B&F Investments Pty Ltd as trustee for the Illuka Park Trust v Commissioner of Taxation

AND: COMMISSIONER OF TAXATION Respondent

order made by: MOSHINSKY, COLVIN and HESPE JJ DATE OF ORDER: 9 JUNE 2023

1. The appeal be dismissed.
2. The appellant pay the respondent's costs of the appeal, as agreed or taxed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

BETWEEN: BBlood Enterprises Pty Ltd Appellant

AND: COMMISSIONER OF TAXATION Respondent

order made by: MOSHINSKY, COLVIN and HESPE JJ DATE OF ORDER: 9 june 2023

1. The appeal be allowed.
2. Paragraph 1 of the orders of the primary judge made on 19 September 2022 in proceeding number VID 114 of 2020 be set aside and in lieu thereof it be ordered that: (a) The application be allowed. (b) The Respondent's objection decision in relation to the year of income ended 30 June 2014 be set aside and in lieu thereof the objection be allowed in full.
3. Within seven days, the parties file any agreed minute of proposed order in relation to costs (in relation to the appeal and the proceedings below).
4. If the parties cannot agree, then within 14 days each party file and serve a short submission (of not more than three pages) in relation to costs.
5. Subject to further order, the issue of costs be determined on the papers. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

INTRODUCTION 1 This is an appeal from a judgment of this Court in relation to the application of s 100A of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) and s 207-150 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) to a buy-back of shares in a company (IP Co) held by the trustee (IP Trustee) of a discretionary trust (IP Trust) in the year of income ended 30 June 2014 (2014 income year). 2 The issues arise because of the difference in treatment of the proceeds of the buy-back (amounting to about $10 million) for income tax purposes and for trust law purposes. For income tax purposes, by reason of s 159GZZZP of the ITAA 1936, the buy-back proceeds, to the extent debited to the retained earnings account of IP Co, were treated as a frankable dividend paid to IP Trustee (deemed dividend). For trust law purposes, by reason of the terms of the trust deed governing the IP Trust, the buy-back proceeds were treated as corpus of the trust. 3 Briefly, in the 2014 income year: (1) the IP Trust received a dividend in the amount of approximately $300,000. The IP Trust had never previously received a dividend; (2) a newly incorporated beneficiary (BE Co) was made presently entitled to the income of the IP Trust; (3) IP Co bought back the shares held in it by the IP Trust. Aside from $99.00, the buy-back proceeds were debited to IP Co's retained earnings account; and (4) the IP Trust deed was varied to change the definition of income to relevantly mean the income of the IP Trust determined by the trustee according to ordinary concepts. 4 Because the buy-back proceeds were not income of the IP Trust according to ordinary concepts, BE Co was not entitled to payment of the proceeds of the deemed dividend. The buy-back proceeds were retained by IP Trustee and treated as an accretion to the corpus of the IP Trust for the purposes of the IP Trust deed. 5 Subject to the application of s 100A of the ITAA 1936, and alternatively s 207-150 of the ITAA 1997, the income tax consequences of these transactions were: (a) the buy-back proceeds were treated as a dividend for income tax purposes. IP Co allocated sufficient franking credits to this deemed dividend to result in the dividend being fully franked; (b) because BE Co was presently entitled to the trust income of the IP Trust, BE Co was presently entitled to and therefore taxable on the deemed dividend received by IP Trustee, pursuant to Div 6 of the ITAA 1936; (c) because the deemed dividend was fully franked, BE Co was entitled to a tax offset and was not liable to pay any further tax on the deemed dividend; and (d) IP Trustee was not liable to tax on any of the deemed dividend because BE Co had been made presently entitled to all of the trust income of the IP Trust. 6 The respondent (Commissioner) assessed IP Trustee for the 2014 income year on the basis that s 100A of the ITAA 1936 applied. In the alternative, the Commissioner assessed BE Co on the basis that s 207-150(1) of the ITAA 1997 applied to deny the entitlement of BE Co to a tax offset (equal to the franking credits). Each of IP Trustee and BE Co objected and, upon their objections being disallowed, appealed. 7 At first instance, the primary judge held that s 100A of the ITAA 1936 applied with the consequence that BE Co was deemed not to be presently entitled to the income of the IP Trust to the extent of the deemed dividend. As a result, the IP Trustee was liable to tax on that amount. In the alternative, s 207-150 of the ITAA 1997 applied because the deemed dividend was paid as part of a dividend stripping operation as defined in s 207-155. The primary judge also concluded that BE Co's application ought to be dismissed notwithstanding it was an alternative assessment to IP Trustee's assessment that had been affirmed. 8 By their notices of appeal, the appellants contend that: (a) the primary judge erred in construing and applying s 100A(8) of the ITAA 1936 and therefore erred in dismissing IP Trustee's application; (b) the primary judge erred in dismissing BE Co's application for two reasons: (i) if s 100A applied, BE Co's appeal should be allowed because the amended assessment issued to BE Co would necessarily be excessive; (ii) in any event, the primary judge erred in concluding that the deemed dividend paid to BE Co was made as part of a dividend stripping operation for the purposes of s 207-150(1) of the ITAA 1997. 9 For the reasons set out below it is concluded that: (a) the primary judge's conclusion that s 100A of the ITAA 1936 applied is correct; (b) because s 100A applied, BE Co's appeal should be allowed; and (c) it is not necessary to decide whether the deemed dividend was made as part of a dividend stripping operation for the purposes of s 207-150(1) of the ITAA 1997.

BACKGROUND 10 The facts are set out at PJ [8] to [33]. They are not in dispute. For present purposes, the critical facts may be summarised as follows. 11 Mr Brian Blood and two business partners operate car dealerships known as the Blood Motor Group. Mr Brian Blood's wife is Mrs Fiona Blood. The Blood Motor Group is owned by entities that are part of Mr Blood's family group (Blood group) or the family groups of his business partners. 12 Prior to the transactions carried out in the 2014 income year, IP Trustee owned 99 shares in IP Co and Mrs Blood owned 1 share. 13 IP Co was a beneficiary of the B&F Investments Trust. The B&F Investments Trust received distributions sourced in the profits of the Blood Motor Group. Most of the income of the B&F Investments Trust had been distributed to IP Co. As at 30 June 2013, IP Co had accumulated retained earnings of $7,421,721.92. 14 BE Co was incorporated on 25 March 2014 and, upon its incorporation, automatically became a "General Beneficiary" of the IP Trust. 15 In the year ended 30 June 2014: (1) For the period ended 31 March 2014: (a) IP Co was made presently entitled to income of the B&F Investments Trust in the amount of $2,999,496.10. (b) IP Trust was made presently entitled to income of the B&F Investments Trust in the amount of $123,237.66. This was the first time the B&F Investments Trust had made a distribution of income directly to the IP Trust. (2) IP Co paid franked dividends on 31 March 2014 and 30 April 2014. The IP Trust received franked dividends from IP Co of $121,739 on 31 March 2014 and $59,400 on 30 April 2014. Together with the distribution of $123,238 from the B&F Investments Trust, the IP Trust received income of $304,377. (3) The IP Trust deed was varied on 13 June 2014 to change the definition of income to read as follows: "income" of the Trust Fund in respect of an Accounting Period shall mean: (i) the income of the Trust Fund determined by the Trustee according to ordinary concepts; or (ii) such other definition determined by the Trustee in writing on or before the end of the relevant Accounting Period, less those outgoings, expenses, charges, provisions and payments that the Trustee determines in its absolute discretion, is properly referable to the derivation of that income having regard to the provisions of the Deed and the nature of the income[.] (4) On 25 June 2014, IP Co bought back all of the shares in it held by the IP Trust. IP Co debited $99 of the purchase price against its share capital account and the remaining $10,189,770 to retained earnings. The amount of $10,189,770 was a deemed dividend for income tax purposes pursuant to s 159GZZZP of the ITAA 1936. (5) IP Co allocated a franking credit of $4,367,002 to the deemed dividend. (6) By resolution dated 30 June 2014, IP Trustee distributed to BE Co all of the IP Trust's trust law income for the 2014 income year (together, the Illuka Park Steps). 16 As noted above, at 30 June 2013, IP Co's retained earnings were $7,421,721.92. By the end of the 2014 income year, IP Co's retained earnings balance was $12,868.51.

