contained any methodological flaw or that his opinion was not open or wrong. Rather, the case which was run was that SFG's assessment of fair value was an available opinion as was Mr Samuel's and that there was no reason to accept Mr Samuel's valuation as better than SFG's: ROS[406].

429. I consider Mr Samuel's methodology is preferable to that employed by SFG and I agree with Mr Samuel's reasoning. The reasoning as expressed in the SFG report is insufficient for me to be satisfied that the discount rates adopted by SFG are soundly based.

430. There was an objection to part of the evidence given by Mr Samuel in reply and to the tender of Exhibit 5, which was an article referred to by SFG in its report. The point of part of the cross-examination of Mr Samuel was to seek to have Mr Samuel agree that the SFG report expressed opinions about market value which were open and that the methodology was different to Mr Samuel's, but not flawed.

431. The re-examination arose out of cross-examination and the evidence given in re-examination is admitted, as is Exhibit 5. I would have reached the same conclusion about market value even if I had rejected Mr Samuel's evidence in reply and Exhibit 5.

Conclusion in relation to the s 177D Proceeding

432. Section 177D of the ITAA 1936 applies.

433. However, for the reasons given, GSM has discharged its onus of establishing that the capital proceeds were incorrectly calculated. It follows that GSM has discharged its onus of establishing that the GSM Amended Assessment is excessive to the extent identified.

5 THE SECTION 177E PROCEEDING

Introduction

434. As noted earlier, GSM and Tironui forgave the Plantic Loans in the sums of $50.192 million and $4.215 million, respectively, on 2 April 2015.

435. In making the s 177E Determination, the Commissioner identified the GSM Debt Forgiveness and the Tironui Debt Forgiveness as schemes "having substantially the effect of a scheme by way of or in the nature of dividend stripping" for the purposes of s 177E(1)(a)(ii) of the ITAA 1936. The GSM Debt Forgiveness Scheme and the Tironui Debt Forgiveness Scheme are referred to collectively as the Debt Forgiveness Schemes .

436. The Commissioner:

(a) formed the opinion required by s 177E(1)(b) that the disposal of the debts by

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GSM and Tironui was a disposal of property (a chose in action within the definition of property in s 177E(3)), and represented a distribution of profits to the MFT (as "another person"); and
(b) identified that, if - immediately before the Debt Forgiveness Schemes - GSM and Tironui had declared and paid dividends to Mr Merchant in the amounts forgiven, those amounts would have been included in Mr Merchant's assessable income for that year, in satisfaction of s 177E(1)(c).

437. The Commissioner made a consequential determination under s 177F(1)(a) including amounts equivalent to the sums forgiven by GSM and Tironui, being the notional amounts calculated in accordance with s 177E(1)(c), in Mr Merchant's assessable income in the 2015 income year by virtue of s 44 of ITAA 1936. The Merchant Amended Assessment was then issued for that year.

Applicable law

The legislation

438. Section 177E includes:

177E Stripping of company profits

(1) Where:

(a) as a result of a scheme that is, in relation to a company:

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

(ii) a scheme having substantially the effect of a scheme by way of or in the nature of a dividend stripping;
any property of the company is disposed of;

(b) in the opinion of the Commissioner, the disposal of that property represents, in whole or in part, a distribution (whether to a shareholder or another person) of profits of the company (whether of the accounting period in which the disposal occurred or of any earlier or later accounting period);

(c) if, immediately before the scheme was entered into, the company had paid a dividend out of profits of an amount equal to the amount determined by the Commissioner to be the amount of profits the distribution of which is, in his or her opinion, represented by the disposal of the property referred to in paragraph (a), an amount (in this subsection referred to as the notional amount ) would have been included, or might reasonably be expected to have been included, by reason of the payment of that dividend, in the assessable income of a taxpayer of a year of income; and

(d) the scheme has been or is entered into after 27 May 1981, whether in Australia or outside Australia;

the following provisions have effect:

(e) the scheme shall be taken to be a scheme to which this Part applies;

(f) for the purposes of section 177F, the taxpayer shall be taken to have obtained a tax benefit in connection with the scheme that is referable to the notional amount not being included in the assessable income of the taxpayer of the year of income; and

(g) the amount of that tax benefit shall be taken to be the notional amount.

(2) Without limiting the generality of subsection (1), a reference in that subsection to the disposal of property of a company shall be read as including a reference to:

…

(d) any transaction having the effect, directly or indirectly, of diminishing the value of any property of the company.

…

(3) In this section, property includes a chose in action and also includes any estate, interest, right or power, whether at law or in equity, in or over property.

439. A "scheme" is defined in section 177A(1) as meaning:

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

440. There are two limbs to s 177E(1). The 'first limb' concerns disposals of property resulting from "a scheme by way of or

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in the nature of dividend stripping". The 'second limb' concerns disposals of property resulting from "a scheme having substantially the effect of a scheme by way of or in the nature of dividend stripping".

441. The Commissioner accepts that the present case does not fall within the first limb. However, it is necessary to understand the first limb in order to understand the second limb.

The first limb of s 177E(1)

442. The term "dividend stripping" is not defined. It has been considered in a number of cases.

443. In
CPH Property Pty Ltd v Commissioner of Taxation (1998) 88 FCR 21 at 47 ( CPH FC ), Hill J 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 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.

444. The Full Court in
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 dividend stripping cases referred to by Gibbs J in
Federal Commissioner of Taxation v Patcorp Investments Limited (1976) 140 CLR 247; 6 ATR 420 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;
• 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; 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).

445. 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.

446. As to the last characteristic - the predominant purpose of avoiding tax on a distribution of dividends by the target company - the Full Court in CPH FFC at [174] stated:

In our view, the first limb of s 177E(1) embraces only a scheme which can be said objectively to have the dominant (although not necessarily the exclusive) purpose of avoiding tax. The requirement of a tax avoidance purpose flows from the use by Parliament of the undefined expression "a scheme by way of or in the nature of dividend stripping". What is important is the nature of the scheme, not the subjective motives or intentions of any of the participants or the beneficiaries. The purpose of the scheme is to be assessed from the perspective of the reasonable observer,

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having regard to the characteristics of the scheme and the objective circumstances in which the scheme was designed and operated.

447. The High Court, in CPH HC at [132] and [134], 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].

448. The identification of these "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 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.

The second limb of s 177E(1)

449. As to the second limb of s 177E(1), the High Court in CPH HC observed that the term "dividend stripping" in s 177E(1)(a)(ii) must have the same meaning as in s 177E(1)(a)(i), and that the reference to "effect" in the second limb does "not require the element of [a tax avoidance] purpose to be discarded": at [138]. It follows that a dominant tax avoidance purpose must exist for the 'second limb' to be engaged.

450. It is clear that the second limb was intended to extend the operation of s 177E(1) beyond the schemes identified in the first limb. A scheme which does not fall within the first limb will be captured if the scheme has "substantially the effect" of a scheme by way of or in the nature of a dividend stripping scheme.

451. In CPH HC at [137], the High Court doubted that the second limb could be construed so as to render the first limb otiose; the High Court considered that the construction given to the second limb by Hill J at trial in CPH FC meant that it was never necessary to look past the effect of the scheme and, implicitly, that this construction was therefore incorrect.

452. In CPH HC, the High Court observed at [139] and [140]:

[139] As the Full Court pointed out [at [182]], 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.

453. If this were taken literally, it would be a narrow construction of a provision expressed in broad terms. A literal interpretation of this passage was rejected in
Lawrence v Commissioner of Taxation [2008] FCA 1497; 70 ATR 376 ( Lawrence FC ) and on appeal in Lawrence FFC. The taxpayer in that case relied on [139] and [140] of CPH HC in 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

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other means - see: Lawrence FFC at [40] and [50]. This argument was rejected: Lawrence FC at [80] to [82]; Lawrence FFC at [50] to [53].

454. The High Court's observation in CPH HC at [137] was referred to by the Full Court in
B&F Investments Pty Ltd v Federal Commissioner of Taxation [2023] FCAFC 89; 298 FCR 449 at [116(2)], concerning the second limb of s 207-155 of the ITAA 1997, which is relevantly in the same terms to s 177E(1)(a). The Full Court considered that the second limb raised difficult issues, but did not resolve any of them, on the basis that it was not necessary for the purpose of disposing of that case. The Full Court did, however, state that it considered that the view taken by the primary judge would mean that it was never necessary to look past the effect of the scheme, and at least implicitly indicated that such a construction of the second limb would be wrong, referring to CPH HC at [137] - see:
BBlood Enterprises Pty Ltd v Commissioner of Taxation [2022] FCA 1112.

455. It is possible that the Full Court in B&F Investments approached s 177E(1)(a) on the basis that what the High Court stated in CPH HC at [139] and [140] was to be taken literally. However, that is not clear and the Full Court did not address the fact that a contrary conclusion had been reached in Lawrence FFC.

456. It has long been recognised that dividend stripping schemes evolve and change in that they "have adopted one ingenious and complicated tactic after another":
Investment and Merchant Finance Corporation Limited v Federal Commissioner of Taxation [1970] HCA 1; 120 CLR 177 at 179.

457. One might think, in light of the known shifting tactics, that s 177E(1)(a) was intended to capture: (i) schemes of which it could be said that they were in the nature of dividend stripping; and (ii) schemes of which it could be said that they had substantially the effect of such schemes, whether or not they were such schemes. It may be unusual for a statute to operate such that the extended operation of a provision overlaps with or subsumes the narrow operation of a provision. Nevertheless, it is a convenient legislative device to convey what is intended to be captured by the provision, and to make sure that the provision hits the intended targets in circumstances where the intended targets are schemes in the nature of dividend stripping (or with that effect) which are known to evolve and adapt by taking different forms. That is particularly so where, as here, the narrow operation of the provision (s 177E(1)(a)(i)) is an ingredient in determining the application of the extended operation of the provision (s 177E(1)(a)(ii)).

458. The end object of the process of statutory construction is to give the words of the statute the meaning which the legislature is taken to have intended them to have:
Lacey v Attorney-General (Qld) [2011] HCA 10; 242 CLR 573 at [43];
Certain Lloyd's Underwriters v Cross [2012] HCA 56; 248 CLR 378 at [25] to [26]. The preferred construction is reached through common law and statutory rules or principles 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]. A construction of one provision which renders another provision otiose furnishes one reason to doubt the construction. It is difficult to see that this principle has any determinative application to s 177E(1)(a) in light of its structure and text and the mischief to which it was directed.

459. In any event, I proceed on the basis that it is not sufficient in applying s 177E(1)(a)(ii) to look only at the effect of the scheme. In particular, it is necessary to compare the effect of the scheme in question with the effect of a scheme which is by way of or in the nature of dividend stripping. This requires an understanding of what is a scheme by way of or in the nature of dividend stripping. Whether a particular scheme falls within the second limb depends on the particular facts. It is relevant to examine which of the common characteristics the scheme under consideration shares with a paradigm example of a scheme by way of or in the nature of dividend stripping. An example of a deviation which would fall within the second limb, and which was at least implicitly considered not to be in the first limb, was provided in CPH FFC at [182] and repeated by the High Court in CPH HC at [139] and [140].

460.

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I proceed on the basis that what was stated by the High Court in CPH HC at [139] and [140] is not to be taken literally as was held by the Full Court in Lawrence FFC. Whilst at least some deviation from the paradigm is permissible to fall within the second limb, the scheme must always involve a dominant tax avoidance purpose. And it must be recognised that the first limb - by speaking of a scheme "by way of or in the nature of" - does not itself require strict adherence to a paradigm example of a dividend stripping scheme. In determining whether a scheme falls within the second limb, it is always necessary to examine the substantial effect of the scheme, this being the central inquiry under the second limb, and it is always necessary to compare that effect with the effect of a scheme in the nature of dividend stripping in order to reach a conclusion about whether the effect of the scheme being considered is substantially the same as the effect of a scheme by way of or in the nature of dividend stripping.

Dominant purpose

461. As has been mentioned, a dominant tax avoidance purpose is essential for a scheme to fall within either the first or second limb. The assessment of purpose is not undertaken under s 177D.

462. The applicants contended that s 177E of the ITAA 1936 requires "all the circumstances which are said to have the effect of dividend stripping - and not merely some of them - [to be] the result of steps carried out for the dominant purpose of avoiding tax": AOS [259(b)].

463. This contention was advanced by emphasising a difference between s 177D and s 177E, namely that the former expressly refers to "the scheme or any part of the scheme" (see also Hart at [47]), whereas the latter does not.

464. The forensic point behind this contention is to facilitate the submission that a particular step was not for a dominant tax avoidance purpose, with the result that the scheme as a whole necessarily could not be for a dominant tax avoidance purpose.

465. The applicants also submitted that "dividend stripping" involves a "combination of consequences - a company disposing of property representing its profits, resulting in property equal to or very close to the amount of those profits being made available to a shareholder in tax free form by means that are '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…'". The applicants submitted (AOS[259(b)]:

So it is all of the circumstances giving rise to that combined effect that ought to be characterised as being done with the relevant purpose in order to fall within the second limb (i.e. to be characterised as having substantially the effect of a dividend stripping scheme).

466. Unlike s 177D (which is a general anti-avoidance provision), s 177E addresses particular schemes, namely dividend stripping schemes or schemes of that nature or with substantially that effect. Under the first and second limbs, the scheme must have been carried out for a dominant tax avoidance purpose. In evaluating the dominant purpose of the relevant scheme, it is relevant to examine:

(a) the purpose behind particular steps in a scheme (whether they are steps in a series of transactions or components of the one transaction); and
(b) the surrounding context in which the scheme was entered into and carried out, including in particular the commercial or other objectives sought to be achieved by entering into the transaction and the various steps of the transaction.

