Commissioner of Taxation v Ashwick

ISSUES ON THE APPEALS 9 In [8] of his written submissions, the Commissioner conveniently summarised the issues on the appeals and the respondents adopt that summary, which is set out below: '8. The issues [on the appeals] are: (1) Whether EFGA was entitled to claim as deductions pursuant to s 25-35(1)(b) or s 8-1 of the Income Tax Assessment Act 1997 ("the 1997 Act"), the amount of $1,202,441,116 in respect of its loan to ELFIC and the amount of $100,009,232 in respect of its loan to EFGS written off by it as bad debts in the 1998 year. Resolution of this issue requires determination of the following questions:- (i) whether, after January 1990, EFGA conducted a business of lending money; (ii) alternatively, whether money lent by EFGA to ELFIC and EFGS after January 1990 was money it lent in the ordinary course of its business of lending money; (2) Whether the respondents in Table 1 below were entitled to deduct bad debts written off in respect of loans to borrowers as shown in the table. Table 1: Bad debt deductions Taxpayer Income Year Amount of deduction Provision under which deduction claimed EFGT 1998 $525,260,163 (unpaid interest on loans to EFGA) 25-35(1)(a) or 8-1 043/2010 FGL 1998 $401,058,393 (unpaid interest on loans to EFGT) 25-35(1)(a) or 8-1 045/2010 Amayana 1999 $133,165,341 (unpaid interest on loans to EFGA) 25-35(1)(a) or 8-1 047/2010 EFGA 1998 Unpaid interest on loans to ELFIC and EFGS 25-35(1)(a) or 8-1 (if not allowable under s 25-35(1)(b)) Notice of contention in 042/2010

(3) Whether the respondents in Table 2 below were entitled to deduct interest expense on borrowings from lenders as shown in the table. Table 2: Interest expense deductions Taxpayer Income Year Amount of deduction Borrowings from EFGT 1998 $47,514,675 FGL 043/2010 (s 8-1) Amayana 1998 $16,875,354 FBGTA 046/2010 (s 8-1) EFGA 1998 $57,645,096 EFGT 042/2010 (s 8-1) EFGA 1998 $25,036,634 Amayana 042/2010 (s 8-1) ELFIC 1995 $95,293,880 EFGA 040/2010 (s 51(1)) ELFIC 1996 $106,399,661 EFGA 039/2010 (s 51(1)) ELFIC 1997 $93,156,592 EFGA 038/2010 (s 51(1)) EFGS 1997 $6,804,054 EFGA 041/2010 (s 51(1))

(4) Whether the Commissioner was entitled to make the determinations set out in Table 3 below pursuant to s 177F of the 1936 Act. That issue arises only if: (i) Amayana, EFGT, EFGA, ELFIC and EFGS were entitled to deductions, pursuant to either s 8-1 of the 1997 Act or s 51(1) of the 1936 Act, for interest they incurred on loans from FBGTA, FGL, EFGT, Amayana or EFGA, as the case may be; (ii) EFGT, Amayana and FGL were entitled to deductions, pursuant to s 25-35(1)(a) or s 8-1 of the 1997 Act, for unpaid interest they wrote off in respect of loans made to EFGA and or EFGT, as the case may be; (iii) EFGA either carried on the business of lending money or alternatively did not carry on the business of lending money but was entitled to deductions pursuant to s 25-35(1)(a) or s 8-1, for unpaid interest it wrote off in respect of loans it made to ELFIC and EFGS; (iv) Ashwick, Nexday and EFGI were, consequently, entitled to deductions for losses transferred to them by EFGA, EFGT, FGL, ELFIC, EFGS or Amayana as the case may be. Table 3: Section 177F determinations Taxpayer Income year Tax benefit disallowed ($) Interest deductions Amayana 1998 16,875,354 EFGT 1998 47,514,675 EFGA 1998 82,681,730 ELFIC 1995 95,293,880 1996 106,399,661 1997 93,156,592 EFGS 1996 7,504,175 1997 6,804,054 Bad debt deductions FGL 1998 401,058,393 Amayana 1999 134,165,341 EFGT 1998 525,260,163 EFGA 1998 976,023,874 Transferred losses Ashwick 1997 30,213 1998 23,628 2001 145 Nexday 2000 139,290 EFGI 1996 739,340

(5) Whether Ashwick was entitled to be paid its costs of VID861/2006. As the [primary] judge noted at [[274] of his] Reasons, … that proceeding was overtaken by VID125 of 2007. His Honour initially dismissed VID861 /2006 and made no order as to the costs of that proceeding. That order was subsequently varied by consent to provide that the Commissioner pay Ashwick's costs of VID861/2006 The Commissioner's consent was given without prejudice to any appeal rights he may have in respect of the costs order. The Commissioner says that if he is successful in one or more of the other appeals, the costs order should be set aside, and Ashwick should be ordered to pay the Commissioner's costs of the proceeding up to and including 16 February 2007; (6) Whether any of the respondents is liable to additional tax pursuant to s 226 or s 226L of the 1936 Act as set out in Table 4 below. If the Commissioner was entitled to make the determinations he did pursuant to s 177F of the 1936 Act, the respondents are liable to additional tax pursuant to s 226(2) of the 1936 Act. Alternatively, it is submitted that in the event that it is held that a respondent was not entitled to a deduction or transferred loss claimed in an income year, s 226L applies to impose additional tax on that respondent because: (i) there was a "tax shortfall" within the meaning of s 222A(1) for that year; (ii) that shortfall was caused by the respondent in a taxation statement treating an income tax law as applying in relation to a scheme in a particular way; (iii) the relevant scheme was a "tax avoidance scheme" within the meaning of s 224(1) of the 1936 Act. Under each provision, the additional tax is to be imposed at the rate of 25% on the tax shortfall, on the basis that the respondent had a reasonably arguable position that Part IVA did not apply. Table 4: Penalties imposed Taxpayer Income Year Penalty FGL 1998 $2,781,834.12 045/2010 EFGT 1998 $4,260,348.62 043/2010 Amayana 1998 $1,518,781.86 046/2010 EFGA 1998 $5,892,219.44 042/2010 EFGI 1996 $70,201.80 044/2010 Ashwick 1997 $2,719.17 036/2010 Ashwick 1998 $2,126.52 035/2010 Nexday 2000 $12,536.10 047/2010 ELFIC 1995 $1,932,285.21 040/2010 ELFIC 1996 $722,719.17 039/2010 ELFIC 1997 $1,027,582.11 038/2010 EFGS 1997 $371,579.76 041/2010

THE PRIMARY JUDGE 10 The primary judge at [1] to [3] and [5] to [63] of his Reasons made a number of findings of fact by way of background, none of which would seem to be in dispute between the parties. In their written submissions on the appeals, the respondents did raise one matter which they say is an error on the part of the primary judge (at [10] of his Reasons), but they conceded that the alleged error is of no material consequence. 11 In the course of examining each of the four main issues, namely - (1) The deductibility of bad debts written off; (2) the deductibility of interest expenses incurred by borrowing companies within the group; (3) the deductibility of losses transferred to loss transferee companies in the group; and (4) the application of Pt IVA of the Income Tax Assessment Act 1936 (Cth) ('the 1936 Act') to the scheme identified by the Commissioner, the primary judge made, in relation to specific taxpayers, findings of fact in addition to those made at [5] to [63] of his Reasons. 12 As noted in [2] above, the primary judge concluded that all the deductions claimed by the relevant taxpayers were allowable deductions, and rejected the Commissioner's case that, if the deductions were otherwise allowable, the provisions of Pt IVA applied to cancel those deductions.

THE STATUTORY PROVISIONS 13 The first statutory provision which bears on the deductibility of the bad debts written off is s 25-35(1) of the Income Tax Assessment Act 1997 (Cth) ('the 1997 Act'). It provides: '(1) You can deduct a debt (or part of a debt) that you write off as bad in the income year if: (a) it was included in your assessable income for the income year or for an earlier income year; or (b) it is in respect of money that you lent in the ordinary course of your *business of lending money.' 14 The other, more generally applicable, provision of the 1997 Act under which the bad debts written off and interest expenses are claimed to be deductible is s 8-1. That sub-section provides: '(1) You can deduct from your assessable income any loss or outgoing to the extent that: (a) it is incurred in gaining or producing your assessable income; or (b) it is necessarily incurred in carrying on a *business for the purpose of gaining or producing your assessable income. Note: Division 35 prevents losses from non-commercial business activities that may contribute to a tax loss being offset against other assessable income. (2) However, you cannot deduct a loss or outgoing under this section to the extent that: (a) it is a loss or outgoing of capital, or of a capital nature; or (b) it is a loss or outgoing of a private or domestic nature; or (c) it is incurred in relation to gaining or producing your *exempt income or your *non-assessable non-exempt income; or (d) a provision of this Act prevents you from deducting it. For a summary list of provisions about deductions, see section 12-5. (3) A loss or outgoing that you can deduct under this section is called a general deduction.' 15 The provisions of Pt IVA of the 1936 Act relevantly provide: '[177C] (1) Subject to this section, a reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to: (a) an amount not being included in the assessable income of the taxpayer of a year of income where that amount would have been included, or might reasonably be expected to have been included, in the assessable income of the taxpayer of that year of income if the scheme had not been entered into or carried out; or (b) a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out; or … and for the purposes of this Part, the amount of the tax benefit shall be taken to be: … (d) in a case to which paragraph (b) applies - the amount of the whole of the deduction or of the part of the deduction, as the case may be, referred to in that paragraph; … (2) A reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as not including a reference to: … (b) a deduction being allowable to the taxpayer in relation to a year of income the whole or a part of which would not have been, or might reasonably be expected not to have been, allowable to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out where: (i) the allowance of the deduction to 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 by any person, being a declaration, agreement, election, selection, choice, notice or option expressly provided for by this Act or the Income Tax Assessment Act 1997, except one under Subdivision 960-D of the Income Tax Assessment Act 1997; and (ii) the scheme was not entered into or carried out by any person for the purpose of creating any circumstance or state of affairs the existence of which is necessary to enable the declaration, agreement, election, selection, choice, notice or option to be made, given or exercised, as the case may be; or … [177D] This Part applies to any scheme that has been or is entered into after 27 May 1981, and to any scheme that has been or is carried out or commenced to be carried out after that date (other than a scheme that was entered into on or before that date), whether the scheme has been or is entered into or carried out in Australia or outside Australia or partly in Australia and partly outside Australia, where: (a) a taxpayer (in this section referred to as the relevant taxpayer) has obtained, or would but for section 177F obtain, a tax benefit in connection with the scheme; and (b) having regard to: (i) the manner in which the scheme was entered into or carried out; (ii) the form and substance of the scheme; (iii) the time at which the scheme was entered into and the length of the period during which the scheme was carried out; (iv) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme; (v) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme; (vi) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme; (vii) any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out; and (viii) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi); it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme or of enabling the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer or is the other taxpayer or one of the other taxpayers).'

