Commissioner of Taxation v Macquarie Bank Limited - [2013] FCAFC 13 - FCAFC 2013 case summary — Zoe

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Commissioner of Taxation v Macquarie Bank Limited

[2013] FCAFC 13

Federal Court of Australia (Full Court)|2013-02-15|Before: Robertson JJ

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Source facts

Court

Federal Court of Australia (Full Court)

Decision date

2013-02-15

Before

Robertson JJ

Source

Original judgment source is linked above.

Judgment (40 paragraphs)

[1]

INTRODUCTION 1 These two appeals are concerned with the incidence of capital gains tax in relation to the sale by Mongoose Pty Limited (Mongoose) of 35.89 per cent of the issued shares in Minara Resources Limited (Minara), an Australian listed company. Prior to March 2004, Mongoose was a subsidiary of Mongoose Acquisitions LLC (Mongoose Acquisitions). The membership interests in Mongoose Acquisitions, which is incorporated in Delaware, United States of America, were owned by two limited partnerships (the Vendors) also incorporated in Delaware. Each of the Vendors was ultimately owned by MatlinPatterson LLC (MatlinPatterson), a United States private equity firm. 2 In February 2004, Macquarie Bank Limited (Macquarie) and MatlinPatterson negotiated the terms on which Macquarie would arrange for Mongoose's sale of its shares in Minara. A subsidiary of Macquarie was to act as the agent of MatlinPatterson to effect the sale. Macquarie's subsidiary was to receive a fee consisting of a proportion of the gross proceeds of sale. However, in the course of the negotiations between MatlinPatterson and Macquarie, an alternative proposal emerged. Thus, on 2 and 3 March 2004, Macquarie purchased all of the membership interests in Mongoose Acquisitions from the Vendors, for a consideration of $438,928,590. That consideration represented a price equal to $2.65 for each share in Minara held by Mongoose. 3 Subsequently, Mongoose sold its shares in Minara for $2.90 per share. As a consequence, Macquarie derived a gain, being the difference between the amount it paid for the membership interest in Mongoose Acquisitions and the value of that interest, having regard to the amount received by Mongoose on the sale of its shares in Minara. The gain amounted to $41,408,357. Macquarie returned a capital gain of that amount for tax purposes. 4 Mongoose had acquired its shares in Minara in January 2003 for 97.7 cents per share. Accordingly, it derived a gain between January 2003 and March 2004, when it sold the shares in Minara at $2.90 per share, of $318,507,469, being the difference between the price paid by it for the shares ($161,829,478) and the proceeds of sale ($480,336,947). The question in the appeals is whether the gain derived by Mongoose was subject to capital gains tax. 5 The Commissioner of Taxation (the Commissioner), the appellant in both appeals, formed the view that the steps briefly described above constituted a scheme within the meaning of Pt IVA of the Income Tax Assessment Act 1936 (Cth) (the 1936 Act) and that one or more of MatlinPatterson, Macquarie, Mongoose, Mongoose Acquisitions and the Vendors had entered into or carried out the scheme for the dominant purpose of obtaining a tax benefit. The Commissioner formed the view that a tax benefit had arisen in connection with that scheme, on the basis that, if the scheme had not been entered into or carried out, the original proposal would have resulted in a significantly higher incidence of capital gains tax, payable by Mongoose. 6 The Commissioner asserted that a tax benefit was obtained in connection with a scheme that consisted of the following steps: On 2 March 2004, Mongoose Acquisitions declared a distribution of US$244,000,000 to its members, the Vendors. On 3 March 2004, Macquarie agreed with Mongoose Acquisitions that Macquarie would lend Mongoose Acquisitions the sum of US$244,000,000 (the Loan Agreement). On 3 March 2004, Mongoose Acquisitions drew down the sum of US$244,000,000 pursuant to the Loan Agreement and paid the distribution. On 3 March 2004, Macquarie and the Vendors entered into an agreement for purchase and sale of all of the Vendors' membership interests in Mongoose Acquisitions for a consideration of AUS$122,045,472.62 (the Sale Agreement). On 3 March 2004, the directors of Mongoose Acquisitions and Mongoose were replaced with appointees of Macquarie, meetings of Mongoose Acquisitions and Mongoose were convened and the new directors of Mongoose resolved to sell its shares in Minara. On 3 and 4 March 2004, Mongoose sold its shares in Minara. 7 Accordingly, the Commissioner issued two separate determinations under Pt IVA of the 1936 Act. One determination was issued to Mongoose and one to Macquarie. Amended assessments purporting to give effect to those determinations were issued to Mongoose and to Macquarie. However, the Commissioner made clear that he would ultimately rely on only one determination and one amended assessment and that an appropriate compensating adjustment under s 177F(3) of the 1936 Act would be made in relation to the assessable income of $41,408,357 returned by Macquarie. 8 Mongoose and Macquarie objected to the assessments and the Commissioner made unfavourable decisions on the objections. On appeal to the Federal Court, a judge of the Court upheld the appeals and set aside the assessments. The Commissioner then appealed to the Full Court. 9 Following the acquisition of Mongoose Acquisitions by Macquarie, Mongoose Acquisitions and Mongoose were incorporated in the consolidated group formed under Pt 3-90 of the Income Tax Assessment Act 1997 (the 1997 Act), of which Macquarie was the head company. The appeals raise questions about the interaction between Pt IVA of the 1936 Act and Pt 3-90, as well as the question of the application of Pt IVA to the circumstances of the case.

[2]

THE LEGISLATIVE PROVISIONS 10 Under s 177D of the 1936 Act, Pt IVA applies to any scheme where, relevantly, a taxpayer has obtained a tax benefit in connection with the scheme and, having regard to the matters set out in s 177D(b), it would be concluded that the person, or one of the persons, who entered into or carried out the scheme, or any part of the scheme, did so for the dominant purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme. 11 Under s 177F(1)(a), where a tax benefit has been obtained by a taxpayer in connection with a scheme to which Pt IVA applies, the Commissioner may, where a tax benefit is referable to an amount not included in the assessable income of the taxpayer of a year of income, determine that the whole or a part of that amount shall be included in the assessable income of the taxpayer of that year of income. Where the Commissioner makes such a determination, he must take such action as he considers necessary to give effect to that determination. Under s 177C(1)(a), a reference in Pt IVA to the obtaining by a taxpayer of a tax benefit in connection with a scheme is to be read, relevantly, as a reference to an amount not included in the assessable income of the taxpayer of a year of income, where the amount would have been included, or might reasonably be expected to have been included, in assessable income of the taxpayer of that year, if the scheme had not been entered into or carried out. 12 Section 177C(1) provides that the tax benefit is to be taken to be the amount that is not included in the assessable income of the taxpayer. However, under s 177C(2), a reference in Pt IVA to the obtaining by a taxpayer of a tax benefit in connection with a scheme is to be read as not including, relevantly, a reference to the assessable income of the taxpayer of the year of income not including an amount that 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, where: the non-inclusion of the amount is attributable to the making of an agreement, choice, declaration, election or selection, the giving of a notice or the exercise of an option expressly provided for by the 1936 Act or the 1997 Act, by any person; and the scheme was not entered into or carried out by any person for the purpose of creating any circumstance or state of affairs the existence of which is necessary to enable the declaration, agreement, election, selection, choice, notice or option to be made, given or exercised, as the case may be. 13 Section 700-1 of the 1997 Act provides that Pt 3-90 allows certain groups of entities to be treated as single entities for income tax purposes. Following a choice to consolidate, subsidiary members are treated as part of the head company of the group, rather than as separate income tax identities. The head company inherits the income tax history of subsidiary members when they become subsidiary members of the group. On ceasing to be subsidiary members, the subsidiary members take with them an income tax history that recognises that they are different from when they became subsidiary members. That object is supported by rules that: set the cost for income tax purposes of assets that subsidiary members bring to the group; determine the income tax history that is taken into account when entities become, or cease to be, subsidiary members of the group; and deal with the transfer of tax attributes, such as losses and franking credits, to the head company when entities become subsidiary members of the group. 14 Section 700-10 provides that the objects of Pt 3-90 are: to prevent double taxation of the same economic gain realised by a consolidated group; to prevent a double tax benefit being obtained from an economic loss realised by a consolidated group; and to provide a systematic solution to the prevention of such double taxation and double tax benefits that will reduce the cost of complying with the tax legislation and will improve business efficiency by removing complexities and promoting simplicity in the taxation of wholly owned groups. 15 Division 701 sets out the core rules of Pt 3-90. Those include the single entity rule, in s 701-1, and the entry history rule, in s 701-5. Under s 701-1(1), if an entity is a subsidiary member of a consolidated group for any period, it and any other subsidiary member of the group are taken, for the purposes covered by s 701-1(2) and s 701-1(3), to be parts of the head company of the group, rather than separate entities, during that period. The purposes covered by s 701-1(2) are working out the amount of the head company's liability, if any, for income tax calculated by reference to any income year in which any of the period occurs, or any later income year, and working out the amount of the head company's loss, if any, of a particular sort for any such income year. The purposes covered by s 701-1(3) are working out the amount of the entity's liability, if any, for income tax calculated by reference to any income year in which any of the period occurs, or any later income year, and working out the amount of the entity's loss, if any, of a particular sort, for any such income year. Under s 701-5, for the head company core purposes in relation to the period after the entity becomes a subsidiary member of the group, everything that happened in relation to the entity before it became a subsidiary member is taken to have happened in relation to the head company. 16 Division 705 contains rules for setting the tax cost of an entity's assets when it becomes a subsidiary member of a consolidated group. When an entity becomes a subsidiary member of an existing consolidated group, the tax cost setting amount for its assets reflects the costs to the group of acquiring the entity. Subdivision 705-A has effect for the head company core purpose set out in s 701-1(2) if an entity (the joining entity) becomes a subsidiary member of a consolidated group (the joined group) at a particular time (the joining time). The object of Subdivision 705-A is to recognise the head company's cost of becoming the holder of the joining entity's assets as an amount reflecting the group's cost of acquiring the entity. That amount consists of the cost of the group's membership interests in the joining entity, increased by the joining entity's liabilities and adjusted to take account of the joining entity's retained profits, distribution of profits, deductions and losses. Under s 705-10(3), the reason for recognising the head company's cost in that way is to align the costs of assets with the costs of membership interests, and to allow for the preservation of that alignment until the entity ceases to be a subsidiary member, in order to: prevent double taxation of gains and duplication of losses, and remove the need to adjust costs of membership interests in response to transactions that shift the value between them, as the required adjustments occur automatically. The alignment is preserved by recognising the head company's cost of membership interest in the entity if it ceases to be a subsidiary member of the group as the cost of its assets reduced by its liabilities.

