1. The concept of "present legal obligations" in s 109Y(2) of the ITAA 1936 was specifically considered by the Full Court of the Federal Court in Commissioner of Taxation v H [2010] FCAFC 128 (Commissioner of Taxation v H), where the issue was whether income tax and the general interest charge were "present legal obligations" that had to be deducted in

calculating "net assets", and in turn, "distributable income", for the purposes of s 109Y(2) of the ITAA 1936. Relevantly, the Full Court held, as follows:

(a) Section 109Y provides a "cap" or "limit" on such loans being treated as assessable dividends (namely they can be treated as assessable dividends up to, but not exceeding, the realised and unrealised profits in the company) (at [35]);

(b) The term "distributable surplus" is to be understood in that context, namely, the realised and unrealised profits in the company available for distribution (at [36]);

(c) In respect of "present legal obligations", the requirement that there be an "obligation" does not require the existence of a debt due (in the sense of being payable), and embraces situations outside a creditor/debtor relationship (at [38]);

(d) The obligation to pay income tax arises by operation of the Income Tax Act 1986

(Cth) itself, and not by the issue of a notice of assessment (at [43]);

(e) As such, the obligation to pay income tax (at the amount subsequently properly ascertained, assessed and determined) is a "present legal obligation" as at the end of the financial year in respect of which the income is derived and within the meaning of s 109Y(2) of the ITAA 1936 (at [44]).

(f) In relation to the general interest charge, a person's liability to the general interest charge accrues on a daily basis as a direct consequence of the fact that tax remains unpaid after the due date and becomes a "present legal obligation' for the purposes of the calculation on each day on which tax should have been paid remains unpaid (at [47]).

1. Applying the Full Court's reasoning in Commissioner of Taxation v H, the Commissioner properly conceded that PPD's liability for unpaid payroll tax as at 30 June 2018 constituted a "present legal obligation", and thus ought to have been deducted from the "net assets" of PPD in calculating the "distributable surplus" for PPD for the 2018 income year. Similarly, the Commissioner acknowledged that interest that had accrued on the unpaid payroll tax that remained unpaid as at 30 June 2018 could also constitute a "present legal obligation", however, noted that the applicants did not discharge their burden of proving the quantum of any interest that had accrued by 30 June 2018. I agree with this analysis. By contrast, on

the evidence, it was possible to calculate the total amount of PPD's unpaid payroll tax as at 30 June 2018, which was agreed by the parties to total $343,884.33.

1. With respect to the penalties on the payroll tax liability, they were not able to be treated as a "present legal obligation" as they were only imposed after the financial year ending 30 June 2018 on the basis of unpaid liabilities, and so had not crystallised as at 30 June 2018.

1. With respect to the Australand defect claims, the applicants failed to persuade me that these were "present legal obligations" of PPD as at 30 June 2018 in circumstances where the Australand proceedings were not commenced until September 2022. The applicants did not provide any probative evidence upon which it could be concluded that PPD's liability arose prior to, and existed as at 30 June 2018 or that the amount that PPD paid in settlement of the Australand proceedings (ultimately $130,000) was connected with any liability that PPD had as at 30 June 2018. In these circumstances, and similar to the interest charges, PPD had not discharged its onus and not established that it had a "present legal obligation" in relation to certain amounts as at 30 June 2018.

ISSUE 3 - DO SECTIONS 177E AND 207-145 APPLY TO THE CORPORATE RESTRUCTURE IN THE 2019 INCOME YEAR?

1. In respect of the 2019 income year, the Commissioner issued assessments to Mr Botella and PPH on the basis that during that year Mr Botella, PPD and PPH entered into a scheme "by way of or in the nature of dividend stripping", within the meaning of s 177E of the ITAA 1936 and s 207-155 of the ITAA 1997 (the subject of the Second and Third Objection Decisions). At the beginning of that financial year, the position was that PPD's financial statements showed retained earnings of $1,008,918, which constituted substantial undistributed profits. They represented a potential tax liability for Mr Botella as PPD's sole shareholder. The Commissioner's position was that the following dividend stripping scheme was conducted on 4 and 21 September 2018, as set out below.

(a) PPH was incorporated.

