THE APPEAL
47 In its notice of contention, Futuris raised a number of issues with which we will deal in the context of the Commissioner's grounds of appeal. The Commissioner contends that the primary judge misconstrued s 177D(a) and s 177C(1). He submits that his Honour erred in:
construing the above sections as requiring the formulation and evaluation of a postulate for the sale of the Building Products Division alternative to the transactions that had in fact been carried out and which included the scheme(s) identified by the Commissioner;
comparing the actual transactions that were carried out with alternative ways by which Futuris might have sold the Building Products Division by way of public float;
failing to compare the actual transactions that were carried out with those transactions minus the steps comprising the scheme(s) identified by the Commissioner;
failing to consider each identified scheme in applying s 177D(a) and s 177C(1);
concluding that had the scheme(s) not been carried out that the Presumed Counterfactual would not have occurred as a matter of reasonable expectation;
concluding, in the absence of evidence of any contemporaneous consideration of such a proposal, that had the scheme(s) identified by the Commissioner not been carried out Futuris would have disposed of the Building Products Division by a float of Bristile.
48 It is not in dispute that for Pt IVA to apply there must be three elements: (i) a scheme or schemes within the meaning of s 177A of the ITAA 1936; (ii) a tax benefit within the meaning of, relevantly, s 177C(1)(a); and (iii) the dominant purpose of enabling the relevant taxpayer to obtain a tax benefit. The tax benefit referred to in s 177C(1)(a) is an amount not included in the assessable income of the taxpayer that would have been included, or might reasonably be expected to be included in the taxpayer's assessable income if the scheme has not been entered into or carried out. The dominant purpose must be assessed having regard to the eight matters in s 177D(b).
49 In this case the primary judge found that the first and third elements were satisfied but not the second. The Commissioner's written submissions argue that this suggests a failure by the primary judge to construe Pt IVA as a whole:
The error, it is submitted, lies in his Honour's construction and application of the definition of 'tax benefit' in s 177C(i)(a) of the Act and, in particular the inquiry directed by the words:
Where that amount would have been included or might reasonably be expected to have been included, in the assessable income of the taxpayer … if the scheme has not been entered into or carried out"
50 As the Commissioner submitted, s 177C(1)(a) and, in particular, the notion of reasonable expectation, creates a link between the scheme and the tax benefit. In this case the primary scheme identified by the Commissioner comprised steps 2, 3 and 4 outlined above at [20]. In brief they were the sale of Bristile assets to Bristile Operations, the declaration of a dividend of $146m to Vockbay, the Vockbay declaration of a dividend in favour of Futuris and the capitalisation of the debts created by the declarations of dividends. It was those steps that attracted the application of Division 19A and thus yielded the tax benefit. Without them the tax benefit would not have been obtained.
51 The fundamental flaw that the Commissioner identifies in the case put by Futuris concerns the paucity of evidence that Futuris adduced to show that it was not reasonable to expect that the tax benefit that it received under the scheme would, in the absence of the scheme, have been included in the company's assessable income. In considering that issue it is necessary to bear in mind the nature of the inquiry that is before the Court.
52 The Commissioner's discretion to cancel a tax benefit only arises where there is a tax benefit that has been obtained in connection with a scheme to which Pt IVA applies. This point was emphasised in Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359 at 382 where the High Court said:
The existence of the discretion is not made to depend upon the Commissioner's opinion or satisfaction that there is a tax benefit or that, if there is a tax benefit, it was obtained in connexion with a Pt IVA scheme. Those are posited as objective facts. The erroneous identification by the Commissioner of a scheme as being one to which Pt IVA applies or a misconception on his part as to the connexion of a tax benefit with such a scheme will result in the wrongful exercise of the discretion conferred by s 177F(1) only in the event that the tax benefit which the Commissioner purports to cancel is not a tax benefit within the meaning of Pt IVA … the question in every case must be whether a tax benefit which the Commissioner has purported to cancel is in fact a tax benefit obtained in connexion with a Pt IVA scheme and so susceptible to cancellation at the discretion of the Commissioner.
53 The starting point here is the identification of a tax benefit within the meaning of s 177C(1)(a). The Commissioner has determined that the amount of $82,950,090 which was not included in the assessable income of Futuris for the 1998 year of income, "would have been included, or might reasonably be expected to have been included" if the scheme(s) identified by the Commissioner had not been carried out.