[5]

Dominant Purpose 20 I agree with the conclusion reached by Middleton and Robertson JJ, for the reasons given by their Honours, that a reasonable person would not conclude that any of the persons alleged to have participated in the scheme or to have carried out the scheme or any part of it did so for the dominant purpose of enabling Mongoose to obtain a tax benefit. At all relevant times, both Mongoose Acquisitions and Mongoose were wholly-owned subsidiaries of either MatlinPatterson or Macquarie. Accordingly, it was appropriate, in the absence of evidence to the contrary, to attribute to each of them the purpose that existed on the part of MatlinPatterson or Macquarie, as the case may be, at the relevant time. 21 The Vendors had a choice of two commercial transactions, with different financial consequences. They chose to take an immediate and certain payment of the full proceeds of a sale, at a lower price than might otherwise been obtained, as against the uncertain prospect of disposing of the Minara shares in a volatile market. While tax considerations may have been relevant to the Vendors' decision to proceed with the sale to Macquarie, the primary judge did not err in concluding that the purpose of enabling Mongoose to obtain a tax benefit was not the dominant purpose of the Vendors. The dominant purpose of the Vendors was purely commercial, namely, to sell the Minara shares in a manner that was satisfactory to them, albeit a manner that was satisfactory as regards matters relating to tax, and to realise the profit from the investment that they had made in Minara, through Mongoose Acquisitions and Mongoose. 22 Macquarie clearly had a purpose of making a profit from its dealings with MatlinPatterson and the Vendors, the primary object of which was the sale of the Minara shares. The circumstances do not support the conclusion that the scheme as described was explicable only by the relevant taxation consequences. The obtaining of a tax benefit by Mongoose was not the dominant purpose in entering into the scheme. It had a clear dominant purpose of making a profit from its dealings, in respect of which the primary object was the sale of the Minara shares. 23 It follows that the Commissioner cannot establish that any of the participants in the scheme described had the dominant purpose of Mongoose obtaining the relevant tax benefit. The Commissioner cannot succeed in a case based on Pt IVA of the 1936 Act.

[7]

INTERACTION BETWEEN PART 3-90 AND PART IVA 25 In the circumstances, it is not strictly necessary to consider the questions concerning the interaction of Pt IVA and Pt 3-90. However, since the questions occupied a considerable part of the appeals and are of some continuing significance, it is desirable to make some observations on the questions. 26 The relevant provisions of Pt IVA and Pt 3-90 must be construed consistently with their language and purpose, in the context of the 1936 Act and the 1997 Act, read together as a whole. They must be construed on the basis that the 1936 Act and the 1997 Act, read together, are intended to give effect to harmonious goals. To the extent that there is a conflict between them, that conflict is to be alleviated, in so far as that is possible, by adjusting the meaning of the relevant provisions having regard to the hierarchy of the provisions, in order to preserve the unity of the statutory scheme. Meaning should be given to every word of the relevant provisions, so that no provision is rendered superfluous, void or insignificant (see Project Blue Sky Inc and Ors v Australian Broadcasting Authority (1998) 194 CLR 355 at [69]-[71]). 27 On the assumption that the Commissioner was empowered to issue the determination to Mongoose, the Commissioner was required by s 177F(1) to take such action as he considers necessary to give effect to that determination. Section 177F(1) does not confer a discretion on the Commissioner as to whether to give effect to a determination. Nor does it contemplate the possibility of a determination to which effect cannot be given. In addition, the decision about the action that is necessary to give effect to a determination is reposed in the Commissioner, albeit to be made according to law. The usual way in which a determination under s 177F would be given effect to is by the issuing of an assessment. 28 In giving effect to the determination in respect of Mongoose, no other means has been suggested other than issuing an amended assessment to either Mongoose or Macquarie. The provisions of Pt IVA and Pt 3-90 should not be construed in a way that would sterilise or limit the proper operation of Pt IVA. The provisions of both parts must be construed consistently with their purpose so as to produce harmonious goals and effects. 29 The effect of Pt IVA will inevitably be to alter the incidence of taxation that would otherwise arise by reason of the operation of the 1936 Act and the 1997 Act. That is the purpose and function of Pt IVA. It is not surprising that a determination under Pt IVA might have the effect of negating the consequences that would otherwise flow from the operation of Pt 3-90. 30 There is a clear hierarchy of provisions underlying the statutory scheme of which Pt IVA of the 1936 Act and Pt 3-90 of the 1997 Act form part. It is clear that Pt IVA is intended to operate at a higher level than Pt 3-90. That is to say, Pt 3-90 is subordinate in the hierarchy to Pt IVA. 31 Macquarie and Mongoose seek to restrict the tax consequences of Mongoose's disposal of the Minara shares to the difference between what Macquarie paid to the Vendors and the amount paid by the purchasers of the Minara shares. They seek to do so by the application of the single entity rule in s 701-1 of the 1997 Act. However, s 701-85 of the 1997 Act expressly provides that the operation of each provision of Pt 3-90 is subject to any provision of the Act that so requires, either expressly or impliedly. Under s 995-1 of the 1997 Act, the phrase the Act includes the 1936 Act. Thus, the single entity rule will be subject to another provision of either Act, such as a provision of Pt IVA, if a Pt IVA provision expressly or impliedly requires it. 32 Further, s 177B(1) of the 1936 Act, which is in Pt IVA, relevantly provides that nothing in the provisions of this Act, other than Pt IVA, is to be taken to limit the operation of Pt IVA. The phrase this Act is defined in s 6(1) of the 1936 Act to include the 1997 Act. Thus, it is clear that the purpose of s 177B is to give Pt IVA paramount force across both the 1936 Act and the 1997 Act. The phrase this Act is defined in s 6(1) of the 1936 Act to include the 1997 Act. Section 701-85 of the 1997 Act and s 177B, when read together, are to be read as saying that a provision of Pt 3-90, such as the single entity rule, is subject to a provision of Pt IVA, if that is required either expressly or impliedly. 33 There is no reason why a determination issued to one taxpayer cannot be given effect to by issuing an assessment or an amended assessment to another taxpayer. There is no limitation to that effect in the words of s 177F and there is no reason to imply such a limitation. The Commissioner's power and obligation to take such action as he considers necessary to give effect to a determination are limited only by what the Commissioner could reasonably consider necessary to give effect to a determination. Necessary must be understood as meaning clearly appropriate and adapted for (see Ronpibon v Commissioner of Taxation (1949) 78 CLR 47 at 56). It may be that, in the usual case, giving effect to a determination will result in the issue of an assessment or an amended assessment to the taxpayer that is the subject of the determination. However, that need not always be so. There is no reason why the issue of an assessment to one taxpayer may be appropriate and adapted for giving effect to a determination issued to a different taxpayer, having regard to the relationship between the two taxpayers (see, for example, McCutcheon v Federal Commissioner of Taxation (2008) 168 FCR 149 at [33]-[35]). 34 The relationship between the head company of a consolidated group and a subsidiary member of that group, being the relationship created by the single entity rule in s 701-1 of the 1997 Act, is a particular example of circumstances where a determination to one taxpayer may be given effect to by the issue of an assessment to another taxpayer. By s 701-1, a subsidiary member of the consolidated group is, for certain purposes, to be taken to be part of the head company of the group, rather than a separate entity. One of those purposes is the working out of the amount of the entity's liability, if any, for income tax, as provided in s 701(3)(a). That is to say, where a subsidiary member of a consolidated group has an income tax liability, it is to be taken to be the liability of the head company and the issue of an assessment to the head company may well be appropriate and adapted for giving effect to the determination issued to the subsidiary member, as is the case in the present circumstances. So long as action taken by the Commissioner can be reasonably considered to be appropriate and adapted to giving effect to the determination, there is no other restriction to be read into s 177F as to what the Commissioner can do. 35 The purpose of Pt IVA is to provide against tax avoidance arrangements that are artificial or contrived. Section 177B relevantly provides that nothing in the provisions of the 1936 Act or the 1997 Act, other than Pt IVA, is to be taken to limit the operation of Pt IVA. The anti-avoidance purpose of Pt IVA is clearly not to be limited by anything else in the general income tax law. Thus, there is nothing in Pt 3-90 that expressly excludes the operation of Pt IVA. Indeed, s 701-85 expressly provides that the operation of each provision of Pt 3-90 is subject to any provision of the 1936 Act or the 1997 Act that so requires, either expressly or impliedly. 36 In the light of those provisions, there is no reason why Pt IVA should not apply to schemes involving consolidated groups. The operation of Pt IVA is not specifically excluded and it is clear that Pt IVA is intended to operate with paramount force, consistently with its general anti-tax avoidance purpose. Section 177C(2) is an example of the paramountcy of Pt IVA and its presence is indicative of that paramountcy. Thus, Pt IVA is capable of having application in circumstances where s 177C(2) has no operation. While not every transaction involving a consolidated group will enliven Pt IVA, it is clear that Pt IVA can be invoked in circumstances where it is necessary for the proper functioning of the anti-avoidance regime of Pt IVA. 37 Pt IVA is not inconsistent with the purposes or policy of Pt 3-90. The benefits of the provisions of Pt 3-90 are available to those who choose to take advantage of them. However, the mere fact that an entity joins a consolidated group is not of itself sufficient to preclude the operation of Pt IVA in relation to the actions of that entity if the prerequisites of Pt IVA are satisfied. If it were, the general anti-avoidance purpose of Pt IVA would be frustrated. 38 The pivotal provisions of Pt IVA are s 177F(1) and s 177D. Pt IVA is applicable only when the Commissioner has made a determination under s 177F(1). Such a determination can be made only where a taxpayer has obtained a tax benefit by connection with a scheme to which Pt IVA applies. Section 177D then identifies the schemes to which Pt IVA applies. 39 Under s 6(1) of the 1936 Act, a taxpayer is a person deriving income or deriving profits or gains that are capital in nature. Most, if not all, active subsidiary members of a consolidated group will in fact receive income or gains. They will therefore be taxpayers for the purposes of Pt IVA. The application of Pt IVA depends upon the concept of a taxpayer obtaining a tax benefit, as defined in s 177C(1)(a). Where it is established that a taxpayer has obtained a tax benefit, and the other criteria of Pt IVA are satisfied, s 177F permits the Commissioner to determine that the whole or part of the tax benefit be included in that taxpayer's assessable income. 40 Nevertheless, while Mongoose satisfies the definition of taxpayer for the purposes of Pt IVA, it does not follow that Mongoose itself has assessable income for the purpose of the application of the provisions of Pt IVA, such as s 177F. While Mongoose was a taxpayer for the purpose of Pt IVA, the operation of Pt 3-90 precludes Mongoose from being directly assessed. 41 Absent the operation of Pt 3-90, the Commissioner would identify a taxpayer who is alleged to have obtained a relevant tax benefit and make a determination in respect of that taxpayer. In such a case, there would be a clear relationship between the taxpayer, the taxpayer's assessable income, the tax benefit obtained under the scheme and the counterfactual proposed under s 177C. Where Pt 3-90 is applicable, however, the entity whose actions give rise to a tax benefit may not be liable to be assessed for income tax, since the entity is deemed not to have a separate existence for that purpose. 42 The effect of Pt 3-90 is not that the actions of a subsidiary member will never be subject to, or be the subject of, tax. Rather, its effect is that the head company will be the entity taxed in relation to those actions. Pt 3-90 does not have the effect that there are no tax consequences in relation to subsidiary members of consolidated groups. Rather, it has the effect of transferring the liability of a subsidiary member for income tax to a different entity, being the head company. Thus, the head company will be the relevant taxpayer for Pt IVA purposes, because a subsidiary member is not liable to assessment. All of the members of the consolidated group are treated collectively as a single entity for income tax purposes. The relevant purpose of Pt 3-90 is to avoid double taxation of the same economic gain and to reduce the cost of complying with the taxation legislation. Its object is to ensure that the 1997 Act and the 1936 Act operate in relation to a consolidated group as if the subsidiary members were absorbed into the head company, which becomes the relevant taxpayer for all of the subsidiary members of the consolidated group. 43 When applying Pt IVA to the Macquarie consolidated group, the Commissioner was entitled to make a determination in respect of Macquarie, in its capacity as head company of that consolidated group, as the relevant taxpayer for that purpose. Where a subsidiary member of a consolidated group enters into a scheme to which s 177D applies, the Commissioner is authorised to make a determination under s 177F(1). However, the authorised determination will be, relevantly, one to include an amount in the assessable income of the head company, to which, for tax assessment purposes, the actions of the subsidiary member are attributed, by s 701-1. The legal fiction created by Pt 3-90 requires that determinations and assessments under Pt IVA be administered to consolidated groups in a particular way that gives effect to the legislative purpose of both parts. The Commissioner is not prevented from relying on the combination of the determination in respect of Macquarie and the amended assessment issued to Macquarie. 44 The entry into the Sale Agreement constituted the entry of Mongoose into the Macquarie consolidated group as a wholly-owned subsidiary of Mongoose Acquisitions. The primary judge found that, if the scheme described above had not been entered into or carried out, Mongoose would have sold its Minara shares as an independent entity and not as a subsidiary member of Macquarie consolidated group. The Commissioner contends that, in those circumstances, a gain of $318,507,469 would have been included in the assessable income of Mongoose. Mongoose is the relevant taxpayer for the purposes of Pt IVA. However, the actions of Mongoose, including the sale of the Minara shares, and the income tax consequences attaching to that sale, are taken to be the actions of Macquarie as head company by virtue of the operation of Pt 3-90. 45 Section 177C(1)(a) relevantly provides that a reference in Pt IVA, to the obtaining by a taxpayer of a tax benefit in connection with a scheme, is to be read as a reference to an amount not included in 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 assessable income of the taxpayer of that year of income if the scheme had not been entered into or carried out. Thus, there must be a clear connection between the relevant taxpayer, the assessable income of that taxpayer and the tax benefit. 46 While Mongoose is a taxpayer for the purposes of determining whether it has assessable income, the effect of Pt 3-90 is to put Macquarie in the shoes of Mongoose. Certainly, Pt IVA must be construed and applied according to its terms. The question is whether the terms of Pt IVA apply to the facts and circumstances of the particular case. That question must be decided in the context of the way in which Pt 3-90 is clearly intended to operate. While Mongoose cannot be the subject of direct application of s 177C, the assessable income of Mongoose must be taken to have been assessable income of Macquarie. I consider that a tax benefit was obtained by Mongoose and that, if there were a Pt IVA scheme, then Macquarie, as the head company, would be the correct entity to whom the Commissioner would issue a determination and amended assessment.