EFGA 16 In the 1998 year of income EFGA wrote off as bad, debts owing by ELFIC and EFGS to EFGA in respect of loans made by EFGA to ELFIC and EFGS. The debt owing by ELFIC at the time it was written off totalled $1,202,441,116 and the debt owing by EFGS at the time it was written off totalled $100,009,231. Both debts were constituted by amounts of outstanding principal and unpaid interest. 17 EFGA claimed deductions for the debts written off as bad in reliance on s 25-35(1)(b) of the 1997 Act; in the alternative, under s 8-1 of that Act. The learned primary judge concluded that EFGA was entitled to the deductions claimed under s 25-35(1)(b). It was unnecessary for the primary judge to consider the alternative claim for relief under s 8-1. 18 There was no issue that the debts were bad at the time they were written off; nor that they were written off in the relevant year of income. 19 The primary judge found that EFGA carried on a business of lending money at all times from 1985 to 1998 ([118] - [126] of his Reasons) and that the debts written off were in respect of money lent in the ordinary course of that business. Accordingly, the principal and interest components (in respect of the latter, see Federal Commissioner of Taxation v National Commercial Banking Corporation of Australia Ltd (1983) 50 ALR 322 at 325 - 326) of the debts written off as bad by EFGA were deductible under s 25-35(1)(b). 20 On the hearing of the appeals, the Commissioner accepted that the primary judge correctly found that EFGA was carrying on a business of lending money before 1990 but contended that at some time shortly after FGL decided in March 1990 to wind down the Finance group, EFGA ceased to carry on a business of lending money. 21 That would not matter if the debts written off as bad were in respect of loans made before 1990. Section 25-35(1)(b) only requires that the taxpayer be carrying on the business of lending money at the time the loan is made and that it be made in the ordinary course of that business. It does not require the taxpayer to be carrying on the business of lending money in the year in which the debt is written off as bad. However, EFGA made loans to ELFIC and EFGS after March 1990 and some or all of the outstanding principal and unpaid interest in respect of such loans was included in the debts written off in 1998. 22 To fully understand the import of the Commissioner's contention, it is instructive to start with the finding the primary judge made at [30] of his Reasons namely, that in March 1990, FGL announced its plan to focus solely on its brewing business and divest itself of all of its other businesses, including those conducted by the Finance group. After March 1990, the activities of EFGA were conducted with the ultimate purpose of realising its assets and winding up its business. The Commissioner had some difficulty in identifying when he contended EFGA's business of lending money ceased. He pointed to the findings of the primary judge at [101] of his Reasons: 'After June 1990, EFGA radically changed the nature of its business. It ceased to borrow funds from external lenders and looked, instead, to lenders within the Foster's Group. It conducted its activities through RAMCO for the benefit of the Foster's Group as a whole, rather than of EFGA's own business. Consistently with that change, it ceased lending to make a profit. That was done by eliminating, from 1 September 1990, the inter-entity interest rate margin, including that charged to ELFIC and EFGS' to support a submission that EFGA's business of lending money ceased around the June - September 1990 period. The submission did not go so far as saying that, at about that time, EFGA ceased business altogether. However, in response to the question from the bench: 'What business was henceforth carried on?', came the answer: 'What we say is that from 30 June 1990 its activities were confined to serving the purposes of its parent company in maximising the realisation of the assets that were held by the finance group.' I deal with this contention at [40] below. 23 Despite the findings of the primary judge at [101] of his Reasons, his Honour concluded at [123] of his Reasons that - '[T]he activities of EFGA during the wind-up period were … in the ordinary course of its business of lending money. It is true that during that period EFGA ceased to charge the previous inter-entity rate of interest on loans to Finance Group borrowers but that was merely in recognition of the precarious financial states of those subsidiaries and the need for EFGA to make its own contribution to a quick and effective realisation of group assets. There was, I consider, an actual and continuing intention by those managing EFGA to carry on during the wind-up period its business of lending money although the carrying on of the same business was directed to a different end or purpose. In that sense the intention of those controlling EFGA during the wind-up period coincided with that regarded by Barwick CJ in Fairway Estates Pty Ltd v Federal Commissioner of Taxation (1970), supra, at 163, as satisfying the relevant test.' 24 After 1990 EFGA continued to manage its existing loan assets, it made further advances, it borrowed further moneys, it received payments and repayments in respect of its loan assets and it made payments and repayments in respect of its liabilities. It charged interest on its loans and it incurred interest on its borrowings. The payments received by EFGA; its operating profits; its operating revenue, interest income and interest expense; the balances on loans owing to EFGA; the balances arising on its borrowings, the interest charges it incurred on its borrowings and its reported assets are tabularised at Appendix 3 to these reasons, Tables 1 to 7 respectively. 25 The Commissioner's contention that the primary judge erred is based upon four findings of the primary judge. They are: (1) From 1 September 1990 EFGA ceased to charge a margin over its cost of funds to ELFIC and EFGS (Reasons [101] and 123]); (2) the employment of funds advanced to ELFIC and to EFGS was not profitable for EFGA as it had been before 1990 (Reasons [101] and [124]); (3) EFGA carried on its activities after 1990 at the direction of others including, ultimately, FGL (Reasons [124]); (4) the internal provision of loan funds to ELFIC and EFGS from 1989 was not a part of a coherent course of conduct but occurred as individual responses from time to time to external exigencies created by circumstances of the external financial climate (Reasons [228]). 26 Based on these findings, the Commissioner contended that EFGA no longer satisfied the requirements for a business of lending money after 1990; it ceased to lend for the purpose of making a profit and it ceased to lend in a systematic, business-like manner. According to the Commissioner, the primary judge ought to have found that EFGA was not entitled to deduct the debts written off in the 1998 income year pursuant to s 25-35(1)(b). 27 In relation to the first of the findings referred to by the Commissioner, the primary judge found that the reduction in the rate of interest was not referrable to the adoption of any intention that the business of lending money should thereupon cease but reflected the recognition of the precarious financial states of ELFIC and EFGS and the need for EFGA to make its own contribution to an effective realisation of group assets (Reasons [123]). The primary judge further found that the intention of those managing EFGA was that EFGA should continue to borrow and to lend at interest and that payments or repayments in respect of the borrowings, loans and interest should continue to be made and received (Reasons [123]). As indicated above, after 1990 EFGA, in accordance with that intention, continued to make borrowings and continued to make loans at interest and continued to receive payments and repayments in respect of those loans and interest (Reasons [123]). In every year from 1986 to 1998, except 1987, EFGA's reported income in the form of interest exceeded its expenses by way of interest on borrowed funds (Reasons [183]); see also Appendix 3, Table 3). 28 As to the second finding relied upon by the Commissioner, namely, that the employment of funds advanced to ELFIC and EFGS was not profitable for EFGA as it had been before 1990, as the primary judge concluded at [124] of his Reasons, this does not lead to the conclusion that EFGA ceased to carry on its business of lending money after 1990; nor, contrary to the Commissioner's submissions, did it entail that the loans to ELFIC and EFGS after 1990 were no longer advanced in the ordinary course of that business. Importantly, the downturn in the profitability of EFGA's business was due to a number of adverse external economic factors and was not due to any intention that the nature of EFGA's business should alter, or the taking of any steps which brought the business of lending money to an end. 29 The Commissioner refers to the finding that EFGA carried out its activities after 1990 at the direction of others, including, ultimately, FGL. However, the direction was that EFGA should continue to carry on the same business of lending money, albeit with the ultimate purpose of realising its assets and winding up the business (Reasons [124]). During the wind-up period, as the primary judge found, the direction was that EFGA was to continue carrying on its business of lending money, which it did (Reasons [124]). 30 Finally the Commissioner refers to the finding that the internal provision of loan funds to ELFIC and EFGS from 1989 was not part of a coherent course of conduct but occurred as individual responses from time to time to external exigencies created by circumstances of the external financial climate. On the other hand, the fact that further funding arrangements were entered into after January 1990 as individual responses to external exigencies which arose from time to time by reason of external factors (Reasons [263]), is strongly supportive of the conclusion that the business of lending money which EFGA had conducted up to December 1989 did not cease in 1990 but continued thereafter. 31 The Commissioner sought to draw factual distinctions between EFGA and the 'internal lender in Federal Commissioner of Taxation v BHP Billiton Finance Ltd (2010) 182 FCR 526'. I agree with the respondent's response that the facts relied on are of no material consequence to these proceedings and do not support the conclusion that EFGA ceased to carry on its business of lending money in 1990 or that thereafter its loans were not made in the ordinary course of that business. As the Full Court in BHP Billiton Finance observed at [1], [2] and [33], what is or is not in the ordinary course of a taxpayer's business of lending money must be determined by reference to the context in which the business is carried on, not by reference to the way in which a major bank might carry on its business. In the present case, the primary judge correctly considered the nature of EFGA's business activities after 1990 in the context of the economic and other external difficulties which adversely impacted upon the business it had conducted since 1985. 32 It has long been recognised that when a company decides to discontinue its business by winding back the scale of the activities which constitute that business to the point that they are no longer carried on, the activities carried on during the winding back period are as much acts done in the course of carrying on that business as they were before the decision was made. So much was recognised by Lord Atkinson in J & R O'Kane & Co v Commissioners of Inland Revenue (1922) 126 LT 707 at 710: 'A trader who wishes to retire from business may wind up his business in several ways; he may sell his concern as a going concern, or he may auction off his stock. But there is another way quite as effectual, and that is by continuing to carry on his business in the ordinary way, but not replenishing his stock which he has accumulated as it is sold. Then he will leave himself with no stock, and therefore he can retire from business. But the fact that he realises stock in the process of carrying on the trade as he has hitherto done will effectuate both purposes.' 33 Even where a company has gone into liquidation and the liquidator realises its stock in the manner that it has hitherto done, and even where the liquidator does not carry on other activities, such as manufacturing, that the company has hitherto carried on, the acts of the liquidator will be regarded as the continuation of the company's business, albeit that it is only carried on for the purpose of winding up: Joshua Brothers Proprietary Limited v Federal Commissioner of Taxation (1923) 31 CLR 490. 34 Such a way of discontinuing a company's business is to be contrasted with a sale of the assets of the business as a going concern: Commissioner of Taxation (WA) v Newman (1921) 29 CLR 484, or the sale of all those assets in order to put an immediate end to the business: Modern Permanent Building & Investment Society (in liquidation) v Federal Commissioner of Taxation (1958) 98 CLR 187 at 192 per Williams J. 35 The case which throws most light on whether the primary judge, in the present case, erred in his conclusion that, notwithstanding the findings of fact upon which the Commissioner relies, EFGA continued to carry on its business of lending money after 1990 and that loans made by it to ELFIC and EFGS after that year were made in the ordinary course of that business, is the decision of a Full Court of this Court in Commissioner of Taxation v Unilever Australia Securities Limited (1995) 56 FCR 152. The taxpayer (UAS) was until 1983 the group finance company for the Unilever group in Australia. In that capacity it had incurred liabilities under borrowings secured by a debenture trust deed which matured in 1987 and 1989. In 1986, the limitations imposed by the debenture trust deed were found burdensome and UAS entered into an 'in-substance defeasance arrangement' whereby in consideration of a payment to a state government financial institution (LGFA), LGFA indemnified UAS against liability for the larger sum payable on the maturity of the debentures. Effectively, it removed the debenture liabilities from UAS' balance sheet. The Commissioner assessed UAS on the basis that it derived a gain at the time the contract was made with LGTA. UAS' objection was upheld at first instance. By majority (Lockhart and Hill JJ), Beaumont J dissenting, the Full Court allowed the Commissioner's appeal holding that the agreement with LGFA gave rise to a profit on revenue account although the profit did not arise at the time of the defeasance agreement but was realised when the debentures matured and LGFA paid out the principal sum thereby discharging the obligations of UAS. 36 Relevantly, for present purposes, was UAS' argument that any profit it made arising out of the defeasance arrangement and the performance of that arrangement by LGFA was on capital account because it arose in the course of UAS going out of business pursuant to an expressed intention to do so. The argument was rejected by the majority in the following terms: (1) At 156, Lockhart J said: 'Although the evidence about the activities of UAS is sparse, it was the finance arm of UAL until 1983. UAS ceased trading thereafter on the short term money market, issued no further debenture stock and made no subsequent loans to companies in the Unilever Australia group including UAL. Nevertheless, it continued to service the loans which were still outstanding including the receipt of interest upon loans made by it to members of the UAL group and the payment of interest upon moneys borrowed by it. I note that the report of the directors on the balance sheet and accounts of UAS for the year ended 31 December 1987 stated that UAS's principal activity was to provide finance to the Unilever group of companies through the existing issue of debentures and that there had been no significant change in the nature of UAS's activities during the year. In my opinion it was in the ordinary course of the business of UAS as a finance company to make the necessary arrangements to repay moneys borrowed by it and to service the payment to it of moneys lent by it. UAS's business did not come to an end after the defeasance arrangements had been made. Its business included always the elements of borrowing, lending and repaying moneys borrowed, servicing the loans including receipt of interest. It was a necessary incident of UAS's business that its debts would be discharged. UAS's business was continuing at all material times. The defeasance arrangements were unusual, but, they nevertheless generated profit or gain to UAS in the course of its business activities which was income according to ordinary concepts. (2) At 187, Hill J said: 'The present is not a case where UAS, in the relevant sense, put an end to its business by virtue of the defeasance transaction. Rather, although UAS had resolved not to expand its business but run it down, its business was still continuing. That business included the receipt of interest on funds lent out by it and the payment of interest on moneys borrowed by it. It continued at the least until the moneys borrowed had been repaid and indeed perhaps thereafter, or at least while moneys were owing to it, by Unilever related companies.' 37 In my view, the facts of the present case, in particular those facts relating to EFGA's activities after 1990 as outlined above, point more strongly to a conclusion that it continued to carry on its business of lending money after 1990, and that loans it made to ELFIC and EFGS after that year were made in the ordinary course of that business, than the facts upon which the majority relied in UAS for their conclusion that the activities of UAS after the defeasance arrangement amounted to a continuation of UAS' business of lending money to the Unilever Australia group. 38 If only by way of example, the payments and repayments by ELFIC in respect of its borrowings from EFGA over the period from 1991 to 1998 were as follows: Year ELFIC's payments and repayments in respect of its borrowings from EFGA $ 1991 343,269,727 1992 95,370,771 1993 196,085,655 1994 68,159,243 1995 27,429,722 1996 5,151,937 1997 197,559,461 1998 75,682,570 Total 1,008,709,086

39 And the payments and repayments in respect of EFGS' borrowings from EFGA for the 1990 to 1998 years were as follows: Year ELFIC's payments and repayments in respect of its borrowings from EFGA $ 1990 18,398,065 1991 5,188,793 1992 9,258,872 1993 4,864,981 1994 765,078 1995 27,020 1996 48,455 1997 4,132,235 1998 0 Total 42,683,502

40 Which brings me to the Commissioner's contention referred to at [22] above that after 1990 EFGA's activities were confined to serving the purposes of its parent company in maximising the realisation of the assets that were held by the Finance group. This is not the first time this argument has been run albeit in slightly different factual circumstances and articulations. It has invariably been rejected. It was first rejected in Commissioner of Taxation v Bivona Pty Ltd (1990) 21 FCR 562 at 569: 'The respondent's activities consisted principally of the borrowing and lending of money. By far the greatest proportion of its income consisted of interest on moneys lent and its largest outgoing was interest on moneys borrowed from overseas. There was no suggestion that any of the relevant transactions were shams. Even if it were right to describe the role of the respondent in its activities of lending money, as counsel for the Commissioner did, as a "conduit" for its parent company or other members of the group, that begs, not answers, the question whether the activities of the respondent are correctly characterised as its principal business consisting of the lending of money.' 41 More recently, a Full Court in Federal Commissioner of Taxation v Tasman Group Services Pty Ltd (2009) 180 FCR 128 at [56] confirmed that response: 'While it may be accepted that the business was being financed by SBC, this does not inevitably lead to the conclusion that SBC was carrying on the business. It is a trite proposition that, where a subsidiary, even if wholly owned by a parent company, carries on a business, the business is that of the subsidiary not the parent. Irrespective of how closely it may monitor the business activities of the subsidiary, the parent does not itself carry on those activities but is engaged in the separate business of a parent or holding company which is, normally, the receipt of income in the form of dividends from the subsidiary.' 42 A similar argument was recently run in BHP Billiton Finance and again rejected at [19]: 'The fact that Finance was the vehicle which financed the Group entities selected by BHPB as the vehicles through which the Group's investment decisions were executed, does not make Finance's business an appendage to the business of the Group as a whole; any more than it makes Finance a mere conduit of BHPB's business.' 43 Again, it must be rejected here. 44 In my view, there was no error in the primary judge's conclusion that EFGA continued to carry on its business of lending money to the group after 1990, notwithstanding that its object in doing so was ultimately to wind up or discontinue that business, and that loans it made to ELFIC and EFGS after that year were made in the ordinary course of that business. It follows that I agree with the primary judge that EFGA is entitled to a deduction under s 25-35(1)(b) of the 1997 Act for the amounts of the debts owing to it by ELFIC and EFGS that were written off as bad during the 1998 year of income. Like the primary judge, it is unnecessary for me to consider the alternative relief claimed under s 8-1 of the 1997 Act. 45 This ground of the Commissioner's appeals cannot be sustained.

EFGT, FGL and Amayana 46 The claims by EFGT, FGL and Amayana for deductions in respect of bad debts relate only to the interest component of the debts written off as bad. 47 The primary judge held that FGL and Amayana were entitled to allowable deductions under s 25-35(1)(a) and also under s 8-1 of the 1997 Act (Reasons [154], [155] and [160]). 48 In relation to EFGT, the primary judge found that the debts owed to EFGT by EFGA which were written off as bad in 1998 were in respect of money lent by EFGT in the ordinary course of its business of lending money (Reasons [145]). His Honour held that it followed that deductions were allowable to EFGT for the debts written off as bad under s 25-35(1)(b) and that it was not necessary to consider the application of s 25-35(1)(a) or s 8-1 (Reasons [148]). 49 Before the primary judge the respondents had submitted that only the interest component of the bad debts were allowable deductions for EFGT under s 25-35(1)(a) and/or s 8-1. EFGT had not relied upon s 25-35(1)(b) in its notice of objection. In those circumstances, the application of s 25-35(1)(b) in relation to EFGT was not pressed in these appeals. Nevertheless, EFGT, like FGL and Amayana, relied on both ss 25-35(1)(a) and 81 as grounds for deductions for the interest component of the debts written off as bad. 50 Three requirements need to be satisfied for a deduction under s 25-35(1)(a): (1) There must be a debt (the first requirement); (2) the debt, or part of the debt, must be written off as bad in the year of income (the second requirement); and (3) the debt must be in respect of an amount included in the taxpayer's assessable income in the current or a prior year (the third requirement). 51 The Commissioner accepted that the first and second requirements are satisfied in relation to each of EFGT, FGL and Amayana. 52 As to the third requirement, each of EFGT, FGL and Amayana had returned the whole of the interest charged on their respective loans as assessable income in the years in which it accrued (Reasons [51], [52]) and each had been assessed in the relevant years of income on the basis that the interest had been properly returned. 53 However, the Commissioner contended that this was not sufficient to satisfy the third requirement because the interest income was incorrectly returned in the relevant years. The Commissioner relied on two grounds for this contention and his consequential contention that the deductions were not allowable under s 25-35(1)(a): (1) First, he submitted that the interest was returnable on a cash basis rather than on an accruals basis because none of EFGT, FGL and Amayana carried on a business of lending money; as no interest had been received, there was nothing to be included in the assessable income; (2) secondly, he submitted that the respective taxpayers had 'no real intention or expectation that the interest would be paid'; accordingly, the return of interest did not give a substantially correct reflex of the taxpayer's true income in the years before the debts were written off. 54 The first ground raises a matter of principle; the second a matter of evidence, although they are really two sides of the same coin. The difficulty with each is that the coin has gone out of circulation. 55 With respect to the evidentiary matter, there is no evidence to support the conclusion that the respective taxpayers had 'no real [whatever that means] intention or expectation that the interest would be paid'. Sham was not alleged. Even if there were no such intention or expectation, it would not lead to the conclusion that the taxpayers should not have returned the interest income as and when it accrued, but only when it was received. 56 The Commissioner pointed to the following matters as evincing no real intention or expectation on the part of the respective taxpayers that the interest would be paid: (1) ELFIC and EFGS suffered losses continually from 1988. By the end of the 1990 year each had negative shareholders' funds. It follows from FGL's decision to cease all but its brewing business and divest itself of all other assets, that the Finance group entities' balance sheets could not improve but only decline as the asset realisation program proceeded; (2) EFGA management recognised at least by April 1991 that EFGA would not even break even in future years without the provision of interest-free funding especially given the declining capacity of ELFIC and EFGS to satisfy their obligations to EFGA as their assets were reduced; (3) the capacity of ELFIC, EFGS and EFGA to satisfy their interest obligations was further reduced by the economic circumstances which prolonged the asset realisation program and forced further expenditure on the acquisition and holding of property assets; (4) the removal of the strategic hold assets from the Finance group to the New Lensworth Group in 1997, to the subsequent benefit of FGL suggests that there was no intention that the internal funding entities were to be paid the interest they charged; (5) with particular respect to Amayana, its prospects of being paid the interest it continued to charge were even more remote. It remained an unsecured creditor of EFGA, ranking behind EFGT and FGL after the security structure was established in 1991. Later, it acquired further debt to facilitate the sale of EFG Financial Limited. 57 With respect, absent a proffered process of reasoning, of which there is none, I am unable to perceive how any or all of these matters lead to a conclusion that 'the respective taxpayers had no … intention or expectation that the interest would be paid'. 58 With respect to the matter of principle, and with respect to those responsible for putting the submission, it has no factual or legal foundation. It is disappointing that it was thought necessary to be made. 59 It lies at the heart of the Commissioner's submission that unless a company is carrying on a business of lending money, when he concedes that an accruals basis of tax accounting interest income is appropriate, the appropriate basis on which the company is to return interest on a loan it makes in the course of carrying on its business is when it is received, that is, a cash basis. For this proposition, the Commissioner relies on the authority of Favaro v Federal Commissioner of Taxation (1996) 34 ATR 1 and the authorities referred to therein as well as a one line statement from the work of the late RW Parsons, Income Taxation in Australia - Principles of Income, Deductibility and Tax Accounting, Law Book Company Limited, 1985, at [11.248]: 'Generally, interest will be accounted for on a cash basis'. The case of Favaro concerned interest earned on funds in an Italian bank by individual members of a family and interest earned on their investment in Italian government bonds. It had nothing whatsoever to do with the case of interest on a loan made by a company in the course of carrying on its business. The conclusion of the Court (Branson J) in that case that the interest in question was to be taxed on a cash or receipts basis is totally irrelevant to the issue at hand. The reliance on the one line statement taken from the work of the late RW Parsons disrespects the author and his work; it is quoted out of context and, for that reason, is equally irrelevant to the issue at hand. 60 There is no dispute that each of EFGT, FGL and Amayana carried on business and that the loans, in respect of which interest accrued but was not paid and ultimately written off, were made in the course of those businesses. In the case of EFGT the primary judge found that its business was one of lending money and that the money it had lent was made in the ordinary course of that business (Reasons [145]). While the respondents do not rely on that finding to press a claim that EFGT is entitled to a deduction for the bad debt write off under s 25-35(1)(b) (see [48] above), they do rely on it in pressing a claim that EFGT is entitled to a deduction for the interest component of the bad debt write off under s 25-35(1)(a) and/or s 81. And in those circumstances, the Commissioner, in his submissions, conceded that it was appropriate for EFGT to bring the interest to account on an accruals basis. In the case of FGL, the primary judge found that while it was not carrying on a business of lending money, it was carrying on business as a holding company and that it was not disputed that it included as part of the assessable income derived from that business in previous years the interest charged to EFGT (Reasons [154]). In the case of Amayana, the primary judge did not specifically characterise the nature of its business by description, but it was never disputed that its loans to EFGA were made in the course of its business 'and it was therefore appropriate to record unpaid interest as a receivable in Amayana's accounts' (Reasons [160]). 61 The relevant authorities in this area, at least in the modern era, start with a decision of the New Zealand Court of Appeal in Commissioner of Inland Revenue v The National Bank of New Zealand (1976) 2 NZTC 61,150. While the case concerned a bank, it was what fell from the bench and its subsequent consideration and application in Australia that provides its relevance to the issue at hand. That case concerned the practice that had been adopted by the Bank over many years of not bringing into the Bank's profits interest debited to a customer's account which was regarded as being 'in doubt of ultimate realisation'. Instead, it was carried to a 'suspense account' and was only credited to the Bank's profits if and when the view of it as doubtful changed, or the interest was actually received. The Bank returned its assessable income on the same basis and the Commissioner ultimately took issue with that. The Court of Appeal held that the interest in the suspended interest account was derived by the Bank in the income year in which it was debited to the customer and became due. In the course of his reasons, Cooke J, as he then was, canvassed the authorities in New Zealand, England, Scotland, Australia, Canada and the United States. In relation to the Australian authorities, his Honour concluded at 61,168: 'Taken as a whole the Australian cases show that accountancy evidence may be important, and they emphasise that in every case the ideal is what Dixon J. called "a substantially correct reflex" of the particular taxpayer's income; but they seem to me to provide no ground for thinking that the tax legislation allows a business enterprise, not operating generally on a cash basis, in computing its gross profits to ignore doubtful debts, even if through the technique of a suspense account that approach may be made acceptable for general accounting purposes.' (Emphasis added.) 62 The National Bank of New Zealand case was referred to with apparent approval by a Full Court of this Court (Bowen CJ, Fisher and Lockhart JJ) in National Commercial Banking Corporation of Australia and evinced the following responses from the late RW Parsons in his work, referred to above. At [11.43] the learned author wrote: 'Where the lending of money is an aspect of a taxpayer's business, such that the loans are revenue assets, interest on those loans will it seems be subject to accounting on a accruals basis. This may be the consequence of the New Zealand Court of Appeal decision in National Bank of N.Z. Ltd v C.I.R. (NZ) (1977) 77 ATC 6001. The principle of that case may extend to a taxpayer who trades in debts, to a life insurance company that invests in debts, and to a taxpayer that engages in a business of investing involving the switching of investments. The last situation was the facts, as understood by Gibbs J., in London Australia Investment Co. Ltd (1977) 138 CLR 106.' At [11.44] and [11.45], he wrote: 'Where a taxpayer carries on a business, one judgment will be made as to the appropriate basis of accounting in regard to all items that are active income of that business. … If a taxpayer is held to conduct one business of selling and repairing motor cars, he will account on one basis, almost certainly on an accruals basis, for all items of active income of that business.' Finally at [11.53], he wrote: 'A doubt that a claim to a receipt will be followed by an actual receipt does not prevent or qualify derivation. The New Zealand Court of Appeal so held in National Bank of N.Z. Ltd (1977) 77 A.T.C. 6001. The taxpayer's doubts may be expressed by writing-off under s. 63 the whole or some part of the amount derived as a bad debt, and a failure to obtain payment may give rise to a deduction for a loss under s. 51 (1). National Bank resulted in a change in bankers' practice. Prior to that case the practice was that so much of an amount of interest receivable whose actual receipt was doubted would not be treated as income derived. Since the case the practice has become to include the full amount of interest receivable.' 63 The foregoing analysis uses as its starting point the Commissioner's contention that EFGT, FGL and Amayana incorrectly returned the interest income on an accruals basis when they should have accounted for it on a cash basis and concludes that the Commissioner's contention is wrong for the reasons given in that analysis. The same conclusion can be reached by using as a starting point the application of first principles. 64 Generally speaking, the determination of whether income is to be recognised on a cash receipts or an accruals basis is done by applying ordinary business and commercial principles adopting a method of accounting that gives a true or substantially correct reflex of the income derived: Commissioner of Taxes (SA) v Executor Trustee and Agency Co of South Australia Ltd (1938) 63 CLR 108 at 152 - 154 per Dixon J with whom Rich and McTiernan JJ agreed ('Carden's case'); Ballarat Brewing Co Limited v Federal Commissioner of Taxation (1951) 82 CLR 364 at 368 per Fullagar J, and Brent v Federal Commissioner of Taxation (1971) 125 CLR 418 at 428 per Gibbs J. 65 The object of the 1936 Act and 1997 Act (together 'the Assessment Acts') is to discover those gains that have come home to the taxpayer in a realised or immediately realisable form during the relevant year of income: Carden's case at 155 per Dixon J, with whom Rich and McTiernan JJ agreed. It is not necessary for an amount to be received before it is derived: Federal Commissioner of Taxation v Orica Ltd (1998) 194 CLR 500 at [24] per Brennan CJ and the cases there cited. The relevant gain can be a chose in action that has vested in the taxpayer provided that a distinct set of legal relations has come into existence during the year of income: see, for example, Abbott v Philbin [1961] AC 352 and Donaldson v Commissioner of Taxation [1974] 1 NSWLR 627 at 642 - 644. 66 The treatment of amounts in a taxpayer's financial statements and accounting records, even if not determinative, are both relevant and significant in determining whether its assessable interest income is to be recognised on receipt or on accrual of the entitlement and are evidence of the test that ought to be applied: Arthur Murray (NSW) Pty Limited v Federal Commissioner of Taxation (1965) 114 CLR 314 at 318 per Barwick CJ, Kitto and Taylor JJ; International Nickel Australia Ltd v Federal Commissioner of Taxation (1977) 137 CLR 347 at 367 per Mason J; Commissioner of Taxation v Citibank Ltd & Ors (1993) 44 FCR 434 at 443 per Hill J with whom Jenkinson and Einfeld JJ agreed; BHP Billiton Petroleum (Bass Strait) Pty Ltd v Commissioner of Taxation (2002) 126 FCR 119 at [50], [67] - [68] per Hill and Heerey J. 67 EFGT, FGL and Amayana (and EFGA) included their relevant interest entitlements in the reported income in their accounts on an accruals basis and those accounts were audited. 68 The taxation treatment which EFGT, FGL and Amayana (and EFGA) afforded to their interest entitlements was appropriate having regard to both their circumstances and the structure of the Assessment Acts: (1) The circumstances of Amayana and EFGT (and EFGA) were that they had borrowings that related directly to the loans which they had made on which interest accrued (Reasons [51], [52], [118], [119], [123], [145], [160]). The accruing liability for interest on their borrowings was the cost to them of using loan funds to earn income by lending at interest. In circumstances where a legal or jurisprudential approach is required to determine whether a liability has been incurred to found a deduction (Coles Myer Finance Limited v Federal Commissioner of Taxation (1993) 176 CLR 640 at 662 - 663 per Mason CJ, Brennan, Dawson, Toohey and Gaudron JJ), and where a pecuniary obligation must become due in the sense of a presently existing liability to have been incurred (Nilsen Development Laboratories Pty Ltd v Federal Commissioner of Taxation (1981) 144 CLR 616 at 623, per Barwick CJ and at 627 per Gibbs J), bringing amounts of interest to account as and when they accrue gives a more reliable reflex of the lending companies' assessable income - both the lending companies' liabilities for interest and their entitlements to interest would be brought to account in the same period to which they relate: cf., J Rowe & Son Pty Ltd v Federal Commissioner of Taxation (1971) 124 CLR 421 at 448 per Menzies J. (2) Further, these companies and FGL had interest entitlements accrue in recoverable form - interest was ordinarily calculated on a daily basis and capitalised monthly - which allowed further interest to be charged on any accrued but unpaid amounts (Reasons [19], [20]). Accruals in such circumstances have sufficiently come home to be regarded as derived. (3) The structure of the Assessment Acts is such that a deduction arises upon the writing off of a bad debt that has previously been included in assessable income. The Assessment Acts do not call for consideration of the debtor's capacity to pay a debt as a condition of and before its inclusion in assessable income of the creditor. To the contrary, the Assessment Acts contemplate inclusion in assessable income and the allowance of a subsequent deduction if and when it is ascertained that the debt is bad and is written off: National Bank of New Zealand per Cooke J at 61,168; National Commercial Banking Corp at 119 - 121. 69 It follows, in my view, that the interest component of the bad debts written off by EFGT, FGL and Amayana are allowable deductions under s 25-35(1)(a) and it is unnecessary to consider whether alternative relief is available under s 8-1. 70 Again, this ground of the Commissioner's appeals cannot be sustained.