54 In Peabody, at 385, the High Court held that the reasonable expectation of which s 177C(1)(a) speaks "involves a prediction as to events that would have taken place if the relevant scheme had not been entered into or carried out and the prediction must be sufficiently reliable for it to be regarded as reasonable". In the absence of an alternative postulate, the Commissioner's prediction is that the float of Walshville would have occurred without the steps which comprise the scheme. The Commissioner was not obliged to put forward an alternative postulate: Federal Commissioner of Taxation v Trail Bros Steel & Plastics Pty Ltd (2010) 186 FCR 410 at [34] per Dowsett and Gordon JJ.
55 In endeavouring to show that the Commissioner's prediction was not "sufficiently reliable for it to be regarded as reasonable" Futuris relied on Mr Duivenvoorde's evidence. The Commissioner did not adduce any evidence and the primary judge rejected, in our view correctly, the invitation by Futuris to draw adverse inferences on that account. The Commissioner was entitled to rely on the inadequacies he perceived in Mr Duivenvoorde's evidence without any obligation to adduce any evidence about transactions to which he was a stranger. As the Commissioner submitted in the appeal, he "identified with precision the schemes on which he relied, and the tax benefit said to have been obtained in connection with the scheme, in a statement of facts issues and contentions and in a respondent's response to the applicant's statement of grounds".
56 The Commissioner also noted that Futuris had unsuccessfully sought an order for further particulars seeking clarification of the Commissioner's case along the lines of his complaint here. In Futuris Corporation Ltd v Federal Commissioner of Taxation (2009) 75 ATR 365 Mansfield J said at [32]:
In my view, the applicant is not entitled to the further and better particulars it seeks in relation to whether a "tax benefit" was obtained. The onus is on the applicant to establish that it would have undertaken or might reasonably be expected to have undertaken a particular activity in lieu of the relevant scheme, and that that activity would or might reasonably be expected to have resulted in a tax benefit similar to the tax benefit obtained by the taxpayer in consequence of the scheme. It is not for the respondent to provide particulars as to what the applicant might have done, had it not entered the scheme. It is not within the Commissioner's knowledge. That is a matter for the applicant to prove.
As the Commissioner pointed out, no application to appeal from his Honour's decision was brought.
57 In seeking to discharge its onus the taxpayer may put forward an alternative postulate to the scheme identified by the Commissioner: Commissioner of Taxation v Hart (2004) 217 CLR 216 at [66]. In Commissioner of Taxation v Consolidated Press Holdings Ltd (No 1) (1999) 91 FCR 524 the Full Federal Court said, at [87]:
There is no doubt a large range of factual circumstances that may require consideration when hypothesising under s 177C(1), the alternative to a scheme being entered into or carried out. If the scheme is a severable component of a larger array of transactions which have been arranged or executed, the fact that they were arranged or executed can offer support for the hypothesis that they would or might reasonably be expected to have stood absent the scheme. The condition that the scheme be severable assumes that the remaining transactions are commercially and legally possible. If that assumption is falsified, then the hypothesis as to what would or might reasonably be expected to have happened may have to cope with a wider range of possibilities.
58 While the Commissioner did not put forward an alternative postulate the Presumed Counterfactual, comprising as it does, all the steps actually taken other than those identified as part of the primary scheme, is by default the scenario to which the Commissioner referred in submitting that the tax benefit which Futuris obtained in connection with the scheme would have been included in its assessable income without the scheme steps.
59 Futuris does not suggest that the Presumed Counterfactual would be legally impossible nor does it suggest that it would be commercially impossible. Rather the submission is that it would not be commercially feasible and the evidence of Mr Duivenvoorde is sufficient to establish this. The primary judge accepted this and his reasons for holding that it was not a reasonable expectation that Futuris would have proceeded in this way are quoted above at [42].
60 The Commissioner does not dispute that the Presumed Counterfactual would be attended by commercial disadvantages. That of course would be an inevitable result of Futuris' increased liability to capital gains tax. He submitted however that there "was no evidence to suggest that there was an alternative way in which the capital gain that resulted from the balance of the suite of transactions would not have flowed absent the scheme". He also submitted that the Presumed Counterfactual should not have been rejected in the absence of direct evidence refuting it from officers of Futuris who were leading the plans for disposal of the Building Products Division.
