Resolution
180 The effect of the Illuka Park steps: The effect of the Illuka Park steps, absent the application of s 100A, was as follows:
(1) IP Co transferred its retained profits to the IP Trust.
(2) For trust purposes, the IP Trust received ordinary income (the dividends and a distribution, together totalling $304,376.97) and capital (the proceeds of the share buy-back, namely the Share Buy-Back Dividend of $10,189,671).
(3) For tax purposes, the proceeds of the share buy-back were deemed to be a dividend. BE Co did not receive the benefit of the share buy-pack proceeds but was liable to tax in respect of the whole of the net income of the IP Trust, comprising both the ordinary income ($304,376.97) and the Share Buy-Back Dividend ($10,189,671). Under s 4-10 of the ITAA 1997, the amount of income tax owed is calculated after taking into account tax offsets. IP Co allocated the Franking Credit of $4,367,002 to the Share Buy-Back Dividend. The tax which would have been payable on the Share Buy-Back Dividend if there were no franking credits was wholly offset by the Franking Credit.
(4) The IP Trust retained the amount of the Share Buy-Back Dividend as corpus of the trust. It was not liable to pay tax under s 99A of the ITAA 1936 because it had distributed all of its (trust) income.
181 Mr Buckley described the "share buy-back strategy" as involving IP Co buying back shares from IP Trustee, the (trust) income of IP Trust being calculated in such a way that it did not include the proceeds of the share buy-back and the IP Trust distributing income to BE Co. His evidence included:
41. … [T]he second thing that began happening in October or November 2013 was that I began considering a strategy that I describe as the "buy-back strategy".
42. That strategy would involve the following:
(a) Illuka Park Pty Ltd, which had retained earnings on which it had already paid income tax, would buy back the shares in it that were owned by the trustee of the Illuka Park Trust. I understood that most of the proceeds of that share buy-back would be treated for tax law purposes as a dividend and that that dividend could be franked. It was my understanding that, under this strategy, that dividend for tax law purposes would be franked.
(b) The income of the Illuka Park Trust would be calculated in such a way that it did not include the proceeds of that share buy-back.
(c) The Illuka Park Trust would distribute its income to BE Co.
43. My understanding was that the effect of this strategy, if implemented, was that the Illuka Park Trust would be able to retain the proceeds of the share buy-back and not distribute those proceeds but that that trust would still have distributed all of its income and so the trustee of that trust would not be subject to tax at punitive rates under section 99A of the Income Tax Assessment Act 1936.
182 An objective assessment of the agreement and its effects weighs heavily in favour of a conclusion that a person had a purpose of securing that a person pay less tax in a year of income.
183 A consideration of a series of further circumstances, set out next, supports this conclusion as does a consideration of the evidence of Mr Buckley, including the evidence set out at [181] above.
184 The injection of income into the IP Trust: The first time the IP Trust received income was in connection with the agreement to implement the Illuka Park steps. Until 31 March 2014, the trust property of the IP Trust was limited to $10 of cash on hand in respect of the initial settlement sum, and the shares in IP Co. The income which IP Trust received in March and April 2014 totalled $304,376.97:
IP Co paid franked dividends to IP Trust on 31 March 2014 ($121,739) and 30 April 2014 ($59,400). It had not previously paid dividends to IP Trust.
B&F Investments Trust distributed its income for the period ended 31 March 2014 by a resolution which made IP Trust presently entitled to $123,237.66 of the B&F Investment Trust's income. The B&F Investments Trust had never before made a distribution to IP Trust. Further, the B&F Investments Trust made an interim distribution, when both before and after the buy-back it only made year-end distributions.
185 As mentioned earlier, the generation of income in the IP Trust was central to creating the mismatch in trust income and (tax) net income, but was unusual from the perspective of the historical behaviour of the parties.
186 Mr Buckley accepted that "dividends were declared and credited at a time when the buyback was in contemplation": T107.11-12. When it was suggested to Mr Buckley that "it would have been simpler to deal with those dividends as part of the buyback", his response was: "Could have been. I don't know at the time": T107.18-19.
