The Opening Salvos
17 In opening, CPL contended that a reasonable person could not conclude that the dominant purpose of a person making an actual payment of foreign tax was the acquisition of foreign tax credits in the same amount. That is evident, so CPL contended, because no rational taxpayer would pay a dollar of foreign tax simply to avoid an obligation to pay an equal amount of tax in Australia: why, one might ask, would the rational taxpayer be anything other than indifferent as to where it paid that tax?
18 So much may be conceded where the foreign tax on the relevant income is equal to or less than the Australian tax on that income; it may also be conceded where the foreign tax on the relevant income is greater than the Australian tax on that income by reason only of a greater foreign tax rate. But where, as here, the foreign tax rate (17.5%) is less than the Australian tax rate (30%) but the foreign income base, in the years in which the relevant transactions are entered into, is considerably greater than the Australian income base by reason of the different computation of those bases, resulting in greater foreign tax payable than the Australian tax that would otherwise be payable, giving rise to excess foreign tax credits, the door of inquiry under s 177D(b) as to the dominant purpose of a person entering into a scheme giving rise to a tax benefit in the form of those foreign tax credits, is not foreclosed by recourse to arguments based on the rationality of a taxpayer. It has to be determined by reference to the relevant matters or considerations set out in s 177D(b) and one of those matters or considerations will be whether the person has other foreign source income which has not borne foreign tax, or has borne foreign tax in an amount less than the applicable Australian tax, against which the excess foreign tax credits can be applied, in whole or in part, to reduce or otherwise relieve the Australian tax liability on the other foreign source income.
19 CPL contended that the HKBTs exhibited none of the elements identified in the Treasury Press Release issued on 13 August 1998 (see [8] above) as being the target of the relevant amendments made to Part IVA by Act No 11 of 1999 (see [9] above) nor any of the elements identified in the EM circulated by authority of the Treasurer at the time the amending bill was introduced into the House of Representatives (see [12] above). The Commissioner responded by observing that such a contention sought to read the EM in substitution for the plain words of the Act, which do not contain the restriction on the operation of the section for which CPL contended. That is of course impermissible: Re Bolton; Ex parte Beane (1987) 162 CLR 514 at 518. Had the intention been to so restrict the section, it could easily have been expressed in the section itself. CPL responded by saying that it did not dispute that the text of the legislation has primacy, but that the EM aids the interpretative task of identifying the particular mischief against which the amendment was directed. The Commissioner's suggestion that the EM be discarded entirely is, according to CPL, entirely inconsistent with the need to construe legislation by reference to its intended purpose.
20 Clearly, Pt IVA, in its form as extended by the amendments effected by Act No 11 of 1999, is not to be construed as being confined to the examples given in either the Treasury Press Release or in the EM; they are just that, examples. The examples given all involved the acquisition of an income stream which is taxed in the foreign jurisdiction on a gross basis but where, for Australian income tax purposes, the cost of acquisition is an allowable deduction thus reducing the income base to a net basis. In such a situation, the product of the foreign tax rate, even one less than the applicable Australian tax rate, and the gross income base is likely to give rise to a greater amount of foreign tax than the product of the higher Australian tax rate and the net income base, and in turn give rise to excess foreign tax credits 'available to offset tax payable on the taxpayer's other foreign income of the same class or to carry forward any excess to future years'.
21 As will be seen, the relevant facts relating to the HKBT's did not give rise to any allowable deductions to CPL in Australia which were not available to it in Hong Kong, but the income base in Hong Kong in the year in which the transactions were consummated included the gross amount of the consideration received by the bond purchasing partnerships, of which CPL was a member, for the sale of the interest coupons (similar to the outcome in Commissioner of Taxation v The Myer Emporium Ltd (1987) 163 CLR 199) whereas the income base in Australia, while starting from the same point, was, by virtue of the application of the provisions of Div 16E of Pt III of the 1936 Act, spread over the life of the bonds to equate with their treatment for financial accounting purposes. This meant that the income base in Hong Kong for HKBT 2003 and HKBT 2004 in the years in which the transactions were consummated included AUD60,495,296 and AUD61,199,317 respectively, whereas no amount was included in the income base in Australia for HKBT 2003 pursuant to Div 16E in the year in which the transaction was consummated (it having been consummated on the last day of the year of income) and only AUD1,977,415 was included in the income base in Australia for HKBT 2004 pursuant to Div 16E in the year in which the transaction was consummated. It is true that over the next five years (or four years plus part of a year for HKBT 2004) the balance was brought to account pursuant to Div 16E and included in the Australian income base of CPL in those years, but my purpose in noting the consequence in the years the transactions were consummated is to illustrate that there is, indeed, a measure of common ground between the examples in the extrinsic material and the facts of the present case.
