• The impact of this case on ATO policy is discussed in Decision Impact Statement: British American Tobacco Australia Services Ltd v Federal Commissioner of Taxation (NSD 80 of 2010).

British American Tobacco Australia Services Ltd v FC of T

Judges:
Dowsett J
Jessup J
Gordon J

Court:
Federal Court of Australia

MEDIA NEUTRAL CITATION: [2010] FCAFC 130

Judgment date: 10 November 2010

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Dowsett, Jessup and Gordon JJ.

Introduction

1. As part of a global merger of the British American Tobacco group of companies (the BAT Group ) and the Rothmans International group of companies (the Rothmans Group ) in 1999, the Appellant (a member of the BAT Group and formerly known as WD & HO Wills Australia Limited) was required by the Australian Competition and Consumer Commission (the ACCC ), inter alia, to divest certain tobacco brands owned at that time by the Appellant (the 9 Wills Brands ). The Appellant sold the 9 Wills Brands to Rothmans Pall Mall (Australia) Limited ( Rothmans ) (a member of the Rothmans Group) which immediately on-sold them for the same price to companies within the group of Imperial Group plc ( Imperial ). The Appellant obtained rollover relief for the capital gains it made on the sale and Rothmans offset its capital gain by utilising tax losses. The Commissioner contended, and the trial judge accepted, that the Appellant obtained a tax benefit (the non-inclusion of the capital gain on the sale of the 9 Wills Brands to Rothmans) in connection with a scheme to which Pt IVA of the Income Tax Assessment Act 1936 (Cth) (the 1936 Act ) applied.

2. On appeal, the Appellant submitted that the trial judge's conclusion that Pt IVA applied was affected by error. The Appellant acknowledged that tax considerations were important to the parties but that the trial judge should have concluded that the ruling or prevailing purpose of the scheme was achieving the global merger by disposing of the 9 Wills Brands as required by the ACCC. For the reasons that follow, the appeal should be dismissed.

Facts and the identified scheme

3. The summary of the facts, set out in the paragraphs which follow, is substantially taken from the reasons of the trial judge. There was no challenge to his Honour's recitation of the facts.

4. The global merger of the BAT Group and the Rothmans Group was announced on 11 January 1999. That decision to merge was made without prior reference to the Australian group members. The merger was completed in September 1999.

5. In Australia, the merger involved WD & HO Wills Holdings Limited ( Wills Holdings ) and Rothmans Holdings Limited ( Rothmans Holdings ) and their respective subsidiaries. Wills Holdings was a listed public company in Australia. 67.3% of the issued shares in Wills Holdings was held by British American Tobacco Australia Limited ( BAT Australia ), a subsidiary of British American Tobacco plc ( BAT UK ). The other 32.7% was held by the public. The Appellant was a wholly owned subsidiary of Wills Holdings. Rothmans Holdings was also a listed public company in Australia. 50% of its shares were held by Rothmans International BV ( Rothmans International ) and the other 50% were held by the public. Rothmans was a wholly owned subsidiary of Rothmans Holdings.

6. Rothmans Asia Pacific Limited ( Rothmans Asia ) was also a wholly owned subsidiary of Rothmans Holdings. PT Rothmans of Pall Mall Indonesia ( Rothmans Indonesia ) was also a wholly owned subsidiary of Rothmans Holdings. 95% of the issued shares in Rothmans Indonesia were held by Rothmans Asia. Prior to the commencement of the merger, Rothmans Indonesia had incurred losses. At the time the merger was announced, Rothmans Asia had accumulated capital losses of $63.3 million.

7. Early in the world wide negotiations, it was agreed that the larger of the BAT Group business or the Rothmans Group business in each jurisdiction would "take the lead in the merger". In Australia, the Rothmans Holdings group, which had a larger market share and a larger market capitalisation than the Wills Holdings group, was to take over the Wills Holdings group. In Indonesia, however, PT BAT Indonesia Tbk ( BAT Indonesia ), which was owned 70% by BAT UK, had a larger market share than Rothmans Indonesia. Accordingly, BAT Indonesia was to acquire Rothmans Indonesia from its Australian owners, Rothmans Holdings and Rothmans Asia.

8. The ACCC expressed concern with the merger. It took the view that the merger would be likely to have the effect of substantially lessening competition in the cigarette market in Australia. The Chairman of the ACCC, Professor Fels, intimated that:

• 1. without brand divestments by the merged group, the merged entity would become a dominant force in the Australian market;
• 2. unless there was divestment of some of the brands of the proposed Australian merged group, the ACCC would seek to restrain the merger; and
• 3. the brand divestment had to be on terms that the buyer of the brands could be up and running as soon as the brands were transferred.