187 I infer that the dividends were paid by IP Co to the IP Trust in order for the IP Trust to have income to distribute to BE Co, the corporate beneficiary which had been incorporated a week before the first dividend was paid.
188 I infer that the interim distribution by the B&F Investments Trust to the IP Trust, was motivated by the same reason. The distribution was made when the buyback was in contemplation. If the intention was simply to provide income to BE Co, then it would have been simpler for the B&F Investments Trust to make a distribution directly to BE Co. It did not. This was because the real reason for the distribution was its role as part of the Illuka Park steps. It was necessary for IP Trust to receive income in the 2014 income year.
189 I infer that the distribution by the IP Trust (of the amounts received from IP Co and the B&F Investments Trust) to BE Co was contemplated and paid in order to ensure 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 Share Buy-Back Dividend.
190 The variations to the IP Trust Deed made on 13 June 2014: As the applicants emphasised in their submissions, the variation of the IP Trust Deed was strictly unnecessary. The IP Trustee already had a discretion to determine how "income" should be defined. However, without the variation, the trustee would need to adopt a definition of income that differed from the "default" definition provided under the IP Trust Deed as it stood before amendment on 13 June 2014. The Deed of Variation ensured that a mismatch between trust income and (tax) net income would arise automatically.
191 In letters to the ATO dated 28 July 2017 and 12 November 2018, Mr Buckley described the Deed of Variation as intended to effect a "standard 'post Bamford' amendment". He gave evidence to the same effect by way of affidavit. In cross-examination, Mr Buckley asserted that the decision to vary the IP Trust Deed was not "crucial" or "necessary" to the buyback, refusing to accept that it was part of what was described by the cross-examiner as "the share buy-back strategy": T130.3-6 and 130.36-37.
192 The "Deed of Variation" and "Share Buy-Back Agreement" bear Maddocks' logo. The "Distribution Minute", distributing the trust income of the IP Trust to BE Co, bears a reference number beginning with the same series of digits as the "Deed of Variation" and "Share Buy-Back Agreement". I infer that the Distribution Minute was prepared by Maddocks and that the documents all relate to the one overarching transaction.
193 I accept the applicants' submission that the Deed of Variation was not critical to the effectiveness of the Illuka Park steps in achieving the tax result referred to at [32] above. However:
(1) It was necessary either: (a) to vary the IP Trust Deed; or (b) for the IP Trustee to take the step of adopting a definition of "income" different to the default position under the unamended IP Trust Deed. If the Trustee was not to do (b), then (a) was necessary.
(2) The contemporaneous documentary evidence shows that the Deed of Variation was part of the suite of transactions entered into to give effect to the buyback strategy. The Deed of Variation was part of a standard set of documents across the series of buyback transactions undertaken for Fordham clients in the 2014 year.
(3) The sequence of events shows that the Deed of Variation was part of the suite of transactions entered into to give effect to the buyback strategy. The Deed of Variation was entered into after the buyback was contemplated and two weeks before the buyback occurred. It was entered into about 4 years after Bamford was decided.
194 As mentioned, the Deed of Variation had the result that it became unnecessary for the IP Trustee to take the step of adopting a definition of "income" different to the default position. I infer that it was considered to be preferable, in the context of carrying out the Illuka Park steps, to vary the IP Trust Deed rather than for the IP Trustee to take the step of adopting a definition of "income" different to the default position.
