Allen (Trustee), in the matter of Allen's Asphalt Staff Superannuation Fund v Commissioner of Taxation

JUDGE: COLLIER J DATE: 19 NOVEMBER 2010 PLACE: BRISBANE

REASONS FOR JUDGMENT 1 This is an application by Mr Bradley Allen and Mrs Anita Allen in their capacity as trustees for the Allen's Asphalt Staff Superannuation Fund ("the Super Fund") pursuant to s 14ZZ of the Taxation Administration Act 1953 (Cth) ("TAA 1953") against an appealable objection decision made by the Commissioner of Taxation on 26 February 2008. The Commissioner's decision was to disallow an objection against an amended assessment issued on 9 November 2006 and penalty assessment issued on 15 November 2006 in respect of the year of income ended 30 June 2003. The applicant has the burden of proof that, inter alia, the assessment is excessive (s 14ZZO TAA 1953). 2 The primary issues for decision in this case are: 1. Whether a distribution from the trustee of the Allen's Asphalt Fixed Trust ("the Fixed Trust") to the Super Fund in the amount of $2,500,005 in consequence of the Super Fund holding a fixed entitlement to 100% of the income of the Fixed Trust constituted "special income" in the hands of the Super Fund for the purposes of s 273(7) of the Income Tax Assessment Act 1936 (Cth) ("ITAA 1936"). This issue is integral to the appeal, because a determination that the income was "special income" has the significant financial consequence of the income being taxed at the rate of 47% rather than 15%, and leads to the question of the correctness of the penalty imposed by the Commissioner in this case. 2. Whether the penalty was correctly imposed by the Commissioner in this case at the rate of 25% under s 284-75 of the TAA 1953. 3 The first primary issue requires a detailed analysis of s 273 of the ITAA 1936, in particular, subs 273(7). I note that s 273 has been repealed since relevant events, however it is common ground that the section in the following form is applicable in these proceedings: 273 Special Income (1) This section applies to income derived in a year of income by a fund or unit trust (in this section called the entity) that is a complying superannuation fund, a complying ADF or a PST in relation to the year of income. (2) A dividend paid to the entity by a company that is a private company in relation to the year of income of the company in which the dividend was paid is special income of the entity unless the Commissioner is of the opinion that it would be reasonable not to treat the dividend as special income of the entity, having regard to: (a) the value of the shares in that company that are assets of the entity; (b) the cost to the entity of the shares on which the dividend was paid by the company; (c) the rate of the dividend paid to the entity by the company on the shares in the company that are assets of the entity; (d) whether the company has paid a dividend on other shares in the company and, if so, the rate of that dividend; (e) whether any shares have been issued by the company to the entity in satisfaction of, or of a part of, a dividend paid by the company and, if so, the circumstances of the issue of those shares; and (f) any other matters that the Commissioner considers relevant. (3) For the purposes of subsection (2), income that, in the opinion of the Commissioner, was derived by the entity indirectly from a dividend paid by a company, being a private company in relation to the year of income of the company in which the dividend was paid, shall be deemed to have been a dividend paid to the entity by the company. (4) Income (other than a dividend to which subsection (2) applies or income derived by the entity in the capacity of beneficiary of a trust estate) derived by the entity from a transaction is special income of the entity if the parties to the transaction were not dealing with each other at arm's length in relation to the transaction and that income is greater than the income that might have been expected to have been derived by the entity from the transaction if those parties had been dealing with each other at arm's length in relation to the transaction. (5) A reference in subsection (4) to a transaction includes a reference to a series of transactions. (6) Income derived by the entity in the capacity of beneficiary of a trust estate (other than by virtue of holding a fixed entitlement to the income) is special income of the entity. (7) Income derived by the entity in the capacity of beneficiary of a trust estate by virtue of holding a fixed entitlement to the income is special income of the entity if: (a) the entity acquired the fixed entitlement under an arrangement (see subsection 8)), or the income was derived under an arrangement, some or all of the parties to which were not dealing with each other at arm's length in relation to the arrangement; and (b) the amount of the income is greater than might have been expected to have been derived by the entity if those parties had been dealing with each other at arm's length in relation to the arrangement. (8) In subsection (7), arrangement 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. (9) This section: (a) applies to a non-share equity interest in the same way as it applies to a share; and (b) applies to an equity holder in the same way as it applies to a shareholder; and (c) applies to a non-share dividend in the same way as it applies to a dividend. 4 It was also clear from the respective cases made by both applicant and the Commissioner that a decision in respect of the first primary issue requires determination of the following sub-issues: 1. Whether "income derived" in s 273(7) of the ITAA Act 1936 includes amounts of ordinary and statutory income, or whether it is restricted to income according to ordinary concepts. 2. Whether the trustee of the Super Fund "acquired" its fixed entitlement to the income. 3. Whether the Super Fund acquired its entitlement to income, or derived income, under an "arrangement". 4. Whether there were parties to the arrangement who were not "dealing" with each other at arm's length in relation to the arrangement. 5. Whether the amount of income was greater than might have been expected to have been derived if the parties had been dealing with each other at arm's length. 5 Before turning to these issues however, it is useful to summarise the background to these proceedings.

BACKGROUND 6 There is little factual controversy in these proceedings. The following facts are taken from the respective appeal statements of the applicant and the respondent.

The Super Fund · The Super Fund is a self-managed superannuation fund established on 28 June 1993. The company then known as Allen's Asphalt Pty Ltd (and later Kylo Constructions Pty Ltd) was appointed trustee at the time of the Super Fund's establishment. · The members of the Super Fund are Bradley Allen and Anita Allen. · Allen's Asphalt Pty Ltd had been originally incorporated on 15 May 1990 under the name Masonpark Pty Ltd. The name of the company was changed to Allen's Asphalt Pty Ltd on 12 May 1993, and again subsequently on 4 February 2003 to Kylo Constructions Pty Ltd. · Bradley Allen has been a director of the company which eventually became Kylo Constructions Pty Ltd since 17 April 1992. Anita Allen was a director between 4 July 1990 and 22 January 2004. · On 15 November 2005, Kylo Constructions Pty Ltd ceased to be the trustee of the Super Fund. On that date Bradley Allen and Anita Allen became the trustees of the Super Fund.

The Hybrid Trust · The Allen's Asphalt Hybrid Fixed Trust was created by deed dated 28 June 2001 ("the Hybrid Trust"). Allen's Asphalt Nominees Pty Ltd was appointed trustee. · On 4 February 2003 the name Allen's Asphalt Nominees Pty Ltd was changed to Kylo Properties Pty Ltd. Bradley Allen has been the sole director of the company since incorporation. · The Principals of the Hybrid Trust are Bradley Allen and Anita Allen. The Principals have power to, inter alia, appoint beneficiaries, and to remove any trustee and appoint a new trustee (cl 6 and cl 9.3 of the trust deed). · The First Schedule of the Hybrid Trust deed showed Allen's Asphalt Pty Ltd as the "absolute beneficiary" of the trust. The Second Schedule listed primary beneficiaries, secondary beneficiaries and tertiary beneficiaries. · In accordance with the Second Schedule of the Hybrid Trust deed, tertiary beneficiaries included any trustee of any settlement or any company or corporation wherein the trustee of this trust or any of the beneficiaries was a beneficiary or had an interest. · Clause 3.3 of the Hybrid Trust deed provided: 3.3 The trustee may at any time prior to the expiration of any year which ends before or upon the Perpetuity date determine with respect to all or any parts of the net income of the Trust Fund of such year: 3.3.1 To pay apply or set aside the same or any part thereof for all or one or more of the Primary and Secondary Beneficiaries living or in existence at the time of the determination. 3.3.1 To pay apply or set aside the same or any part thereof for all or one or more of the Tertiary Beneficiaries living or in existence at the time of the determination. 3.3.3 To accumulate the same or any part thereof. But in the absence of any determination to apply or set aside all of the net income for all or one or more of the Primary, Secondary and Tertiary Beneficiaries, that part of the net income not so dealt with shall be held for the absolute benefit of the Absolute Beneficiary.

