• This judgment was the subject of a Special leave application.

FC of T v Michael John Hayes Trading Pty Ltd ATF MJH Trading Trust & Ors

Judges:
Bromwich J
Thawley J
Hespe J

Court:

MEDIA NEUTRAL CITATION: [2024] FCAFC 80

Judgment date: 14 June 2024

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Bromwich, Thawley and Hespe JJ

1. This is an "appeal" brought in this Court's original jurisdiction by the Commissioner of Taxation under s 44 of the Administrative Appeals Tribunal Act 1975 (Cth), from a decision of the Administrative Appeals Tribunal made on 20 September 2023:
Michael John Hayes Trading Pty Ltd as trustee of the MJH Trading Trust and Commissioner of Taxation (Taxation) [2023] AATA 3005. The Tribunal decided to set aside the Commissioner's objection decisions by which the Commissioner had disallowed objections made by the respondents to amended assessments which had been issued to them.

STATUTORY CONTEXT - DIVIDEND STRIPPING

2. The question of law is whether the Tribunal erred in its construction of s 207-155 of the Income Tax Assessment Act 1997 (Cth) ( ITAA 1997 ). Section 207-155 provides:

207-155 When is a distribution made as part of a dividend stripping operation?

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

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

3. The composite phrase "dividend stripping" is not defined. It is used in a particular statutory context relating to the denial of imputation benefits where a distribution has been made as part of a "dividend stripping operation". The consequence of a distribution being made as part of a dividend stripping operation includes that the amount of the franking credit on the distribution is not included in the assessable income of the dividend recipient and the dividend recipient is not entitled to tax offsets: s 207-145(1)(d), (e) and (f) of the ITAA 1997. The correct construction of s 207-155(a), including the meaning of the phrase "dividend stripping", raises a question of law:
Collector of Customs v Agfa-Gevaert Ltd [1996] HCA 36; 186 CLR 389 at 397.

4. The concept of dividend stripping was discussed by the Full Court in
Commissioner of Taxation v Consolidated Press Holdings Ltd (No 1) [1999] FCA 1199; 91 FCR 524 (French, Sackville and Sundberg JJ) ( CPH FFC ) in the context of s 177E of the Income Tax Assessment Act 1936 (Cth) ( ITAA 1936 ).

5. These reasons also refer to the primary judgment by Hill J and the High Court judgment in the Consolidated Press Holdings taxation litigation ( CPH ):
CPH Property Pty Ltd v Commissioner of Taxation [1998] FCA 1276; 88 FCR 21 ( CPH PJ ) and
Commissioner of Taxation v Consolidated Press Holdings Ltd [2001] HCA 32; 207 CLR 235 ( CPH HC ).

6. In CPH FFC, the Full Court observed that a scheme may be "by way of or in the nature of dividend stripping" even though not all the elements of a "standard" dividend stripping scheme are present or the scheme varies from the paradigm dividend strip, provided that the scheme retained the central characteristics of a dividend stripping scheme (at [156]). The Full Court had earlier identified those central characteristics by reference to the four dividend stripping cases referred to by Gibbs J in
Commissioner of Taxation v Patcorp Investments Limited [1976] HCA 67; 140 CLR 247. Their Honours identified those cases as having the following five characteristics in common (at [136]):

• • 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).

7. 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.

8. As to the last characteristic - the predominant purpose of avoiding tax on a distribution of dividends by the target company - the Full Court stated at [174]:

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, having regard to the characteristics of the scheme and the objective circumstances in which the scheme was designed and operated.

THE TRIBUNAL'S DECISION

9. The Tribunal's decision concerned four schemes which the Commissioner considered to be dividend stripping operations within the meaning of Div 207-F of the ITAA 1997. The applicants (the respondents on this appeal) were four corporate trustees of public trading trusts (the Trading Trusts ), each controlled by one of four brothers, and each settled on 24 February 2010:

• • Michael John Hayes Trading Pty Ltd as trustee of the MJH Trading Trust ;
• • John Hayes Trading Pty Ltd as trustee of the JPH Trading Trust ;
• • Paul Hayes Trading Pty Ltd as trustee of the PAH Trading Trust ; and
• • Bryan Hayes Trading Pty Ltd as trustee of the BGH Trading Trust .