EFGA, EFGT, ELFIC, EFGS and Amayana 71 The disputed interest expenses for EFGA, EFGT, ELFIC, EFGS and Amayana are as set out in Table 2 in [8(3)] of the Commissioner's written submissions, which is reproduced in [9] above. In the case of ELFIC and EFGS, the interest relates to borrowings by those companies from EFGA: in the case of EFGA, the interest relates to borrowings from EFGT and Amayana; in the case of EFGT, the interest relates to a borrowing from FGL; and in the case of Amayana, the interest relates to a borrowing from FBGTA. 72 The primary judge found that each of the relevant respondents incurred its interest expenses on loan funds which it employed in its business for the purpose of producing assessable income (Reasons [176] - [178], [185], [189], [194], [198]). Further, in relation to each of EFGA, EFGT, ELFIC and EFGS the loan funds on which the interest was incurred were used as the circulating capital of its business. It followed that the interest incurred by EFGA, EFGT, ELFIC, EFGS and Amayana is deductible under s 8-1 of the 1997 Act or s 51(1) of the 1936 Act. In respect of EFGA, see Reasons [179] - [185]; see also Reasons [118] - [125] in respect of EFGA's business activities of lending to, amongst others, ELFIC and EFGS. In respect of EFGT, see Reasons [195] - [198]; see also Reasons [145] in respect of EFGT's business activities of lending money to EFGA. In respect of ELFIC, see Reasons [6], [25], [176] - [178]. In respect of EFGS, see Reasons [25], [191] - [194]. In respect of Amayana, see Reasons [33], [52], [186], [189]. 73 On these appeals, the Commissioner said first that the primary judge failed to apply correctly the principles expressed in Ure v Federal Commissioner of Taxation (1981) 50 FLR 219 and Fletcher v Federal Commissioner of Taxation (1991) 173 CLR 1. According to the Commissioner, the primary judge should have found that the taxpayers had failed to establish that the interest was incurred - (1) in gaining or producing assessable income; (2) in the course of carrying on their respective businesses; (3) for the purpose of gaining or producing assessable income through the conduct of their respective businesses. 74 Second, even if the claimed interest expenses were incurred for the purpose of gaining or producing assessable income, those expenses were of a capital nature. In this respect the Commissioner said that: (1) The primary judge erred in relying on Australian National Hotels Ltd v Federal Commissioner of Taxation (1988) 19 FCR 234 (Reasons [200]) to find the interest revenue in nature; (2) the respective taxpayers incurred the interest to serve the purposes of FGL; (3) the respective taxpayers incurred the interest expense with respect to funds intended to be employed by way of permanent capital. 75 Contrary to how the Commissioner predicated his submission in [74] above, the question is not whether the claimed interest expenses were incurred for the purpose of gaining or producing assessable income. As Hill J warned in Kidston Goldmines Ltd v Commissioner of Taxation (1991) 30 FCR 77 at 85, a warning he repeated in Commonwealth of Taxation v Roberts and Smith (1992) 37 FCR 246 at 257: '[T]here is a danger … in substituting for the words of the subsection language which does not appear in it. The statutory issue is whether the interest outgoing was incurred in (ie in the course of) the income-producing activity or, in the case of the second limb of the subsection, whether the interest outgoing was incurred in (ie in the course of) the business activity which is directed towards the gaining or producing of assessable income' not whether the interest expenses were incurred for the purpose of gaining or producing assessable income. See too Magna Alloys & Research Pty Ltd v Federal Commissioner of Taxation (1980) 33 ALR 213 at 215-216 per Brennan J. 76 The Commissioner's contention that the primary judge failed to apply the principles expressed in Ure and Fletcher correctly is misconceived. 77 In Ure, the appellant had borrowed at commercial rates of interest and on-lent the borrowed moneys at 1 per cent per annum either to his wife or to a family company. The taxpayer argued, unsuccessfully, by reference to the use to which the moneys were put, being an income-producing use, that the whole of the interest on the borrowed funds was deductible. The court apportioned the interest allowing a deduction equivalent to the income to be derived by the on-lending. 78 In the course of their judgment, Deane and Sheppard JJ said (at 230): 'The fact that money is re-lent at a lower rate of interest than the rate at which it was borrowed does not necessarily mean that the liability to pay the interest cannot properly be seen as having been incurred wholly in earning the assessable income and as being of neither a private nor domestic nature. Even where no business is carried on, circumstances can obviously exist in which money borrowed wholly for the purposes of earning income by way of re-lending can only, in the event, be re-lent at a rate of interest lower than the rate payable in respect of the original loan. Again, notwithstanding the fact that it may always have been intended to re-lend borrowed money at a rate of interest lower than that payable in respect of the original borrowing, the liability to pay the interest may plainly have been wholly incurred in earning assessable income where it is expected or hoped that the re-lending will also lead to assessable income in another form being derived or preserved, such as, for example, dividends on shares held in the company to which the money is lent at a favourable rate. Yet again, plain miscalculation or lack of business understanding or anticipated subsequent lending at higher rates could conceivably lead to the position where it was plain that a liability to pay interest on borrowed money at a higher rate than the rate payable in respect of an immediate re-lending had been incurred wholly in earning assessable income.' (Emphasis added.) 79 At 232 their Honours said: 'In the ordinary case where the income which is expected to flow from an outgoing offers an obvious commercial explanation for incurring it the relevant characterization can readily be determined by reference to the gaining or producing of that income. In the more complex case, however, where there is no such obvious commercial explanation, the solution of the problem of characterization must be derived from a weighing of the many aspects of the whole set of circumstances including direct and indirect objects and advantages which the taxpayer sought in making the outgoing.' (Emphasis added.) 80 And at 233 their Honours concluded: 'One of the most difficult aspects of the problem of characterizing an outgoing is the assessment of what, if any, weight is to be given to indirect objects which a taxpayer had in mind in incurring the outgoing. Such objects form part of the relevant circumstances by reference to which the problem of characterization must be resolved. There is however no rigid principle which can be applied in determining what, if any, weight should be given to them. In the ordinary case, such as, for example, where the immediate object achieved by the outgoing is the production of assessable income which is commensurate with the amount of the outgoing or where it is clear that the outgoing was for the purchase of stock-in-trade or the acquisition of services or hire of equipment used in earning assessable income, indirect objects or motives of a personal or domestic character will plainly not prevent the characterization of the outgoing as having been incurred in earning assessable income (see, for example, Cecil Bros. Pty. Ltd. v. Federal Commissioner of Taxation [(1964) 111 CLR 430]; Federal Commissioner of Taxation v. Phillips [(1978) 36 FLR 399]. In other cases, the immediate object or effect of an outgoing will not suffice either to explain or to characterize it. In such cases, indirect objects or motives can assume a sometimes decisive importance.' (Emphasis added.) 81 Fletcher concerned a complicated arrangement whereby a partnership borrowed money for the purpose of funding an annuity. The result of the arrangement was that if the arrangement were not terminated, the partnership would, in the early years, have a large net loss, which would be available to the partners to deduct against their other income. In the later years, however, there would be corresponding large amounts of assessable income to be taken into account in calculating the net income of the partnership and thereby, through s 92, to be included in each of the partner's assessable income. 82 Fletcher, like Ure, was a case where the issue of characterisation arose under the first limb of s 51(1). In a unanimous judgment of all seven justices of the High Court, the court pointed out that the process of characterisation involved in resolving an issue under s 51(1) will be commonly possible without reference to the taxpayer's subjective thought processes. In other cases motive may be a relevant fact, at least where the outgoing has been voluntarily incurred. Reference was made to what was said in Magna Alloys & Research at 218 - 219 per Brennan J. Thus motive could be relevant to a case where no assessable income could be identified at the time the outgoing was incurred, or where the relevant assessable income was less than the amount of the outgoing. Reference was made to Ure. The court remitted the case to the Tribunal to make findings of fact as to whether the parties intended that the arrangement would be terminated before assessable income was derived. 83 In the course of its reasons in Fletcher, the court said (at 18 - 19): '[I]t is commonly possible to characterize an outgoing as being wholly of the kind referred to in the first limb of s. 51(1) without any need to refer to the taxpayer's subjective thought processes. That is ordinarily so in a case where the outgoing gives rise to the receipt of a larger amount of assessable income. In such a case, the characterization of the particular outgoing as wholly of a kind referred to in s. 51(1) will ordinarily not be affected by considerations of the taxpayer's subjective motivation. If, for example, a particular item of assessable income can be earned by making a lesser outgoing in one of two possible ways, one of which is a loss or outgoing of the kind described in s. 51(1) and the other of which is not, it will ordinarily be irrelevant that the taxpayer's choice of the method which was tax deductible was motivated by taxation considerations or that the non-deductible outgoing would have been less than the deductible one. In such a case, the objective relationship between the outgoing actually made and the greater amount of assessable income actually earned suffices, without more, to characterize the whole outgoing as one which was incurred in gaining or producing assessable income. If the outgoing can properly be wholly so characterized, it "is not for the Court or the commissioner to say how much a taxpayer ought to spend in obtaining his income, but only how much he has spent" [Cecil Bros Pty Ltd v Federal Commissioner of Taxation (1964) 111 CLR 430 at 434]. The position may, however, well be different in a case where no relevant assessable income can be identified or where the relevant assessable income is less than the amount of the outgoing. Even in a case where some assessable income is derived as a result of the outgoing, the disproportion between the detriment of the outgoing and the benefit of the income may give rise to a need to resolve the problem of characterization of the outgoing for the purposes of the sub-section by a weighing of the various aspects of the whole set of circumstances, including direct and indirect objects and advantages which the taxpayer sought in making the outgoing. Where that is so, it is a "commonsense" or "practical" weighing of all the factors which must provide the ultimate answer. If, upon consideration of all those factors, it appears that, notwithstanding the disproportion between outgoing and income, the whole outgoing is properly to be characterized as genuinely and not colourably incurred in gaining or producing assessable income, the entire outgoing will fall within the first limb of s. 51(1) unless it is either somehow excluded by the exception of "outgoings of capital, or of a capital, private or domestic nature" or "incurred in relation to the gaining or production of exempt income". If, however, that consideration reveals that the disproportion between outgoing and relevant assessable income is essentially to be explained by reference to the independent pursuit of some other objective and that part only of the outgoing can be characterized by reference to the actual or expected production of assessable income, apportionment of the outgoing between the pursuit of assessable income and the pursuit of that other objective will be necessary.' 84 A more recent decision of a Full Court of this Court which held that the primary judge did not err in taking into account evidence as to the subjective purpose of the taxpayer in relation to the acquisition by it of shares, carrying dividend rights, in a related company with funds borrowed from its parent company, where the issue before this Court was the deductibility of the interest on the borrowing, was Spassked Pty Ltd v Commissioner of Taxation (2004) 136 FCR 441. The taxpayer was born out of the implementation of a complex structure designed to avoid what was called a 'dividend trap', the loss of the inter-corporate rebate on group dividends received by a company through interest incurred on borrowings to acquire the dividend-producing shares. In the result, there could be no loss in the taxpayer company available to be transferred to another group company because the interest deduction would be offset by the dividend received; to the extent that the dividend it received was franked, the company would have no ability to declare a dividend so to pass the benefit of the franking credit through intermediate companies to an individual shareholder because it had no company law profits absent other income. 85 In the course of their judgment, Hill and Lander JJ said (at [76] and [78]): 'Ordinarily, where a taxpayer borrows money for the purpose of acquiring shares carrying rights to a dividend the interest on the funds borrowed will be deductible without reference to subjective matters. But, equally, where no dividends are derived by the taxpayer from the investment and especially where, as here, it appears that no dividend was intended to be paid on those shares for an indefinite time, the result would be very different, for in such a case the occasion of incurring the interest in the year of income would not be found in gaining or producing assessable income at all. In the present case the question whether dividends were to be paid on the shares acquired by Spassked was the subject of considerable evidence and a conclusion was drawn which was adverse to the appellants. … Submission one - did the learned primary judge err in considering subjective purpose? We have dealt with this matter in the above discussion of the law. From that discussion it follows that the learned primary judge did not err in taking into account, in the limited way his Honour did, evidence adduced by the appellants as to the subjective purpose of Spassked and particularly in relation to the acquisition by it of the shares in GIH.' 86 A little later, in relation to the issue of whether Spassked was carrying on a business of a holding company, their Honours said (at [84], [85]): 'It can be accepted that a holding company can itself carry on a business, which may be referred to as the business of a holding company: Brookton Co-operative Society Ltd v Commissioner of Taxation (Cth) (1981) 147 CLR 441 at 469-470. The taxpayer in Total Holdings on the facts of that case was held to carry on such a business. … His Honour found, it would seem, that Spassked was not carrying on such a business. Indeed it was more likely on the facts that it was IEL which was the holding company carrying on a business than Spassked. What is clear here is that the only assessable income which Spassked could possibly derive were the dividends it might receive from GIH if it were allowed to receive any dividends. Despite a submission on behalf of the appellants that Spassked was acting to further the ends of the corporate group (presumably the group of which it was the holding company, although in reality Spassked was acting to further the ends of IEL) this would not, of itself, make the interest it incurred deductible. The present case is wholly different from EA Marr & Co where the intermediate holding company leased items of plant from a finance company and made the plant available to the subsidiaries rent free.' 87 Gyles J agreed with Hill and Lander JJ, but in the course of his judgment said (at [127], [128]): 'Some business decisions are good, some are bad. Indeed, with the benefit of hindsight some may be seen as negligent or even profligate. The point may be made by considering the arm's length external borrowing by the IEL Group to make the corporate acquisitions in question. Some of those acquisitions might have been successful and some might have failed. In hindsight, some may have been doomed to failure. However there would be little doubt as to the deductibility of interest on all of those borrowings. The same principle does not apply to purely intra-group arrangements with no external aspect. All of the relevant arrangements were between companies with the same beneficial ownership. Many of the companies involved, including Spassked, had no external role at all. The arrangements involving those companies were inherently variable at the will of the ultimate board of directors. They do not reflect the exercise of business judgment in the relevant sense. Thus, the requisite connection or relationship between the outgoing and the earning of assessable income is not to be inferred but must be positively established. The trial judge found that that had not been done. I agree. Further, the inherently variable nature of the arrangements explains why the one error by the trial judge was of no consequence in the result.' 88 The Commissioner relied on what his Honour said concerning 'purely intra-group arrangements with no external aspect' at [128] in support of his argument in the present case, but what his Honour said has to be understood in the context of the facts of Spassked, which bear no correlation to the facts of the present case. In my view, what his Honour said in this passage from his reasons was not in recognition of some dichotomy of principle between purely intra-group transactions and those with external parties, particularly where the terms and conditions of the purely intra-group transactions exhibited features of a kind that might be expected to exist between parties dealing with each other at arm's length. (See what his Honour said on the same topic in the subsequent case of Macquarie Finance Ltd v Commonwealth of Taxation (2005) 146 FCR 77 at [254].) If I am wrong in my view of this passage from his Honour's reasons then, with respect, I would have to disagree with it; such a dichotomy certainly cannot be supported by reference to any authority and, in any event, it would be impossible to support the dichotomy in point of principle; only in point of fact. 89 The facts of the present case, as found by the primary judge, bear no correlation to the facts in Ure, Fletcher or Spassked. Moreover, they exhibit none of the features relied on in those cases to warrant going beyond 'the obvious commercial explanation' for incurring the interest, such as by recourse to 'indirect objects or motives' or 'subjective purposes'. Indeed, as Brennan J said in Magna Alloys & Research at 225: 'Given a sufficient identification of what the expenditure is for and the character and scope of the taxpayer's income-earning undertaking or business, the question whether expenditure is incurred for the purpose of carrying on a business or for the purpose of gaining or producing assessable income does not depend upon the taxpayer's state of mind. The relationship between what the expenditure is for and the taxpayer's undertaking or business determines objectively the purpose of the expenditure.' 90 In concluding that the claimed interest expenses were deductible, the primary judge made the following findings: (1) As to ELFIC, he found that the fact that interest expenses were significantly greater than the income it derived was a reflection of the financial difficulties experienced by ELFIC's external customers in the late 1980s which resulted in diminished returns to ELFIC on the circulating capital deployed in its business. Further, his Honour held (Reasons [176]): 'It does not follow that, because the core business was being wound down, the interest expenditure incurred in continuing the business was not wholly expended in carrying on the business'. In this latter respect, he relied on what Beaumont J and Hill J said in Unilever Australia Securities at 165 and 187 respectively, in contrast to what a Full Court of this Court said in Coal Developments (German Creek) Pty Ltd v Commissioner of Taxation (2008) 166 FCR 140 at [19] in respect of expenditure incurred after the business has been sold, or has otherwise ceased to be carried on by the taxpayer: Reasons [176] - [178]; (2) as to EFGA, he found that for essentially the reasons outlined in relation to the claim by ELFIC to deduct its interest expenses that the interest incurred by EFGA on its borrowings from EFGT was deductible. The expenditure was calculated to effect from a practical and business point of view the continuing provision of funds at interest to the Finance group subsidiaries to enable them to maintain their businesses as going concerns until they could be disposed of or closed down as part of the wind-up operation. That provision of funds was the central function which EFGA had assumed in the conduct of its business: Reasons [185]; (3) as to Amayana, he found that the reasons already outlined in respect of the claims for deductions in respect of interest by ELFIC and EFGA compel the same conclusion as to the claim for interest by Amayana. The funds which Amayana had borrowed had been used to derive assessable income in the form of interest from EFGA. The interest which Amayana had been required to pay represented the recurrent or periodic cost to it of securing those funds. There was, he considered, a frequent and often nice exercise of business judgment in conducting the affairs of Amayana and those of the related party borrowers from it. Moreover, Amayana's liability to pay interest to FGL was tied to Amayana's own income-producing purposes. He did not regard Amayana's prospect of receiving that income in the form of interest as 'illusory' at the time when the interest was charged: Reasons [189]; (4) as to EFGS, he found that the reasons outlined above in relation to the claim made by ELFIC for a deduction in respect of interest applied with equal force to the corresponding claim by EFGS. The money borrowed from EFGA was used in the course of the business of EFGS which included the derivation of income and during the wind-up the realisation of loans to external customers and other interest-bearing assets. These considerations were reinforced by the accession of EFGS during the wind-up to the management of the Finance group's interest in the 'Akron' bloodstock joint venture: Reasons [194]; (5) as to EFGT, he found that: 'For the reasons already explained in respect of the claims by EFGA and Amayana to deduct interest, I have concluded that the similar claim by EFGT should have been allowed. The money which EFGT had borrowed from FGL was genuinely advanced to borrowers and deposit and interest was genuinely charged on it. Except for the interposition of the security structure, those transactions essentially continued the same income-producing activity which had been carried on since 1986. I do not regard the creation of the security structure or the purpose for which it occurred as having any relevant bearing on the entitlement of EFGT to claim a deduction for interest expenses actually incurred': Reasons [198]. 91 The Commissioner submitted that the primary judge's conclusions are based only on the observed continuation of funding activities after January 1990; that his Honour's reasoning does not constitute a commonsense or practical weighing of all the factors to provide the ultimate answer: cf., Fletcher at 19. After January 1990, the purpose of those same funding activities had changed. According to the Commissioner, his Honour ought properly to have concluded that the interest outgoings claimed by the respective taxpayers were not properly to be characterised as genuinely and not colourably incurred in gaining or producing assessable income: cf., Fletcher at 19. 92 The Commissioner again observed, as he did in relation to the first issue, that: (1) After 1990 EFGA ceased to charge a margin over its cost of funds to ELFIC and to EFGS: Reasons [123]; (2) the employment of funds advanced to ELFIC and to EFGS was not profitable for EFGA as it had been before 1990: Reasons [124]; (3) EFGA carried on its activities after 1990 at the direction of others, including, ultimately, FGL: Reasons [124]; (4) the internal provision of loan funds to ELFIC and EFGS from 1989 was not part of a coherent course of conduct but occurred as individual responses from time to time to external exigencies created by circumstances of the external financial climate: Reasons [228]. 93 It was submitted by the Commissioner that further funds, originating with FGL, were provided, through EFGA, only to facilitate the management and disposal of the Finance group's assets without any real intention or expectation of profit but to protect and maximise the interests of the Foster's Group as a whole. 94 According to the Commissioner, having regard to those matters, the taxpayers' claimed interest expenses were colourably incurred in terms of its connection to the purpose of gaining or producing assessable income. From 1990 each ceased to employ the funds it borrowed with any intention or expectation of making a profit. Rather, the evidence showed that the interest which continued to be charged by EFGA and the other companies in the funding chains had a different purpose: (1) To protect FGL from the risk that equity funding would become available to third party litigation creditors of the companies in the Finance group (before the security structure was put in place in or about October 1991); (2) interest was referred to as necessary for taxation and statutory requirements, maintained for technical reasons and as a notional cost of capital. The main concern was to ensure that inter-company accounts matched. Ultimately, then, it was preferable to book the interest on the debts owing by EFGA and later, EFGT, to notionally balance out the additional costs to FGL in funding the Finance group; (3) as well as because of previously expressed concerns with respect to litigation creditors, EFGA's request for interest-free funding in April 1991 was rejected and the practice of charging interest on debt it owed was maintained because of the adverse impact interest-free funding would have on FGL's ability to pay a dividend (which would be reduced by the interest expense FGL would otherwise have to bear as the ultimate source of funding to the Finance group). 