22 In opening, the Commissioner submitted that the authorities establish that the fact that a Pt IVA scheme can be justified commercially, does not prevent Pt IVA from operating, and to reason otherwise is to adopt a false dichotomy: reference was made to Commissioner of Taxation v Spotless Services Limited (1996) 186 CLR 404 at 415 - 416 per Brennan CJ, Dawson, Toohey, Gaudron, Gummow and Kirby JJ. Reference was also made to what Gummow and Hayne JJ said in Commissioner of Taxation v Hart (2004) 217 CLR 216 at [64]:
'[A]s was held in Spotless, there is a false dichotomy between a "rational commercial decision" and "the obtaining of a tax benefit as 'the dominant purpose of the taxpayers in making the investment'". Pointing to the "commercial end" of the scheme reveals the adoption of the same, or at least a substantially similar, false dichotomy. The presence of a discernible commercial end does not determine the answer to the question posed by s 177D. As Hely J rightly said [Hart (2002) 121 FCR 206 at 230 [81]]:
"A particular course of action may be both tax driven, and bear the character of a rational commercial decision. The presence of the latter characteristic does not determine in favour of the taxpayer whether, within the meaning of Pt IVA, a person entered into or carried out a 'scheme' for the dominant purpose of enabling a taxpayer to obtain a tax benefit."'
23 So much may be conceded, but in the very next breath, Hely J said (at [81]):
'But nor does the fact that a taxpayer adopted one of two or more alternative courses of action, being the one that produces a tax benefit, determine the answer to that question in favour of the Commissioner: Metal Manufactures Ltd v Commissioner of Taxation (Cth) (1999) 43 ATR 375 at 427; 99 ATC 5229 at 5275 per Emmett J (on appeal Commissioner of Taxation (Cth) v Metal Manufactures Ltd (2001) 108 FCR 150; [2001] ATC 4152); Spotless at 425 per McHugh J; Inland Revenue Commissioners v Brebner [1967] 2 AC 18 at 30, per Lord Upjohn.'
This was taken up by Gleeson CJ and McHugh J in Hart, as follows (at [15]):
'As Hely J correctly observed in the Full Court, the fact that a particular commercial transaction is chosen from a number of possible alternative courses of action because of tax benefits associated with its adoption does not of itself mean that there must be an affirmative answer to the question posed by s 177D. Taxation is part of the cost of doing business, and business transactions are normally influenced by cost considerations. Furthermore, even if a particular form of transaction carries a tax benefit, it does not follow that obtaining the tax benefit is the dominant purpose of the taxpayer in entering into the transaction. A taxpayer wishing to obtain the right to occupy premises for the purpose of carrying on a business enterprise might decide to lease real estate rather than to buy it. Depending upon a variety of circumstances, the potential deductibility of the rent may be an important factor in the decision. Yet, if there were nothing more to it than that, it would ordinarily be impossible to conclude, having regard to the factors listed in s 177D, that the dominant purpose of the lessee in leasing the land was to obtain a tax benefit. The dominant purpose would be to gain the right to occupy the premises, not to obtain a tax deduction for the rent, even if the availability of the tax deduction meant that leasing the premises was more cost-effective than buying them.'
24 What these extracts from their Honours' reasons in Hart go to exemplify is that the task for the Court under s 177D(b) in drawing a conclusion as to the dominant purpose of a taxpayer in entering into or carrying out a scheme is not to be determined by reference to whether it represents a 'rational commercial decision' or that the scheme has a 'commercial end', any more than it is to be determined by reference to the fact, if it be a fact, that a taxpayer adopted one of two alternative courses of action, being the one that produces a tax benefit. Moreover, I do not read their Honours' articulation of the test in Spotless at 423 namely '… that, viewed objectively, it was the obtaining of the tax benefit which directed the taxpayers in taking steps they otherwise would not have taken by entering into the scheme', as embracing a 'but for' test; the requisite dominant purpose is not to be drawn merely because, as a matter of objective fact, it is to be concluded that 'but for' the tax benefit the course of action adopted would not have been adopted or that 'but for' the tax benefit, another course of action would have been adopted, although those considerations may be relevant to the conclusion as to the alternative postulate or hypothetical construct by reference to which the 'tax benefit', if any, may be measured.
25 The conclusion which the Court is required to draw under s 177D(b) is one which must be drawn having regard to such of the eight matters or considerations referred to therein as are relevant to the scheme under scrutiny (in many cases they may not all be relevant), and to no other matters. This does not exclude consideration of particular matters which fall within the wider umbrella of one or more of the eight matters or considerations referred to, but if they do not, they cannot be taken into account as part of the process of conclusion-drawing that the Court is required to undertake. In my view, this still leaves the Court with considerable latitude in the matters or considerations it can have regard to in the conclusion-drawing process.