9. During April and May 1999, negotiations concerning the merger continued. Some aspects of the negotiations should be noted.

10. First, on 30 April 1999, a Term Sheet was signed on behalf of BAT UK and Imperial. The Term Sheet provided for the sale and purchase of a number of Australian and New Zealand cigarette brands, tobacco brands and tobacco paper brands together with their related intellectual property rights and know how (collectively defined as the Brands ), a factory in New Zealand and "all such other assets as may be agreed relating to the Brands business". Some were Wills brands, some were Rothmans brands. The vendors named in the Term Sheet were the Appellant, British American Tobacco (New Zealand) Limited ( BAT NZ ) and Rothmans Holdings. Rothmans was not a vendor. The purchaser was Imperial. The price was A$325 million and included the assets necessary for the functioning of the sales force for the Brands to be sold. Completion of the definitive Sale and Purchase Agreement was to be negotiated subject, inter alia, to regulatory and shareholder approvals and completion of the merger in Australia. The Term Sheet recognised that "the parties [would] work together to achieve as efficient structure for the transaction as may be possible and [that] this may affect who [were] the vendor(s) and purchaser(s)".

11. Secondly, by 13 May 1999, the Wills Holdings' minority shareholders' position had been resolved in principle. The minority shareholders were to receive $6.25 per share from Rothmans Holdings for the transfer of their shares in Wills Holdings to Rothmans Holdings. Although BAT UK considered the $6.25 cash offer as "somewhat excessive", BAT UK was prepared to support the payment conditional on the receipt of all regulatory consents including the ACCC and on the parties agreeing to expedite the merger process in accordance with stated principles including:

• 1. the giving of whatever reasonable undertakings were required by the ACCC;
• 2. in respect of the Brand divestments, that the proposals be put to shareholders as soon as practical and notwithstanding that the buyer would not be obligated to execute the final brand sale agreements until after shareholder approval; and
• 3. in order to minimise any "tax leakage", that Rothmans Holdings and Wills Holdings would do whatever was required in order to mitigate tax liabilities relating to the merger including, but not limited to, the grouping of Indonesian losses and the maximisation of those losses.

12. On 19 May 1999, the merger of Rothmans Holdings and Wills Holdings in Australia was announced on the same day that a Memorandum of Understanding was signed behalf of BAT UK, Rothmans Holdings (Australia) BV, Wills Holdings and Rothmans Holdings (the MOU ). The MOU set out "the basic principles, terms and structure of the Australian merger": cl 1.1. Clause 3.1 provided that Rothmans Holdings (the prospective merged company) immediately upon entry into the MOU, would procure Rothmans to negotiate in good faith with Imperial to agree upon option arrangements whereby Rothmans would irrevocably offer to sell to Imperial, and Imperial would irrevocably offer to purchase from Rothmans, the assets identified in the Term Sheet. Each irrevocable offer was subject to the condition precedent that the Australian merger was successfully implemented: cl 3.2.

13. On 20 May 1999, Mr Mark Dunkley ( Mr Dunkley ), the Group Taxation Manager for Rothmans Holdings, wrote to Mr John Kingsley ( Mr Kingsley ), the chief finance officer of Rothmans Holdings, reiterating the need to complete the merger prior to entering into any contractually binding agreements for the sale of brands to Imperial to utilise the tax losses which were to exist in Rothmans Asia. Mr Dunkley said that it appeared to him that there may have been instances of the BAT Group and Imperial entering into negotiations and preliminary agreements that could give rise to a question as to whether a brand disposal had taken place at a date prior to the merger occurring. While Mr Dunkley did not believe that their arguments had been jeopardised to date, he thought it was important that Mr Hardman be advised of the steps that needed to be undertaken in order to be in a position to utilise the tax losses that would exist in Rothmans Asia. Mr Dunkley prepared a memorandum for Mr Kingsley to send to Mr Ken Hardman ( Mr Hardman ), then head of tax of BAT UK.

14. In the memorandum Mr Kingsley sent to Mr Hardman on 20 May 1999, Mr Kingsley first described the current position. He said that Rothmans Asia had carried forward capital losses of $63.3 million that arose from the sale of an investment in the Philippines. As a result of the sale of Rothmans Indonesia, a capital loss of in excess of $100 million would also arise in Rothmans Asia. In total, therefore, the Rothmans Holdings group had in excess of $163 million of capital losses, which could be utilised and set off against capital gains arising in the Rothmans Holdings group.