95 In addition, the Commissioner pointed to EFGT having: (1) Commenced lending to EFGA in or about October 1991, some months after EFGA acknowledged, by its request for interest-free funding, that it would be unable to meet future funding costs; (2) functioned as nothing more than a funding conduit to EFGA to secure funding provided by FGL for the purposes of protecting FGL from third party litigation creditors of Finance group companies. 96 Finally on this issue, the Commissioner submitted that Amayana's prospects of profitably employing funds it borrowed from FGL were even more remote than EFGTs. Furthermore, Amayana's interests were consistently sacrificed in the interests of FGL. It was left with unsecured debt when the security structure was established to facilitate the interests of FGL. Subsequently, it acquired EFGA's debts to EFG Financial in order to facilitate the sale of the latter. There was no basis in the evidence for the primary judge's finding (Reasons [189]) that there was a frequent and often nice exercise of business judgment in the conduct of Amayana's affairs. 97 The respondents contended that the Commissioner's contention, referred to in [91] above, concerning the conclusion the primary judge ought to have reached in the face of Fletcher, was incorrect for two substantive reasons. 98 First, as the primary judge found, the explanation for why in relation to ELFIC and EFGS the interest expenses exceeded the income derived in the years in question lies in the adverse economic and commercial factors which affected their businesses and not in the independent pursuit of some objective other than the production of assessable income: Reasons [176], [194]. The evidence is clear. The affairs of ELFIC and EFGS were conducted to maximise the financial return from their business: Reasons [36]. According to the respondents, there can be no issue as to the application of the Fletcher principle or Ure to ELFIC and EFGS. I agree with this submission. 99 The same conclusion is to be drawn in relation to the affairs of EFGA, EFGT and Amayana. There can be no suggestion that the affairs of those companies were conducted for any objective other than to achieve the greatest possible financial return from their businesses: Reasons [36]. The losses sustained by them are to be explained by the economic circumstances which affected their businesses, and not by the independent pursuit of some non-income production objective. Again, I agree with this submission. 100 According to the respondents, for EFGA, EFGT and Amayana there is a second compelling reason why the Commissioner's reliance upon Fletcher and Ure is misconceived. In relation to those companies, there was no 'disproportion' between the outgoing and the income produced. For the period from 1990 to 1998, for each of those companies the interest incurred substantially equalled or was less than the interest accrued which was recognised and returned as assessable income: see Appendix 3, Table 3 for EFGA; Appendix 3, Table 8 for EFGT; Appendix 3 Table 9 for Amayana. In those circumstances, the Fletcher and Ure principles are inapplicable. 101 The respondents submitted that the matters referred to by the Commissioner noted at [92] to [96] above do not demonstrate that the interest expenses of EFGA, EFGT, ELFIC, EFGS and Amayana were 'colourably incurred'. Again, I agree. As the primary judge found in relation to each of those companies, the interest was the recurrent or periodic cost to each company for securing the use of loan funds: see [72] above. 102 Finally, on this aspect of the issue, the respondents submitted that the Commissioner incorrectly submitted (see [96] above) that there was no basis in the evidence for the primary judge's finding that there was a frequent and often nice exercise of business judgment in the conduct of Amayana's affairs. They observed that at trial they produced a number of witnesses who had responsibility for controlling, managing and undertaking the companies of the Foster's Group so far as they related to the affairs of the Finance group; they referred in particular to Mr O'Grady, Mr Johnson and Mr Tan. They submitted it was open to his Honour on the basis of that evidence to conclude as he did at [189] of his Reasons. The Commissioner did not challenge this evidence on the appeal. 103 In summary, what the Commissioner seeks to do under the umbrella of cases such as Ure, Fletcher and Spassked, and contrary to established authority of the cases referred to below, is introduce into the test for deductibility under s 8-1(1) notions of motive and subjective purpose going to the ultimate end to which the business activities of the relevant respondent companies were directed and how best to achieve that objective, rather than accept that the question of whether expenditure is incurred for the purpose of carrying on a business is to be determined objectively by reference to the relationship between what the expenditure is for and the taxpayer's undertaking or business: Magna Alloys & Research at 225 per Brennan J (see [89] above). 104 As Dixon J said in Federal Commissioner of Taxation v Midland Railway Co of Western Australia Ltd (1952) 85 CLR 306 at 313: '[W]hat governs the issue is the business purposes for which the outgoing was incurred from the point of view of the taxpayer company. The controlling factors are those which arise from the character of the business or undertaking and the relation which the expenditure or the liability to make it bore to the carrying on of the business or the gaining of assessable income.' And as Brennan J responded at 222 in Magna Alloys & Research: 'Once the "controlling factors" are ascertained, the business purposes for which an outgoing is incurred may be determined. In that step towards characterization, the taxpayer's state of mind has no part to play. His purpose or motive is not a controlling factor of the purpose to be attributed to the incurring of the expenditure. But in ascertaining the controlling factors, the taxpayer's state of mind may have a significant evidentiary role to play, and by leading to the ascertainment of the controlling factors, it may even be the determinative element in characterizing expenditure in a particular case. Nevertheless, the taxpayer's state of mind - whether intention, or purpose, or motive - is evidentiary only. What the taxpayer has in mind may bear upon "the character of the business or undertaking" in showing the scope of his business or undertaking. The taxpayer is at liberty to determine for himself what the scope and nature of his business or undertaking shall be and how it shall be conducted, the Act having no effect upon those matters but taking "the result of the taxpayer's activities as it finds them": per Williams J in Tweddle v FC of T (1942) 7 ATD 186 at 190; 2 AITR 360 at 364. Fullagar J, referring to the operation of "necessarily" in the second limb of s 51(1), said in Snowden & Willson Pty Ltd, supra, (99 CLR at 444; 7 AITR at 317): "It means for practical purposes that, within the limits of reasonable human conduct, the man who is carrying on the business must be the judge of what is 'necessary'." And thus what the taxpayer says are the character and scope of his business or undertaking is evidence of what its character and scope are in fact.' (Emphasis added.) 105 For the foregoing reasons, there was, in my view, no error in the primary judge's conclusion that the interest expenses claimed by EFGA, EFGT, ELFIC, EFGS and Amayana as deductions were incurred by each of them in carrying on business for the purpose of gaining or producing assessable income and that, in consequence, the requirements for deductibility under s 8-1(1) are satisfied. It remains to consider the requirements of s 8-1(2) to which I now turn. 106 Notwithstanding satisfaction of the requirements of s 8-1(1), s 8-1(2)(a) will deny a deduction for a loss or outgoing if it is, inter alia, a loss or outgoing of capital, or of a capital nature. 107 The Commissioner says that the fact that an outgoing is called or labelled 'interest' does not determine its character as an outgoing on revenue account; that it is necessary to determine the 'essential character' of the liability; that in doing so, the nature of the advantage sought is the chief, if not the critical factor in determining the essential character: Commissioner of Taxation v Citylink Melbourne Limited (2006) 228 CLR 1 at [148] per Crennan J (with whom Gleeson CJ, Gummow, Callinan and Heydon JJ agreed); GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1990) 170 CLR 124 at 137; that the nature of the advantage is to be determined objectively: St George Bank v Commissioner of Taxation (2008) 69 ATR 634; and essential character is to be considered from a practical and business point of view: Hallstroms Pty Ltd v Federal Commissioner of Taxation (1946) 72 CLR 634 at 648. 108 So much may be accepted, although there are nuances which come out of the labyrinth of cases that have been decided by the courts of this country over nearly 100 years of federal income tax legislation on the capital/income distinction in the context of the construction and application of s 51(1) (s 8-1) that, arguably, give lie to its accuracy or, at best, entitle one to criticise it as an over-simplification. More importantly, as a statement of principle it takes us nowhere. As has often been said of the distinction, it is not so much the principles that are in doubt, but the application of those principles to a given set of facts. 109 The Commissioner accepts that ordinarily interest will be on revenue account if incurred in the course of an income-producing activity. In Texas Company (Australasia) Ltd v Federal Commissioner of Taxation (1940) 63 CLR 382 at 468 Dixon J said; 'Some kinds of recurrent expenditure made to secure capital or working capital are clearly deductible. Under the Australian system interest on money borrowed for the purpose forms a deduction. So does the rent of premises and the hire of plant. No doubt the difficulty of assigning an outgoing to capital or income is often very great.' This passage has been repeatedly relied on over the years. 110 It will be a rare case where interest incurred by a company in raising money which it uses as capital or working capital in the course of its business is found to be of a capital nature. That there may be particular circumstances where that occurs was recognised in Steele v Deputy Commissioner of Taxation (1999) 197 CLR 459 at [29] where Gleeson CJ, Gaudron and Gummow JJ said: 'As was explained in Australian National Hotels Ltd v Commissioner of Taxation [(1988) 19 FCR 234 at 239 - 241], interest is ordinarily a recurrent or periodic payment which secures, not an enduring advantage, but, rather, the use of borrowed money during the term of the loan. According to the criteria noted by Dixon J in Sun Newspapers Ltd v, Federal Commissioner of Taxation [(1938) 61 CLR 337 at 359-363], it is therefore ordinarily a revenue item. This is not to deny the possibility that there may be particular circumstances where it is proper to regard the purpose of the interest payments as something other than the raising or maintenance of the borrowing and thus, potentially, of a capital nature,' (See, for example, RW Parsons, Income Taxation in Australia at [6.111].) 111 At that time, the High Court was unable to refer to any judicial authority which exemplified this possibility for the simple reason that there was none; hence the Court's reference to the circumstance postulated in the learned author's work. Since that time, Full Courts of this Court have considered factual situations in two cases, one involving a finance company and the other a bank, where it was concluded that the circumstances were such that interest outgoings incurred by the taxpayer on moneys borrowed and used in the course of carrying on their finance/banking businesses were nevertheless of a capital nature: Macquarie Finance Ltd v Commissioner of Taxation (2005) 146 FCR 77; St George Bank Ltd v Federal Commissioner of Taxation (2009) 176 FCR 424. While the Commissioner seeks to rely on these cases, or at least the first in support of his contention that the interest expenses in the present case are, for each of the relevant respondent taxpayers, of a capital nature and therefore not deductible, thankfully it is not necessary to 'drill down' into the processes of reasoning which led to the conclusion reached in each of those cases; the facts of the present case are so far removed from the facts in those cases as to make that reasoning irrelevant. 112 More importantly for present purposes, was what was said in the joint judgment in the High Court in Steele in the passage that immediately followed the extract reproduced in [110] above. Their Honours said (at [29]): 'However, in the usual case, of which the present is an example, where interest is a recurrent payment to secure the use for a limited term of loan funds, then it is proper to regard the interest as a revenue item, and its character is not altered by reason of the fact that the borrowed funds are used to purchase a capital asset. The fact that the asset has not yet become, and may never become, income-producing may be relevant to a decision as to whether the case falls within the first limb of s 51(1). However, once it is determined, or accepted by hypothesis, that the interest is, during the relevant year, an outgoing incurred in gaining or producing the taxpayer's assessable income [or in carrying on a business for that purpose], (even though no assessable income is derived during that year, and no such income may ever be derived), the circumstance that the capital asset has produced no income is not a reason to conclude that the interest is an outgoing of a capital nature.' (Emphasis added.) 113 The analysis and conclusion manifest in this passage from their Honours' reasons may be enough to conclude this aspect of the issue in favour of the respondents. Nevertheless, in deference to the Commissioner's submissions, I turn to address them in the context of the primary judge's findings. 114 The primary judge held that the interest was revenue in nature, because even if the loan principal is properly to be regarded as a capital asset in the hands of the lender, the interest paid to secure that capital sum or keep it in circulation is on revenue account: Reasons [200]. The authority the primary judge relied on was a passage from the judgment of Bowen CJ and Burchett J, in Australian National Hotels Ltd v Commissioner of Taxation (1988) 19 FCR 234 at 240, where their Honours said: 'If the capital is raised by loan, an investment of the borrowed moneys in a business will ordinarily remain an investment of capital, and the same consequences will follow. But there is a special feature of loan capital, which flows from the ephemeral nature of a loan. The cost of securing and retaining the use of the capital sum for the business, that is to say, the interest payable in respect of the loan, will be a revenue item. It creates no enduring advantage, but on the contrary is a periodic outgoing related to the continuance of the use by the business of the borrowed capital during the term of the loan.' 115 The Commissioner had argued that the debtor companies incurred the interest expense so as to protect FGL's position as an unsecured creditor of the Finance group, to preserve the full rebate on dividends flowing to FGL and to achieve a 'balancing out' of additional costs incurred by FGL in funding the Finance group. But the primary judge held that the extraneous purposes the Commissioner identified did not disentitle the debtor companies from claiming the interest expense on revenue account: Reasons [199], [200]. 116 The Commissioner submitted that the primary judge erred in his conclusion on this issue. The Commissioner referred to Macquarie Finance at first instance (2004) 210 ALR 508 where Hill J referred to Australian National Hotels in the course of deciding that interest on money that Macquarie Finance borrowed was capital in nature. At [63] his Honour said: 'The emphasis their Honours place is on "the ephemeral nature" of the loan. In the circumstances of the present case the close relationship between the notes and the preference shares, as well as the fact that MBL can ensure the loan is never repayable but that an investor is left commercially only with MBL preference shares, can be seen to produce a different result. The present case is not concerned with the cost of acquiring or maintaining a loan of an ephemeral character, but rather with the cost of a capital raising which so far as MBL is concerned is the cost of a permanent injection of capital. The circumstance that the capital is in the present conditions used to make loans to Macquarie Leasing is not determinative.' 117 The Commissioner in his submissions observed that a majority of the Full Court (French and Gyles JJ) upheld Hill J's decision. Although French and Gyles JJ preferred to uphold the decision on the basis that the interest was not deductible under s 8-1(1), they agreed that it was also capital in nature. In a persuasive reasoned analysis, Hely J dissented on both limbs. 118 The Commissioner submitted that, like the loans in Macquarie Finance, the loans here manifest the features of permanent capital, rather than debt. The funds borrowed by EFGT, Amayana and EFGA were poured into the 'tottering subsidiaries', at FGL's direction to protect the investment FGL had been forced to make following withdrawal of EFGA's external funding lines; cf., Levin & Co Ltd v Commissioner of Inland Revenue [1963] NZLR 801. None of the taxpayers were seeking to derive income for itself or to conduct business for that purpose but to maximise profits in the interests of FGL and its shareholders. The funding was provided in what was, in effect, the informal liquidation of the Finance group in circumstances where there was an insufficiency of shareholders' funds and no profits for distribution. The funding was needed to shore up the insufficiency in shareholders' funds long enough to secure an orderly realisation of the residual assets and provided as necessary to meet the weaknesses in the capital structures of ELFIC and EFGS whilst limiting equity funding to optimise recoveries in the light of possible claims by litigants. The interest incurred on those funds was not, then, incurred for the purpose of earning assessable income. Further or alternatively, properly characterised, the claimed interest deductions were expenses of a capital nature. 119 There are a number of difficulties with the Commissioner's submissions, most, if not all of which, stem from his attempt to assimilate the 'essential character' of the interest expenses claimed by the relevant respondent taxpayers in the present case with the interest outgoings of the taxpayer under review in Macquarie Finance. 120 First, while Hill J (at first instance) approached the deductibility of the interest in Macquarie Finance from an holistic basis - looking at s 8-1 as a whole - the majority on appeal approached the issue on a bifurcated basis - first by reference to s 8-1(1) and only then by reference to s 8-1(2). Both held that the interest payments on the notes were not incurred by Macquarie Finance Ltd ('MFL') in gaining or producing assessable income nor necessarily incurred in carrying on a business for that purpose: French J at [103], [104]; Gyles J at [255]. Here, the primary judge found that the interest expenses claimed by the relevant respondent taxpayer did satisfy the requirements of s 8-1(1), a finding with which I am in total agreement. That being so, what was said in the joint judgment in the High Court in Steele at [29] (see [112] above), comes into play and the fact that no income, or less income than the interest outgoing, is produced in the relevant year of income 'is not a reason to conclude that the interest is an outgoing of a capital nature'. 121 Second, the factual matters which the Commissioner asserted assimilates the loans to the relevant respondent taxpayers in the present case to the loan in Macquarie Finance do not withstand scrutiny. (1) It is said that the loans here manifest the features of 'permanent capital' rather than 'debt' but apart from that bald statement, the manifestation is not explained by reference to any distinguishing criteria in characterising 'permanent capital', on the one hand, and 'debt' on the other, let alone identifying the criteria referable to 'permanent capital' exhibited by the loans to the relevant respondent taxpayers in the present case. (2) It is said that the funds borrowed by EFGT, Amayana and EFGA were poured into: (i) 'tottering subsidiaries' (a phrase taken from Levin); and (ii) at FGL's direction to protect the investment FGL had been forced to make following withdrawal of EFGA's external funding lines. The fact that the subsidiary borrowers were in financial difficulty at the time loans ('underlying loans') to them were made or that the underlying loans were made at the direction of the ultimate parent company does not convert the interest outgoings, on loans ('funding loans') made to fund the underlying loans, from outgoings of a revenue nature to outgoings of a capital nature. To suggest otherwise would be to deny deductibility for interest incurred on moneys borrowed to fund interest-bearing loans to borrowers in financial difficulty, or where such loans were made at the direction of the lender's parent. These matters are irrelevant to the issue of the characterisation of the interest outgoings on the funding loans as being on revenue or capital account. (3) It is said that none of the relevant respondent taxpayers were seeking to derive income for itself or to conduct business for that purpose but to maximise profits in the interests of FGL and its shareholders. But it is not in dispute that the relevant respondent taxpayers did derive income for themselves, and in amounts approximating, or in some cases even exceeding, their annual interest outgoings; and that they did carry on business. Every subsidiary company that carries on business and derives income in the process is doing so for itself even though its profits ultimately enure for the benefit of its parent and its shareholders. Even if, as one would hope to be the case in a well-run business, the subjective motivation or purposes of those who controlled the relevant respondent taxpayers extended to maximising profits for the ultimate benefit of FGL and its shareholders, that would not convert what was otherwise be an outgoing of a revenue nature into one of a capital nature. (4) The same comment can be made of the Commissioner's observation that the funding was provided in what was, in effect, the informal liquidation of the Finance group in circumstances where there was an insufficiency of shareholders' funds and no profits for distribution; as it can of his observation that funding was needed to shore up the insufficiency in shareholders' funds long enough to secure an orderly realisation of the residual assets to meet the investments in the capital structures of ELFIC and EFGS whilst limiting equity funding to optimise recoveries in the light of possible claims by litigants. There are business considerations which dictate how the business is carried on in pursuit of its business objectives. Even if all of these considerations were uppermost in the minds of those charged with responsibility in the decision-making process involved in the making of the underlying loans, as to which there is no finding, this would not alter the essential character of the interest on the funding loans in the objective circumstances as found, namely, that the loans were income-producing and made in the ordinary course of business of the relevant respondent taxpayers, irrespective of how those businesses may be described. 122 In making these submissions, the Commissioner placed considerable reliance on the decision of the New Zealand Court of Appeal in Levin, in particular for his submission that simply because the same activities of lending money were carried on after 1990 as were carried on before 1990, this was no foundation to characterise the post-1990 activities in the same way as the pre-1990 activities, where relevant circumstances had changed. As a matter of principle, so much may be accepted. However, not only is the factual context of Levin very different from the one under consideration in the present case, it concerned a totally different statutory context. Moreover, at the end of the day, the reason why the majority (Turner and McCarthy JJ) held that write-offs in respect of advances made after 1 August 1958 were not deductible whereas write-offs in respect of advances made prior to 1 August 1958 were deductible was that the taxpayer had not discharged the onus in respect of loans made after that date. In the words of McCarthy J at 844: 'I do not overlook that there is authority for the proposition that further loans advanced to salvage loans made in the course of the normal activity of a money-lending company partake of the nature of the original advances and do not thereby become capital; but the appellant here was in a somewhat different situation from that of the appellant in Calders Ltd. v Commissioners of Inland Revenue 1944 S.C. 433; (1944) 26 T.C. 213. Here the appellant had a large capital investment in Snowcraft, and moreover had a liability under its guarantee to the bank. Inevitably, one would think, when considering whether or not further loans would be advanced, the protection of the capital position of Snowcraft must have arisen in the minds of the appellant's directors and would have influenced them. But it is not necessary to go as far as that. The onus is on the appellant to show that those loans were not of the character claimed by the Commissioner, that is that they were not of a capital nature and were made wholly in the earning of the assessable income of the appellant. Whilst I am prepared to say that the appellant discharged that onus in respect of loans made up to 1 August 1958, it certainly has not discharged the onus in respect of loans made after that date. In these circumstances I find myself, as does Turner J., unable to say that the whole of the £75,000 is necessarily deductible. Whether all that sum or less should be allowed depends, as Turner J. points out, on a number of considerations which were not really canvassed before us.' For these reasons, very little, if anything, can be drawn from the decision. It certainly does not support a conclusion based on the facts found by the learned primary judge that, while EFGA's money-lending activities prior to 1990 are conceded to be on revenue account, such activities after that time were on capital account. 123 For the foregoing reasons the interest expenses claimed by the relevant respondent taxpayers were not outgoings of a capital nature so as to be denied deductibility under s 81(2)(a). 124 It follows that this ground of the Commissioner's appeals cannot be sustained.