Legislative provisions 17 Section 100A(1) of the ITAA 1936 provides: (1) Where: (a) apart from this section, a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate; and (b) the present entitlement of the beneficiary to that share or to a part of that share of the income of the trust estate (which share or part, as the case may be, is in this subsection referred to as the relevant trust income) arose out of a reimbursement agreement or arose by reason of any act, transaction or circumstance that occurred in connection with, or as a result of, a reimbursement agreement; the beneficiary shall, for the purposes of this Act, be deemed not to be, and never to have been, presently entitled to the relevant trust income. 18 The term "reimbursement agreement" is defined in s 100A(7), which provides: (7) Subject to subsection (8), a reference in this section, in relation to a beneficiary of a trust estate, to a reimbursement agreement shall be read as a reference to an agreement, whether entered into before or after the commencement of this section, that provides for the payment of money or the transfer of property to, or the provision of services or other benefits for, a person or persons other than the beneficiary or the beneficiary and another person or other persons. 19 The word "agreement" is defined in s 100A(13). It defines the concept of an "agreement" broadly, but excludes agreements "entered into in the course of ordinary family or commercial dealing". It provides: (13) In this section: agreement means any agreement, arrangement or understanding, whether formal or informal, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings, but does not include an agreement, arrangement or understanding entered into in the course of ordinary family or commercial dealing. 20 Section 100A(8) removes certain types of agreements from what might otherwise fall within the phrase "an agreement" in s 100A(7). It provides: (8) A reference in subsection (7) to an agreement shall be read as not including a reference to an agreement that was not entered into for the purpose, or for purposes that included the purpose, of securing that a person who, if the agreement had not been entered into, would have been liable to pay income tax in respect of a year of income would not be liable to pay income tax in respect of that year of income or would be liable to pay less income tax in respect of that year of income than that person would have been liable to pay if the agreement had not been entered into. 21 Section 100A(9) provides that, for the purposes of s 100A(8), an agreement shall be taken to have been entered into for a particular purpose if any of the parties to the agreement entered into the agreement for that purpose. It provides: (9) For the purposes of subsection (8), an agreement shall be taken to have been entered into for a particular purpose, or for purposes that included a particular purpose, if any of the parties to the agreement entered into the agreement for that purpose, or for purposes that included that purpose, as the case may be. 22 Section 100A(5) adjusts the amount to which a beneficiary is taken to be presently entitled for the purposes of s 100A(1), in certain circumstances. That section provides: (5) For the purposes of subsection (1), but without limiting the generality of that subsection, where: (a) a reimbursement agreement was entered into at or after the time when a person became a beneficiary of a trust estate (whether the person became a beneficiary of the trust estate before or after the commencement of this section); and (b) the amount (in this subsection referred to as the increased amount) of the share of the income of the trust estate to which the beneficiary is presently entitled exceeds the amount (in this subsection referred to as the original amount) of the income of the trust estate to which the beneficiary would have been, or could reasonably be expected to have been, presently entitled if the reimbursement agreement had not been entered into or if an act, transaction or circumstance that occurred in connection with, or as a result of, the reimbursement agreement had not occurred; the present entitlement of the beneficiary to so much of the increased amount as exceeds the original amount shall be taken to have arisen out of the reimbursement agreement.

The issues 23 On appeal, there was no dispute that: (a) The Illuka Park Steps as a whole constituted an "agreement" within the meaning of s 100A(13). (b) Before the Illuka Park Steps were implemented, there was an "agreement" within the meaning of s 100A(13) to implement those steps. (c) Neither the agreement comprising the Illuka Park Steps nor the agreement to implement those steps was an agreement "entered into in the course of ordinary family or commercial dealing". 24 The issues on appeal concerning s 100A were confined to s 100A(8). 25 The primary judge held that, in determining whether an agreement was entered into for purposes that included "the purpose of securing that a person who, if the agreement had not been entered into, would not be liable to pay income tax in respect of that year of income or would be liable to pay less income tax in respect of that year of income than that person would have been liable to pay if the agreement had not been entered into", it was not necessary to identify precisely what would have occurred, or precisely what income tax would have been payable or precisely by whom in which specific year, if the agreement had not been entered into: PJ [163]-[166]. It was not necessary to identify a definite "alternate postulate" before concluding that the relevant purpose existed: PJ [166]. 26 In the alternative, the primary judge held that if, under s 100A(8), it is necessary to determine the relevant purpose by reference to a definite alternative postulate, he would still have concluded that the relevant purpose existed. The primary judge was satisfied that IP Co would have paid to the IP Trust a dividend in the amount of the deemed dividend in the 2014 income year if the agreement to enter into the Illuka Park Steps had not been entered into or carried out. The primary judge did not accept that IP Co would not have distributed its retained earnings to the IP Trust by way of dividend and thereby simply retained them. 27 By its notice of appeal, IP Trustee contended that: (a) the primary judge erred in construing the word "would" in s 100A(8) as requiring or permitting the Court to consider what tax would have been payable if hypothetical transactions (which were not in fact entered into) had been entered into. In other words, s 100A(8) did not permit the identification of an alternate postulate based on a reconstruction. The word "would" required a comparison of the tax in fact payable by the entities with the tax payable if the agreement had not been entered into. In other words, s 100A(8) required an ascertainment of the tax that would have been payable by the entities based only on an annihilation of the agreement; (b) if s 100A(8) does permit a consideration of alternative hypothetical transactions, the primary judge erred in concluding that, if the agreement had not been entered into, IP Co would have paid a dividend to the IP Trust and IP Trustee would have (sometime in the future) distributed that income to an individual or individuals. The primary judge ought to have concluded that if the agreement had not been entered into, IP Co would not have distributed retained earnings and would have continued to retain those earnings or, if IP Co had paid a dividend to the IP Trust, IP Trustee would have distributed that dividend to BE Co; (c) the primary judge erred in concluding that, for the purposes of s 100A(8), one or more parties to the agreement entered into the agreement for a purpose of facilitating access to IP Co's profits in later years without further tax becoming payable or with less being payable. It was submitted that the primary judge ought to have found that tax will be or is likely to be payable on any future distributions to discretionary objects of the IP Trust, particularly having regard to s 99B of the ITAA 1936. Accordingly, it was submitted, no party to the agreement entered into it with a relevant purpose. 28 The appellant, IP Trustee, sought to emphasise the words "securing" and "would have been liable" in its construction of s 100A(8). In oral submissions, the appellant contended: Now, the word "securing" is very important. It's carefully and deliberately chosen by Parliament. The same language was used in the explanatory memorandum - or the same verb was used. The Shorter Oxford Dictionary [definition] of "securing" is: Ensuring, to make certain of receiving, to get hold of or get possession of. The Macquarie Dictionary is likewise: To obtain, to get hold or possession of, to make certain of. The word "securing" is used because what follows is requiring certainty, a definite outcome produced by applying a particular hypothesis, the framework … If entry into the subsection (7) agreement is incapable of securing the outcome specified in subsection (8), it's hard to see how anyone could be found to have entered into that agreement for the purpose of securing as required by subsection (8). 29 The appellant further contended that the analysis mandated by s 100A(8) required the identification of a definite and certain tax liability falling upon an identified person in a year of income. The purpose of entering into the agreement must be to secure for that person in respect of that year of income either no tax or less tax than that person would have been liable to pay if no agreement had been entered into. 30 The appellant's submission on this point sought to define the requisite purpose by reference to the certainty of a particular tax outcome achieved by entry into the agreement. If the agreement did not achieve that certainty of outcome, s 100A(8) could not be satisfied. 31 The next step, according to the appellant, was to identify the definite and certain tax liability of the identified person on the hypothesis that the agreement had not been entered into. The precise hypothesis mandated by s 100A(8) is identified by assuming away the agreement. The hypothesis is an annihilation of the agreement. The section does not mandate or permit the construction of an alternative hypothesis involving the construction of an alternative to the agreement. It is merely a question of assuming away the agreement that provided for payment. 32 Because the agreement in this case provided for a payment of income from IP Co to the IP Trust, annihilating the agreement would, on the appellant's analysis, result in no tax liability for any identified person. Absent the agreement in this case, the funds would have remained in IP Co and not reached the IP Trust at all. 33 The appellant submitted that its construction of s 100A was consistent with its purpose, as referenced in the relevant extrinsic materials, as Hill J explained in East Finchley Pty Ltd v Federal Commissioner of Taxation (1989) 20 ATR 1623 at 1637: As appears from the explanatory memorandum circulated with the Income Tax Assessment Amendment Bill (No 5) 1978, s 100A was designed to overcome tax avoidance arrangements referred to as "trust stripping". The memorandum at p 5 said: "The particular tax avoidance arrangements rely on a nominal 'beneficiary' being introduced into the trust and being made presently entitled to income of the trust, thus relieving the trustee of any tax liability in respect of the income. However, it is a feature of the arrangements that the introduced beneficiary also escapes tax by one means or another, eg, as a tax-exempt body or organisation. This 'beneficiary' retains only a minor portion of the trust income, while the group in whose favour the trust in substance exists effectively enjoys the major portion, but in a tax-free form. For example, a corresponding amount may be gifted to form the corpus of a further trust for the group's benefit. "The amendment proposed will look to the existence of an agreement or arrangement that is entered into otherwise than in the course of ordinary family or commercial dealing and under which present entitlement to a share of trust income is conferred on a beneficiary in return for the payment of money or the provision of benefits to some other person, company or trust. In those circumstances, the amendment will treat trust income dealt with under the 'reimbursement agreement' as not being income to which any beneficiary is presently entitled but as having been accumulated by the trustee, who will then be liable to pay tax on the income under section 99A at the prescribed tax rate (61.5 per cent for 1978-79)." 34 The appellant submitted that the concept of "trust stripping" involved "a trust pregnant with current year income which will, if nothing is done, be taxable at the end of the income year". The appellant submitted that the "paradigm" trust stripping arrangement involved an apparent or introduced beneficiary being made presently entitled and that introduced beneficiary making a payment to the real or intended beneficiary. The current case was said to differ radically from that paradigm because the IP Trust was "not pregnant with income" and BE Co was not only entitled to but also enjoyed all the trust law income. The appellant contended that its construction of s 100A was perfectly apt to deal with the mischief to which the section was directed.