15. Mr Kingsley then outlined a strategy for utilising the capital losses as follows:

• 1. Complete the merger prior to entering into any contractually binding agreements for the sale of the brands to Imperial.
• 2. Transfer the 9 Wills Brands to Rothmans: while that would give rise to a stamp duty liability, no capital gain would be generated, as a rollover would be available in respect of assets transferred between group companies.
• 3. Complete the contractually binding agreements between Rothmans and Imperial for the disposal of all brands, including the 9 Wills Brands, giving rise to a significant capital gain in Rothmans.
• 4. Transfer the available capital losses from Rothmans Asia to Rothmans.

16. As the trial judge recorded, Mr Kingsley had identified a critical issue - the need to ensure that there was no contractually binding agreement for the disposal of the 9 Wills Brands prior to the Appellant and Rothmans becoming part of the same group. Mr Kingsley said that if a disposal of the 9 Wills Brands occurred prior to the Appellant being wholly owned by the Rothmans Groups, the rollover would be ineffective, a capital gain arising from the disposal of the 9 Wills Brands would be generated in the Appellant and it would not be possible to transfer the capital losses in Rothmans. Mr Kingsley therefore urged Mr Hardman to monitor the creation of contracts and documentation in the United Kingdom that related to the disposal of the 9 Wills Brands to Imperial. He said that failure to do so could significantly jeopardise the ability to maximise the utilisation of the capital losses that existed in the Rothmans Holdings Group.

17. On 2 June 1999, BAT UK, BAT Australia and Rothmans Holdings (the Merger Parties ) executed an enforceable undertaking to the ACCC (the ACCC Undertaking ). By the ACCC Undertaking, each of the Merger Parties agreed to do all things in its power or control to cause or procure the disposal of the business of manufacturing, marketing, selling and distributing cigarettes and other tobacco products under the brand names listed in a schedule to the ACCC Undertaking, which included the 9 Wills Brands. Each of the Merger Parties also agreed to cause or procure entry into a series of contractual arrangements with Imperial as described in another schedule to the ACCC Undertaking. Each of the Merger Parties undertook to give effect to those contractual arrangements in accordance with their terms.

18. On 16 July 1999, Wills Holdings, Rothmans Holdings and BAT Australia entered into a Merger Implementation Agreement. The Merger Implementation Agreement provided detailed mechanisms and arrangements to give effect to the proposed merger of the Australian groups.

19. On 20 July 1999, Wills Holdings and Rothmans Holdings announced the conditional sale of brands to Imperial. On the same day, Rothmans Holdings executed a deed whereby it covenanted with Imperial that it would comply with the terms of the ACCC Undertaking and would comply with the terms of the contractual arrangements described in the ACCC Undertaking. In addition, on the same day, Rothmans, Imperial and the Appellant entered into an instrument entitled "Offers for Sale and to Acquire (Australian Brands)" (the Offer Instrument ). By the Offer Instrument, Rothmans irrevocably offered to sell to a subsidiary of Imperial, nominated by it, certain Australian intellectual property assets and Imperial irrevocably offered to procure the acquisition, by one of its subsidiaries, from Rothmans of those Australian intellectual property assets. The Australian intellectual property assets included the 9 Wills Brands as well as Australian brands owned by Rothmans. The sale and acquisition was to be on the terms of an agreement in the form annexed to the Offer Instrument.

20. Clause 3.5 of the Offer Instrument provided that, if either offer was accepted, Rothmans and the subsidiary nominated by Imperial would be deemed to have entered into a binding and enforceable agreement for the sale and purchase of the Australian intellectual property assets on the terms of the agreement annexed to the Offer Instrument (the Australian Brands Sale Agreement ). The date of such agreement was to be the date of acceptance of the relevant offer. Clause 3.1 of the Offer Instrument provided that neither offer would be capable of acceptance unless the conditions precedent specified in the Offer Instrument had been satisfied or the conditions had been waived and unless the Implementation Date, as defined in a proposed scheme of arrangement between Wills Holdings and certain of its members, had occurred.

21. The merger was ultimately implemented through a scheme of arrangement in conjunction with a buy-back of BAT Australia's 67.3% shareholding in Wills Holdings for $3.85 per share (totalling A$342 million). On 16 July 1999, the Supreme Court of New South Wales ordered that a meeting of members of Wills Holdings be convened for the purpose of considering a scheme of arrangement under which Wills Holdings would buy back all shares in Wills Holdings held by BAT Australia and Rothmans would acquire all of the shares in Wills Holdings held by other shareholders for the consideration stated in the scheme. At the meeting held on 18 August 1999, the shareholders of Wills Holdings voted in favour of a resolution to approve that scheme of arrangement. On the same day, the shareholders of Rothmans Holdings also voted in favour of a scheme of arrangement between Rothmans Holdings and its shareholders. On 2 September 1999, the merger of Rothmans Holdings and Wills Holdings was completed in accordance with the scheme of arrangement.

