Commissioner of Taxation v AXA Asia Pacific Holdings Ltd

1. The Appeal is dismissed.
2. The Appellant pay the Respondent's costs of and incidental to the Appeal, such costs to be taxed in default of agreement.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court's website.

INTRODUCTION 1 I have read the reasons prepared by Edmonds and Gordon JJ and agree that, to the extent that the appellant (the "Commissioner") relies upon Part IVA of the Income Tax Assessment Act 1936 (Cth)(the "1936 Act") the appeal should fail. My reasons for that view are substantially the same as those given by their Honours. However I conclude that the Commissioner should succeed on the "roll-over" point in connection with subdiv 124-M of the Income Tax Assessment Act 1997 (Cth) (the "1997 Act"). I do not propose to rehearse in detail the facts of the case. They appear from the judgment at first instance and from their Honours' reasons. 2 I shall refer to the parties and other entities identified in the primary Judge's reasons as follows: the appellant: the "Commissioner"; the respondent: "AXA;" Medical Benefits Fund of Australia Ltd: "MBF"; AXA Australian Health Insurance Pty Ltd: "AXA Health"; Macquarie Bank Ltd (other than Macquarie Advisory, but including Macquarie PTG): "Macquarie"; Macquarie's advisory arm: "Macquarie Advisory"; Macquarie's Principal Transactions Group: "Macquarie PTG"; British United Provident Insurance Ltd: "BUPA"; Macquarie Health Acquisitions Pty Ltd: "Macquarie HA"; Macquarie Health Holdings Pty Ltd: "Macquarie HH"; Macquarie Health Funding Pty Ltd: "Macquarie HF"; BUPA Australia Pty Ltd: "BUPA Australia"; MB Health Holdings Pty Ltd "MB Health". 3 The separate identification of Macquarie, Macquarie Advisory and Macquarie PTG is necessary at some stages in the consideration of this case. However, as I understand it, the only relevant legal entity is Macquarie Bank Ltd of which Macquarie Advisory and Macquarie PTG are parts. The need for separate identification arises out of the different functions performed for AXA by Macquarie Advisory and Macquarie PTG, leading to the erection of a "Chinese Wall" to separate the involvement of Macquarie Advisory and Macquarie PTG. Of course, that process, laudable as it may have been, did not change the fact that Macquarie was involved in both capacities. As will be seen, the Chinese Wall was erected after significant information had already been given to Macquarie PTG and after the general structure of the relevant transaction had emerged. As the question is whether Macquarie HA (or Macquarie HF) dealt with AXA at arm's length in the transaction for the sale of AXA Health, the effect of the Chinese Wall may be of some importance. It is common ground that Macquarie's conduct in connection with the transaction is to be attributed to Macquarie HA (and Macquarie HF).

THE RELEVANT PROVISIONS 4 The 1997 Act provides for relief from capital gains tax where a capital gain is made as a result of the exchange of shares in the capital of one corporation for shares in the capital of another. The purpose of this relief is to facilitate takeovers. The present case concerns a transaction by which AXA transferred all of the shares in AXA Health to Macquarie HF pursuant to an agreement with Macquarie HA which held all of the issued shares in Macquarie HF. The transaction was much more complicated than is suggested by that short description and involved other parties, directly and indirectly. However it was the disposition by AXA of the shares in AXA Health which generated the relevant capital gain. It is common ground that AXA will be entitled to roll-over relief if it is able to satisfy the requirements of ss 124-780(4) and (5) which provide: (4) The conditions specified in subsection (5) must be satisfied if the original interest holder and an acquiring entity did not deal with each other at arm's length and: (a) neither the original entity nor the replacement entity had at least 300 members just before the arrangement started; or (b) the original interest holder, the original entity and an acquiring entity were all members o f the same linked group just before that time. Note There are some cases where a company will not be regarded as having 300 members: see section 124-810. (5) The conditions are: (a) the market value of the original interest holder's capital proceeds for the exchange is at least substantially the same as the market value of its original interest; and (b) its replacement interest carries the same kind of rights and obligations as those attached to its original interest. … (7) A company is the ultimate holding company of a wholly-owned group if it is not a 100% subsidiary of another company in the group. 5 The term "arm's length" is defined in s 995-1 as follows: in determining whether parties deal at arm's length, consider any connection between them and any other relevant circumstance.

DEFINITIONS 6 The present appeal focuses upon the meaning of the expression "did not deal with each other at arm's length" where it appears in s 124-780(4) and its application to the facts of this case. The learned primary Judge referred to a number of cases in which similar expressions have been considered. In particular his Honour referred to definitions identified by the Full Court in Australian Trade Commission v WA Meat Exports Pty Ltd (1987) 75 ALR 287 at 291 as follows: The first matter to be determined is the meaning of the phrase "not at arm's length" where used in section 4(8) [of the Export Market Development Grants Act 1974 (Cth)]. It is, of course, often found in revenue statutes … . The ordinary meaning of the phrase is explained in Osborn's Concise Law Dictionary, 6th ed, p 32: "The relationship which exists between parties who are strangers to each other, and who bear no special duty, obligation, or relation to each other, eg vendor and purchaser …" A similar explanation is given by Black's Law Dictionary, 5th ed 100: "Arm's length transaction. Said of a transaction negotiated by unrelated parties, each acting in his or her own self interest; the basis for a fair market value determination. Commonly applied in areas of taxation when there are dealings between related corporations, eg parent and subsidiary … . The standard under which unrelated parties, each acting in his or her own best interest, would carry out a particular transaction. For example, if a corporation sells property to its sole shareholder for $10,000, in testing whether $10,000 is an 'arm's length' price it must be ascertained for how much the corporation could have sold the property to a disinterested third party in a bargained transaction." 7 I add two more general definitions. The Oxford English Dictionary (2nd ed, 1989) states: at arm's length: as far out or away from one as one can reach with the arm; hence, away from close contact or familiarity, at a distance; spec. in Law, without fiduciary relations, as those of trustee or solicitor to a client; (at) arm's length: ..., designating a sale or transaction in which neither party controls the other. 8 The Collins Australian Dictionary (7th ed, 2005) defines the term as meaning: at a distance; away from familiarity with or subjection to another.

THE CASES 9 I should briefly examine the cases. The first in time is the decision of the Full Court (Beaumont, Wilcox and Burchett JJ) in WA Meat Exports (supra). Thatcase concerned a "grant entitlement" in respect of eligible expenditure. Eligible expenditure was expenditure which, in the opinion of the relevant decision-maker, had been incurred by a person primarily and principally for the purpose of expanding the export of goods produced, assembled or processed in Australia. Excluded from the definition of expenditure was any amount paid to a person by a prescribed associate. The term "prescribed associate" was defined to include "any person determined by the [decision-maker] to be a person not at arm's length with the claimant …". In that case the claimant company had retained the services of a former employee, such services being provided by him as an employee of another company which he owned. After the references to Osborne and Black referred to above, the Court observed at 291: There is no reason to suppose that the ordinary meaning of the phrase was not intended to be applied here. That is to say, the context of s 4 is consistent with the disqualification of expenditure by one party in favour of another where one of them has the ability to exert personal influence or control over the other. It is evident that the policy of the legislation would seek to exclude payments to such persons, because, if such payments were not excluded, abuse of the incentive scheme provided by the Act would be open. An obvious example is the possibility that parties might seek to inflate the fees payable for particular services. 10 In Re Hains (deceased); Barnsdall v Federal Commissioner of Taxation (1988) 81 ALR 173, Davies J considered a provision which provided that: · where a taxpayer had sold property within twelve months of its purchase; · there was no consideration, or inadequate or excessive consideration for the sale; and · the Commissioner was satisfied that having regard to any connection between the taxpayer and the purchaser or any other relevant circumstances, the taxpayer and the other person were not dealing with each other at arm's length, then certain tax consequences followed. His Honour considered that the expression "not dealing with each other at arm's length" differed from the expression "not at arm's length" used in WA Meat Exports. At 176, Davies J observed that: That term should not be read as if the words "dealing with" were not present. The Commissioner is required to be satisfied not merely of a connection between a taxpayer and the person to whom the taxpayer transferred, but also of the fact that they were not dealing with each other at arm's length. A finding as to a connection between the parties is simply a step in the course of reasoning and will not be determinative unless it leads to the ultimate conclusion. 11 The taxpayer had sold shares to a company which he owned. After examining a number of cases his Honour observed at 177: It will be seen that those cases looked primarily to the relationship between the contracting parties and to influence and control. I do not disagree with this analysis, but I accept … [the] submission that there may be transactions between related parties in which the parties deal with each other at arm's length. This may occur notwithstanding a close relationship between the parties or the power of one party to control the other. 12 In that case the taxpayer submitted that the Commissioner, in reaching his decision, had considered only the relationship between the parties and not the nature of the transaction, or the circumstances in which the parties had dealt with each other. Davies J rejected this criticism, observing that there was other material bearing upon the question, including evidence that the shares were not sold on the open market, but rather transferred pursuant to a private transaction "of a somewhat unusual character". The "unusual" nature of the transaction was that the taxpayer had acquired rights to the allotment of shares in a public company and granted to his company options to acquire such shares when they were allotted. The price payable was such that the taxpayer's costs and receipts matched. On this material his Honour considered that the conclusion was inevitable that the parties had not dealt at arm's length, observing at 178 that: Proof that a transaction was fair is not sufficient to show, in the context, that the dealing was at arm's length. The term "at arm's length" in s 26AAA(4)(b) is not to be construed as meaning "for a fair price". Indeed, this provision did not turn its attention primarily to price, but the price paid may be a relevant factor. The provision did not purport to fix a fair price for the transaction but rather, when a finding had been made that the dealing was not at arm's length, fixed and [sic] arbitrary consideration, the value of the property at the time of its sale. The subject transaction was one between [the taxpayer] and his private company. It was a private transaction with a company which he controlled and which was his investment and share dealing arm. Such a transaction is not an arm's length dealing for the purposes of s 26AAA(4). 13 Trustee for the Estate of the Late AW Furse No 5 Will Trust v Federal Commissioner of Taxation (1990) 21 ATR 1123 concerned a provision in the 1936 Act dealing with assessable income: derived by a trustee, directly or indirectly, under or as a result of an agreement … any 2 or more of the parties to which were not dealing with each other at arm's length in relation to the agreement and the amount of the assessable income so derived is greater than the amount … of the assessable income that, in the opinion of the Commissioner, would have been derived by the trustee, directly or indirectly, under or as a result of that agreement if the parties to the agreement had dealt with each other at arm's length in relation to the agreement … . 14 At 1132, Hill J said: The first of the two issues is not to be decided solely by asking whether the parties to the relevant agreement were at arm's length to each other. The emphasis in this subsection is rather upon whether those parties, in relation to the agreement, dealt with each other at arm's length. The fact that the parties are themselves not at arm's length does not mean that they may not, in respect of a particular dealing, deal with each other at arm's length. This is not to say that the relationship between the parties is irrelevant to the issue to be determined under the subsection. 15 His Honour then referred to the decision of Davies J in Hains and continued: What is required in determining whether parties dealt with each other in respect of the particular dealing at arm's length is an assessment whether in respect of that dealing they dealt with each other as arm's length parties would normally do, so that the outcome of their dealing is a matter of real bargaining. Both Hains and Furse highlight the need to examine the course of the dealings between the parties in order to determine whether they have dealt with each other at arm's length. 16 Granby Pty Ltd v Federal Commissioner of Taxation (1995) 129 ALR 503 concerned the calculation of a cost base for capital gains tax purposes. Section 160ZH(9)(c) provided that in determining such cost base, certain consequences would follow if the consideration paid by the taxpayer was less than the market value of the asset at the time of the acquisition, and the taxpayer and the person from whom it had acquired the asset were not dealing with each other at arm's length in connection with the acquisition. At 506, Lee J said: The expression 'dealing with each other at arm's length' involves an analysis of the manner in which the parties to a transaction conducted themselves in forming that transaction. What is asked is whether the parties behaved in the manner in which parties at arm's length would be expected to behave in conducting their affairs. Of course, it is relevant to that inquiry to determine the nature of the relationship between the parties, for if the parties are not parties at arm's length the inference may be drawn that they did not deal with each other at arm's length. 17 Again the relevant considerations were the relationship between the parties and the extent to which their conduct of the transaction was consistent with that which one would expect in negotiation between parties at arm's length. His Honour then observed at 506-507 that whatever else the expression might mean, it at least meant that the parties to a transaction had acted "severally and independently in forming their bargain". His Honour continued: That is not to say, however, that parties at arm's length will be dealing with each at arm's length in a transaction in which they collude to achieve a particular result, or in which one of the parties submits the exercise of its will to the dictation of the other, perhaps, to promote the interests of the other. 18 His Honour was there identifying circumstances in which parties, otherwise at arm's length, nonetheless might be found to have dealt with each other, other than at arm's length. His Honour was certainly not saying that, in general, it is necessary that the parties collude in order that they be found not to have dealt with each other at arm's length. Nor was he necessarily seeking to describe exhaustively the circumstances in which parties, otherwise at arm's length, would be said to have dealt other than at arm's length. His Honour then observed that: there was no evidence that the lessor corporations and the partnership acted in concert with an ulterior purpose, or that the lessor corporations accepted dictation or instruction from the partnership to the exclusion of the exercise of the independent minds of the corporations … . 19 The words"ulterior purpose" seem to mean a purpose "[b]eyond what is immediate or present" or "[b]eyond what is openly stated or evident; intentionally concealed or kept in the background" (New Shorter Oxford English Dictionary (1993)). 20 Collis v Federal Commissioner of Taxation (1996) 33 ATR 438, concerned the profit arising from the sale of land and the effect for tax purposes of s 26AAA of the 1936 Act. Four parcels of land had been offered for sale at auction. A factory was built on three of the parcels. The fourth parcel was used for access to the factory. The taxpayers owned all four parcels, the fourth block having only recently been acquired. The company occupying and operating the factory was also owned by them. The four parcels were sold together by auction. After the fall of the hammer the taxpayers asked the purchaser to sign two contracts for purchase, one over the fourth block for $200,000, and the other over the other three blocks for $1,437,000. Section 26AAA provided that certain tax consequences would flow if the Commissioner was satisfied that, having regard to any connection between the taxpayer and the purchaser, or any other relevant circumstances, the parties had not dealt with each other at arm's length. The question was whether or not the arrangements which occurred after the fall of the hammer constituted a dealing not at arm's length. At 442, Jenkinson J said: There is nothing in the material before the tribunal to suggest, nor was it submitted, that [the purchaser] and the applicants were not dealing with each other at arm's length at and before the fall of the hammer. The fact that the oral contract was unenforceable - and remained unenforceable until [the purchaser] became the registered proprietor of the subject land - would not affect the operation of s 26AAA(2). Presumably the parties have taken the view that the making of the subsequent written contract for the sale of the subject land and the written contract for the sale of the factory land had the result that the oral contract was thereupon rescinded, no doubt pursuant to an implied term of each of the written contracts that that should be so. The oral contract being rescinded, the subject land could not perhaps be said to have been sold "in pursuance of" that contract. … The form of contract for purchase of the whole of the land offered at the auction was before the tribunal. … On the evidence before the tribunal [the purchaser] could be expected to be indifferent as to whether he made the two contracts proposed or the one contract which the applicants had represented that they were willing to make with the successful bidder at the auction, provided that he was satisfied that the former course would not expose him to any disadvantage or risk of disadvantage not attendant on the latter course. The evidence before the tribunal strongly suggested that he was so satisfied, and the tribunal appears to have found that he was. If he was, the inference - which it is for the tribunal, not for the court, to draw - seems irresistible that [the purchaser] did not deal with the applicants at arm's length. 21 His Honour then referred to the observations of Lee J in Grandby and continued: I respectfully agree. The inference must surely be drawn that [the purchaser], being indifferent, submitted the exercise of his will to the applicants' wishes in acceding to their request. 22 As in the earlier cases, Jenkinson J focussed upon the way in which the parties dealt with each other. The purchaser had bid for all four blocks as one parcel but agreed to sign two contracts although it yielded no further benefit to him. Clearly, his agreement was for no purpose other than to oblige the vendors. In these circumstances, the parties could be seen to be other than at arm's length. On the other hand, if a potential purchaser were to include a particular term in its offer to a potential vendor, in the expectation that the latter would find it attractive, thus inducing it to sell to the purchaser, the position may be otherwise. The purchaser will have made the offer in order to advance its own interests. 23 ACI Operations Pty Ltd v Berri Ltd (2005) 15 VR 312 concerned the construction of the term "bona fide arm's length" offer in a contract for the supply of packaging. At [223]-[224] Dodds-Streeton J said: 223 The above authorities indicate that an arm's length relationship is that of strangers, or parties who are unaffected by existing mutual duties, liabilities, obligations, cross-ownership of assets, or identity of interests which might: (a) enable either party to influence or control the other; or (b) induce either party to serve that common interest in such a way as to modify the terms on which strangers would deal. 224 The concept of an arm's length relationship is distinct from that of an arm's length dealing or transaction, despite the potential overlap. Unrelated parties may collude or otherwise deal with each other in an interested way, so that neither the dealing nor the resultant transaction may properly be considered arm's length. 225 Where the parties are not in an arm's length relationship, it is recognised that the inference may be drawn that they did not deal with each other at arm's length. It may further be inferred that the resultant transaction is not arm's length. 226 Related parties may nevertheless, in some circumstances, demonstrate a dealing which displaces the inference based on their relationship. They may engage in the disinterested bargaining characteristic of strangers, applying independent separate wills. The circumstances of the impugned transaction may be such that, despite the parties' connection or common interest, the interposition of some independent process (such as the sale of shares on the stock exchange) ensures that the transaction itself is arm's length, in the sense that it could equally have been concluded by unrelated parties, consulting their own self-interest and uninfluenced by any particular association or interest in common. 24 The learned primary Judge also referred to the decision of Gyles J in Baxter v Commissioner of Taxation (2003) 196 ALR 519, identifying the proposition that the fact that a transaction is devised in a certain way so as to obtain a revenue advantage does not mean that the transaction is not at arm's length. I accept that the offer and acceptance of a proposal which has a tax-related attraction for the offeree may not necessarily lead to the conclusion that the transaction is not at arm's length. For reasons which I have given, the offer may well have been motivated by the offeror's self-interest. However, there will be cases in which one side accommodates the other simply because it is able to do so without loss or inconvenience to itself, or because there are extraneous reasons for wanting so to do. I use the word "extraneous" in lieu of the word "ulterior" used in Granby, but with the purpose of describing a motivation other than that of facilitating the proposed transaction. 25 Gyles J found difficulty with the proposition that parties at arm's length might become involved in transactions which were not at arm's length. I suspect that his Honour meant that the very fact of entering into a non-arm's length transaction means that the parties are not at arm's length for the purposes of that transaction. I agree with that proposition.