10. The four trustee companies were acquired in February 2010 by members of the Hayes family. Shortly thereafter, they became trustees of trusts that were formed with particular features so as to attract the "trading trust" rules in Div 6C of the ITAA 1936. The Trading Trusts were formed to participate as trading trusts in a reorganisation of the Hayes Group in the 2010 income year. Trading trusts are treated as companies for some tax purposes. Trading trusts are public trading trusts and not subject to Div 7A of the ITAA 1936.

11. The Hayes Group included four " Operating Companies ": Malacorp Pty Ltd, Fuentes Pty Ltd, MJB&P Pty Ltd and MBJP Hayes Investments Pty Ltd. Each of these Operating Companies had profits available for distribution to shareholders.

12. On 7 May 2010, after the existing shareholders had declined an offer to acquire Z class shares:

• • two of the respondents (the MJH Trading Trust and the PAH Trading Trust) each acquired 10 Z class shares for $1 per share in three of the four Operating Companies;
• • two of the respondents (the BGH Trading Trust and the JPH Trading Trust) each acquired 10 Z class shares for $1 per share in each of the four Operating Companies.

13. On the day the respondents acquired the Z class shares, the four Operating Companies declared and paid fully franked dividends totalling $8,008,459.72 to the respondents, as holders of the Z class shares. The dividends represented almost all of the retained earnings of the Operating Companies, being $8,393,036.59.

14. The proceeds of the dividends were lent by the Trading Trusts either to the Operating Companies or to the original (existing) shareholders (set out in Tables 12 and 13 of the Tribunal's reasons).

15. The Tribunal observed that the "transactions entered into to pay the … dividends … and to use the funds representing those dividends after the dividends were paid were of a kind that would naturally attract curiosity": at [9]. The transactions had been "designed" or "formulated" by solicitors (Cleary Hoare) "having particular regard to various [ITAA 1936] rules that are not of common application" in order "to pass corporate wealth to an unexpected new owner in an unusual way", being "effected by executing documents, entering accounting journals, and executing and passing BPNs [bearer promissory notes]". The transactions were "executed in a short space of time, and in a choreographed manner and order".

16. In each of its 2010 income tax returns, each respondent included the franked dividends and the associated franking credits in its assessable income and claimed tax offsets under s 207-20 of the ITAA 1997. The Commissioner considered that the respondents were not entitled to the tax offsets on the basis that the dividends were distributions made as part of a dividend stripping operation because those dividends were paid pursuant to a scheme that was by way of, or in the nature of, dividend stripping or had substantially the effect of a scheme by way of, or in the nature of, dividend stripping: s 207-145(1)(d); s 207-155.

17. According to the Commissioner, the result was that:

• • the dividends were included in the respondents' assessable incomes;
• • the franking credits were not included in assessable income: s 207-145(1)(e); and
• • the respondents were not entitled to tax offsets for those amounts: s 207-145(1)(f).

18. At the core of the dispute before the Tribunal was the question of whether the relevant purpose in carrying out the reorganisation was tax avoidance: at [7]. The respondents contended that it was not, and "that the purpose was to secure better asset protection features of the asset ownership arrangements within a group of family entities, and to streamline those arrangements": at [7]. The Commissioner contended that the purpose was to avoid tax.

19. The Tribunal described the matters which were not in dispute in the following way at [11]:

The parties do not dispute the transactions that were entered into or carried out. Further, they agree that those transactions and the circumstances in which they were entered into or carried out mean that at least some elements of what is necessary to constitute a dividend stripping operation are satisfied. The parties agree:

• (a) the four … Operating Companies had retained profits …;
• (b) had those profits been distributed without changes to shareholding structures, tax liabilities would have arisen;
• (c) new shares in the … Operating Companies were acquired by new shareholders (the [Trading Trusts, being the applicants before the Tribunal]);
• (d) dividends were paid to the new shareholders shortly after the [Trading Trusts] acquired the new shares;
• (e) the dividends were paid following external advice, careful planning of the steps taken with all relevant parties acting in concert; and
• (f) if the requisite tax avoidance purpose is not present then neither of the s 207-155(a) (first limb) or (b) (second limb) tests apply.

20. The Tribunal described matters in dispute in the following way at [12]:

The parties dispute the proper answers to three questions.