22. On 3 September 1999, several instruments were entered into and completed to effect the merger. In particular, the Appellant, as assignor, and Rothmans, as assignee, entered into a deed of assignment, for a consideration of $181,700,000, of the 9 Wills Brands. Following exercise of the options under the Offer Instrument, Rothmans as vendor, on the one hand, and Pinelawn, an Irish corporation, Imperial New Zealand Limited and Van Nelle Tabak Nederland BV, as buyers, on the other hand, entered into the Australian Brands Sale Agreement. The three buyers were subsidiaries of Imperial. Each of those entities purchased different brands from Rothmans. The brands sold included the 9 Wills Brands. Ultimately, the Australian Brands Sale Agreement was completed and the 9 Wills Brands and the relevant Rothmans brands were transferred to one or other of the three buyers. The consideration received by Rothmans for the sale of the 9 Wills Brands to the three buyers was the same as that received by the Appellant from Rothmans, namely $181,700,000.

The scheme, the parties to the scheme and the counterfactual

23. At trial, the Commissioner identified the following steps as constituting a scheme within the meaning of s 177A(1)(a) of the 1936 Act:

• 1. the decision to interpose Rothmans between the Appellant and the members of the Imperial Group in relation to the disposal of the 9 Wills Brands from the Appellant to the members of the Imperial Group;
• 2. the disposal of the 9 Wills Brands from the Appellant to Rothmans;
• 3. the disposal of the 9 Wills Brands from Rothmans to the members of the Imperial Group;
• 4. the making of the choices by the Appellant and Rothmans to obtain rollover relief in relation to the capital gains made by the Appellant as a result of the disposal of the 9 Wills Brands to Rothmans;
• 5. the making of agreements for the transfer of net capital losses between Rothmans Holdings and Rothmans Asia as transferors, on the one hand, and Rothmans as transferee, on the other hand, including net capital losses arising as a consequence of agreements to dispose and the disposal by Rothmans Holdings and Rothmans Asia of their respective shareholdings in Rothmans Indonesia;
• 6. the utilisation by Rothmans of the net capital losses transferred from Rothmans Holdings and Rothmans Asia for the purposes of the calculation by Rothmans of its net capital gain for the 2000 year of income; and
• 7. the utilisation by Rothmans of a net capital loss carried forward from an earlier year of income for the purposes of the calculation by Rothmans of its net capital gain for the 2000 year of income,

  (the Scheme ).

24. The relevant parties to the Scheme were identified as the Appellant and Rothmans. At trial, the judge found that the steps in [23] did constitute a scheme within the meaning of s 177A(1)(a) of the 1936 Act. Before the trial judge and on appeal, the Commissioner posited the counterfactual as "a disposal of the 9 Wills Brands by the Appellant directly to the Imperial Group with the consequence that the [Appellant's] capital gain would be the income of the Appellant". The "tax benefit" within the meaning of s 177C(1)(a) was identified as the non-inclusion of a net capital gain of $118,128,953 in its assessable income.

Appellant's case on appeal

25. The Appellant submitted that three errors affected the trial judge's primary conclusion that Pt IVA of the 1936 Act applied to the Scheme:

• 1. "but for" reasoning underpinned the conclusion that the Appellant and Rothmans entered into and carried out the Scheme "for the purpose of enabling the Appellant to obtain the tax benefit resulting from the rollover choice" (at [99] of the primary judge's reasons for decision). The Appellant submitted that the trial judge did not enquire or reach a conclusion, as required by s 177D(b) of the 1936 Act, as to the dominant purpose of a person in entering into or carrying out the Scheme;
• 2. the reasons of the trial judge focussed on a tax benefit not the subject of, nor giving rise to, the Pt IVA determination to support a conclusion that Pt IVA applied with respect to the tax benefit the subject of the Pt IVA determination; and
• 3. s 177C(2A)(a) of the 1936 Act was given an erroneous construction.