IN SUMMARY 26 I have no real difficulty with any of the propositions which emerge from those cases. They may be summarised as follows: · in determining whether parties have dealt with each other at arm's length in a particular transaction, one may have regard to the relationship between them; · one must also examine the circumstances of the transaction and the context in which it occurred; · one should do so with a view to determining whether or not the parties have conducted the transaction in a way which one would expect of parties dealing at arm's length in such a transaction; · relevant factors which may emerge include existing mutual duties, liabilities, obligations, cross-ownership of assets, or identity of interests which might enable either party to influence or control the other, or induce either party to serve a common interest and so modify the terms on which strangers would deal; · Where the parties are not in an arm's length relationship, one may infer that they did not deal with each other at arm's length, and that the resultant transaction is not at arm's length; · however related parties may, in some circumstances, so conduct a dealing as to displace any inference based on the relationship; · un-related parties may, on occasions, deal with each other in such a way that the resultant transaction may not properly be considered to be at arm's length.

IS S 124-780(5) ENGAGED? 27 In the present case AXA bears the burden imposed by s 14ZZO of the Taxation Administration Act 1953 (Cth) (the "Administration Act") of establishing that the Commissioner's assessment was excessive. In order to do this it undertakes the task of demonstrating that it was not obliged to comply with the requirements of s 124-780(5), that subsection not being engaged pursuant to s 124-780(4). It is common ground that AXA cannot satisfy the requirements of s 124-780(5)(b). However s 124-780(4) will only engage the operation of s 124-780(5) if the parties to the relevant transaction did not deal with each other at arm's length, and either: (a) neither the original entity nor the replacement entity had at least 300 members just before the arrangement started; or (b) the original interest-holder, the original entity and an acquiring entity were all members of the same linked group just before that time. 28 It seems to be common ground that for present purposes s 124-780(4)(a) applies whilst s 124-780(4)(b) does not. Thus, if the relevant parties did not deal at arm's length, s 124-780(4) will operate to engage s 124-780(5). It is therefore necessary that AXA demonstrate that it dealt with Macquarie at arm's length.

AT FIRST INSTANCE 29 At [101] the primary judge said, concerning the decision in ACI Operations at [223]-[224] and [239]-[241]: Counsel for the Commissioner relied particularly on so much of Dodds-Streeton J's judgment as commences 'Unrelated parties …'. I would, with respect, regard that passage as unobjectionable, but it expresses the point at a very high level of generality. It leaves open the factual, and I consider more problematic, questions which will arise in every case where there was 'collusion' or rehearsed dealings to the extent sufficient to justify the conclusion that the parties did not deal with each other at arm's length. 30 I do not entirely understand the term "rehearsed dealings". Presumably, it means something like collusion. It suggests an act previously agreed upon. The word "collusion" itself carries negative overtones. The New Shorter Oxford Dictionary (1993) defines it to mean "[s]ecret agreement or understanding for nefarious purposes; conspiracy; fraud, trickery." Its legal meaning is said to be "[a]n agreement between two or more people, esp. ostensible opponents in a suit, to act to the prejudice of a third party or for an improper purpose." The word "collude" means "[c]onspire, plot, connive; act in secret concert." Nothing in the wording of s 124-780 suggests the need to prove any degree of moral impropriety. None of the other cases, nor the dictionary references adopted in WA Meat Exports suggests the necessary involvement of an element of collusion. As far as I can see the term is used only in Granby, but Lee J was suggesting only that collusion between interested parties would mean that dealings were not at arm's length. Collis and ACI suggest that the "dictation" contemplated in Granby need not involve moral, legal or physical obligation. The cases generally support an approach which involves examination of the parties' dealings in order to determine whether they have dealt with each other in the way in which parties at arm's length might deal in such a transaction. Collusion might be an example of dealings not at arm's length. Submission of the will of one party to that of the other may be the cause of a transaction being other than at arm's length. Neither "label" exhaustively identifies the essential indicia of such a transaction. 31 At [103] the primary Judge accepted denials by Messrs Owen and Penn that AXA and Macquarie had colluded with a view to devising a means to avoid the incidence of capital gains tax or otherwise. His Honour also observed that the Commissioner had not strongly pressed the assertion of collusion. His Honour found no evidence of collaboration between AXA and Macquarie, and that there was no suggestion in the evidence that AXA or any of its directors or senior executives knew, before 1 March 2002, that Macquarie proposed a structure in which any acquirer of AXA Health shares would not be wholly owned by Macquarie. AXA understood that there would be roll-over relief on its capital gain. However his Honour considered that such knowledge did not amount to collusion or submission by Macquarie of its will to the wishes of AXA or vice versa. 32 These comments suggest that his Honour limited his inquiry to the alternatives expressed by Lee J in Granby at 507 (collusion or submission of the will). In my view that approach involved a narrower test than is established by the cases. This is particularly so, given the connotations attaching to the word' "collusion" and to the concept of submission of the will. As is demonstrated by Collis, mere agreement out of lack of interest may be sufficient to deprive a transaction of arm's length status. Whilst Jenkinson J seems to have considered such agreement to involve submission of the will, the expression seems a little too dramatic for use in describing a commonplace event. The cases indicate that the proper approach necessarily involves an examination of the relationships between the parties and an assessment of their conduct against expectations as to the way in which a similar transaction would be conducted at arm's length.

THE APPEAL 33 In the notice of appeal the Commissioner asserts that the primary Judge erred in holding that AXA and Macquarie had dealt with each at arm's length and, in particular, that: 3. The learned judge erred in failing to hold that AXA and [Macquarie HF] did not deal with each other "at arm's length" within the meaning of section 124-780(4) of the [1997 Act] in circumstances where: (a) in return for a fee, [Macquarie] (on behalf of [Macquarie HF]) designed the structure of the transaction to further the interests of AXA by reducing the capital gains tax payable upon its disposal of shares in AXA Health; (b) further or alternatively, in return for a fee, [Macquarie] (on behalf of [Macquarie HF]) prepared the terms of the transaction so as to further the interests of AXA by reducing the capital gains tax payable upon its disposal of shares in AXA Health; (c) further or alternatively, in negotiating the terms of the transaction, the parties worked together to further the interests of AXA by reducing the capital gains tax payable upon its disposal of shares in AXA Health. 4. The learned judge erred in concluding that the fact that a transaction is devised in a certain way by a party to obtain a revenue advantage for the other party does not mean that the transaction is a non-arm's length one for the purposes of section 124-780(4) of the [1997 Act]. 34 This approach focuses upon both the relationship between AXA and Macquarie and the conduct of negotiations between them. In his written submissions the Commissioner submits that the primary Judge erred in his interpretation of the requirement that there be an arm's length dealing and in his conclusions on the facts.