• (a) Whether the [Trading Trusts] received the dividends free of tax (in the relevant sense)?
• (b) Whether the pre-existing shareholders received non-taxable or capital amounts in full or sufficiently partial substitution for the dividends paid to the new shareholders?
• (c) Whether the required sole or dominant purpose was to avoid tax?

21. As to the first matter, the Tribunal concluded that the dividends received by the Trading Trusts did not bear tax in the relevant sense, satisfying the fourth characteristic of the paradigm example of a dividend stripping scheme: at [90] - [93].

22. As to the second matter, the Tribunal observed that 30.46% of the dividends made their way to the original shareholders in the form of loans and concluded that, even if loan funds could be regarded as a substitute for capital, it was well short of the substitute required to be a dividend stripping operation and therefore the fifth characteristic was not satisfied. The Tribunal reasoned at [94] - [95]:

The proportion of the dividends that made their way to the Hayes brothers in the form of loans was 30.46% as noted above. Even if loan funds could be regarded as a substituted receipt of capital, 30.46% is well short of the extent of the substitute required to be a dividend stripping operation.

In the present matters:

• (a) the majority of what was paid in the form of a dividend to the [Trading Trusts] was returned to the original source of the dividend (the Operating Companies) by way of inter-entity loan. The dividends formed part of the system of continuing finance provided to trusts and companies in the Hayes Group. The majority of the money did not make its way back to the original shareholders who maintained substantially the same economic interests in the Hayes Group both before and after the 2010 reorganisation; and
• (b) a minority of the dividend money passed to the Hayes brothers (either individually or jointly) and was then used to retire or repay existing debt. That minority of the dividend money could be seen to be a refinancing of pre-existing debt. The Hayes brothers either individually or jointly assumed new liabilities in substitution for earlier liabilities owed to Hayes Group entities. They did not in any relevant sense receive any capital. They assumed dollar-for-dollar debt obligations in substitution of pre-existing debt obligations.

23. As to the third matter, the Tribunal concluded that the schemes lacked the requisite tax avoidance purpose because tax was not avoided: at [96] - [104]. At [96(d)], the Tribunal stated that the transactions "did not release profits from the target companies in a manner that eliminated future taxation burdens arising in respect of those profits". At [96(f)], the Tribunal stated that the transactions "preserved within the same family group … the same partly taxed profits … and the same latent future tax liability in respect of the accrued pre transaction profits, such that when those profits are released to the Hayes Group owners of the [Trading Trusts] beyond a corporate tax setting, the same or substantially equivalent tax liability will be attracted as would have been attracted had those profits been distributed to those Hayes Group owners directly". At [98], the Tribunal stated that "the relevant profits were not transformed to become non-taxable amounts, or moved beyond the Hayes family". At [103], the Tribunal stated:

In the present circumstances, most of the amounts of the dividends paid by the Operating Companies to the [Trading Trusts] was returned by way of loan by the [Trading Trusts] to the Operating Companies or trusts connected with them and were not made available to the pre-scheme shareholders in the Operating Companies or their associates. Further the profits underlying the dividends paid to the [Trading Trusts], being corporate entities, remain profits of a company owned within the same family group available and liable to tax upon distribution to the ultimate owners thereof namely the same Hayes families with the same tax effect. The profits were not removed from the Australian income tax system at all.

24. The Tribunal's conclusion was that the dividends paid to the respondents "were not part of either a dividend stripping operation or a scheme of that nature or effect": at [105]. The Tribunal stated at [105]:

When regard is had to:

• (a) the Consolidated Press predication test;
• (b) the focus on the vendor, or original, shareholders;
• (c) the absence of:
  • (i) transformation of taxable profits;
  • (ii) relocation of those taxable profits beyond the Hayes family; and
  • (iii) any compensating non-taxable receipt, usually found in dividend stripping operations; and
• (d) the setting in which the transactions occurred including the 2007 transactions,

the conclusion that follows is that the sole or dominant purpose of the transactions was not to avoid tax on the dividends paid, and that the dividends paid to the [Trading Trusts] by the Hayes Group Operating Companies were not part of either a dividend stripping operation or a scheme of that nature or effect.