195 The incorporation of a new corporate beneficiary of the IP Trust: I am cognisant that this was not relied upon as one of the Illuka Park steps - see [78] above. It is nevertheless a part of the circumstances. BE Co was incorporated on 25 March 2014. Upon its incorporation, BE Co automatically became a "General Beneficiary" of the IP Trust. The establishment of BE Co as a new corporate beneficiary had been decided upon as necessary in a meeting between Mr Baring, Mr Buckley and Ms Rogers (née Bourns) in mid-February 2014. One reason it was considered necessary for a new corporate beneficiary was, I infer, because it was then planned to distribute all of the income of the IP Trust to the new corporate beneficiary. A corporate beneficiary (as opposed to a beneficiary with a marginal rate of tax higher than 30%) was required so that no 'additional tax' or 'top-up tax' would be payable. By reason of the terms of the IP Trust Deed as varied by the Deed of Variation, the income of the IP Trust would be the trust's income according to ordinary concepts ($304,376.97) - see: [24] above. Accordingly, the income of the trust would not include the Share Buy-Back Dividend. The Share Buy-Back Dividend would be capital for trust purposes, but income (a deemed dividend) for the purposes of s 95 of the ITAA 1936. The new corporate beneficiary would be liable to tax in respect of the whole of the net income of IP Trust, comprising both the ordinary income ($304,376.97) and the Share Buy-Back Dividend ($10,189,671). IP Co allocated the Franking Credit ($4,367,002) to the Share Buy-Back Dividend. The tax payable on the Share Buy-Back Dividend was wholly offset by the Franking Credit. BE Co would pay no "additional tax" over the corporate rate. Indeed BE Co would pay no tax because the Share Buy-Back Dividend was fully franked. Under s 4-10 of the ITAA 1997, the amount of income tax owed is calculated after taking into account tax offsets.
196 The decision to buy back shares (and the explanations given for the buy-back): It is to be inferred from the objective facts (and consistently with Mr Buckley's evidence) that the architects of the Illuka Park steps considered that IP Co should distribute IP Co's retained earnings to IP Trust by means of a buy-back rather than a dividend precisely so that the mismatch would arise.
197 If the object of the Illuka Park steps was to move retained earnings into a trust rather than a company, then the simplest method of achieving that object was for IP Co to pay dividends to IP Trust, consistently with the smaller dividends which it had just paid.
198 Mrs Blood signed a "statement of material information under sections 257D(2) and 257G of the Corporations Act 2001" dated 10 June 2014. The statement of material information included the following:
3. Reasons for the Buy-Back
The reasons for the share buy-back is to simplify the share capital structure of the Company [IP Co] by having an individual own the shares rather than the trustee of a discretionary trust. This will enable more simple estate planning measures to be put in place.
199 A similar explanation was included in a letter dated 28 July 2017 sent by Mr Buckley to the ATO. His letter stated:
• The buyback simplifies the group's structure by removing the [IP Trust] as a shareholder of [IP Co];
• It enables easier succession planning as all of the shares are owned by an individual, and therefore can be dealt with via a Last Will & Testament;
200 These explanations are unlikely:
(1) The buyback was part of a series of transactions which could not be described as simplifying the group's structure. A new trust (the Brian Blood Family Settlement) was created, a new company (BE Co) was established, and the main corporate beneficiary (BE Co) was substituted for another (IP Co): T102.23-31. I am not satisfied that there was a desire to simplify the group's structure or a concern that it was overly complex which motivated the Illuka Park steps.
(2) After the share buy-back transaction, IP Co had negligible net assets. As noted above, IP Co's retained earnings were $7,421,721.92 as at 30 June 2013. The retained earnings were increased by $2,999,496.10 by the distribution from the B&F Investments Trust on 31 March 2014 and were then reduced by various dividends including the Share Buy-Back Dividend ($10,189,671). Ultimately, its retained earnings were $12,868.51.
(3) Because IP Co had negligible assets after the share buy-back, there was no real benefit in removing the IP Trustee as a shareholder. In any event, there was no evidence of other steps being taken to simplify the group structure.
(4) There was no real benefit for "succession planning" in having an individual, rather than a trustee, hold the shares in IP Co. In his letter to the ATO dated 12 November 2018, Mr Buckley stated that "[o]ver time [IP Co] will collect its assets, pay out its liabilities, declare dividends to clear any retained earnings, and deregister once the company has a nil balance sheet". The bulk of IP Co's retained earnings were distributed to IP Trust, where they remained.
201 Mr Buckley acknowledged in cross-examination that the reasons expressed in the statement of material information could not explain the share buy-back transaction: T100.45 to 101.14. Mr Buckley accepted that a buy-back was chosen because it would produce a deemed dividend which would not form part of trust income and which would therefore enable a capital sum to stay in the IP Trust without the IP Trustee paying tax under s 99A: T127.1-8, 133.16-27 and 134.9-16.