THE DEALINGS 35 During 2001, Macquarie Advisory was advising AXA concerning the proposed disposal of its subsidy AXA Health. A possible buyer was MBF. Negotiations had been continuing for some time. As appears from the primary Judge's reasons at [6] Macquarie Advisory "had become concerned that, … 'there were no competitive forces driving the negotiations with MBF' ". There was also concern about the financial ability of MBF to fund the acquisition and complete the transaction. For these reasons Ms Birch of Macquarie Advisory and others were considering alternative options, including a preliminary investigation as to the viability of an initial public offering of shares (an "IPO"). Subsequently there was consideration of a leveraged buy-out (an "LBO"). Macquarie Advisory sought to engage Macquarie PTG in the process. On 18 November, Mr McLean of Macquarie Advisory had sent an email to Macquarie personnel, including Mr Facioni who was responsible for the operation of Macquarie PTG. A meeting with AXA was scheduled for 21 November 2001 at which Macquarie PTG was to make a presentation concerning a proposed IPO or LBO. The email appears at AB Pt B vol 1, tab 55. It included the following information: · that AXA was very interested in an initial public offer or an MBO/LBO; · "Negotiations continue with MBF - the latest development is that we have set up a two week deadline to resolve the (long list of) outstanding issues. By the end of this two week period (Friday 30 November) it is likely we will either call off negotiations or start frantically trying to document a deal by Christmas. As a reminder, MBF are offering a 'pivot price' of $560m, with an upside sharing mechanism that could achieve total consideration of up to $640-650m if the business performs well (and a downside risk sharing mechanism if adverse regulatory events occur). AXA is likely to have to provide MBF with around $250m of vendor finance, which AXA is unsurprisingly not particularly happy about." · Mr McLean's assessment of AXA's likely reaction to various price ranges; · that AXA would probably prefer the MBO/LBO over an IPO because it would be implemented more quickly and have lower transaction costs; and · that Mr McLean would confer with the various addressees to ensure that "we are all happy with" the proposed presentation to AXA. The letters "MBO" mean "management buy-out". The distinction between an MBO and an LBO is not presently relevant. 36 In providing this information to Macquarie, Mr McLean was assisting Macquarie to prepare its proposal to AXA. It is not clear whether he did so in the belief that Macquarie would use the information in order to assist AXA to achieve its goal or for its own purposes. However the email suggests that he was participating as an officer of a potential purchaser. The presentation occurred on 21 November 2001. It seems from the presentation slides used on that occasion, that Macquarie's involvement as a purchaser was already contemplated. In the presentation, the proposed price range reflected the range suggested by Mr McLean. AXA had previously determined that AXA Health was worth $570 million plus a further $105 million, representing one-half of its valuation of "agreed synergies". Thus AXA was asserting a total valuation of $675 million. Whether Mr McLean knew of this view is not clear, but he seems to have had knowledge of AXA's expectations. 37 Macquarie suggested that the LBO process might be conducted in parallel with a trade sale to MBF and an IPO at no additional cost to AXA. His Honour understood this to mean that if negotiations with MBF came to fruition, AXA Health could be on-sold from Macquarie to MBF. This suggests that the relationship between AXA and Macquarie was not that usually found between potential seller and potential buyer. 38 Although at some stages it was suggested that Macquarie might retain AXA Health for up to three years in the hope of re-selling at a profit, the evidence generally suggests an intention to dispose of it as soon as was practicable. Further, Macquarie seems never to have necessarily expected to derive a profit on resale, although it no doubt hoped for such an outcome. The evidence suggests that Macquarie's interest in the transaction was substantially focussed upon the fees to be derived from facilitating it and not from the acquisition of the asset. In that sense Macquarie was not a willing purchaser, dealing with a not unwilling vendor, to paraphrase the language of Griffith CJ in Spencer v The Commonwealth of Australia (1908)5 CLR 418 at 432. Rather, it was anxious to facilitate such a sale, even if it had temporarily to acquire AXA Health itself. Nor was the transaction of the kind contemplated by Isaacs J at 441 in the same case, when he said: To arrive at the value of the land at that date, we have, as I conceive, to suppose it sold then, not by means of a forced sale, but by voluntary bargaining between the plaintiff and a purchaser, willing to trade, but neither of them so anxious to do so that he would overlook any ordinary business consideration. 39 His Honour was clearly speaking of a buyer wishing to acquire the land, not facilitate a sale to somebody else. 40 Mr Facioni said in evidence that Macquarie's interest was in earning the fees associated with setting up and completing the transaction, suggesting that the possibility of profit on any resale of AXA Health was largely incidental to the motivation which led it to enter into the transaction. He said at para 9-10 of his affidavit: 9. [Macquarie] did not intend to become a permanent or long-term owner of a private health insurance business. It had never carried on such a business and did not seek to do so at this time. At the time of conceiving and developing the proposal regarding AXA Health I envisaged that [Macquarie] would pre-arrange a full or partial sale of AXA Health before entering into any binding agreement with the Applicant to acquire the company, in effect a form of sub-underwriting. This could potentially be done by organising an equity consortium of private investors, thus mitigating the burden and risk for [Macquarie] of on-selling AXA Health. 10. I considered that organising an equity consortium as part of the LBO would have significant advantages for [Macquarie]. As the arranger of the equity consortium, [Macquarie] would derive significant fees from the consortium members as consideration for the provision of advisory, equity, underwriting and debt arranging services to the consortium. I considered this to be particularly attractive in view of the fact that [Macquarie] would also derive a significant underwriting fee from the Applicant. 41 At para 43 he said: In the course of preparing this affidavit I have become aware that the respondent has suggested that if the Applicant had not sold AXA Health to [Macquarie HA], it would have sold AXA Health directly to MB Health. That suggestion is incorrect. The transaction with the Applicant to purchase AXA Health had been originated, structured, negotiated and executed by [Macquarie]. MB Health, BUPA and [BUPA Australia] were participants in the transaction, with [Macquarie] as the overall transaction sponsor. [Macquarie] stood to receive certain financial benefits for arranging and leading the transaction and for assuming certain material risks (financial and reputational) and devoting significant resources throughout the course of the transaction. At no time was MB Health in a position independently to offer to acquire AXA Health and, as a 50 per cent shareholder in MB Health with significant commercial benefit at stake, [Macquarie] would not have permitted such a transaction to occur. 42 This evidence suggests strongly that in negotiating the agreement to acquire AXA Health from AXA, Macquarie was not negotiating as a potential purchaser in the sense used by the High Court in Spencer. The primary motivation seems not to have been either long term acquisition of the business, or even acquisition for the purpose of resale at a profit. The primary incentive for its involvement in the transaction appears to have been the associated fees, both those to be received from AXA and those to be received from the proposed consortium. See also the judgment at first instance at [24]-[26] and [31]-[32]. 43 Various other contemporaneous documents demonstrate the ambiguous nature of the relationship between Macquarie and AXA. In a "proposal summary" for Project Huey (apparently a name used to identify the AXA Health project) it is said that: AXA has appointed Macquarie Bank Limited … to act as financial adviser in regard to the divestment. As part of this role, Macquarie is exploring the feasibility of a management buyout of AXA Health for [$550-$600] million. 44 Thus, at this stage, Macquarie did not see itself as a buyer but as an adviser. Under the heading "Constraints" the document states: While critical to establishing the feasibility of an MBO of AXA Health, AXA has not consented to Macquarie approaching a bank prior to the expiry of MBF's exclusivity period (31 December 2001). Further, Macquarie has not yet conducted financial, accounting or legal due diligence on the business or sought the advice of an independent consultant. Accordingly, this paper and all representations made to AXA are subject to achieving Macquarie's assumptions relating to debt and confirmatory due diligence on AXA Health. 45 The reference to the need for AXA's consent to Macquarie's approaching a bank suggests that the latter was to act on behalf of AXA in so doing. This is hardly consistent with Macquarie being involved in an arm's length transaction with AXA. In the document Macquarie discloses its own interests in investing up to $125 million in the project, the balance to be provided by a strategic partner. A number of possible strategic partners are identified, including BUPA. Macquarie's involvement was also said to involve receipt of fees. Under the heading "Potential Upside" (apparently from Macquarie's point of view) the "[t]ransaction structuring opportunities" are said to be to "[m]anage capital gains tax exposure for AXA on sale (share in up to $100m NPV uplift to AXA)" and various other matters. Some of the other potential advantages may have involved longer-term ownership. However it seems clear that Macquarie saw itself as providing a service to AXA, which service included management of AXA's capital gains tax exposure. 46 In a memorandum dated 22 January 2002 it is suggested that Macquarie was interested in acquiring AXA Health for the purpose of resale at a profit. However the proposed structure seems to have contemplated resale within six months. In a subsequent internal briefing memorandum dated 22 February 2002 the preferred option was re-sale within three to twelve months, although retention for two to three years was also contemplated. Macquarie was described as: Promoter, equity arranger/participant, debt arranger, financial adviser. Ongoing strategic relationship covering M&A and ECM Services, funds management, x-distribution [sic] of retail products. 47 In identifying returns to Macquarie, various fees were identified totalling $20-54 million, including some fees payable by entities other than AXA. A possible profit of $16-20 million from equity participation was also contemplated. 48 The ultimate proposal advanced for approval by Macquarie involved an equity exposure limited to $20 million. In the end the equity sell down agreement provided that AXA would participate in any profit derived from the subsequent disposition of AXA Health or its business within twelve months of the completion of the underwriting agreement. No such profit was derived. Pursuant to the underwriting agreement a $5 million underwriting fee was payable to Macquarie. Pursuant to the equity sell down agreement a further fee of $5 million was payable for procuring Macquarie HA as purchaser to satisfy its obligations under the agreement. By the time that the transaction documentation was completed BUPA had effectively committed itself to taking all of the shares in AXA Health in the event that Macquarie had not otherwise been able to dispose of its interest. 49 Macquarie's ambiguous position had not passed unnoticed. On 26 November 2001 Mr McLean wrote to Mr Facioni, pointing out difficulties which Ms Foster of AXA had identified. They included pursuing the LBO with Macquarie in face of the exclusivity arrangement which existed between AXA and MBF. She had also raised the question of a conflict of interest on the part of Macquarie as between the role of Macquarie Advisory and Macquarie's role in any LBO. Ms Foster was also concerned about the fact that Macquarie, as a potential purchaser, had received more information than any other potential bidder for AXA Health. She suggested that Macquarie should reduce the level of its advisory fees given that it was to get "a good deal" on the LBO. As I have previously observed, Mr McLean's interest in the transaction seems not to have been limited to advising AXA on behalf of Macquarie Advisory. He suggested, apparently as a way of avoiding an accusation that AXA was negotiating with Macquarie in breach of the exclusivity agreement with MBF, that "[t]here is an argument that we are really looking at financing options for AXA Health … rather than negotiating a sale …". However he considered this to be "hard to maintain if we go much further". Mr McLean suggested that if Macquarie acquired AXA Health, "we could announce the deal and then give alternative bidders one month to beat the offer in order to ensure that the market is fully tested (although it probably is already)". Ms Foster apparently replied that she did not think that this was "a full answer" as Macquarie had "access to information that others do not". Mr McLean then suggested that, "[w]e could perhaps agree to set up Chinese Walls between our advisory team and our LBO team, to put the LBO team in the same position as they would be in if they were from a party external to Macquarie." In view of the information already supplied, this precaution seems to have emerged at a rather late stage. Mr McLean continued: I'm not sure AXA should be concerned about that - it is in their best interests to give us enough information to put in a fully informed bid (and they are not risking a breach of confidentiality doing this, given that Macquarie knows the deal already). If the issue is that there is not a level playing field between potential bidders, we could use a mechanism such as the "1 month to bid" option mentioned above. If AXA really finds this difficult, we could perhaps look to set up Chinese Walls to limit the flow of information. 50 As to the question of reduction in fees he said: The answer here is pretty clear - if we take this up Macquarie will be taking some very material risks and is likely to pay a figure close to what a synergy buyer is offering for the business. At the price paid, the deal may or may not go well for Macquarie: it is not appropriate for us to lose our fee given that we are paying a full price for the business. The advice is a separate deal from the acquisition. 51 AXA was concerned to ensure that it participated in any profit derived by Macquarie from on-selling its interest in AXA Health at a profit. Whether the concern was primarily financial or more about reputation in the business community is unclear. However it is clear that AXA and Macquarie accepted that there might be a relatively quick resale at a profit, suggesting doubts about whether the price being paid to AXA was market price. 52 These considerations suggest that this was not a case in which the sale price was negotiated between a willing, but not overly anxious vendor and a willing, but not overly anxious purchaser. It was negotiated between a relatively anxious vendor (although that may not matter much) and a merchant bank which was anxious to derive fees from the transaction, and was willing to facilitate it by making a short-term investment on its own accord in the expectation that it would recoup it, possibly with a profit, possibly at a loss. However, by the time that the agreement was made, the possibility of a loss was gone. There was, however, the chance of a profit which Macquarie would share with AXA. 53 The early stages of the negotiation, from which the ultimate form of the transaction largely emerged, took place against a background of the knowledge provided to Mr Facioni and others by Mr McLean. He had derived it from his position as adviser to AXA. The information included AXA's likely attitude to possible monetary yields from the proposed sale and the state of dealings between AXA and MBF, the other likely purchaser. The position was such that both Ms Foster (for AXA) and Mr McLean were concerned at the possibility of conflict of interest. Those concerns were justified. It is also clear that the transaction was structured so as to minimize AXA's exposure to capital gains tax. This was not a case of a potential purchaser offering a potential vendor a tax advantage by structuring the transaction in a way which yielded a particular benefit to the latter as part of the inducement for accepting the offer. This was rather a case of Macquarie using its cash resources to provide a service to AXA, its client, for a fee. 54 Section 124-780(4) addresses dealings between the "original interest holder" and "an acquiring entity". In the present case, AXA was the original interest holder. It is common ground that Macquarie acted on behalf of the acquirer, whether it was Macquarie HA or Macquarie HF, and that it is Macquarie's conduct which is to be assessed, together with AXA's, for the purpose of determining whether the parties dealt with each other at arm's length. The dealings in question were those which led to the exchange of shares in AXA Health for shares in Macquarie HA.