Construction of s 100A 35 From the outset, it needs to be recognised that it is the text of s 100A which must be construed. Extraneous material cannot and must not be a substitute for the statutory text. Where it applies, s 100A operates to "switch off" a beneficiary's present entitlement with the result that the trustee will be taxed on that share of the trust's net income. 36 Section 100A applies if a beneficiary's present entitlement arose out of a "reimbursement agreement" or arose by reason of a transaction or circumstance that occurred in connection with a "reimbursement agreement": s 100A(1). For the section to apply, there must be a causal connection between the beneficiary's present entitlement and the "reimbursement agreement". Essential to the operation of s 100A is the existence of a "reimbursement agreement", defined in s 100A(7) as informed by ss 100A(8), (9) and (13). 37 Sections 100A(5) and (6) are directed at the identification of the amount of the beneficiary's present entitlement that is to be "switched off". They do so by reference to an amount of income of the trust estate to which the beneficiary "would have been, or could reasonably be expected to have been, presently entitled if the reimbursement agreement had not been entered into" (s 100A(5)) or by reference to an amount of income of the trust estate that "would have been, or could reasonably be expected to have been, paid to, or applied for the benefit of, the beneficiary if the reimbursement agreement had not been entered into" (s 100A(6)). The words "would … or could reasonably be expected" are words of prediction. 38 The phrase is similar to the phrase "would … or might reasonably be expected to have been" in s 177C in Pt IVA of the ITAA 1936, in respect of which the High Court in Federal Commissioner of Taxation v Peabody [1994] HCA 43; (1994) 181 CLR 359 observed (at 385, footnotes omitted): A reasonable expectation requires more than a possibility. It involves a prediction as to events which would have taken place if the relevant scheme had not been entered into or carried out and the prediction must be sufficiently reliable for it to be regarded as reasonable. 39 Section 100A(7) provides for two of the criteria of a "reimbursement agreement": (1) The first criterion is that there must be an "agreement", as defined by s 100A(13). (2) The second criterion is identified by reference to an action for which the agreement must provide. In order to be a "reimbursement agreement", the agreement must relevantly provide for the payment of money or the transfer of property to a person or persons other than the beneficiary or the beneficiary and another or other persons. It is observed that, although labelled a "reimbursement agreement", s 100A(7) does not require that the agreement provide for the (non-beneficiary) recipient of the payment or property to make a payment in consideration for or as reimbursement of the payment or property they receive. As the Full Court said in Commissioner of Taxation v Prestige Motors Pty Ltd [1998] FCA 221; (1998) 82 FCR 195 at 220 per Hill and Sackville JJ (Beaumont J agreeing at 197), the definition of "reimbursement agreement" in s 100A(7) cannot be controlled by the word "reimbursement". The words of a definition are not construed by reference to the term defined: Owners of the Ship "Shin Kobe Maru" v Empire Shipping Co Inc [1994] HCA 54; (1994) 181 CLR 404 at 419. 40 There was no dispute that there was an agreement. The agreement encompassed the Illuka Park Steps, though the appellant sought to focus on those steps that provided for the payment of the buy-back proceeds as it was by reason of providing for that payment that the agreement satisfied s 100A(7). The buy-back proceeds were not paid to the beneficiary (BE Co) but were paid to and retained for the benefit of IP Trustee. 41 Section 100A(8) provides for another criterion of a reimbursement agreement. That criterion is identified by reference to the purpose for which the agreement was entered into: Prestige Motors at 217 (Hill and Sackville JJ). It is awkwardly drafted in a series of negatives. It sets out those agreements not included in the reference to a "reimbursement agreement" and identifies those excluded agreements by reference to a purpose for which those agreements were not entered. Put in positive terms, a "reimbursement agreement" only includes an agreement entered into for the purpose, or for purposes that included the purpose, of securing that: (a) a person who, if the agreement had not been entered into, would have been liable to pay income tax in respect of a year of income, would not be liable to pay income tax in respect of that year of income; or (b) a person would be liable to pay less income tax in respect of that year of income than that person would have been liable to pay if the agreement had not been entered into. 42 Section 100A(9) is also critical. It deems an agreement to have been entered into for a particular purpose if any of the parties to the agreement entered into the agreement for that purpose. The purpose to be identified is not an objective purpose of an agreement but the purpose of a person who is a party to the agreement.

An inquiry into purpose 43 Against this background, the task under s 100A(8) is not one of identifying the effect of an agreement; it is one requiring a view about the purposes of a person. The conclusion that s 100A(8) requires to be drawn is that a party entered into the agreement for a purpose of securing that: (a) a person who, if the agreement had not been entered into, would have been liable to pay income tax in respect of a year of income, would not be liable to pay income tax in respect of that year of income; or (b) a person would be liable to pay less income tax in respect of that year of income than that person would have been liable to pay if the agreement had not been entered into . It is an assessment of a purpose of a party in undertaking an activity (entering into an agreement): Federal Commissioner of Taxation v Ludekens [2013] FCAFC 100; (2013) 214 FCR 149 at 193 [236]. The time at which the relevant purpose is to be ascertained is the time of entry into the agreement. Section 100A(8) will be satisfied if the proscribed purpose is one of the purposes of a party. There is no requirement that the proscribed purpose be the sole or dominant purpose.

Whose purpose 44 It follows from the provisions that what is to be investigated are the purposes of one or more of the parties to the reimbursement agreement. The parties to the reimbursement agreement are the parties to the understanding that provided for the payment of moneys to a person other than the beneficiary. The understanding can be reached prior to the moment of execution of any document. The advisers formulating the documentation and implementing the arrangement with the knowledge and assent of the controllers of the entities who were parties to the transactions are themselves parties to the reimbursement agreement: see PJ [138]; Prestige Motors at 218 (Hill and Sackville JJ).