The Fixed Trust · Astonglen Pty Ltd was incorporated on 27 May 1997. Bradley Allen has been the sole director since 1 February 2000. · On or about 28 June 2002 Bradley Allen, as sole director of Astonglen Pty Ltd, executed a deed whereby Astonglen Pty Ltd declared that it was the trustee of the Fixed Trust. The sum held on trust was $10.00. The schedule to the deed nominated Allen's Asphalt Pty Ltd (in its capacity as trustee of the Super Fund) as the "absolute beneficiary" of the Fixed Trust. · The Super Fund provided no valuable consideration for being made a beneficiary of the Fixed Trust.

Additional events of 28 June 2002 7 In addition to the declaration of the Fixed Trust on 28 June 2002: · By deed of variation, Allen's Asphalt Pty Ltd repealed the terms of the existing deed of the Super Fund as varied, and replaced them with those terms contained in Appendix 1 to the Deed of Variation; and · Bradley Allen as director of Allen's Asphalt Nominees Pty Ltd signed a deed of variation of the Hybrid Trust deed whereby, pursuant to cl 9.2 of the deed, the Hybrid Trust deed was varied by adding a new class of beneficiaries called "discretionary beneficiaries". This new class included, inter alia, the trustee of the Fixed Trust.

Purported appropriation of income of the Hybrid Trust for year of income ended 30 June 2003 8 In an undated and unsigned resolution Bradley Allen, as director of the trustee of the Hybrid Trust, purportedly resolved an appropriation of income of the Hybrid Trust. The resolution, which does not separately distinguish the character or class of income being distributed to each beneficiary, specifies the appropriation of trust income as follows: · Bradley E Allen $1,561,830 · Anita H Allen $1,561,830 · Allen's Asphalt Fixed Trust $2,500,005 · Allen's Investment Trust $150,025

Purported appropriation of income of the Fixed Trust for year of income ended 30 June 2003 9 In an undated and unsigned resolution Bradley Allen, as director of the trustee of the Fixed Trust, purportedly resolved to appropriate the trust income of $2,500,005 to the Super Fund. 10 The amount of $2,500,005 was distributed to the Super Fund in several instalments prior to the end of the 30 June 2003 income year.

2003 Income Tax Returns 11 On 5 March 2004 the trustee of the Super Fund, lodged its income tax return for the income year ended 30 June 2003. The return showed a discount capital gain of $5,000,000, and an "other" capital gain of $5,000,010. The trustee offset current and prior year capital losses, appeared to apply the capital gains tax discount of 1/3rd to the discount capital gain, and included a net capital gain of $8,320,639 in the Super Fund's assessable income. 12 The records of the Australian Taxation Office (ATO) indicate that an amendment request dated 5 April 2004 was received from the tax agents for the Super Fund requesting that the Super Fund's income tax return for the year ended 30 June 2003 be amended to reduce the net capital gain from $8,320,639 to $3,320,639. This had the effect of reducing the Super Fund's taxable income from $8,331,951 to $3,331,948. A notice of amended assessment was issued on 13 May 2004. 13 On 5 March 2004 the trustee of the Hybrid Trust lodged its income tax return for the year of income ended 30 June 2003. This return showed, inter alia, a distribution of $2,500,000 to the Super Fund rather than to the Fixed Trust. 14 On 2 April 2004 the auditor of the Super Fund advised the tax agents for the Super Fund that the distribution from the Fixed Trust recorded in the accounts had been mistakenly included in the income tax return as being from the Hybrid Trust. Accordingly, the Super Fund's income return would require amendment to show the correct distribution details. 15 On 28 September 2004 the tax agent for the Super Fund wrote to the ATO amending the Super Fund's income tax return to state that the trust distribution was in fact received from the Fixed Trust, and not from the Hybrid Trust. 16 On 4 October 2004 the trustee of the Fixed Trust lodged an income tax return for the income year ended June 2003 which included the relevant distribution in its assessable income, and showing the distribution to the Super Fund. 17 In respect of the income year ended 30 June 2003, the income tax returns for the Super Fund and for the Hybrid Trust were amended as requested. The Hybrid Trust's return was amended to increase its distribution to the Fixed Trust from nil to $2,500,000, and to decrease its distribution to the Super Fund from $2,500,000 to nil.

Notice of Amended Assessment 18 At the relevant time s 26 of the Income Tax Rates Act 1986 (Cth) imposed tax upon the trustee of a complying superannuation fund at the rate of 15% in respect of the standard component of taxable income and 47% in respect of the special component of taxable income. 19 By Notice of Amended Assessment dated 9 November 2006, the Commissioner assessed the Super Fund's share of distribution from the Fixed Trust as "special income" pursuant to s 273(7) of the ITAA 1936 for the year of income ended 30 June 2003. The Notice of Amended Assessment also reduced the amount included in the assessable income of the Super Fund on account of the distribution from the Fixed Trust from $3,320,636 to $2,500,005. 20 By Notice of Assessment and Liability to Pay Penalty dated 15 November 2006, the Commissioner imposed tax shortfall penalty pursuant to s 284 of the TAA 1953 in the sum of $169,226.70. The Commissioner also sought a General Interest Charge of $301,335.29 (as at 5 June 2008) from the Super Fund.

Notice of Objection Against Assessment and Notice of Decision on Objection 21 By Notice of Objection against Assessment dated 16 March 2007, the Super Fund objected to the assessments issued on 9 and 15 November 2006. 22 By Notice of Decision on Objection dated 26 February 2008, the Commissioner disallowed the Super Fund's objection. 23 By application dated 23 April 2008 the Super Fund appealed to the Federal Court against the Commissioner's decision.

REASONS OF COMMISSIONER 24 In his reasons for decision disallowing the objection the Commissioner stated in summary: · The Super Fund's 2003 amended assessment should not be amended to exclude the net capital gain of $2,500,005 from its assessable income for the year. Based on the available information the net capital gain was distributed by the Hybrid Trust to the Fixed Trust as per its 2003 tax returns and from there to the Super Fund. · The basis of the applicant's objection was that, inter alia, s 273 of the ITAA 1936 only applied to income according to ordinary concepts, and did not apply to capital gains which were statutory income, that s 273(6) of the ITAA 1936 had no application in its case, and that s 273(7) of the ITAA 1936 had no application because: o there were no dealings whereby the Super Fund obtained a fixed entitlement in the Fixed Trust; o there was no "arrangement" between the Super Fund and the two related trusts; o the fixed entitlement of the Super Fund in the Fixed Trust did not arise as a result of non-arm's length dealings; o income was not derived by the Super Fund under an arrangement involving non-arm's length dealings; o the distribution could not be said to be greater than an arm's length amount. · The word "income" in s 273 of the ITAA 1936 includes both income according to ordinary concepts and amounts included in assessable income under a statutory provision. Capital gains can be special income provided all other requirements are satisfied. The Commissioner accepted that s 273(6) was not applicable in the circumstances of the case, but considered that s 273(7) was applicable. · Section 273(7) applies to trust income derived by a superannuation entity where the entity holds a fixed entitlement to that income. The subsection requires the satisfaction of several criteria before income derived from holding a fixed entitlement in a trust estate is deemed special income. · Paragraph 103 of Tax Ruling 2006/7 sets out the Commissioner's view in respect of the application of subs 273(7) to determine whether a trust distribution received by a complying superannuation fund is special income. Paragraph 103 provides that a trust distribution arising from a fixed entitlement will only be special income if the following three conditions are met: (1) the entity must have acquired the fixed entitlement under an arrangement or the income must have been derived under an arrangement; (2) some or all of the parties to the arrangement must not have been dealing with each other at arm's length; and (3) the amount of the distribution must be greater than the amount of income that might have been expected if the parties had been dealing with each other at arm's length. · All conditions in the tax ruling were met in this case. · The tax shortfall penalty in this case was not incorrectly imposed.