CONCLUSION 55 The evidence demonstrates the following aspects of those dealings: · Macquarie was engaged in the dealings for the purpose of assisting AXA to dispose of AXA Health; · Macquarie received information concerning the dealings between AXA and MBF, the other possible acquirer, which information informed its dealings with AXA regarding the acquisition of AXA Health; · at least a substantial part of the benefit which Macquarie expected to derive from the transaction was comprised of fees for facilitating it and from the acquirer; · Macquarie advised AXA on the advantages and disadvantages of the proposed transaction; · Macquarie's facilitation of the transaction included its own short term capital participation, at least partly for the purpose of earning its fees; · both AXA and Macquarie were conscious that there was at least a possibility that Macquarie could make a profit on a quick resale of its interest in AXA Health, leading AXA to demand and receive a promise that it would share in any such profit; and · by the time that the transaction was effected, Macquarie's capital exposure was minimal or non-existent. 56 In my view there was an identity of interest in the transaction, as between AXA and Macquarie, which was not simply that of vendor and purchaser. Macquarie had, in effect, undertaken to assist AXA to dispose of AXA Health in a way which would minimize AXA's capital gains tax exposure. They were to have an ongoing relationship with respect to any short-term profit on resale. Their relationship was not at arm's length. Their dealings reflected that fact. Those dealings were inevitably coloured by the disclosures made by Mr McLean in November 2001. From Macquarie's point of view the parameters of the transaction were effectively set by knowledge of AXA's ambitions for the sale and the state of negotiations with MBF. Mr McLean's motivation may have been to benefit AXA, and Macquarie may also have had that intention. Indeed, that is the point. The transaction was designed to enable Macquarie to obtain fees for services, not to acquire an asset. The negotiations concerning AXA's participation in any profit on re-sale suggested a perception that Macquarie's offer might not reflect market price.

ORDERS 57 I would allow the appeal and set aside the orders below. I would order that the application be dismissed with consequential costs orders in respect of the proceedings below and on appeal. I certify that the preceding fifty-seven (57) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Dowsett.

INTRODUCTION 58 The respondent, AXA Asia Pacific Holdings Ltd (AXA), disposed of its shares in a wholly-owned subsidiary, AXA Health Insurance Pty Ltd (AXA Health), on 30 August 2002 for $570 million pursuant to agreements entered into on 4 June 2002. The trial judge held that under subdiv 124-M of the Income Tax Assessment Act 1997 (Cth) (the 1997 Act), AXA was entitled to partial roll-over relief for $383,125,293 of the capital proceeds on the disposal of its shares in AXA Health. 59 There were three substantive issues before the trial judge: 1. did AXA deal at arm's length with Macquarie Bank Limited (MBL)? A subsidiary of MBL (Macquarie Health Funding Pty Ltd (MHF) as nominee for Macquarie Health Acquisitions Pty Ltd (MHA))acquired the shares in AXA Health; 2. if yes to (1), did Pt IVA of the Income Tax Assessment Act 1936 (Cth) (the 1936 Act) operate to deny AXA the partial roll-over relief? and 3. did the Commissioner of Taxation (the Commissioner) err in assessing penalty tax? The trial judge found that AXA and MBL dealt with each other at arm's length and Pt IVA of the 1936 Act did not apply. Given the findings of the trial judge, it was unnecessary for his Honour to consider the third substantive issue. 60 On appeal, the Commissioner challenged both of the trial judge's findings - that AXA and MBL dealt with each other at arm's length and that Pt IVA did not apply. The parties accepted that consideration of the third issue (penalties) should be deferred until the substantive appeal was determined. First, the Commissioner submitted that the trial judge erred in his interpretation of s 124-780(4) of the 1997 Act and in his conclusion that AXA and MHF dealt with each other at arm's length: Appeal Grounds 1 to 4. In broad terms, the Commissioner submitted that AXA did not deal at arm's length with MBL because "MBL's role in structuring the transactions, so as to minimise the capital gains tax payable by AXA, meant that MHF (which was a subsidiary of MBL created for the purposes of the transactions) did not deal with AXA at arm's length". 61 Next, if the Commissioner's appeal against the trial judge's finding that AXA and MHF dealt with each other at arm's length was dismissed, the Commissioner submitted that the trial judge erred in finding that Pt IVA of the 1936 Act did not apply to disallow the partial roll-over relief because AXA obtained a "tax benefit" within the meaning of s 177C(1)(a) of the 1936 Act and, further, having regard to the matters set out in s 177D(b) of the 1936 Act, it would be concluded that 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 AXA to obtain that tax benefit in connection with the scheme: Appeal Grounds 5 to 15. 62 For the reasons that follow, we would dismiss the appeal. The trial judge was correct to conclude that AXA and MHF dealt with each other at arm's length and that AXA did not obtain a tax benefit within the meaning of s 177C(1)(a) of the 1936 Act.