467. However, an assessment issued to give effect to a determination made by the Commissioner under s 177E is not necessarily shown to be excessive by establishing that a particular step in the scheme, viewed in isolation, did not have the dominant purpose of tax avoidance.

468. At this point it is convenient to address a preliminary issue which arose and which was connected with the issue just addressed.

The s 177E schemes

469. The applicants submitted that the Debt Forgiveness Scheme (being two schemes) as identified by the Commissioner was not capable of being a scheme within s 177E(1). The applicants submitted that:

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(a) while the Debt Forgiveness Scheme in isolation can be a "scheme" within the meaning of s 177A(1), the Debt Forgiveness Scheme, as identified by the Commissioner:
- (i) did not have the effect of making profits of GSM and Tironui available to Mr Merchant in a tax free form because the scheme consists solely of each of GSM and Tironui "irrevocably and unconditionally forgiving and releasing Plantic" from their respective intercompany loans - see: AFAAS [87] and [88]; AOS[247] and [248]. The scheme identified by the Commissioner did not, for example, include the receipt by the MFT of the capital proceeds for the Plantic shares: AOS[248];
- (ii) cannot have substantially the effect of a dividend stripping scheme because they did not have the effect of making property, in an amount the same as or close to the undistributed profits of the target company, available to shareholders of the target company in tax free form. In particular, an increase in the value of the Plantic shares resulting from the debt forgiveness is not itself in tax free form. In order to be capable of being characterised as being in effect in tax free form, there would need to be a sale of those shares, coupled with a capital loss that offset any capital gain made on the sale of those shares: AOS[249].
(b) a further difficulty with treating the Debt Forgiveness Scheme in isolation as the relevant "scheme" is that there would be, in terms of s 177E, no "disposal of property" by GSM and Tironui which can be said to have occurred "as a result of" the scheme, because the debt forgiveness is itself the disposal of property in question: AOS[250].

470. The Commissioner submitted that his identification of the scheme as consisting solely of the debt forgiveness was permissible. This was said to follow from the decision of Jessup J in Lawrence FC. The Commissioner's position was presumably adopted in an attempt to secure the forensic advantage of focussing solely on the debt forgiveness when examining the dominant purpose of the scheme.

471. The forensic advantage comes about because various elements of the transaction as a whole have a clear commercial purpose, whereas the debt forgiveness viewed in isolation provides the Commissioner a stronger case. This is a tactic commonly employed by the Commissioner with respect to the general anti-avoidance provision: the more narrowly one can define the scheme, the more likely one can force a conclusion that the dominant purpose was one of obtaining the tax benefit. The tactic does not readily translate to s 177E which does not turn on an identification of a "tax benefit", or a purpose of obtaining a "tax benefit". Section 177E (a specific anti-avoidance provision) is structurally very different from the general anti-avoidance provisions in Part IVA. Section 177E(1) turns on identification of a scheme which falls within s 177E(1)(a) as a dividend stripping scheme or one of that nature or of that effect. One cannot - as the Commissioner sought to do in this case - select one component of what is in fact the scheme and argue that the other components are not part of the scheme but must be considered as part of the context which must be taken into account in assessing the single component of the scheme. No doubt that would provide a forensic advantage when it comes to assessing dominant purpose, but it would be an unfair one and inconsistent with the terms of s 177E.

472. The applicants' criticisms of the Commissioner's position on this issue are good ones. The debt forgiveness, viewed in isolation, is not a dividend stripping scheme. Nor, viewed in isolation, is it either a scheme in the nature of or having substantially the effect of a dividend stripping scheme. The debt forgiveness as a scheme is a scheme to forgive debts and nothing more. Contrary to the Commissioner's submissions, the point was not addressed in Lawrence FC. It does not follow from the decision in Lawrence FC that, in the present context, the single step of forgiving debts could be substantially in the nature of a dividend stripping scheme.

473. Perhaps in recognition of the weakness of his position on this issue, the Commissioner foreshadowed in opening submissions that - should his argument based on Lawrence FC be rejected (which it is) - he would seek leave at

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the hearing to rely upon a broader alternative definition of the scheme as follows (ROS[354]):

(1) First, the MFT sold the BBG Shares to the GMSF on 4 September 2014, crystallising a capital loss of $56,561,940 in the 2015 income year.
(2) Secondly, on 31 March 2015, the MFT entered a contract for the sale of the Plantic shares to Kuraray containing as Condition 3 of cl 2.1 of the SSA a condition precedent that the MFT must procure the release and forgiveness of Plantic's loans to GSM and Tironui.
(3) Thirdly, on 2 April 2015, GSM and Tironui released and forgave the Plantic Loans for nil consideration from either Plantic or the MFT, with a corresponding increase in the market value of the Plantic shares.

474. No objection was ultimately taken by the applicants to the Commissioner relying upon such a scheme and leave was granted at the hearing for the Commissioner to rely upon the broader schemes. This scheme is "pleaded" at [34B] of the RAJAS lodged on 15 March 2024.

475. In her opening address for the Commissioner, Ms Brennan KC stated that the scheme "does not include the actual sale of the Plantic shares to Kuraray", but it does include the "inclusion of the term in the contract with Kuraray that as a condition to the sale, the debts are forgiven and then the forgiveness": T37.25-29. The point of this submission, I infer, was to facilitate the submission that Kuraray was not a party to the s 177E scheme, such that its purpose and what it did or did not do in terms of careful planning was irrelevant. The applicants characterise Ms Brennan's submission in this respect as a variation to the broader schemes, but addressed it in closing submissions: AOCS[49A], [49B], [53].

476. This variation to the broader scheme, by excluding the actual sale of the Plantic shares, makes it more difficult to characterise the scheme as one in the nature of dividend stripping.

477. The debt forgiveness transforms the undistributed profits of GSM and Tironui into equity, thereby increasing the amount a purchaser would pay for the Plantic shares. There is no relevant tax avoided at this point. Without the sale of the Plantic shares to Kuraray, the scheme merely shifts value. No tax is avoided. With a sale of the shares in Plantic, the scheme is one in which the profits of GSM and Tironui have been converted to equity and - subject to matters discussed later - tax is avoided.

The issues

478. The two main issues as framed by the applicants were:

(1) whether the Debt Forgiveness Scheme (being two schemes) was one which had the features required to fall within the scope of s 177E(1)(a)(ii): AOCS[50(a)]. The applicants addressed these issues under the heading "Presence or absence or relevant dividend stripping effect" in closing submissions at AOCS[51] to [60]; and
(2) whether the sole or dominant purpose of the scheme was not to avoid tax on a distribution of the company profits to Mr Merchant: AOCS[50(b)]. The applicants addressed these issues in closing submissions under the heading "Dominant purpose" at AOCS[61] to [73].

Applicants' first issue: Presence or absence or relevant dividend stripping effect

479. In relation to the first issue, the applicants submitted that there were three principal reasons why neither the narrow scheme nor the broad scheme had the features required to fall within the scope of s 177E(1)(a)(ii). These were addressed under the headings "Disposal of property as the result of the scheme"; "Tax free effect"; and "Careful planning with all parties acting in concert". It is convenient to address these submissions under the same headings.

Disposal of property as the result of the scheme

480. The first submission concerned only the narrow scheme: AOCS[52]. Section 177E(1) applies "where … as a result of a scheme … any property of the company is disposed of …". The narrow scheme merely identifies a disposal of property and does not identify a scheme from which such disposal is said to be a result. This has been addressed earlier. The narrow scheme, comprising only the debt forgiveness, cannot of itself be a scheme by way

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of or in the nature of dividend stripping or a scheme with that effect.

481. The broader scheme is, in my view, one which falls within s 177E(1)(a)(ii) as one which has the effect of a scheme by way of or in the nature of dividend stripping.

"Tax free" effect

482. Secondly, the applicants submitted that "[t]he essential characteristic of dividend stripping is that something becomes tax free (or perhaps substantially so …) and that is missing here" because "the sum which but for the debt forgiveness might have been paid out to Mr Merchant as dividends remains in fact taxed or as potentially liable to be distributed to Mr Merchant and taxed in the same way": AOCS[53].

483. This was said to arise in two ways (AOCS[54]):

(a) First, if the Commissioner succeeds on its s 177D case, the capital loss is to be treated as not sustained. The sum of the debts forgiven have become taxable capital gains for the MFT and included in the taxable income of GSM. The "entitlement to the money is a sum which might thereafter be distributed by GSM to Mr Merchant as dividends".
(b) Second and in any event, the increased sale price by reason of the amount the subject of the debt forgiveness is received by the MFT. It is not tax free in its hands. Nor is the money it holds free of tax when or if distributed to GSM and its shareholder.

Is the capital gain in the MFT not relevantly tax-free if the s 177D Proceeding fails?

484. In opening, the applicants submitted that, if the applicants are unsuccessful in the s 177D Proceeding (which they have been), then it cannot be said that the scheme has resulted in profits of GSM and Tironui being made available to Mr Merchant in a relevantly (or sufficiently) tax-free form: AOS[272].

485. In closing, the applicants submitted that, if the Commissioner succeeds in the s 177D Proceeding, there is no s 177E case because there is no sum made available free of tax: AOCS[72]. The applicants submitted that (AOCS[72]):

• the operation of the Commissioner's s 177F determination is that the MFT did not incur a capital loss;
• the MFT thus made a net capital gain, and it is common ground that the MFT's net income was distributed to GSM: RAJAS at [20], [28];
• by operation of the ordinary provisions of the tax legislation, GSM has been assessed as liable to pay tax on the distribution; and
• GSM will also, in those circumstances, have more property available to distribute as dividends to Mr Merchant (which would in turn attract top up tax).

486. It was submitted that "the s 177E scheme viewed in context of the s 177D determination is really the inverse of a dividend strip" and that:

It does not ensure that company profits will be free of tax, but rather that they will be taxed at least twice (the assessments to both Mr Merchant and to GSM), and possibly a third time (if GSM pays the capital gain distributed to it on to Mr Merchant as a dividend).

487. To the extent this submission was raised as one relevant to purpose (which is where the submission was located in the AOCS), the question of purpose is assessed objectively by reference to the actual events which occurred, not by reference to what the purpose would have been if part of the scheme had not been carried out. The s 177E(1)(a)(ii) scheme here was carried out on the basis that a capital loss had crystallised in the MFT as a result of the BBG Share Sale Scheme. The question of purpose is not addressed on the basis that the Commissioner had cancelled the tax benefit arising from the BBG Share Sale Scheme.

488. To the extent the submission is advanced more broadly, ss 177D and 177E operate according to their terms. In a situation such as the present, one determines whether s 177E applies in relation to the events (the "scheme") which in fact occurred. The scheme included the BBG Share Sale resulting in the crystallisation of the capital loss. One does not determine whether s 177E applies on the basis of events which did not occur.

489.

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The applicants did not raise any question about the operation of s 177F(3). The Court raised this issue with the parties on the first day of the hearing and, ultimately, this led to a consent adjournment of the two penalty hearings in the AAT proceedings.

490. The fact is that, if: (a) s 177D applies to the BBG Share Sale Schemes; and (b) s 177E applies to a scheme which included the BBG Share Sale Scheme (or in respect of a scheme to which that was relevant, as in the Commissioner's narrow scheme), it is obvious that s 177F(3) has a potential role to play. This is why the matter was raised by the Court. The Commissioner has made two s 177F determinations in respect of interrelated schemes.

491. The scheme of Part IVA is that - where amounts are included in assessable income because of determinations made by the Commissioner under s 177F(1) and, if relevant schemes had not been entered into, other amounts would not have been included in assessable income of a taxpayer - then adjustments can be made under s 177F(3) where "fair and reasonable".

492. Why s 177F(3) has never been raised by the applicants was, and remains, unclear.

493. The applicants submitted that, unless the scheme involves the crystallising of the capital loss in the MFT, so as to overwhelm the capital gain, the value which passes to the MFT is subject to capital gains tax: AOCS[55(a)]. It does not matter that this might be at a lower tax rate.

494. In other words, the applicants submitted, the scheme results in the receipt of a capital sum that attracts capital gains tax, which is inconsistent with the scheme being characterised as a scheme with the substantial effect of a dividend stripping scheme, referring to CPH FFC at [162], [177] and CPH HC at [127], [133] to [134]. The applicants also referred to Lawrence FFC at [44] which was said to "hint at the contrary".

495. The applicants contended that a reduced tax is insufficient to satisfy the 'tax effect' requirement of s 177E. The applicants submitted (AOCS[55(a)]):

(i) Where s 177E applies, it has the effect of deeming the 'tax benefit' 'referable to' the scheme to be an 'amount' which is fundamentally driven by the Commissioner's opinion about the amount of company profits that are represented by the disposal of property. That amount is identified without taking account of any tax paid on the sum represented by the disposal of property (ie that which is pointed to as the substitution for dividends). The Commissioner is then empowered by s 177F to include the whole (or part) of that (deemed) tax benefit in the shareholder's assessable income.
(ii) That Parliament has proceeded without making express provision in this respect points strongly in favour of s 177E not being intended to operate when the effect of the scheme is not or not substantially to render something available tax free.

496. The passage referred to by the applicants in Lawrence FFC at [44] must be read with what was said at [42] and [43]. At [42], the Full Court referred to the five characteristics of first limb dividend stripping schemes identified by Gibbs J in Patcorp and then stated:

[43] At [137], the Full Court [in CPH FFC] identified a further common characteristic of each of the schemes in the cases considered by Gibbs J, namely:

"[T]hat 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."
[44] We would merely add that, notwithstanding the advent of comprehensive taxation of capital gains, this characteristic remains relevant because the methods of calculating capital gains inevitably lead to a lower amount of tax.