(b) Mr Botella sold 100% of his shareholding in PPD to PPH (comprising 100 shares), in return for PPH issuing Mr Botella with 1,009,018 shares in PPH. Subsequently, Mr Botella chose to obtain CGT roll-over relief under Subdivision 122-A of the ITAA

1997 on the disposal of his shares in PPD, and no capital gain arose for Mr Botella as a result of this disposal.

(c) PPD declared a franked dividend of $1,008,918 to be paid to PPH, with a franking credit of $382,693. Subsequently, PPH claimed a tax offset under Division 207 of the ITAA 1997 equal to the franking credit to reduce its tax payable on the dividend to nil, for the income tax year ended 30 June 2019.

(a) PPD issued a promissory note to PPH for $1,008,918, in satisfaction of the dividend that had previously been declared.

(b) PPH endorsed the promissory note issued by PPD in favour of Mr Botella, and PPH recorded this as a loan from PPH to Mr Botella.

(c) Mr Botella presented the promissory note back to PPD, as repayment of the loans that PPD had advanced to Mr Botella and which remained outstanding at the end of the income tax year ended 30 June 2018.

1. The Commissioner submitted that the abovementioned transactions carried out by Mr Botella, PPD and PPH in the year ended 30 June 2019 exhibited each of the six common characteristics of a dividend stripping scheme, as set out in CPH (Full Court) at [136]-[137] as approved in CPH (High Court).

1. In particular, first, there was a target company (PPD), with substantial undistributed profits (retained earnings of $1,008,918 at the end of 30 June 2018) creating a potential tax liability either for the company or its sole shareholder, Mr Botella.

1. Second, there was a sale or allotment of shares in the target company to another party. This is because Mr Botella sold 100% of his shares in PPD (the target company) to PPH (another entity) on 4 September 2018 in exchange for being issued shares in PPH.

1. Third, there was a payment of a dividend to the purchaser or allottee of the shares out of the target company's profits. On 4 September 2018, PPD declared a franked dividend of

$1,008,918 to PPH (the "purchaser"), being an amount equal to the retained earnings of PPD being the target company from the previous financial year.

1. Fourth, the purchaser escaped Australian income tax on the dividend so declared because PPD declared a franked dividend, and PPH being the "purchaser" did not pay tax on the dividend.

1. Fifth, the vendor shareholder received a capital sum for their shares in an amount the same as or very close to the dividends paid to the purchasers. Here, PPH issued Mr Botella with 1,008,918 shares and each share was valued at $1 such that the value of the shares was equal to the value of the dividend paid to PPH. Further, the Full Court explained in _CPH (Full Court) (_at [159]) that it is not necessary for the "capital sum" received by the vendor shareholder (in this case, Mr Botella) to be in cash, and it can instead be in the form of an allotment of shares. The Full Court emphasised that "the critical point is that the vendor shareholder receive[d] a consideration which is in a tax-free or largely tax-free form", which Mr Botella did because he chose to elect CGT roll-over relief, such that Mr Botella did not pay capital gains tax on the capital sum received.

1. Sixth, the scheme was carefully planned, with all the parties acting in concert, for the predominant if not the sole purpose of the vendor shareholder, in particular, avoiding tax on a distribution of dividends by the target company. Here, all the steps in the scheme were carefully planned and executed by or on behalf of Mr Botella and the companies, PPD and PPH, which were controlled by him. Further, as a result of the scheme, Mr Botella as the "vendor shareholder" was not required to pay tax on the undistributed profits held by PPD (the "target company") at the end of 30 June 2018.

1. Accordingly, the Commissioner submitted that the scheme exhibited all of the common characteristics of a "dividend stripping" scheme within the meaning of s 177E of the ITAA 1936, and a "dividend stripping operation" within the meaning of s 207-155 of the ITAA 1997. Further, the other statutory requirements of s 177E(1) were also clearly satisfied, namely, in respect of s 177E(1)(b), the scheme involved the disposal of property that represented profits of the company (in this case all the profits in the company), because the undistributed profits of PPD were disposed of by the payment of a franked dividend in that amount to PPH. Pursuant to s 177E(2)(b), the payment of a dividend is taken to be a disposal of property.