Role of other possibilities 45 The words "if the agreement had not been entered into" must be construed in the context of assessing the purpose of a person. In that context, the focus is on what the party did (enter into the agreement) and why. The focus is not on the effect of hypothesised events or circumstances, or a minute consideration of the consequences of something that did not happen. 46 It is not part of the statutory task to establish what the parties to the agreement would have done if the agreement had not been entered into. As the Full Court stated in Ludekens (at 192 [229]), it is incoherent to posit an alternative postulate in coming to a view about what a person's purpose was. The nature of the statutory task under s 100A(8) is different from that required by ss 100A(5) or (6), or s 177C. In those contexts, the alternative postulate is determined in the context of comparing a tax outcome from the agreement with the tax outcome without the agreement. The need for a comparison with a precise alternative arises because of the need to quantify the tax advantage or tax benefit by reference to a particular taxpayer: Ludekens at 193 [235]. It is for that reason that the word "would" is part of the predictive phrase "would … or could reasonably be expected" in ss 100A(5) and (6). 47 An inquiry as to the purpose of a party (as required by s 100A(8)) is, on the other hand, an historical inquiry of why party entered into the agreement in fact entered into. The inquiry is not a prediction. Nor is it an examination of a comparative position or comparative outcomes for a particular taxpayer requiring you to remove from the proposed future what was done and positing what might have been done: Ludekens at 192 [231]. 48 Once it is appreciated that the statutory inquiry is as to purpose, the language of s 100A(8) (and in particular its reference to "securing" and "would") should not be construed as requiring certainty as to the effect to be produced. Ascertaining purpose in this context does not require or dictate an inquiry as to certainty of an outcome, consequence or effect. The dicta observation of Hill J in East Finchley (at 1639) that s 100A(8) "requires the hypothesis to be formulated as to what income tax would become payable if the relevant agreement had not been entered into" is not to be read as dictating such certainty. An activity entered into for the purpose of securing a commercial gain does not require the commercial gain to be certain in outcome. A "purpose of securing" is wide enough to encompass a desired but uncertain outcome or an expectation (see, for example, the description of the transaction in Ludekens at 194-5 [244]). In this respect, care needs to be taken in the use of dictionaries to fasten on the separate meaning of words used in a particular context: Sea Shepherd Australia Ltd v Federal Commissioner of Taxation [2013] FCAFC 68; (2013) 212 FCR 252 at 261-2 [34]-[36] (Gordon J). The word "would" is not used in the context of s 100A(8) as requiring certainty of a particular outcome but is, as the primary judge observed (at PJ [168]), reflective of the conditional rather than predictive tense. 49 The relevant purpose is that a party intends that, by entering into the agreement, someone - "a person" - is liable to pay "less tax" or no tax in a year of income. Whether that intention would in fact be realised is not to the point. It is not part of the statutory task to establish what a particular person's hypothesised tax position would necessarily have been in a particular income year in coming to a view about the purpose of a person. 50 Because the inquiry is as to the purpose of a party, the party's understanding of the effect to be achieved by the arrangement is relevant to the statutory task, regardless of whether that party's understanding may be objectively assessed as correct, particularly with the benefit of hindsight. 51 Although the identification of an alternative postulate is not part of the statutory task of investigating purpose, drawing a conclusion about the purpose of doing something may require a consideration of any non-tax outcome sought to be achieved by what was done and what other possibilities existed that might have achieved that outcome: see Hart v Commissioner of Taxation [2002] FCAFC 222; (2002) 121 FCR 206 at 226-7 [66], [69] (Hill J), albeit in the context of Pt IVA. A focus on annihilating or deleting what was done (here, entering into an agreement) without such a consideration may be a sterile and meaningless exercise in the context of assessing purpose. But the consideration of such other means is relevant only to the extent it casts light on the purpose of a party in adopting the means in fact adopted. Simply pointing to another means to achieve the same commercial objective does not, of itself, address the statutory question: PJ [179]; Prestige Motors at 222 (Hill and Sackville JJ).

Onus 52 Something should also be said about the onus of the taxpayer. The taxpayer bears the onus of demonstrating that the assessment is excessive. In the present case, that requires IP Trustee to demonstrate that the requirements for the carve out provided by s 100A(8) are satisfied. The appellant submitted that it was sufficient for it to discharge this onus by showing that the agreement was not capable of "securing" that outcome. Accordingly, it followed that the section did not require the taxpayer to prove the purpose of entering into the agreement. 53 The taxpayer's approach to the satisfaction of the onus seeks to leverage off the negative terms in which s 100A(8) is drafted. Ordinarily, a taxpayer discharges their onus of proving an assessment is excessive by establishing a positive proposition and, accordingly, a taxpayer would ordinarily discharge their onus of proving that a party to an agreement did not have a proscribed purpose by showing what the purpose of a party entering into the agreement in fact was. The primary judge rejected the appellant's explanations for the buy-back (as a substitution for a liquidation and as a tool for succession planning) and thereby rejected the appellant's submission as to the purpose of the parties in entering into the Illuka Park Steps. These findings were not challenged on appeal.