497. Section 177E does not require a complete, or a substantially complete, avoidance of tax to apply. Section 177E is capable of applying where the tax avoidance purpose is to avoid the higher tax which would have been payable on dividends, albeit a lower amount of tax is still payable as a result of the scheme. One of the central stated purposes of the structure of the Plantic share sale was to

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avoid tax on dividends from GSM, achievable "because the debt forgiveness on the loans reduces top up tax payable by [Mr Merchant] on getting cash out of GSM": CB260.

Assets remaining available to GSM and Tironui?

498. The applicants submitted that, even if the scheme involves the crystallisaton of the capital loss such that the extra $55 million received by the MFT does not attract capital gains tax, the additional amount remains in the MFT and remains able to be paid to GSM (to satisfy its unpaid present entitlement) or distributed to GSM (or other beneficiaries) and would enhance GSM's assets from which GSM could pay a dividend to Mr Merchant: AOCS[55(b)]. In these scenarios tax would be paid. Submissions to equivalent effect were made in AOS[251] to [253].

499. By way of explanation for parts of the submission recorded in the paragraph above, GSM and Tironui are within the definition of "General Beneficiaries" pursuant to cl 1(b)(iii)(B) of the relevant trust deed, because Mr Merchant is a "Specified Beneficiary" (making him also a "General Beneficiary" pursuant to cl 1(b)(i)) and is a shareholder of those companies: CB12; CB13; CB14.

500. GSM and Tironui had significant unpaid present entitlements owing by the MFT ($179 million owing to GSM and $140,000 to Tironui). An amount of $302,055.99 was also owing to Mr Merchant: CB682.

501. The applicants submitted that the "MFT is obliged to at least pay GSM and Tironui the amounts of $179 million and $140,000 respectively for their unpaid present entitlements" and that "[t]here is no reason to conclude that MFT is unlikely to meet those obligations": AOCS[59(c)].

502. The applicants submitted that the circumstance in this case that there were corporate beneficiaries was a significant distinction between this case and Lawrence FC. It was submitted that, in Lawrence FC, the company profits were converted into capital sums held "on trust for a class of discretionary beneficiaries which was confined to the applicant and members of his family": Lawrence FC at [2] (applicants' emphasis).

503. The Commissioner submitted that, "despite Jessup J's comment at [2] … it is not clear whether the reference to members of his family include[d] (as is typically the case) companies in which Mr Lawrence or members of his family had an interest", referring to Lawrence FC at [85]. At [85], Jessup J stated that the "applicant and his associates" were beneficially entitled to the capital of the trust.

504. Whether or not the applicants' understanding of the underlying facts in Lawrence FC is correct or not, any distinction between that case and this in that regard has little significance.

505. The point is that the assets of the target companies (GSM and Tironui) were, through the debt forgiveness in the context of the sale of Plantic, in substance transferred to the MFT. As is discussed below, objectively, the purpose of that was to enable Mr Merchant to access the profits via the trust in a tax effective manner, rather than receiving dividends from GSM and Tironui on which he would have had to pay tax at marginal rates.

506. No commercial and objective onlooker could sensibly conclude that the object of the structure was to permit GSM and Tironui to access the increase in value in the MFT. It is plain that Mr Merchant would not choose to make a capital distribution to GSM and Tironui, and thereby expose himself again to top up tax as a shareholder of those entities, rather than to distribute the profits to himself in a manner which avoided that consequence.

507. The applicants submitted that there "is no scenario in which the scheme results in the money being made - in the relevant sense - tax free or substantially so or perhaps even substantially taxed at some lower rate": AOCS[56].

508. I do not accept that submission. For the reasons given in relation to the s 177D Proceeding above, and those given below in relation to dominant purpose, it is clear that the objective purpose of the loan forgiveness was to permit the amounts forgiven to be accessed in a way in which substantially less tax would be paid than if those amounts were repaid to GSM and Tironui and received by Mr Merchant by way of dividends.

509.

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If s 177E(1)(a)(ii) is otherwise engaged, an applicant will not discharge the onus of establishing that an assessment is excessive, or what it would have been, merely by demonstrating a potential reduction in the tax advantage produced by the scheme. On the other hand, the amount of tax likely to arise is relevant to purpose. If a taxpayer is demonstrated to be likely to pay substantially the same amount of tax as a consequence of a scheme, just not tax on the dividend, then the taxpayer is perhaps unlikely to have a dominant purpose of avoiding tax.

510. The statutory scheme caters for the situation in which some amount of tax is paid notwithstanding that there is a dividend stripping scheme. The tax benefit from the dividend stripping scheme is included in assessable income through s 177F of the ITAA 1936 - see: s 177E(1)(f). In situations where a taxpayer has carried out a dividend stripping scheme, but has included an amount in assessable income because of the scheme (otherwise than by receipt of the dividend), the Commissioner may determine that the amount, or a part of it, should not have been included in assessable income, if it is "fair and reasonable" that the amount not be included: s 177F(3).

Careful planning with all parties acting in concert

511. Thirdly, the applicants submitted that (AOCS[60]; see also AOCS[66A)):

an essential effect absent from the Commissioner's schemes arises from the critical involvement of Kuraray and other events outside the scheme. The BBG sale in September 2014 giving rise to $56.562m in losses were not part of a 'careful plan', 'in concert' with Kuraray, to avoid tax on a distribution of dividends from GSM and Tironui to Mr Merchant. Kuraray was not then on the scene relevantly.

512. As noted earlier, the sixth characteristic of dividend stripping schemes identified by the Full Court in CPH FFC at [137] as one which was present in the four particular cases considered by Gibbs J in Patcorp was 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.

513. A dividend stripping scheme does not cease to be one simply because the purchaser of the shares does not have a tax avoidance motive or is indifferent. It is not necessary for every party who plays a role in a scheme which has the effect of a scheme in the nature of dividend stripping to be involved in "careful planning" or to act "in concert" with the others. The more important issue is the purpose of the person who would have received the dividend. I do not consider that the Full Court in CPH FFC at [137] was intending to set a requirement, not found in the statutory language, that all parties must be involved in "careful planning" or to act "in concert" with the others before a scheme can fall within the second limb of s 177E(1)(a). The Full Court's observation was its characterisation of one aspect of what it considered was present in the four cases considered by Gibbs J in Patcorp.

514. I accept the applicants' submission that Kuraray did not engage in careful planning in concert with the MFT to achieve a tax benefit for Mr Merchant or anyone else. The structure of the transaction had, in substance, been set by the MFT. Kuraray ultimately, but reluctantly, accepted that structure after careful consideration of its own interests. As is addressed in detail below, Kuraray had significant concerns about the debt forgiveness, but Mr Merchant's interests were ultimately able to satisfy Kuraray about the impact of that forgiveness on its interests in a context in which the SSA contained tax indemnities and warranties which protected Kuraray's position in that regard - see [0] to [0] below. Whilst Kuraray did not act "in concert for a tax avoidance purpose", it was more than indifferent (
Collis v Commissioner of Taxation (1996) 33 ATR 438). It was reluctantly able to be convinced.

Applicants' second issue: Dominant purpose

515. There are two key aspects to the (broader) scheme advanced by the Commissioner at hearing: first, the BBG Share Sale; and secondly, agreeing to the forgiveness of debts as a condition precedent to settlement of the SSA and forgiving the debts.

516.

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In the context of s 177E, as they did in relation to s 177D(1), the applicants contended that the dominant purpose of the BBG Share Sale was (AOS[271]):

(a) to free up cash for the MFT, amongst other things in order to fund Plantic's expenses, and to do so without reducing the Merchant Group's stake in BBG; and
(b) to give the GMSF exposure to the future economic performance of BBG in circumstances where Mr Merchant thought it was a good investment.

517. For the reasons given earlier, I reject those as being the dominant purpose of the BBG Share Sale. The BBG Share Sale was - for the purposes of s 177D(1) - carried out for the dominant purpose of obtaining a tax benefit, namely crystallising a capital loss in connection with the sale by the MFT of its Plantic shares.

518. In their closing submissions about dominant purpose, the applicants structured their arguments around eight points: AOCS[64] to [72].

519. It is convenient to deal with the first three submissions together.

First to third submissions

520. First, the applicants submitted that the forgiveness served an obvious commercial objective, namely to facilitate the sale of the MFT's shares in Plantic to an arm's length purchaser who wanted Plantic free from related-party debt: AOCS[64].

521. Secondly, the applicants submitted that the fact that GSM and Tironui forgave their debts for no consideration was explained by the relationship between the Merchant Group entities: AOCS[65]. The applicants submitted that:

(a) there is nothing uncommercial about one entity engaging in a transaction that has a benefit for a related group entity, referring to
Orica Ltd v Commissioner of Taxation (2016) 332 ALR 621 at [31];
(b) GSM and Tironui forgiving the debts Plantic owed them had an obvious commercial benefit to the MFT beyond any tax benefit - namely, facilitating the sale of its Plantic shares to Kuraray free of related-party debts; and
(c) further, such a benefit to the MFT was also of benefit to GSM and Tironui, because they were both beneficiaries of the MFT and were owed substantial amounts by way of unpaid present entitlements: AOCS[65]; see also AOS[258] and AOCS[64].

522. Thirdly, the applicants submitted that, to the extent that the scheme depends on receipt of increased sale proceeds via the Plantic sale, Kuraray is a key party to that arrangement. It is an arm's length party and cannot be said to have had a purpose of obtaining a tax benefit for Mr Merchant. It cannot be said that "all the parties" were "acting in concert" to enable Mr Merchant to obtain a tax benefit: AOCS[66]. The applicants raised, in this context, that Kuraray had a concern with the commercial debt forgiveness rules, but submitted that the events in this regard did not satisfy the requirement of a scheme being "carefully planned", with all the parties "acting in concert", for the predominant if not the sole purpose of Mr Merchant avoiding tax: AOCS[66A].

523. There is no doubt that the forgiveness of debts was consistent with the commercial purpose of selling the shares in Plantic. As has been discussed and as is discussed further below, that does not mean that the dominant purpose of forgiving the debts was the commercial purpose of selling the shares.

524. Looking at the position practically and commercially, a third-party purchaser (such as Kuraray) would either:

• pay more for the Plantic shares if Plantic did not have the related-party loans of about $55 million (and was therefore essentially debt free); or
• pay less for the Plantic shares on the basis that Plantic would need to refinance or pay out the loans which had been made to Plantic.

525. An arm's length purchaser's first preference might have been for the Plantic Loans to be repaid before purchase of the shares. If that were not possible, however, it is far from clear that an arm's length purchaser's next preference would be for the loans to be forgiven, which is an assumption which underlies the applicants' submissions and which is not made out by

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the evidence. The fact that a debt forgiveness was to happen caused Kuraray significant concern.

526. If the loans were forgiven, that would give rise to a number of tax risks about which the incoming purchaser would need to be satisfied and in relation to which the purchaser would likely want warranties or indemnities.

527. It is more likely that an arm's length purchaser's preference would be to pay less for the shares and repay the debts itself. The applicants submitted that:

• it was unlikely that an arm's length purchaser would "be enthusiastic about having to get involved in any way in resolving the vendor's related-party loans, for various reasons": AOCS[64(b)(i)];
• if "Kuraray were to divert part of its upfront purchase price payment towards a loan to Plantic to enable it to repay GSM and Tironui's loans, that would have the consequence of reducing Kuraray's cost base on its shares": AOCS[64(b)(ii)];
• if this were to occur, "the mechanics of the sale contract would not necessarily have been straightforward, because there would be a delay between signing the sale contract and completion": AOCS[64(b)(iii).

528. Beyond these submissions, there was no clear explanation about what the "various reasons" were, and the evidence did not directly address this topic.

529. There was no need for Kuraray to loan funds to the MFT to enable Plantic to repay its debt. It is commonplace for an incoming purchaser to pay out related-party debt as part of a purchase, either directly or by refinancing. In the present case, Kuraray would have been able to repay the Plantic Loans directly as part of its acquisition of the Plantic shares. Kuraray's upfront cash payment to the MFT exceeded the amount of the Plantic Loans. If anything, the "mechanics" of such a sale would have been less complicated than the mechanics of the sale in fact entered into and would not have caused any additional delay. This would not have had any different cost base outcome - see: s 110-25(2)(b) ITAA 1997.

530. It is common to prefer repaying the debt of the company being acquired rather than having to:

(a) engage in an often complex investigation of the tax consequences of a debt forgiveness to the company being acquired; and
(b) obtain warranties and tax indemnities from the vendor; and
(c) bear the consequent risks of:
- (i) the Commissioner disagreeing with the company about the consequences of the debt forgiveness and issuing an assessment to the company; and
- (ii) the vendor not being in a financial position to meet the indemnities given or pay damages for losses for breach of warranties.

531. The forgiveness of related party debts - the Plantic Loans - was not something which had its genesis in any requirement suggested by Kuraray. Nor was it sourced in any requirement suggested by Sealed Air. Neither Sealed Air nor Kuraray had any interest in the Plantic Loans being forgiven.

532. Rather, the forgiveness of the Plantic Loans had its origin as the preferred structure of the MFT, Mr Merchant having received, and considered, advice from EY on the issue. The first draft "Share Purchase Agreement" sent by Sealed Air on 19 August 2014 contemplated that the MFT would deliver, at completion, evidence that related party debts had been "repaid or discharged in full": CB259 at page 28, cl 5.2(c)(ii).