202 In re-examination, Mr Buckley was asked if he considered liquidating IP Co: T137.5. He answered:
Well, I was aware of a liquidation because I've done them in the past, or one in the past where by I got the same result, or the liquidator got the same result. But the issue with that was - well, too expensive for starters, a long, long time to wait, and we - we weren't winding up a trading company. There was no commercial reason to actually wind it up from a liquidation point of view.
203 Mr Buckley went on to say that the tax result for the IP Trust would have been identical in such a situation. In its closing submissions, by reference to this evidence, the applicants submitted:
The transaction was effectively a simpler, and cheaper, alternative to a liquidation. It left the company, IP Co, with only 1 share on issue (instead of 100) and nominal net assets.
204 Apart from Mr Buckley's evidence in re-examination there was no previous suggestion that the parties considered the possibility of liquidating IP Co. It was not mentioned in any of the three affidavits sworn by Mr Buckley or the three affidavits sworn by Mr Blood or in any contemporaneous document. In any event, Mr Buckley's evidence was that "[t]here was no commercial reason to actually wind it [IP Co] up from a liquidation point of view". The share buy-back was not undertaken as a cheap alternative to a liquidation.
205 Succession planning and the buy-back: It was suggested by Mr Blood and Mr Buckley that "succession planning" was a part of the reason for undertaking the Illuka Park steps. In his affidavit, Mr Blood stated that he was told by Mr Baring that the structure he would recommend would "help to make sure" that Mr and Mrs Blood's assets would be evenly split between their three children after they died. He also stated that he thought the share buy-back transaction would make it easier for his group to make investments in the future and to help the "the succession planning structure".
206 Mr Buckley explained in an affidavit:
My understanding is that the Brian Blood Family Settlement and BE Co were set up in response to concerns that Brian had about how he could direct his entity's assets to his children when he and Fiona died. While my staff and I assisted in establishing those entities and I was involved in discussions concerning their establishment, I was not involved in the design of that structure or recommendation that it be set up. Rather, I understand, that the structure was a product of recommendations by Brian's solicitors including Coulter Roache in Geelong and Leigh Baring at Maddocks who I know has provided Brian (and the Blood Group) with tax advice from time to time.
…
My understanding of the Brian Blood Family Settlement was that it was a good vehicle for Brian and his family to grow their wealth into the future. I understood that Brian and his family could accumulate wealth in that trust, with Brian and Fiona during their lifetimes having a wide discretion as to how that wealth would be applied, but also having the comfort that after their passing their children would each in economic effect have one third of the wealth that Brian and Fiona had accumulated during their lifetimes.
Based on that understanding, I formed the view that it would be a good idea for assets to be transferred to the Brian Blood Family Settlement or to BE Co, which was wholly owned by the Brian Blood Family Settlement. I described this as the "succession planning strategy".
207 It is difficult to see how the share buy-back transaction facilitated or furthered succession planning. It resulted in the vast majority of IP Co's retained earnings being accumulated to corpus by the IP Trustee. After IP Co's retained earnings were distributed to IP Trust, they could either be accumulated to corpus by IP Trust (in accordance with the "share buy-back strategy") or distributed by IP Trust to the Brian Blood Family Settlement or BE Co (in accordance with the so-called "succession planning strategy"). In cross-examination, Mr Buckley accepted that "the buyback strategy was clearly not part of the family succession strategy, at least in 2014": T97.34-35.
208 The object of entering into the share buy-back was not to move the bulk of retained earnings into the Brian Blood Family Settlement or BE Co. That did not happen. BE Co's financial position was unaffected by the buy-back, because its tax liability in respect of the Share Buy-Back Dividend was offset by the Franking Credit. If the object was to move retained earnings into BE Co, then this could have been achieved by IP Co paying the retained earnings by way of dividends to IP Trust. If it had done so, these would have been distributed to BE Co by IP Trust in accordance with its resolution of 30 June 2014. The only income in fact distributed to BE Co by that resolution was the trust income of $304,376.97. The only reason that amount was the whole of the trust income was because of the Deed of Variation, which operated such that the default position was that the Share Buy-Back Dividend fell outside of the definition of "income" in the Trust Deed - see: [24] above. Absent the Deed of Variation, the trustee could have adopted a definition of "income" different to the default position under the unamended IP Trust Deed.