[13]

INTRODUCTION 48 The appellant (Commissioner) appeals from the orders of the primary judge of 26 September 2011 [2011] FCA 1076, by which the primary judge set aside objection decisions of the Commissioner dated 15 December 2009 and ordered that the respondents' objections against two amended assessments of 23 June 2009 be allowed in full. Those amended assessments followed determinations issued by the Commissioner on 5 June 2009 under s 177F of Pt IVA of the Income Tax Assessment Act 1936 (Cth) (1936 Act). 49 It is convenient to commence with a brief overview of the relevant facts and background to these appeals. 50 By the assessments under objection in these proceedings, the Commissioner, in reliance on the provisions of Pt IVA ("Schemes to Reduce Income Tax") of the 1936 Act sought to cancel the tax consequences that would otherwise apply to the respondents as members of a consolidated group under Pt 3-90 ("Consolidated Groups") of the Income Tax Assessment Act 1997 (Cth) (1997 Act). These tax consequences related to a gain made by the applicant in NSD 106 of 2010, Mongoose Pty Limited (Mongoose). This gain related to the sale of Mongoose's principal asset, being shares in the Australian listed company Minara Resources Limited (Minara). 51 At the time when Mongoose sold the Minara shares it was a subsidiary member of the consolidated group of which the applicant in NSD 105 of 2010, Macquarie Bank Limited (MBL), was the head company (MBL consolidated group). Consistent with the provisions of Pt 3-90 of the 1997 Act (in particular Divs 701 and 705), the gain on the sale of the Minara shares was returned by MBL as head company of the MBL consolidated group by reference to the difference between the proceeds of sale of the Minara shares ($480,336,947) and MBL's cost of bringing Mongoose into the MBL consolidated group ($438,928,590). This comprised a total gain of $41,408,357. MBL - again, as head company of the MBL consolidated group - was assessed to tax as returned. 52 The Commissioner asserted that the events which culminated in the sale of the Minara shares by Mongoose formed part of a scheme entered into by the relevant parties in contravention of Pt IVA. The tax benefit alleged was calculated by reference to the gain that would have been derived by Mongoose on the sale of the Minara shares had it sold them when it was not a subsidiary member of the MBL consolidated group. This was said to be a gain of $318,507,469 (calculated by reference to the difference between the proceeds of sale - being $480,336,947 - and Mongoose's actual cost of acquiring the Minara shares, being $161,829,478). Accordingly, in respect of this amount, in June 2009 the Commissioner made determinations in respect of and issued amended assessments to each of Mongoose and MBL. These determinations and amended assessments were made and issued in the alternative. 53 The primary judge ultimately concluded that the Commissioner's action against the respondents could not be supported either by reference to the provisions of Pt IVA or otherwise, and found in favour of the respondents. The Commissioner appealed this decision (giving rise to the current proceedings, NSD 1793 and NSD 1794 of 2011). On appeal, the respondents sought to have the primary judge's conclusions affirmed, albeit on slightly different grounds (about which more will be said below). 54 Against that background, the issues for determination in these appeal proceedings are broadly as follows: 1. how Pt IVA of the 1936 Act and Pt 3-90 of the 1997 Act are intended to interact - specifically, whether and how the Commissioner may make determinations and issue amended assessments under Pt IVA in respect of income derived by (or as a result of the actions of) a subsidiary member of a consolidated group to which Pt 3-90 applies; and 2. if a determination could properly be made and an amended assessment could properly be issued by the Commissioner in this case; (a) whether a tax benefit was obtained by a relevant "taxpayer" in connection with the scheme relied upon by the Commissioner for the purposes of Pt IVA; and (b) whether it would be concluded, having regard to the matters specified in s 177D(b), that one or more of the scheme participants entered into or carried out the scheme (or part thereof) for the purpose of enabling the relevant taxpayer to obtain a tax benefit, as required by s 177D. 55 A number of other issues were also raised by the Commissioner on appeal, for example, involving the primary judge's treatment of and findings regarding the evidence before him at trial, and the application of the High Court's decision in Federal Commissioner of Taxation v Futuris Corporation Limited (2008) 237 CLR 146 to the issue of compensating adjustments under s 177F(3). These matters will be dealt with briefly at the conclusion of these reasons.

[14]

Factual Background 56 The primary judge set out much of the relevant factual background in his reasons for judgment. There is no contest about these facts between the parties (but we note that the Commissioner seeks to supplement the facts set out by the primary judge with a number of further facts, which are addressed below in the context of the inquiry as to purpose under s 177D of the 1936 Act). Accordingly, it is convenient to reproduce these facts here, adopting the acronyms and abbreviations referred to by the primary judge. These acronyms and abbreviations were originally set out in a table at [60] of his Honour's reasons for judgment (which in turn purported to adopt the same acronyms and abbreviations that appeared in contemporaneous documents in evidence before his Honour, and/or documents filed with the Court). For convenience we substantially reproduce that table here. Acronym/Abbreviation Entity/Expression Acts: Income Tax Assessment Act 1936 (Cth) 1936 Act Income Tax Assessment Act 1997 (Cth) 1997 Act Agency Proposal The proposal described at [61] below APRA Australian Prudential Regulation Authority ASIC Australian Securities and Investments Commission ASX Australian Stock Exchange Commissioner The Commissioner of Taxation Cornerstone investors The institutional investors who gave a commitment to MECM to buy Minara shares Glencore Glencore International AG Loan Agreement The agreement between MALLC and MBL on 3 March 2004 referred to at [65(b)] below MALLC Mongoose Acquisition LLC MatlinPatterson MatlinPatterson LLC MatlinPatterson group All of MatlinPatterson, MPAM, MPGP, MPGA, MPGOP, MPGOPB, MALLC and Mongoose MBL Macquarie Bank Limited MBL amended assessment The amended assessment referred to at [74] below MBL consolidated group The consolidated group for the purposes of Pt 3-90 of the 1997 Act, of which MBL was the head company and Mongoose was a subsidiary member MBL determination The determination referred to at [73] below MECM Macquarie Equity Capital Markets Ltd Minara Minara Resources Limited Minara shares The 165,633,430 ordinary shares in Minara held by Mongoose Mongoose Mongoose Pty Limited Mongoose amended assessment The amended assessment referred to at [72] below Mongoose determination The determination referred to at [71] below MPAM MatlinPatterson Asset Management LLC MPGA MatlinPatterson Global Advisers LLC MPGOP MatlinPatterson Global Opportunities Partners LP MPGOPB MatlinPatterson Global Opportunities Partners (Bermuda) LP MPGP MatlinPatterson Global Partners LLC Relevant years of income For Mongoose the year ended 31 December 2004 in lieu of year of income ended 30 June 2005; for MBL the year ended 30 September 2004 in lieu of year of income ended 30 June 2004 Sale Agreement The agreement between MPGOP, MPGOPB and MBL on 3 March 2004 referred to at [65(d)] below.