1. In respect of s 177E(1)(c), immediately before the scheme was carried out on 4 September 2018, PPD had profits in the amount of $1,008,918, and Mr Botella was the sole shareholder

of PPD. If, immediately prior to the scheme, PPD had paid a dividend, PPD would have paid Mr Botella a dividend equivalent to the profits held in the company being the "notional amount" per s 177E(1)(c), and that amount would have been included, by reason of the payment of that dividend, in Mr Botella's assessable income for the 2019 income year. In respect of s 177E(1)(d), the scheme was clearly entered into after 27 May 1981.

1. The applicants argued that s 177E, which was introduced in 1979 as part of a suite of amendments targeting specific tax avoidance schemes, must be understood in its historical context. In particular, s 177E was directed at "dividend stripping schemes and similar arrangements designed to enable shareholders to obtain the benefit of company profits in a tax-free form". The applicants submitted that the mischief addressed was the conversion of taxable dividend income into tax-free capital receipts through the interposition of an external party who could receive dividends without any Australian tax consequences and in this way sought to distinguish their arrangement.

1. The applicants identified what they considered to be key differences in their circumstances from the following characteristics in CPH (Full Court) at [136]-[137]:

(a) The second characteristic referred to an unrelated stripper.

(b) The fourth characteristic referred to the stripper escaping Australian income tax on the dividend.

(c) The fifth characteristic referred to the vendor shareholders receiving a capital sum for their shares at a time when there was no capital gains tax.

(d) The sixth characteristic stated that the predominant if not sole purpose of the vendor shareholders was that of avoiding tax on a distribution of dividends.

1. With reference to the second characteristic set out in CPH (Full Court) at [136], the applicants noted the expression was in terms of the sale of shares in the target company "to another party". The applicants contended that the Commissioner's assertion that PPH constituted "another party" ignored the essential nature of dividend stripping schemes which referred to an unrelated stripper. Specifically, the applicants submitted that contrary to a scheme in the nature of dividend stripping, Mr Botella did not sell his shares to "the stripper". Mr Botella was allotted shares in PPH and retained those shares giving him 100% ownership in the stripper entity (PPH). Clearly, PPH was not an external party as it was wholly owned and controlled by Mr Botella.
2. According to the applicants, in every decided dividend stripping scheme case, the shares were acquired by an external third party - the "stripper"- who had no prior connection to the target company or its shareholders. The stripper's role was to extract profits using tax advantages unavailable to the original shareholders. The applicants further submitted that Mr Botella could not simultaneously be the vendor shareholder and the beneficial owner of the "stripper" because such a construction would transform every corporate restructure into a potential dividend stripping scheme, which Parliament cannot have intended.

1. The applicants also observed that, more recently, the Full Court of the Federal Court in B&F Investments Pty Ltd v Federal Commissioner of Taxation (2023) 298 FCR 449; [2023] FCAFC 89 (B&F Investments) at [101]-[102] referred to the six characteristics identified in CPH (Full Court) and commented at [104] as follows:

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.

1. The applicants also relied on the following further statement in the Full Court's judgment in

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. (Emphasis added)

1. I do not accept the applicants' submission that dividend stripping schemes always involve an external stripper and that the second characteristic is so constrained, particularly having regard to the fact there is no definition of what amounts to a dividend stripping scheme. Besides, the Full Court expressly confirmed in Hayes (Full Court), another recent dividend stripping case, that the "stripper" may well be a related party of the target company or vendor shareholder (at [48]), as follows:

The fact that the "stripper" Trading Trusts are members of the same group is not inconsistent with a dividend stripping operation. A dividend stripping operation does

not require an "outsider" to be a party to the scheme. In [CPH (Full Court)] the fact that the "stripper" was a member of the same corporate group was not inconsistent with a dividend stripping operation...