209 The 30 June 2014 distribution of $304,376.97 was not made for a substantial purpose of succession planning. The predominant purpose of making the distribution was to facilitate the outcome which, but for the operation of s 100A, was achieved.
210 The contemporaneous documents indicate that the share buy-back transaction was progressed before any family succession planning. Maddocks' invoice to Blood Auto Group Pty Ltd dated 29 November 2013 contains numerous entries relating to the share buy-back transaction, but no reference to the establishment of the Brian Blood Family Settlement or BE Co.
211 The requirement for a new corporate beneficiary (BE Co) was first mentioned in an email of 4 March 2014 which indicated it was recommended in mid-February 2014. The Brian Blood Family Settlement was established on 19 March 2014. BE Co was incorporated on 25 March 2014.
212 Moving IP Co's retained earning into a trust and strengthening IP Trust's balance sheet: In his letter to the ATO dated 28 July 2017, Mr Buckley asserted that the buy-back "strengthens the balance sheet of [IP Trust] as the gain is a realised capital profit and is recorded as such in the financial statements of the trust". That is true, but it does not explain the Illuka Park steps as a whole. In any event, the effect of the buy-back was that the IP Trust exchanged its shares in IP Co, which had significant retained earnings which could be paid to IP Trust by dividend, for an unsecured loan owing by IP Co. IP Trust remained at risk should IP Co incur liabilities. There was no reasonable explanation as to why recording IP Co's retained earnings as a "realised capital profit" was more beneficial than those earnings constituting an unrealised profit in respect of IP Trust's shareholding.
213 In his letter to the ATO dated 28 July 2017, Mr Buckley stated that the buy-back "will give rise over time to a pool of funds that will be available for investment in a more appropriate investment entity (ie a trust compared to a company)". In his affidavit, Mr Buckley stated:
I formed the view that the "buy-back strategy" would benefit Brian and his entities because it would allow a pool of funds to be established in the Illuka Park Trust. That would allow for any future investment to be made in a trust rather than a company. I was, and still am, of the view that a discretionary trust is a much better vehicle compared to a company to acquire passive growth assets. Not only is it possible to access the 50% CGT discount through a trust, it is relatively easy to distribute unrealised gains compared to a company.
214 These statements show that Mr Buckley considered that it was preferable for IP Co's retained earnings to be distributed to IP Trust and accumulated to corpus for investment purposes. If the objective had been to facilitate access to the CGT discount in respect of capital gains made by the IP Trust on future investments, then IP Co could simply have paid a dividend to IP Trustee. In any event, the IP Trust did not make significant new investments in subsequent years. I refer below to certain transactions in which debts owed by Mr Blood and trusts associated with him were assigned to IP Trust in satisfaction of the Buy-Back Loan.
215 The advisers brought the strategy to the Brian Blood group for reasons which included a purpose of securing that less tax be paid in relation to the distribution of company profits: The suggestion that the advisors generally, and Mr Buckley in particular, recommended and implemented the buy-back strategy without regard to its tax advantages is inconsistent with the contemporaneous documents and the objective facts, including the effect of the Illuka Part steps. The asserted objectives - transferring the retained earnings into a trust for advantages which included access to the CGT discount on future investments - could have been achieved more simply without the share buy-back transaction. For example, IP Co could have paid a dividend to the IP Trust.
216 The "Share Buy-Back Strategy" originated with the advisers rather than with Mr Blood or any entity within his group or with any of the other groups which entered into equivalent transactions. The "Share Buy-Back Strategy" did not originate as a consequence of Mr Blood or his group seeking advice. The "Share Buy-Back Strategy" was brought to Mr Blood and his group by the advisers.
217 The documents evidencing the genesis of the structure do not indicate that the scheme was devised for succession planning purposes or structural simplification. The documents do not suggest a particular concern about either of those matters at a time when the "Share Buy-Back Strategy" was brought to Mr Blood for his consideration.