533. On 27 August 2014, Mr Burgess sent an email to MinterEllison in relation to Sealed Air's draft Share Purchase Agreement: CB612. The email included:

As discussed, have listed below a couple of the 'easy' tax changes for you to make to the SPA before circulating the next draft to the group …

3. A key aspect of the transaction that delivers a favourable outcome to Gordon is that the amounts owed by Plantic to his related entities are waived/forgiven - it would be good to make this clearer in Clause 5.2(c) - the clause as currently drafted covers all amounts owing to/from and therefore talks about 'repaid in full or discharged' - therefore I think we need to insert a separate sub

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paragraph to specifically deal with the waiver (and then will need to draft the appropriate deeds of release which we will need to provide to them by completion).

534. Clause 2.1 of the SSA as ultimately entered into provided that completion of the sale must not occur until all Conditions in that clause were fulfilled or waived. One effect of Condition 3 was to require that the MFT procure the forgiveness of the Plantic Loans.

535. For its part, as would be expected, Kuraray was concerned about the tax implications to Plantic of the proposed debt forgiveness. On 18 March 2015, Mr Burgess emailed to Mr Morris, MinterEllison, and others an "updated letter on the debt forgiveness to cover the issues discussed on the call with Deloitte": CB664. Mr Pace of MinterEllison forwarded this email to Mr McGrath at 7:09am on 19 March 2015. Mr McGrath forwarded the email to Ms Lyons (copied to Ms Paull) and stated:

Attached is the letter EY have prepared around the debt forgiveness strategy that will be supplied to Kuraray.

Kuraray need to understand why the loans are being repaid etc. as they are actually buying the shares of the company not the assets and need to be comfortable that performing the loan forgiveness will not result in any potential liability when they own the company.

Just wanted you to be aware of this and have a copy so that you were OK with the content.

536. On 19 March 2015 at 12:43pm, Mr Burgess emailed Mr Morris a "final debt forgiveness letter". The letter considered the application of the commercial debt forgiveness rules, the impact upon the available fraction of Plantic's transferred losses and share capital tainting: CB741 at page 168. On 19 March 2015 at 7:21pm, Mr Morris emailed Mr Merchant, Ms Paull, Mr McGrath, and another with an update after having "just completed a long day with the Kuraray team": CB357. It noted some key issues were still being debated with Kuraray, one being:

Tax issue for debt forgiveness was a major issue this morning but hopefully the work Luke and Ian are doing with SFG consulting on the valuation should resolve this issue.

537. On 20 March 2015, SFG Consulting issued a letter to Plantic (addressed to Mr Morris) in which SFG Consulting confirmed that it had assessed the market value of the loans owing from Plantic and considered that the loans would have a value at the time of the proposed forgiveness equal to the face value of the loans: CB666. SFG Consulting explained:

That is, we agree with the characterization of the EY letter that:

It is clear that at the time of the forgiveness, the debtor has the capacity to repay the debts. That is, an arm's length purchaser will have entered an agreement to acquire the shares in the company (conditional on the debts being forgiven) for an amount that values the net assets of the company at an amount far in excess of the face value of the loans. Even the upfront cash consideration payable for the shares (approx A$58m) is greater than the face value of the loans.

538. On 20 March 2015 at 7:31pm, Mr Morris emailed with an update noting that all the outstanding points had been resolved and "signing is planned for next Wednesday/Thursday with settlement on 1 April": CB357. Next to the "Tax issue" mentioned in the earlier email, an update had been added stating "Valuation completed and tax indemnity once confirmed by Deloitte will be removed". The applicants did not seek to establish that:

• Deloitte was satisfied with whatever was said to them; or
• there were any changes made to the warranties or indemnities which were then contained in the draft SSA. These provided Kuraray significant protection.

539. There was no sensible commercial objective from the point of view of either GSM or Tironui in forgiving the substantial debts. The MFT gave no consideration for the forgiving of the debts. The applicants did not suggest that any consideration was received by GSM or Tironui for giving up $55 million in loans.

540.

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The debts were real debts and were worth their face value. The cash component of the sale price alone, being $59,803,400, exceeded the Plantic Loans, as SFG Consulting had noted. The MFT stood to benefit from the forgiving of the debts because Kuraray would pay more for the Plantic shares. It was not submitted, nor could it sensibly have been, that the debts could not have been repaid in the context of the sale to Kuraray.

541. The applicants observed that there was no "evidence led to contradict Mr Burgess's statement in correspondence tendered by the Commissioner that 'forgiveness of related party debt is a common aspect of a share sale transaction'": AOCS[64(b)(iv)]. There was no need for the Commissioner to lead evidence contradicting this comment made by Mr Burgess in a document which was amongst the many thousands of pages in evidence. The question of whether or not debt forgiveness in share sale transactions is common is not of great significance. Of more significance is the question why there was a debt forgiveness in this case.

542. The applicants bear the onus of establishing that s 177E of the ITAA 1936 does not apply. The applicants have not established that the debt forgiveness was not motivated predominantly because of the tax benefit it would deliver. Objectively assessed, the point of introducing the forgiveness of GSM and Tironui's loans to Plantic into the sale transaction, was to avoid the payment of "top up tax" on GSM's and Tironui's undistributed profits. If those loans had been repaid, GSM's and Tironui's retained earnings would have increased commensurately. Mr Merchant would have had to pay tax at the marginal rate on any dividends, receiving an offset to the extent those distributions were franked. The practical effect of structuring the transaction in the way it was, was that the capital received by the MFT was augmented rather than GSM's and Tironui's retained earnings being augmented. The advantage was increased by the fact that the BBG Share Sale had occurred, because the capital losses crystallised by that transaction offset the capital gains from the sale.

543. As to the third submission advanced by the applicants, for the reasons given earlier, it does not matter that Kuraray cannot be said to have been engaged in "careful planning", or "acting in concert" with the relevant entities in the vendor's group, with a view to Mr Merchant avoiding tax.

Fourth submission

544. Fourthly, the applicants submitted that the negotiations regarding the Plantic sale (with both Sealed Air and with Kuraray) show that obtaining a tax benefit from the debt forgiveness was not what drove the transaction: AOCS[67]. The applicants submitted that:

(a) the tax consequences (including tax benefits) - and the tax consequences of alternative structures - were discussed between the parties in the context of negotiating price;
(b) what was contemplated was that adopting one structure or the other would result in a change in the overall price, referring to CB269, CB270 and CB636. The applicants observed that:
- (i) the relative magnitude of the tax that would have been incurred under other structures is relevant to assessing dominant purpose in that the less the tax would have been, the less likely it is that avoiding it was the dominant purpose;
- (ii) the top up tax on a dividend from GSM to Mr Merchant was identified contemporaneously as being around $12 to $13 million; and
- (iii) even this amount overstates the 'tax advantage' because of the 'cost' in using up capital losses which are then no longer available to offset future capital gains. This too was expressly taken into account in the contemporaneous communications: CB634 at page 7; and
(c) if the dominant purpose had been to carry out a dividend strip, then no other form of transaction would have been considered to be negotiable at all. That is not what is shown in the contemporaneous communications.

545. The applicants submitted that the assessment of purpose is informed by looking at the course of negotiations with Sealed Air, given that the structure of the sale to Kuraray adopted the structure which had been negotiated

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with Sealed Air: AOS[265]. The applicants submitted that - if accessing GSM and Tironui's profits in tax free form was more important than selling Plantic (in one form or another) - then when Sealed Air raised objections to a structure involving a sale of shares with a forgiveness of related party debts (because of the potential tax costs on Sealed Air's side of the transaction), then the deal would have been off the table, but that is not what occurred: AOS[266] to [268].

546. The applicants submitted that, instead (AOS[267]):

(a) On 28 August 2014, Mr Burgess did calculations of the cost of an asset sale structure so that "if you are deep in negotiation next week trying to get the transaction across the line and it appears that an asset sale might be the only way to get that done, that you have an understanding of what the fall back positions might be for [Mr Merchant] to help make the judgment on price etc": CB269.
(b) Mr Burgess explained in his 3 September 2014 email that "if the 'cost' of getting Sealed Air to accept a share sale is much more than $2m-$3m, then it might be better to agree to an asset sale and aim for an increase in the sale price to compensate [Mr Merchant] for his increased costs" and going on to give the example that if Sealed Air wanted a reduction in sale price of $5 million to compensate for their extra tax costs, then "it would appear to be better to accept an asset sale and ask for a $5m increase in the price to compensate for [Mr Merchant's] extra tax cost": CB269.
(c) Those communications indicate that what was more important than any tax benefit of any particular structure was "trying to get the transaction across the line".

547. I do not accept these submissions.

548. The debt forgiveness was undertaken for the dominant purpose of moving value away from GSM and Tironui into the MFT. The BBG Share Sale was undertaken for the dominant purpose of obtaining a tax benefit, namely the crystallisation of a capital loss. These transactions were entered into with the purpose of maximising the outcome for Mr Merchant on the basis of a share sale in which the potential purchasers were prepared to pay the amounts they were relevantly offering.

549. It may be accepted that it is possible that Mr Merchant might have structured the transaction differently if the incoming purchaser was prepared to pay more. If an offer had been received for an asset sale at a price which meant that Mr Merchant stood to benefit more from that form of transaction than he would benefit under the proposed share sale transaction, he may well have accepted such an offer. That did not happen.

550. Allied to these submissions, in their opening submissions the applicants also submitted that:

(a) the receipt by the MFT of the capital proceeds for the Plantic shares sold to Kuraray points against a conclusion that there was any dominant purpose of avoiding tax on the profits of GSM and Tironui: AOS[260];
(b) the purpose of the payment by Kuraray to the MFT was for Kuraray to acquire, and the MFT to dispose of, the shares in Plantic (and the associated economic exposure associated with owning and running the business): AOS[261]; and
(c) to say that such a purpose could have been achieved by a differently structured transaction at a higher tax cost does not establish that the structure adopted was adopted for the dominant purpose of tax avoidance; so long as selling Plantic was the predominant purpose, the fact that it resulted in less tax does not bring it within s 177E: AOS[262].

551. In their opening submissions, the applicants emphasised the observations that Emmett J in
Metal Manufactures Ltd v Commissioner of Taxation [1999] FCA 1712; 43 ATR 375 at [260] to [261] made in relation to the general anti-avoidance provisions, rather than s 177E:

[260] Thus a taxpayer may have a particular objective or requirement that is to be met or pursued by a particular transaction. The shape of such a transaction need not necessarily take one form. It is only to be expected that the adoption of one form over another may be influenced by revenue

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considerations. However, the fact that a particular course of action may bear the character of a rational commercial decision does not determine the answer to the question of whether a person entered into or carried out a scheme for the dominant purpose of enabling a taxpayer to obtain a tax benefit - Spotless Services Ltd at 416. Nor, in my opinion, does the fact that a taxpayer chooses one of two or more alternative courses of action, being the one that produces a tax benefit, determine the answer to that question.
[261] Pt IVA will be satisfied if it was the obtaining of the tax benefit that directed the relevant persons in taking steps they otherwise would not have taken by entering into the scheme - Spotless Services Ltd at 423. However, more is required than that a taxpayer has merely arranged its business or investments in a way that derives a tax benefit. The scheme must be examined in the light of the eight matters set out in s 177D(b). Further, that examination must give rise to the objective conclusion that some person entered into or carried out the scheme or part of the scheme for the sole or dominant purpose of enabling the Taxpayer to obtain a tax benefit in connection with the scheme. Such a conclusion will seldom, if ever, be drawn if no more appears than that a change of business or investment has produced a tax benefit for a taxpayer - Spotless Services Ltd at 425. Nor should such a conclusion be drawn if no more appears than that a taxpayer adopted one of two or more alternative courses of action, being the alternative that produces a tax benefit.

552. The applicants also referred to
Commissioner of Taxation v Metal Manufacturers Ltd [2001] FCA 365; 108 FCR 150 and Macquarie Bank at [260].

553. It may be accepted that the mere fact that a taxpayer selects one form of transaction over another, influenced by revenue considerations, does not establish that the form of transaction that was chosen was pursued for the dominant purpose of tax avoidance. A good example of that proposition was furnished by Gleeson CJ and McHugh J in Hart at [15]:

… A taxpayer wishing to obtain the right to occupy premises for the purpose of carrying on a business enterprise might decide to lease real estate rather than to buy it. Depending upon a variety of circumstances, the potential deductibility of the rent may be an important factor in the decision. Yet, if there were nothing more to it than that, it would ordinarily be impossible to conclude, having regard to the factors listed in s 177D, that the dominant purpose of the lessee in leasing the land was to obtain a tax benefit. The dominant purpose would be to gain the right to occupy the premises, not to obtain a tax deduction for the rent, even if the availability of the tax deduction meant that leasing the premises was more cost-effective than buying them.

554. But the presence of a rational commercial objective, or a discernible commercial end, does not preclude a finding that a particular form of transaction was selected for the dominant purpose of tax avoidance. As Gleeson CJ and McHugh then stated in Hart at [16] (footnotes omitted):

Even so, a transaction may take such a form that there is a particular scheme in respect of which a conclusion of the kind described in s 177D is required, even though the particular scheme also advances a wider commercial objective. In Federal Commissioner of Taxation v Spotless Services Ltd, Brennan CJ, Dawson, Toohey, Gaudron, Gummow and Kirby JJ, after noting that revenue law considerations influence the form of most business transactions, and that the presence of a fiscal objective does not mean that a person entered into or carried out a scheme for the dominant purpose of obtaining a tax benefit, said:

Much turns upon the identification, among various purposes, of that which is 'dominant'. In its ordinary meaning, dominant indicates that purpose which was the ruling, prevailing, or most influential purpose. In the present case, if the taxpayers took steps which maximised their after-tax return and they did so in a manner indicating the presence of the 'dominant

ATC 28607
purpose' to obtain a 'tax benefit', then the criteria which were to be met before the Commissioner might make determinations under s 177F were satisfied.