[15]

57 In January 2003, Mongoose, a company incorporated in Australia, made a takeover offer for all the shares in Minara (then called Anaconda Nickel Limited), a company which operated a nickel and cobalt mine in Western Australia. Minara was also incorporated in Australia, and its shares were listed on the Australian Stock Exchange (ASX). 58 At the time, Mongoose was wholly owned by Mongoose Acquisition LLC (MALLC), a limited liability company incorporated in Delaware, United States of America. MALLC was part of the MatlinPatterson group, a US private equity firm, having no ownership of or other relationship with MBL. 59 The ownership structure of the MatlinPatterson group was depicted by a diagram in the relevant takeover documents, which is reproduced below: 1 General Partner of the Fund 2 MatlinPatterson Global Opportunities Partners (Bermuda) LP holds approximately 25% participating interest in the Fund 60 Mongoose's takeover was unsuccessful and it only succeeded in acquiring a 36% interest in Minara. The cost of that interest to Mongoose was $161,829,478. As it did not accept Mongoose's offer, Glencore International AG (Glencore), Minara's principal shareholder, retained a 47% interest in Minara. 61 In February 2004, having formed the view that MatlinPatterson would not wish to retain a minority stake in Minara (namely, 36%), MBL made an unsolicited approach to MatlinPatterson to assist it in a sale of the minority interest by organising through a subsidiary, Macquarie Equity Capital Markets Ltd (MECM), a bookbuild for the sale of the Minara shares in return for a commission (Agency Proposal). By this time, the ASX price for Minara had substantially increased. Discussions in relation to the Agency Proposal began in early February 2004 and continued until the weekend of 22-23 February (or thereabouts), but MECM was not in the event appointed agent for MatlinPatterson (or Mongoose as its subsidiary) and the Agency Proposal did not proceed. 62 Instead, an agreement was reached between MatlinPatterson and MBL for the sale to MBL of MatlinPatterson's indirect investment in Minara, on terms by which MBL would purchase MALLC and take the market and other risks on the subsequent sale of the Minara shares held by Mongoose. 63 At that time - late February 2004 - the only difference in the ownership structure of the MatlinPatterson group from that depicted in the diagram reproduced at [59] above was that MatlinPatterson Global Opportunities Partners (Bermuda) LP (MPGOPB) had exchanged its 25% interest in MatlinPatterson Global Opportunities Partners LP (MPGOP) for a 25% interest in MALLC. Thus: 64 MBL understood that if it acquired Mongoose it would be liable to pay tax on the net profit to it from the transaction, that is, the proceeds of realisation of the Minara shares less the cost to MBL of its investment and transaction costs. Concerns as to a potentially adverse operation of s 457 of the 1936 Act (part of the Controlled Foreign Companies provisions in Pt X of that Act) were the subject of consideration, advice and steps taken to avoid any adverse consequences of an arguable application of that provision. 65 On or about 2 or 3 March 2004 the following transactions took place: (a) MALLC declared a distribution of US$244 million to its members, MPGOP and MPGOPB; (b) MBL agreed with MALLC to lend it US$244 million (Loan Agreement); (c) MALLC paid US$244 million to its members; (d) MBL and the members of MALLC entered into an agreement for the purchase and sale of the membership interests in MALLC for A$122,045,472.62 (Sale Agreement); (e) the membership interests in MALLC were transferred to MBL; (f) senior executives of MBL, Messrs John Prendiville, Michael Carapiet and Richard Phillips, were appointed directors of MALLC, and then of Mongoose; in consequence, MALLC became a resident of Australia for the purposes of the 1936 and 1997 Acts, and MALLC and Mongoose members of a consolidated group, of which MBL was the head company; and (g) the directors of Mongoose resolved to sell the Minara shares using MECM as its broker. 66 Thus, Mongoose became a subsidiary member of the MBL consolidated group in consequence of, inter alia, MBL purchasing all the membership interests in MALLC from the MatlinPatterson vendors (both non-residents of Australia) for $438,928,590. This figure comprised a purchase price of $122,045,472.62, plus a liability of MALLC owing to MBL for moneys lent to MALLC in the sum of US$244 million ($316,883,117.38). 67 The MatlinPatterson vendors of the membership interests in MALLC sold their indirect interest in Minara for a gain of $277,099,112 ($438,928,590 less the cost to Mongoose of the Minara shares, being $161,829,478). It is common ground that this gain was not subject to Australian income tax to the MatlinPatterson vendors, being (as it was) a sale by non-residents of their respective interests in a non-resident company. 68 The Minara shares were sold by Mongoose on 4 March 2004 at a price of $2.90 per share, for a total amount of $480,336,947. 69 As noted above, the cost to MBL of acquiring all the membership interests in MALLC was $438,928,590. That was also MBL's tax cost of Mongoose's interest in Minara for the purposes of Pt 3-90 of the 1997 Act (see Div 705). In consequence of Mongoose's sale of the Minara shares, for the year of income ended 30 September 2004 (in lieu of the year of income ended 30 June 2004), MBL returned, as head company of the MBL consolidated group (of which Mongoose was, by then, a subsidiary member) an assessable gain of $41,408,357. This comprised the difference between the proceeds of the disposal by Mongoose of the Minara shares ($480,336,947) and MBL's tax cost of Mongoose's interest in Minara ($438,928,590). The primary judge noted that it was "common ground" that, the application of Pt IVA aside, in the relevant year of income - (1) MBL did not derive a gain of $318,507,469; its gain, as head company of the consolidated group, was limited to that which it returned, namely, $41,408,357; and (2) Mongoose is deemed not to be a separate entity, and not to be liable to tax, in that part of the relevant year of income during which the gain was derived. 70 The relevant determinations and assessments made and issued by the Commissioner were as follows. 71 On 5 June 2009 the Commissioner made a determination pursuant to s 177F of the 1936 Act (Mongoose determination) in the following terms: I, Paul Duffus, Deputy Commissioner of Taxation, Large Business and International, in the exercise of the powers and functions delegated to me by the Commissioner of Taxation determine under paragraph 177F(1)(a) of the Income Tax Assessment Act 1936 (the Act) that the amount of $318,507,469 being a tax benefit that is referable to an amount that has not been included in the assessable income of Mongoose Pty Ltd, TFN … (the taxpayer) for the substituted accounting period 1 January 2004 to 31 December 2004 in lieu of year of income ended 30 June 2005, shall be included in the assessable income of the taxpayer for that year of income. I further determine under subsection 177F(2) of the Act that the amount shall be deemed to be included in the assessable income of the taxpayer by virtue of section 102-5 of the Income Tax Assessment Act 1997. 72 On 23 June 2009 the Commissioner issued an amended assessment to Mongoose for the year ended 31 December 2004 (in lieu of the year of income ended 30 June 2005), including the sum of $318,507,469 in Mongoose's assessable income (Mongoose amended assessment). The amount of the tax benefit alleged - $318,507,469 - comprises the proceeds of disposal of the Minara shares (namely, $480,336,947) minus the cost to Mongoose of acquiring the Minara shares ($161,829,478). 73 On 5 June 2009 the Commissioner made another determination pursuant to s 177F of the 1936 Act (MBL determination) in the following terms: I, Paul Duffus, Deputy Commissioner of Taxation, Large Business and International, in the exercise of the powers and functions delegated to me by the Commissioner of Taxation determine under paragraph 177F(1)(a) of the Income Tax Assessment Act 1936 (the Act) that the amount of $318,507,469 being a tax benefit that is referable to an amount that has not been included in the assessable income of Macquarie Bank Ltd, TFN … (the taxpayer) for the substituted accounting period 1 October 2003 to 30 September 2004 in lieu of year of income ended 30 June 2004, shall be included in the assessable income of the taxpayer for that year of income. I further determine under subsection 177F(2) of the Act that the amount shall be deemed to be included in the assessable income of the taxpayer by virtue of section 102-5 of the Income Tax Assessment Act 1997. 74 On 23 June 2009 the Commissioner issued an amended assessment to MBL for the year ended 30 September 2004 (in lieu of the year of income ended 30 June 2004), including this same sum of $318,507,469 in MBL's assessable income (MBL amended assessment). 75 It was said by the primary judge that the Commissioner's action in taxing the gain was "obviously attended by uncertainty on his part as to which applicant to tax, so he taxed both". It was conceded by the Commissioner that both assessments could not be correct, and also that: if one is correct, he would have to make a compensating adjustment pursuant to s 177F(3) of the 1936 Act excising from MBL's assessable income the gain of $41,408,357 returned by, and taxed to, MBL as head company of the MBL consolidated group in respect of the sale. In his closing written outline of submissions, the Commissioner submitted that for him to proceed otherwise than the way he did "while tax appeals are pending would risk a loss of the tax on $41 million to the revenue which on any view is properly assessable, if the appeals succeed". 76 The primary judge rejected these submissions, in part on the basis of the Full Court's decision in Futuris Corporation Ltd v Federal Commissioner of Taxation (2007) 159 FCR 257. This issue - which is the subject of one of the grounds of appeal asserted by the Commissioner, but was not ultimately necessary for this Court to determine - will be dealt with later in these reasons. 77 The scheme relied upon by the Commissioner - which was set out in the primary judge's reasons, and is not in contest between the parties - is as follows: (a) On 2 March 2004, the declaration of a distribution of US$244 million by MALLC; (b) On 3 March 2004, the entry into the Loan Agreement by MBL and MALLC; (c) On 3 March 2004, the drawdown by MALLC of US$244 million pursuant to the loan agreement; (d) On 3 March 2004, the entry into the Sale Agreement pursuant to which MPGOP and MPGOPB sold their membership interests in MALLC to MBL; (e) On 3 March 2004, replacement of the existing directors of MALLC and Mongoose with MBL appointees, the convening of meetings by the new directors of MALLC and Mongoose and the resolution of the new Mongoose directors to sell the Minara shares; and (f) On 3 and 4 March 2004, the sale of the Minara shares by MECM on behalf of Mongoose, at a price of $2.90 per share. 78 In [40] of the amended appeal statement filed in each of the proceedings NSD 105 of 2010 and NSD 106 of 2010, the Commissioner quantified the tax benefit alleged to have been obtained under Pt IVA and particularised the relevant counterfactual required by s 177C, as follows: Mongoose (alternatively, MBL) obtained a tax benefit in connection with a scheme of $318,507,469 (being the expected proceeds of $480,336,947 less the cost of the shares $161,829,478) being the amount not included in its assessable income for the income year ended 31 December 2004 where that amount would have been included or might reasonably have been expected to have been included if the scheme had not been entered into or carried out. Particulars If the scheme had not been entered into or carried out it might reasonably be expected that Mongoose would have sold the Minara shares in accordance with the Agency Proposal for a price equal to $2.90 per Minara share. 79 As noted at [27] and following of the primary judge's reasons, the Commissioner initially argued that, having regard to the factors in s 177D, the dominant purpose of MBL, MPGOP and MPGOPB in entering into or carrying out the scheme (as previously defined) was to enable Mongoose (alternatively, MBL) to obtain the tax benefit in question. During the course of the proceeding before the primary judge, the Commissioner expanded the scope of his dominant purpose argument to include MALLC and Mongoose as relevant parties.