218 In his affidavit, Mr Blood confirmed that the "potential transaction" was suggested to him by Mr Buckley in the second half of 2013, but before 11 October 2013. A similar, if not materially identical, arrangement was set out in the 17 September 2013 Memorandum entitled "Share Buy-Back Strategy - Test Case - Geoff Harris Group". This was sent by Mr Cahir (Fordham) to Mr Buckley and Mr Baring. It described a "proposed Share Buy-Back of Ordinary Shares" comprising substantially the same steps and having substantially the same result as the Illuka Park steps. The 17 September 2013 Memorandum included:
In general terms, under a Share Buy-back, any amount returned to the shareholders in excess of the issued cost of the ordinary shares bought back constitutes a frankable Dividend for income tax purposes.
Under Common Law, for accounting purposes however, this excess component is not considered a dividend. Therefore if the trust receiving a buy-back dividend has a Trust Income definition calculated in accordance with ordinary accounting principles, then this excess component is treated as received on capital account and does not form part of Trust Income.
219 Section 3 of the memorandum set out what were perceived to be the favourable tax outcomes of the distribution by way of share buy-back, which included a consideration of the potential Div 7A ITAA 1936 consequences. I infer from the memorandum that one objective behind the strategy was to enable a company's retained earnings to be extracted without additional tax being paid.
220 The 17 September 2013 Memorandum was followed by correspondence between Mr Baring, David Buckley and Mr Cahir concerning the tax consequences of the proposed transactions, including the Div 7A implications. Mr Baring sent an email on 19 September 2013 with the subject "Subdivision EA", in which Mr Baring wrote: "Just confirming the conclusion we came to the other day". The balance of the text of the email is redacted. I infer that the reference in the email to "Subdivision EA" is to Subdiv EA of Div 7A in Part III of the ITAA 1936, consistently with Mr Buckley's understanding: T119.15-18. Mr Buckley's evidence was that he regarded avoiding deemed dividends under Div 7A as "a basic part of tax planning" and an "expectation" of his clients: T117.10-14.
221 In relation to Div 7A specifically, I conclude that the advisers considered the operation of Div 7A in connection with the scheme. It is likely that the advisers considered how IP Co's retained earnings which were to be transferred to the IP Trust might be accessed without triggering a tax liability under Div 7A. On balance, it likely that the advisers reached the conclusion that, if the Illuka Park steps were implemented, it would be easier to extract what had been IP Co's retained earnings in a way which did not trigger a liability under Div 7A. I note, in particular, that s 109L(1) provides that ss 109C and 109D do not apply to a payment of an amount included in assessable income. The proceeds of the share buy-back were a deemed dividend, included in assessable income. I do not accept the applicants' submission that the consideration given to Div 7A by some of the advisers was peculiar to the Harris group. This is objectively unlikely, particularly in circumstances where Mr Buckley considered avoiding deemed dividends under Div 7A to be a basic part of tax planning.
222 In cross-examination, Mr Buckley accepted that Mr Harris, the controller of the Harris group, had not asked Fordham to consider the strategy; the Harris group was simply a "live example" for Mr Buckley to consider the strategy's tax consequences and then propose the strategy to his clients if he were satisfied about them: T135.31-136.9. The interrelated series of steps were implemented by at least seven private groups (during the 2014 year) that were then clients of Fordham.
223 Mr Buckley accepted that he met with Mr Blood and his brother in October 2013, and later with Mr Harris and his business partners, to propose the strategy to them: T136.11-18. As has been mentioned, it was not in dispute that seven groups implemented the strategy in the 2014 year.
224 Mr Baring: Mr Baring was not called to give evidence. Given that much of what Mr Baring might have said could properly have been the subject of a claim for legal professional privilege, I draw no adverse inference from the absence of his evidence.