26. The Appellant submitted that once the correct approach to s 177D(b) was applied to the Scheme, it would not be concluded that the Appellant, Rothmans or any other person entered into or carried out the Scheme for the dominant purpose of obtaining the tax benefit. Rather, the Appellant contended that whilst it acknowledged that tax considerations were important in the Scheme, the ruling or prevailing purpose of the Scheme was achieving a global merger by disposing of brands as required by the ACCC. Further, the Appellant submitted that under the proper construction of s 177C(2A)(a), the "scheme" is not the Scheme defined by the Commissioner but the choice to obtain the rollover relief under subdiv 126-B of the Income Tax Assessment Act 1997 (Cth) (the 1997 Act ) and that such a "tax benefit" is removed from Pt IVA by s 177C(2A)(a) of the 1936 Act.

27. Consistent with the structure of Pt IVA, it is appropriate to consider the identification of the scheme, then the questions of tax benefit and the application of s 177C(2A)(a) and, finally, the application of the s 177D factors:
Commissioner of Taxation v Hart (2004) 217 CLR 216 at [33] and [34] per Gummow and Hayne JJ.

The "scheme" and s 177C(2A)

28. The Appellant submitted that it was the choice to obtain the rollover relief under subdiv 126-B of the 1997 Act which was the "scheme" for the purposes of s 177C(2A) on the basis that the choice was the only step which produced the tax benefit. That proposition is rejected.

29. First, "scheme" is defined in s 177A(1). It provides:

• "(1) In this Part, unless the contrary intention appears:

  …

  'scheme' means:

  • (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."

30. By the express terms of Pt IVA, a "scheme" is not necessarily limited to the "step" that "produces" a tax benefit. "Scheme" is defined broadly in s 177A for Pt IVA: Hart at [43], [47]-[50], [55];
Commissioner of Taxation v Consolidated Press Holdings (No 1) (1999) 91 FCR 524 at [75]-[81];
Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404 at 425 and
Commissioner of Taxation v Peabody (1994) 181 CLR 359 at 378 and 380. Pt IVA does not provide that a scheme includes part of a scheme: Hart at [41] citing Peabody at 383. However, paragraph (b) of the definition of "scheme" in s 177A(1) provides that it includes a scheme, plan, proposal, action, course of action or course of conduct. The inclusion of the words in italics reflects that the definition of a scheme may not always permit the precise identification of what are said to be all of the integers of a particular scheme and that a scheme can encompass a series of steps which together constitute a "scheme" or "plan" or the taking of a single step (by reference to the word "action"): Hart at [39]-[47].

31. Other sections in Pt IVA also expressly acknowledge that a "scheme" within the meaning of s 177A(1) is not necessarily limited to the step which produces the tax benefit. Section 177D, which identifies the schemes to which Pt IVA applies (Hart at [34]), provides that it applies where it would be concluded that the person or persons who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the taxpayer to obtain a tax benefit in connection with the scheme. Section 177A(5) then goes on to provide that the reference to a scheme or part of a scheme being entered into or carried out for a particular purpose is to be read as including a reference to the scheme or the part of a scheme being entered into or carried out for two or more purposes of which that particular purpose is the dominant purpose: Hart at [34]-[36]. Each section proceeds on the assumption that it is at least possible that a scheme may be comprised of more than one step or part.

32. The Appellant's reliance on the opening words in the definition of scheme in s 177A(1), "unless the contrary intention appears", does not advance the argument. There is nothing to support the contention that it is necessary to read the definition of "scheme" in s 177A(1) more narrowly for the purposes of s 177C(2A): cf Hart at [54]. First, s 177C is directed to the issue of identification of the tax benefit. Subsection (1) identifies how a tax benefit can be obtained. Subsections (2), (2A) and (3) identify exclusions to a taxpayer obtaining a tax benefit in connection with a scheme. Section 177C(2A)(a) provides:

"A reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme is to be read as not including a reference to:

• (a) the assessable income of the taxpayer of a year of income not including an amount that would have been included, or might reasonably be expected to have been included, in the assessable income of the taxpayer of that year of income if the scheme had not been entered into or carried out where:
  • (i) the non-inclusion of the amount in the assessable income of the taxpayer is attributable to the making of a choice under Subdivision 126-B of the [1997 Act] or an agreement under Subdivision 170-B of that Act; and
  • (ii) the scheme consisted solely of the making of the agreement or election; …"

  (Emphasis added.)

33. The terms of s 177C(2A) reflect the purpose for which it was enacted - to preserve the benefit of the rollover and loss transfer regimes: Explanatory Memorandum, Taxation Laws Amendment Bill (No 2) 1998 (Cth), para [1.66] (the Explanatory Memorandum ). The pre-conditions to the exclusion are specific. So far as is relevant here, the pre-conditions are the making of a choice under s 126-B and in circumstances where the scheme consists solely of the making of the election. (It was common ground that the "choice" in s 177C(2A)(a)(i) is equated with "election" in s 177C(2A)(a)(ii)).