FACTS 63 No ground of appeal challenged the findings of fact by the trial judge. What follows is a summary of the facts set out in paragraphs [2] to [81] of his Honour's reasons for decision. 64 AXA Health, a wholly owned subsidiary of AXA, inter alia, operated a profitable health insurance business trading as "HBA" in Victoria and "Mutual Community" in South Australia. By the end of 2000, a committee established to conduct a strategic review of AXA's health insurance business determined that AXA Health's position was unsustainable in the long term. A number of courses open to AXA were considered, including the acquisition of another health insurance business or businesses (Medical Benefits Fund of Australia Ltd (MBF), Medibank Private or the acquisition of a combination of smaller health insurers), a strategic alliance with MBF or, if none of those proved viable, the divestment of AXA Health. The committee's chairman (Mr Les Owen, AXA's Group Chief Executive (Mr Owen)) concluded the most propitious options were a merger with MBF or the sale of the existing business to MBF. 65 In early 2001, AXA engaged MBL (through its advisory arm (MBL Advisory)) to assist it in an approach to MBF. Despite negotiations in the first half of 2001 between AXA and MBF about the possible merger of MBF with the business of AXA Health, the negotiations had concluded unsuccessfully by July 2001. 66 On 27 July 2001 and again on 13 August 2001, MBF made "an indicative proposal" to AXA to acquire AXA Health. On 13 August, the headline price was increased to $535 million. Under both proposals, the sum to be paid at settlement was $250 million with the balance to be paid by way of vendor finance. AXA's board considered the proposal on 29 August 2001. MBF's offer was significantly below AXA's valuation of AXA Health of $675 million comprising a "stand alone" valuation of $570 million and an "agreed synergies" valuation of $105 million. The AXA board were told that the tax effects (a capital gains tax liability of approximately $140 million and revenue loss trade offs) would impact on the net proceeds. The board resolved to give MBF a short period of exclusivity it had requested (subject to appropriate milestones) to move the parties toward a satisfactory price and funding structure. 67 At about the same time, MBL Advisory was assisting AXA to locate other domestic and foreign sources of interest in AXA Health including meeting with representatives of British United Provident Insurance Ltd (BUPA) of the United Kingdom. Ms Marianne Birch, a Division Director with MBL Advisory (Ms Birch), was one of the group who met with BUPA. MBL Advisory ultimately concluded that there was little or no domestic or foreign interest in the acquisition of AXA Health. By October 2001, MBL Advisory was investigating two further options - an initial public offering (IPO) and a leveraged buy out (LBO) of AXA Health. The prospect of an LBO had been raised by Ms Susan Foster, AXA's Strategic Projects Manager (Ms Foster). MBL Advisory contacted another arm of MBL to assist - the Principal Transactions Group (MBL PTG). Mr Richard Facioni, an Executive Director of MBL (Mr Facioni), was the head of MBL PTG. 68 On 21 November 2001, MBL PTG made a presentation to AXA. Mr Owen, Ms Foster and Mr Andrew Penn, AXA's General Manager of Operations (Mr Penn), attended. (Mr Penn was the executive with overall responsibility of disposing of AXA Health on the most favourable terms). The LBO proposed by MBL PTG was that AXA Health be sold "into an unlisted, leveraged structure". A company would be established to acquire AXA Health in which MBL and other investors would hold the equity. Debt finance of $300 million would be obtained. The LBO proposal was to be conducted in parallel with a trade sale to MBF so that if AXA's negotiations with MBF succeeded, AXA Health could be on-sold from the MBL structure to MBF. (In fact, in the first week of November 2001, AXA and MBF were still seeking to effect a sale of AXA Health to MBF. Mr Owen of AXA granted MBF a further period of exclusivity until 31 December 2001). 69 The AXA board met on 30 November 2001. Mr Penn told the board that except for a sale to MBF, the prospects of disposing of AXA Health for a price in line with AXA's expectations were limited. The board resolved to continue discussions with MBF and progress investigations into the IPO and the LBO options to determine price and feasibility. 70 MBL PTG prepared a memorandum dated 7 December 2001 which proposed the creation of a new entity "BidCo" (BidCo) to acquire AXA Health. The memorandum also addressed, inter alia, the advantages and risks to MBL of such a transaction. Although the scrip-for-scrip exchange was not mentioned, the trial judge concluded that the evidence left "little doubt that at least someone in MBL PTG had it in mind to structure the transaction in such a way that capital gains tax would not be payable". On 9 December 2001, a form of the memorandum (in the same terms as the one prepared on 7 December 2001) was sent to the chief executive officer of MBL and to the head of the Investment Banking Group within MBL. 71 The AXA board met again on 20 December 2001. The board considered a paper (contributed to by MBL Advisory) which compared options for the disposal of AXA Health. The board endorsed a recommendation that AXA maintain a tough line with MBF and not to extend exclusivity beyond 31 December 2001 unless there was agreement on value and if not, then pursue the IPO / LBO without precluding ongoing discussions with MBF. A "Chinese wall" was in place between MBL Advisory and MBL PTG in relation to the disposal of AXA Health. 72 During January 2002, a number of events occurred. On 2 January 2002 (immediately after the exclusivity period provided to MBF had expired), MBL Advisory provided Mr Penn with a table setting out the net present value of the various options then potentially available for the sale of AXA Health. The tax payable by AXA was one of the economic implications. On 22 January 2002, MBL PTG prepared a confidential memorandum which identified the key steps in its proposal for an LBO of AXA Health. The memorandum again referred to the idea of MBL establishing BidCo, which would acquire AXA Health. The memorandum was the first documentary reference for the balance of the consideration (after the deposit) to be convertible shares in BidCo. BidCo ultimately became MHA. 73 On 16 January 2002, MBL Advisory met again with representatives of BUPA. Mr Owen was told of BUPA's interest. He authorised MBL Advisory to raise with BUPA the possibility of BUPA participating in the LBO proposed by MBL PTG, or of BUPA making a bid for the outright acquisition of AXA Health. BUPA told Ms Birch of MBL Advisory that BUPA could not finance an outright acquisition of AXA Health but was keen to participate in an LBO by contributing equity. Ms Birch told the BUPA representative that MBL Advisory could not deal with BUPA about equity participation in an LBO (because of the "Chinese wall") and gave the representative Mr Facioni's telephone number. Mr Facioni provided BUPA with a detailed briefing paper which, inter alia, summarised the financial position of AXA Health, the proposed structure for the LBO and provided that MBL would be retained to act as financial advisors to BidCo and would receive fees for financial advice and debt and equity arranging. 74 At the same time, AXA was still considering a sale of AXA Health to MBF. On 11 February 2002, Mr Penn advised Mr Owen his preference was for a direct sale to MBF rather than the LBO proposal. MBL PTG spent February preparing drafts of an "indicative bid" for AXA Health. 75 On 27 February 2002, AXA's board considered a paper prepared by Mr Owen. The paper informed the board that progress on both options (direct sale to MBF and the LBO) was continuing slowly and that AXA would continue with the strategy of working with both parties. The board minutes record that it appeared that the LBO team intended to realise the investment through a subsequent IPO and AXA would seek to ensure participation in any excess over the offer from the LBO team. 76 On 1 March 2002, MBL made a "non-binding" bid for AXA Health, described as an "unconditional underwriting". The bid's form was devised by MBL PTG and other groups in MBL, but not MBL Advisory. AXA had no input into the structure or form of the bid. Letters of support from third party investors were included in the bid. The bid contained, inter alia, provisions that: 1. MBL was not a strategic acquirer nor long term owner of AXA Health; 2. MBL would undertake the acquisition through a MBL special purpose company - MHA; 3. MBL would assume the risk of on-selling AXA Health either by on-sale to a private equity consortium or an IPO; 4. AXA was to receive a minimum price of $550 million plus up to a further $10 million if AXA Health was subsequently sold by way of an IPO within 12 months; 5. consideration of $550 million would be paid by a $65 million non-refundable deposit plus $485 million vendor financing in the form of converting vendor shares in AXA Health; 6. AXA would grant MBL a period of exclusivity during which time AXA would undertake not to enter into discussions with third parties in relation to a trade sale or IPO of AXA Health; and 7. an underwriting fee of $10 million plus stamp duty on share transfers would be payable by AXA to MBL. 77 On 8 March 2002, AXA responded to the bid. AXA gave, to adopt the words of the trial judge, "limited, provisional and somewhat cautious support to the MBL bid". AXA required a number of issues to be addressed (including that the voting and distribution entitlements of the vendor shares had to be increased) and proposed a number of other modifications (including a base price of $560 million and a requirement that AXA share, to the extent of 50%, in any profit made from the on-sale AXA Health under certain conditions). 78 After discussions between MBL and the proposed investors, on 16 April 2002 MBL submitted a revised non-binding bid for AXA Health. It followed the same general approach as the initial bid. The total price was increased to $560 million made up of $65 million cash deposit and convertible vendor shares to the value of $495 million, AXA was to be entitled to a share of 50% (reducing pro-rata to 30% over 12 months) of any profit made from any on-sale of AXA Health for more than $575 million (net of costs) within 12 months and, subject to negotiation, AXA would have 25% of the voting power at a general meeting of MHA and would have one seat on the board. 79 On 17 April 2002, the AXA board considered two options - the sale to MBF and MBL's non-binding bid. The scrip-for-scrip roll-over provisions in the MBL bid were discussed at this meeting. The board resolved that the MBL bid should be progressed to a heads of agreement and that MBF should be informed that although AXA would continue to negotiate with MBF, it was no longer the preferred buyer. 80 On 19 April 2002, AXA responded to the "key commercial issues" of MBL's revised bid. AXA's response included seeking to extend the profit share in the event of the IPO or trade sale to 18 months, and aggregating the underwriting fee and stamp duty at $10 million. Negotiations of the "key commercial issues" continued on 22, 24 and 26 April 2002. 81 On 29 April 2002, representatives from MBL Advisory (representing AXA), MBL PTG and BUPA met for the first and only time. The file note of the meeting records, inter alia,that AXA expressed concern that it would be "embarrassed by an on-sale through an IPO at a significant profit" and further questioned what benefit it would obtain from paying large fees to MBL to sell AXA Health to BUPA. The file note further recorded that AXA would seek "appropriate profit share terms" to address these concerns. 82 On the same day, 29 April 2002, AXA extended the period of exclusivity to MBL to 14 May 2002. As a result, AXA could negotiate with MBF but not with any other prospective acquirer, including BUPA. The concerns of AXA concerning BUPA's larger equity stake in the acquisition of AXA Health were again expressed in an email from Mr Owen on 7 May 2002, where he stated that AXA would "not be at all happy" if a trade sale to BUPA took place and that if BUPA were "changing their position in the whole business" that AXA should be talking with them directly. Mr Green responded on 8 May 2002. The issue was not addressed. 83 On 3 May 2002, AXA's solicitors produced a first draft of the heads of agreement. The parties to the agreement were to be AXA, MBL, MHA, and Macquarie Health Holdings Pty Ltd (MHH). 84 On 8 May 2002, Mr Bob Herbert of MBL sent an email to others within MBL attaching a draft transaction description of how AXA Health was to be acquired. The document described, in some detail, the proposed arrangement including aspects that had been negotiated with AXA and aspects that had been negotiated with BUPA. The document included a diagram that set out the "acquisition structure to facilitate a scrip-for-scrip bid for AXA Health", explaining the details of the companies and their relationship. 85 On the same day, 8 May 2002, Mr Herbert wrote another memorandum jointly with Mr Greg Pahek (an executive of MBL PTG) seeking approval for the establishment of three special purpose companies required to complete the acquisition of AXA Health. These companies were MHH, MHA and MHF. MHH was to have 100 ordinary shares of which 99 were to be held by MBL and one was to be held by BDW Nominees Pty Ltd (a special purpose company owned by MBL's legal advisors, Blake Dawson Waldron). MHA was to have 100 ordinary shares of which 99 were to be held by MBL and one was to be held by MHH. MHF was to be wholly owned by MHA. The memorandum included another diagram explaining the structure of the proposed acquisition. The companies were duly incorporated on 10 May 2002. 86 Between 10 and 20 May 2002, further draft heads of agreement were being prepared by AXA's solicitors. During this time, the agreement was renamed the "Underwriting Agreement". On 20 May 2002, a new warranty was inserted to be given by MBL that MHH would not be a wholly owned subsidiary of MBL. On 22 May 2002, MBL and BUPA Australia Pty Ltd (BAPL, the wholly owned subsidiary of BUPA) procured the incorporation of a company called MB Health Holdings Pty Ltd (MB Health). By 22 May 2002, the price being offered by MBL had risen to a total of $595 million, comprising of a deposit of $57.6 million and vendor shares in MHA of $537.4 million. 87 Meanwhile, AXA continued to deal with MBF as a possible (though not a preferred) buyer. 88 On 27 May 2002, Mr Facioni put the proposal for the acquisition of AXA Health (the Proposition Summary) to senior executives in MBL for approval. The Proposition Summary provided that the transaction would occur in four stages. The first stage was the establishment of the transaction entities MHF (described as "Fundco"), MHH, MHA and MB Health (described as "NewCo"), which had already occurred (see [85] and [86] above). The Proposition Summary provided that MB Health's role would be to acquire AXA Health either by the exercise of a put option by AXA to provide AXA with a "fallback" method of completing the sale of AXA Health, or, in the event that such an option was not exercised, by the acquisition of MHF from MHA. MB Health would also have the task of raising debt funding from the banks, the equity funding from MBL and BAPL, to fund the acquisition of AXA Health. 89 The second stage was the "announcement", which proposed that MBL would enter into a series of agreements which would "evidence the various parties' intentions in respect of AXA Health". These agreements were a binding conditional underwriting agreement with AXA, a binding equity participation agreement with BUPA and BAPL, two put options granted by BAPL to MBL, one call option granted by MBL to BAPL and credit-approved commitments from two named banks. 90 The third stage was described as "financial close" which described the execution of the sale documentation to acquire AXA Health and was divided into four categories, namely, capitalisation of the structure, the acquisition of AXA Health, the MBL sell-down, and banking arrangements. 91 The final stage was "completion" which described the procedures necessary to settle the sale. The Proposition Summary further outlined, inter alia, the transaction's risks and benefits to MBL. The Proposition Summary was approved by the executives subject to 14 conditions. 92 On 30 May 2002, MBL, BAPL, MB Health and BUPA entered into an "Equity Participation Agreement". By this agreement, MBL and BAPL agreed to establish a consortium to own and operate AXA Health, and that MB Health would be the vehicle through which this would occur. MBL and BAPL would each have a 50% interest in MB Health, to be adjusted by factors such as "any sell-down" by MBL under the agreement. Under the Equity Participation Agreement, BAPL granted MBL two put options and MBL granted BAPL one call option in respect of MBL's shares in MB Health. 93 On the same day, 30 May 2002, MBL forwarded its proposed offer for the sale of AXA Health to AXA. As the trial judge's reasons for decision explained: [61] Also on 30 May 2002 (which was a Friday), MBL forwarded its "proposed offer" for the sale of AXA Health to [AXA], attaching agreements in executable form, in which it made its preparedness to execute those agreements conditional upon [AXA] confirming in writing, by 7.00 pm on Monday 3 June 2002, that it ([AXA]) had ceased discussions and negotiations with all other prospective bidders, including MBF. Indeed, MBL's letter of 30 May stated that, absent [AXA] indicating its intention to "proceed with [the] proposal" by 7.00 pm on 3 June, the proposal would be withdrawn. [AXA's] sub-committee met on the afternoon of 3 June 2002. It considered a further letter of that day from MBL which pointed out certain benefits which the MBL proposal involved for [AXA], and which extended the 7.00 pm deadline for acceptance to midnight. On the same day, Mr Owen wrote to Mr Conde indicating a preparedness to sign an agreement for the sale of AXA Health to MBF that day, so long as certain conditions could be met. Mr Owen spoke to Mr Conde by telephone on the evening of 3 June, in the course of which it became clear that [AXA] would be unable to conclude an agreement with MBF. Mr Owen so informed the sub-committee at about 9.15 pm. The sub-committee then decided that [AXA] should accept the offer from MBL. [62] MBL was informed of that decision. Negotiations between [AXA] and MBL re-commenced at about 11.30 pm on 3 June 2002, an in-principle agreement was reached at about 9.00 am on 4 June 2002, the transaction documents were circulated for comment at about 1.00 pm, and the documents were executed at about 8.00 pm. The transaction documents so executed were the Underwriting Agreement, to which the parties were [AXA], MBL, MHA and MHH, and an "Equity Sell Down Agreement", to which the parties were [AXA], MBL and MHA. 94 The Underwriting Agreement provided that on the Completion Date (30 August 2002), AXA would exchange, and MHA would buy, the shares in AXA Health: cl 4.1 of the Underwriting Agreement. In exchange for the shares in AXA Health, MHA would pay $57.6 million in cash to AXA and MHA would issue to AXA 537.4 million shares with a value of $537.4 million, totalling $595 million: cl 4.2 of the Underwriting Agreement. This amount was later adjusted pursuant to the agreement to $570 million. The Underwriting Agreement further provided for a put option to be granted to AXA (cl 10(a), Sch 3) and for MBL and MHH to grant AXA a call option over their ordinary shares in MHA (cl 11, Sch 4). These options were only be exercised if the "vendor shares" (convertible ordinary shares in the capital of MHA) were converted and would expire if not exercised within two months of conversion or upon the exercise of the put option (whichever occurred first). The agreement further described the vendor shares, redeemable preference shares and the voting rights in MHA that the holder of the vendor shares would obtain. Finally, the Underwriting Agreement provided, inter alia, that AXA agreed to pay MBL an "underwriting fee" of $5 million on the Completion Date. 95 Also on 4 June 2002, AXA, MBL and MHA executed the Equity Sell Down Agreement. The agreement enabled AXA to participate in such profit that may be made by the on-sale of AXA Health, while at the same time allowing MBL a return on its investment. Under this agreement, AXA agreed to pay MBL an "equity sell-down fee" of $5 million in consideration for MBL procuring MHA to satisfy its obligations under the agreement. 96 Between 4 June 2002 and 30 August 2002, the parties engaged in "intense negotiations" and entered into a number of further agreements to complete the transaction. The trial judge described the period immediately prior to the Completion Date (30 August 2002) as follows: [76] It seems that the last week before execution of the transaction documents was a very busy time for all concerned. On 25 August 2002, the parties on the BUPA side of MBL, as it were, executed a deed to amend the Equity Participation Agreement. In relation to MBL's shareholding in MB Health, BAPL granted to MBL a put option and MBL granted to BAPL a call option, the exercise of which in each case was tied to the exercise by [AXA] of its right to convert its vendor shares in MHA, the exercise by [AXA] of its put option over those shares, or the expiry of that put option, as the case required. On the same day, those parties executed a shareholders' deed to regulate the operation and governance of MB Health. [77] On 26 August 2002 [AXA], MBL, MHA and MHH by deed amended the Underwriting Agreement. One of the amendments was to replace cl 4.1 with the following: "4.1 Exchange of Shares (a) The parties agree that on the Completion Date, AXA will exchange and MHA will buy the Shares for the Purchase Price free of Encumbrances and other third party rights. (b) MHA may, on Completion, direct AXA to execute an instrument of transfer of the Shares to Newco or other nominee company. (c) Where MHA gives a direction in accordance with clause 4.1(b), the duly executed instruments of transfer to be delivered by AXA on Completion must be in favour of Newco or other nominee company." On the same day, [AXA], MBL, MHA and MHF by deed replaced the Equity Sell Down Agreement. At least to the extent relevant for present purposes, what I have written in para 74 may likewise be said about the deed of 26 August (save for the fact that "NewCo" had by then been interposed in the form of MHF, and was itself a party to the deed). On the same day, [AXA], MBL, MHA, MHH and The National Mutual Life Association of Australasia Limited executed the Covenant Agreement. It contained a range of provisions calculated to govern the parties' obligations in the intervening period while the commercial business of AXA Health was effectively under the control of MBL, but might (depending on how matters turned out) ultimately be returned to [AXA]. … [78] On 29 August 2002, MHA and MHF entered into what was described as "MHA Undertaking". By it, MHA agreed to direct [AXA] to execute an instrument of transfer of its shares in AXA Health to MHF, and agreed to pay [AXA] the purchase price for those shares. MHA assigned to MHF certain benefits, or expected benefits, arising under detailed provisions of other instruments then executed or expected to be executed. The consideration passing from MHF to MHA was an agreement to issue to MHA, upon completion under the Underwriting Agreement, 240,000,000 ordinary shares in MHF (of a value, it seems, of $240m). MHF also agreed to pay to MHA, on the "settlement date", the sum of $330m, described as "deferred consideration". The "settlement date" was the earlier of two dates, one of which was the date specified by [AXA] for the conversion of its vendor shares in MHA in a notice of intention to convert (if one were given) in that behalf. As will appear, the combination of these sums ($240m and $330m) represented the agreed sale price of AXA Health ($570m). [79] On 29 August 2002, MHA and MB Health executed an agreement called "Consortium Acquisition Agreement". A condition precedent to the operation of that agreement was that [AXA] was no longer able to exercise the put option granted to it by MB Health in relation to its vendor shares in MHA. The terms of the put option were such that, if [AXA] had given a notice to convert the vendor shares into ordinary shares, it could no longer be exercised. The effect of these provisions was, therefore, that the giving by [AXA] of a notice of conversion in relation to the vendor shares would bring the Consortium Acquisition Agreement into operation. Under that agreement, MHA agreed to sell and MB Health agreed to buy all of the issued share capital in MHF. 97 On 30 August 2002, completion of the transaction took place. MHA directed AXA to execute an instrument of transfer of its shares in AXA Health to MHF. The transfer occurred and MHA paid AXA the sum of $57 million in cash and issued 513 million $1 convertible preference shares to AXA. MBL and MHH granted to AXA call options over the ordinary shares held by them in MHA and MB Health granted to AXA a put option over the convertible vendor shares. AXA duly paid the underwriting fee of $5 million to MBL. MBL subscribed 57 million $1 redeemable preference shares in MHA and paid $57 million to MHA for that issue. 98 Finally, on 7 February 2003, AXA gave notice of the conversion of its vendor shares in MHA (effective on 28 February 2003), and further gave notice that it would exercise the call options granted by MBL and MHH. As explained by the trial judge: [The conversion of AXA's vendor shares] triggered the operation of the consortium acquisition agreement as between MHA and MB Health and the "MHA Undertaking" as between MHA and MHF. MHA's shareholding in MHF was acquired by MB Health for the sum of $240m, and MHF paid MHA the "deferred consideration" which, after adjustment, amounted to $317.85m. In the result, MHA's only asset was cash in the sum of $557.85m. MHF, which owned all the shares in AXA Health, was in turn owned by MB Health.