555. The applicants invited a comparison between the present case and Macquarie Bank: AOS[269]. After referring to the facts of that case, the applicants relied in particular on the following observations of Middleton and Robertson JJ (with whom Emmett J agreed; applicants' emphasis in bold):

[258] For the foregoing reasons, there is no overwhelming evidence in respect of the manner in which the scheme was entered into or carried out that the dominant purpose of any party was enabling Mongoose to obtain a tax benefit. Rather, it seems to us that the dominant purpose indicated by this criterion is the commercial purpose of selling the Minara shares at a profit, in a manner that was to the satisfaction of all parties to the transaction. We find that the MatlinPatterson vendors were willing to accept a fixed price under the bought deal that was lower than would have been the case under the Agency Proposal as consideration for the market and other risks assumed by MBL under the scheme. Similarly, [Macquarie] was willing to accept these risks (after doing what it could to minimise their impact) in order to make a significantly larger profit than would otherwise be available, as well as to complete a large-scale resources deal to the satisfaction of a new client (with the future business opportunities that might result from a successful transaction). On the evidence, we do not consider that this is a case like Hart, where entry into the scheme was explicable only by the tax benefit defined by the Commissioner (at 244).

[259] This conclusion does not ignore the fact that the scheme as implemented appears to have been selected at least in part on the basis that no tax would be directly payable by MatlinPattison, and that the consolidation provisions were the mechanism by which [Macquarie] (as the head company) could sell the Minara shares with no tax unless the sale price exceeded the cost of the shares . Nor does it fall into the trap of the false dichotomy adverted to in Spotless Services. The mere fact that taxation considerations may have, to some extent, driven the deal or played a part in enabling the profit to be made by all parties does not require a finding of the requisite dominant purpose under s 177D. Such considerations clearly existed, but the presence of these factors may be expected in a deal of this magnitude, involving corporate groups from different jurisdictions. To this extent, we do not find the evidence relied upon by the Commissioner (in particular the extracts from the Macquarie Board papers set out above) as probative as he would seek to portray them.

…

[301] We do not think that enabling Mongoose to obtain a tax benefit was the dominant purpose of [Macquarie] entering into the scheme. On balance, our analysis of the s 177D factors as they apply in this case does not support that proposition. Rather, [Macquarie]'s dominant purpose was to make a profit by effecting a sale of the Minara shares in a manner that met its client's objectives. The real risks associated with entry into the scheme meant that there was potential for [Macquarie]to earn significantly more profit on the sale of the Minara shares than would have been the case under the Agency Proposal (but there was also the potential for [Macquarie] to incur a loss, given factors such as the share price volatility, and the fact that MatlinPatterson was unwilling to grant any termination events or give more than minimal warranties). The fact that the operation of the consolidation provisions was the mechanism by which this profit could be made is not enough in and of itself to give rise to a finding of dominant purpose under s 177D. Although the taxation consequences produced by the operation of the consolidation provisions were doubtless a consideration for [Macquarie] when determining whether to enter into the scheme (as evidenced by the advice obtained on the subject), neither these consequences nor the possibility of Mongoose getting a tax benefit were the ruling, prevailing or most influential purpose of MBL in deciding to do so. As Gummow and Hayne JJ noted in Hart, tax laws affect the shape of nearly every business transaction (citing

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Frank Lyon Company v United States (1978) 435 US 561 at 580; at 239). Further, the bare fact that a taxpayer pays less tax if one form of transaction is pursued rather than another does not demonstrate that Pt IVA applies (at 240). This was not a case in which entry into the scheme was explicable only by the relevant taxation consequences (Hart at 244).

556. A comparison between the facts and outcomes in different cases is rarely particularly useful - see, in a quite different context:
CEU22 v Minister for Home Affairs [2024] FCAFC 11 at [63]. This is particularly so in cases such as the present which require a careful examination of often complicated facts. What is important is the correct identification and application of legal principles to the particular facts of the case.

557. Macquarie Bank involved a situation in which the structure adopted was recorded as having beneficial tax outcomes, but was also found to have had other non-tax advantages that the Court concluded were dominant in the decisions taken. In the present case:

(a) Mr McGrath, and through him Mr Merchant, were advised that the Debt Forgiveness Schemes are "what gives Gordon the big [tax] benefit from the share sale": CB261. The evidence did not suggest that any genuine commercial consideration was given to following what might be thought to be the common commercial practice of repaying loans.
(b) An element of the scheme was the BBG Share Sale which, for the purposes of s 177D(1), was carried out for the dominant purpose of obtaining a tax benefit and which, objectively, was not for the purpose of increasing cash in the MFT or providing the GMSF with a "good investment".
(c) It is true that the structure adopted was consistent with securing the commercial end of selling Plantic. It is also true that the broader transaction within which the BBG Share Sale and the Debt Forgiveness Schemes occurred was the sale of the Plantic shares and that the purpose of the sale was for Mr Merchant to divest himself of his interest in Plantic and the associated requirement to provide funding - see: AOS[255], [259], [260], [261], [266]. However - as mentioned - that does not prevent a conclusion that there was a scheme with a tax avoidance purpose. It may be accepted that the sale of the Plantic shares to Kuraray was a genuine commercial transaction. It does not follow from that fact that the schemes carried out in pursuit of that ultimate objective did not have the dominant purpose of tax avoidance - see, in addition to the cases already mentioned:
British American Tobacco Australia Services Limited v Commissioner of Taxation [2010] FCAFC 130; 189 FCR 151 at [51] and [53].

Fifth submission

558. Fifthly, the applicants noted that Angourie was a discretionary trust rather than a company with retained profits and that this was presumably why the amount of the forgiveness of the Angourie loan was not included in the Commissioner's s 177F determination based on s 177E: AOS[257]; CB783 at [157]. The applicants submitted that:

(a) a further indicator against a dominant tax avoidance purpose was that the deed forgiving the debts owed by Plantic to GSM and Tironui also forgave debts owed by Plantic to Angourie in identical terms: AOCS[68]; AOS[256]; CB340;
(b) the Angourie forgiveness could not have been for the dominant purpose of enabling shareholders to receive profits in a tax free form and that it was objectively likely that the dominant purpose of the GSM Debt Forgiveness and Tironui Debt Forgiveness was no different from the dominant purpose of the forgiveness of the debt owed to Angourie: AOS[257].

559. These submissions are unpersuasive. The loan forgiven by Angourie was comparatively small at $790,854. The fact that the forgiving of this loan could not form part of a dividend stripping scheme or a scheme having substantially the effect of a dividend stripping

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scheme does not indicate that the GSM Debt Forgiveness and Tironui Debt Forgiveness were not entered into with the dominant purpose of tax avoidance. The forgiving of the debt owed to Angourie also operated to increase the amount of capital received by the MFT. It was convenient to forgive that debt in circumstances where the decision had been taken to forgive the far larger debts owed to GSM and Tironui.

560. It may also have caused even more concern to Kuraray if the Angourie loan had been treated differently to the GSM and Tironui loans.

Sixth submission

561. Sixthly, the applicants submitted that the deed effecting the forgiveness of the loans was only executed after the SSA was executed and only had effect at completion: AOCS[69]; CB340. If the dominant purpose of the Debt Forgiveness was to make GSM and Tironui's profits available by increasing the value of the MFT's assets, then that could have been done at any time: AOS[254]. The Debt Forgiveness did not occur until there was agreement with a purchaser of the shares of Plantic. According to the applicants, this pointed in favour of the dominant purpose of the Debt Forgiveness being to facilitate the sale of the MFT's shares in Plantic: AOS[255].

562. It is true that the debt forgiveness was connected to the sale of the Plantic shares. The idea of forgiving debts was conceived in connection with the sale of the Plantic shares, together with the idea of the MFT selling the BBG Shares to the GMSF, as ways in which to maximise the return to Mr Merchant by minimising the amount of tax payable.

563. As mentioned earlier, the sale of the Plantic shares required the debts to be addressed. The sale of Plantic provided an opportunity to forgive Plantic's debts and increase the capital return for the MFT from that sale, rather than repay those debts. This occurred in a context where the MFT had crystallised a loss by selling the BBG Shares to the GMSF in anticipation of a sale of the shares in Plantic.

564. In this context, the timing of the debt forgiveness is not persuasive in suggesting a non-tax purpose. The real point of significance is that the structure was designed to involve the forgiveness of debts as part of the sale of the MFT's shares in Plantic. As Mr Burgess stated in his email on 21 August 2024, the debt forgiveness "is what gives [Mr Merchant] the big benefit from a share sale": CB261.

Seventh submission

565. Seventhly, the applicants submitted that the schemes in the present case bear none of the contrivance or artificiality that is present in the cases where s 177E has been applied: AOCS[70].

566. In their opening submissions, the applicants emphasised the Full Court's comments in CPH FFC at [171] (it is also necessary to set out [170]):

[170] This conclusion is reinforced by the extrinsic materials to which we have also referred. The Explanatory Memorandum and second reading speech accompanying the 1981 Bill emphasised that Part IVA, which includes s 177E, was concerned with "tax avoidance arrangements that ... are blatant, artificial or contrived". According to the Explanatory Memorandum, Part IVA was not designed to catch arrangements of a normal business or family kind. Section 177E itself was to be a "self-contained code, within the framework of Part IVA" and was to deal with "dividend-stripping schemes of tax avoidance and certain variations on such schemes".
[171] These carefully formulated observations, in our opinion, clearly indicate that s 177E was intended to apply only to schemes which can be said to have the dominant purpose of tax avoidance. The section was not intended, in our view, to apply to a "scheme" entered into or carried out primarily for business or other purposes unconnected with avoidance of tax, even if the scheme is implemented in a manner that produces taxation advantages: Spotless at 425 per McHugh. (We recognise, of course, that a taxpayer may have the dominant purpose of avoiding tax consistently with the pursuit of commercial gain in the course of carrying on a business: Spotless at 415.) Since the section is directed at vendor shareholders participating in or benefiting from dividend stripping schemes, the required tax avoidance purpose is ordinarily

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that of enabling the vendor shareholders to receive profits of the target company in a substantially (if not entirely) tax-free form, thereby avoiding tax that would or might be payable if the target company's profits were distributed to shareholders by way of dividends.

567. The question is whether the terms of s 177E, properly construed in context, apply. It may be accepted that the context includes the history of the legislation. The question is not whether one should describe what occurred as artificial and contrived, less still whether it is appropriately so described in comparison to other cases.

568. Notwithstanding, the broader scheme - which included the BBG Share Sale - was structured in order to avoid top up tax being payable by Mr Merchant, and involved steps only sensibly explicable by the tax advantage which was sought and, in this sense, is appropriately described as "contrived".

Eighth submission

569. Eighthly, the applicants submitted that the timing and circumstances of the BBG Share Sale point against a dominant purpose of avoidance: AOCS[71]. The applicants accepted that, at the time of the BBG Share Sale, Mr Merchant's advisers specifically identified the possible benefit of a capital loss on that sale in the context of a sale of the MFT's shares in Plantic together with a debt forgiveness by GSM and Tironui. However, the applicants submitted, that is not what drove the BBG Share Sale. That argument has been rejected earlier.

Conclusion on purpose

570. The main purpose of the broader scheme was to avoid the payment of top up tax by Mr Merchant on GSM's and Tironui's undistributed profits. This is a sufficient tax avoidance purpose for the purposes of s 177E(1)(a)(ii).

Conclusion in relation to the s 177E Proceeding

571. Were it not for the forgiveness of the Plantic Loans, GSM (the target company) would have had substantial undistributed profits creating a potential tax liability for Mr Merchant who would have had to pay tax at marginal rates on dividends paid to him. No consideration was provided for the forgiveness of the loans such that the forgiveness had the effect of:

• reducing the undistributed profits of GSM and Tironui; and
• converting the Plantic Loans to equity, thereby increasing the value of Plantic's shares and the consideration paid by Kuraray for those shares.

572. Because of the BBG Share Sale, the MFT would not have a capital gain. The effect of the scheme was, in substance, to transfer undistributed profits in GSM and Tironui to the MFT from where they could be distributed (including to Mr Merchant) at substantially lower rates of tax.

573. Mr Merchant has not discharged the onus of establishing that the broader scheme did not have substantially the effect of a scheme by way of or in the nature of dividend stripping.

6 THE TOFA PROCEEDING

Introduction

574. As mentioned, the purchase price under the SSA included contingent rights to future payments, referred to earlier as the Future Payment Rights:

(a) the Milestone Amounts and the Extrusion Coating Milestone; and
(b) the Earn-Out Amounts, which comprised amounts calculated on the basis of sales target amounts in US dollars under cl 4.5 of the SSA for the years 2018 to 2024.

575. The issues raised in the TOFA Proceeding are:

(1) Are the MFT's rights to receive the Milestone Amounts financial arrangements for the purposes of the TOFA Provisions?
(2) If those rights are financial arrangements, are the MFT's rights to receive the Milestone Amounts the subject of the exception in (former) s 230-460(13) of the ITAA 1997?

576. There is no dispute that, if the TOFA Provisions apply, then the MFT is entitled to the deductions claimed and Mr Merchant is entitled to a consequential reduction in assessable income in each of the 2017 and 2018 income years. Likewise, if the TOFA

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Provisions do not apply, either because there was no financial arrangement or because of the exception in former s 230-460(13) of the ITAA 1997, then the TOFA Objection Decision refusing the deductions must be affirmed.