The approach to establishing purpose 54 The conclusion as to purpose is to be drawn in light of the established facts. Here, those facts included that one of Mr Buckley's - an adviser to the Blood group and an appointor of the IP Trust - purposes in implementing the Illuka Park Steps was to secure a transfer of IP Co's retained earnings to the IP Trust. The primary judge accepted Mr Buckley was adamant that a trust was a better investment vehicle than a company (because of the tax advantages associated with investing through a trust) and it was highly desirable, if not critical, that the retained earnings be put into a trust: PJ [245]. The primary judge also accepted that Mr Buckley considered that the IP Trust was a better investment vehicle than IP Co: PJ [247]. 55 Mr Buckley was a party to the arrangement. He provided evidence of his understanding of the expected effect of the IP Co share buy‑back from IP Trustee in the terms recorded at PJ [181]. His understanding was that the intended effect of the arrangement would be that the trust would retain the benefit of the proceeds of the share buy-back and the trustee would not be subject to tax at "punitive rates". In other words, Mr Buckley's understanding was that the arrangement would result in the trustee paying less tax than it would otherwise be required to pay on receiving and retaining a distribution of IP Co's retained earnings. This was reflected in the conclusion reached by the primary judge at PJ [182]. Mr Buckley's understanding of the intended effect of the arrangement was a matter relevant to a conclusion as to his purpose of entering into the reimbursement agreement. 56 Also relevant to the consideration of a party's purpose in entering into an arrangement is a consideration of how that arrangement marries with the historical behaviour of the parties. Arrangements which involve departures from historical patterns of behaviour without commercial justification and which departures contribute to an expected tax outcome are capable of supporting a conclusion as to the purpose of a party in entering into the arrangement. 57 As the primary judge found, the 2014 income year was the first in which the IP Trust received a dividend from IP Co and the first in which it was made presently entitled to income from the B&F Investments Trust. No commercial justification was proffered for the making or timing of these distributions to the IP Trust. The derivation of these amounts of tax law income by the IP Trust were necessary to create the mismatch between trust law income and the trust's tax net income. That mismatch was essential to the trust being able to distribute all of its trust law income to BE Co (and thereby render BE Co liable for tax on the tax net income of the trust) but have the IP Trustee retain amounts that were tax net income (but not trust law income) without being subject to tax under s 99A. The primary judge concluded (at PJ [189]) that the interim dividends paid by IP Co to the IP Trust and the interim distribution made in favour of the IP Trust were made as part of an arrangement entered into for a purpose of ensuring that BE Co would be liable for tax on both the trust income distributed to it and on the trust's net income which included the deemed dividend. The necessary corollary to the primary judge's conclusion is that IP Trustee would not be liable to tax on the buy-back proceeds it was to receive and retain. 58 The primary judge drew the same conclusion in relation to the execution of a deed of variation on 13 June 2014. Prior to 2014, the deed of settlement establishing the IP Trust had not been varied, nor had the trustee exercised its power to determine that the trust income be different from the tax law net income of the trust. The deed of variation was part of the means adopted to create the mismatch between the trust law income and tax net income of the trust. That mismatch was essential to the trust being able to distribute all of its trust law income to BE Co (and thereby render BE Co liable for tax on the tax net income of the trust) but have IP Trustee retain amounts that were tax net income (but not trust law income) without being subject to tax under s 99A. There being no commercial justification for the deed of variation, the primary judge concluded that the deed was executed as part of an arrangement entered into for the purpose of ensuring the IP Trustee would not be liable to tax on the buy-back proceeds it was to receive and retain: PJ [193]-[194]. We agree. 59 An investigation as to the purpose of a party in entering into an arrangement may include a consideration of the circumstances leading up to and surrounding that entry. One of the events that occurred in March 2014 was the incorporation of BE Co, which, immediately upon incorporation became a "General Beneficiary" of the IP Trust. Making BE Co presently entitled to the income of the IP Trust had the effect of making BE Co liable for tax on the whole of the tax law net income of the IP Trust. Because it was a corporate beneficiary, BE Co would not be liable to pay additional tax on the net income to the extent that the income was in the form of franked distributions. The circumstance of BE Co's incorporation so close to the implementation of the arrangement was a factor to be considered in determining the purposes of a party entering into the arrangement. 60 Another circumstance leading up to the parties entering into the arrangement concerned the genesis of the concept for the arrangement. The share buy-back strategy did not originate as a consequence of Mr Blood or the Blood group seeking advice but was a strategy brought to him by the advisers who were also taking the strategy to other clients. That circumstance may give a greater emphasis to the purposes of advisers as parties to the arrangement. 61 As explained above, a consideration of alternative ways in which a commercial outcome might be achieved can be relevant in considering the purpose of a party to an arrangement. A consideration of whether there were other ways of achieving the same commercial outcome may assist in understanding why the arrangement in fact entered into was entered into. The primary judge considered that an ordinary commercial transaction to move retained earnings from IP Co to the IP Trust which owned shares in IP Co would be for IP Co to pay a dividend to the IP Trust. There was no error in the primary judge's consideration of the alternatives of the payment of dividends and liquidation in evaluating the purpose of the parties entering into the arrangement at PJ [197]-[204]. 62 The examination of the facts and circumstances relevant to an investigation of the purpose of a party as required by s 100A(8) supports the conclusion that a party (and, in particular, Mr Buckley) entered into the reimbursement agreement for a purpose of ensuring that the retained earnings of IP Co could be distributed to and retained by the IP Trust without IP Trustee being liable to tax. It was therefore to be concluded that the reimbursement agreement was entered into for a purpose of securing that IP Trustee who, if the agreement had not been entered into, would have been liable to pay income tax in respect of the 2014 income year, would not be liable to pay income tax in respect of that year of income. The primary judge was correct to hold that the appellant had not discharged its onus of establishing that the carve out provided for in s 100A(8) applied. 63 This conclusion is not dependent upon forming a view about the manner in which IP Trustee might choose to distribute the buy-back proceeds in the future. Nor does it require a conclusion to be drawn about whether a distribution of those proceeds, as corpus of the IP Trust, would or would not be taxable to the recipient of such a distribution: cf PJ [239(c)]. 64 The Commissioner sought to draw support for the conclusion that s 100A was satisfied by having regard to the manner in which IP Co came to discharge its obligation to pay the buy-back proceeds to IP Trustee. The fact that IP Co discharged its payment obligation by assigning debts that were owed to it seems to be of no relevance to the consideration of purpose of a party to the reimbursement agreement. 65 It is observed that many of the contentions of the appellant here concerning the construction of s 100A echoed those made in Prestige Motors. Here, it was contended that the section did not apply because it could not be said that, once the reimbursement agreement was annihilated, there would be any income of the IP Trust. Absent the agreement, there is no buy‑back by IP Co so the retained earnings of IP Co remain undistributed. It was submitted that this result was consistent with s 100A being directed at a trust that had existing current year profits. 66 In Prestige Motors it was contended that, absent the agreement, the whole trust would not have existed. The Full Court did not constrain the language of s 100A in that way. The Full Court also eschewed the proposition that s 100A ought to be construed as though the legislators had in mind a specific form of trust stripping involving an existing trust with existing income that would be assessable to the beneficiaries or the trustee if steps were not taken. The mere fact that s 100A can be characterised as a specific anti-avoidance provision does not demonstrate that it should be given a narrower construction than its ordinary meaning and grammatical sense suggest. The Full Court (Hill and Sackville JJ) accepted that s 100A was capable of applying to arrangements directed to expected income of a trust not yet in existence and was not limited to the stripping of current year income of an existing trust (at 219, emphasis added): There may well be tax avoidance arrangements that satisfy s 100A, yet contemplate the creation of a new trust. For example, the arrangements may provide from the beginning a class of beneficiaries wide enough to include a tax exempt body, with the intention that expected income be paid to that body in return for an agreed capital payment. Of course, the fact that a new trust is to be created may bear on the question of purpose and of ordinary commercial or family dealing. But there is no reason to read down the language of s 100A to exclude a particular category of tax avoidance arrangements that otherwise satisfy the statutory language, merely because the trust was not in existence when the arrangements were formulated. 67 If s 100A is capable of applying in a situation in which, absent the agreement, the trust may not have existed at all, a fortiori it is capable of applying to a trust which, absent the agreement, would not have trust income. 68 On the facts as found by the primary judge, s 100A applied. As a result, IP Trustee was liable to tax on the net income of the IP Trust that was attributable to the deemed dividend. IP Trustee has not discharged its onus of demonstrating that the assessment issued to it for the 2014 income year was excessive.

DIVIDEND STRIPPING 69 As noted above, the Commissioner issued an alternative assessment to BE Co on the basis that s 207-150(1)(g) of the ITAA 1997 applied to deny the entitlement of BE Co to a tax offset equal to the franking credits allocated to the deemed dividend. 70 Section 207-150(1)(g) relevantly provides: (1) If a *franked distribution *flows indirectly to an entity in an income year in one or more of the following circumstances: … (e) the distribution is made as part of a *dividend stripping operation; … then, for the purposes of this Act: … (g) the entity is not entitled to a *tax offset under this Division because of the distribution… 71 Section 207-155 provides: A distribution made to a *member of a *corporate tax entity is taken to be made as part of a dividend stripping operation if, and only if, the making of the distribution arose out of, or was made in the course of, a *scheme that: (a) was by way of, or in the nature of, dividend stripping; or (b) had substantially the effect of a scheme by way of, or in the nature of, dividend stripping. 72 The assessment issued to BE Co was necessarily an alternative assessment to that issued to IP Trustee because, if s 100A applied, BE Co would be taken not to have been presently entitled to the deemed frankable dividend and therefore BE Co would not be liable to tax (with or without a tax offset) in respect of that deemed dividend. 73 The primary judge concluded that the deemed dividend that flowed to BE Co was made as part of a dividend stripping operation (PJ [359], [366]-[367]) and, therefore, BE Co was not entitled to a tax offset in respect of that deemed dividend. The primary judge also made orders dismissing BE Co's appeal. In BBlood Enterprises Pty Ltd v Commissioner of Taxation (Costs) [2022] FCA 1278 at [10], the primary judge refused to set aside that order on the basis that BE Co had been wholly unsuccessful on the arguments it had advanced about excessiveness even though there had been "no dispute about the assessment [issued to BE Co] being excessive if s 100A applied in relation to the assessment" issued to IP Trustee. 74 BE Co appeals against: (1) the primary judge's conclusion that the deemed dividend was made as part of a dividend stripping operation for the purposes of s 207-150(1) of the ITAA 1997; and, alternatively, (2) the primary judge's order dismissing its application on the basis that, if s 100A applied to cause BE Co not to be presently entitled to the income of the IP Trust, the assessment issued to BE Co was necessarily excessive. 75 It is convenient to deal with the second issue first.