ISSUE 1, SUBISSUE 1: DOES "INCOME DERIVED" IN SECTION 273(7) ITAA ACT 1936 INCLUDE AMOUNTS OF ORDINARY AND STATUTORY INCOME OR IS IT RESTRICTED TO ORDINARY INCOME? 25 That the Super Fund had a fixed entitlement to income from the Fixed Trust during the 2003 financial year is not in dispute. It is also not in dispute that the Super Fund derived income during that year as a consequence of this fixed entitlement. A threshold issue, however, is whether s 273, and in particular s 273(7) applied to income in the relevant form received by the Super Fund, and in particular whether "income" for this purpose was restricted to income according to ordinary concepts.

Submissions of the parties 26 There is no authority considering the meaning of "income derived" for the purposes of s 273(7) of the ITAA 1936. 27 It is common ground that the distribution from the Fixed Trust to the Super Fund was a distribution of a capital gain, which had previously been distributed by the Hybrid Trust to the Fixed Trust. It is also common ground that capital gains do not constitute income in the ordinary sense of the word, but may be deemed income by force of the legislation. 28 In summary, the submissions of the applicant in relation to the meaning of "income" for the purposes of s 273(7) are: · Capital gains are included in assessable income as statutory income and are not considered income according to ordinary concepts. · Section 273 only applies to income according to ordinary concepts, and does not apply to capital gains which are statutory income. · Section 273 refers to "income derived", not "assessable income derived". There is no compelling reason to interpret s 273 as referring to "assessable income derived". · The Explanatory Memorandum accompanying the introduction of the Superannuation Legislation Amendment Bill (No 2) 1999 (Cth) (which introduced the relevant form of s 273) ("the Explanatory Memorandum") provides no support for the Commissioner's proposition that "assessable" is to be deemed to qualify "income derived" in s 273. · The applicant is entitled to rely on the assumption that the term "income" is used consistently according to its ordinary meaning in the ITAA 1936: Commissioner of Taxation v Montgomery (1999) 198 CLR 639. · In Commissioner of Taxation v Bamford (2010) 240 CLR 481, the High Court at [41] accepted that statutory income was not income according to ordinary concepts. · If Parliament had intended "income" to mean "assessable income" it could have said so. The requirement that income be "derived" supports the construction that it means income according to ordinary concepts. · If there is doubt as to the true meaning of "income" in s 273 the applicant as a taxpayer should be given the benefit of doubt. 29 In summary, the Commissioner's submissions are as follows: · The context in which s 273 operates provides no support for the contention that the special component of taxable income is limited to income according to ordinary concepts. · The terms of s 273 clearly extend to gains of a capital nature. The section specifically refers to dividends, income derived from a non-arm's length transaction and non-share dividends, all of which may include gains of a capital nature. · The derivation of income in s 273(7) relates to income derived by an entity as a beneficiary of a trust. Beneficiaries' entitlement to income derived is achieved through s 97 of the ITAA 1936, which includes ordinary and statutory income. · The notion of "derivation" as a timing provision is of long standing. · The Explanatory Memorandum provides support for the contention that the legislation intended to capture assessable income rather than merely ordinary income. · The applicant's reliance on Bamford does not advance their case. Bamford is authority for the proposition that the tax law concept of ordinary income is not synonymous with trust law income.

Consideration 30 While the interpretation of "income derived" in s 273(7) submitted by the applicant is superficially persuasive, it does not withstand close scrutiny. In my view "income derived" within the meaning of s 273(7) refers to both statutory income and income according to ordinary concepts. 31 I take this view for the following reasons.

"Income" 32 First, while there is authority that courts have regarded the ascertainment of income as governed by the ordinary principles recognised or followed in business and commerce unless the legislature has itself made some specific provision affecting a particular matter or question (Commissioner of Taxes (SA) v Executor Trustee and Agency Co of South Australia Ltd (1938) 63 CLR 108 at 152), it is also clear that Courts at the highest level in this country have recognised that, in appropriate circumstances, the concept of "income" for income tax purposes extends to include amounts that are not income according to ordinary concepts (Resch v Federal Commissioner of Taxation (1942) 66 CLR 198 at 210-211 per Rich J and 221-225 per Dixon J, and South Australia v Commonwealth (1992) 174 CLR 235 at 251). This principle has been applied in recent decisions in this Court (for example, Virgin Holdings SA v Federal Commissioner of Taxation [2008] FCA 1503, Undershaft No 1 Ltd v Federal Commissioner of Taxation [2009] 175 FCR 150).

"Derived" 33 Second, I am not satisfied that the use of the word "derived" together with unqualified reference to "income" in s 273(7) unequivocally limits the meaning of "income" to income according to ordinary concepts (as distinct from statutory income). 34 The plain English meaning of the word "derive" (according to the Macquarie Dictionary, 4th ed (so far as relevant in these proceedings)) is: 1. to receive or obtain from a source or origin. 2. to trace, as from a source or origin. 35 There is authority that the term "derive" should be given a non-technical meaning, namely according to the "general understanding among practical business people of what constitutes a derivation of income" (Arthur Murray (NSW) Pty Ltd v Federal Commissioner of Taxation (1965) 114 CLR 314 at 318, 320). 36 "Derive" in the taxation context appears generally associated with concepts of income, however there is no magic in the use of the word "derived" so as to affect the interpretation of "income" or suggest that "derive" is always used in relation to ordinary concepts of income only (cf comments of Taylor J in Federal Commissioner of Taxation v French (1957) 98 CLR 398 at 420). While in the Income Tax Assessment Act 1997 (Cth) ("ITAA 1997") the word "derived" is used in the context of ordinary income as distinct from statutory income (compare s 6-5(2) with s 6-10 of that Act), the historical context of this association is that consideration of income "derived" by the courts has invariably involved issues of timing of receipt of income (for example Executor Trustee and Agency Co of SA Ltd (Carden's Case)) and the method of computing tax payable. This is not an issue in these proceedings. 37 Further, I note that the ITAA 1936 commonly uses "derive" in association with "income" generally (for example, s 136AE and s 271A ITAA 1936), assessable income (for example, ss 152, 156 and 282B ITAA 1936) and capital gains rather than income (for example, s 45A(1)(a) ITAA 1936).