61 The only officer of Futuris to give evidence was the company secretary, Mr Clark. His evidence gives the background to the transactions that did take place but does not directly address the Presumed Counterfactual, or indeed Counterfactual 1 or 2. The Commissioner's "no evidence" submission also reflects his view that no weight should be given to Mr Duivenvoorde's evidence. He argues that Mr Duivenvoorde's opinion was mere speculation as to what Futuris "might" have done unsupported by evidence which would have transformed it into a reasonable expectation. The question before the primary judge, it was submitted,
did not involve consideration of alternative means by which the respondent and its subsidiaries might have sold the [Building Products Division] by way of a public float as if they were operating from a blank slate.
62 This much may be accepted however it must also be accepted that between a blank slate and merely deleting the scheme from the transactions in question there may be many approaches to predicting an alternative scenario that is "sufficiently reliable for it to be regarded as reasonable": Peabody at 385. To put the matter another way, the issue is "whether a tax benefit has been obtained which would not have been obtained without the scheme": GT Pagone, Tax Avoidance in Australia, The Federation Press, 2010 at 52. While it is true that the Commissioner may leave it to the taxpayer to prove the relevant assessment is excessive without himself adducing evidence, it is equally true that the taxpayer may seek to prove, in its own way, that the assessment is excessive. In Federal Commissioner of Taxation v Trail Bros Steel & Plastic Ltd (2010) 186 FCR 410 (Trail) the Full Federal Court observed that it is the taxpayer who bears the onus to establish that there is no tax benefit in connection with a scheme and added, at [36], that it is a matter for the taxpayer how it does that:
It may, for example … 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.
[Emphasis added]
63 The Full Court in Trail upheld the decision of the trial judge, Greenwood J, setting aside the decision of the Administrative Appeals Tribunal. Justice Greenwood had held that although the Tribunal had formulated the correct test in respect of s 177C(1)(b) of the ITAA 1936, it had applied a different test: Commissioner of Taxation v Trail Bros Steel & Plastic Ltd (2009) 75 ATR 916.
64 The problem in Trail arose as a result of legislative amendments that had substantially eliminated the deductibility of payments the taxpayer was contractually bound to make to its employees' superannuation fund. Citing Federal Commissioner of Taxation v Lenzo (2008) 167 FCR 255, Greenwood J said, at [49] that the applicable test,
necessarily involves an examination of the particular activity the taxpayer would have undertaken or might reasonably be expected to have undertaken in lieu of the scheme and whether the activity would or might reasonably be expected to have resulted in an allowable deduction of the same kind as that claimed by the taxpayer in the two tax years, under the scheme.
His Honour continued at [50]-[52]:
There was however no evidence before the Tribunal of that activity. What would or might the taxpayer have reasonably done absent the scheme? Would the taxpayer have paid all the amounts due under the contracts to the two brothers by making the contributions to the superannuation fund? The Tribunal thought not …
What would the taxpayer have otherwise done or might reasonably be expected to have done in the circumstances absent the scheme? Might it have varied the agreements to negotiate new employment contracts containing particular terms which might have given rise to an allowable deduction of the kind claimed in the full amount claimed, and, if so, on what basis or by reference to what steps? …
The question asked by s 177C(1)(b) of the Act however is what activity would the taxpayer have undertaken or might reasonably be expected to have undertaken absent the scheme? Since the deductibility of the payments had been substantially eliminated by the amendments to the Act, it is not unlikely that the employer and the two brothers would have engaged in an activity of seeking to negotiate new employment terms. The new terms may have resulted in steps, events, actions or activities being undertaken by the taxpayer in furtherance of its commercial undertaking that would have given rise to, or might reasonably be expected to have given rise to, a deduction in the hands of the taxpayer of the kind it claimed under the scheme. However, it may not have given rise to such a deduction. The deduction claimed under the scheme must be characterised and a comparison made with the character of the activity said to give rise to, or reasonably expected to give rise to, a deduction of the same kind.
65 In the absence of answers to these questions Greenwood J found, at [54], that there was no evidence by which the Tribunal could test the alternate postulate to determine whether it was "just a possibility or unsupported speculation or, alternatively, sufficiently reliable so as to be regarded as reasonable".
66 In Trail when legislative amendments significantly reduced the deductibility of contractual payments from the assessable income of the employees, the employer, with the consent of the employees concerned, established an employee welfare fund into which it made the payments previously made to the superannuation fund. For reasons it is not necessary to canvass here, the Commissioner claimed that the deductibility thus achieved was a tax benefit obtained in connection with a scheme.