[16]

THE FINDINGS OF THE PRIMARY JUDGE 80 As previously noted, the primary judge upheld the respondents' applications at first instance. Central to the primary judge's reasoning in this regard appears to have been certain defects or inconsistencies perceived in the manner in which the Commissioner purported to issue assessments to and make determinations in respect of Mongoose and MBL, and the combinations thereof that the Commissioner sought to rely upon for the purpose of his case under Pt IVA. 81 His Honour was inclined towards the view (albeit ultimately not deciding) that the Commissioner theoretically could make the Mongoose determination, despite the fact that Mongoose was a subsidiary member of the MBL consolidated group at the relevant time. But the primary judge ultimately held that: (a) On the assumption that a determination can only be given effect to by issuing an assessment to the specific taxpayer whose assessable income is to be increased, the Commissioner could not rely on the Mongoose amended assessment to give effect to the Mongoose determination because, as a subsidiary of the MBL consolidated group (to which Pt 3-90 applied), Mongoose was not a separate entity liable to tax at the relevant time. (b) Further, the Commissioner could not use the MBL amended assessment to give effect to the Mongoose determination. Outside of specific contexts involving trustees and beneficiaries (about which it was not necessary for his Honour to ultimately decide), the primary judge doubted whether the Commissioner could issue an amended assessment to one taxpayer to give effect to a determination made in respect of another. The primary judge considered that even if such a thing were possible in certain limited circumstances involving consolidated groups, this was not such a case. To this end, his Honour held that any assessment intended to give effect to an anterior determination (whether issued to the taxpayer referred to in the determination or otherwise) "must be factually consistent with the hypothesis upon which that determination is predicated". His Honour held at [61] that the MBL amended assessment was not factually consistent with the hypothesis on which the Mongoose determination was predicated (namely, that if the scheme was not entered into, Mongoose would have sold the Minara shares otherwise than as a member of the MBL consolidated group). Accordingly, the MBL amended assessment could not give effect to the Mongoose determination. (c) Further, the Commissioner could not rely on the MBL amended assessment to give effect to the MBL determination, as this would also be inconsistent with the Commissioner's counterfactual that Mongoose would have or might reasonably be expected to have sold the Minara shares otherwise than as a subsidiary of the MBL consolidated group. Regarding this issue, his Honour commented at [45] of his reasons that "MBL could never, and did not, obtain such a tax benefit from such a sale". (d) Notwithstanding the foregoing conclusions (which were, in his Honour's opinion, sufficient to permit him to dispose of the proceedings in favour of Mongoose and MBL), the primary judge was asked to determine the issues of "tax benefit" and "dominant purpose" under ss 177C and 177D of Pt IVA, as a precautionary measure "in the event that these proceedings go further". His Honour proceeded to do so on the assumption that the MBL amended assessment was capable of giving effect to the Mongoose determination (and that Mongoose was the relevant taxpayer for the purpose of the Pt IVA analysis). In respect of the tax benefit issue, his Honour concluded that Mongoose had obtained a tax benefit for the purpose of s 177C, as - had the scheme not been carried out - Mongoose might reasonably be expected to have sold the Minara shares under the Agency Proposal and derived a gain equivalent in amount to the alleged tax benefit. Further, in respect of what was referred to as the "dominant purpose" inquiry under s 177D, the primary judge found that because none of the parties identified by the Commissioner entered into or carried out all of the steps of the scheme, it was necessary to determine whether each party entered into or carried out their particular step/s of the scheme for the dominant purpose of enabling Mongoose to obtain a tax benefit. His Honour concluded that when the question was so confined, it could not be concluded that any of MBL, Mongoose, MALLC, MPGOP or MPGOPB entered into or carried out their respective step/s of the scheme for such a purpose.

[17]

ARGUMENTS ADVANCED BY THE PARTIES ON APPEAL 82 As previously foreshadowed, on appeal the Commissioner challenges each of these conclusions (with the exception of the primary judge's finding regarding the existence of a tax benefit). 83 Grounds of appeal 1 to 4 in the Notices of Appeal filed by the Commissioner relate to the conclusions in sub-paras (a) to (c) of [34] above. At the heart of the issues raised by those grounds of appeal are questions of construction concerning the interaction of Pt IVA of the 1936 Act and Pt 3-90 of the 1997 Act. 84 The conclusions summarised in sub-para (d) of [34] above are taken up in grounds of appeal 5 to 9 of the Notices of Appeal. The issues raised in those grounds of appeal concern the correctness of the construction of Pt IVA of the 1936 Act adopted by the primary judge, the correctness of the primary judge's conclusions on the issue of dominant purpose and his Honour's treatment of the evidence and findings of fact in this regard. 85 Ground of appeal 10 (which is misnumbered as ground of appeal "11" in the Notice of Appeal for proceeding NSD 1794 of 2011) is a discrete point and is directed towards the primary judge's observations at [4] of his Honour's reasons concerning the Commissioner's power to make compensating adjustments under s 177F(3) of the 1936 Act. 86 By contrast, the respondents submit that the determinations made in respect of and assessments issued to Mongoose and MBL cannot be supported under the 1936 and 1997 Acts, and that the appeals should be dismissed. 87 It will be apparent that the issues raised by these appeals can broadly be divided into two categories: those issues that fall to be determined before the specific provisions of Pt IVA can be applied (i.e. because they relate to or turn on the manner in which Pt IVA interacts with other parts of the income tax legislation), and those that concern the substantive operation and application of Pt IVA. Each of these categories will be addressed in turn.

[19]

Part 3-90 of the 1997 Act 91 Part 3-90 of the 1997 Act was introduced by the New Business Tax System (Consolidation) Act (No 1) 2002 (Cth) (No 68 of 2002). The Explanatory Memorandum to the New Business Tax System (Consolidation) Bill (No 1) 2002 (Cth) indicates that the consolidation provisions were born out of a desire for greater business efficiency and tax system integrity in the taxation of wholly-owned entity groups (Explanatory Memorandum at [1.7] and [1.9]). 92 Section 700-1 of the 1997 Act provides an overview of the effect of Pt 3-90: This Part allows certain groups of entities to be treated as single entities for income tax purposes. Following a choice to consolidate, subsidiary members are treated as part of the head company of the group rather than as separate income tax identities. The head company inherits their income tax history when they become subsidiary members of the group. On ceasing to be subsidiary members, they take with them an income tax history that recognises that they are different from when they became subsidiary members. This is supported by rules that: (a) set the cost for income tax purposes of assets that subsidiary members bring into the group; and (b) determine the income tax history that is taken into account when entities become, or cease to be, subsidiary members of the group; and (c) deal with the transfer of tax attributes such as losses and franking credits to the head company when entities become subsidiary members of the group. 93 Section 700-10 provides that the objects of Pt 3-90 are: (a) to prevent double taxation of the same economic gain realised by a consolidated group; and (b) to prevent a double tax benefit being obtained from an economic loss realised by a consolidated group; and (c) to provide a systematic solution to the prevention of such double taxation and double tax benefits that will: (i) reduce the cost of complying with this Act; and (ii) improve business efficiency by removing complexities and promoting simplicity in the taxation of wholly owned groups. 94 Division 701 sets out the "Core Rules" of Pt 3-90. Critically, these include ss 701-1 (the "single entity rule") and 701-5 (the "entry history rule"): Common rule 701-1 Single entity rule (1) If an entity is a *subsidiary member of a *consolidated group for any period, it and any other subsidiary member of the group are taken for the purposes covered by subsections (2) and (3) to be parts of the *head company of the group, rather than separate entities, during that period. Head company core purposes (2) The purposes covered by this subsection (the head company core purposes) are: (a) working out the amount of the *head company's liability (if any) for income tax calculated by reference to any income year in which any of the period occurs or any later income year; and (b) working out the amount of the head company's loss (if any) of a particular *sort for any such income year. Note: The single entity rule would affect the head company's income tax liability calculated by reference to income years after the entity ceased to be a member of the group if, for example, assets that the entity held when it became a subsidiary member remained with the head company after the entity ceased to be a subsidiary member. Entity core purposes (3) The purposes covered by this subsection (the entity core purposes) are: (a) working out the amount of the entity's liability (if any) for income tax calculated by reference to any income year in which any of the period occurs or any later income year; and (b) working out the amount of the entity's loss (if any) of a particular *sort for any such income year. Note: An assessment of the entity's liability calculated by reference to income tax for a period when it was not a subsidiary member of the group may be made, and that tax recovered from it, even while it is a subsidiary member. … Head company rules 701-5 Entry history rule For the head company core purposes in relation to the period after the entity becomes a *subsidiary member of the group, everything that happened in relation to it before it became a subsidiary member is taken to have happened in relation to the *head company. Note 1: Other provisions of this Part may affect the tax history that is inherited (e.g. asset cost base history is affected by section 701-10 and tax loss history is affected by Division 707). Note 2: Section 73BAC of the Income Tax Assessment Act 1936 overrides this rule for the purposes of the research and development incremental expenditure provisions. … 95 Division 701 also contains special rules to calculate the cost to the head company of a consolidated group of an entity becoming a subsidiary member of that group (s 701-10: "Cost to head company of assets of joining entity"), and to determine the tax position of subsidiaries for periods when they were not part of the consolidated group (see, for example, s 701-30: "Where entity not subsidiary member for whole of income year"). 96 Section 701-85 notes that "[t]he operation of each provision of this Division is subject to any provision of this Act that so requires, either expressly or impliedly". For these purposes, "this Act" was - and still is - defined in s 995-1 to include the 1936 Act. 97 Division 703 defines what a consolidated group is, and when a company will be a subsidiary thereof. It also sets out the mechanics of how a consolidated group is created (something that was not directly relevant in these proceedings, as the date from which the MBL consolidated group came into being was 1 October 2002). 98 Division 705 contains the rules for setting the tax cost of an entity's assets when it becomes a subsidiary member of a consolidated group. Subdivision 705-A deals with the basic case of a single entity joining an existing consolidated group. Section 705-5 is a guide to Subdiv 705-A and provides: When an entity becomes a subsidiary member of an existing consolidated group, the tax cost setting amount for its assets reflects the cost to the group of acquiring the entity. 99 Section 705-10 deals with the application and object of Subdiv 705-A in the following terms: Application (1) This Subdivision has effect, subject to section 705-15, for the head company core purposes set out in subsection 701-1(2) if an entity (the joining entity) becomes a *subsidiary member of a *consolidated group (the joined group) at a particular time (the joining time). Object (2) The object of this Subdivision is to recognise the *head company's cost of becoming the holder of the joining entity's assets as an amount reflecting the group's cost of acquiring the entity. That amount consists of the cost of the group's *membership interests in the joining entity, increased by the joining entity's liabilities and adjusted to take account of the joining entity's retained profits, distributions of profits, deductions and losses. (3) The reason for recognising the *head company's cost in this way is to align the costs of assets with the costs of *membership interests, and to allow for the preservation of this alignment until the entity ceases to be a *subsidiary member, in order to: (a) prevent double taxation of gains and duplication of losses; and (b) remove the need to adjust costs of membership interests in response to transactions that shift value between them, as the required adjustments occur automatically. Note: Under Division 711, the alignment is preserved by recognising the head company's cost of membership interests in the entity if it ceases to be a subsidiary member of the group as the cost of its assets reduced by its liabilities.