1. Turning to the fourth characteristic set out in CPH (Full Court) at [136], the applicants argued that PPH is not relevantly "escaping Australian income tax on the dividend so declared". Rather, the dividend qualifies for an imputation credit, being a credit for tax previously paid. Therefore, there is no "escape" of Australian tax in the sense contemplated in CPH (Full Court) by way of a s 46 rebate. Effectively, the tax remains fully payable but PPH qualifies for a credit against its tax liability. The applicants further noted that PPH is a fully taxable Australian resident company and its profits remained within the Australian tax net at all times. Moreover, according to the applicants, the intended operation of Division 207 of the ITAA 1997 is to prevent double taxation of corporate profits. It is not an "escape" from tax but rather the mechanical operation of the imputation system.

1. The applicants also submitted that no "tax benefit" has been derived. The applicants stated that PPH has retained earnings of the same sum, and the situation is distinguishable from Hayes (Full Court) in that the profits are retained within a corporate structure owned by Mr Borella being the sole original shareholder. By contrast, in Hayes (Full Court), the profits were paid to an associate and then lent back to the group thus removing the profits from the original owners. It was also submitted that Mr Botella temporarily accessing funds by way of a loan that does not trigger Division 7A could not amount to "escaping" Australian tax.

1. With respect to the applicants' above submissions on the fourth characteristic, similar arguments were considered, and rejected, by the Administrative Appeals Tribunal in Michael John Hayes Trading Pty Ltd as trustee of the MJH Trading Trust and Commissioner of Taxation [2023] AATA 3005 (Hayes (AAT)). Deputy President O'Loughlin explained the position and the relevant test (at [91]), with which I agree as follows:

... For present purposes, namely analysis of whether there is a dividend stripping operation, a tax credit, a tax offset and a tax rebate should all be seen in the same light. The authorities concerning what constitutes a dividend stripping operation acknowledge that the dividend in question can escape taxation by a variety of means, one of which was the availability of what was once known as a s 46 rebate. The relevant test is to look to whether the dividend received, after associated credits or deductions or rebates, and in today's parlance tax offsets, bears taxation liability

in a net sense. In a net sense, a fully franked dividend received by a corporate taxpayer who is entitled to the tax offset on account of the imputation credits does not bear taxation. That dividend remains eligible for consideration as to whether the dividend was received as part of a dividend stripping operation.

1. Furthermore, it is clear that PPH as the purchaser did "escape" paying income tax because PPD declared a fully franked dividend in favour of PPH. For the same reasons as in Hayes (AAT), it follows that this is sufficient to satisfy the fourth characteristic, namely, that the purchaser "escaped" Australian income tax on the dividend so declared.

1. The fifth characteristic in CPH (Full Court) at [136] refers to the fact the vendor shareholders received "a capital sum for their shares". The applicants referred to the fact that the Commissioner assumed that Mr Botella sold his shares in PPD for a capital sum, however, he was allotted 100% of the shares in the interposed holding company - PPH - "the stripper". Therefore, Mr Botella did not receive a capital sum of money. Furthermore, the allotment of shares in PPH to Mr Botella was the subject matter of specific capital gains tax roll-over relief in Subdivision 122-A of the ITAA 1997. The applicants also noted that s 177C(1)(a), when read with s 177C(2)(a)(i), provides for the situation where "[t]he non-inclusion of the amount in the assessable income of the taxpayer is attributable to the making of a declaration, agreement, election, selection or choice, the giving of a notice, or the exercise of an option (expressly provided for by this Act or the Income Tax Assessment Act 1997, by any person." Accordingly, the transfer of shares to PPH by Mr Botella and the allotment to him of 100% of the shares in PPH was the subject matter of CGT relief.

1. The applicants also pointed to the fact that in CPH (Full Court), the Court was at pains to suggest that the capital sum received by the vendor shareholders for their shares was not at that time subject to tax as there was no capital gains tax. Here, there is in fact a capital gains tax imposed on the transfer of shares from Mr Botella to PPH, but the CGT event is expressly negated by the presence of an election regarding CGT rollover relief. It follows that, Mr Botella's receipt of PPH shares did not constitute the extraction of value, as effectively, he retained 100% ownership of accumulated profits before and after the corporate restructure. Also, the CGT rollover merely deferred recognition until disposal of the replacement shares.
2. I agree with the Commissioner's submissions that the applicants above arguments with reference to the fifth characteristic are without merit. First, as the Full Court explained in CPH (Full Court) at [159], it is not necessary for the "capital sum" received by the vendor shareholder, here, Mr Botella, to be in cash. It can take the form of an allotment of shares. As to the fact of CGT rollover relief, the relevant "tax benefit" in issue for the purposes of s 177E was the amount of PPD's profits that would have been included in Mr Botella's income, if PPD had declared a dividend to him. It is not concerned with the CGT roll-over relief in respect of the sale of Mr Botella's shares in PPD.