LOSS TRANSFEREE COMPANIES - ASHWICK, NEXDAY AND EFGI 125 It also follows that, subject to the application of Pt IVA of the 1936 Act which is considered below, consistently with the findings of the primary judge at Reasons [216], [219] and [222], the losses transferred to the respondent taxpayers mentioned below (each a 'transferee') in the year(s) and amount(s) set opposite the name of each transferee -

1. Ashwick 1997: $30,213 1998: $23,628 2001: $145
2. Nexday 2000: $139,290
3. EFGI 1996: $739,340 were available to be transferred to the relevant transferee in the relevant year(s) and is/(are) allowable deduction(s) to that transferee in that/(those) year(s).

PART IVA 126 The Commissioner made determinations pursuant to s 177F of the 1936 Act cancelling the deduction(s) otherwise allowable to each respondent. Details of the deduction(s) cancelled in respect of each respondent, the year in which it/(they) was/(were) otherwise allowable and the amount(s) of the deduction(s) cancelled is(are) set out in Table 3 in [8(4)] of the Commissioner's written submissions and reproduced in [9] above. 127 The Commissioner contended that the primary judge erred in holding that Pt IVA of the 1936 Act does not operate to cancel the deduction(s) that are otherwise allowable to each respondent. 128 In so holding the primary judge found in relation to each respondent: (1) The acts referred to by the Commissioner did not constitute a scheme within the meaning of Pt IVA: Reasons [226] - [228]; (2) even if they did constitute a scheme, each respondent did not obtain a tax benefit in connection with the scheme within the meaning of s 177C: Reasons [229] - [237]; (3) even if the respondent did obtain a tax benefit in connection with the scheme, having regard to the matters referred to in s 177D(b) it would not be concluded that any person who entered into the scheme or any part thereof did so for the sole or dominant purpose of enabling the respondent to obtain a tax benefit: Reasons [238] - [270]. 129 In summary, the Commissioner says that the charging of interest by FGL, Amayana, EFGT and EFGA and the incurring of interest expense by Amayana, EFGT, EFGA, ELFIC and EFGS until 1998 has no commercial explanation when: (1) Foster's Group management accepted in 1991 that the interest so charged could not be paid, having particular regard to the terms of the memorandum of April 1991 by which the Finance group requested interest-free funding and the subsequent memorandum from Latchford to Johnson, dated 26 August 1991 in which alternative means of addressing EFGA's deficiency of net assets as at 30 June 1991 were, again, considered. (2) FGL's funding of the Finance group was protected from litigation creditors by the security structure which was put in place in October 1991 and was sufficient to secure the residual assets of the Finance group; (3) the charging, capitalising and compounding of interest at successive levels of the financing structure provided multiple deductions in respect of the debt funding needed to support ELFIC and EFGS for an aggregate amount well in excess of the actual cost to the Foster's Group and when it was reasonable to conclude that the corresponding interest income flows to group companies would be reversed by bad debt deductions given ELFIC and EFGS could not pay interest; (4) Finance group assets regarded as capable of returning a profit were deliberately removed in 1997, having particular regard to the creation of the New Lensworth Group. 130 Further, with respect to creditor companies, the Commissioner pointed to the fact that loan repayments were allocated first to principal and second to interest. This is contrary to the usual presumption. It did, however, increase the proportion of the loan accounts, which comprised interest. 131 In relation to EFGA, the tax benefit of $976,023,874 in respect of its bad debt write-off is attributable to unpaid interest of $911,209,176 and to principal of $64,814,498. The Commissioner pointed out that he did not apply Pt IVA to principal of $326,426,473 that EFGA also wrote-off as bad. The tax benefit includes a principal component of $64,814,498 because repayments of that amount were allocated to interest. If the interest had not been charged, those repayments would have reduced the principal, which would therefore not have given rise to a bad debt deduction to that extent. 132 Accordingly, the continued charging of interest in respect of the successive levels of internal funding and the creditor companies' conduct in allocating loan repayments in a manner that maximised the interest component of the bad debts written off, are courses of conduct and actions mainly explicable by the taxation advantages that were preserved and then crystallised when the internal debts were written off and significant losses transferred to other profitable companies in the Foster's Group. 133 In short, it was at the forefront of the Commissioner's submissions that the respondents have never sought to explain what commercial advantage the creditor companies sought to obtain by continuing to charge interest on their internal loans between April 1991 and June 1998. The short answer to this submission is that no explanation as to commercial advantage is necessary because it is self-evident: to conduct their respective businesses at a profit. If they had conducted their respective businesses by borrowing money at interest and lending the money so borrowed free of interest, or even at a rate of interest less than the rate at which they borrowed, their respective businesses would have been run at a loss. Indeed, ongoing activity of that kind may well call into question whether any business was being carried on at all, particularly if the view were taken that the creditor companies, apart from perhaps FGL, were not carrying on business as holding companies: see Spassked at [84] and [85] per Hill and Lander JJ, or were not intermediate holding companies of the kind considered in Commissioner of Taxation v EA Marr & Sons (Sales) Ltd (1984) 2 FCR 326.