[20]

Pt IVA of the 1936 Act 100 Part IVA of the 1936 Act was inserted by the Income Tax Laws Amendment Act (No 2) 1981 (Cth) (No 110 of 1981). 101 The Explanatory Memorandum for the Income Tax Laws Amendment Bill (No 2) 1981 (Cth) explains the proposed replacement of the previous anti-avoidance provision - s 260 of the 1936 Act - with the new general anti-avoidance provisions in Pt IVA. It states that this new Part was designed to overcome the "difficulties" associated with s 260, and to "provide - with paramount force in the income tax law - an effective general measure against those tax avoidance arrangements that - inexact though the words be in legal terms - are blatant, artificial or contrived" (Explanatory Memorandum at p 2). 102 In Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404, the plurality provided the following overview of the operation of Pt IVA (at 413): 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] 103 Section 177D is one of the central provisions in Pt IVA. At the relevant time, it provided: 177D Schemes to which Part applies This Part applies to any scheme that has been or is entered into after 27 May 1981, and to any scheme that has been or is carried out or commenced to be carried out after that date (other than a scheme that was entered into on or before that date), whether the scheme has been or is entered into or carried out in Australia or outside Australia or partly in Australia and partly outside Australia, where: (a) a taxpayer (in this section referred to as the relevant taxpayer) has obtained, or would but for section 177F obtain, a tax benefit in connection with the scheme; and (b) having regard to: (i) the manner in which the scheme was entered into or carried out; (ii) the form and substance of the scheme; (iii) the time at which the scheme was entered into and the length of the period during which the scheme was carried out; (iv) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme; (v) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme; (vi) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme; (vii) any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out; and (viii) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi); it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme or of enabling the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer or is the other taxpayer or one of the other taxpayers). … 104 Section 177A sets out a number of key definitions that inform the application of the rest of Pt IVA. At the relevant time it read as follows: (1) In this Part, unless the contrary intention appears: … scheme means: (a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and (b) any scheme, plan, proposal, action, course of action or course of conduct. taxpayer includes a taxpayer in the capacity of a trustee. (2) The definition of taxpayer in subsection (1) shall not be taken to affect in any way the interpretation of that expression where it is used in this Act other than this Part. (3) The reference in the definition of scheme in subsection (1) to a scheme, plan, proposal, action, course of action or course of conduct shall be read as including a reference to a unilateral scheme, plan, proposal, action, course of action or course of conduct, as the case may be. (4) A reference in this Part to the carrying out of a scheme by a person shall be read as including a reference to the carrying out of a scheme by a person together with another person or other persons. (5) A reference in this Part to a scheme or a part of a scheme being entered into or carried out by a person for a particular purpose shall be read as including a reference to the scheme or the part of the scheme being entered into or carried out by the person for 2 or more purposes of which that particular purpose is the dominant purpose. 105 Section 177B purports to govern the "operation" of Pt IVA. At the relevant time, s 177B(1) read as follows: 177B Operation of Part (1) Subject to subsection (2), nothing in the provisions of this Act other than this Part … shall be taken to limit the operation of this Part. … 106 For these purposes, "this Act" was (and still is) defined in s 6(1) of the 1936 Act to include the 1997 Act. 107 Section 177C determines when a tax benefit has been obtained for the purpose of this Part: 177C Tax benefits (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) … 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) … … (2) A reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as not including a reference to: (a) the assessable income of the taxpayer of a year of income not including an amount that 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 where: (i) the non-inclusion of the amount in the assessable income of the taxpayer is attributable to the making of an agreement, choice, declaration, agreement, election, selection or choice, the giving of a notice or the exercise of an option (expressly provided for by this Act other than section 160ZP or 160ZZO or the Income Tax Assessment Act 1997) by any person, except one under Subdivision 126-B, 170-B or 960-D of the Income Tax Assessment Act 1997; and (ii) the scheme was not entered into or carried out by any person for the purpose of creating any circumstance or state of affairs the existence of which is necessary to enable the declaration, agreement, election, selection, choice, notice or option to be made, given or exercised, as the case may be… 108 Unlike its predecessor section, Pt IVA is not self-executing (Spotless Services (above) at 413-414). Rather, if a tax benefit has been obtained by a taxpayer in connection with a scheme to which Pt IVA applies, the Commissioner may make a determination that the whole or part of the amount of the tax benefit be included in a taxpayer's assessable income for that year, in accordance with s 177F. At the relevant time, this section (and s 177G, which deals with amended assessments) provided: 177F Cancellation of tax benefits etc. (1) Where a tax benefit has been obtained, or would but for this section be obtained, by a taxpayer in connection with a scheme to which this Part applies, the Commissioner may: (a) in the case of a tax benefit that is referable to an amount not being included in the assessable income of the taxpayer of a year of income - determine that the whole or a part of that amount shall be included in the assessable income of the taxpayer of that year of income; or … and, where the Commissioner makes such a determination, he shall take such action as he considers necessary to give effect to that determination. (2) Where the Commissioner determines under paragraph (1)(a) that an amount is to be included in the assessable income of a taxpayer of a year of income, that amount shall be deemed to be included in that assessable income by virtue of such provision of this Act as the Commissioner determines. (2A) … (3) Where the Commissioner has made a determination under subsection (1) or (2A) in respect of a taxpayer in relation to a scheme to which this Part applies, the Commissioner may, in relation to any taxpayer (in this subsection referred to as the relevant taxpayer): (a) if, in the opinion of the Commissioner: (i) there has been included, or would but for this subsection be included, in the assessable income of the relevant taxpayer of a year of income an amount that would not have been included or would not be included, as the case may be, in the assessable income of the relevant taxpayer of that year of income if the scheme had not been entered into or carried out; and (ii) it is fair and reasonable that that amount or a part of that amount should not be included in the assessable income of the relevant taxpayer of that year of income; determine that that amount or that part of that amount, as the case may be, should not have been included or shall not be included, as the case may be, in the assessable income of the relevant taxpayer of that year of income; or ... 177G Amendment of assessments Nothing in section 170 prevents the amendment of an assessment at any time before the expiration of 6 years after the date on which tax became due and payable under the assessment if the amendment is for the purpose of giving effect to subsection 177F(3).

[21]