1. In respect of the sixth characteristic, the applicants contended that there was no requisite dominant or sole purpose of the vendor shareholders avoiding tax on the distribution of profits. Rather, the interposition of PPH as a new holding entity was the result of a standard corporate reorganisation. Its "commercial purpose" was professional advice regarding asset protection" and also, obtaining access to loan funds on more generous terms. The applicants likened their situation to that of the taxpayer as set out in [133] of the CPH (High Court):

133. Hill J and the Full Court found that there was no purpose of avoiding tax on distributions of profits. For the reasons already given, it is dominant purpose which matters. There was a corporate reorganisation, entered into for reasons related to the United Kingdom tax treatment of future earnings, and a desire to avoid double taxation. The disposal of shares involved in the reorganisation attracted liability in Australia to capital gains tax. A number of the characteristics common to schemes that have been regarded as typical dividend stripping schemes were absent. Above all, there was an absence of the particular taxation purpose which is the hallmark of such a scheme, and which is the reason why such schemes were intended to be covered by Pt IVA of the Act."

1. I reject the applicants' position as to the purpose of the scheme, viewed objectively. In particular, I was not persuaded that the characteristics of the scheme and the objective circumstances in which the scheme was designed and operated were not for the dominant purpose of avoiding tax. The scheme identified by the Commissioner did not simply comprise the interposition of PPH as a new holding entity for PPD which is how the applicants sought to portray the reorganisation. The scheme displayed the well-understood characteristics common to dividend stripping schemes in conformity with the decision in CPH (Full Court). As stated above, the scheme included complex transactions which had

the result of using undistributed profits in PPD to declare dividends in favour of PPH, which were then used to on-lend money to Mr Botella on more favourable terms, and which Mr Botella then purported to use to discharge his loans from PPD. This was a carefully orchestrated scheme and was not confined to the interposition of PPH as a new holding entity. To the extent the applicants suggested that there was a need to interpose PPH to achieve asset protection in relation to potential liability arising from the Australand proceedings, this is rejected for the simple reason that if PPD had declared a dividend in favour of Mr Botella in the 2019 financial year, this would have had the effect of achieving asset protection by moving all the undistributed profits out of PPD, and beyond the reach of parties making claims against PPD. Mr Botella conceded as much in cross-examination, as set out at [77] above.

1. The applicants separately submitted that restructuring the loans to be on terms more favourable than Division 7A could not involve tax avoidance. They contended that the funds still must either be repaid or paid out in a taxable form. This was said to be particularly relevant in the context of then proposed changes to Division 7A following a Consultation Paper released by Treasury in October 2018 that canvassed the removal of the concept of distributable surplus and provided for transitional rules for the repayment of certain loans. Mr Botella was apparently made aware of the proposed changes but, notwithstanding, the company profits were still retained within the corporate group. Against this background, the applicants argued it was inconceivable that the dividend stripping provisions or Part IVA generally could have any application. The applicants suggested their situation was similar to the reasoning in Ierna v Commissioner of Taxation [2024] FCA 592 in that there has been no significant payment of dividends from the group and it could only be expected that the profits would be retained and loans repaid when required either commercially or as a result of the proposed amendments to Division 7A. When the scheme is examined objectively, the conclusion reached is that the dominant purpose of the scheme was to enable the applicants, especially Mr Botella, to avoid tax in respect of the undistributed profits in PPD. The scheme achieved that tax avoidance purpose by moving those undistributed profits into PPH, which also did not pay any tax on those same profits.