Scheme 134 The first requirement that must be satisfied to entitle the Commissioner to make a determination under s 177F(1) is that a person has entered into or carried out or commenced to carry out a 'scheme' as defined in s 177A(1). 135 The primary judge concluded that the steps taken between 1989 and 1998 to provide the members of the Finance group with loan funds from internal, instead of external, sources did not amount to a scheme: Reasons [227]. The basis for the primary judge's conclusion was that there was no coherent course of conduct to be found in the internal provision of loan funds from 1989. At [228] of his Reasons, his Honour said: 'I accept that course of conduct may constitute a "scheme" even if it occurs as part of a larger series of transactions; see Federal Commissioner of Taxation v Consolidated Press Holdings Ltd (2001) 207 CLR 235, at 254 [52]. However, the internal provision of loan funds to ELFIC and EFGS from 1989 was not part of a coherent course of conduct but occurred as individual responses from time to time to external exigencies created by circumstances of the external financial climate. The fact that intra-group loans were made at interest does not signify the existence of a scheme. Intra-group loans had commenced before 1989. Moreover, the loans from external sources which they replaced had also been at interest and the charging of interest has been adequately explained by the need to preserve an index by which the performance or profitability of borrowers within the Finance Group could be measured.' 136 The Commissioner submitted that his Honour's approach was contrary to authority and referred to what Gummow and Hayne JJ said in Commissioner of Taxation v Hart (2004) 217 CLR 216 at [43]: '"[S]cheme" is defined, in s 177A(1), in terms that may not always permit the precise identification of what are said to be all of the integers of a particular "scheme". So much follows from the inclusion, within the statutory meaning, not only of arrangements that are not and are not intended to be enforceable by legal proceedings, but also "any scheme, plan, proposal, action, course of action or course of conduct". This definition is very broad It encompasses not only a series of steps which together can be said to constitute a "scheme" or a "plan" but also (by its reference to "action" in the singular) the taking of but one step. The very breadth of the definition of "scheme" is consistent with the objective nature of the inquiries that are to be made under Pt IVA.' 137 At [47], their Honours said further: [T]here is no basis to be found in the words used in Pt IVA for the introduction of some criterion additional to those identified in the Act itself. There is no reference to a scheme having some commercial or other coherence.' (Emphasis added.) 138 In my view, while a lack of some commercial or other coherence may not impede a conclusion as to the existence of a scheme, it may impede the drawing of a conclusion as to the purpose of a party to the scheme under s 177D(b) sufficient to entitle the Commissioner to make a determination under s 177F(1) and so trigger the application of Pt IVA to the scheme as identified. I return to this matter at [168] of these reasons below. 139 I agree with the Commissioner's submission there can be no doubt that each of the: (1) charging of interest by each of FGL, Amayana, EFGT and EFGA; and (2) incurring of interest expense by Amayana, EFGT, EFGA, ELFIC and EFGS, throughout the 1990s, constituted a course of conduct within the meaning of 'scheme' in s 177A(1). 140 I also agree with his submission that: (1) the allocation of loan repayments to creditor companies as between principal and interest; (2) the writing-off of outstanding debts by each of EFGA, EFGT and FGL in the 1998 year and by Amayana in the 1999 year; and (3) the transfer of losses to profitable companies in the Group and the terms of those transfers, were 'actions' or 'a course of action' within the definition of 'scheme' in s 177A(1). 141 On the appeals, the respondents submitted that the scheme as alleged conflicts with the enquiry required by Pt IVA. Objective purpose is to be determined when the scheme is entered into: CPH Property Pty Ltd v Federal Commissioner of Taxation (1998) 88 FCR 21 at 42. Here the date disclosed by the Commissioner's description of the scheme is November 1989. However, the provision of loan funds to the members of the Finance group from internal sources instead of external sources (being the core of the scheme alleged) commenced before November 1989 and many of the steps said to constitute the scheme occurred thereafter as individual responses to external economic factors. The Commissioner, by his selection of November 1989 as the start date of the scheme, describes at most a part of the scheme. That, say the respondents, is insufficient for the purposes of Pt IVA. 142 They also submitted that in relation to EFGA, Amayana and EFGT, there is an additional and independent reason why the steps identified by the Commissioner do not constitute a scheme within the meaning of s 177A(1). The alleged scheme is not defined by reference to, and cannot stand with, the tax benefits alleged by the Commissioner. The tax benefits allegedly include deductions for interest outgoings on intra-group loans where the assessable income of the relevant respondents is comprised of interest earned on intra-group loans. The assessments which the Commissioner issued, allegedly in order to cancel the tax benefits under Pt IVA, disallow the interest deductions and assess the interest earned. However, the scheme identified by the Commissioner, namely, the funding by intra-group loans at interest in and after November 1989, encompasses both interest outgoings and interest income. Similarly, the tax benefits alleged include deductions for bad debts written off in respect of intra-group loans where the assessed income of the relevant respondents is comprised of interest earned on those loans. In those circumstances, the respondents contended that the scheme identified by the Commissioner cannot stand with the tax benefits asserted by him and the assessments raised. For example, EFGA earned interest income on its loans to ELFIC and EFGS. However, the Commissioner denied the deductions for interest claimed by EFGA on its borrowings from EFGT and Amayana. EFGT and Amayana earned interest income on their loans to EFGA. However, the Commissioner denied the deductions for interest claimed by EFGT and Amayana on their borrowings from FGL and FBGTA, respectively. 143 I am not persuaded that the matter raised in [141] above impedes a conclusion as to the existence of a scheme of the kind alleged by the Commissioner. That said, the existence of the same activity constituting the scheme at an anterior point in time to when it is said the relevant taxpayer entered into the scheme, may too impede the drawing of a conclusion as to the purpose of a party to the scheme under s 177D(b), sufficient to entitle the Commissioner to make a determination under s 177F(1) and so trigger the application of Pt IVA to the scheme as identified. I return to this matter at [166] of these reasons below. 144 Similarly, I am not persuaded that the matters raised in [142] above impede a conclusion as to the existence of a scheme of the kind alleged by the Commissioner. They are matters, it seems to me, which may be the subject of claims for compensating adjustments pursuant to s 177F(3) but, as a practical matter, that potentially would only arise if a relevant s 177F(1) determination was ultimately upheld. On the other hand, the matters raised in [142] above may too impede the drawing of a conclusion as to the purpose of a party to the scheme under s 177D(b) sufficient to entitle the Commissioner to make a determination under s 177F(1) and so trigger the application of Pt IVA to the scheme as identified. 145 In the alternative, the Commissioner sought to rely upon a narrower description of the scheme than that put at trial. In relation to the various respondents he contended as follows: (1) In relation to ELFIC and EFGS, the: (i) continued charging of interest by EFGA on debts owing by ELFIC and EFGS after April 1991, including ELFIC's and EFGS's claims for deductions for interest on the debts owing to EFGA; and (ii) loss transfers by ELFIC and EFGS, were together a scheme; (2) in relation to EFGA, the: (i) continued charging of interest on the loans to ELFIC and EFGS after April 1991; (ii) writing off by EFGA of debts owed by ELFIC and EFGS that were bad; and (iii) transfers by EFGA of losses resulting from the bad-debt write-offs and interest incurred on its debts owing to EFGT, were together a scheme; (3) in relation to EFGT, the: (i) charging of interest by EFGT on debts owed to it by EFGA and the charging of interest by FGL on debts owed to it by EFGT after October 1991; (ii) writing off by EFGT of debts owed by EFGA that were bad; and (iii) transfer of losses resulting from the deductions claimed by EFGT for bad debts written off, and from interest incurred on its debts owing to FGL, were together a scheme; (4) in relation to Amayana, the: (i) charging of interest by Amayana on debts owed to it by EFGA and the charging of interest by FBGTA on debts owed to it by Amayana after July 1990; (ii) writing off by Amayana of debts owed to it by EFGA that were bad, and (iii) transfer of losses resulting from the deductions claimed by Amayana for bad debts written off, and for interest incurred on its debts owing to FBGTA, were together a scheme; and (5) in relation to FGL, the: (i) charging of interest by FGL on debts owed to it by EFGT after October 1991; (ii) writing off by FGL of debts owed to it by EFGT that were bad; and (iii) transfer of losses resulting from the deductions claimed by FGL for bad debts written off, were together a scheme. 146 Whatever the form of articulation of the scheme or schemes, I propose to consider whether the Commissioner was entitled to make the s 177F(1) determinations that he did on the basis that there was a scheme or schemes of the kind upon which the Commissioner relied on the hearing of the appeals.

Tax Benefit 147 The second requirement that must be satisfied to entitle the Commissioner to make a determination under s 177F(1) is that a taxpayer has obtained a tax benefit in connection with the scheme: s 177D(a). 148 A 'tax benefit' is defined relevantly in s 177C(1)(b) in the terms set out in [15] above. 149 The tax benefits contended for by the Commissioner are as follow: (1) for EFGA - deductions claimed in the 1998 year of income for the write-off of debts comprising outstanding loan principal and unpaid accrued interest in respect of loans to ELFIC and EFGS, and for interest expenses incurred on borrowings from Amayana and EFGT; (2) for ELFIC and EFGS - deductions claimed (in the 1995 to 1997 years of income and 1996 and 1997 years of income, respectively) for interest expenses incurred on borrowings from EFGA; (3) for FGL - deductions claimed in the 1998 year of income for the write-off of debts comprising unpaid accrued interest on loans to EFGT; (4) for EFGT - deductions claimed in the 1998 year of income for interest expenses incurred on borrowings from FGL and for the write-off of debts comprising unpaid interest accrued on loans to EFGA; (5) for Amayana - deductions claimed in the 1998 year of income for interest expenses incurred on borrowings from FBGTA and in the 1999 year of income for the write-off of debts comprising unpaid interest accrued on loans to EFGA; (6) for Ashwick, Nexday and EFGI - the deductions for transferred losses derived from the deductions referred to in paras (1) to (5) above. 150 The determination of whether there is a tax benefit under s 177C(1)(b), and its quantum, requires a determination of whether, and the extent to which, if the scheme had not been entered into or carried out, a deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the relevant respondent taxpayer. 151 The question whether an amount would or might reasonably be expected to have been allowable as a deduction to the taxpayer involves an enquiry as to what the taxpayer would reasonably be expected to have done if the scheme had not been entered into: see Macquarie Finance (2004) 210 ALR 508 at [81] (Hill J) and (2005) 146 FCR 77 at [204] (Hely J). 152 This requires a prediction as to events which might have taken place if the relevant scheme had not been entered into (referred to in the cases as the 'counterfactual' or the 'alternative hypothesis' or the 'alternative postulate') and that prediction must be sufficiently reliable for it to be regarded as reasonable: Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359 at 385. A reasonable expectation requires more than a possibility: Peabody at 385; Essenbourne Pty Ltd v Federal Commissioner of Taxation (2002) 51 ATR 629 at [42]. It is necessarily a hypothetical analysis: Federal Commissioner of Taxation v Trail Bros Steel & Plastics Pty Ltd (2010) 186 FCR 410 at [30]; Federal Commissioner of Taxation v AXA Asia Pacific Holdings Ltd (2010) 189 FCR 204 at [132]. 153 The following general propositions can be stated as to the analysis required to establish the relevant counterfactual:

Objective prediction (1) The focus of s 177C is the identification of an activity - the prediction of events that would have or might reasonably have expected to have taken place in the absence of the scheme: Trail Bros at [47]; AXA Asia Pacific Holdings at [131]. (2) In the case of a deduction, s 177C(1)(b) provides that it is an objective inquiry as to what would have been allowed or might reasonably be expected to have been allowed as a deduction had the scheme not been entered into or carried out: Epov v Federal Commissioner of Taxation (2007) 65 ATR 399 at [62]; Peabody at 385 - 386; Trail Bros at [24]. It is an objective fact whether a taxpayer obtained a tax benefit in relation to a scheme to which Pt IVA applies: Peabody at 382; Hart at [37]; Trail Bros at [23]; AXA Asia Pacific Holdings at [126]. (3) When predicting the events which would or might have taken place, that question is assessed on the assumption that the scheme had not been entered into or carried out: Federal Commissioner of Taxation v Lenzo (2008) 167 FCR 255 at [121]. Section 177C requires the entirety of the scheme to be ignored: Trail Bros at [28]; see also Peabody, cf. Lenzo at [121] and [136]. (4) But that is not the entire question posed by s 177C. The rest of the question involves the objective enquiry of predicting the particular activity or the events that would or might reasonably be expected to have taken place in the absence of the scheme. The identification of the activity or events does not necessarily preclude any element of the scheme: AXA Asia Pacific Holdings at [131] - [133]. Of course, it cannot be the same complete set of events giving rise to the scheme: Trail Bros at [28] - [29]. (5) The integers relevant to the objective enquiry are not limited, and will be different in each case: Trail Bros at [30]. (6) A fact is not disqualified from consideration merely by reason of it having been an element of the scheme which was in place. To the contrary: what the taxpayer in fact did in the commercial circumstances which existed is likely to shed much light on what they would have done in the absence of the scheme, and in some cases to be, as a matter of prediction, elements of that counterfactual: AXA Asia Pacific Holdings at [132].

Relevance of evidence from taxpayer (7) How the taxpayer establishes that there is no tax benefit is a matter for it: Trail Bros at [36]. (8) It is conceivable that a taxpayer may not lead positive evidence of an alternative postulate because, for example, the result of any objective enquiry of the alternative postulate is inevitable: AXA Asia Pacific Holdings at [139]. Futuris Corporation Limited v Federal Commissioner of Taxation 2010 ATC 20-206 provides an example of a case where the taxpayer did not lead any direct evidence, but established the alternative postulate through expert evidence. (9) It is relevant to have regard to the evidence of the taxpayer as to the steps it says it would have undertaken or would have been likely to undertake in the absence of the scheme: Federal Commissioner of Taxation v Spotless Services Limited (1996) 186 CLR 404 at 423 - 424. (10) The taxpayer may lead evidence that it would have undertaken a particular activity, or adopted a particular course in lieu of the scheme. If a taxpayer has given evidence of what he or she would have done but for entering the scheme, that evidence will be relevant and useful to the extent to which it reveals facts or matters that bear upon the objective determination of the alternative postulate: Trail Bros at [36]; AXA Asia Pacific Holdings at [139]; Federal Commissioner of Taxation v Mochkin (2003) 127 FCR 185 at 209 - 210. (11) The taxpayer can give evidence as to what it would have done in the absence of the scheme, provided foundation facts are given to support what would otherwise be a bald speculative statement: McCutcheon v Federal Commissioner of Taxation (2008) 168 FCR 149 at 163 - 164; AXA Asia Pacific Holdings at [140].

The actual rejection of some alternatives is relevant (12) The taxpayer's actual rejection of an alternative at the relevant time will be important evidence in determining what would have been expected to have occurred: Spotless Services at 422, 424; Federal Commissioner of Taxation v Spotless Services Limited (1995) 62 FCR 244 at 284 - 285. In Spotless Services, the Court considered that the taxpayer's actual rejection of one alternative to the scheme to be relevant to its conclusion that only one alternative remained open to the taxpayer.

Deduction does not need to be of the 'same kind' (13) In a deduction case, if it can be predicted that, if the relevant scheme had not been entered into or carried out, the taxpayer would have done something which would give rise to a deduction being allowable to it of an equivalent amount, and the prediction is sufficiently reliable as to be regarded as reasonable, there will be no tax benefit: CPH Property at 32 and 40 (see Corrigenda to 139 FCR); (1998) 98 ATC 4983 at 4998 per Hill J. See also Essenbourne at [45] per Kiefel J. (14) The allowable deduction identified in the alternative postulate does not need to be of the 'same kind' as that claimed as a deduction under the scheme: Trail Bros at [44], [52], [65], despite a suggestion to the contrary in earlier authorities (e.g., Lenzo at first instance (per French J) and Full Court): Trail Bros at [52], [65]. The comparison does not assume, let alone require, that if the scheme had not been effected, the taxpayer would have ordered its affairs in a way that engaged the same provisions of the Act (or engaged the same provisions in the same way) as were said to be applicable to the events and transactions comprising the scheme: Trail Bros at [48], [65]. (15) That does not mean that the taxpayer is at large in pointing to some alternative allowable deduction, having no relevance to the impugned scheme; it is the alternative postulate that provides the limitation: Trail Bros at [65].