Consideration 109 The first task for this Court is to determine the way in which Pt IVA and Pt 3-90 are intended to interact. Our conclusion on this issue will provide the framework for determination of the other issues in these appeals. To this end, the first question must be: does Pt IVA have any application to consolidated groups formed under Pt 3-90? 110 Both parties' arguments on this issue referred to Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 and the principles of statutory interpretation enunciated by the High Court therein. In particular, reference was made to the following statements taken from the joint judgment of McHugh, Gummow, Kirby and Hayne JJ (at 381-382): The primary object of statutory construction is to construe the relevant provision so that it is consistent with the language and purpose of all the provisions of the statute. The meaning of the provision must be determined "by reference to the language of the instrument viewed as a whole". In Commissioner for Railways (NSW) v Agalianos, Dixon CJ pointed out that "the context, the general purpose and policy of a provision and its consistency and fairness are surer guides to its meaning than the logic with which it is constructed". Thus, the process of construction must always begin by examining the context of the provision that is being construed. A legislative instrument must be construed on the prima facie basis that its provisions are intended to give effect to harmonious goals. Where conflict appears to arise from the language of particular provisions, the conflict must be alleviated, so far as possible, by adjusting the meaning of the competing provisions to achieve that result which will best give effect to the purpose and language of those provisions while maintaining the unity of all the statutory provisions. Reconciling conflicting provisions will often require the court "to determine which is the leading provision and which the subordinate provision, and which must give way to the other". Only by determining the hierarchy of the provisions will it be possible in many cases to give each provision the meaning which best gives effect to its purpose and language while maintaining the unity of the statutory scheme. Furthermore, a court construing a statutory provision must strive to give meaning to every word of the provision. In The Commonwealth v Baume Griffith CJ cited R v Berchet to support the proposition that it was "a known rule in the interpretation of Statutes that such a sense is to be made upon the whole as that no clause, sentence, or word shall prove superfluous, void, or insignificant, if by any other construction they may all be made useful and pertinent". [Citations omitted] 111 We also note that in addition to the principles set out by the High Court in Project Blue Sky and similar cases, the Parliament has provided legislative guidance on how Courts are to interpret enactments. Relevantly for present purposes, s 15AA of the Acts Interpretation Act 1901 (Cth) (Acts Interpretation Act) indicates that what may be referred to as the "purposive approach" is preferred when interpreting legislation. This section states: 15AA Interpretation best achieving Act's purpose or object In interpreting a provision of an Act, the interpretation that would best achieve the purpose or object of the Act (whether or not that purpose or object is expressly stated in the Act) is to be preferred to each other interpretation. 112 Appropriately guided by the foregoing principles of statutory interpretation (both legislative and judicial), we consider that the intended interaction of the two Parts is clear when regard is had to the express words and purpose of the legislation and, where relevant, the accompanying explanatory materials. Our reasons are as follows. 113 We have previously referred to the purpose of Pt IVA being to provide a general measure against tax avoidance arrangements that are blatant, artificial or contrived. As was recently observed by the High Court in Mills v Commissioner of Taxation (2012) 293 ALR 43; [2012] HCA 51 (at 64 per Gageler J; French CJ, Hayne, Kiefel and Bell JJ agreeing): Part IVA of the ITAA 1936 "is as much a part of the statute[s] under which liability to income tax is assessed as any other provision thereof" and "is to be construed and applied according to its terms". In the construction of those terms, the text of Pt IVA is to be read in the context of the ITAA 1936 and the ITAA 1997 as a whole, and an available construction of that text that advances the objects of the Part is to be preferred to one that does not. The heading to Pt IVA indicates that an object of Pt IVA as a whole is to address schemes to reduce income tax. [Citations omitted] 114 At the relevant time, s 177B provided that "nothing in the provisions of this Act other than this Part … shall be taken to limit the operation of this Part", where "this Act" includes the 1997 Act (which houses the consolidated group provisions). The Explanatory Memorandum states that the purpose of this section is to "give to Part IVA a position of paramount force in the income tax law" (at p 8). This Explanatory Memorandum further states (at pp 8-9): Part IVA will be applicable where from an objective view of a scheme and its surrounding circumstances it would be concluded that it was entered into for the sole or dominant purpose of obtaining a tax benefit… Against this background, sub-section (1) of section 177B will mean that the anti-avoidance operation of Part IVA is not to be limited by anything else in the general income tax law, whether in the Principal Act or in a double taxation agreement with another country that is given the force of law in Australia by the Income Tax (International Agreements) Act 1953… [Emphasis added] 115 For the avoidance of doubt, we do not consider that the references made in the explanatory material to Pt IVA being a Part "of last resort" are inconsistent with an intention that, where Pt IVA applies, it does so with paramount force. At p 5 of the Explanatory Memorandum, this is explained: In ascertaining whether a tax benefit has arisen under a particular scheme, the other provisions of the Principal Act apart from Part IVA are first to be applied. This means, for example, that if a specific anti-avoidance provision has applied to take away a tax advantage sought to be achieved under a scheme there will be no room for Part IVA to apply to that scheme. Another situation in which a tax benefit will not arise for examination under Part IVA is where a reduction in tax liability follows from the mere making of a declaration, election or selection, the giving of a notice or the exercising of an option expressly provided for by the Principal Act. Nor is the deduction available for investment in Income Equalisation Deposits to be within the purview of Part IVA. 116 Further explanation is provided at pp 10 to 11 of the Explanatory Memorandum, in the context of a discussion of s 177C: Section 177C: Tax benefits … It follows that if there is a scheme designed so that an amount is not included in assessable income and another provision of the Principal Act operates to counter that scheme by requiring that it be so included, the amount cannot be a tax benefit obtained by the taxpayer concerned, and Part IVA will be inapplicable. In other words, Part IVA is a "last resort" measure. [Emphasis added] 117 There is nothing in Pt 3-90 to which our attention was drawn that expressly purports to exclude the operation of Pt IVA. In fact, the contrary is true - s 701-85 of the 1997 Act expressly states that "[t]he operation of each provision of this Division is subject to any provision of this Act that so requires, either expressly or impliedly". Again, "this Act" includes the 1936 Act, thereby encompassing Pt IVA. 118 In our view, the combined effect of these provisions and their corresponding explanatory materials disposes of any suggestion that Pt 3-90 operates to immunise consolidated groups in some way against the operation of Pt IVA. We see no reason why Pt IVA should not apply to schemes involving consolidated groups: the operation of this Part has not been specifically excluded; Pt IVA operates with "paramount force"; and such a situation is consistent with the general anti-avoidance purpose of Pt IVA. Further, this conclusion does not disturb the purpose of the consolidated group provisions. 119 This conclusion is buttressed by the existence of s 177C(2), the text of which is set out above. Of this sub-section, the relevant Explanatory Memorandum said (at p 11): Sub-section (2) is designed so that a mere making of a declaration, election or selection, giving of a notice or exercising of an option will not be affected by Part IVA. The Principal Act expressly provides in various provisions for taxpayers to exercise in one of these ways, a choice as to the taxation consequences of designated transactions or states of affairs… By sub-section 177C(2) there will not, for purposes of section 177D, be a "tax benefit" when the situation is one where (in the sense explained earlier) an amount is left out of assessable income by a scheme and its non-inclusion is attributable to a declaration, election, etc., expressly provided for by the Principal Act. That will be so, however, only if the scheme was not one for the purpose of creating the conditions necessary for the declaration, election, etc., to be made. 120 This was not a provision addressed by the parties either in the proceedings before the primary judge, or during the hearing of the appeals. After provision of final submissions to this Court, the parties were asked to provide further brief submissions regarding the relevance of this provision to the question of the appropriate interaction of Pts 3-90 and IVA. In the correspondence sent by the Court to the parties inviting such further submissions, express reference was made to ¶8-950 of the Australian Master Tax Guide 2012 (CCH, 50th ed.). Several sets of submissions ensued. 121 In brief, the Commissioner submitted that s 177C(2) was further proof of the paramountcy of Pt IVA in income tax law. The respondents, however, for the first time submitted that subss (2) and (3) of s 177C apply such that neither respondent "obtained a tax benefit arising from the events in issue", on the basis that the tax benefit alleged in these proceedings is ultimately "attributable to" the election or choice to form the MBL consolidated group for the purpose of s 177C(2). 122 Both parties provided submissions on the causal relationship required between the declaration, election, agreement, selection or choice referred to in s 177C(2) and the alleged tax benefit, and the meaning of the words "attributable to" as used in this section. However, it is unnecessary for us to ultimately determine these issues, as we do not consider that the respondents should now be permitted to rely on s 177C(2). 123 As submitted by the Commissioner, having not relied on s 177C(2) to date, the respondents may not now seek to put this argument for the first time in response to the Court's invitation for further submissions on a different issue (namely, the proper construction of Pts IVA and 3-90, and what assistance s 177C(2) may lend to that task). The respondents did not submit that exceptional circumstances exist to permit them to raise this new argument at this late stage in the proceedings; nor can it be said that to allow them to do so at this point would either work no injustice on the Commissioner, or otherwise be in the interests of justice. To this end, we accept the principles and cases relied on by the Commissioner in support of this contention (see, for example, Metwally (No 2) v University of Wollongong [1985] HCA 28; (1985) 60 ALR 68 at 71; Branir Pty Limited v Owston Nominees (No 2) Pty Limited (2001) 117 FCR 424 at 439-440 [38]). 124 We are satisfied that, as submitted by the Commissioner, s 177C(2) is an example of the paramountcy of Part IVA. By the terms of this subsection and as an aspect of (and not an exception to) its paramountcy, Pt IVA expressly yields to the effect achieved by other parts of the income tax law. This subsection has for this reason been described as the "escape hatch to Part IVA" (see AAT Case W58; No 5219 (1989) 20 ATR 3777 at [63]). In this way, s 177C(2) underlines the status of Pt IVA as the "leading provision" in the "hierarchy of provisions", to invoke the language of the High Court in Project Blue Sky (1998) 194 CLR 355. In circumstances where s 177C(2) does not operate, Pt IVA may apply. Suggestions by the respondents that "primacy is not a happy choice of language" (picking up on comments made by French CJ and Hayne J during argument in Mills v Commissioner of Taxation [2012] HCA Trans 259 at 1830-1875), however accurate they may be, do not detract from the substance of this conclusion. It will not be every transaction involving a consolidated group that enlivens Pt IVA. But clearly it must be possible to invoke that Part in such circumstances as required for the proper functioning of the anti-avoidance regime. To the extent that the Commissioner suggested in his submissions that the learned primary judge may have found to the contrary (for example, at [43] where his Honour suggested that it was a "real problem" that the Commissioner sought to "cancel, in reliance on the provisions of Pt IVA, tax consequences intended by Parliament to be conferred on a company, such as Mongoose, joining a consolidated group irrespective of whether it, or other persons, had as its or their purpose in joining, taking advantage of those consequences"), it must first be said that we are not convinced that this was what the primary judge intended. However, if this was his Honour's intention in this regard, we would respectfully disagree with such a conclusion. 125 Giving effect to this expression of legislative intent in respect of Pt IVA is not to ignore the purposes or policy of Pt 3-90. The benefits of the consolidated group provisions (including the operation of the single entity rule) remain available to those who choose to take advantage of them. However, the mere joining of a consolidated group is not sufficient in and of itself to preclude the operation of Pt IVA in respect of actions taken by that entity if the criteria in that Part are otherwise satisfied. Any argument to the contrary would be wholly inconsistent with the purpose of the Pt IVA general anti-avoidance provisions. Nor would this achieve the desired unity between competing provisions referred to by the Court in Project Blue Sky (1998) 194 CLR 355 at 382. To this end, we refer to the Second Reading Speech for the Income Tax Laws Amendment Bill (No 2) 1981 (Cth) (27 May 1981, Mr Howard - Bennelong - Treasurer, p 2684 and following): I do, however, want to touch on just one point. This is that the Bill indicates specifically that a tax benefit cannot arise in respect of the deduction available for deposits made under the income equalisation deposits scheme, and that the mere making of an election or the giving of a notice specifically provided for in the Act will not be affected by Part IVA. I note these things as a prelude to my response to concern that I can foresee being expressed in some quarters that taxpayers who simply take advantage of certain incentives in the law will find themselves at risk under Part IVA. Other critics of the Bill will, no doubt, say that arrangements that survive the application of specific anti-avoidance provisions inserted to support particular provisions are in double jeopardy in then having to face and survive the paramount general provisions. I make no apology for the approach adopted in the Bill. But I do assert that taxpayers who simply take advantage of concessions for the purposes for which they were put in the law cannot and will not be affected by the new provisions. Specifically, for example, Part IVA will not deny to people who simply respond to our concessions for investment in Australian films the benefit of the tax advantages that are part of those concessions. But I think it incontrovertible that blatant misuse of those and other 'incentive' concessions ought to be within the scope of Part IVA. A general anti-avoidance provision would be of little worth if it could not be used to prevent unintended exploitation of such concessions in the law, or to operate as a backup to a specific anti-avoidance provision in circumstances where a taxpayer has tailored arrangements so that the provision is circumvented in form, but not in substance. [Emphasis added] 126 For these reasons, we are satisfied that it is possible (at least in theory, where the other criteria of Pt IVA are satisfied) for Pt IVA to apply to a consolidated group to which Pt 3-90 applies. 