34. If the scheme did consist solely of the making of the choice, as commonly occurred at the end of a financial year between group members in the period prior to consolidations, the exclusion would apply. That is not this case. Here, contrary to the Appellant's submissions, there were relevant steps that took place both before (steps 1 to 3 at [23] above) and after the rollover (steps 4 to 7 at [23] above). Those steps were not "merely context" but part of the scheme. The Appellant did not satisfy the exclusion. The Scheme did not consist solely of the making of the choice. The making of the choice was part of a wider scheme. Adapting the language of the Explanatory Memorandum at para [1.66]:

"… Part IVA could only apply in such cases if the making of the agreement or election was part of a wider scheme which had as its sole or dominant purpose the creation of a capital loss which would not have existed if the wider scheme had not been entered into."

35. In the present case, s 177C(2A) does not apply and was not intended to apply because the Scheme was entered into for "the purpose of creating the conditions necessary for the making of the [choice/election]": cf Explanatory Memorandum para [1.66].

36. Contrary to the Appellant's submissions, this construction of s 177C(2A) and the word "scheme" in subs (ii) of s 177C(2A) does not mean that s 177C(2A) would never apply and its legislative purpose would go unrealised. As just noted, the section addresses the fact that it is possible to have a scheme which consists solely of the making of a rollover choice. By way of a further example, it is possible for related companies to effect a disposal of an asset from one to another at one point in time and then, later in the same year, when preparing and lodging the tax returns, make a subdiv 126-B rollover choice.

37. Section 177C(2A) is an exclusion. It contains limitations. The limitation in s 177C(2A)(a)(ii) is express. Its legislative purpose is clear. The Appellant's submissions ignore both aspects. Finally, it must be recalled that s 177C(2A) is one method of exclusion from the application of Pt IVA. It is not the only one. Where, as here, the Scheme is not confined to the choice, it is still necessary for the Scheme to satisfy s 177D before Pt IVA applies. That issue is addressed below.

38. If parliament had intended to limit "scheme" in Pt IVA to a "step" that "produces" a tax benefit, it could have done so expressly. It did not. If Parliament had intended to adopt a different definition of "scheme" for the purposes of s 177C(2A) it could have done so expressly and at the time s 177C(2A) was enacted. It did not. The trial judge correctly identified the "Scheme" as a scheme within the meaning of s 177A(1).

Tax benefit

39. As noted earlier, before the trial judge and on appeal, the Commissioner posited the counterfactual as "a disposal of the 9 Wills Brands by the Appellant directly to the Imperial Group with the consequence that the [Appellant's] capital gain would be the income of the Appellant". The "tax benefit" within the meaning of s 177C(1)(a) was identified as the non-inclusion of a net capital gain of $118,128,953 in its assessable income. The primary judge found that the Appellant obtained that "tax benefit" of $118,128,953.

40. On appeal, the Appellant did not challenge the counterfactual or alternate postulate that resulted in the identification of that tax benefit. Instead, the Appellant submitted that the trial judge expressed the object of the scheme as being "the utilisation of tax losses" (in [96], [97] and [99] of the trial judge's reasons for decision) and thereby focused on a tax benefit different to the tax benefit which had been the subject of, or given rise to, the Commissioners' Pt IVA determination. The submission is rejected. It incorrectly characterises the trial judge's reasons for decision.

41. Paragraphs [96], [97] and [99] of the trial judge's reasons for decision were directed at the factors in s 177D(b) and were in the following terms:

• [96] The sixth factor is any change in the financial position of any person who has any connection with the relevant taxpayer, being a change that has resulted from the scheme. Rothmans acquired the 9 Wills Brands for a consideration equal to their value and then disposed of the 9 Australian Wills brands for a consideration equal to their value. There was no change except to the extent that it was able to participate in the use of the tax losses of the Rothmans Holdings group.
• [97] The seventh factor is any other consequence for the relevant taxpayer or for any person who has any connection with the relevant taxpayer, of the scheme having been entered into or carried out. The consequence for the [Appellant] and the Rothmans Holdings group, as just indicated, was that tax losses were utilised that would not have been utilised by the [Appellant] if the [Appellant] had transferred or disposed of the 9 Nine Wills Brands direct to the Imperial subsidiaries rather than to Rothmans.

  …

• [99] I consider that, overall, the eight factors required to be considered point strongly to the conclusion that the [Appellant] and Rothmans, both of whom entered into and carried out the scheme, together with other parties, did so for the purpose of enabling the [Appellant] to obtain the tax benefit resulting from the rollover choice. That had the consequence that the [Appellant] was not required to bring into account as assessable income the capital gain of $118,128,953 derived on the disposition of the 9 Wills Brands that would have been derived, without the benefit of set off against tax losses, had they been disposed of direct to the Imperial subsidiaries rather than to Rothmans.