25. The Tribunal reached no definitive conclusions concerning what it described (at [99]) as "motivators" (which was presumably a reference to what the Hayes family contended were its subjective motivations), namely asset protection and "better and simpler organisation of asset and loan arrangements within a family group". As to "asset protection", Cleary Hoare's fee of over $200,000 for its advice apparently came as a surprise to the Hayes family and their accountant, Mr Miller, but was said to be 70% tax deductible as tax advice: at [45] - [46]. The Tribunal's reasons do not contain findings of fact or conclusions from which it would be easy to conclude that the transactions had a dominant asset protection purpose.

26. As to "simpler organisation of asset and loan arrangements", the Tribunal stated at [88]:

Mr Miller's evidence was that the 2010 steps laid a foundation for further rationalisation of the Hayes Group structure in later years, and it was beneficial from an organisational sense. Whether organisational arrangements are complex or not calls for a degree of subjective opinion. Those working with and managing structures may have a perception that differs from others looking in from the outside. And it is possible that additional entities may well make organisation and understanding easier for those with that need just as organisation of an office or warehouse may be improved by having additional containers to house things that need a home. Given the subjective nature of opinion on topics like the present, no material weight is to be afforded to the contention that the February and May 2010 steps simplified the structure. It was open to Mr Miller to have the view that it did, and there is no reason to conclude that his view was not honestly held. The Tribunal does not reject the contention, as the Commissioner has sought, but Mr Miller's view is not of material weight in the analysis required.

CONSIDERATION

27. The Tribunal's ultimate conclusion, summarised at [105] of its reasons, was determinatively influenced by two principal factual matters:

• (a) the "profits were not removed from the Australian income tax system at all": at [103]; see also: [96(e)], [96(f)] and [105(c)(i)]; and
• (b) a majority of the dividends were ultimately loaned back to the Operating Companies (such that it could not be said that the original shareholders received a capital sum that substantially represented the profits distributed; there was no compensating non-taxable receipt" (implicitly by the original shareholders) as "usually found in dividend stripping operations"): at [95(a)], [105(c)(iii)].

28. These two factual matters assumed particular significance in two parts of the Tribunal's reasoning:

• (a) first, in the Tribunal's consideration of the central or common characteristics of the particular dividend stripping schemes to which Gibbs J had referred in Patcorp, as identified by the Full Court in CPH FFC;
• (b) second, in its analysis of whether there was a dominant tax avoidance purpose which was undertaken by reference to what the Tribunal described as the "Consolidated Press predication test": at [105(a)].

29. Before turning to the two factual matters referred to at [27] above, it is convenient to say something first about these two parts of the Tribunal's reasoning.

Common characteristics of dividend stripping schemes

30. The description by the Full Court in CPH FFC of the common characteristics of a dividend stripping scheme is not a legislative prescription of the requirements of a dividend stripping scheme. It is wrong to approach the terms in which the Full Court described those central characteristics as though it were a statutory formula. This is demonstrated by the Full Court's analysis in CPH FFC - see, for example, at [159].

31. No doubt it is convenient to assess the statutory question by reference to what the Full Court stated, but one must not lose sight of the statutory language. Section 207-155 of the ITAA 1997, like s 177E(1) of the ITAA 1936, applies to a scheme "by way of, or in the nature of, dividend stripping" or a scheme with substantially the effect of such a scheme. The phrase "by way of, or in the nature of" are words of enlargement. Section 207-155 was plainly intended to capture, for example, schemes which contain variations of the central characteristics identified in CCH FFC.

The so-called "Consolidated Press predication test"

32. The Tribunal attached considerable weight to possible future tax being potentially payable in respect of the amounts loaned by the Trading Trusts to the Operating Companies as a result of its interpretation of what it termed the "Consolidated Press predication test".

33. It is not clear what the Tribunal meant when it referred to the "Consolidated Press predication test" at [105(a)]. At [25], the Tribunal said (footnote omitted):

In the Consolidated Press primary decision, Hill J noted that any tax advantages to the stripper (eg rebates, the contemporary equivalent being tax offsets for franking credits) are not an essential ingredient in a dividend stripping scheme, a connection between the stripper and the shareholder is not critical either, and what is required is an enquiry as to whether a reasonable observer looking at the transaction would conclude that the essential character of the transaction was dividend stripping. And what differentiates a dividend stripping scheme from a scheme which is not, eg a mere reorganisation, is whether 'it could be predicated that it would only have taken place to avoid the shareholders in the target company becoming liable to pay tax on dividends out of the accumulated profits of the target company'.