Alternative assessment 76 It was not disputed that, if s 100A applied, it necessarily followed that BE Co was not assessable on that part the IP Trust income referable to the deemed dividend in the 2014 income year. 77 The primary judge dismissed BE Co's application on the basis that the assessment the subject of the objection decision was not shown to be excessive on any of the specific bases the subject of the objection which had been made. The objection did not refer to s 100A. At the time the objection was lodged, the assessment to IP Trustee had not been issued. 78 In proceedings on an appeal to the Court against an objection decision, the appellant is limited to the grounds stated in the taxation objection to which the decision relates: Taxation Administration Act 1953 (Cth) s 14ZZO. BE Co's ground of objection was: [T]he Amended Assessment is excessive and should be reduced to nil on the basis that s. 207-150(1) of the ITAA 1997 cannot apply to deny the Taxpayer the franking credit tax offset that it claimed in its income tax return. 79 The particulars of the ground of objection were that: [T]he franked distribution that gave rise to the franking credit tax offset did not arise out of, nor was it made in the course of, a scheme that: (a) was by way of, or in the nature of, dividend stripping; or (b) had substantially the effect of a scheme by way of, or in the nature of, dividend stripping, as is required by ss 207-150(1)(e) and 207-155 of the ITAA 1997. 80 Although the particulars to the ground of objection made no reference to s 100A, BE Co's ground of objection was that the assessment issued to it was excessive because s 207-150(1) of the ITAA 1997 could not apply. 81 In order for s 207-150 to apply, a franked distribution must "flow indirectly to" BE Co. The circumstances in which a franked distribution "flows indirectly to" an entity are set out in s 207‑50. Section 207-50(3) relevantly provides: (3) A *franked distribution flows indirectly to a beneficiary of a trust in an income year if, and only if: (a) during that income year, the distribution is made to the trustee of the trust…; and (b) the beneficiary has this amount for that income year (the share amount): (i) a share of the trust's *net income for that income year that is covered by paragraph 97(1)(a) of the Income Tax Assessment Act 1936… (whether or not the share amount becomes assessable income in the hands of the beneficiary)… 82 As explained above, where s 100A of the ITAA 1936 applies, the beneficiary is deemed not to be, and never to have been, presently entitled to the share of the income of the trust estate. As a result, there is no share of the net income of the trust estate that is included in the assessable income of the beneficiary under s 97(1)(a) of the ITAA 1936 as required by s 207-50(3)(b)(i) of the ITAA 1997 and thus there can be no franked distribution which flows indirectly to that beneficiary. Although the preferable course may have been for BE Co to seek leave to amend the particulars to its ground of objection following the issue of the assessment to IP Trustee, the primary judge ought to have found that BE Co's ground of objection was sufficiently wide to cover a circumstance in which s 100A applied. 83 Whilst it is open to the Commissioner to issue alternative assessments which are necessarily inconsistent, once the true state of facts is determined and the liability of the correct taxpayer has been established, the alternative inconsistent assessment is necessarily excessive. The true state of affairs here is that s 100A was found to have applied. This necessarily entailed a conclusion that the assessment issued to BE Co was excessive because s 207-150(1) could not be satisfied. 84 The Commissioner contended that, given that the Court had dismissed the appeal by IP Trustee against the objection decision on its objection, the Commissioner was required to take such action, including amending any assessments, as is necessary to give effect to the decision. Giving effect to that decision would have required the Commissioner to amend BE Co's assessment (because that assessment would necessarily be excessive). The difficulty with that contention is that, by doing so, it is not clear how the Commissioner would be giving effect to the primary judge's orders in respect of BE Co's appeal. The primary judge's orders in relation to BE Co's appeal could not be given effect to whilst, at the same time, the orders in respect of IP Trustee's appeal were given effect to. 85 In Deputy Commissioner of Taxation v Moorebank Pty Ltd [1988] HCA 29; (1988) 165 CLR 55, the High Court considered that a "case in which the Commissioner issues a number of assessments on an alternative basis to different taxpayers in respect of the same income provides an obvious example" of a situation in which it would be "oppressive for the Commissioner to seek to enforce payment of the full amount due under a notice of assessment or by way of additional tax before the final resolution of a genuine dispute about the correctness of the assessment" (at 67, emphasis added). Two inconsistent alternative assessments ought not be affirmed as correct by order of the Court. Where it is necessary in order to avoid such an outcome, leave to amend the grounds of objection ought to be granted. 86 BE Co's appeal should be allowed.

Dividend stripping operation 87 Given the conclusions expressed above, it is unnecessary to determine whether the deemed dividend paid by IP Co was made as part of a "dividend stripping operation". However, we make the following observations. 88 Pursuant to s 207-155 of the ITAA 1997, a distribution is taken to have been made as part of a dividend stripping operation only in two circumstances: (1) where the making of the distribution arose out of, or was made in the course of, a scheme that was by way of, or in the nature of, dividend stripping (first limb); or (2) where the making of the distribution arose out of, or was made in the course of, a scheme that had substantially the effect of a scheme by way of, or in the nature of, dividend stripping (second limb). 89 As explained further below, historically, a scheme by way of, or in the nature of, dividend stripping was characterised by the content, purpose and effect of the scheme.