67 The present case may be distinguished from Trail. In Trail, first, the employer was contractually bound to make the superannuation payments and as such the scope for alternative postulates was limited. Secondly, it is clear from the questions posed in the passages extracted from the judgment that the issue was not one of the weight to be given to evidence but that there was no evidence.
68 In the present case there is before the Court the evidence of Mr Duivenvoorde. We do not accept the Commissioner's submission that it should be given no weight. How much weight must be assessed in the context of the other evidence adduced by Futuris. This includes the background to the transactions leading up to the float of Walshville, the advice of its consultants and its own deliberations, plus the significance, if any, of there being no evidence other than that of Mr Clark from officers of Futuris or the Futuris Group.
69 The primary judge's reasons for regarding it as not reasonable to predict that the Presumed Counterfactual would have been entered into are explained above at [42]. The Commissioner submits that no reasonable alternative to the Presumed Counterfactual has been made out and that his Honour's finding lacks an adequate evidentiary foundation:
The basis of the finding of the primary judge in this connection appears to be his own assessment of the taxation consequences of the "Presumed Counterfactual" (being a $235 million capital gain) and an inference drawn based upon that assessment of whether, given those taxation consequences, the respondent would have sold the [Building Products Division] in the manner postulated by the "Presumed Counterfactual".
70 His Honour's conclusion that the Presumed Counterfactual would have generated a $235m capital gain which would have led Futuris not to proceed with this approach is said to be "no more than speculation or conjecture, unfounded on any objective evidence". With respect, this criticism is unfair. His Honour did not pluck the numbers out of the air. They were calculated on the basis of undisputed facts as to the price of the Bristile shares that Futuris sold to Vockbay; the election by Futuris and Vockbay for the application of roll-over relief; the price at which Vockbay sold Bristile shares to Walshville and the cost base of those shares; and the given cost base and the sale of the Walshville shares. These were not, as Futuris contended, "generalised propositions drawn from ordinary human experience".
71 When it is remembered that the Presumed Counterfactual is simply comprised of the transactions that actually occurred minus the scheme, it can be seen that his Honour had all the information necessary to make the above calculations. There was, of course, other evidence that might have weighed in favour of the opposite conclusion. The survey of the advice received by Futuris was equivocal as to the likelihood of the Commissioner invoking Pt IVA against Futuris. In particular the warning note quoted at [14] above refers to a "significant" risk of the Commissioner considering that Pt IVA applied. It might be argued that, as Futuris proceeded with the float of Washville in the face of this advice, the advantages of the proposal outweighed the risk. The difference is, however, that with the Presumed Counterfactual there would be no risk. The capital gains burden was completely predictable. It is reasonable to expect this to be a material factor in the reluctance of Futuris to proceed with this approach.
72 His Honour's reasons for reaching the opposite conclusion in relation to Counterfactual 1 are quoted at [45] above. The Commissioner repeated his submissions about Mr Duivenvoorde's evidence. In addition he submitted that there could be no reasonable expectation that Futuris would have followed Counterfactual 1 in the absence of (a) any evidence of contemporaneous consideration of the float of Bristile as postulated in Counterfactual 1; (b) any evidence from company officers or employees as to "established commercial parameters for the sale"; and (c) evidence as to whether Counterfactual 1 met those parameters.
73 The primary judge attached some significance to the fact that a draft prospectus for the float of Bristile had been prepared. The draft prospectus was annexed to the affidavit of Mr Clark. The Commissioner submitted that, on examination, the draft prospectus does not support the primary judge's characterisation of it, at [111] as "evidence that in about November 1996 persons within [Futuris] were considering the disposal of the Building Products Division by a public float of Bristile". The Commissioner said:
Examination of that draft prospectus shows it to relate only to the sale of Bristile (including elements, such as Australian Fine China, that were not part of the [Building Products Division] and not part of the actual transactions subsequently undertaken) with no suggestion that other elements of the [Building Products Division] held in Walshville … were to be transferred to Bristile prior to the float.