Explanatory memorandum 38 Third, and contrary to the submission of the applicant, I consider that the terms of the Explanatory Memorandum do support an interpretation of s 273 as including statutory income. 39 Under "General outline and financial impact", an explanation is provided for the introduction of s 273 in its relevant form. In particular, below the heading "Non-arm's length trust distributions etc. to superannuation and similar funds", is the following: Amends the Income Tax Assessment Act 1936 so that the special income of a complying superannuation fund, approved deposit fund (ADF) or pooled superannuation trust (PST) will include: • Distributions from all trusts other than where the superannuation fund, ADF or PST has a fixed entitlement to income from that trust; and • Non-arm's length trust distributions of income where the superannuation fund, ADF or PST has a fixed entitlement to income from that trust. 40 This explanation is repeated under the heading "Overview" in Ch 2 of the Explanatory Memorandum, which is entitled "Non-arm's length trust distributions etc. to superannuation and similar funds". The Explanatory Memorandum states that the amendments were strictly anti-avoidance in nature (para 2.4). 41 Paragraphs 2.11-2.15 of the Explanatory Memorandum outline in further detail the background to the amendments. They provide: 2.11 The taxation treatment of the income of a superannuation entity is governed by Part IX of the ITAA 1936. In general terms the trustee of a superannuation entity is taxed on the taxable income of the entity at the concessional rate of 15% where there is no 'special component' of the taxable income. 2.12 Where a superannuation entity derives assessable income that is included in the 'special component' of the taxable income of the entity, the trustee of the entity is taxed on that income at the rate of 47%. The assessable income that is included in the special component is termed special income and is income derived from certain types of non-arm's length transactions (including the payment of certain private company dividends) that fall within the provisions of section 273 of the ITAA 1936. 2.13 Section 273 is designed to prevent income from being unduly diverted into superannuation entities as a means of sheltering that income from normal rates of tax applying to other entities, particularly the marginal rates applying to individual taxpayers 2.14 The ATO has become aware of arrangements which circumvent section 273. Under the arrangements, pre-tax income of a trust (usually a discretionary trust) is distributed to a complying superannuation fund set up for the benefit of the beneficiaries of that trust rather than to the beneficiaries themselves. The effect of the arrangements is that the income is taxed at only 15% as income of the superannuation fund rather than at the marginal rate of tax applicable to other beneficiaries. 2.15 It is doubtful whether subsection 273 (4) of the ITAA 1936, which seeks to tax income derived by a superannuation entity from a non-arm's length transaction at the non-concessional rate of 47%, would catch these discretionary trust distributions. 42 Later, the Explanatory Memorandum refers to circumstances where trust distributions will be treated as special income and states: Superannuation entity receives income from a fixed trust under non-arm's length arrangements 2.18 Assessable income that is derived by a superannuation entity in the capacity of beneficiary of a trust estate with a fixed entitlement to income will be regarded as special income of the entity under new subsection 273(7) if both of the following tests are satisfied: • The entity acquired the fixed entitlement under an arrangement, or the income was derived under an arrangement, in relation to which some or all of the parties were not dealing with each other at arm's length [new paragraph 273(7)(a)] and • The amount of that income is higher than might have been expected to have been derived by the entity if those parties had been dealing with each other at arm's length in relation to the arrangement [new paragraph 273(7)(b)]. 43 Reviewing these excerpts, the Explanatory Memorandum clearly refers to "assessable income" and "taxable income" of the taxpayer in the context of the introduction of s 273 in the form relevant to these proceedings. As is clear from para 2.13 of the Explanatory Memorandum, s 273 is an anti-avoidance provision designed to prevent income from being unduly diverted into superannuation entities as a means of sheltering that income from the normal rates of tax applying to other entities. Paragraph 2.13 is set clearly in the context of a discussion of derivation of assessable income by superannuation entities. To that extent, unqualified references to "income" in s 273 appear to be simply shorthand references to assessable income, which includes statutory income.

Bamford 44 Fourth, I am not persuaded that the decision of the High Court in Bamford supports the position that, without further qualification, "income" does not include "statutory income". 45 The dispute in Bamford involved interpretation of s 97(1) of the ITAA 1936 which defines, inter alia, the assessable income of a beneficiary of a trust estate where the beneficiary is not under a legal disability. Key concepts considered by their Honours were the "net income of the trust estate" as found in s 97(1) and defined in s 95(1), and "income of the trust estate" which also appears in s 97(1) but which is not defined by the legislation. In relation to the expression "income of the trust estate" the Court said: 36. The very juxtaposition within s 97(1) of the defined expression "net income of the trust estate" and the undefined expression "the income of the trust estate" suggests that the latter has a content found in the general law of trusts, upon which Div 6 then operates. 37. The opening words of s 97(1) speak of "a beneficiary of a trust estate" who is "presently entitled to a share of the income of the trust estate". The language of present entitlement is that of the general law of trusts, but adapted to the operation of the 1936 Act upon distinct years of income… 38. The identification in s 97(1) of "a trust estate" of which there is "a beneficiary" also bespeaks the general law of trusts. It is true that s 97(1) must be read with s 96. This is addressed to "a trustee", and the effect of the decisions to which reference has been made is that there may be a trustee of a trust created by the operation of a legislative regime not by settlement inter vivos or testamentary disposition. Nevertheless, there must be a "trust estate". 39. Further, the phrase "presently entitled to a share of the income" directs attention to the processes in trust administration by which the share is identified and entitlement established… 40. Reliance was placed by the Commissioner upon a passage in Federal Commissioner of Taxation v Australia and New Zealand Savings Bank Ltd… There was, however, in that case no submission to the effect that the trust deed could operate to treat as capital receipts what otherwise might have been included as income of the trust estate. This is apparent from the argument in the Full Court of the Federal Court in that case, and the argument there, as in this Court, was, as the Trustee submitted in this appeal, upon other issues. 41. Finally, the Commissioner only partially invoked the operation of the 1936 Act to give content to the expression "income of the trust estate", and would exclude "statutory income", which is not income according to ordinary concepts. The lack of consistency which this involves tells against the submission.

46 It appears from the decision in Bamford that: · The term "income of the trust estate" has a meaning referable specifically to the general law of trusts. · If the trust deed authorises the trustee to treat an amount as income even if it would not be income under general law, it is "income of the trust estate" for the purposes of Pt III Div 6 of the ITAA 1936. To that extent Bamford confirmed the reasoning in such cases as Richardson v Commissioner of Taxation (2001) 187 ALR 680 at [47]. · The issue whether "income" without qualification includes or excludes statutory income was not the subject of consideration by the Court in Bamford. Indeed the Court at [41] clearly disposes of that issue without discussion. 47 In respect of the matter before me I draw no assistance from paras 43-47 of their Honour's decision. 48 The distribution of the income of the Hybrid Trust (being capital gain) to the trustee of the Fixed Trust and then the Super Fund was a distribution of trust law income pursuant to relevant provisions of the trust deeds of the Hybrid Trust and the Fixed Trust. That it was trust law income is reinforced by the decision in Bamford. However this is a separate issue from whether that income was income according to ordinary concepts or statutory income. Accordingly, I reject the applicant's submissions based on Bamford.

Structure of the section 49 Finally, I accept the submission of the Commissioner that a construction of s 273 and in particular s 273(7) confining "income derived" to ordinary income derived would be incongruous in light of subss 273(2), (3), (4) and (9) which encompass, by their terms, amounts of ordinary and statutory income which are assessable, including dividends, income derived from non-arm's length transactions and non-share dividends (all of which may include gains of a capital nature: Commissioner of Taxation v McNeil (2007) 229 CLR 656 at [42]).

ISSUE 1 SUBISSUE 2: DID THE TRUSTEE OF THE SUPER FUND "ACQUIRE" ITS FIXED ENTITLEMENT TO THE INCOME OF THE FIXED TRUST? 50 As I have already noted, in this case it is not in dispute that the Super Fund has a fixed entitlement to income of the Fixed Trust. However it also appears to be common ground that the Super Fund performed no act to receive that fixed entitlement, or to receive the income resulting from that fixed entitlement. 51 A key question is whether the trustee of the Super Fund acquired that fixed entitlement within the meaning of s 273(7)(a).

Submissions of the parties 52 In relation to this issue, the applicant submits in summary as follows: · In order for s 273(7) to apply, the trustee of the Super Fund must have "acquired" its entitlement to the income. · This is not a case where there was an acquisition of property by the Super Fund. There was no purchase of units in a unit trust, or of shares. · In this case there was a declaration of trust resulting in the Super Fund receiving the fixed entitlement. The Super Fund played no part in that process. · In order for s 273(7)(a) to be satisfied the Super Fund must take some step to obtain for itself the entitlement to which the subsection refers. It is not sufficient for there to be a passive conferral of the entitlement on the Super Fund. This conclusion is supported by dictionary definitions of "acquire". 53 The Commissioner submits in summary: · The term "acquired" takes its meaning from the context of the provision in which it appears. · In Allina Pty Ltd v Federal Commissioner of Taxation (1991) 28 FCR 203 the Full Court rejected the submission that for an acquisition there must be a corresponding disposal of the thing acquired. Further, this case is authority that "acquired" covers transactions of a purely passive nature and means little more than receiving. · Section 273(7) is an anti-avoidance provision, which would be defeated by the adoption of a narrow interpretation of "acquired".