225 Mr Baring advised in respect of the transactions so far as concerned the Brian Blood group. The transactions entered into by the remaining groups were implemented by documents prepared by Maddocks. The applicants submitted that, while Maddocks was involved in implementing the transactions, its role was to provide legal advice and to draft the necessary documents. The probabilities favour that the Illuka Park steps would not have been implemented and the agreement to implement them would not have been reached, without the legal advisers having given advice. The "understanding" to implement the Illuka Park steps was an understanding to which Mr Baring was also a party.
226 For the reasons given at [198] to [201] above, I do not accept the reasons put forward for the buy-back in the "statement of material information under sections 257D(2) and 257G of the Corporations Act 2001" as a correct account of the reasons for the buy-back or as a complete account of those reasons. Mr Buckley denied having reviewed the document, but accepted it could not explain the buy-back. I infer that the document was prepared and reviewed by Maddocks. The statement of material information bears a footer which is consistent with it being prepared by Maddocks. Mr Andrew Wright of Maddocks lodged the "Notice of intention to carry out a share buy-back" with ASIC on 10 June 2014 and informed Mr Baring of that fact by an email sent on 11 June 2014.
227 To the extent it is to be inferred that Mr Baring either prepared or reviewed the statement of material information (about which I reach no conclusion), I do not accept that the document reflects a complete explanation of his purposes as a party to the understanding to implement the Illuka Park steps. Indeed, the document does not contain the principal purposes for which the buy-back was conducted.
228 It is obvious, as has been pointed out, that the scheme was intended to secure a tax advantage for a person in a year of income and, more specifically, for the purposes identified at [182] above. The evidence does not disclose whose brainchild the buy-back strategy was, but it is naïve to think an experienced lawyer advising in tax would not have perceived the purpose underlying the otherwise unusual series of transactions in respect of which advice was being sought. Mr Baring's role in giving advice presumably included maximising the probability of the objectives being achieved, even if some of those objectives might only be achieved in later years of income.
229 Mr Buckley: Mr Buckley gave evidence and was cross-examined. It was submitted by the applicants that Mr Buckley thought that:
the effect of the buy-back transaction would be for funds to be transferred to and retained by the Illuka Park Trust to establish a "pool of funds" held by that trust so that the trustee of that trust could use those funds to make future investments;
a discretionary trust was a better vehicle for passive growth assets than a company, referring in particular to the CGT discount and the ease of distributing unrealised gains as advantages of a discretionary trust.
230 I am satisfied that one of Mr Buckley's purposes in agreeing to implement, and assisting in the implementation of, the Illuka Park steps was to secure a transfer of IP Co's retained earnings to the IP Trust without that trust paying tax and in a way which would facilitate discretionary objects of the IP Trust accessing the retained earnings at some future time in a manner which would secure the outcome that no or less additional tax would be paid that would have been paid if the Illuka Park steps had not been carried out.
231 Mr and Mrs Blood: I infer that the advice of Mr Baring and Mr Buckley was communicated to Mr Blood. Leaving aside Mr Baring's role as appointor, Mr Blood was de facto controller of the relevant entities which would carry out the Illuka Park steps. I consider it likely that he understood the basics of the Illuka Park steps and that his purposes included a purpose of securing that a person pay less tax in a year of income in the manner envisaged by s 100A(8).
232 Mrs Blood was the sole director of IP Co, B&F Investments and BE Co. She signed most of the key documents, including the Share Buy-Back Agreement and Distribution Minute. She did not give evidence. Mr Blood's evidence was that Mrs Blood "always left all decisions in relation to managing my family group to me" and that he would take the documents to Mrs Blood and would ask her to sign them.
233 Mr Buckley's evidence was that: he "never dealt with [Mrs Blood] professionally"; Mrs Blood "never attended meetings with me in which we discussed strategic planning or financial or tax issues"; he "received all instructions from, had all discussions with and gave all of my recommendations to Brian"; and it was his "understanding that Brian controlled each of those entities". Mrs Blood was a party to the agreement to enter into the Illuka Park steps. However, in the circumstances just described, her subjective purposes will not take the matter further than the purposes of Mr Blood and the advisers.