42. The effect of those passages is clear. They reflect the statutory task - that "all eight matters listed in s 177D(b) [must] be considered in deciding what conclusion would be reached about the purpose of the relevant persons": Hart at [58]. Each reference to "utilisation of tax losses" was not a reference to the "tax benefit". Each was a reference to a matter to be taken into account pursuant to s 177D(b)(vi), (vii) and (viii) in ascertaining whether the Scheme was a scheme to which Pt IVA applied. Sections 177D(b)(vi), (vii) and (viii) provide that in ascertaining purpose, the 1936 Act requires one to have regard to, inter alia, "any change in the financial position of any person who has, or has had, any relevant connection … with the [Appellant], being a change that has resulted, will result, or may reasonably be expected to result, from the scheme". Consideration of matters other than the tax benefit are not only relevant but usually essential. "The utilisation of tax losses" was a matter properly taken into account in considering s 177D(b)(vi), (vii) and (viii).

43. This ground of appeal fails.

Section 177D and dominant purpose - rejection of the "but for test"

44. The Appellant submitted that the trial judge erred in adopting a "but for" approach to Pt IVA and left the question of dominant purpose in s 177D unanswered. This appeal ground also fails. The trial judge did not adopt a "but for" test and the application of the factors in s 177D(b) leads to the conclusion that the Scheme was entered into and carried out by the Appellant and other persons for the dominant purpose of obtaining the tax benefit.

45. Before turning to consider the trial judge's approach and the Appellant's criticisms of it, a number of principles are worth restating.

46. It is well established that Pt IVA is not a "but for" test: Hart at [53] and at [15]; Spotless Services Limited at 414;
Macquarie Finance Ltd v Commissioner of Taxation (2005) 146 FCR 77 at [240] and
Eastern Nitrogen Ltd v Commissioner of Taxation (2001) 108 FCR 27 at [20]. (As the Commissioner submitted, a "but for" test is a test of causation, not of purpose:
March v E & MH Stramare Pty Limited (1991) 171 CLR 506 at 508, 515-6, 529-530). For example, the fact that a higher taxed hypothetical alternative can be identified does not of itself answer the question whether Pt IVA applies to disallow the claimed deduction or to include an amount not included in the assessable income of a taxpayer. Put another way, "the bare fact that a taxpayer pays less tax, if one form of transaction rather than another is made, does not demonstrate that Pt IVA applies": Hart at [53] and [15].

47. However, "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": Hart at [16]. As Gummow and Hayne JJ said in Hart at [56], "[t]he central question then becomes, would it be concluded, having regard to the eight matters listed in s 177D(b), that a person who entered into or carried out the … scheme, or any part of [the] scheme, did so for the dominant purpose of enabling the [Appellant] to obtain a tax benefit in connection with the scheme?" "Dominant" purpose is the "prevailing, ruling or most influential purpose": Spotless Services Limited at 416.

48. What then did the trial judge do in relation to s 177D(b)? First, the trial judge correctly identified that s 177D(b) was focussed on purpose, not causation: see [58], [63] and [87] of the trial judge's reasons for decision.

49. Secondly, the trial judge set out the Appellant's contention that the dominant or ruling or prevailing purpose of the Appellant, Rothmans and all other parties involved in the Scheme was to allow the merger of the BAT Group and the Rothmans Group to proceed both in Australia and worldwide by bringing about the disposal of brands to Imperial and thereby obviating the possibility of intervention by the ACCC. Accordingly, the Appellant contended that the Scheme was an ordinary transaction entered into or carried out for the dominant purpose of successfully completing the merger without intervention from the ACCC, and therefore did not satisfy Part IVA.

50. The Appellant submitted to the trial judge that that contention was supported by the following facts:

• 1. that the purpose was effected in a way that utilised capital losses that were properly available to the merged group without transforming that purpose into one of obtaining a tax benefit;
• 2. it was only because of the proposed merger of the BAT Group and the Rothmans Group that the ACCC intimated that it would intervene and to avoid the ACCC's intervention it was necessary to dispose of the 9 Wills Brands to parties outside the merged group;
• 3. substantial capital gains were also realised on the disposal by Rothmans to the Imperial Group, of brands that had always been within the Rothmans Holdings group (defined as the Rothmans Brands );
• 4. the regional organisation resulted in the crystallisation of capital losses on the part of Rothmans Asia and Rothmans Holdings in amounts almost equal to the capital gain attributable to the disposal of the 9 Wills Brands; and
• 5. absent the Scheme, which included the disposal of the brands to Imperial by Rothmans, the 9 Wills Brands would not have been disposed of to Imperial subsidiaries and the parties to the merger would have been in breach of the undertaking given to the ACCC.