Consideration 54 In my view for the purposes of s 273(7) the Super Fund can "acquire" a fixed entitlement to income notwithstanding that it is a passive recipient of that entitlement. 55 The Macquarie Dictionary defines "acquire" as follows: 1. to come into possession of; get as one's own… 2. to gain for oneself through one's actions or efforts. 56 While the plain English definition clearly contemplates the possibility of an active role for the "acquirer" of property, equally clearly it contemplates acquisition by passive receipt. The appropriate meaning depends on the context in which the term is used. Indeed this has been the approach of this Court previously where considering the meaning of the term "acquire". I note, for example, comments of Hill and Mansfield JJ in Edensor Nominees Pty Ltd v Australian Securities and Investments Commission (2002) 120 FCR 78 at [36] where their Honours observed: We think it unhelpful to begin with a prima facie or usual meaning of a word such as "acquire" and to seek from its context a reason to discard that meaning. One is more likely to discern the intended meaning by going straight to the context with an open mind. (Emphasis added) 57 Further, in Allina at 211 the Court said: But, as has already been shown, property can be acquired by one person without there being any disposition of that property by another person. The allotment of shares is an act of the company, the capital of which is the source of the allotment. The allottee in ordinary parlance acquires the shares from the company. The transaction falls within the first meaning of the word 'acquire' in the Oxford English Dictionary of gaining, obtaining or getting as one's own or gaining the ownership of. Also, as was observed by Cohen LJ who delivered the judgment of the Court of Appeal in England in Congreve v Inland Revenue Commissioners (1947) 1 All ER 168 at 173; aff. (1948) 1 All ER 947: … as used by lawyers the word "acquired" has long covered transactions of a purely passive nature and means little more than receiving. Indeed, that is the second ordinary meaning given in the Shorter Oxford Dictionary. 58 In this case the Court is being asked to interpret "acquired" for the purposes of s 273(7). It is not in dispute that s 273 is an anti-avoidance provision, intended to close previous loopholes allowing certain distributions of trust income to superannuation funds made under non-arm's length arrangements to be taxed at concessional rates (cf Explanatory Memorandum para 2.2). To that extent a construction should be given to the words of the section which promotes its purpose or object: s 15AA of the Acts Interpretation Act 1901 (Cth). In my view such a construction is one where "acquire" is interpreted broadly for the purposes of s 273(7), to include passive receipt of income by a superannuation fund. It is also consistent with para 2.14 and para 2.19 of the Explanatory Memorandum which contemplate circumstances where income is distributed to a complying superannuation fund. 59 I am not satisfied that a restricted interpretation of "acquire" is warranted in this context.

ISSUE 1 SUBISSUE 3: DID THE SUPER FUND ACQUIRE ITS ENTITLEMENT TO INCOME OR DERIVE THE INCOME UNDER AN "ARRANGEMENT"? 60 "Arrangement" for the purposes of s 273(7) is very widely defined by s 273(8) in the following terms: (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. 61 It appears that there is no real dispute as to the existence of an "arrangement" between the parties. There is, however, a fundamental dispute as to the nature of the arrangement.

What was the "arrangement"? 62 The applicant conceded that the fixed entitlement of the Super Fund to income came about as a result of an "arrangement" because that term is very widely defined. However the applicant submitted that "arrangement" must be the establishment of the structure whereby the Super Fund became entitled to receive income from the Fixed Trust. It follows that, in summary, the "arrangement" was the creation of the Fixed Trust in June 2002. 63 The applicant submits further that other events which the Commissioner claims to constitute the "arrangement" were actually a series of unilateral acts which were not part of an arrangement for the purposes of s 273(7). 64 The Commissioner submits that a narrow interpretation of "arrangement" would improperly limit the operation of s 273(7). The Commissioner submits that the trustee of the Super Fund acquired the fixed entitlement to income of the Fixed Trust estate under an arrangement, or derived that net income under that arrangement, which arrangement comprised the following steps: · the establishment of the Fixed Trust providing for a fixed entitlement to the trustee of the Super Fund to 100% of the net income of the Fixed Trust; · the amendment of the Hybrid Trust deed to include the newly created Fixed Trust as a beneficiary; · the amendment of the Super Fund trust deed; · the preparation of a trustee resolution for the distribution of income from the Hybrid Trust to the Fixed Trust; · the distribution of income from the Hybrid Trust to the Fixed Trust and the acceptance of the distribution by the Fixed Trust; · the preparation of a trustee resolution for the distribution of income from the Fixed Trust to the Super Fund; · the distribution of income from the Fixed Trust to the Super Fund and the acceptance of the distribution by the trustee of the Super Fund; (I note that it is not in dispute that these events occurred - the applicant's objection relates to whether they all formed part of "the arrangement"). 65 The Commissioner further submits, in summary, that: · the arrangement involved an understanding, promise or undertaking between the trustee of the Hybrid Trust, the Fixed Trust and the Super Fund; · that this understanding, promise or undertaking was to execute the necessary documents to ensure that income could be distributed: o from the Hybrid Trust through to the newly created Fixed Trust (now included for that purpose as a beneficiary in the Hybrid Trust); and o then, by way of a fixed entitlement to the income and capital of the Fixed Trust, to the Super Fund; · the parties to this arrangement were the first applicant and the trustees of each of the Hybrid Trust, the Fixed Trust and the Super Fund.

Identification of "arrangement" by Commissioner 66 At the hearing the applicant submitted that the "arrangement" as identified by the Commissioner in his reasons for disallowing the applicant's objection was composed of, inter alia, irrelevant facts, facts going to the implementation of an arrangement as distinct from the arrangement itself, and facts occurring prior to the establishment of the Fixed Trust. 67 Comparing the Commissioner's articulation of the "arrangement" in his reasons for disallowance, with his articulation in his Appeal Statement, it is clear that the Commissioner's identification of the arrangement had refined by the time these proceedings reached this Court (although there was considerable overlap between the two versions). 68 I accept the submission of the applicant that the arrangement the subject of the assessment must be identified by the Commissioner with precision. However it is also clear that the Commissioner has done exactly that in his Appeal Statement, supported by his submissions in these proceedings. The Commissioner's Appeal Statement, dated and filed 28 May 2008, has been available to the applicant for some time. In light of principles explained by the High Court in Commissioner of Taxation v Hart (2004) 217 CLR 216 at [41]-[43] and Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359 at [25], the Commissioner is not bound to the precise way in which he had initially identified the arrangement, and may seek to rely on an articulation before the Court narrower than had earlier been identified, provided that no undue embarrassment or surprise to the other side is occasioned. It is difficult to see that the applicant could claim to be taken by surprise by the Commissioner's articulation of the "arrangement" in the circumstances, and indeed I note that no such specific claim has been made.

Interpretation of "arrangement" 69 So far as concerns the interpretation of s 273(8) and the definition of "arrangement", I see no justification for a narrow interpretation of that term. Indeed the width of the definition of "arrangement" in s 273(8) specifically militates against a narrow interpretation, in that s 273(8) clearly contemplates understandings beyond legally enforceable agreements or instruments. A liberal interpretation of "arrangement" for the purposes of s 273 - in my view warranted by the terms of the s 273(8) - is in turn supported by the Explanatory Memorandum which states that s 273(8) was inserted to tighten s 273 and close a loophole which allowed certain distributions of trust income to superannuation entities made under non-arm's length arrangements to be taxed at the concessional rate. Accordingly, I accept that the "arrangement" in this case could involve a series of interrelated steps beyond the formal declaration of trust conceded by the applicant.