34. At [26], the Tribunal stated (footnotes omitted):

The Consolidated Press [Full] Court decision did not comment on the methodology adopted to determine the purposes of the transactions, but the High Court did:

• (a) endorse the result that both Hill J and the Full Court reached concerning absence of tax avoidance;
• (b) describe the tax avoidance purpose as the hallmark of a dividend stripping scheme; and
• (c) note that if there was a difference in approach between Hill J and the Full Court in formulating the tax avoidance predication test, the Full Court's formulation:

  that s l77E was intended to apply only to schemes which can be said to have the dominant purpose of tax avoidance; the required tax avoidance purpose ordinarily being that of enabling the vendor shareholders to receive profits of the target company in a substantially 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 is preferrable.

35. The passage referred to by the Tribunal at [26(c)] is from CPH HC at [129], where the High Court stated:

In one respect, immaterial on the facts of the present case, there may have been a difference between Hill J and the Full Court as to the operation of s 177E(1)(a)(i). Hill J considered that a scheme would only be a scheme by way of or in the nature of dividend stripping if it would be predicated of it that it would only have taken place to avoid the shareholders in the target company becoming liable to pay tax on dividends out of the accumulated profits of the target company. The Full Court considered that s 177E was intended to apply only to schemes which can be said to have the dominant purpose of tax avoidance; the required tax avoidance purpose ordinarily being that of enabling the vendor shareholders to receive profits of the target company in a substantially 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. Hill J may not have intended anything different from what was said by the Full Court. If there is a difference, the formulation of the Full Court is to be preferred, being consistent with the scheme of Pt IVA, and s 177A(5) in particular.

36. The word "predicated" was used by Hill J in describing the kinds of schemes to which his Honour considered s 177E(1)(a)(i) applied - see: CPH PJ at 47 - 48. It was also used by the High Court at [129] in describing what Hill J had said. The High Court did not say that there was a "predication" test. Indeed, the High Court at [129], reproduced above, endorsed the Full Court's formulation of the circumstances to which s 177E(1)(a)(i) was intended to apply, acknowledging that Hill J may not have intended anything different, but also expressly stating that if his Honour did mean anything different, the Full Court formulation was to be preferred.

37. The High Court at [129] also accepted the consideration by the Full Court to the effect that "s 177E was intended to apply only to schemes which can be said to have the dominant purpose of tax avoidance; the required tax avoidance purpose ordinarily being that of enabling the vendor shareholders to receive profits of the target company in a substantially 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".

38. The word "predicated" was not being used by Hill J to suggest that one needed to predict what future events might occur as a result of the relevant scheme having been undertaken, if that is what the Tribunal intended by referring to the "the Consolidated Press predication test". What Hill J stated (CPH PJ at 47 - 48) was:

Obviously not all sales of shares, even if cum dividend, are in the nature of dividend stripping. Nor is the sale of 100 per cent of shares in a company necessarily dividend stripping, even if the company has accumulated profits. What is missing in the first case and may be missing in the second is the conclusion that an objective observer would reach as to why the scheme has taken place. For a scheme will only be a dividend stripping scheme if it would be predicated of it that it would only have taken place to avoid the shareholders in the target company becoming liable to pay tax on dividends out of the accumulated profits of the target company. It is that matter which distinguishes a dividend stripping scheme from a mere reorganisation.

39. In place of the word "predicated", his Honour could equally have used the word "said". The word "predicated", in the context in which it was used, should be taken to be referring to the basis or purpose of the scheme.

40. In any event, there is no "Consolidated Press predication test" as such. If the Tribunal considered that the inquiry about the purpose of a scheme centred upon a prediction of future events, that was erroneous. The inquiry about purpose centres on whether there was a purpose of avoiding tax that would or might be payable if the target company's profits were distributed to the original shareholders by way of dividends. That is a more immediate purpose than what might occur in the future.

Profits not being removed from the Australian income tax system

41. As noted earlier, the Tribunal concluded at [103] that the "profits were not removed from the Australian income tax system at all" - see also at [96(e)], [96(f)], [105(c)(i)]. This observation suggests that the wrong question was asked and/or that the wrong test was applied. The fact that it is possible that the amounts distributed to the Trading Trusts, the majority of which were loaned back to the Operating Companies, might attract tax at some future point says very little about the relevant (more immediate) purpose of the scheme or, more precisely, says little about whether the purpose of the scheme was to avoid tax that would or might be payable if the target company's profits were distributed to the original shareholders by way of dividends.