51. The trial judge rejected the Appellant's contentions as to purpose. His Honour stated at [89]:

"However, that analysis ignores the essential concept of the scheme identified by the Commissioner. As I have said, the essential element is to be found in the disposal of the 9 Wills Brands by the [Appellant] to Rothmans and the subsequent disposal by Rothmans to the Imperial Group of the 9 Wills [B]rands, together with the Rothmans Brands. The desired objective of the disposition of all of the relevant brands, both the 9 Wills brands and the Rothmans Brands, to the Imperial subsidiaries could have been achieved by a transfer direct from the [Appellant] to the Imperial subsidiaries of the 9 Wills Brands and a transfer direct from Rothmans to the Imperial subsidiaries of the Rothmans Brands. The requirements of the [ACCC] would have been satisfied and the intended object of the merger would have been achieved. There was no commercial or legal reason why the disposition to the Imperial subsidiaries of both the 9 Wills Brands and the Rothmans Brands should have been effected from a single vendor, transferor or disposer rather than a disposition from separate vendors, transferors or disposers. Precisely the same commercial and legal object could have been achieved without the transfer, sale or disposal by the [Appellant] to Rothmans followed by transfer, sale or disposal by Rothmans to the Imperial subsidiaries."

52. His Honour then addressed each of the factors in s 177D(b) and after posing the correct question (at [90]) concluded (at [99]) that "the eight factors required to be considered point strongly to the conclusion that the [Appellant] and Rothmans, both of whom entered into or carried out the Scheme, together with other parties, did so for the purpose of enabling the [Appellant] to obtain the tax benefit from the rollover choice" (emphasis added). The language adopted reflects the concluding words of s 177D(b).

53. The trial judge's approach and conclusion were both open and correct. As was said in Hart, "to draw a conclusion about purpose from the eight matters identified in s 177D(b) … require[s] consideration of what other possibilities existed": at [66] and [94]. In addressing s 177D(b)(i)-(v) and (vii), the trial judge compared the Scheme as carried out with the counterfactual: see [42] above. Such an approach was not only open but is usually required in assessing the dominant purpose of a scheme. A comparison between the Scheme carried out and the counterfactual was important in the present case because it revealed that the manner in which the Scheme was formulated and carried out was, when compared with the counterfactual, explicable only by taxation consequences: s 177D(b)(i). Next, that under the Scheme, and the counterfactual, the merger and its commercial benefits (facts relied upon by the Appellant as noted in [49] and [50] above) would have been achieved. Put another way, as the trial judge concluded, it was unnecessary to implement the Scheme to achieve both those objectives - the merger and the commercial benefits identified (see [51] above and Hart at [17], [18] and [58]: ss 177D(b)(i), (ii), (iv), (vii)).

54. A consideration of the other factors also "point[ed] strongly to the conclusion that the [Appellant] and Rothmans, both of whom entered into or carried out the scheme, together with other parties, did so for the purpose of enabling the [Appellant] to obtain the tax benefit from the rollover choice". As to the time at which the Scheme was entered into and the length of the period during which the Scheme was carried out (s 177D(b)(iii)), it is sufficient to refer to the memorandum from Mr Kingsley dated 20 May 1999 (see [14] to [16] above). Timing of the Scheme was critical to its success. The trial judge was correct to conclude that the timing of the disposition of the 9 Wills Brands by the Appellant to Rothmans was critical to achieving the tax benefit.

55. In relation to the fifth and sixth factors (any change in financial position of the Appellant or any person who has any connection with the Appellant, being a change resulting from the Scheme), the trial judge correctly concluded (1) that the Appellant received $181,700,000 ( value ) from Rothmans on the disposition of 9 Wills Brands and avoided capital gains tax and (2) Rothmans acquired the 9 Wills Brands for value, then immediately disposed of them for value and then was able to participate in the tax losses of the Rothmans Holdings Group.

56. The eighth factor - any connection between the Appellant and any person who has any connection with the Appellant was correctly addressed by the trial judge. At the time of the disposition of the 9 Wills Brands by the Appellant to Rothmans, they were both members of the merged group. Prior to that, they were competitors. The relationship enabled the Scheme to be effected.

57. The Appellant's appeal should be dismissed with costs.