Steps "part" of the arrangement 70 The applicant submits that steps by which the arrangement was carried into effect, including the resolution to appropriate Hybrid Trust income for the financial year ended 30 June 2003 and the resolution to distribute the total net income of the Hybrid Trust cannot be part of the arrangement. However it is clear from the examples given in the Explanatory Memorandum that steps taken by the parties beyond those focused on the formalities of the trust relationship, including implementation, can properly constitute aspects of the "arrangement". So, for instance, following the provision of an example under para 2.19 of the Explanatory Memorandum involving the acquisition of units in a unit trust where there is a mutual understanding that a specified amount will be distributed annually to the unit trust from a discretionary trust of which the unit trust is a beneficiary, the Explanatory Memorandum states: In these circumstances, the purchase of the units, the subsequent injection of funds from the discretionary trust and the distributions of trust income to the superannuation fund, being within the contemplation of the trustee of the superannuation fund and the trustee of the unit trust… would fall within the definition of "arrangement" in new subsection 273(8), being an arrangement that relates to the acquisition of a fixed entitlement to the income of the trust. (Emphasis added) 71 "Arrangement" for the purposes of s 273 is not synonymous with a formal contract, where the terms of the contract are clearly distinct from steps taken in performance thereof. In my view actions such as resolutions made and distributions of income can properly be characterised as part of an arrangement.

Fixed Trust did not exist at the time of the arrangement 72 In written submissions, the applicant contended that at the time the arrangement alleged by the Commissioner occurred the Fixed Trust did not exist. This submission was expanded by counsel for the applicant during the hearing, where the point was made that the arrangement contended by the Commissioner occurred at some time on or prior to 28 June 2001 at which time the Fixed Trust did not exist and no amendments had been made to the deed of the Hybrid Trust (TS p 25 ll 19-21). 73 It seems to me perfectly reasonable that the arrangement in this case could have commenced at a time when the Fixed Trust did not exist and no amendments had been made to the Hybrid Trust deed. The width of the definition of "arrangement" is such that an arrangement may come into being by a sequence of interconnected steps, including, at various stages, incorporation of companies or declaration of trusts. Where the alleged arrangement is characterised by a series of steps it is necessary that the steps be co-ordinated in anticipation of achieving a goal to fall within the definition of "arrangement" in s 273(8), rather than be random steps with no structure or pattern. The declaration of the Fixed Trust was, in my view, one of those planned steps in the development of the arrangement. The fact that it did not exist at the time of commencement of the arrangement does not mean that its existence was not planned as part of the overall arrangement.

Conclusion 74 In my view the restricted interpretation of "arrangement" advanced by the applicant unduly limits the meaning of "arrangement" as defined in s 273(8). I accept the Commissioner's submission that the overall plan carried out by Mr Allen in conjunction with the relevant trustee companies, as evidenced in the background facts set out earlier in this judgment, and which plan culminated in the distribution of income from the Hybrid Trust through the Fixed Trust to the Super Fund, should be regarded as the "arrangement".

ISSUE 1 SUBISSUE 4: WERE PARTIES TO THE ARRANGEMENT NOT "DEALING" WITH EACH OTHER AT ARM'S LENGTH IN RELATION TO THE ARRANGEMENT? 75 In this case the applicant submits in summary that, although there was an arrangement to put a structure in place whereby the Super Fund became entitled to receive income from the Fixed Trust, there was no dealing by the parties to that arrangement. This is because, assuming that "dealing" is read widely to mean conducting oneself towards persons or to take action with respect to (as stated by the Commissioner in his reasons for decision): · there was no dealing by the Super Fund; · rather, the Super Fund was entirely passive; · there was no dealing between the trustee of the Hybrid Trust and the trustee of the Fixed Trust; · each of the trustees undertook unilateral acts, even if as part of an overall arrangement; · there was no transaction between any party; · the fact that there was a commonality of director between the various parties to the arrangement did not create a dealing between those parties where there was none; · the construction favoured by the Commissioner deprives s 273(7)(b) of any meaning, because that subsection presupposes that if the parties were in an arm's length transaction a different result could be achieved. This in turn presupposes some negotiation or bargaining between the parties rather than a series of unilateral acts. 76 The Commissioner submits, in summary, that both "party" and "dealing" in s 273(7) should be construed widely, and that a narrow interpretation would be inconsistent with the purpose of the legislation as evidenced in the Explanatory Memorandum.

Consideration 77 Section 273(7) deems income, derived by an entity in the capacity of beneficiary of a trust estate by virtue of holding a fixed entitlement to the income, to be "special income" of the entity if, inter alia, the acquisition of the fixed entitlement or derivation of the income was under an arrangement, some or all of the parties to which were not dealing with each other at arm's length. 78 The threshold in respect of dealing is to that extent low - s 273(7) applies if some or all of the parties were not dealing with each at arm's length.

"Parties" "dealing" 79 Neither "party" nor "dealing" are defined for the purposes of s 273. The plain English meaning of those expressions may be found in the Macquarie Dictionary. "Party" bears many possible definitions, however the most relevant definitions for the purposes of these proceedings appear to be: 7. a person immediately concerned in some transaction or legal proceeding. 9. someone who participates in some action or affair. 80 "Dealing" in s 273(7) is used as a verb. "Deal" is relevantly defined as "to conduct oneself towards persons". I note that the applicant accepts that "dealing" should be given its ordinary dictionary definition. 81 As "arrangement" for the purposes of s 273(7) is not confined to legally enforceable agreements, similarly "party" in the meaning of that section must extend beyond contractual parties. For the purposes of these proceedings, I accept the submission of the Commissioner that the parties to the relevant arrangement include the first applicant and the trustees of the Hybrid Trust, Fixed Trust and Super Fund. 82 Further, the submission of the applicant to the effect that "dealing" does not encompass passive conduct or unilateral acts echoes earlier contentions in relation to the meaning of "acquire". However in my view "deal", being referable to conduct of oneself to persons, can be both active and passive. 83 Depending on the context, passive behaviour can constitute "conduct…towards persons" and thus "dealing" with those persons. A perusal of the Explanatory Memorandum's explanation of the background to amendments to s 273 highlights the breadth of "dealing" and, in my view, its application to positive acts by one party and passive receipt by another. I note in particular para 2.13 and para 2.14 which refer to the mischief sought to be addressed by the amendments, and which provide as follows: 2.13 Section 273 is designed to prevent income from being unduly diverted into superannuation entities as a means of sheltering that income from the normal rates of tax applying to other entities, particularly the marginal rates applying to individual taxpayers. 2.14 The ATO has become aware of arrangements which circumvent section 273. Under the arrangements, pre-tax income of a trust (usually a discretionary trust) is distributed to a complying superannuation fund set up for the benefit of the beneficiaries of that trust rather than to the beneficiaries themselves. The effect of the arrangements is that the income is taxed at only 15% as income of the superannuation fund rather than at the marginal rate of tax applicable to other beneficiaries. (Emphasis added) 84 It is clear from these paragraphs that the amendments address circumstances involving, inter alia, mere receipt by a complying superannuation fund of income. To that extent, the Explanatory Memorandum accepts that the superannuation fund is "dealing" with another party simply by receiving pre-tax income of a trust. Contrary to the submissions of the applicant, it is clear from the Explanatory Memorandum that "deal" in this context is not limited to a transaction of a business/trading nature. To that extent, the submission of the applicant that there was no dealing by the Super Fund because it was "passive" has no merit. 85 Similarly, it is difficult to see how a "unilateral" act is not encompassed by "dealing" when the act constitutes conduct which has regard to, or affects, another person or their interests. Where "deal" means "to conduct oneself towards persons", this includes unilateral acts being measures taken concerning another, behaviour towards another, distributing to another, and causing to be received. One example is in the context of trust law - a declaration by a person that he or she holds property on trust for a beneficiary where the beneficiary is a volunteer is conduct by the trustee towards the beneficiary. 86 In this case as I have already observed the arrangement under which the Super Fund acquired the fixed entitlement to the income and actually derived the income was not merely the formal creation of the Fixed Trust in June 2002, but was a series of interrelated steps culminating in the Super Fund's acquisition of the fixed entitlement and the derivation of income. To that extent the Super Fund "dealt" with the other parties to the arrangement.