Legislative Framework and Legal Principles 99 The assessable income of a taxpayer includes "your net capital gain (if any) for the income year": s 102-5 of the 1997 Act. A capital gain occurs if a CGT event happens: s 102-20 of the 1997 Act. In the present appeal, it was common ground that CGT event A1 occurred on the disposal by AXA of its shares in AXA Health in the year ended 31 December 2002, that the disposal proceeds ($570 million) exceeded the cost base of the AXA Health shares and that part of the consideration for the disposal ($513 million) was given by way of shares in MHA. 100 Subdivision 124-M of the 1997 Act provides for CGT roll-over relief for shareholders in a company where the shares in one company are exchanged for shares in another company: see, in particular, s 124-780 of the 1997 Act and the relevant extrinsic materials (Explanatory Memorandum, New Business Tax System (Capital Gains Tax) Bill 1999 (Cth) at [2.1] and the Second Reading Speech to the New Business Tax System (Capital Gains Tax) Bill 1999 (Cth): Commonwealth, Parliamentary Debates, House of Representatives, 25 November 1999, 12611 (Peter Costello)). 101 In the present case, the trial judge concluded that AXA was permitted to defer the making of the capital gain on $513 million of the capital proceeds until a later CGT event because of the "scrip-for-scrip" roll-over: s 112-105 of the 1997 Act. 102 The effect of the CGT roll-over is to permit the capital gain made on the disposal of the CGT asset (the original shares) to be deferred until disposal of the replacement shares: Explanatory Memorandum, New Business Tax System (Capital Gains Tax) Bill 1999 (Cth) at [2.2]. The rules for determining whether there was a "scrip-for-scrip" roll-over are set out in sub-div 124-M of the 1997 Act. The central provision is s 124-780. A number of conditions need to be satisfied to obtain CGT roll-over relief. Section 124-780(4) provides that additional conditions (set out in s 124-780(5)) must be satisfied "if the original interest holder and an acquiring entity did not deal with each other at arm's length". 103 Before turning to consider the issues on appeal, it is important to note that two matters were not in dispute at first instance and accordingly were not the subject of appeal. The Commissioner accepted that the relationship between AXA and MBL was an arm's length one and, further, accepted that in the broad negotiation of the terms of the transactions by which shares in AXA Health passed to MHF, AXA and MBL dealt with each other at arm's length. At trial and on appeal, the only issue was whether AXA (the original interest holder) and MBL (on behalf of MHF the acquiring entity) dealt with each other "at arm's length". If they did deal at arm's length, AXA was entitled to defer the capital gain to a later CGT event. If they did not, it was common ground that AXA would not be entitled to roll-over relief and would be required to include the whole of the capital gain in its assessable income in the 2002 year. 104 At first instance, the trial judge held that AXA and MHF dealt with each other at arm's length within the meaning of s 124-780(4) of the 1997 Act. On appeal, the Commissioner submitted that the trial judge erred in his interpretation of s 124-780(4) of the 1997 Act and in his conclusion that AXA and MHF dealt with each other at arm's length. In particular, the Commissioner submitted that AXA did not deal at arm's length with MBL because "MBL's role in structuring the transactions so as to minimise the capital gains tax payable by AXA, meant that MHF (which was a subsidiary of MBL created for the purposes of the transactions) did not deal with AXA at arm's length". In our view, the trial judge was correct to reject that submission and Appeal Grounds 1 to 4 should be dismissed. 105 Any assessment of whether parties were dealing at arm's length involves "an assessment [of] whether in respect of that dealing they dealt with each other as arm's length parties would normally do, so that the outcome of their dealing is a matter of real bargaining": Trustee for the Estate of the late AW Furse No 5 Will Trust v Federal Commissioner of Taxation (1991) 21 ATR 1123 at 1132 per Hill J. The reference in Furse 21 ATR 1123 to "real bargaining" is significant. It focuses on actual dealing between the parties: see also Re Hains (deceased); Barnsdall v Federal Commissioner of Taxation (1988) 81 ALR 173. That is not surprising. It is the same mental process as that described by Griffith CJ in Spencer v The Commonwealth (1907) 5 CLR 418 at 432. 106 The question of whether parties dealt with each other at arm's length in respect of a particular dealing is one of fact in each case: Granby v Federal Commissioner of Taxation (1995) 129 ALR 503 at 507. What is required is that "parties to a transaction have acted severally and independently in forming their bargain": Granby129 ALR 503 at 507. Put another way, it requires consideration of how "unrelated parties, each acting in his or her own best interest, would carry out a particular transaction": Australian Trade Commission v WA Meat Exports Pty Ltd (1987) 75 ALR 287 at 291. 107 Consistent with those principles, there is no presumption that parties at arm's length dealt with each other at arm's length: Hains 81 ALR 173 and Furse 21 ATR 1123 at 1132. Parties may be at arm's length generally yet not deal with each other at arm's length in respect of a particular matter: Re RAL and Federal Commissioner of Taxation (2002) 50 ATR 1076 at [45] - [51]. So, for example, even where parties to a transaction are at arm's length, they will not "be dealing with each other at arm's length in a transaction in which they collude to achieve a particular result, or in which one of the parties submits the exercise of its will to the discretion of the other, perhaps, to promote the interests of the other": Granby 129 ALR 503 at 507. 108 Similarly, where one party to a transaction seeks only an overall result and is indifferent to the outcome of a particular aspect on which the statute focuses, the parties will be found not to have dealt with each other at arm's length on that particular aspect: Collis v Federal Commissioner of Taxation (1996) 33 ATR 438 at 443. In Collis 33 ATR 438, there was a question as to whether a vendor (the taxpayer) and purchaser of land had dealt at arm's length in connection with the signing of two contracts of sale in relation to four parcels of land which had been sold at auction in a single bid. The purchaser who made the single bid for all blocks did not enquire as to why the contracts were apportioned between the blocks in the manner proposed by the taxpayer. Jenkinson J considered that this failure to enquire suggested 'indifference' on the part of the purchaser such as to indicate that the dealing was not at arm's length. The taxpayer in Collis 33 ATR 438 argued that not all arm's length dealings involve a discussion or enquiry as to price (using an analogy of purchasing items of stock in a food store) and that the absence of such discussions or enquiries did not suggest indifference by the taxpayer. His Honour rejected that submission, noting that (at 443): A parcel of land is not ordinarily dealt with in commerce as is a can of beans in a food store. 109 In Baxter v Commissioner of Taxation (2002) 196 ALR 519, a sales tax case, Gyles J held that a lease devised in order to obtain a revenue advantage did not make it a non-arm's length transaction, "no matter how widely that concept is construed": at [38]. (Baxter 196 ALR 519 was considered the "most obviously helpful" by the trial judge when determining whether the transaction was an arm's length one: see [105] of the trial judge's reasons for decision). 110 In this context, one further matter should be noted. At first instance, the Commissioner submitted that MBL and AXA "colluded" to achieve the purpose of minimising tax independently of, and in addition to, the commercial purposes they were pursuing. The Commissioner placed particular reliance on ACI Operations Pty Ltd v Berri Ltd (2005)15 VR 312 and Granby129 ALR 503 at 507. The trial judge rejected the submission and held that AXA and MBL did not collude to devise a means to avoid the incidence of capital gains tax (or at all): see [103] of the trial judge's reasons for decision. On appeal, the Commissioner submitted that he did not consider it necessary to put his submission "as high as" collusion and that the situation in the present case was "where you have one party, acting not in its own self-interests but acting in the interests of the other party, design[ing] a transaction to enable the other party to avoid tax".

Application of Facts to the Legal Principles 111 As noted earlier, the Commissioner submitted that MBL's "overriding objective" was to structure the transaction to further the interests of AXA. In support of this submission, the Commissioner pointed to the following factual findings and conclusions: 1. from the early stages of the bid for AXA Health, MBL "had it in mind" to structure the bid in such a way that capital gains tax would not be payable: see [70] above; 2. on 17 April 2002, the AXA Board discussed the capital gains tax consequences of proceeding by way of a scrip-for-scrip roll-over: see [79] above; 3. that "[i]n all of the evidence in the case, no explanation for a large part of the consideration flowing to [AXA] in the form of stock, other than to take advantage of the scrip-for-scrip roll-over provisions, was proffered": paragraph [88] of the trial judge's the reasons for decision; 4. that "so far as [AXA was] concerned, more or less from the outset it was aware that the MBL bid was structured so that capital gains tax would not arise on any resulting transaction" and that "[t]hat circumstance was recognised as an attractive feature of the bid": paragraph [90] of the trial judge's reasons for decision; and 5. the trial judge "consider[ed] it to be almost self-evident that MBL's intention was that capital gains tax not be payable by any relevant entity at any stage of the proposed transactions": paragraph [91] of the trial judge's reasons for decision. 112 Further, the Commissioner pointed to "indicia" that supported this submission, namely each of the elements of the structure designed to achieve the scrip-for-scrip roll-over relief. Specifically, the Commissioner pointed to the existence of MHH, the vendor call option granted by MBL to AXA over the shares in MHA, the call option granted by MHH to AXA over its share in MHA, and the put option granted by MB Health to AXA. The Commissioner submitted, citing Furse 21 ATR 1123, this demonstrated there was "no real bargaining … because both parties were pushing in the same direction". 113 However, AXA identified several facts and matters that indicated that both parties were acting in their own interests, or were acting "severally and independently in forming their bargain" (Granby129 ALR 503 at 507). These circumstances included: 1. AXA had no input into the structure and form of the initial non-binding bid of 1 March 2002: see [76] above; 2. between 8 March 2002 and 29 April 2002, AXA and MBL negotiated on the "key commercial issues" of the non-binding bid, including discussions about the amount of MBL's underwriting fee and the voting entitlements associated with vendor shares: see [77] to [82] above; 3. on 29 April 2002, at the meeting between MBL Advisory (representing AXA), MBL PTG and BUPA, AXA expressed concern about the payment of large fees to MBL for no apparent benefit in the sale to BUPA. At around the same time, AXA expressed concern about BUPA having a larger equity stake in the acquisition of AXA Health: see [81] and [82] above; and 4. on 27 May 2002, Mr Facioni presented the Proposition Summary to the MBL senior executives for approval. This document outlined the transaction risks and benefits to MBL in entering into the transaction: see [88] to [91] above. 114 It was accepted by all parties that a feature of the offer put to AXA by MBL was that it could provide AXA with the choice of obtaining scrip-for-scrip roll-over relief. It was accepted that the evidence was that MBL perceived the availability of roll-over relief as a benefit to AXA and that it would make MBL's offer more attractive to AXA. 115 However, it does not follow that, in making the offer with the intent to attract AXA's acceptance, that MBL's structuring of the bid to obtain scrip-for-scrip roll-over relief was the "overriding objective" or that, in making the offer, MBL was not acting in its own interests. There were a number of factors or circumstances identified by AXA (see [113] above) that indicated that the parties were acting severally and independently in forming their bargain. The Commissioner's submissions ignored the benefits MBL would obtain, and the self-interest it exercised, in the acquisition of AXA Health. MBL structured the bid not only to obtain scrip-for-scrip roll-over relief for AXA, but also in such a way so that MBL could and did charge an underwriting fee. MBL further structured the bid in such a way that it would be able to sell-down its interest in the equity it had created without putting in cash up-front. As correctly identified by the trial judge, the transaction did not amount to either collusion or submission of the will of MBL to the wishes of AXA, or vice-versa: see Granby129 ALR 503 at 507. 116 Concerning the Commissioner's reliance on Collis 33 ATR 438, we agree with the finding of the trial judge that the circumstances of this case are different when he stated: [104] Neither do I accept the Commissioner's submission that the present is a stronger case than Collis for the reason that the putative disinterested party (MBL) actively co-operated to achieve the fiscal advantage sought by the putative taxpayer [AXA]. In my view, the present is a different case from Collis. There, the parties, having made their commercial bargain on the fall of the auctioneer's hammer, manipulated the legal expression of that bargain for fiscal purposes. That could only be done by a consensus driven either by a mutual desire to achieve those purposes or by the submission of the will of one to the wishes of the other. Here, by contrast, the corporate structure lying behind MHA was the doing of MBL alone. The architecture of that structure was integral to the MBL offer which [AXA] accepted. It truly reflected the commercial reality of what was agreed. True it is that that architecture made the MBL bid the more attractive for [AXA], but I cannot, with respect to the Commissioner, appreciate how that circumstance made the dealing between them other than an arm's length one. 117 AXA was motivated to sell its business. MBL wanted to acquire and on-sell that business. That the structure through which the acquisition would be achieved contained features attractive to AXA (including the scrip-for-scrip roll-over) does not make the transaction a non-arm's length transaction. Many agreements negotiated between parties at arm's length involve promises that will provide a benefit to a promisee. The fact that a purchaser of an asset seeks to obtain, for its own benefit, a collateral advantage from the purchase transaction (in this case the earning of fees) over and above the acquisition of the asset, cannot, without more, lead to a conclusion that the parties to the transaction were not dealing with each other at arm's length. There is no evidence that the purchase consideration did not represent the market value of the asset and the fact that the vendor (AXA) had the right to participate in any profit arising to the purchaser (MBL) from the onward sale of the asset does not, in our view, reflect any such perception; on the contrary, it reflects the bargaining power which the vendor (AXA), acting in its own best interest, brought to bear on the overall architecture of the transaction. 118 The trial judge was correct to conclude that the fact the transaction was devised to obtain a revenue advantage to AXA does not mean that the transaction was a non-arm's length one: see Baxter 196 ALR 519. If the Commissioner's submission was taken to its logical conclusion, it would be difficult to conceive of any circumstances in which parties to an arrangement under which roll-over relief is provided could to be said to be an arm's length transaction. 119 Finally, we consider there may be real risks in approaching the question of whether two parties are dealing with each other at arm's length by "dissecting" the dealing into segments or aspects and submitting that the parties "colluded" or "yielded judgment" one to the other on some aspect of the dealing in the manner contended for by the Commissioner. As the facts of this case demonstrate, one party can frame an offer in terms that it knows will attract the other party. There may be little debate between them about the terms (or some of the terms) yet the parties will still have dealt with each other at arm's length. If, however, the dealings are dissected, it may be thought to lead to the result that if A offers B a term that it knows will attract B, A has somehow yielded its freedom of bargaining power to B when, in fact, the contrary is the position - A has exercised its freedom of bargaining power with a view to attracting acceptance by B. In the end, what must be borne steadily in mind is that any assessment of whether parties were dealing at arm's length is a question of fact and that question of fact is resolved by "an assessment [of] whether in respect of that dealing they dealt with each other as arm's length parties would normally do, so that the outcome of their dealing is a matter of real bargaining": Furse 21 ATR 1123 at 1132 per Hill J. "Dissecting" the dealing into segments may not assist that enquiry. But that is not to deny, however, the possibility that there may be one or more aspects of parties' dealings which, on assessment, can be seen not to have been a dealing where the parties dealt with each other as arm's length parties would normally do: see, by way of example, Collis 33 ATR 438. 120 For those reasons, we reject the Commissioner's Appeal Grounds 1 to 4. The trial judge was correct to conclude that AXA and MBL did deal with each other at arm's length.