577. It is convenient first to outline how the Milestone Amounts and Earn-Out Amounts were calculated.

The Milestone Amounts

578. Clause 4.4 of the SSA provided for payment of "Milestone Amounts", with a maximum aggregate amount of US$25 million: CB370, cl 4.4(b). There were a variety of milestones for different categories of sales. The sales were categorised geographically, and by reference to particular customers: Australasian Sales, International Sales, J&G Foods sales and Valley Fine Foods sales. The milestones identified a target sales volume (in metric tonnes, or MT ) to be met in a specified calendar year.

579. There were also "top-up" milestones, so that if one calendar year's target volume milestone was not met, the MFT could be entitled to a "top-up" payment (in the same amount as the original milestone amount) if the target volume milestone was met in the following year.

580. There was also an "Extrusion Coating Milestone". As was mentioned earlier, Plantic manufactures and distributes packaging materials that are a plant-based substitute for plastic. Plantic's products are manufactured by extruding resin from high-amylose corn starch. The products are considered by Plantic to have a variety of benefits over traditional plastic alternatives, including environmental benefits and providing greater shelf-life for certain food products: Morris at [7].

581. One of Plantic's products was called Plantic HP (standing for "High Performance"). It was typically used to make chocolate and biscuit trays: Morris at [9(a)]. Plantic HP is soluble in water and biodegradable. It provides a gas barrier, which can extend shelf-life of certain perishable food products.

582. Plantic developed products called Plantic E and Plantic R which involved gluing a layer of water soluble Plantic HP between layers of other petroleum-based plastics that Plantic purchased from other manufacturers: Morris at [9(b)]. These products permitted the gas-barrier benefits of Plantic HP being used for packaging wet food products.

583. In 2014 and 2015, Plantic was developing a more cost-effective way of manufacturing Plantic E and Plantic R: Morris at [9(d)]. Instead of gluing a layer of Plantic HP between layers of other plastics, the new technique involved Plantic buying resin from which those other plastics were made and extruding layers of resin directly onto the Plantic HP product. To adopt this new technique, Plantic needed to install a new extrusion coating line at its premises in Altona, Victoria. By 31 March 2015, when the Plantic Sale agreement was signed, Plantic had been negotiating for a quote to supply the equipment required for the extrusion coating line.

584. The Extrusion Coating Milestone provided, in substance, that if Kuraray approved the capital expenditure required to build the new extrusion coating line, and 100MT of product was supplied to customers utilising the new extrusion coating line, then Kuraray would pay the MFT an amount of US$5 million. If Kuraray did not approve the capital expenditure, then that $5 million milestone was effectively spread across (by increasing the amount that would be paid for achieving) the first sales milestones for Australasian sales and the milestones for two particular customers (J&G Foods and Valley Fine Foods). This was achieved by the following provisions of the SSA:

(a) Clause 4.4(a)(vi) required Kuraray to pay the MFT "the Extrusion Coating Milestone Amount on the Extrusion Coating Milestone Amount Payment Date" if the "Extrusion Coating Milestone" was satisfied on or before the "Milestone Drop Dead Date".
(b) The "Milestone Drop Dead Date" was defined as being the date on which milestone amounts of US$25 million had been paid or, subject to cl 8.15(d), 31 December 2017. Clause 8.15(d) provided for the date to be extended if Kuraray was in breach of certain obligations.
(c) The "Extrusion Coating Milestone" was defined to mean, if cl 8.17(b) applied, the date on which the Kuraray Group (including Plantic) has supplied, in aggregate, to one or

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more of its customers at least 100MT of Product utilising the Extrusion Coating Line. The "Extrusion Coating Line" was defined to mean such a line "to be established at" Plantic's Altona property as identified in particular due diligence documents.
(d) Clause 8.17(b) applied on and before 1 September 2015, and if "Formal Corporate Approval" was obtained on or before 1 September 2015, then from that time until the Milestone Drop Dead Date. It specified that the amount of the "Extrusion Coating Milestone Amount" would remain, for that period, as US$5 million.
(e) "Formal Corporate Approval" was defined to mean the grant of corporate approval by the Kuraray Group for a capital expenditure program for the installation and commission of the Extrusion Coating Line in a specified manner.
(f) Clause 8.17(a) applied if "Formal Corporate Approval" was not obtained on or before 1 September 2015. In that event, the Extrusion Coating Milestone would be "no longer applicable and cannot be satisfied" and the amounts payable for the satisfaction of various sales milestones would be increased.

585. There were two "Australasian Sales Milestones" (the first achievable in either 2015 or 2016 and the second achievable in either 2016 or 2017). There was also an "International Sales Milestone (achievable in either 2016 or 2017), a "J&G Foods Milestone" (achievable in either 2015 or 2016) and a "Valley Fine Foods Milestone" (achievable in either 2015 or 2016).

586. The first Australasian Sales Milestone was 3,724MT, which could be achieved in either calendar year 2015 or 2016. If achieved, the amount payable by Kuraray would either be $3.4 million (if Kuraray had approved the capital expenditure required so as to make the US$5 million Extrusion Coating Milestone capable of being achieved) or US$5.1 million (if Kuraray had not approved such expenditure - in which case part of the amount of the US$5 million Extrusion Coating Milestone was effectively added to the first Australasian Sales Milestone.

587. The second Australasian Sales Milestone was 5,134MT, which could be achieved either in calendar year 2016 or 2017. If achieved, the amount payable by Kuraray would be US$5 million. The provisions of the SSA which achieved this were as follows:

(a) Clause 4.4(a)(i)(A) provided for Kuraray to pay the MFT "the CY Australasian Sales Milestone Amount within 30 days of the CY15 Australasian Sales Milestone being satisfied". "CY" was defined to mean "calendar year".
(b) The "CY15 Australasian Sales Milestone" was defined to mean "the CY15 Australasian Sales Amount reaching the Sales Volume referred to in the first row in the table set out in part 1 of schedule 9". The CY15 Australasian Sales Amount was defined to mean "the Sales Volume in Australia and New Zealand during CY15". "Sales Volume" was defined, in effect, to mean the aggregate volume in MT of products sold by Plantic less the aggregate volume of any of those products that are defective and returned.
(c) The "CY15 Australasian Sales Amount" was identified in the first row of the table in part 1 of sch 9 as greater than or equal to 3,724MT. That row identified the "CY15 Australasian Sales Milestone Amount" as being US $3.4 million if cl 8.17(b) applies, and US$5.1 million if cl 8.17(a) applies. The reference to cl 8.17(a) and (b) is the adjustment to increase the sales milestone if it became impossible for the Extrusion Coating Milestone to be triggered because Kuraray decided not to incur the capital expenditure required to build the new extrusion coating line, as explained above.
(d) Clause 4.4(a)(i)(B) provided that if the CY15 Australasian Sales Milestone is not satisfied but the CY16 Australasian Sales Top-Up Milestone is satisfied, then Kuraray would pay the MFT "the CY16 Australasian Sales Top-Up Milestone Amount within 30 days of" the milestone being satisfied.
(e) The CY16 Australasian Sales Top-Up Milestone Amount was defined to mean "the CY16 Australasian Sales Top-Up Amount reaching the Sales Volume amount

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referred to in the first row in the table set out in part 2 of Schedule 9".
(f) The CY16 Australasian Sales Top-Up Amount was defined to mean "the Sales Volume in Australia and New Zealand during CY16".
(g) The CY16 Australasian Sales Top-Up Amount was identified in the first row of the table in part 2 of sch 9 as greater than or equal to 3,724MT (the same target volume as the CY15 Australasian Sales Amount). That row identified the CY16 Australasian Sales Top-Up Milestone Amount as being US$3.4 million if cl 8.17(b) applies, and US$5.1 million if cl 8.17(a) applies (the same milestone amount as the CY15 Australasian Sales Milestone).
(h) There are similar provisions for a "CY16 Australasian Sales Milestone" and a "CY17 Australasian Sales Top Up Milestone".
(i) The "CY16 Australasian Sales Amount" was 5,134MT and the "CY16 Australasian Sales Milestone Amount" was US$5 million. Schedule 9 makes clear that "the CY16 Australasian Sales Milestone Amount is independent of whether the CY16 Australasian Sales Top-Up Milestone Amount is US$3,400,000 or US$5,100,000 or zero".
(j) The "CY17 Australasian Sales Top-Up Amount" was also 5,134MT and the "CY17 Australasian Sales Top-Up Milestone Amount" was also US$5 million.

588. The other milestones were structured in a similar way.

The Earn-Out Amount

589. The "Earn-Out Amounts" were provided for in cl 4.5 of the SSA. The maximum that the MFT could receive in respect of the Earn-Out Amounts was capped at US$70 million: cl 4.5(c)(iii). In summary:

(a) Clause 4.5 provided for Kuraray to pay the MFT an Earn-Out Amount each calendar year from 2018 to 2024, calculated as a percentage of "Gross Sales" above certain levels. "Gross Sales" was defined as follows:

Gross Sales means the invoice price of the Products Sold anywhere in the world (provided that if any Products are Sold in a transaction that is not at arm's length, then the invoice price of those Products will be the price that would have been paid by an independent Third Party customer in a bona fide arm's length transaction, as determined by the Purchaser or otherwise subject to clauses 9.2 and 9.3) less any returns, customer allowances, customer discounts, customer rebates and sales, use and value added taxes including goods and services tax.
(b) "Product" was defined to capture specified products and "any other packaging materials as manufactured by the Group as at the date of this agreement". "Sold" was defined to mean "invoiced and / or delivered".
(c) Up until the point that the MFT received US$25 million either by way of Milestone Amounts or by way of Earn-Out Amounts (if it did), an Earn-Out Amount would be payable at 2.5% of gross sales exceeding US$20 million in a given year. The percentage would increase to 4.5% to the extent that the gross sales exceeded specified targets (being a number varying from US$55 million in the 2018 calendar year up to US$290 million in the 2024 calendar year).
(d) After the MFT received the US$25 million either by way of Milestone Amounts or by way of Earn-Out Amounts (if it did), then the MFT would only be entitled to an earn-out payment if the Gross Sales in a given year exceeded the specified targets (in which case, the Earn-Out Amount would be 6.5% of the amount by which the Gross Sales for the year exceeded that year's specified target).

590. Clause 4.5(a) addressed the Earn-Out Amounts during the period where the amounts paid by Kuraray by way of Milestone Amounts (or Earn-Out Amounts) were less than the maximum of US$25 million.

(a) The specification of the relevant period is achieved by the clause stating that it applies if "the Aggregate Pre-Earn Out Purchase Price Amount" is less than the "Maximum Pre-Earn Out Purchase Price

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Amount". The "Maximum Pre-Earn Out Purchase Price Amount" was defined to mean the aggregate of the first component of the purchase price (the "Initial Purchase Price", subject to the working capital adjustment under cl 4.2) plus US$25 million (being the maximum that could be paid in respect of the milestone amounts discussed above). The "Aggregate Pre-Earn Out Purchase Price Amount" was defined to mean the aggregate of the first component of the purchase price plus the Milestone Amounts actually paid by Kuraray.
(b) Where cl 4.5(a) applies, if the aggregate amount of Gross Sales during a given calendar year (called an "Earn-Out Period") is less than US$20 million (called the "First Target Amount"), then no earn out amount is payable that year: cl 4.5(a)(i).
(c) If the aggregate amount of Gross Sales during a given calendar year exceeds US$20 million but does not exceed certain specified targets (called being "within the Second Sales Target Amount"), then the Earn-Out Amount is 2.5% of the amount by which the "Gross Sales" for that year exceed US$20 million: cl 4.5(a)(ii). The "Second Sales Target Amount" (which is in fact a range from US$20 million up to specified amounts) is set out in part 1 of sch 10 of the SSA.
(d) If the aggregate amount of Gross Sales during a given calendar year exceeds the specified targets that are the top end of the Second Sales Target Amount (called being "within the Third Sales Target Amount"), then the Earn-Out Amount is 2.5% of the amount by which the upper limit of the Second Sales Target Amount for the year exceeds US$20 million, plus 4.5% of the amount by which the Gross Sales for the year exceed the upper limit of the Second Sales Target Amount: cl 4.5(a)(iii). The "Third Sales Target Amount" is again set out in part 1 of sch 10 and is specified as the same number each year as the top end of the "Second Sales Target Amount" range "or above".

591. Clause 4.5(b) concerns the period of time after the amounts paid by Kuraray - by way of Milestone Amounts or amounts paid under cl 4.5(a) - exceed the maximum of US$25 million:

(a) The first is if the "Aggregate Pre-Earn Out Purchase Price Amount" is equal to the "Maximum Pre-Earn Out Purchase Price Amount" (that is, if Kuraray has paid the US$25 million by way of Milestone Amounts).
(b) The second is if the "Aggregate Pre-Earn Out Purchase Price Amount" is less than the "Maximum Pre-Earn Out Purchase Price Amount" and Kuraray has paid the "Purchase Price Make Up Amount" in accordance with cl 4.5(a), where "Purchase Price Make Up Amount" is defined as the "Maximum Pre-Earn Out Purchase Price Amount" less the "Aggregate Pre-Earn Out Purchase Price Amount" (that is, if what Kuraray has paid by way of Milestone Amounts plus whatever extra it has paid by way of Earn-Out Amounts under cl 4.5(a) equals US$25 million).
(c) Once cl 4.5(b) applies - that is, once Kuraray has effectively paid an amount equal to the US$25 million maximum Milestone Amount - then an Earn-Out Amount is only payable if the aggregate amount of Gross Sales during a calendar year exceeds the year's Fourth Sales Target Amount: cl 4.5(b)(iii). The "Fourth Sales Target Amount" is a number rather than a range, being the exact same number each year as is both the top end of the Second Sales Target Amounts and the bottom end of the Third Sales Target Amounts.
(d) If an Earn-Out is payable in accordance with the foregoing, then the amount of the Earn-Out payable is 6.5% of the aggregate Gross Sales during the year less the amount of the Fourth Sales Target Amount for the year: cl 4.5(b)(iv).