1. The applicants argued that another reason for the non-application of s 177E was that paragraph 177E(1)(c) was not satisfied. That paragraph states as follows:

... if, immediately before the scheme was entered into, the company had paid a dividend out of profits of an amount equal to the amount determined by the

Commissioner to be the amount of profits the distribution of which is, in his or her opinion, represented by the disposal of the property referred to in paragraph (a), an amount (in this subsection referred to as the notional amount ) would have been included, or might reasonably be expected to have been included, by reason of the payment of that dividend, in the assessable income of a taxpayer of a year of income;

1. The applicants argued that where the word "dividend" appears in paragraph 177E(1)(c), it includes "deemed dividend" under Division 7A. They observed that "dividend" and "deemed dividend" were used interchangeably_,_ for example, by the Full Federal Court in CPH (Full Court) at paragraphs [44] and [181]-[182]. Any inclusion of a deemed dividend amount in Mr Botella's assessable income under Division 7A was said to be not a reasonable expectation, because he had in place, or would reasonably be expected to have in place, a complying loan agreement. However, the fact that the loan advanced to Mr Botella may be covered by Division 7A does not affect the conclusion that the scheme set out above satisfies the requirements of being a scheme by way of or in the nature of dividend stripping for the purposes of s 177E of the ITAA 1936.

1. Finally, the applicants argued that Division 7A represented Parliament's comprehensive response to the provision of benefits by private companies to shareholders and their associates. That is, Division 7A established detailed, prescriptive rules governing when arrangements would be treated as deemed dividends which effectively displaced other general anti-avoidance provisions in accordance with orthodox statutory interpretation principles: see, for example, Federal Commissioner of Taxation v Lutovi Investments Pty Ltd [1978] HCA 55; (1978) 140 CLR 434 at 441. However, there is nothing in the income tax laws to the effect that where Division 7A applies, then other provisions of the ITAA 1936 (such as the provisions in Part IVA, including s 177E) are rendered inoperative. On the contrary, the statutory provisions apply according to their terms. Moreover, a similar argument was made and rejected by the Lawrence (Full Court) at [60]-[68]. Furthermore, s 177E is a specific provision which applies to anti-avoidance schemes involving dividend stripping and is not a "general" anti-avoidance provision.

1. Turning to the applicants' contentions that the scheme was not a "dividend stripping operation" for the purposes of ss 207-145 and 207-155, on the basis that any distribution from PPH to Mr Botella would be fully taxable, the position reached above that the scheme

was a "dividend stripping" scheme in accordance with CPH (Full Court) is applicable. That is, if the six characteristics are present, the scheme was also a "dividend stripping operation" within the meaning of s 207-155, such that s 207-145(1)(d) was engaged, similarly to the outcome in Hayes (Full Court). Consequently, the "franked distribution" (the payment of the franked dividend to PPH by PPD) was made as part of a dividend stripping operation, such that "the amount of the *franking credit on the distribution is not included in the assessable income" of PPH by operation of s 207-145(1)(e) of the ITAA 1997. Further, PPH is not entitled to an equivalent tax offset under Division 207, per s 207-145(1)(f) of the ITAA 1997.

1. For the reasons explained, the applicants have not discharged their onus of establishing that the transactions were not dividend stripping schemes under s 177E of the ITAA 1936 and a dividend stripping operation under s 207-155 of the ITAA 1997.

ISSUE 4 - SHOULD SCHEME PENALTIES APPLY? IF SO, SHOULD THEY BE REMITTED?

1. The Fourth Objection Decision related to the assessments issued to Mr Botella, whereby the Commissioner imposed:

(a) a false and misleading statement penalty under s 284-75(1) of the TAA, relating to shortfall amounts arising from making a false or misleading statement in the 2019 income year;

(b) a scheme penalty under s 284-145 of the TAA, relating to a scheme benefit that Mr Botella would have received in the 2019 income year, were it not for the application of s 177F of the ITAA 1936; and

(c) tax in the amount of $3,750 pursuant to Division 293 of the ITAA 1997, on the basis that Mr Botella's income for the 2019 income year was increased as a result of the assessment for the 2019 income year.

1. At the hearing, the Commissioner conceded that Mr Botella should not be subject to a statement penalty assessment pursuant to s 284-75(1) of the TAA, for the year ended 30 June 2019 and the total penalty in issue (in the form of scheme penalty) was the amount of

$235,836.85. The Commissioner maintained his position that the applicant did not have a reasonably arguable position, that no further remission of penalty was appropriate, and to levy tax pursuant to Division 293 of the ITAA 1997.