42. A tax avoidance purpose on the part of the original shareholders is not disproved by the fact that the majority of the dividends were loaned back to the Operating Companies or because the "profits were not removed from the Australian income tax system".

43. First, as a matter of fact, a portion of the amounts paid as dividends to the Trading Trusts was accessed by the original shareholders in a form which did not attract tax in the hands of the original shareholders. That fact is probative both as to purpose and as to likely future events.

44. Secondly, the fact that the whole of the amount representing the dividends did not immediately find its way back to the original shareholders says nothing about whether those amounts will not do so in the future. There is nothing in the findings of the Tribunal to suggest that it would not be open to the original shareholders to access the balance of the amounts paid as dividends (namely, the amounts loaned to the Operating Companies) as loans in the future.

45. Thirdly, it is not particularly to the point that one could hypothesise future transactions which would result in tax being payable. One can equally hypothesise, consistently with practical commercial and tax planning reality, transactions in which tax would not be payable.

46. It may be accepted that, if tax on dividends is avoided as a result of a scheme, but tax is payable by a different entity in an equivalent amount in the same income year, that may be probative of whether there was a dominant purpose of tax avoidance on the dividends. However, in this case, tax on the dividends which would have been payable by the original shareholders has been avoided. The dividends were paid to associates of the shareholders and the majority of the proceeds lent back to the Operating Companies where they might be accessed in the future by the original shareholders in a tax-free way. The fact that the profits did not leave the Australian tax net (in the tax year in which the scheme was undertaken) is not determinative of whether the purpose of the scheme was for the original shareholders to avoid a tax liability on a distribution of profits had the distribution been made to those original shareholders.

Dividends being loaned back to Operating Companies

47. The fact that the target Operating Companies' profits were paid to associates of the original shareholders and a majority then paid back to those target companies does not preclude the scheme from being one by way of, or in the nature of, dividend stripping. Having regard to the history and context, and what has been said earlier about the common characteristics of a dividend stripping scheme, a scheme may be "by way of, or in the nature of, dividend stripping" even if:

• (a) the profits are distributed to persons related to, associated with or controlled by the original shareholders; and
• (b) a compensating non-taxable receipt is not received by the original shareholder but is received by a person related to, associated with or controlled by the original shareholders.

48. The fact that the "stripper" Trading Trusts are members of the same group is not inconsistent with a dividend stripping operation. A dividend stripping operation does not require an "outsider" to be a party to the scheme. In CPH the fact that the "stripper" was a member of the same corporate group was not inconsistent with a dividend stripping operation: CPH FFC at [159], referring to
Commissioner of Taxation v Ellers Motor Sales Pty Ltd [1972] HCA 17; 128 CLR 602 at 623.

49. The fact that there was an absence of "a compensating non-taxable receipt usually found in dividend stripping operations" ([105(c)(iii)] of the Tribunal's reasons) does not necessitate a conclusion that the scheme was not "by way of, or in the nature of, dividend stripping". The fact that a scheme may have an attribute different from a paradigm example of dividend strip is not determinative.

50. Nor is a scheme necessarily denied the character of a scheme "by way of, or in the nature of, dividend stripping" by reason of the fact that a non-taxable receipt is not received by the original shareholder directly. The Full Court in CPH FFC (at [136]) referred to the "vendor shareholders receiving a capital sum for their shares" as one of the common characteristics. The Full Court also noted that a common form of dividend strip might involve the allotment of shares rather than a sale of shares. There is no good reason why a dividend stripping scheme could not involve the target company receiving a capital sum, rather than the original shareholders receiving a capital sum. Once it is appreciated that a dividend stripping operation may involve an allotment of new shares rather than a sale of existing shares, there is no logical basis for denying a scheme the character of a scheme "by way of, or in the nature of, dividend stripping" merely because all or part of the capital sum is received by the target company rather than the original shareholders themselves. In the present case, the amount received by the target company would seem to have been received at the direction of, or pursuant to arrangements set by, the original shareholders.