592. Each of the Milestone Amounts were calculated in a similar way. Each was calculated by reference to sales in MT.

593. In the events which occurred:

(a) the Extrusion Coating Milestone was met on 30 September 2016 and payment was received by the MFT shortly thereafter in the amount of US$5 million (A$6,577,040): CB773 at page 12, [2.6]; CB801 at [56(b)]; and

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(b) the CY15 Valley Fine Foods Sales Milestone was not met, but the CY16 Valley Fine Foods Sales Top-Up Milestone was met on 31 October 2016, which entitled the MFT to payment of US$3.3 million (A$4,415,310): CB773 at [2.9]; CB801 at [56(e)].

594. However, the following Milestones were not met:

• CY15 Australasian Sales Milestone;
• CY16 Australasian Sales Top-Up Milestone;
• CY16 Australasian Sales Milestone;
• CY17 Australasian Sales Top-Up Milestone;
• CY16 International Sales Milestone;
• CY17 International Sales Top-Up Milestone;
• CY15 J&G Foods Sales Milestone; and
• CY16 J&G Foods Sales Top-Up Milestone: CB773 at page 12, [2.7], [2.8]; CB774 at page 13, [2.6], [2.7]; CB801 at [ 56(c)], [56(d)], [56(g)], [56(h)].

595. Mr Merchant contended that the rights to the Milestone Amounts expired at the following times and in the following ways (CB801 at [ 30] to [31]; AOS[323] to [324]) (together, the Expired Future Payment Rights ):

(a) The CY15 Australasian Sales Milestone required a sales target of 3,724MT in Australasia to be met, which was capable of being met by 31 December 2015 and, if not achieved in that year, in the following year via the CY16 Australasian Sales Top-Up Milestone. As neither sales target was met in CY15 or CY16, the right to receive the CY15 Australasian Sales Milestone Amount expired on 31 December 2016, in the 2017 Financial Year: CB773 at page 12, [2.7].
(b) Similarly, the CY15 J&G Foods Sales Milestone required a sales target of 100MT to be met. It could be met by 31 December 2015 and, if not achieved in that year, in the following year via the CY16 J&G Foods Sales Top-Up Milestone. As the relevant target was not met in CY15 or CY16, the right to receive the CY15 J&G Foods Sales Milestone Amount expired on 31 December 2016, in the 2017 Financial Year: CB773 at page 12, [2.8].
(c) The CY16 Australasian Sales Milestone required a sales target of 5,134MT in Australasia to be met by 31 December 2016 and, if not achieved in that year, in the following calendar year by meeting the CY17 Australasian Sales Top-Up Milestone. As the sales target was not met in either CY16 or CY17, the right to earn the CY16 Australasian Sales Milestone Amount expired on 31 December 2017, in the 2018 Financial Year: CB774 at page 13, [2.6].
(d) The CY16 International Sales Milestone required a sales target of 3,100MT (excluding Australia and certain overseas jurisdictions) to be met by 31 December 2016 and, if not achieved in that year, in the following year by the CY17 International Sales Top-Up Milestone. As the sales target was not met in either CY16 or CY17, the right to earn the CY16 International Sales Milestone Amount expired on 31 December 2017, in the 2018 Financial Year: CB774 at page 12, [2.7].

596. On 15 May 2018:

(a) the MFT lodged its tax return for the income year ended 30 June 2017, where it reported net income of $5,724,671, all of which was assessable to Mr Merchant who was presently entitled to 100% of the trust's income; and
(b) Mr Merchant lodged his tax return for the income year ended 30 June 2017, where Mr Merchant reported his taxable income to be $7,466,253 which included his 100% share of the MFT's net income of $5,724,671: CB739.

597. On 22 May 2018, Mr Merchant was issued an assessment which disclosed a taxable income of $7,466,253 and resulted in an amount payable of $1,126,789.90: CB740.

598. On 28 February 2019:

(a) the MFT lodged its tax return for the income year ended 30 June 2018, where it reported its net income to be $6,147,243, all of which was assessable to Angourie , which was presently entitled to 100% of the MFT income; and

ATC 28616
(b) Angourie lodged its tax return for the income year ended 30 June 2018, where it reported its net income to be $5,172,158 (which included its 100% share of the MFT's net income of $6,147,243) of which Mr Merchant's share was 100%.

Procedural background

599. On 1 April 2019, Mr Merchant lodged his tax return for the income year ended 30 June 2018, where he reported his taxable income to be $6,431,852 which included his 100% share of the Angourie net income of $5,172,158: CB761.

600. On 9 April 2019, Mr Merchant was issued with an assessment for the 2018 year. This disclosed a taxable income of $6,413,852 and resulted in an amount refundable of $485,302.17: CB765.

601. On 23 April 2019, Mr Merchant was issued with an amended notice of assessment for the 2018 year. This disclosed a taxable income of $6,415,542 and resulted in an amount refundable of $484,761.37: CB765.

602. On 24 September 2019, Mr Merchant lodged an objection to the 2017 and 2018 assessments and later, on 1 March 2021, expanded the grounds of objection in relation to the 2018 assessment: CB773; CB774.

603. In relation to the 2017 assessment, Mr Merchant submitted that the share of the MFT's net income on which he is assessable should be adjusted from $5,724,671 to nil and that his taxable income should therefore be reduced by that amount, being from $7,466,253 to $1,741,582. The basis for the reduction in the amount of the MFT's net income assessable to Mr Merchant was said to be that the MFT was entitled to deduct, on revenue account, the net losses on the expiry of rights to relevant Milestone Amounts by virtue of the operation of the TOFA Provisions in Division 230 of the ITAA 1997.

604. In relation to the 2018 assessment, Mr Merchant submitted that Angourie's share of the MFT's net income should be adjusted from $6,147,243 to nil, that his share of Angourie's net income should therefore be reduced from $5,172,158 to nil, and that his taxable income should be reduced from $6,413,852 to $1,241,695. Mr Merchant contended that the MFT is entitled to deduct losses under the TOFA Provisions.

605. The expanded objection, made on 1 March 2021, concerned a claimed error in the forex data used to convert foreign currencies to Australian dollar amounts for the purposes of calculating forex gains and losses for the purposes of Division 775 of the ITAA 1997 with respect to foreign currency bank accounts held by the MFT. In broad terms, Mr Merchant raised that the reported error impacted the 2018 assessment because it resulted in: (i) an understatement of forex losses deductible in the 2018 year pursuant to s 775-30 of the ITAA 1997; and (ii) an overstatement of forex gains of the MFT in the 2019 year.

606. On 10 September 2021, the Commissioner disallowed Mr Merchant's objections on the basis that:

(a) the Plantic rights are the subject of the exception from Division 230 in (former) s 230-460(13) of the ITAA 1997; and
(b) Mr Merchant had not provided any contemporaneous evidence to support his expanded objection grounds that the MFT made an additional forex realisation loss under s 775-30 of the ITAA 1997 for the income year ended 30 June 2018 from an asserted forex realisation event that happened on or around 19 September 2017 under s 775-20 of the ITAA 1997.

607. On 10 November 2021, the applicant filed a notice of appeal against an appealable objection decision under s 14ZZ of the TAA 1953 contending that the 2017 and 2018 assessments are both excessive. All issues related to forex gains and losses have been abandoned.

The legislation

608. Division 230 of the ITAA 1997 taxes certain financial arrangements that certain entities start to have on or after the start of their first applicable income year.

609. There is no issue that the MFT met the relevant threshold tests in the 2010 income year so as potentially to enliven the TOFA provisions.

610. Section 230-1 explains that the Division is about the tax treatment of gains and losses from "financial arrangements", allowing a

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taxpayer to recognise the gains and losses, as appropriate, over the life of a financial arrangement and to ignore distinctions between income and capital, unless specific rules apply. Subsections 230-45(1), 230-50(1) and 230-50(2) provide tests which specify when a financial arrangement has arisen.

611. Section 230-15(2) permits the deduction of a loss made from a "financial arrangement" to the extent that it is made in gaining or producing assessable income or is necessarily made in carrying on a business for the purpose of gaining or producing assessable income.

612. Section 230-45(1) provides:

230-45 Financial arrangement

(1) You have a financial arrangement if you have, under an *arrangement:

(a) a *cash settlable legal or equitable right to receive a *financial benefit; or

(b) a cash settlable legal or equitable obligation to provide a financial benefit; or

(c) a combination of one or more such rights and/or one or more such obligations;
unless:

(d) you also have under the arrangement one or more legal or equitable rights to receive something and/or one or more legal or equitable obligations to provide something; and

(e) for one or more of the rights and/or obligations covered by paragraph (d):

(i) the thing that you have the right to receive, or the obligation to provide, is not a financial benefit; or

(ii) the right or obligation is not cash settlable; and

(f) the one or more rights and/or obligations covered by paragraph (e) are not insignificant in comparison with the right, obligation or combination covered by paragraph (a), (b) or (c).

The right, obligation or combination covered by paragraph (a), (b) or (c) constitutes the financial arrangement.

Note 1: Whether your rights and/or obligations under an arrangement constitute a financial arrangement can change over time depending on changes either to the terms of the arrangement or external circumstances (such as particular rights or obligations under the arrangement being satisfied by the parties). For example, a contract may provide for the transfer of a boat in 6 months time and payment of the contract price at the end of 2 years. Until the boat is delivered, there is no financial arrangement because of the operation of paragraphs (d), (e) and (f) above. Once the boat is delivered, there is a financial arrangement because those paragraphs are no longer applicable.

…

613. The term "arrangement" is defined in s 995-1 as follows:

arrangement means any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings.

614. Section 974-160 states:

974-160 Financial benefit

(1) In this Act:

financial benefit :

(a) means anything of economic value; and

(b) includes property and services; and

(c) includes anything that regulations made for the purposes of subsection (3) provide is a financial benefit;
even if the transaction that confers the benefit on an entity also imposes an obligation on the entity.

(2) In applying subsection (1), benefits and obligations are to be looked at separately and not set off against each other.

(3) The regulations may provide that a thing specified in the regulations is a financial benefit for the purposes of this Act.

615. Section 230-50 provides two further tests for financial arrangement. Subsection 230-50(1) provides that an equity interest constitutes a financial arrangement. Under s 230-50(2), you have a financial arrangement if you have, under an arrangement, one or more

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legal or equitable rights to receive or provide something that is an equity interest.

616. However, for the purposes of Div 230, specific grouping and disaggregation rules apply.

617. Section 230-55 provides:

230-55 Rights, obligations and arrangements (grouping and disaggregation rules)

Single right or obligation or multiple rights or obligations?

(1) If you have a right to receive 2 or more *financial benefits, you are taken, for the purposes of this Division, to have a separate right to receive each of those financial benefits.

(2) If you have an obligation to provide 2 or more *financial benefits, you are taken, for the purposes of this Division, to have a separate obligation to provide each of those financial benefits.

(3) Subsections (1) and (2) apply for the avoidance of doubt.

Matters relevant to determining what rights and/or obligations constitute particular arrangements

(4) For the purposes of this Division, whether a number of rights and/or obligations are themselves an *arrangement or are 2 or more separate arrangements is a question of fact and degree that you determine having regard to the following:

(a) the nature of the rights and/or obligations;

(b) their terms and conditions (including those relating to any payment or other consideration for them);

(c) the circumstances surrounding their creation and their proposed exercise or performance (including what can reasonably be seen as the purposes of one or more of the entities involved);

(d) whether they can be dealt with separately or must be dealt with together;

(e) normal commercial understandings and practices in relation to them (including whether they are regarded commercially as separate things or as a group or series that forms a whole);

(f) the objects of this Division.
In applying this subsection, have regard to the matters referred to in paragraphs (a) to (f) both in relation to the rights and/or obligations separately and in relation to the rights and/or obligations in combination with each other.

618. The Explanatory Memorandum to the Taxation Laws Amendment (Taxation of Financial Arrangements) Bill 2008 (Cth) stated:

2.47 The various rights and obligation subsisting under a contract will typically constitute the relevant arrangement for the purposes of Division 230. That is, the contract is typically viewed on a 'stand alone' basis. In this context, the contract is neither aggregated with another contract (or contracts), nor disaggregated into component parts, when determining the relevant arrangement to be considered under Division 230.

619. Division 230 is subject to various exceptions, which are set out in Subdiv 230-H. If an exception applies to the relevant right or obligation that gives rise to the gain or loss, then that right or obligation is not subject to the operation of the Division. The exception presently in issue is contained in s 230-460, which provided, as at 31 March 2015 (which is the relevant time for the purposes of this part of the proceeding):

(1) This Division does not apply to your gains and losses from a *financial arrangement for any income year to the extent that your rights and/or obligations under the arrangement are the subject of an exception under any of the following subsections.
…

Proceeds from certain business sales

(13) A right to receive, or an obligation to provide, *financial benefits arising from the sale of:
- (a) a business; or
- (b) shares in a company that operates a business; or
- (c) interest in a trust that operates a business;
  is the subject of an exception if the amounts, or the values, of those benefits are contingent only on the economic
  
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  performance of the business after the sale.

620. Neither the term "economic performance", nor the phrase "contingent only on the economic performance of the business", is defined in the Act.