DID AXA OBTAIN A TAX BENEFIT WIThIN THE MEANING OF SECTION 177C? 121 The next issue raised by the Commissioner on appeal was whether AXA obtained a "tax benefit" in connection with the scheme within the meaning of s 177C of the 1936 Act. The Commissioner submitted, in broad terms, that the trial judge erred in his interpretation of s 177(1)(a) and erred in concluding that there was no tax benefit. The Commissioner submitted that the "tax benefit" AXA obtained in connection with the "scheme" was the capital gain of $383,125,293 (being part of the capital gain on disposal of AXA's shares in AXA Health) which allegedly would have been or might reasonably be expected to have been included in AXA's assessable income if the scheme had not been entered into or carried out. 122 In Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404 at 413, the High Court stated: Part IVA operates where (i) there is a "scheme" as defined in s 177A; (ii) there is a "tax benefit" which, in relation to income amounts, is identified in par (a) of s 177C(1) as an amount not included in the assessable income of the taxpayer where that amount would have been included or might reasonably be expected to have been included in that assessable income for the relevant year of income if the scheme had not been entered into or carried out; (iii) having regard to the eight matters identified in par (b) of s 177D, it would be concluded that there was the necessary dominant purpose of enabling the taxpayer to obtain the tax benefit; and (iv) the Commissioner makes a determination that the whole or part of the amount of the tax benefit is to be included in the assessable income of the taxpayer (s 177F(1)(a)). The Commissioner then "shall take such action as he considers necessary to give effect to that determination" (s 177F(1)). (citations omitted.) 123 The Commissioner identified the scheme as comprising: (a) establishing the corporate structure to acquire AXA Health from [AXA] and in particular: (i) the incorporation of MHF as a wholly owned subsidiary of MHA; (ii) the incorporation of MHA as a subsidiary of MBL (which owned 99 $1 shares), with one share being owned by MHH; and (iii) the incorporation of MHH as a subsidiary of MBL (which owned 99 $1 shares), which one share being owned by BDW [Nominees Pty Ltd]; (b) the incorporation of MB Health as a special purpose company jointly owned as to 50% by MBL and as to 50% by BUPA, through BAPL; (c) issuing [AXA] with a replacement interest in MHA on the disposal of the shares to MHF; (d) attaching special rights to the vendor shares so that the replacement interest was not a significant stake in MHA thereby enabling [AXA] to make the choice unilaterally to obtain the roll-over; (e) the agreements by and under which the vendor shares were created and issued by MHA to [AXA]; (f) all of the agreements and steps taken up to and on 28 February 2003 to complete the sale of AXA Health to MB Health; (g) [AXA] purportedly choosing to obtain the roll-over; and (h) The relevant scheme was entered into or carried out by one or more of [AXA], MHF, MHA, MHH, MB Health, MBL and their legal and taxation advisors, with the requisite purpose. Neither the existence nor the identification of the "scheme" for the purposes of s 177A was in dispute. However, three matters must be noted. First, the reference to "all of the agreements" in sub-paragraph (f) is a reference to "all agreements that [were] in evidence before the Court": see para [107] of the trial judge's reasons for decision. Secondly, the reference in sub-paragraph (h) does not include BUPA. Counsel for AXA informed the Court that before the trial judge the relevant parties in sub-paragraph (h) were AXA and MBL. Finally, the scheme was defined broadly and the Commissioner eschewed reliance on any other or narrower scheme: see paras [110] to [113] of the trial judge's reasons for decision.

Relevant Legal Principles 124 The starting point in any consideration of s 177C must be the whole of Pt IVA of the 1936 Act. No one provision can be viewed in isolation: Commissioner of Taxation v Hart (2004) 217 CLR 216 at [37] per Gummow and Hayne JJ. 125 Section 177C(1) provides: (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: (c) in a case to which paragraph (a) applies - the amount referred to in that paragraph; and (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; … 126 Section 177C (read with the other provisions in Pt IVA) identifies that it is an "objective fact" whether a taxpayer obtained a tax benefit in relation to a scheme to which Pt IVA applies: Commissioner of Taxation v Peabody (1994) 181 CLR 359 at 382; Hart 217 CLR 216 at [37]; Federal Commissioner of Taxation v Lenzo (2008) 167 FCR 255 at [119] citing Commissioner of Taxation v Mochkin (2003) 127 FCR 185 at [26]. 127 In the case of an amount being included in the assessable income of a taxpayer, s 177C(1)(a) provides that it is an objective inquiry as to what would have been included or might reasonably be expected to have been included in the assessable income had the "scheme" not been entered into or carried out: Epov v Federal Commissioner of Taxation (2007) 65 ATR 399 at [62] and Peabody 181 CLR 359 at 385-6. 128 The legislation requires a comparison between the relevant scheme and an alternative postulate, or counterfactual: Hart 217 CLR 216 at [66]. 129 The alternative postulate requires a "prediction as to events which would have taken place if the relevant scheme had not been entered into or carried out and that prediction must be sufficiently reliable for it to be regarded as reasonable" (emphasis added). "A reasonable expectation requires more than a possibility": Lenzo 167 FCR 255 at [122] citing Peabody 181 CLR 359 at 385. The question posed by s 177C(1) is answered on the assumption that the scheme had not been entered into or carried out: Lenzo 167 FCR 255 at [121]. 130 In its Notice of Contention, AXA submitted that any alternative postulate could not include a direct sale to MB Health, as the scheme included the incorporation of MB Health and if the scheme had not been entered into, MB Health would never have been incorporated to allow a direct acquisition. AXA relied on the statement of Sackville J in Lenzo 167 FCR 255 at [136] that s 177C required the "entirety of the scheme to be ignored". 131 However, contrary to AXA's submissions, 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 have, or might reasonably be expected to have, taken place in the absence of the scheme: Lenzo 167 FCR 255 at [128]; Peabody 181 CLR 359 at 385 and Commissioner of Taxation v Trail Bros Steel & Plastics Pty Ltd (2010) 186 FCR 410 at [28]. The particular activity or the events that would have, or might reasonably be expected to have, taken place in the absence of the scheme and which are identified as a result of the objective enquiry are not confined or defined by the scheme. As the High Court has said, "scheme" is a word of wide import: Peabody 181 CLR 359 at 383; Hart 217 CLR 216 at [87]. 132 The express words of s 177C require a prediction about what would happen or might reasonably be expected to happen. It is necessarily a hypothetical analysis. But it is a hypothetical analysis directed at ascertaining what particular activity would have been (or might reasonably have been) undertaken if the scheme was not entered into. The "integers" comprising the scheme that are relevant to that objective enquiry are not limited and "may not always permit the precise identification of … all the integers of a particular 'scheme'": Hart 217 CLR 216 at [43] and Trail Bros (2010) 186 FCR 410 at [30]. 133 It is contrary to the express words of s 177C (including s 177C(2)), its context and its purpose to exclude particular integers from a prediction about what would happen or might reasonably be expected to happen. Put another way, absent particular integers, the enquiry would not be an objective enquiry as required by s 177C but a prediction of what would happen or might happen having regard to only a sub-set of the integers available to a taxpayer: see Trail Bros (2010) 186 FCR 410 at [31]. 134 Finally, the onus is on the taxpayer (AXA) to establish that he or she did not obtain a tax benefit in connection with the scheme; that is the taxpayer needs to show that the amount would not have been included, or might not reasonably be expected to have been included, in its assessable income if the scheme had not been entered into or carried out: s 14ZZK (and s 14ZZO) of the Taxation Administration Act 1953 (Cth); McAndrew v Federal Commissioner of Taxation (1956) 98 CLR 263 at 268-9; Gauci v Commissioner of Taxation (1975) 135 CLR 81 at 89; McCormack v Commissioner of Taxation (1979) 143 CLR 284 at 303, 306 and 323; Commissioner of Taxation v Dalco (1990) 168 CLR 614 at 620, 623-625 and Lenzo 167 FCR 255 at [125].