First limb 90 The ITAA 1997 and ITAA 1936 contain no definition of "dividend stripping" but have been drafted on an assumption that the term has an established meaning. The High Court in Federal Commissioner of Taxation v Consolidated Press Holdings Ltd [2001] HCA 32; (2001) 207 CLR 235 observed (at 268 [104]) that the expression "dividend stripping" cannot be understood without regard to its history as part of tax avoidance discourse. That history was set out by the Full Court of this Court in Commissioner of Taxation v Consolidated Press Holdings Ltd (No 1) [1999] FCA 1199; (1999) 91 FCR 524 and summarised by the primary judge at PJ [299]-[323]. 91 The primary judge referenced the explanation of the terms "bond washing and dividend stripping" in Fowler's Modern English Usage (2nd ed, rev Sir Ernest Gowers, Clarendon Press, 1965) at pp 61-2: PJ [301]. In addition to the passage quoted by his Honour, the explanation included the following: In their original and simplest form they were collusive transactions by which a person liable to high rate of surtax would avoid liability by selling investments cum dividend and buying them back at a lower price after the dividend had been paid to the purchaser; in this way he converted what would have been taxable income in his hands into a non-taxable gain. The other party to the deal would be either a tax-exempt body (e.g. a charity) or someone (e.g. a dealer in securities) who, unlike the ordinary taxpayer, was taxable on his gains from transactions in securities and so could set off his loss on resale against his liability. Thus, provided that the difference between the two prices, with incidental expenses, did not exceed the amount of the dividend, the only loser would be the Revenue. 92 The primary judge (at PJ [300]) quoted the definition of dividend stripping from Halsbury's Laws of England (3rd ed, Butterworths, 1957) Vol 20 at pp 201-2 [356], cited by Windeyer J in Investment and Merchant Finance Corporation Ltd v Federal Commissioner of Taxation (1970) 120 CLR 177 at 179. In that case, his Honour went on to describe the following witness testimony as stating "the basic principle of a dividend stripping operation" (at 185): [A] dividend stripping operation is a two-phase operation of removing the dividend and disposing of the share. One by itself as such does not create the desired result from a dividend stripping operation. … If one has a series of transactions and one is buying some shares for a given price and selling some for more, one is taxed on the profit that one makes on the selling of those shares. If one can marry that off with a loss from the sale of other shares, then the overall situation is contra to a greater or lesser extent, and I therefore link the obtaining of the dividend and the removal of the shares as a contra to the other transaction as being the operation … The advantage of the sale of the shares is that you sell them at a loss? - - - Yes. - - - And you offset that loss against the profits which you have made in other share deals? - - -Yes. 93 The primary judge observed that the term "dividend stripping" has appeared in the ITAA 1936 since 1972, when s 46A was introduced to reduce a dividend rebate in respect of the payment of dividends that arose out of, or was made in the course of, a scheme that the Commissioner was satisfied was by way of dividend stripping. At a general level, the section applied only in relation to a dividend paid in respect of shares where the shareholder held those shares or other shares in the paying company as trading stock or on revenue account. The rebate was generally limited to the amount of the dividend less any loss or deduction for the cost of acquiring the shares in the paying company. It is in this context that the statements made in the explanatory memorandum quoted by the primary judge at PJ [304] are to be understood. 94 The matters which the Commissioner was required by s 46A to take into account in forming his opinion as to whether the payment of the dividend arose out of a scheme that was by way of dividend stripping included: (a) whether, in effect, the receipt of dividends on the shares amounts to a recoupment of the price paid for the shares (former s 46A(3)(a)); and (b) whether the value of the shares is substantially reduced after acquisition by the shareholder and, if so, whether the reduction is wholly or mainly attributable to dividends received (former s 46A(3)(b)). 95 It was not therefore possible to conclude that there was a scheme by way of dividend stripping without regard to the circumstances relating to the acquisition of the shares in respect of which the dividend had been paid. A scheme by way of dividend stripping was considered to involve an acquisition of shares and a payment of a dividend out of profits referable to a period prior to acquisition, such that the value of which profits might be said to be reflected in the price paid for the shares. 96 Section 46B of the ITAA 1936 was introduced as schemes evolved to evade the terms of s 46A by having one company acquire shares in the target company but an associated company receive the dividends (and enjoy the rebate). 97 In Commissioner of Taxation v Patcorp Investments Limited (1976) 140 CLR 247 at 253-4, the term "dividend stripping operation" was applied by Mason J to the following transactions: In the critical transactions the appellants acquired shares in companies which had accumulated large amounts of profits available for distribution by way of dividends to shareholders. By s. 46 of the Act a shareholder, being a resident non-private company, was entitled to a rebate in its assessment to income tax of the amount obtained by applying the average rate of tax payable by the shareholder to the amount of dividends included in its taxable income. The value of shares in a company having such accumulated profits naturally reflected the existence of assets consisting of accumulated profits available for distribution by way of dividend subject to a s.46 rebate. The advantages of performing a dividend stripping operation on such a company are obvious. The dividends are rebatable and, subject to the arguments of the Commissioner, the inevitable loss on the resale of the shares is a tax deduction. The loss on the resale of the shares is inevitable because the assets of the company as they existed at the time of acquisition are depleted by the distribution of the valuable asset consisting of the accumulated profits. Moreover, on the assumption that the loss on resale is a tax deduction, an assumption made by the appellants, the acquisition of shares in such a company offers an opportunity of reducing the tax liability of the purchaser by offsetting the loss on resale against the profits which it has otherwise made in the year of income. 98 A dividend stripping operation so understood comprised an acquisition of shares by a share trader, the payment of a dividend (usually out of pre-acquisition profits), the purchaser claiming not to be subject to tax upon the dividend received, the vendor of the shares obtaining a capital sum that largely reflected the profits distributed to the purchaser and the subsequent disposition of the shares by the purchaser, at a loss. A dividend stripping operation was driven by the tax outcomes it secured for both the vendor and the purchaser of the shares. 99 Examples can be found of the term "dividend stripping" being applied to transactions which do not exhibit all of the above characteristics. In the High Court decision in Patcorp, Gibbs J referred to the following line of cases as pertaining to "arrangements which might be described as dividend stripping operations" (at 300): Bell v Federal Commissioner of Taxation (1953) 87 CLR 548; Newton v Federal Commissioner of Taxation [1958] AC 450; (1958) 98 CLR 1; Hancock v Federal Commissioner of Taxation (1961) 108 CLR 258 and Federal Commissioner of Taxation v Ellers Motor Sales Pty Ltd (1972) 128 CLR 602. 100 Gibbs J observed in Patcorp that the arrangements in all of those cases "had the purpose of giving the character of capital to what, apart from the arrangement, would have been received as income and thus of avoiding liability for tax on the amounts received" (at 300). 101 In Consolidated Press Holdings (No 1), the Full Court observed that the four cases referred to by Gibbs J in Patcorp had the following five characteristics in common (at 561 [136]): (1) a target company, which had substantial undistributed profits creating a potential tax liability either for the company or its shareholders; (2) the sale or allotment of shares in the target company to another party (a company in three cases and individuals resident in the then Territory of New Guinea in Bell); (3) the payment of a dividend to the purchaser or allottee of the shares out of the target company's profits; (4) the purchaser escaping Australian income tax on the dividend so declared (whether by reason of a s 46 rebate, an offsetting loss on the sale of the shares, or the fact that the shareholders were resident outside Australia); and (5) the vendor shareholders receiving a capital sum for their shares in an amount the same as or very close to the dividends paid to the purchasers (there being no capital gains tax at the relevant times). 102 The Full Court added that a further common characteristic was a predominant or sole purpose of the vendor shareholders avoiding tax on a distribution of dividends by the target company: Consolidated Press Holdings (No 1) at 561 [137]. 103 Together, these six characteristics were said by the Full Court to be the "central characteristics of a dividend stripping scheme": at 566 [157]. A dividend stripping scheme takes its character from the content of the scheme and its purpose: see 571-2 [183]. 104 It might be observed that each of the cases involved an acquisition of shares by a new shareholder (the purported "stripper"), a payment out of profits to the new shareholder (or an associate) and the existing vendor shareholders receiving a capital payment. Of these cases, neither Bell nor Ellers Motor involved a subsequent disposal of shares by the new shareholder at a loss. None of the cases involved a payment out of retained earnings to an entity that was an existing shareholder of the company. 105 The focus of ss 46A and 46B of the ITAA 1936 had been to reduce or deny the dividend rebate to the new shareholder. When Pt IVA was introduced to the ITAA 1936 in 1981, it included a new s 177E to tax the pre-existing vendor shareholder on the dividend they would have derived if the company had paid out its profits. According to the Explanatory Memorandum to the Income Tax Laws Amendment Bill (No. 2) 1981 (Cth), s 177E was introduced to (at p 4, emphasis added): deal with dividend-stripping schemes of tax avoidance and certain variations on such schemes, the effect of which is to place company profits in the hands of shareholders in a tax-free form, in substitution for taxable dividends. Section 177E is designed against the background that, while such schemes are of the general kind to which preceding provisions of Part IVA are to apply, it may not always be able to be concluded that, if the scheme had not been entered into, the relevant dividends would have been (or might reasonably be expected to have been) included in assessable income: the company may simply have retained the profits for the time being. In schemes of this kind, arrangements are generally made to convert into cash the assets of the company to be stripped and, following the sale by shareholders of their shares in the company for a capital sum, subsequent transactions ensure either that the purchaser is reimbursed for the price of the shares in the form of a dividend or other payment from the company or that an entity which has a close association with the shareholder obtains the enjoyment of property of the company in one form or another. These transactions are structured so that profits thus effectively stripped from the company do not bear tax. Section 177E will treat such schemes as schemes to which the Part applies so that, for example, a shareholder who disposes of his or her shares in the context of a dividend-stripping scheme will be treated as having obtained a "tax benefit" of the amount which the person would have derived as a dividend had the company paid as a dividend the amount of company profits that are represented in the property of the company that is stripped from it under the scheme. 106 Section 177E contained the two limb test that forms part of s 207-155 of the ITAA 97. According to the Explanatory Memorandum (at p 14, emphasis added): Paragraph (a) sets out the initial and key test that there be a scheme that in fact is either one by way of or in the nature of dividend stripping or one having substantially the effect of such a scheme. Schemes within the category of being, or being in the nature of, dividend stripping schemes would be ones where a company (the "stripper") purchases the shares in a target company that has accumulated profits that are represented by cash or other readily-realisable assets, pays the former shareholders a capital sum that reflects those profits and then draws off the profits by having paid to it a dividend (or a liquidation distribution) from the target company. In the category of schemes having substantially the same effect would fall schemes in which the profits of the target company are not stripped from it by a formal dividend payment but by way of such transactions as the making of irrecoverable loans to entities that are associates of the stripper, or the use of the profits to purchase near-worthless assets from such associates. 107 In relation to the first limb, the Full Court in Consolidated Press Holdings (No 1) held that: (1) The terms of the first limb of s 177E(1)(a), and in particular the phrase "by way of or in the nature of", suggest that a scheme may fall within its scope, even though not all the elements of a standard or paradigm dividend stripping scheme are present, provided it retains the "central characteristics" of a dividend stripping scheme: at 566 [156]. (2) A scheme could satisfy s 177E(1)(a) notwithstanding that the acquirer of the shares was not a dealer in shares. The claiming of a deduction for a loss on a subsequent disposal of the shares was not a "central characteristic" of a dividend strip (although it may well be a characteristic of the "paradigm"). The critical point was that "the dividends paid to those who acquired the shares were not assessable income for Australian tax purposes": at 566-7 [159]. (3) It does not matter whether the vendor shareholders receive a consideration for their shares in cash or in other property. "The critical point is that the vendor shareholders receive a consideration which is in a tax-free or largely tax-free form": at 567 [159]. (4) The stripper/purchaser's acquisition of the shares in the target company did not need to be effectively financed by the target company: at 567 [159]. (5) A dividend stripping scheme connotes a scheme that has a dominant purpose of the avoidance of tax that otherwise would or might be payable by the vendor shareholders in respect of the profits of the target company or of enabling the vendor shareholders to receive profits of the target company in a substantially tax-free form, thereby avoiding tax that would or might be payable if the target company's profits were distributed to shareholders by way of dividends: at 569 [169]. This conclusion was endorsed by the High Court in Consolidated Press Holdings at 275 [134]. (6) Both the first and second limb of s 177E(1) required that there be a purpose of tax avoidance (being the avoidance of tax by the vendor shareholders on amounts distributable to them as dividends): Consolidated Press Holdings at 276-7 [140]-[141]. 108 It was accepted on appeal in this matter that, contrary to the approach of the primary judge at PJ [315] and [356], determining whether a scheme is by way of or in the nature of dividend stripping did not involve an inquiry into the subjective purpose of any participant in the scheme. The purpose of the scheme was to be assessed objectively: Consolidated Press Holdings (No 1) at 570 [174]. 109 The primary judge considered that the term "by way of or in the nature of dividend stripping" was protean and was capable of adapting to changes in the income tax legislative regime. The primary judge considered that, at its simplest, a dividend stripping operation is an operation to extract profits from a company in a way intended to avoid or reduce tax which, absent the operation, would have been payable by a person on those profits being distributed by way of dividends: PJ [353]. At the time Patcorp was decided, a company was prohibited from acquiring its own shares. Historically, a new shareholder was required because the existing shareholder could not sell their shares to the company itself. 110 At PJ [355], the primary judge concluded that, by the Illuka Park Steps, including the buy‑back, IP Co transferred its retained earnings to IP Trustee in capital form without any person being liable to pay tax on the distribution of retained earnings beyond the level of company tax already paid: IP Co did not declare and pay dividends to its shareholder. Rather, together with others, it agreed to enter into a series of transactions including a share buy-back the end result of which was to transfer the retained earnings to IP Trustee in capital form without any person being liable to pay tax on the distribution of the retained earnings. Immediately before the buy-back, IP Co's retained earnings were increased by about $3 million, by a distribution from B&F Investments made to maximise the amount of retained profits to be extracted through the buy-back strategy: T106. As a matter of substance rather than legal form, the effect of the scheme included: • a sale of shares by the target company (IP Co), in the legal form of a cancellation of shares, at a price which reflected the company's retained profits; • the payment out by the target company of substantially all of its profits; • the liability to tax in respect of the payment out of the retained earnings falling upon a newly introduced corporate beneficiary (BE Co) which would not need to pay tax in respect of the retained earnings; • the original shareholder (IP Trustee) ultimately taking the benefit of a capital sum, rather than receiving taxable dividend income. 111 In relation to the primary judge's conclusions concerning the first limb, we make the following observations: (1) In characterising a scheme as being by way of or in the nature of dividend stripping, it is necessary to look at the content, purpose and effect of the scheme. A scheme is not characterised as being by way of or in the nature of dividend stripping by looking only at the purpose of the scheme. Whilst the purpose of avoiding tax on a dividend is the typical characteristic of a dividend stripping scheme, perhaps an essential characteristic, it is not the only characteristic. The High Court in Consolidated Press Holdings referred to "the particular taxation purpose" as "the hallmark of such a scheme", but it also observed that, in that case, a "number of characteristics common to schemes that have been regarded as typical dividend stripping schemes were absent": at 275 [133]. (2) In so far as the content of the scheme is concerned, whilst it may be accepted that the term "in the nature of dividend stripping" is capable of encompassing schemes that depart from the paradigm of a dividend stripping operation, the term cannot be so protean as to be meaningless. It may be doubted that a scheme can be by way of dividend stripping without a participant in the scheme acting as a dividend stripper. Although it is not necessary to express a concluded view, there is room to doubt whether a scheme can be in the nature of dividend stripping where the scheme involves a payment of a deemed dividend between a company and long-standing shareholder. This conclusion would be consistent with the reasoning of the Full Court in Lawrence v Federal Commissioner of Taxation [2009] FCAFC 29; (2009) 175 FCR 277, where the concession that the scheme was not "by way of or in the nature of dividend stripping" within the first limb of s 177E(1) was said by the Full Court to have been correctly made in the context of a scheme that involved no dividend or deemed dividend, no vendor shareholder and no purchaser of shares: at 286 [29]-[30]. (3) In so far as the effect of a scheme by way of or in the nature of dividend stripping is concerned, such schemes historically resulted in the receipt by the vendor shareholder of a sum that was not income for tax purposes. The receipt by the vendor shareholder was described as a "capital sum" in contradistinction to an income receipt for income tax purposes. In this context, "capital" was not used in a trust law sense but in the tax law sense. It is observed that the Illuka Park Steps resulted in the existing vendor shareholder receiving a tax law deemed dividend that was taxable as a dividend. The retained earnings of IP Co were not moved from IP Co to the shareholder in a form that was recognised for tax law purposes as capital.