1. In relation to the scheme penalty, I agree that it was correctly imposed per s 284-145 of the TAA on the basis that Mr Botella, PPD and PPH had participated in a dividend stripping scheme subject to s 177E of the ITAA 1936. As a result of that scheme, Mr Botella avoided income tax that he would otherwise have paid if he had instead received the amount as a dividend from PPD in the 2019 income year. Mr Botella got a "scheme benefit" within the meaning of s 284-50 because Mr Botella's tax liability was less than it would have been apart from the scheme.

1. Pursuant to s 177F of the ITAA 1936, Mr Botella's tax liability was increased by

$471,917.11, such that this was the "scheme shortfall amount" (per s 284-145(1), ITAA 1936). The Commissioner then applied s 284-160(1) to calculate the "base penalty amount", being half of $471,917.11, on the basis that s 284-160(1)(a) applied. Accordingly, the Commissioner imposed a scheme penalty of $235,958.55. The total penalty (comprising the scheme penalty and the statement penalty, the latter no longer being in issue) was remitted to $235,836.85. For the same reasons as stated above in respect of the Second and Third Objection Decisions, it is clear that the "dividend stripping" scheme that Mr Botella engaged in and that was the subject of the scheme penalty did have the dominant purpose of tax avoidance and was therefore applicable on its terms.

1. While the applicants argued for a reduction of the scheme penalty on the basis of their interpretations of the law being reasonably arguable (per s 284-160(1)(b) and 285-15(1)), the applicants failed to demonstrate, having regard to relevant authorities, that what was argued for was about as likely to be correct as the position taken by the Commissioner. Moreover, no case was made for further remission of the scheme penalty. Accordingly, the applicants failed to discharge their onus of proving that the assessment of scheme penalties was excessive or otherwise incorrect.

1. Finally, the applicants did not advance any basis to show that the Commissioner's assessment which imposed $3,750 in tax on Mr Botella pursuant to Division 293 of the ITAA 1997 could be said to be excessive or otherwise incorrect.

1. The Tribunal notes that, in his written submissions, the Commissioner maintained that the Tribunal should make decisions in respect of all four related objection decisions (see[1]).

However, the Commissioner proposed to treat the assessment underpinning the First Objection Decision on the one hand, and the assessments underpinning the Second, Third and Fourth Objection Decisions on the other hand, as being alternatives. Consequently, the Commissioner stated that in the event he was successful on the First Objection Decision, the Commissioner would not seek to collect tax payable in respect of the assessments underpinning the Second, Third and Fourth Objection Decisions. The Commissioner stated he considered this appropriate "given that the mischief against which both Division 7A and s 177E are directed, namely, the avoidance of tax on the distribution of profits substantially overlap, and that Part IVA is a provision of last resort". This position was said to apply solely for the purpose of the Tribunal proceedings.

1. The applicants failed to discharge the burden of proving that the assessments issued to them by the Commissioner were excessive or otherwise incorrect under s 14ZZK(b)(i) of the TAA, except in relation to the First Objection Decision issued to Mr Botella insofar as the calculation of the "distributable surplus" was concerned.

1. This was due to the conclusion reached with respect to the unpaid payroll tax liability constituting a "present legal obligation" (see [88] above). Accordingly, the Tribunal has decided to vary the First Objection Decision to reflect the unpaid payroll tax liability that had accrued as at 30 June 2018 (in the agreed sum of $343,884.33) as a present legal obligation for the purpose of calculating the distributable surplus and deemed dividend, in respect of which income tax was payable by Mr Botella. For the avoidance of doubt, the balance of the First Objection Decision is affirmed.

1. The Second, Third and Fourth Objection Decisions are affirmed.

I certify that the preceding 134 [one hundred and thirty-four] paragraphs are a true copy of the reasons for the decision herein of Deputy President G. Lazanas.

............[SGD]..........................................................

Associate

Mr Dom Velcich and Dr Bruce Rowntree, Rubicon Lawyers