Quantitative analysis (16) If it is determined that the relevant activity would give rise to tax deductions, then the tax benefit is any differential between the amount claimed and the deductions arising from the counterfactual: Trail Bros at [54] and [67]. 154 It has been suggested that the recent approach of this Court, as exemplified in cases such as Trail Bros and AXA Pacific Holdings, as to what constitutes 'the obtaining by a taxpayer of a tax benefit in connection with the scheme', in particular, how the Court has gone about the task of determining whether such a benefit has been obtained by a taxpayer in a particular case, namely, 'the hypothetical fact-finding approach', 'distorts the whole operation of Part IVA': Transcript of Special Leave Application, High Court of Australia: Commissioner of Taxation v AXA Pacific Holdings Ltd, No. M165 of 2010, 11 March 2011 at 2. Unfortunately, the transcript does not disclose the reasoning process supporting the suggestion. That creates a difficulty because this Court's approach has been fundamentally predicated on what the High Court said in Peabody at 382 and 385, namely: '[T]he question in every case must be whether a tax benefit which the Commissioner has purported to cancel is in fact a tax benefit obtained in connexion with a Pt IVa scheme and so susceptible to cancellation at the discretion of the Commissioner. … 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. … The Full Court was correct in its conclusion that there was no reasonable expectation that TEP Holdings would have acquired the Kleinschmidt shares as part of the exercise involved in the float. It may be added that, in any event, even if TEP Holdings had been able to acquire the Kleinschmidt shares in its own right and not as trustee, it would appear that there would have been no present entitlement on Mrs. Peabody's part to any proportion of any profit arising from the sale of those shares.' And what the High Court said in Peabody has its source not only in the words of the statute, but in what was said in the Explanatory Memorandum circulated by the Treasurer of the day when the Income Tax Law Amendment Bill (No 2) 1981 was introduced into the House of Representatives. In relation to s 177E, it read: 'In brief, this section is a self contained code, within the framework of Part IVA, designed to apply to schemes of a dividend stripping kind which would otherwise effectively place company profits in the hands of shareholders in a tax-free form. Schemes of the kind to which section 177E is directed could on occasions come within the general ambit of section 177D, but section 177E is needed for situations where, for example, although profits are in fact stripped from a company, it may not be a reasonable hypothesis that, but for the scheme, the profits would have been paid as dividends. But for the scheme they would formally have remained in the company, at least for the time being. If that were so in a particular case, the situation would not fall within section 177D because there would not, under section 177C, be a "tax benefit" - i.e., an amount not included in assessable income that but for the scheme would have been, or might reasonably be expected to have been, included.' (Emphasis added.) 155 If it be the case that the hypothetical fact finding that the concept of 'the obtaining by a taxpayer of a tax benefit in connection with the scheme' requires be undertaken is perceived as adversely impacting on the operation of Pt IVA as general anti-avoidance rule, then that is a matter for Parliament, although interestingly I note that the Treasury Discussion Paper that issued on 18 November 2010 entitled: 'Improving the operation of the anti-avoidance provisions in the income tax law', did not raise it as an item for discussion (see [2.2] of the Paper). 156 The tax benefits (see [149] above) that the Commissioner contended on the appeals were obtained by each of the respondent taxpayers in connection with the scheme or schemes the Commissioner identified are predicated on the following counterfactuals: (1) That after July 1990 FBGTA would not have charged any interest on debts owed to it by Amayana; (2) that after July 1990 Amayana would not have charged interest on debts owed to it by EFGA; (3) that after October 1991 FGL would not have charged any interest on debts owed to it by EFGT; (4) that after October 1991 EFGT would not have charged any interest on debts owed to it by EFGA; and (5) that after April 1991 EFGA would not have charged any interest on debts owed to it by ELFIC and EFGS; 157 The choice of these dates viewed in isolation can be explained, indeed supported, by reference to certain findings of the primary judge. For example, as between FBGTA and Amayana and Amayana and EFGA, the July 1990 date presumably has its provenance in his Honour's finding at Reasons [33]: 'In July 1990, another wholly owned subsidiary of FGL, Amayana Pty Ltd ("Amayana") made a loan of $34.8 million to EFGA using funds which Amayana had borrowed from its subsidiary, FBG Treasury Aust Pty Ltd ["FGBTA"]. Both the loan from [FBGTA] to Amayana and that from Amayana to EFGA were at the standard intra-company interest rates charged by [FBGTA].' And, as between FGL and EFGT and EFGT and EFGA, the October 1991 date presumably has its provenance in his Honour's finding at Reasons [41]: 'From October 1991, loans were made by the Foster's Group to the Finance Group through EFGT under a Security Note arrangement.' And, as between EFGA and ELFIC and EFGS, the April 1991 date presumably has its provenance in his Honour's finding at Reasons [39]: 'In April 1991, EFGA made a request to the Foster's Group for $400 million in interest-free funding, in order to eliminate a budgeted loss for the 1992 financial year and to prevent external auditors from requiring additional provisioning of $60 million in the Finance Group accounts. That proposal was rejected by the Board of FGL.' 158 But it is the correlation of these dates which raises more questions than it answers. For example, why is it a reasonable prediction that EFGA would not charge interest on loans to ELFIC and EFGS funded from borrowings from EFGT when EFGA was still being charged interest by EFGT on those borrowings? And why is it a reasonable prediction that FBGTA would not charge interest on loans to Amayana and Amayana would not charge interest on loans to EFGA when EFGA was still charging interest on loans to ELFIC and to EFGS funded from borrowings from FBGTA via Amayana? 159 The learned primary judge was not persuaded that the respondent taxpayers obtained tax benefits in connection with the scheme or schemes the Commissioner identified: Reasons [235]. In this regard, he was not persuaded that the counterfactuals - the predictions as to what might reasonably be expected to have taken place if the Commissioner's scheme or schemes had not been entered into - would not have given rise to deductions of the same amounts: Reasons [228] and [235]. He did not say so in these terms, but that is the effect of what he held. 160 If it mattered, then, with respect to the primary judge, I would not be prepared to go that far. While I do not think the 'counterfactuals' relied on by the Commissioner (see [156] above) are sufficiently reliable to constitute a reasonable expectation as to what might have taken place if the Commissioner's scheme or schemes had not been entered into, I would not be prepared to find, on the material before the primary judge, that no tax benefit was obtained by one or more of the respondent taxpayers in connection with that scheme or those schemes. If it mattered, the quantification of the tax benefit may have to go back to the Commissioner for re-assessment, in default of agreement between the parties. 161 However, I am of the view that, for the reasons set out below, the conclusion which s 177D(b) requires to be drawn as to the purpose of a party to the scheme, in order for the Commissioner to be entitled to make a determination under s 177F(1), would not be drawn in the present case. It follows that my difficulty in quantifying the tax benefits in the present case does not matter.

Purpose 162 The learned primary judge at Reasons [240] said: 'It was accepted that the imputation to a taxpayer of a dominant purpose after consideration of the matters enumerated in s 177D(b) requires a comparison between the arrangement which effectuated the scheme and any alternative arrangement into which the taxpayer might have entered had the taxpayer not entered into the scheme arrangement.' What his Honour said has its provenance in what was said by Gummow and Hayne JJ in Hart at [66], namely: 'To draw a conclusion about purpose from the eight matters identified in s 177D(b) will require consideration of what other possibilities existed.' In British American Tobacco Services Limited v Federal Commissioner of Taxation (2010) 189 FCR 151 at [53], a Full Court of this Court seemed to take the matter even further by suggesting that: 'In addressing s 177D(b)(i) - (v) and (vii) … it was not only open but is usually required in assessing the dominant purpose of a scheme [to undertake a] … comparison between the Scheme carried out and the counterfactual …' not just 'other possibilities'. This extract from the Full Court's reasons is also noteworthy because of what Gummow and Hayne JJ said in Hart at [62], [63]; their Honours made it clear, in no uncertain terms, that talking about 'the dominant purpose of a scheme' as Hill J did in the Full Court in that case, is not what s 177D requires; it requires consideration of the purposes to be attributed to the relevant persons who entered into or carried out the scheme or any part of the scheme. 163 Accepting for present purposes the correctness of what Gummow and Hayne JJ said in Hart at [66] extracted in [162] above, it is difficult to discern its legislative foundation. It certainly does not appear as one of the matters enumerated in s 177D(b) and, as their Honours said (at [47]) in Hart (in response to a submission that the term 'scheme' had to be understood by reference to criteria outside the statute itself - namely, that the term does not encompass circumstances that are incapable of standing on their own without being 'robbed of all practical meaning': Peabody at 384): 'There is no basis to be found in the words used in Pt IVA for the introduction of some criterion additional to those identified in the Act itself.' 164 The learned primary judge addressed each of the matters listed in s 177D(b) to determine whether, if there was a relevant scheme from which the nominated tax benefits had been obtained, then having regard to those matters, it would be concluded that any person entering into or carrying out the whole or a part of the alleged scheme did so for the sole or dominant purpose of enabling any of the respondent taxpayers to obtain the tax benefits. He held that an assessment of those matters would not lead to that conclusion: Reasons [228] - [270].

Manner in which the scheme was entered into or carried out - s 177D(b)(i) 165 Before the primary judge, the Commissioner identified a number of features which he submitted went to the manner in which the scheme was entered into or carried out and which, he submitted, were explicable as actuated by a dominant purpose of obtaining a tax benefit. The primary judge rejected these submissions saying at Reasons [248] that: '[T]he features identified by the Commissioner as going to "manner" were explicable as actuated by a dominant purpose other than the obtaining of a tax benefit.' He then proceeded to deal with each feature identified by the Commissioner as going to 'manner' and explained why each was explicable as actuated by a dominant purpose other than the obtaining of a tax benefit. 166 His Honour's treatment of this matter was not challenged on appeal; indeed, in his written and oral submissions, the Commissioner did not address at all the matter of the manner in which the scheme was entered into or carried out. 167 In relation to the primary scheme identified by the Commissioner, the funding of the Finance group via intra-group loans at interest in and from November 1989 is not a circumstance from which it would be concluded that any of the participants had a dominant purpose of obtaining tax benefits. 168 First, within the Finance group the provision of intra-group funding had been established since at least 1985: Reasons [9]. As the primary judge said at Reasons [247]: 'It has to be borne in mind that the question of dominant purpose will usually be determined at the time when the alleged scheme was entered into; see Vincent v Commissioner of Taxation (2002) 124 FCR 350, at 372. In the present case some of the matters relied on by the Commissioner such as the charging of interest to subsidiaries within the Finance Group predated the time ascribed by the Commissioner to entry into the scheme.' The particular funding arrangements that occurred in and after November 1989 were responsive to the exigencies that arose from time to time by reason of external economic factors. Nothing about the manner in which the lending from EFGA was effected indicated a tax purpose. 169 Secondly, in relation to EFGA, the replacement of external borrowing arose by reason of the external financiers' desire to shift their lending from EFGA to FGL: Reasons [27]. The fact that the borrowing was at interest does not suggest a tax purpose. EFGA's borrowings had always been at interest. Moreover, there was evidence, which the learned primary judge accepted, that the charging of interest was as readily explicable by a concern to measure or accepted, that the charging of interest was as readily explicable by a concern to measure or monitor performance of borrowing companies: Reasons [248]. In addition, the interest charged on all of the loans was a source of income for, and included in the operating profit of, each lender and included in the operating revenue and profit of each lender. Tables 10 and 11 in Appendix 3 show the effect for FGL for the 1989 to 1998 years. 170 Thus the manner in which intra-group loans were made to or by the Finance group companies in and from 1989 provides no support for the Commissioner's contentions as to 'purpose'. 171 Consideration of the 'manner' in which all of the alternative schemes posited by the Commissioner were carried out does not point to a purpose of obtaining a tax benefit. The Commissioner's first alternative contention is that EFGA's continued charging of interest on advances owing from (or new advances made to) ELFIC and EFGS after April 1991 was a scheme. However, the fact that interest continued to be charged does not at all suggest a tax purpose. EFGA still had its own interest obligations to meet (see [158] above). Its loans to ELFIC and EFGS continued. Those loans were used in the conduct of their businesses, albeit that those businesses were focused on an orderly wind-down at the time, and it still expected both to be repaid principal and paid interest. 172 The Commissioner's alternative scheme focuses on the security structure established between February and October 1991. The manner in which the structure was established and carried out indicates one purpose, viz., protecting the Foster's Group's interests in the Finance group assets from potential claims by litigation creditors. The security structure resulted in EFGA swapping two sources of interest-bearing funding (FGL and AML Finance) for another (EFGT): Reasons [41]. This was a re-financing of EFGA's debts to ensure FGL's funding of the Finance group would be secured. There was no reason to alter the terms of the loans to EFGA, in particular, given EFGA was using the funds to fund its subsidiaries to enable them to undertake an orderly realisation of their assets. The dominant purpose overwhelmingly indicated by the implementation of the security structure was a re-financing of EFGA for the purpose of asset-protection, not tax minimization.

The form and substance of the scheme - s 177D(b)(ii) 173 The Commissioner submitted that: 'Although the form of the funding by EFGA to ELFIC and to EFGS, and by EFGT and Amayana to EFGA, was debt, in substance it was equity, After January 1990 it was likely that ELFIC and EFGS would be unable to repay money lent by EFGA, and that EFGA would be unable to repay its loans. Nevertheless, EFGA supported ELFIC and EFGS and Amayana and FGL (through EFGT from October 1991) lent to EFGA. The terms of the loans did not include any definite repayment date. Although interest was charged it was not paid. The "loans" therefore bore the hallmarks of equity.' 174 Even if the Commissioner's submission be accepted, it does not suggest that the dominant purpose which actuated the making of new loans at interest after January 1990 and the continued charging of interest on loans made before that time was the obtaining of the tax benefits identified by the Commissioner. 175 The learned primary judge declined to find that there was any relevant difference between the form and the substance of the scheme(s) identified by the Commissioner: Reasons [252]. The form of the transactions was intra-group lending at interest. The substance was the same. The intra-group lending at interest had commenced at least as early as 1985 when EFGA commenced its operations. It was and remained the intention of the companies that the loans and borrowings would be repaid and that interest thereon would accrue and be paid: Reasons [119]. At least until 30 June 1990 (Reasons [32]), if not for a substantial period after that date, the expectation was that all the outstanding debts, including interest would be paid or repaid. Thereafter and throughout the wind-up period the activities of the companies were directed at enhancing and maximizing the total recoverable value of the outstanding loans and unpaid interest: Reasons [36]. Substantial repayments and payments were in fact made. See Appendix 3, Table 1 which tabulates the payments and repayments made, as shown on the accounts that comprised the balances of the debts written off as bad. Taking steps to secure the balances owed in 1991 also is consistent with the arrangements being intended to be interest bearing debt funding. 176 The Commissioner's assertion that after January 1990 it was likely that ELFIC and EFGS would be unable to repay money lent by EFGA, and that EFGA would be unable to repay its loans, is not supported by any evidence that was accepted by the learned primary judge. Moreover, the efforts of the Finance group that were directed at enhancing and maximizing the total recoverable value of the outstanding loans and unpaid interest, were made in respect of the debts, amongst others, owed by ELFIC and EFGS to EFGA.

Time of entry into alleged scheme and length of period during which it was carried out - s 177D(b)(iii) 177 The Commissioner submitted that: '[I]nterest continued to be capitalised over a period of years after it became apparent that the interest could not be paid and after capital protection considerations which underpinned the charging of interest had fallen away.' 178 Before the primary judge, the Commissioner focussed specifically on 19 June 1998 as the date on which EFGA, EFGT and FGL wrote off as bad debts the loan amounts respectively due to each of those companies. At Reasons [256] and [257] the primary judge concluded: 'I can discern nothing in the events which occurred at about that time which tends to indicate that a purpose of the relevant actors was to obtain a tax benefit. Those events were a natural consequence, in the light of changed financial circumstances, of pre-existing arrangements between the members of the Foster's Group as a whole and of the arrangements to which particular members of the Finance Group were parties. Similarly, the period over which the alleged scheme was carried out does not assist in imputing the requisite purpose to any relevant person. It is clear from the evidence that the period over which various arrangements were maintained between lenders and borrowers within the Foster's Group was dictated by the time needed to realise assets and make repayments of principal and interest. There is nothing to suggest that any presumptive tax benefit was predicated on an event occurring within, or after the lapse of, a particular period of time.' 179 The funding arrangements within the Finance group after November 1989, whereby intra-group loans were provided at interest, were a continuation of arrangements that had been entered into since 1985. 180 The continued lending arrangements entered into after November 1989 were taken as individual responses to exigencies that arose from time to time by reason of external economic factors. 181 As for the first of the alternative schemes posited by the Commissioner, EFGA's continued charging of interest on its loans to ELFIC and EFGS in and after April 1991 must be considered in light of the business it had conducted since 1985 of lending money to those companies. 182 The timing of the establishment of the security structure - between February and October 1991 - is explained by the emergence of significant third party claims. By early 1991, the potential claims of litigation counterparties on Finance group assets ran to some hundreds of millions of dollars. It is the gravity of the risk for FGL in having only unsecured claims against Finance group assets which most naturally explains the transition to the 'security structure', not any tax purpose. 183 As for the period during which the scheme(s) operated, for both the wide scheme and each of the narrower schemes their duration is explained by the time taken for the Finance group to complete a substantial part of the orderly realisation of its assets: Reasons [257] (see [178] above). 184 The eventual writing off of various debts as bad in 1998 and 1999 was an appropriate, and appropriately timely, reflex of the 'recoverability review' undertaken by Neufeld in 1998: Reasons [54] - [55]. The timing of the actual write-offs does not suggest a tax purpose.

The result in relation to the operation of the Act that but for Part IVA would be achieved by the scheme - s 177D(b)(iv) 185 Again, in his written and oral submissions, the Commissioner did not address this matter at all. 186 Before the primary judge, the Commissioner pointed to the fact that the decision to fund the Finance group by interest-bearing debt allowed deductions to be claimed in respect of interest by the lending companies and the writing-off as bed debts of unpaid interest. Had interest not been charged, and had repayments not been allocated on a first-in first-out basis, write-offs of $64,814,698 in the year ended 30 June 1998 would not have been available. 187 The learned primary judge concluded at Reasons [259]: '[T]he result of the scheme in relation to the operation of the Act independently of Part IVA, was one for which the Act itself provided namely that interest returned as income could, if never received, be written off as a bad debt. I regard the application of this criterion as neutral on whether an intention to achieve a tax benefit can objectively be imputed to the relevant actors.' 188 In the present matters, deductions arose for interest expenses, bad debts written off and losses transferred: (see [149] above). Similarly, the arrangements for the intra-group funding produced assessable income comprised of interest on intra-group loans. 189 In considering the tax consequences of the intra-group funding arrangements, the fact of a tax consequence (in the present matters the deductions being allowable) resulting from a given transaction, attracts no inference that the parties to the transaction entered into it or carried it out for the dominant purpose of obtaining that tax consequence: Hart at [15] per Gleeson CJ and McHugh J and at [65] per Gummow and Hayne JJ. This is particularly so when assessable income is also produced by the scheme identified. 190 The various tax results were the ordinary taxation reflex of the making of loans at interest. Viewed in isolation, nothing about them suggests a tax purpose. On any view, the s 177D(b)(iv) consideration is, as the learned primary judge concluded, neutral at best (see [187] above).