234 It was submitted that Mr Blood did not think that the buy-back transaction would either increase or reduce the amount of income tax that anyone would be liable to pay and that he thought that the buy-back transaction would: (a) make it easier for investments to be made in the future by the entities associated with Mr Blood; and (b) help with the "succession planning structure" of the Brian Blood Family Settlement and BE Co.
235 The applicants noted that it was not directly put to Mr Blood that he intended to secure any reduction or elimination of tax by entering into the agreement. It is true that Mr Blood was not directly cross-examined on this matter. Nevertheless, it was plain from the evidence and opening submissions which had been filed that this was in issue. The circumstances included that the Illuka Park steps comprised a transaction which had been brought to Mr Blood and the principal focus of attention was on the purpose of the advisers and the purpose as exposed by the objective circumstances. Mr Blood had given evidence that he had a limited understanding of the detail of the Illuka Park steps. In the circumstances of this case, fairness did not require this particular matter to be put to Mr Blood.
236 Mr Blood's evidence was that the share buy-back transaction was recommended to him by Mr Buckley, who was his main contact at Fordham. He did not understand the details of the transaction and "relied heavily on Fordham Group's recommendation" that IP Co undertake the transaction. He "asked Fiona to sign the documents" based on "the recommendation of Fordham Group".
237 I accept Mr Blood's evidence that he did not understand the detail of the Illuka Park steps, including precisely how the Illuka Park steps would achieve an advantageous outcome in terms of tax. Nevertheless, he is likely to have understood that the steps were intended to achieve the outcome that: (a) the IP Trust would not pay tax in the 2014 year; (b) the tax payable by BE Co in relation to the Share Buy Back Dividend would be wholly offset by the franking credits; and (c) the retained earnings could be accessed or distributed in the 2014 or a subsequent income year in a way which meant that he and others would not be subject to additional tax, or would be subject to less tax, than would be the case if those retained earnings had been accessed in some other way, for example, by those retained earnings being distributed from IP Co to IP Trust by way of dividends.
238 The applicants accepted that, in appropriate circumstances, an advisor's purpose can be attributed to a party to a transaction, referring to Federal Commissioner of Taxation v Bidencope [1978] HCA 23; 140 CLR 533 at 547; Federal Commissioner of Taxation v Consolidated Press Holdings Ltd [2001] HCA 32; 207 CLR 235 at [95]. It is unnecessary to consider the conclusions in those cases or the potential application of what was said in them to the present case because: (a) I have concluded on the balance of probabilities that Mr Blood (and therefore the entities entering into the relevant transactions) in fact had the relevant purpose as "a" purpose (s 100A(9)), despite not understanding the detail of the transactions; and (b) the advisers had the relevant purpose as "a" purpose and they were a party to the agreement or understanding to implement the Illuka Park steps.
239 Conclusion: The Illuka Park steps were implemented in order to achieve the tax result identified at [32] above. The decision to have IP Co distribute the retained earnings by conducting a share buy-back was intended to create a situation where the trust income and the net income of the trust were different. The Illuka Park steps as a whole, and the choice of distributing the retained earnings by a share buy-back in particular, was intended to transfer IP Co's retained earnings to the IP Trust in a way which (absent the application of s 100A) secured that:
(a) the IP Trust would not pay tax on the distribution in the 2014 (or any) year;
(b) there would be no tax payable by BE Co in relation to the Share Buy Back Dividend, because the tax which would otherwise be payable would be wholly offset by the Franking Credit; and
(c) the retained earnings, which would form corpus of the IP Trust, might be accessed or distributed in the 2014 or a subsequent income year in a way which reduced or avoided the payment of 'additional tax' or 'top-up tax'.
240 I conclude that the purpose just identified was the purpose of Mr Baring and Mr Buckley. It is likely that the purpose was explained to, and understood and adopted by, Mr Blood. Mr Blood was the de facto controller of each of the relevant corporate entities.
241 For these reasons, I am satisfied that the purpose of entering into the agreement (s 100A(8)) and a purpose of each of IP Co, IP Trustee, BE Co, the advisers and Mr Blood (s 100A(9)) included a purpose of securing the result 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.
242 The applicants have not discharged the onus of establishing that there was not a purpose covered by s 100A(8).