621. However, the applicants relied upon s 974-85(1), which is found in Div 974 of the ITAA 1997. Division 974 is entitled "Debt and equity interests" and sets out whether an interest is a debt interest or an equity interest for tax purposes. Subdivision 974-C is entitled "Equity interests in companies". Within Subdiv 974-C, s 974-85(1) provided, as at 31 March 2015:

(1) A right, or the amount of a return, is not contingent on the economic performance of an entity, or a part of the entity's activities, merely because the right or return is contingent on:
- (a) the ability or willingness of an entity to meet the obligation to satisfy the right to the return; or
- (b) the receipts or turnover of the entity or the turnover generated by those activities.

622. The section currently defines the phrase "contingent on aspects of the economic performance".

623. Section 974-85 was introduced by the New Business Tax System (Debt and Equity) Act 2001 (Cth). The Explanatory Memorandum for that Act contained the following:

Disregarded kinds of economic performance - de minimis contingencies and turnover based payments

2.32 There can be circumstances where a right to a return or an amount of return is based on the turnover of the entity obliged to make the relevant payments. An example is a lease contract where part of the rentals are based on the lessee's turnover. Generally speaking, turnover based returns will be excluded from being regarded as contingent on economic performance in the relevant sense. [Schedule 1, item 34, paragraph 974 85(1)(b)]

2.33 However, there may be types of contracts where turnover is a close proxy for an economic performance indicator other than turnover (e.g. profitability) of the payer. Regulations may be made to treat such contracts as equity interests. Regulations may also be made to clarify when a particular return is or is not contingent on economic performance. [Schedule 1, item 34, subsection 974 85(2)]

2.34 Where a right to a return or an amount of return on an interest is contingent on profitability or some other economic performance indicator (other than turnover) to a minor extent, regulations may be made to exclude such types of interests from being equity interests. [Schedule 1, item 34, subsection 974 85(2)]

Consideration

Are each of the Expired Future Payment Rights a "financial arrangement"?

624. The applicants submitted that each of the Expired Future Payment Rights was a "financial arrangement" within the meaning of s 230-45 of the ITAA 1997 because:

(a) each was a cash settlable legal right to receive a "financial benefit"; and
(b) the MFT did not have, under the arrangement, a right to receive or an obligation to provide, anything that was not a "financial benefit".

625. The Commissioner contended that the SSA was a single arrangement, including after the shares were transferred, with the result that there was no "financial arrangement" under s 230-45 because the arrangement included non-cash settlable rights which were "not insignificant": ROS[529]. In this regard, the Commissioner relied upon (ROS[531]):

(a) the rights to information contained in cl 8 and 9;
(b) the duties imposed on Kuraray by cl 8 and 9 in regard to the management of the Plantic Business in the period between Completion and the point at which the Milestones were due to be completed and the Earn-Out Period; and
(c) the obligation imposed upon the MFT not to engage in a competitive business or solicit clients contained in cl 5.

626. The Commissioner submitted that these obligations were plainly significant because they "formed part of the value being exchanged

ATC 28620

between the parties, and were intrinsic to the value of the cash settlable rights that comprised the Milestone Amounts and Earn-Out Amounts" and that "[w]ithout them, the value of those rights would have changed significantly for both parties": ROS[532].

627. For the reasons set out below, the exception in s 230-460(13) applies such that it unnecessary to reach a conclusion about whether the Expired Future Payment Rights constitute one or more financial arrangements. Nevertheless, I will address the issue briefly.

628. Had it been necessary to decide, I would have been inclined to conclude that the rights relied upon by the Commissioner set out at [0] above were "insignificant in comparison with the right[s]" otherwise attracting the operation of the provision, namely the rights to receive the future payments. The contractual provisions were important because of the protections they afforded, and in that sense significant, but they were in the nature of typical contractual protections associated with post-completion financial benefits. The statutory question raised by s 230-145(1)(f) is not whether a right is "insignificant" when looked at on its own. The question is whether it is "insignificant in comparison with the right" otherwise attracting the operation of the provision.

629. The Commissioner submitted that the expired rights could, in any event, not individually constitute a financial arrangement: ROS[493].

630. It is to be accepted that the Milestone Amounts and the Earn-Out Amounts were interlinked. Earn-Out Amounts were payable at differing rates depending on what amount had been received in respect of the Milestone Amounts. Specifically:

(a) up until the time when the MFT had received the maximum US$25 million Milestone Amounts, an Earn-Out Amount would be payable at 2.5% of gross sales exceeding US$20 million in a given year. The percentage would increase to 4.5% to the extent that the Gross Sales exceeded specified targets (being a number varying from $55 million in the 2018 calendar year up to $290 million in the 2024 calendar year); and
(b) once the MFT had received amounts equal to the maximum US$25 million Milestone Amounts (either by way of Milestone Amounts or by way of Earn-Out Amounts), then the MFT would only be entitled to an earn out payment if the Gross Sales in a given year exceeded specified targets, in which case, the Earn-Out Amount would be 6.5% of the amount by which the Gross Sales for the year exceeded that year's specified target.

631. Further, the Milestone Amounts were affected by the Extrusion Coating Milestone or whether "Formal Corporate Approval" was obtained.

632. However, whether aggregation is appropriate is "question of fact and degree": s 230-155(4). Had it been necessary to decide, I would have been inclined to the view that the Expired Future Payment Rights were appropriately treated as individual financial benefits when assessing the matter in a commercial, practical way in light of the apparent object of the TOFA Provisions.

Does the exception in former s 230-460(13) apply?

633. The applicants accepted that each of the Expired Future Payment Rights was a right to receive financial benefits "arising from the sale of … shares in a company that operates a business", within the meaning of s 230-460(13): AOS[337]. However, the applicants submitted that it should not be concluded that the "the amounts, or the values" of those benefits "are contingent only on the economic performance of the business after the sale". The applicants submitted that the contingencies that affected the expired future payment rights were (AOS[338]):

(a) whether "Formal Corporate Approval" was obtained for the Extrusion Coating Line - failing which, the Extrusion Coating Milestone would be unavailable and cl 8.17(a) would operate to make the higher sales milestone amount applicable; and
(b) whether "Sales Volume" in each category and period met the targets specified in sch 9 of the SSA. Sales Volume referred to the aggregate volume in metric tonnes of products sold by Plantic (less the aggregate volume of any products returned).

634.

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According to the applicants (AOS[339]):

(a) these contingencies do not make the Future Payment Rights "contingent only on the economic performance of the business after sale";
(b) s 974-85(1) makes clear that a right does not meet that description "merely because the right ... is contingent on … the receipts or turnover of the entity or the turnover generated by those activities"; and
(c) "economic performance" must be understood as directed at profitability, which is independent of turnover.

635. The applicants submitted that this understanding of the expression "economic performance" is confirmed by the explanatory memorandum, referred to earlier, which gives the example of turnover rents not being contingent on economic performance in the relevant sense. Similarly, according to the applicants, contingencies fixed by whether corporate approval is given for a project or by reference to volume of sales (regardless of profitability) do not fall within the section: AOS[339].

636. At the relevant time, s 974-85(1) in Div 974 defined the phrase "contingent on the economic performance". The definition in s 974-85(1) is not a definition provided for the purposes of the whole Act (compare s 975-60, set out at [0] above). The phrase "contingent only on the economic performance" in s 230-460(13) is not defined by s 974-85(1) and that section provides no real assistance in construing the different phrase in s 230-460(13). The Divisions address quite different issues. Division 974 addresses debt and equity interests. Subsections 974-85(2) to (4) contemplated that regulations might specify the circumstances in which a right or return is to be taken to be contingent, or that s 974-85(1)(b) might not apply in circumstances specified in the regulation. Section 230-460(13) addresses financial benefits arising from the sale of a business under an earn out arrangement.

637. The Explanatory Memorandum to the Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2008, which, when enacted, inserted (former) s 230-460(13), relevantly provides:

2.184 A right to receive, or an obligation to provide, financial benefits arising from the direct or indirect sale of business, including those rights or obligations arising from the sale of shares in a company (or interests in a trust) that operates the business, may be the subject of an exception. These rights and obligations will only be the subject of this exception where the amounts or the values of the financial benefits to be received or provided are contingent on the economic performance of the business after the sale. [Schedule 1, item 1, subsection 230-460(13)]

2.185 This exception applies to exclude arrangements commonly known as 'earn-outs'.

638. The words "contingent only on the economic performance of the business after the sale" mean what they say. The phrase "economic performance" is not the same as, or equivalent to, the word "profitability". Profitability is one way to measure the success or otherwise of a business's "economic performance", but "economic performance" refers to a business's performance, not its profitability.

639. If the legislature had wanted to limit the exception to profitability, it could have done so by using the phrase "contingent only on the profit of the business after sale".

640. It is clear enough that the exception was intended to address, amongst other things, earn-out arrangements. These are commonly structured by reference to performance of the business other than by way of profit. Earn-out arrangements might be structured, for example, by reference to numbers of clients retained or gained or volume of sales. These are both appropriately described as matters of "economic performance". They are indicators of performance or profitability and are commonly used because they do not turn on choices that the incoming purchaser might make about business operations or the cost of sales being matters which affect profitability.

641. The Milestone Amounts were contingent only on sales volumes. They were contingent only on the economic performance

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of the business after the sale. Each of the rights said to have expired was a right contingent only on the economic performance of the Plantic business after the sale, and so is within the exception set out in s 230-460(13). It does not matter that the contingency (volume of sales) does not also factor in the cost of sales such that the contingency is not one which calculates profit.

642. It is true that the amount to be paid in respect of the Australasian sales milestones and the milestones for J&G Foods and Valley Fine Foods was affected by whether or not the Extrusion Coating Milestone was met (which it was not), but that does not mean that the rights which expired were relevantly contingent on anything other than the economic performance of the Plantic business after the sale. The Extrusion Coating Milestone was not a contingency which affected whether or not the sales milestones were payable. And, in any event, it was appropriately classified as a contingency about economic performance.

Conclusions in relation to the TOFA Provisions

643. On the assumption that the Future Payments Rights were "financial arrangements" to which the TOFA Provisions would otherwise have applied, the rights were subject to the exception in (former) s 230-460(13) of the ITAA 1997.

644. It follows that the TOFA Proceeding should be dismissed.

7 CONCLUSION

645. The parties should confer with a view to agreeing orders to give effect to these reasons within 14 days.

THE COURT ORDERS THAT:

1. The parties are to confer and provide a short minute of order giving effect to these reasons and any agreement as to costs within 14 days.

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

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Investment	(%)
Shares in Listed Companies	0 - 40
Shares in Unlisted Companies	0 - 20
Units in Listed Unit Trusts	0 - 10
Units in Unlisted Unit Trusts	0
Managed Funds	0 - 10
Property	0
Loans	0 - 5
Shares in Unlisted Hybrid Funds	0 - 50
Fixed Interest	0 - 20
Cash ie Bank Bills/Term Deposits etc	0 - 100

Investment	(%)
Shares in Australian Listed Companies	0 - 80
Shares in International Companies	0 - 20
Shares in Unlisted Companies	0 - 10
Units in Listed Unit Trusts	0
Units in Unlisted Unit Trusts	0
Managed Funds	0 - 10
Property	0 - 20
Artwork/Collectables	0
Fixed Interest	0 - 50
Cash ie Bank Bills/Term Deposits etc	0 - 50
Other	0 - 100

Merchant & Anor v FC of T

Factual background

The related proceedings

Evidence, submissions and definitions

Mr Merchant

Ms Paull

Mr McGrath

Ms Lyons

Mr Burgess

Mr Morris

Billabong: 1973 to 2000

The MFT acquires further shares in BBG: 2004

The MFT acquires 14% of Plantic

The MFT sells BBG shares: 2006

The GMSF established on 30 June 2006

The GFC and its consequences ATC 28532

The GMSF in 2008 and 2009

The pension paid to Mr Merchant

Acquisition of 100% of Plantic: November 2010

Consideration to acquisition of BBG shares by GMSF: 2011

GMSF acquired BBG shares: 29 February 2012

GMSF formulates and adopts an investment strategy: 15 March 2012

The MFT acquires further BBG shares in June 2012

Consideration given to accessing cash from the GMSF: July 2012

Plantic negotiations: July and August 2012

Consideration to GMSF acquiring BBG shares: October 2012

Plantic negotiations: January to May 2013

The GMSF as at 30 June 2013

Plantic negotiations: June 2013 to December 2013

BBG renounceable rights issue: September 2013 to March 2014

Multivac distribution agreement and Braskem negotiations: March - May 2014

The GMSF as at 30 June 2014

Negotiations with Sealed Air: June and July 2014

Further negotiations and EY consideration of tax outcomes: August to September 2014

The BBG Share Sale: 4 September 2014

Sealed Air and Kuraray negotiations post-BBG Sale

Plantic Sale agreement: 31 March 2015

Settlement (and post-settlement) of Plantic sale

Decision to cease pension: 30 April 2015

The MFT purchases BBG shares: September 2015

The GMSF formulates a new investment strategy: 19 November 2015

The issue

Applicable law

Summary of the parties' submissions

Applicants' submissions on commercial context and purpose

Consideration

The value of the Future Payment Rights

Conclusion in relation to the s 177D Proceeding

Introduction

Applicable law

The s 177E schemes

The issues

Applicants' first issue: Presence or absence or relevant dividend stripping effect

Applicants' second issue: Dominant purpose

Conclusion in relation to the s 177E Proceeding

Introduction

The Milestone Amounts

The Earn-Out Amount

Procedural background

The legislation

Consideration

Conclusions in relation to the TOFA Provisions

The GFC and its consequences

ATC 28532