51. In this regard, we note that the Tribunal made no findings about the rights attached to the Z class shares issued to the Trading Trusts beyond the entitlement to the special dividend which resulted in the stripping of the retained profits of the Operating Companies. Whether the Operating Companies remained subject to the control of the original shareholders is not known.

Conclusion

52. The Tribunal erred in its construction of s 207-155 of the ITAA 1997 by failing to give proper effect to the words "by way of, or in the nature of" as words of expansion. Whilst it was relevant to observe that the original shareholders did not directly receive all of the dividends by way of capital (they only received part of the dividends by way of capital, as loans), it was erroneous not to consider whether the receipt by the Operating Companies of the balance of the dividends was sufficient in the circumstances for a conclusion that the scheme was "by way of, or in the nature of dividend stripping".

53. The Tribunal also erred in its analysis of dominant purpose by hypothesising that tax might be paid at some future time on the amounts loaned by the Trading Trusts to the Operating Companies, rather than addressing whether there was a dominant purpose of avoiding tax on a distribution of profits to the original shareholders. The payment of the dividends to the Trading Trusts in fact avoided tax on the part of the original shareholders, but this receives little attention. The Tribunal's reasons, including the terms of its conclusion at the end of [105], indicate that it was addressing a broad undefined tax avoidance purpose assessed by reference to the possibility of future events engaging a future tax liability in respect of amounts represented by the dividends which had been paid to associates of the original shareholders, rather than on the question of whether there was a purpose of avoiding tax on a distribution of profits to the original shareholders.

FURTHER ARGUMENTS RAISED ON APPEAL

54. The Commissioner sought leave to raise on appeal a submission that it is sufficient if tax avoidance was an "incidental purpose" of a scheme and that a scheme did not need to have a dominant tax avoidance purpose in order for it to be found to be a scheme by way, of or in the nature of, dividend stripping. The Commissioner explained that what he meant by "incidental purpose" was a purpose less than a dominant purpose, but more than a trivial or de minimis purpose.

55. This submission must be rejected and leave refused. A dividend stripping scheme is a scheme to avoid tax. The term "dividend stripping" is rooted in the history of tax avoidance, specifically the tax which would be payable by the shareholder if that shareholder were to receive dividends. Although the statutory language is expansive, a scheme cannot be "by way of, or in the nature of, dividend stripping" if it lacks that essential characteristic as the sole or dominant characteristic.

56. Further, this case was not run before the Tribunal. Had that case been run, it is likely that the respondents would have run their cases in a different way, both forensically and in relation to the evidence or other material which would have been put before the Tribunal. The case was not fought at the level of the lower bar which the Commissioner now seeks to set.

57. The Commissioner also sought to raise on appeal a contention that s 207-145 of the ITAA 1997 might operate in circumstances where a part of a distribution might be said to have been made as part of a dividend stripping operation. Section 207-145(1)(d) refers to "the distribution". It contains no words of apportionment. Section 207-145(2), by contrast, applies to a "specified part of the distribution". The language of s 207-145(1)(d) does not support the Commissioner's contention.

58. During the hearing, the respondents abandoned reliance on a notice of contention. Without accepting that a notice of contention is the appropriate method to raise an issue by way of what is in substance a cross-appeal or cross-application in a s 44 "appeal", the notice of contention should be dismissed.

CONCLUSION AND DISPOSITION

59. Whilst the Court is satisfied that the Tribunal erred in its construction of s 207-155, the Court is not satisfied that the facts have been fully found. It cannot be satisfied that only one conclusion would be reasonably open on the facts fully found.

60. Accordingly, the application is allowed and the matter is remitted to the Tribunal for redetermination according to law. The way in which the Tribunal should proceed with the rehearing, including how the Tribunal is constituted, is a matter for the Tribunal to decide.

61. We understood the parties to be in agreement that there would be no order as to costs of the appeal or the notice of contention. However, we reserve liberty to the parties to apply within 7 days in respect of costs to cater for the possibility that this understanding is incorrect.

THE COURT ORDERS THAT:

• 1. The application be allowed.
• 2. The respondents' notice of contention dated 9 November 2023 be dismissed.
• 3. The decision of the Administrative Appeals Tribunal be set aside.
• 4. The proceeding be remitted to the Tribunal for redetermination according to law.
• 5. Unless either party applies within 7 days, there be no order as to costs.