74 Considered in isolation this submission has much weight, however, it must be considered in the light of Mr Duivenvoorde's opinion. Mr Duivenvoorde was an independent expert witness who confirmed that he had read the Guidelines for Expert Witnesses in Proceedings in the Federal Court of Australia and agreed to be bound by them. He gave his opinion in accordance with instructions contained in letters dated 3 and 29 June 2009. The letters of instruction outlined the steps that had been taken in disposing of the Building Products Division and the steps which the Commissioner asserted comprised the primary scheme and the alternative scheme. Mr Duivenvoorde was asked to provide his opinion of what might "reasonably be expected would have occurred in selling the building products division if neither of those schemes had been entered into".
75 Mr Duivenvoorde said in his report that in considering what might reasonably be expected he took into account the following key matters: costs of implementation; attractiveness of listed company's financial structure for marketing purposes; the impact on forecast profitability of the listed company; the taxation consequences to the vendor and the listed company; and contractual consequences such as any change of control clauses. Applying these criteria to the alternative postulates, Mr Duivenvoorde concluded that they would be best satisfied by a float of Bristile. At paragraphs 5.2 to 5.3 of his report Mr Duivenvoorde noted the draft prospectus referred to by his Honour and said:
This indicates that Futuris had contemplated the transfer of the Prestige Entities to the Bristile Entities prior to the floating of Bristile.
To achieve the sale of the Building Products Division the Prestige Entities would have been transferred by Walshville to Bristile.
76 This conclusion might be regarded as mere speculation however, given that disposal of the Building Products Division was the stated goal, it was reasonable for the fact that a float of Bristile had been contemplated to be a factor supporting the conclusion that the disposal might be effected by the transfer of the Prestige Entities and the subsequent float of Bristile.
77 Mr Duivenvoorde analysed the key factors referred to at [75]. He concluded that the cost of implementing a float of Bristile would be lower than for a float of Walshville. Central to this conclusion was that the market value of the Prestige Entities ($40.0m) was considerably lower than the market of the Bristile entities ($210.0m). Consequently the transfer costs (including stamp duty) would be lower than the transfer costs of the Prestige Entities.
78 Mr Duivenvoorde's conclusion was based on the result of calculations using given facts. This was also the case with his conclusion that the financial structure of Bristile would, for the purposes of marketing the float have been equally attractive as that of Walshville because it would have achieved the same as that of Walshville. In paragraphs 5.4 to 5.8 of his report, Mr Duivenvoorde set out the basis of his calculations on this issue. He took into account the fact that Futuris acquired Walshville for $2 for the specific purpose of acquiring the Prestige Entities for which Walshville acted only as a holding company. The price paid by Walshville for the Prestige Entities and the profit that their sale would have yielded for Walshville. He explained the effect of the purchase on Bristile's consolidated financial statements and debt levels and the way in which the debt and equity levels adopted for the Walshville float could have been achieved in a float of Bristile. Finally he described the steps that would have been necessary to achieve these outcomes.
79 There was, of course an element of speculation involved in Mr Duivenvoorde's analysis. But it was not mere speculation. It was a prediction based on given facts, established market values, calculations based on unchallenged financial data, a stated goal and the application of Mr Duivenvoorde's expertise in corporate finance and his experience as a chartered accountant. The definition of 'tax benefit' in s 177C(1)(a) requires that there be a prediction as to what "might reasonably be expected to have been included in the assessable income of the taxpayer". That prediction necessarily involves an opinion as to events and transactions that have not taken place. It must be not just a possibility but "sufficiently reliable for it to be regarded as reasonable": Peabody at 385.
80 The reliability of a prediction might be established by direct evidence of contemporaneous consideration of the alternative postulate; or by evidence from company officers as to established commercial parameters for sale and whether the alternative postulate met those parameters; or evidence from those who were involved in the transactions challenged under Pt IVA. But that is not the only way to establish reliability. To the extent that the Commissioner submits that it is only by such direct evidence that a reliable prediction can be made, we reject that submission. This much was recognised by the Full Federal Court in Trail; see above at [62].
81 Mr Duivenvoorde's evidence was relevant and persuasive. We see no error in the primary judge accepting his evidence. As we have found that the primary judge was correct in concluding that there was no tax benefit in connection with the primary scheme or the alternative scheme within s 177C(1)(a) it is not necessary for us to consider the issues raised in the appeal and in Furturis' notice of contention concerning s 177D(b) and dominant tax purpose.
82 The appeal must be dismissed with costs.
I certify that the preceding eighty-two (82) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Kenny, Stone and Logan.