Second limb 112 The Full Court in Consolidated Press Holdings (No 1) concluded that the second limb of s 177E(1) was intended to deal with situations in which profits were stripped otherwise than by a dividend or deemed dividend: at 571 [181]. This construction was endorsed by the High Court in Consolidated Press Holdings at 276 [140]. 113 The Full Court in Lawrence considered that the second limb of s 177E was capable of applying to the scheme in that case, which involved no vendor of shares in a company and no payment of a dividend to a new shareholder. The second limb was found to apply to a scheme which involved the stripping of the value of profits out of a target company by stripping the value of an asset owned by that company and the placement of a corresponding capital sum into a trust for the original shareholder and his family. The capital sum took the form of a loan (the principal of which was advanced by the delivery of a promissory note issued by the company). 114 The primary judge concluded that the second limb of the definition in s 207-155(1) was not limited to schemes which did not involve the payment of a dividend or deemed dividend: at PJ [362]. His Honour concluded that the Illuka Park Steps had substantially the effect of a scheme by way of or in the nature of dividend stripping: at PJ [367]. The primary judge considered (at PJ [355]) that the effect of the scheme was for "the original shareholder (IP Trustee) ultimately taking the benefit of a capital sum, rather than receiving taxable dividend income". 115 The primary judge concluded that, having regard to the statutory context, whatever the meaning ascribed to the second limb of s 177E(1)(a), in the context of s 207-155, it was difficult to confine its operation to a scheme that involved a distribution that was not in the form of a dividend or deemed dividend. Section 207-155 (and its predecessor, former ss 160APP(6) and 160APHA) was inserted to deny franking credits on dividends paid as part of a dividend stripping operation: at PJ [364]. If the second limb of the definition did not apply to dividends, it was difficult to conceive of the role the second limb played in the context of a denial of franking credits which, of their nature, attached only to dividends: at PJ [365]. 116 We make the following observations: (1) In Lawrence, the payment into the trust was capital only in the sense that it was not a receipt of tax law income. The proceeds of a loan are not income. By contrast, the payment by IP Co in this case was a payment of a dividend and tax law income as ordinarily understood. It is an open question as to whether a scheme can have substantially the same effect as a scheme by way of or in the nature of dividend stripping if the scheme involves an existing shareholder receiving a payment in the form of a tax law dividend or deemed dividend. (2) The construction of the second limb of s 207-155 raises difficult issues. On the one hand, the primary judge was correct to observe that, if it is given the same construction as in s 177E, it is difficult to understand what role it could have played in ss 160APP(6) and 160APHA. On the other hand, it is difficult to conceive of an alternative construction which would not result in the first limb being rendered otiose (as the High Court observed in Consolidated Press Holdings at 276 [137]). If s 207-155(1)(b) has the meaning ascribed to it by the primary judge, it would never be necessary to look past the effect of the scheme. 117 It is not necessary to resolve these issues in the present case. In our view, these matters are best addressed in circumstances where any tax liability depends upon their resolution.

CONCLUSION 118 IP Trustee's appeal is to be dismissed with costs. 119 BE Co's appeal is to be allowed. Paragraph 1 of the orders of the primary judge made on 19 September 2022 in proceeding number VID 114 of 2020 is to be set aside and in lieu thereof it is to be ordered that: (a) BE Co's application be allowed; and (b) the Commissioner's objection decision in relation to the 2014 income year be set aside and in lieu thereof the objection be allowed in full. 120 If the parties are unable to reach agreement as to costs, it is appropriate to receive submissions from the parties as to costs in relation to BE Co's appeal and the proceeding below. I certify that the preceding one hundred and twenty (120) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justices Moshinsky, Colvin and Hespe.