Any change in the financial position of the relevant taxpayer that has resulted, or will result, or may reasonably be expected to result from the scheme - s 177D(b)(v)

Any change in the financial position of a person with a connection with the relevant taxpayer - s 177D(b)(vi) 191 It is convenient to deal with these two matters together. 192 In relation to (v), the Commissioner pointed out that while the net asset position of the Finance group entities continued to deteriorate, interest continued to accrue. According to the Commissioner, there was no justification for plunging the Finance group and the funding entities further into debt by the continued charging, capitalisation and compounding of interest that could not be paid. Correspondingly, as the Finance group's ability to repay debt deteriorated, so did the financial position of the funding entities. Nevertheless, interest continued to accrue down the funding chain beginning with FGL itself, then at the Amayana/FBGTA level, then at the EFGA level and finally at the ELFIC/EFGS level. According to the Commissioner, the explanation lies in the tax benefits to be obtained by the transfer of tax losses arising from the charging of interest and, once the asset realisation program had been completed and the extent of the deficiency ascertained, the writing off of the corresponding interest income as bad debts. According to the Commissioner, the financial position of the Finance group was, further, prejudiced by: (i) The selling down of assets as part of the process of winding down those businesses since those entities were unable to pay interest. The sell down further reduced the income and assets of the Finance group businesses and their ability to pay interest; (ii) the removal of potentially profitable assets into the New Lensworth Group; (iii) in Amayana's case, by the acquisition of EFGA's debt to EFG Financial. Finally, the Commissioner submitted that the creditor companies' financial positions were manipulated to maximise the amount of interest outstanding on debts owed to them. 193 In relation to (vi), the Commissioner observed that each entity in the funding chain was adversely affected by the financial deterioration of the Finance group companies, exacerbated by the continued accrual of interest. Other entities in the Foster's Group (Ashwick, Nexday and EFGI) benefited from the losses magnified by the continued accrual of interest, by the receipt of transfers of those losses. 194 In relation to (v), the learned primary judge concluded at Reasons [263]: 'There were clearly changes in the respective financial positions of various members of the Foster's Group from time to time between 1989 and 2000. … On balance, I do not regard these changes, or those more specifically indicated by the Commissioner, as strengthening or weakening the inference that the alleged scheme was entered into or carried out for the dominant purpose of obtaining a tax benefit.' 195 In relation to (vi), the learned primary judge concluded at Reasons [266] - [267]: 'The changes identified by the Commissioner under this head were said to be consistent with the dominant purpose of obtaining the tax benefits flowing from the scheme. Because of the elaborate inter-connected group structure of FGL and its subsidiaries action taken in response to changed financial circumstances in respect of one member of the Group necessarily had repercussion for one or more other members of the Group. However, I do not regard any changes in the financial position of one or more Foster's Group companies which were connected in that way to a particular taxpayer member of the Group as having any purposive significance of the kind to which s 177D(b)(vi) points. In my view, all of the changes which can be characterised as relevant to this criterion have been evaluated in the application of the criteria erected by sub-paragraphs (i), (iii) and (v) of s 177D(b).' 196 There is no evidence, nor does the Commissioner refer to any evidence, to support the claim that any of the respondents manipulated their financial positions. In addition, the Commissioner has not alleged that any of the transactions the subject of these appeals were shams. 197 In respect of the financial deterioration, the primary judge accepted that, while there were changes in the respective financial positions of various members of the Foster's group from time to time between 1989 and 2000, 'many of those changes resulted from external forces which were regarded, for reasons unrelated to any tax benefit, as compelling internal adjustments of assets and liabilities and a re-arrangement of security over some assets': Reason [263]. The primary judge went on: 'Some of those adjustments, although they involved a substitution of internal lenders for outside financiers, did not significantly change the financial position of the relevant borrower. Corresponding changes also resulted in some lending companies within the Foster's group deriving assessable income in the form of interest on loans which had not been derived before the changes occurred': Reasons [263]. 198 The primary judge's conclusions are supported by his findings of fact and the evidence. The commencement of borrowing from the Foster's group companies in August 1989 produced little change in the financial position of EFGA, ELFIC or EFGS. EFGA had been obtaining its circulating capital via debt funding already, and ELFIC and EFGS simply continued to obtain their circulating capital from EFGA. Rather, the one effect of FGL's intervention was that it enabled Finance group companies to avoid a fire sale and the associated expected losses, and instead to pursue an orderly realisation of assets. Another effect was that an income stream flowed to FGL which contributed to its profits and dividend paying capacity: see Appendix 3, Table 11. Accordingly, FGL's loans to EFGA from before November 1989 (and then subsequently, via AML Finance and EFGT) and Amayana's loans to EFGA from July 1990, enabled EFGA to continue to fund the Finance group companies and to meet the further commitments which evolved as the orderly realisation of assets was pursued. 199 The considered view of Finance group management and their external advisers at the time was that this was the best strategy for maximising the Finance group's recoupment from the finance businesses it had built up over the years. The loans from FGL, AML Finance and Amayana before October 1991, and from EFGT after October 1991 refinanced prior funding arrangements and otherwise enabled further lending to assist in the recovery of loans made. Upon the refinancing of EFGA, EFGA continued its orderly realisation of its assets with a view to maximising recoveries and collections. The financial consequences for EFGT were that it incurred interest expense on its borrowings from FGL for which it claimed deductions and it earned and returned interest income on its lending to EFGA; it received substantial repayments and payments on its loans and accrued interest and made repayments and payments to FGL.

Any other consequences for the relevant taxpayer or for any person referred to in s 177D(b)(vi) of the scheme being entered into or carried out - s 177D(b)(vii) 200 Both before the primary judge and on the appeals, the Commissioner accepted that there were no other consequences for the respondent taxpayers or for any person referred to in s 177D(b)(vi).

Nature of any connection between the relevant taxpayer and any person referred to in s 177D(b)(vi) - s 177D(b)(viii) 201 Before the primary judge, the Commissioner reiterated that the companies referred to under s 177D(b)(vi) had all been wholly-owned subsidiaries of FGL and subject to its direction in the implementation of intra-group funding arrangements. Under that direction, the lending companies had continued to make advances to the borrowers at interest in circumstances in which no independent lender would have done so. 202 On this matter, the primary judge concluded at Reasons [270]: 'The inter-connection between companies in the Foster's group and the fact that they were subject to the overall direction of FGL has already been noted and evaluated in the application of other criteria postulated in s 177D(b). The making of loans and the giving of guarantees and letters of comfort to borrowers within the group which would have been hopelessly insolvent if considered as independent entities, is readily explicable by the need to preserve the financial viability of the Foster's group as a whole. In my view, those features of the nature of the connection does not support any inference that the dominant purpose of those who administered the connected activities of the Foster's group was to obtain a tax benefit.' 203 I totally agree with the primary judge's conclusion on this matter. The respondent taxpayers are all companies within the Foster's group. In isolation this circumstance is at best neutral. If, however, as the Commissioner would put it, the focus is enlarged to accommodate the parlous financial position of the borrower entities, then the examination also must include the wider circumstances of those companies. Upon that examination, it would not be concluded that any person entered into or carried out the arrangements posited for the sole or dominant purpose of securing a tax benefit for one or more of the respondent taxpayers.

Conclusion as to Section 177D(b) 'Purpose' 204 For the foregoing reasons, and those reflected in the reasoning of the learned primary judge, having regard to the matters enumerated in s 177D(b) it would not be concluded that any of the persons who entered into or carried out either the wide scheme, or any of the narrower schemes posited by the Commissioner did so for the sole or dominant purpose of enabling any of the respondent taxpayers to obtain a tax benefit. 205 It follows that this ground of the Commissioner's appeals cannot be sustained.

CONCLUSION 206 As all of the Commissioner's grounds of appeal on the substantive issues have failed, like the learned primary judge, it is unnecessary to consider the issue of penalties. 207 All the appeals must be dismissed and the Commissioner must pay the respondents' costs of the appeals as agreed or, in default of agreement, as taxed. I certify that the preceding two hundred and six (206) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Edmonds.

IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 34 of 2010 VID 35 of 2010 VID 36 of 2010 VID 37 of 2010

AND: ASHWICK (QLD) NO 127 PTY LTD (ACN 010 577 456)

IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 38 of 2010 VID 39 of 2010 VID 40 of 2010

IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 41 of 2010

IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 42 of 2010

IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 43 of 2010

IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 44 of 2010

AND: EFG INVESTMENTS PTY LTD (ACN 006 169 955)

IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 45 of 2010

IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 46 of 2010

IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 47 of 2010

JUDGES: BENNETT, EDMONDS AND MIDDLETON JJ DATE: 8 April 2011 PLACE: mELBOURNE

MIDDLETON J: 208 I agree that the appeals should be dismissed with costs for the reasons given by Edmonds J. I certify that the preceding one (1) numbered paragraph is a true copy of the Reasons for Judgment herein of the Honourable Justice Middleton.

Associate: Dated: 8 April 2011 Appendix 1 Appendix 2 Appendix 3 Table 1 Payments and repayments made by borrowers to lenders 1990 to 1998 Year EFGT to FGL EFGA to EFGT EFGA to Amayana EFGS to EFGA ELFIC to EFGA Amayana to FBGTA $ $ $ $ $ $ 1990 18.4M 1991 42M 5.2M 343M 34.1M 1992 135M 165M 90M 9M 95M 90.2M 1993 149M 9M 5M 196M 0 1994 143M .0006M .8M 68M 0 1995 153M .0008M .03M 27M 0 1996 48M .05M 5M .009M 1997 318M 540M 4M 198M 0 1998 93M 295M .0008M - 76M 0 1990 to 1998 1,041M 1,010M 132M 43M 1,009M 124.3M

Appendix 3 Table 2 EFGA Reported operating profits (losses) 1985 - 1998 Year Reported operating profits (losses) of EFGA $ 1985 11,401,000 1986 17,502,000 1987 38,561,000 1988 45,108,000 1989 40,549,000 1990 (28,363,000) 1991 (232,955,000) 1992 (782,570,000) 1993 (6,800,000) 1994 (44,184,082) 1995 2,231,701 1996 (126,356,924) 1997 (1,562,914) 1998 (1,422,910)

Appendix 3 Table 3 EFGA Total reported operating revenue, total reported interest income and total reported interest expense 1985 - 1998 Year Total reported operating revenue Total reported interest income Total reported interest expense $ $ $ 1985 11,420,000 0 0 1986 20,028,000 168,000 1,000 1987 239,805,000 194,787,000 203,630,000 1988 296,493,000 222,875,000 187,565,000 1989 412,429,000 336,714,000 326,481,000 1990 408,196,000 368,259,000 343,737,000 1991 313,025,000 254,642,000 241,682,000 1992 175,532,000 175,515,000 161,311,000 1993 120,970,000 120,942,000 112,511,000 1994 104,173,224 104,163,975 100,267,066 1995 142,819,386 142,684,117 140,885,858 1996 159,848,697 159,848,697 153,330,954 1997 132,080,290 132,080,290 128,846,043 1998 86,813,428 86,813,428 83,609,336

Appendix 3 Table 4 EFGA Amounts owed by related parties 1988, 1990, 1992 Related Party Amounts owed to EFGA by related parties as at 30 June 1988 1990 1992 $ $ $ Elders Finance Limited (Lensworth) 51,765,809 286,881,211 403,187,226 EFGS 1,090,321 80,839,862 77,516,104 EFG Services Pty Ltd 0 1,790,136 0 Elders Futures 1,319,160 216,598 0 Elders Investment Management Ltd 0 305,824 0 ELFIC 1,332,924,962 991,793,213 1,300,557,100 Elders Rural Finance 49,670,215 18,861,852 0 Elders Trade Financiers Limited 24,974,706 2,322,249 0 EFGSB UK Limited (Cobbold Roach) 2,304,830 371,121 0 EFG Administration UK Limited (Elders Keep Brothers Ltd) 1,889,702 21,308,676 0 EFG Investments UK Limited 0 106,762 0 Elders Finance Group UK Limited 99,388,505 52,264,361 0 Elders Finance Holdings (UK) Limited 5,945,613 29,460,921 0 Elders Finance Limited (UK) 0 220,758,165 0 Elders Real Estate Limited 0 9,245,289 0 Elders Finance Inc 0 14,153,225 0 FGL 40,114,125 48,000,000 48,000,000 EFGT 0 0 45,352,196 Elders Malt 6,815,998 0 0 R&T Agriculture 2,225,711 0 0 Swisstex Finance Pty Ltd 10,720,551 0 0 Elders Merchant Finance HK 32,258 0 0 RTG 27,884,600 0 0 Elders London 25,359,028 0 0 Elders Keep Ltd 36,610,436 0 0 EFL Birmingham 15,258,474 0 0 EFL Corporate 213,721,678 0 0 EFIB (Bahrain) 60,118,955 0 0 EAFL (HK) 4,818,565 0 0 EFG Sydney 770,492 0 0

Appendix 3 Table 5 EFGA Balances of debts owed to Amayana, EFGT, FGL, EFG Financial, Elders Finance & Investment Bank and AML Finance 1989 - 1998 Year Balances of debts owed by EFGA to: Amayana EFGT FGL EFG Financial Elders Finance & Investment Bank AML Finance $ $ $ $ $ $ 1989 0 0 N/A N/A N/A 4,708,183 1990 0 0 155,614,740 183,618 133,954,872 59,469,548 1991 251,690,081 0 403,147,714 101,258,735 0 495,132,079 1992 214,195,597 969,479,476 0 110,531,196 0 1993 230,678,439 1,226,882,044 0 120,516,106 0 1994 245,371,822 1,305,027,889 0 121,389,229 0 1995 265,838,058 1,413,879,053 0 129,926,436 0 1996 420,953,007 1,531,493,429 0 0 0 1997 452,762,985 1,087,665,011 750 0 0 1998 489,243,394 849,965,535 0 0 0

Appendix 3 Table 6 EFGA Interest incurred on loan debts owed to Amayana, EFGT, FGL, EFG Financial, Elders Finance & Investment Bank and AML Finance 1989 - 1998 Year Amayana EFGT FGL EFG Financial Elders Finance & Investment Bank AML Finance $ $ $ $ $ $ 1989 0 0 14,219,240 10,015 14,892,327 1,516,856 1990 0 0 25,305,172 18,542 17,794,353 3,444,859 1991 31,022,110 0 51,672,304 1,915,813 13,768,953 37,212,030 1992 23,272,972 58,919,064 15,981,386 7,751,362 15,527,723 1993 16,482,842 82,710,022 0 5,835,423 0 1994 14,693,383 78,147,827 0 5,234,609 0 1995 20,466,236 108,851,164 0 7,892,230 0 1996 23,678,135 117,575,840 750 7,462,247 0 1997 28,989,033 96,503,042 750 0 0 1998 25,036,634 57,645,096 750 0 0

Appendix 3 Table 7 EFGA Total reported assets (net of provisions) 1990 to 1998 Year Total reported assets (net of provisions) of EFGA $ 1990 1,846,698,000 1991 1,478,135,000 1992 666,691,000 1993 664,011,000 1994 705,560,429 1995 854,279,475 1996 877,995,925 1997 422,595,126 1998 193,117,220

Appendix 3 Table 8 EFGT Reported operating revenue, interest income and interest expense 1992 - 1998 Year Total reported operating revenue Total reported interest income Total reported interest expense $ $ $ 1992 61,559,131 61,599,131 61,599,131 1993 111,844,168 92,826,180 93,062,277 1994 87,106,299 87,106,299 87,067,587 1995 124,679,940 124,677,317 124,549,218 1996 138,987,259 138,987,259 139,487,717 1997 112,133,473 107,760,172 108,171,192 1998 59,599,437 59,599,437 59,631,683

Appendix 3 Table 9 Amayana Total reported operating revenue, total reported interest income and total reported interest expense 1991 - 1999 Year Total reported operating revenue of Amayana Total reported interest income of Amayana Total reported interest expense of Amayana $ $ $ 1991 38,464,627 38,464,627 38,464,627 1992 34,437,029 34,437,029 34,437,029 1993 16,506,552 16,506,552 16,506,552 1994 14,693,383 14,693,383 14,693,383 1995 20,617,455 20,466,236 20,466,236 1996 22,106,652 22,106,652 22,106,652 1997 20,267,902 20,267,902 20,267,902 1998 16,875,354 16,875,354 16,875,354 1999 0 0 0

Appendix 3 Table 10 FGL Reported operating revenue and interest income 1989 - 1998 Year Total reported operating revenue Total reported interest income $ $ 1989 5,003,378,000 541,311,000 1990 4,883,808,000 600,533,000 1991 3,147,798,000 473,068,000 1992 609,235,000 417,266,000 1993 213,959,000 152,923,000 1994 621,400,000 103,200,000 1995 352,113,667 155,984,658 1996 573,474,616 169,802,169 1997 177,226,035 164,274,163 1998 327,260,806 65,371,572

Appendix 3 Table 11 FGL Opening retained profits or losses, operating profit after tax, dividends and interest on loans from FGL to EFGT 1992 - 1998 Year Opening retained profits (losses) Operating profit after tax Dividends Interest on loans from FGL to EFGT $ $ $ 1992 (263,924,000) (966,160,000) 82,400,000 60,759,870 1993 (1,312,354,000) 194,173,000 189,368,000 80,340,400 1994 (1,308,300,000) 196,600,000 191,900,000 68,189,266 1995 (1,303,500,645) 204,562,324 204,168,914 84,305,518 1996 (1,303,453,058) 500,205,073) 215,760,943 88,158,387 1997 284,445,669 104,688,969 200,636,816 76,880,140 1998 188,497,713 264,335,256 188,395,145 47,514,675