Analysis 135 At first instance, the Commissioner relied on two alternative postulates as to what would or might reasonably be expected to have occurred had the scheme not been entered into. The first was that if AXA had not entered into the scheme, it would have or might reasonably be expected to have disposed of AXA Health directly to MB Health. The second was that if AXA had not entered into the scheme, AXA would or might reasonably be expected to have disposed of AXA Health in the same way as it did (i.e. to MHA) but with MBL holding 100% of MHA. 136 On appeal, the Commissioner only relied on the first alternative postulate. The trial judge held that having regard to the Commissioner's identification of the scheme (see [123] above), the time for assessing any alternative postulate must be at the time that AXA decided to enter into the scheme, being 3 June 2002 "or some other point in time thereabouts when MBL and the BUPA interests had executed the Equity Participation Agreement but before the execution of the Underwriting Agreement". After considering the evidence before him, the trial judge rejected the alternative postulate, stating: The same conclusion cannot, in my view, be reached with respect to the position which MBL would occupy in its relations with the applicant, if it be assumed that there was to be a direct sale to MB Health. As I have pointed out above, it must be here assumed that there would have been no Underwriting Agreement. Thus MBL would have foregone the underwriting fee of $5m. Neither would the Equity Sell Down Agreement have made any sense under a direct sale scenario. There would, therefore, have been no equity sell down fee of $5m. Thus MBL itself would have been $10m the worse off for the absence of the mechanism by which AXA Health was sold indirectly to MB Health. Mr Facioni was adamant that MBL would never have made itself part of a direct acquisition of AXA Health by MB Health for the reason (at least) that it would not then derive this fee income. Although his apprehension that a direct sale would have denied MBL the prospect (which existed on 3 June 2002) of profiting from the on-sale of its interest in MB Health is not, I have found, a relevant point of difference between the two scenarios, I accept what he said about the loss of the fees to which I have referred. I therefore consider it to be outside the range of reasonable expectation that, if AXA Health had not been sold in the way that it was, it would have been sold directly by the applicant to MB Health at the same price. 137 The Commissioner submitted that the words "might reasonably be expected to have been included" in s 177C(1)(a), when considered in light of the object and purpose of Pt IVA, set a "relatively low hurdle" which provided the gateway for the other provisions in Pt IVA to operate. The Commissioner submitted the trial judge erred in: 1. not treating it "as a given" that AXA would have (or might reasonably be expected to have) disposed of its shares in AXA Health, and that MB Health would have (or might reasonably be expected to have) acquired the shares in AXA Health, if the scheme had not been carried out; 2. testing the Commissioner's alternative postulate in such a detailed and exacting manner; 3. relying on "the subjective evidence of witnesses as to what they thought would have occurred if the scheme had not been entered into or carried out"; 4. failing to consider "the usual or conventional way to structure the transaction and use this as the alternative postulate"; 5. failing to have regard to the putative purpose of the scheme in considering whether the amount would have been included, or might reasonably be expected to have been included, in the assessable income AXA absent the scheme; and 6. in the alternative, rejecting the alternative postulate on the basis that a direct sale from AXA to MB Health "essentially on the basis" that MBL would not have agreed to such a transaction because it would have deprived it of its opportunity to earn its fees. 138 In reaching his conclusion that the Commissioner's alternative postulate should be rejected, the trial judge cited with approval the evidence of Mr Facioni and then addressed the alternative postulate as follows: [122] In his affidavit sworn on 8 December 2008, Mr Facioni said: In the course of preparing this affidavit I have become aware that the [Commissioner] has suggested that if [AXA] had not sold AXA Health to MHA, it would have sold AXA Health directly to MB Health. That suggestion is incorrect. The transaction with [AXA] to purchase AXA Health had been originated, structured, negotiated and executed by MBL. MB Health, BUPA and BAPL were participants in the transaction, with MBL as the overall transaction sponsor. MBL stood to receive certain financial benefits for arranging and leading the transaction and for assuming certain material risks (financial and reputational) and devoting significant resources throughout the course of the transaction. At no time was MB Health in a position independently to offer to acquire AXA Health and, as a 50 per cent shareholder in MB Health with significant commercial benefit at stake, MBL would not have permitted such a transaction to occur. Objection was taken to the final sentence in that extract. I deferred my ruling on that objection pending Mr Facioni being asked in chief what was the basis for the statement contained in that sentence. He was so asked, and responded as follows: I was the transaction leader, so I was directing the transaction on behalf of [MBL] and I was reporting through to [MBL's] executive committee and ultimately board of directors. The transaction had been arranged in a way that [MBL] stood to make quite significant economic benefits by virtue of how the transaction was anticipated to proceed; that is, AXA Health to be acquired by [MBL] and then on-sold to a consortium. That was the nature of the transaction that we structured. That was how [MBL] stood to make an economic benefit. If [MBL] were to be bypassed in that sequence, it would sacrifice quite significant fees and it wasn't in its interests for that to occur. So [MBL] was highly incentivised to ensure that the transaction proceeded along those lines. I guess, further to that, MB Health itself had no resources, had no employees, had no financial resources, and was only able to ultimately acquire AXA Health through the work that [MBL] and [MBL's] executives - being myself and the team - were conducting. On the strength of that evidence, counsel for the Commissioner did not pursue their objection. Under cross-examination, Mr Facioni confirmed that the transactions which MBL negotiated with the applicant were separate from those which it negotiated with BUPA. He agreed that the "significant commercial benefit" to which he referred in the final sentence in the passage from his evidence set out above was the selldown fee of $5m provided for in the Equity Sell Down Agreement and the underwriting fee of $5m provided for in the Underwriting Agreement, adding "plus also any profits that [MBL] could make through an on-sale". He was challenged about that latter aspect, and explained that, as at the time when the Underwriting Agreement was executed with the applicant on 4 June 2002, MBL had obtained a commitment from BUPA that it (or presumably BAPL) would take 100% of AXA Health if MB Health were not able in the meantime to sell it to third parties at a profit. It was only later, when no such third parties could be found, that it was agreed as between MBL and BUPA that the latter would assume complete ownership of MB Health (and, presumptively, of AXA Health). [123] I consider that the question whether it might reasonably be expected that MB Health would have made an offer to buy AXA Health directly from the applicant must be asked, notionally, at 3 June 2002, or some other point in time thereabouts when MBL and the BUPA interests had executed the Equity Participation Agreement but before the execution of the Underwriting Agreement. It was the latter that primarily set up the structure that was employed for the sale of AXA Health, a structure that could not be described as a direct sale from the applicant to MB Health. Put another way, the execution of the Underwriting Agreement necessary destroyed any prospect of a direct sale, thereby excluding it from the range of outcomes that might reasonably be expected to have occurred. (emphasis added.) 139 The Commissioner submitted that Mr Facioni's evidence was "speculative" as it concerned the subjective views of participants as to what would or would not have occurred absent the scheme. As noted earlier, the enquiry is based on objective facts (see [126] above). However, AXA was entitled (as it did) to lead evidence to discharge its onus of proof. As Sackville J said in Lenzo 167 FCR 255, the taxpayer may lead evidence that the taxpayer would have undertaken a particular activity, or adopted a particular course, in lieu of the scheme. It is also 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. In the end, the Court will decide what would have been done, or might reasonably be expected to have been done, in lieu of the scheme having regard to all of the evidence that is led. 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. 140 As Greenwood J stated in McCutcheon v Federal Commissioner of Taxation (2008) 168 FCR 149: [37] It is perfectly clear that a deponent in seeking to demonstrate (and discharge the onus of proof) that an assessment is excessive having regard to a prediction as to whether an amount might reasonably have been included in the assessable income of the taxpayer, cannot simply give evidence that the answer is to be found in the deponent speculating as to what he or she would or would not have done in the absence of the scheme (WD & HO Wills (Australia) Pty Ltd v Federal Commissioner of Taxation (1996) 65 FCR 298). The Commissioner accepted in the course of argument on the appeal that it is perfectly proper for a deponent in the position of Mr McCutcheon to say in evidence that the trustee (controlled by the taxpayers) would not have made distributions of the amounts postulated by the Commissioner to the taxpayers, provided the foundation for that observation or conclusion is given in evidence. In other words, Mr McCutcheon might have said that "the trustee would never have distributed such a substantial portion to either my wife or I" because (or for that reason that) and then identify factual circumstances which support the proposition. The vice said to exist in Mr McCutcheon's evidence is that it is simply speculative evidence on the ultimate question unsupported by any evidence of material facts from which the conclusion Mr McCutcheon contends for could be drawn. … [39] It seems to me that the Tribunal is entitled to receive into evidence the statement objected to by the respondent provided foundation facts are given in evidence which support what would otherwise be a bald speculative statement. Those foundation facts would in the ordinary course of events be detailed and comprehensive and seek to explain why the prediction could not reasonably be entertained in the context of a full understanding of the matrix of fact. Such an approach would be consistent with principle and enable the taxpayer to state a position derived from a factual foundation. … … [45] The Tribunal also concluded that it was a matter for the Commissioner to demonstrate to the Tribunal that a basis for sufficiently reliable prediction subsisted once the appellants put the determination and assessments in issue. There is no doubt that the onus and burden of proof falls upon the appellants to demonstrate that the assessment issued to each taxpayer is excessive. That necessarily involves each taxpayer adducing evidence which would discharge the onus of demonstrating that the Commissioner's prediction or hypothesis was not sufficiently reliable for it to be regarded as reasonable. The appellants sought to do that by reliance upon the history of distributions. 141 The objective facts before the trial judge were that the Underwriting Agreement (see [94] above) and the Equity Sell Down Agreement (see [95] above) would not have been entered into had the scheme not been carried out and the fees payable to MBL under those agreements would have been lost. These objective facts were identified by Mr Facioni and accepted by the trial judge thereby discharging AXA's onus of demonstrating that the Commissioner's alternative postulate "was not sufficiently reliable for it to be regarded as reasonable": McCutcheon 168 FCR 149. The trial judge was entitled to have regard to and rely upon the evidence of Mr Facioni. 142 The Commissioner's submission that it was a "given" that a direct sale from AXA to MB Health would have taken place absent the scheme is contrary to the evidence of Mr Facioni and ignores the significance of the fees that were imposed under the Underwriting Agreement and the Equity Sell Down Agreement (see [136] and [138] above). The contention by the Commissioner that there was "no good reason why these fees … could not have been charged by MBL in connection with a direct sale from AXA to MB Health" was similarly contrary to the evidence of Mr Facioni that was accepted by the trial judge. Further, although there cross-examination at first instance of Mr Penn and Mr Owen about the nature of the fee (specifically whether the fee was a "structuring fee" or otherwise), no witnesses were cross-examined on whether there would have been a fee charged by MBL in any event with a direct sale from AXA to MB Health. 143 Similarly, the Commissioner's submission that the trial judge erred in failing to consider "the usual or conventional way to structure the transaction (i.e. a direct sale from AXA to MB Health) and use this as the alternative postulate" and that "the facts of the transaction themselves yielded up that alternative postulate" must also be rejected. The evidence accepted by the trial judge demonstrated that a direct sale of the shares in AXA Health from AXA to MB Health would not have (or would not reasonably be expected to have) occurred because it would have, inter alia, denied MBL its fees. The facts did not support the Commissioner's alternative postulate. 144 The Commissioner further submitted that the trial judge erred in testing the alternative postulate in such a detailed and exacting matter. The Commissioner submitted the trial judge "in effect approached the question on the basis of what would have occurred if the scheme had not been entered into or carried out", rather than a more "conceptual enquiry" about what might reasonably be expected to have occurred had the scheme not been entered into or carried out. This submission must be rejected. As noted in Lenzo 167 FCR 255 and Peabody181 CLR 359, a reasonable expectation requires more than a possibility. The trial judge's evaluation of the evidence to determine what would or might reasonably be expected to have taken place in the absence of the scheme was consistent with authority and no error has been demonstrated. 145 Finally, the Commissioner submitted that the trial judge erred in failing to consider the "putative purpose" of the scheme. The submission is without foundation and must be rejected. First, there was no factual finding by the trial judge that the "putative purpose" of the scheme was to attract the benefit of the scrip-for-scrip roll-over relief. Secondly, Counsel for the Commissioner conceded that this submission contradicted his earlier submission concerning the use of subjective evidence (see [139] and [140] above). As a result, the Commissioner stated that this was an alternative submission. Looking to the "putative purpose" of the scheme is not something contemplated by s 177C(1)(a) and is contrary to the notion that the inquiry be one based on objective fact: Epov 65 ATR 399 at [62] and Peabody 181 CLR 359 at 385-6. 146 One final matter should be noted. In our view, having regard to the evidence before the trial judge, it might reasonably be expected that, had the scheme not been entered into or carried out, a direct sale to MBF would have occurred. That was the only other offer on the table on 3 June 2002: see [93] above. Neither party suggested this as the alternative postulate. AXA conducted the case at first instance by demonstrating that there would have been no sale to MB Health, as that was what was the alternative postulate identified by the Commissioner. AXA did not propose or pursue another alternative postulate and, in particular, did not pursue an alternative postulate that there would have been a direct sale to MBF. On appeal, AXA submitted that it was "content" for a direct sale to MBF to be the alternative postulate. The Commissioner opposed this approach and submitted that the Court should not find the alternative postulate of a direct sale to MBF because "it was not the subject of questioning of witnesses and … therefore the evidence is incomplete on that issue". We reject the Commissioner's submission. Both parties referred the Court to evidence that suggested MBF was a likely buyer, indeed largely the preferred buyer, for AXA Health: see, for example, paras [63] to [66], [68], [74], [87] and [93] above. As noted earlier, it was the only other offer on the table on 3 June 2002. The difficulty for the Commissioner was that if a direct sale to MBF was the alternative postulate, there would be no tax benefit within the meaning of s 177C(1)(a) because AXA would not have generated a capital gain but rather a profit in the hands of AXA Health. Why? Because MBF wanted to acquire the business and not the shares. 147 The finding that it might reasonably be expected that the alternative postulate was a direct sale to MBF is a further example of the difficulties which now arise in litigation concerning Pt IVA where the focus is on the "scheme" and the "alternative postulate" identified by the parties. Of course, this is a direct result of the adversarial process. The problem is that it does run the risk of creating considerable artificiality often divorced from commercial reality. 148 For these reasons, the Commissioner's Appeal Grounds concerning the tax benefit must be rejected. The trial judge was correct to conclude that there was no tax benefit. Having concluded that there was no tax benefit, it is unnecessary to consider the submissions concerning s 177C(2)(a), s 177D(b) and penalties. I certify that the preceding ninety one (91) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Edmonds & Gordon.