Not at "arm's length" 87 In its submissions, the applicant has highlighted the importance of distinguishing an arm's length relationship and an arm's length dealing. I accept that this is a distinction of importance, noted by Davies J in Re Hains (deceased), Barnsdall v Federal Commissioner of Taxation (1988) 81 ALR 173 where his Honour observed: That term ["not dealing with each other at arm's length"] should not be read as if the words "dealing with" were not present. The Commissioner is required to be satisfied not merely of a connection between a taxpayer and the persons to whom the taxpayer transferred, but also of the fact that they were not dealing with other at arm's length. A finding as to a connection between the parties is simply a step in the course of reasoning and will not be determinative unless it leads to the ultimate conclusion. (at 176) (cf Hill J in Re Trustee of the Estate of the late AW Furse [1990] FCA 470 at [36]-[37], Jessup J in AXA Asia Pacific Holdings Ltd v Commissioner of Taxation [2009] FCA 1427 at [98]) 88 However, it is also clear that the nature of the relationship between parties is relevant to a determination of whether dealings between them were at arm's length. As Lee J said in Granby Pty Ltd v Federal Commissioner of Taxation (1995) 129 ALR 503 at [17]). The expression "dealing with each other at arm's length" involves an analysis of the manner in which the parties to a transaction conducted themselves in forming that transaction. What is asked is whether the parties behaved in the manner in which parties at arm's length would be expected to behave in conducting their affairs. Of course, it is relevant to that enquiry to determine the nature of the relationship between the parties, for if the parties are not parties at arm's length the inference may be drawn that they did not deal with each other at arm's length. 89 The meaning of the expression "arm's length" was discussed at length by the Full Court in Re Australian Trade Commission v WA Meat Exports Pty Ltd [1987] FCA 308, albeit outside the revenue context and in respect of arm's length relationships. In relation to the expression, Beaumont, Wilcox and Burchett JJ observed: 12. The first matter to be determined is the meaning of the phrase "not at arm's length" where used in s4(8). It is, of course, often found in revenue statutes (see, e.g. Income Tax Assessment Act 1936, s136 AD; cf. Robson Leather Company Limited v. M.N.R. 77 DTC 5106). The ordinary meaning of the phrase is explained in Osborn's Concise Law Dictionary, 6th ed. (at p32): The relationship which exists between parties who are strangers to each other, and who bear no special duty, obligation, or relation to each other, e.g. vendor and purchaser. Cf. UNDUE INFLUENCE. 13. A similar explanation is given by Black's Law Dictionary, 5th ed. (at p100): Arm's length transaction. Said of a transaction negotiated by unrelated parties, each acting in his or her own self interest; the basis for a fair market value determination. Commonly applied in areas of taxation when there are dealings between related corporations, e.g. parent and subsidiary. Inecto, Inc. v. Higgins, D.C.N.Y., 21 FSupp418. The standard under which unrelated parties, each acting in his or her own best interest, would carry out a particular transaction. For example, if a corporation sells property to its sole shareholder for $10,000, in testing whether $10,000 is an "arm's length" price it must be ascertained for how much the corporation could have sold the property to a disinterested third party in a bargained transaction. 14. There is no reason to suppose that the ordinary meaning of the phrase was not intended to be applied here. That is to say, the context of s4 is consistent with the disqualification of expenditure by one party in favour of another where one of them has the ability to exert personal influence or control over the other. It is evident that the policy of the legislation would seek to exclude payments to such persons, because, if such payments were not excluded, abuse of the incentive scheme provided by the Act would be open. An obvious example is the possibility that parties might seek to inflate the fees payable for particular services. 90 In my view the manner in which the Full Court in Australian Trade Commission approached the concept of "non arm's length" is applicable in the context of these proceedings to the concept of arm's length dealings. The above quote (in particular the reference to Black) also indicates a consideration by their Honours of arm's length dealings. It follows from this consideration that, if conduct of parties is not consistent with conduct of independent third parties, because one party is exerting personal influence or control over the other or others, dealings between them cannot be termed "arm's length". 91 In this case the relevant trusts, established for the benefit of persons including the applicant, could not realistically be said to be at arm's length either from each other or the applicant. All relevant actions leading to and including the distribution of income to the Super Fund were taken either by Mr Allen or by trusts under his control. Moreover, the dealings between the parties could not be said to be at arm's length, in that: · it is clear that all acts of the trusts were performed under the effective direction of Mr Allen. · the effect of the arrangement was to provide for the distribution of income of the Hybrid Trust, through the Fixed Trust, to the Super Fund in the 2003 financial year. The arrangement diverted the distribution of income that might have been expected to have been distributed to the beneficiaries of the Hybrid Trust, including individual beneficiaries. · No consideration was provided by the Super Fund in respect of the distribution of income from the Fixed Trust. · There appeared to be no commercial justification for the distribution of income from the Hybrid Trust to the Fixed Trust and thence to the Super Fund. 92 The Commissioner submits that the nature of the dealings was infused by the close and self-serving relationships between the parties. In my view this submission accurately describes the relevant dealings in this case. The picture clearly emerging from these events is of a number of dealings in which the parties engaged for the specific purpose of providing those parties (and ultimately the Allens who effectively controlled the trustees of all the participating trusts) with a tax advantage in the avoidance of the payment of tax on the net income of the trading trust at corporate (or alternatively, marginal) rates, in favour of the concessional rate of 15%.

Conclusion 93 In my view the Super Fund acquired the fixed entitlement to income and subsequently derived the income under an arrangement, where some or all of the parties were not dealing with each other at arm's length.

ISSUE 1 SUBISSUE 5: WAS THE AMOUNT OF THE INCOME GREATER THAN MIGHT HAVE BEEN EXPECTED TO HAVE BEEN DERIVED IF THE PARTIES HAD BEEN DEALING WITH EACH OTHER AT ARM'S LENGTH? 94 Income is deemed to be special income for the purposes of s 273(7) not only if, inter alia, the arrangement was one where the parties were not dealing at arm's length, but where the amount of the income is greater than might have been expected to have been derived by the entity if those parties had been dealing with each other at arm's length in relation to the arrangement (s 273(7)(b)). 95 In this case the income derived by the Super Fund as a result of the arrangement was $2,500,005. 96 The applicant submits in summary that: · Under the Fixed Trust deed, the Super Fund is absolutely entitled to all of the income of the Fixed Trust. · The rights of the Super Fund under the Fixed Trust are not of a nature that the trustee would ever be at arm's length. · In any event, it could be said that the trustee has dealt with the Super Fund on an arm's length basis by providing the entitlement of the Super Fund under the Fixed Trust deed. The members of the Super Fund are eligible employees of the Hybrid Trust. · The distribution to the Super Fund is an amount which was commercially reasonable to provide for the superannuation needs of the members of the Super Fund. As a result, it cannot be said that the amount to which the Super Fund is entitled under the Fixed Trust is greater than might have been expected had the parties been dealing at arm's length. 97 While under the Fixed Trust deed the Super Fund was entitled to distributions of income of the Fixed Trust, to say that, as a result, the income received by the Super Fund under the arrangements was therefore no more than that to which the Super Fund was entitled misconceives the purpose of s 273(7) and the mischief the section was intended to address. 98 In short, in these circumstances steps were taken, in non-arm's length dealings and in pursuance of the arrangement, to cause a distribution of income to the Super Fund to allow taxation of the income at only 15% rather than at the marginal tax rate applicable. There does not appear to have been any other justification for the arrangement except this ultimate goal. 99 The amendments to s 273 were, as I have already noted, to address such arrangements. To find that, as matter of legal form, the Super Fund was entitled to income of the Fixed Trust, and that the income distributed was only that to which the Super Fund was legally entitled, would disregard the very arrangements which the legislation impugns. It is not in dispute that the Super Fund was a stranger and a volunteer. Had the parties been at arm's length, there is no evidence before me to support a finding that the arrangement would have occurred at all and that the Super Fund would have derived the income it received. It follows that the amount of relevant income received by the Super Fund was greater than might have been expected to have been received if the parties had been dealing with each other at arm's length. 100 In my view s 273(7)(b) is satisfied.

ISSUE 1: CONCLUSION 101 It follows that the amount of income derived by the Super Fund was special income for the purposes of s 273(7) of the ITAA 1936.

ISSUE 2: WAS THE PENALTY CORRECTLY IMPOSED BY THE COMMISSIONER AT THE RATE OF 25% UNDER SUBSECTION 284-75 TAA 1953 102 The Commissioner imposed an administrative penalty of 25% on the applicant pursuant to s 284-75 of the TAA 1953. 103 There is no dispute that the Commissioner is empowered to impose an administrative penalty at this rate in appropriate circumstances. The question is whether the Commissioner has correctly done so in light of the events which have transpired. 104 In his reasons for decision disallowing the applicant's objection, the Commissioner said in summary that: · For the income year ending 30 June 2003, the trustee of the Super Fund failed to declare the relevant trust distributions as special income in its income tax return. · The return treated s 273(7) as if it did not apply to the income derived by the trust resulting in a shortfall amount within the meaning of s 284-80(1) of the TAA 1953 of $676,906.95. · The approach taken in the return, with this result, was wrong. A false or misleading statement had been made. It followed that a shortfall amount existed because a false or misleading statement had been made in the income tax return as to the derivation of special income during the financial year ending 30 June 2003. · The applicant did not take reasonable care in making the statement. Accordingly the exception in s 284-215 TAA 1953 was inapplicable. · Further, the applicant had made a statement resulting in a tax shortfall in which it had treated an income tax law as applying to the distribution from the Fixed Trust to the Super Fund in a particular way that was not reasonably arguable. 105 So far as relevant, s 284-75 of the TAA 1953 provides: (1) You are liable to an administrative penalty if: (a) you or your agent makes a statement to the Commissioner or to an entity that is exercising powers or performing functions under a taxation law; and (b) the statement is false or misleading in a material particular, whether because of things in it or omitted from it; and (c) you have a shortfall amount as a result of that statement. (2) You are liable to an administrative penalty if: (a) you or your agent makes a statement to the Commissioner or to an entity that is exercising powers of performing functions under an income tax law; and (b) in the statement, you or your agent treated an income tax law as applying to a matter or identical matters in a particular way that was not reasonably arguable; and (c) you have a shortfall amount as a result of the statement; and (d) item 4, 5 or 6 of the table in subsection 284-90(1) applies to you. 106 The term "shortfall amounts" is defined in s 284-80. 107 As it then read, s 284-215(2) of the TAA 1953 stated (in summary) that in determining whether a taxpayer was liable to an administrative penalty for a shortfall amount as a result of a statement in the tax return that was false or misleading in a material particular, the taxpayer was deemed not to have a shortfall if the taxpayer had taken reasonable care in making the statement. 108 In his appeal statement the Commissioner relied on both s 284-75(1) and (2) as grounds for imposing the penalty. However in written and oral submissions before the Court, the Commissioner did not press s 284-75(1), and relied only on the contention that the applicant, inter alia, had not had a reasonably arguable case. Accordingly in my view the question whether the applicant had taken reasonable care in making statements which were false or misleading is not relevant in these proceedings. 109 In respect of whether the statement of the applicant was "reasonably arguable", the applicant submits that it had received written legal advice from a solicitor as to the taxation implications associated with the receipt by the Super Fund of any distribution from the Fixed Trust, which advice was supported by the written opinion of senior counsel. On this basis, the applicant submits that the position represented by the statement in the tax return was reasonably arguable. 110 So far as relevant in these proceedings, "reasonably arguable" is defined in s 284-15(1) of the TAA 1953 as follows: A matter is reasonably arguable if it would be concluded in the circumstances, having regard to relevant authorities, that what is argued for is as likely to be correct as incorrect, or is more likely to be correct than incorrect. 111 In Walstern v Commissioner of Taxation [2003] 138 FCR 1 at [108], Hill J discussed the meaning of "reasonably arguable" within the context of s 226K of the ITAA 1936. Section 226K incorporated concepts similar to those in s 284-75 of the TAA 1953, and relevantly provided that a taxpayer was liable to pay a penalty in respect of a shortfall if, when a statement was made, it was not reasonably arguable that the way in which the application of the law was treated was correct. His Honour said that the following conclusions could be drawn as to the correct approach to penalty: 1. The test to be applied is objective, not subjective. This is clear from the use of the words "it would be concluded"…; 2. The decision-maker considering the penalty must first determine what the argument is which supports the taxpayer's claim; 3. That person will already have formed the view that the claim is wrong, otherwise the issue of penalty could not have arisen. Hence the decision-maker at this point will need to compare the taxpayer's argument with the argument which is considered to be the correct argument; 4. The decision-maker must then determine whether the taxpayer's argument, although considered wrong, is about as likely as not correct, when regard is had to "the authorities"; 5. It is not necessary that the decision-maker form the view that the taxpayer's argument in an objective sense is more likely to be right than wrong. That this is so follows from the fact that tax has already been short paid, that is to say the premise against which the question is raised for decision is that the taxpayer's argument has already been found to be wrong. Nor can it be necessary that the decision-maker form the view that it is just as likely that the taxpayer's argument is correct as the argument which the decision-maker considers to be the correct argument for the decision-maker has already formed the view that the taxpayer's argument is wrong. The standard is not as high as that. The word "about" indicates the need for balancing the two arguments, with the consequence that there must be room for it to be argued which of the two positions is correct so that on balance the taxpayer's argument can objectively be said to be one that while wrong could be argued on rational grounds to be right; 6. An argument could not be as likely as not correct if there is a failure on the part of the taxpayer to take reasonable care. Hence the argument must clearly be one where, in making it, the taxpayer has exercised reasonable care. However, mere reasonable care will not be enough for the argument of the taxpayer must be such as, objectively, to be "about as likely as not correct" when regard is to be had to the material constituting "the authorities"; and 7. Subject to what has been said the view advanced by the taxpayer must be one where objectively it would be concluded that having regard to the material included within the definition of "authority" a reasoned argument can be made which argument when contrasted with the argument which is accepted as correct is about as likely as not correct. That is to say the two arguments, namely, that which is advanced by the taxpayer and that which reflects the correct view will be finely balanced. The case must thus be one where reasonable minds could differ as to which view, that of the taxpayer or that ultimately adopted by the Commissioner was correct. There must, in other words, be room for a real and rational difference of opinion between the two views such that while the taxpayer's view is ultimately seen to be wrong it is nevertheless "about" as likely to be correct as the correct view. A question of judgment is involved. 112 I note that the applicant relied on reputable legal advice (and also, as is clear from the evidence, reputable accounting advice) in preparing the relevant income tax return. Notwithstanding this reliance, I am unable to find that the position maintained by the relevant statement was "reasonably arguable" for the purposes of s 284-75(2) of the TAA 1953. I take this view because: · As Hill J observed in Walstern, the test of whether a statement is "reasonably arguable" is objective, not subjective. If objectively the statement is not reasonably arguable, the belief of the taxpayer in advice provided by professional advisers does not make its position reasonably arguable. · Although there are no authorities considering s 273, there are many authorities considering concepts of "income", "derived", "dealing", "arrangement", "parties", and "arm's length". Those authorities support the position taken by the Commissioner in these proceedings rather than the applicant, as does the Explanatory Memorandum. 113 It follows that there is no basis for a finding that what the applicant argued is as likely to be correct as incorrect, or is more likely to be correct than incorrect.

CONCLUSION 114 In the circumstances of this case the income derived by the Super Fund as a result of its acquisition of a fixed entitlement to income of the Fixed Trust was "special income" within the meaning of s 273(7) of the ITAA 1936. Accordingly, there was a shortfall amount in the income tax return of the applicant. The basis on which the applicant treated the income in the tax return was not reasonably arguable. 115 The appropriate order is that the application be dismissed with costs and the Commissioner's objection decision be affirmed. I certify that the preceding one hundred and fifteen (115) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Collier.