127 Therefore, the next question for determination is: what are the precise mechanics of the interaction between the two Parts, in circumstances where Pt IVA is sought to be applied to a consolidated group? 128 We have previously referred to the fact that in these proceedings (before both the primary judge and this Court), the Commissioner relied on various combinations of the determinations and amended assessments made in respect of and issued to the respondents. 129 As previously stated, determinations are made by the Commissioner pursuant to s 177F. In Commissioner of Taxation v Hart (2004) 217 CLR 216 at 232-233, Gummow and Hayne JJ provided an overview of the operation of this section (and its role in Pt IVA): Taking Pt IVA as a whole, it is clear that ss 177D and 177F(1) are the two provisions about which the Part pivots. Section 177F(1) provides: "Where a tax benefit has been obtained, or would but for this section be obtained, by a taxpayer in connection with a scheme to which this Part applies, the Commissioner may - (a) in the case of a tax benefit that is referable to an amount not being included in the assessable income of the taxpayer of a year of income - determine that the whole or a part of that amount shall be included in the assessable income of the taxpayer of that year of income; or […] and, where the Commissioner makes such a determination, he shall take such action as he considers necessary to give effect to that determination." Part IVA falls for consideration only where the Commissioner has made a determination under s 177F(1). A determination can be made only where a tax benefit has been obtained (or, but for s 177F(1), would be obtained) by a taxpayer in connection with a scheme to which Pt IVA applies. It follows, of course, that the concepts of "tax benefit", "scheme" and "scheme to which this Part applies" all have their part to play in deciding whether the power given to the Commissioner by s 177F(1) can be exercised. But it is important to consider what the Act says about those concepts having regard to two considerations. First, the various defined terms must be given operation in the interrelated way which s 177F(1) requires. Each of the defined terms takes its place in a single provision permitting the making of a determination. Secondly, each of the definitions must be understood bearing in mind that the inquiry required by Pt IVA is an objective, not subjective, inquiry. The objective nature of the inquiry required is evident from s 177D, which identifies the schemes to which Pt IVA applies. 130 We have concluded that Pt IVA may apply to schemes involving consolidated groups. The question then is how that is to be achieved in a manner that gives harmonious effect to the goals of the two Parts (Project Blue Sky (1998) 194 CLR 355 at 381-382). It is worth recalling at this point that the single entity rule in s 701-1 provides that for the purpose of working out the amount of a subsidiary or head company's liability (if any) for income tax, the subsidiary is taken to be part of the head company (rather than a separate entity). Many of the respondents' submissions on this subject turn on the assertion that as a subsidiary of a consolidated group, Mongoose is not a "taxpayer", and therefore cannot receive a tax benefit or be liable to a determination under s 177F. Aspects of these submissions may technically be correct, insofar as Mongoose's status as a subsidiary of a consolidated group goes. But that is not the end of the inquiry. 131 Section 177A(1) provides that a "taxpayer" as referred to in Pt IVA "includes a taxpayer in the capacity of trustee". The core definition of "taxpayer" is found in s 6(1) of the 1936 Act, where the word is defined as "a person deriving income or deriving profits or gains of a capital nature". As was accurately conceded by the respondents in their submissions, "most if not all active subsidiary members of a consolidated group will in fact receive income or derive gains, and - Part 3-90 apart - will be 'taxpayers'". We have no trouble finding that Mongoose is technically a "taxpayer" insofar as the s 177A definition goes. It is at the next stage of the inquiry - when seeking to carry that conclusion forward - that conceptual complications arise. 132 Pt IVA revolves around the concept of a taxpayer who has obtained a tax benefit, which is relevantly defined in s 177C(1)(a) as being an amount not included in the assessable income of a taxpayer, where that amount would have been included (or might reasonably be expected to have been included) in that taxpayer's assessable income if the scheme had not been entered into or carried out. Where this has been made out (along with the other criteria of Pt IVA), s 177F permits the Commissioner to determine that the whole or part of that tax benefit be included in that taxpayer's assessable income. 133 However, it is one thing to conclude that, as a subsidiary, Mongoose technically satisfies the broad definition of "taxpayer" for the purpose of Pt IVA. It is a further - and we consider, impermissible - step to say that as a result, Mongoose in and of itself also has distinct assessable income for the purpose of the application of the provisions of Pt IVA (in particular, s 177F). In this regard, we agree with the respondents' submissions to the effect that although it may technically have been a "taxpayer", Mongoose was not liable to be directly assessed as such. 134 In normal circumstances it is expected that in order to administer the provisions of Pt IVA, the Commissioner will identify the taxpayer who is alleged to have obtained the relevant tax benefit, and make a determination in respect of that taxpayer. In such a situation, one would expect a clear relationship between the taxpayer, the taxpayer's assessable income, the tax benefit alleged to have been received under the scheme and the counterfactual proposed under s 177C. 135 However, in the case of a subsidiary of a consolidated group, the entity whose actions give rise to a tax benefit may not be liable to be directly assessed for income tax as such, as they are deemed not to have a separate existence for this purpose. To illustrate this point - and to make clear why achieving the harmonious interaction of Pts 3-90 and IVA requires a modified approach to the process of making determinations and issuing assessments - it is convenient to return momentarily to first principles. 136 "Income tax" is defined in s 995-1 of the 1997 Act as income tax imposed by enactments including the Income Tax Act 1986 (Cth) (1986 Act). Section 4 of the 1986 Act provides that the 1936 Act shall be incorporated and read as one with it. Section 5(1) of the 1986 Act states that income tax is imposed in accordance with that Act. In turn, s 4-10(2) of the 1997 Act provides that income tax is worked out by reference to a person's taxable income for a given financial year. "Taxable income" is defined in s 4-15(1) as being assessable income minus deductions ("assessable income" itself is defined in Div 6 of the 1997 Act to include ordinary income plus statutory income). However, s 4-15(2) notes that in certain cases, taxable income is worked out in a special way. Item 1B of the table set out in that section refers to the case where "[a]n entity is a member of a consolidated group at any time in the income year", and directs the reader to Pt 3-90 for the purpose of determining taxable income in such circumstances. 137 Section 177F invokes these concepts by providing that the Commissioner may determine that the whole or part of a tax benefit obtained be included in a taxpayer's assessable income, and may also take such action as he or she considers necessary to give effect to that determination. This may include - as it did in this case - the issuing of an assessment, which is relevantly defined in s 6(1) of the 1936 Act to mean "the ascertainment of the amount of taxable income (or that there is no taxable income) and of the tax payable on that taxable income (or that no tax is payable)". Of the determinations capable of being made by the Commissioner under s 177F, Mason CJ said in Deputy Commissioner of Taxation v Richard Walter Pty Ltd (1995) 183 CLR 168 at 178 that "the making of the determination forms part of the process of assessment and goes to the ascertainment of the substantive liability of the taxpayer to tax" (emphasis in original). 138 There is a tension between these concepts on the one hand, and the fact that Pt 3-90 deems that subsidiaries do not have existences independent from their head companies for the purpose of working out liability for income tax, on the other. The answer is not to make determinations in respect of or directly assess subsidiaries, for the reasons advanced by the respondents. But nor is the answer to simply ignore the tax consequences of dealings by subsidiaries. We do not think that such an approach would be any more consistent with the legislative intent underpinning Pts 3-90 and IVA than to ignore the operation of the single entity rule in Pt 3-90 and assess subsidiaries directly. 139 In our view, Pt 3-90 does not contemplate that acts by subsidiaries will never be subject to (or the subject of) tax - simply that the head company will be the entity taxed for these purposes. If the legislature had intended that no income tax consequences should ever arise in relation to subsidiaries of consolidated groups or their dealings, it could have expressly so provided. Instead, a Part was specifically enacted that has the effect of moving a subsidiary's liability for income tax "up the chain" within a consolidated group to rest ultimately with a different entity - namely, the head company. This suggests that the head company will technically be the relevant "taxpayer" for Pt IVA purposes, because - as the respondents submitted - a subsidiary of a consolidated group is not liable to direct assessment for these purposes. Rather, the consolidated group entities are viewed collectively as a single entity for income tax purposes. 140 This interpretation is consistent with the expressed purposes of Pt 3-90, including the aims of preventing double taxation of the same economic gain realised by a consolidated group, and providing a systematic solution to such double taxation to reduce the cost of complying with the Act and improve business efficacy. It is also supported by the explanatory materials relating to the single entity rule (which, of course, are not determinative but merely of assistance in determining purpose). For example, the relevant Explanatory Memorandum states (at [2.12]): The income tax treatment of a consolidated group flows from the rule that an entity is treated as part of the head company while it is a subsidiary member of a consolidated group. Actions of the subsidiaries are treated as actions of the head company, as this is the only entity the income tax law recognises for the purposes of working out the income tax liability or losses of a consolidated group. For example, a transfer of an asset from one subsidiary member to another is treated like a transfer from one division of a company to another division. Such a transaction could not have any income tax consequences, as no disposal between distinct entities would have occurred (an entity cannot transact with itself). 141 The Explanatory Memorandum further notes that the single entity rule "ensure[s] that the ITAA 1997 and the ITAA 1936 operate in respect of a consolidated group as if the subsidiaries are absorbed into the head company, which is the relevant taxpayer" (at [2.16]). The implications flowing from the application of this rule were said to include the following: treatment of assets (at [2.20]): "The assets, liabilities, etc. of the subsidiary member are treated for income tax purposes as if they were owned by the head company, as this is the only entity the income tax law recognises." liability (at [2.21]): "In general, the head company will be liable for the income tax-related liabilities of the consolidated group that are referable to the period of consolidation. Special rules apply to allow the recovery of income tax-related liabilities directly from other members of the group where the head company has failed to pay that group liability on time." accounting for non-membership periods of a subsidiary entity (at [2.82]): "When a subsidiary entity becomes a member of a consolidated group part way through the income year, it ceases to be a taxpayer in its own right because of the operation of the single entity rule during consolidation..." 142 The Explanatory Memorandum also specifically states at [2.22] - in the context of discussing particular examples of the effect of the absorption of subsidiaries into the head company (for the purpose of working out income tax liability or losses) - that: • the taxable income of the taxpayer under section 4-15 of the ITAA 1997 refers to that of the head company. This calculation is made on the basis that income and deductions are assessed or allowable under the ITAA 1997 to the head company only… … • for the purpose of determining any relevant income tax consequences arising out of the holding or disposal of assets: • assets that a member entity brings into a consolidated group are taken to be held by the head company as well as assets that the entity acquires whilst a member of the group; • the head company is taken to hold any assets for so long as they are held by an entity while it is a subsidiary member of the group and to do anything in relation to those assets that is done by the subsidiary member; [and] • if a CGT event happens in relation to any CGT assets held by any entity while a subsidiary member of the group, that event is taken to happen in relation to the asset while held by the head company and anything done by the subsidiary entity as part of the CGT event is taken to have been done by the head company… 143 Further, in respect of "characterisation of assets and transactions", the Explanatory Memorandum says (at [2.26]): Following an election to consolidate, the single entity rule has the effect that for the purposes of assessing the income tax position of the head company, the head company is taken to hold all the assets and liabilities of its subsidiaries and to enter into the transactions of its subsidiaries. This is because the subsidiary members are treated as if they are parts of the head company for income tax purposes. 144 For all of these reasons, we consider that when seeking to apply Pt IVA to the MBL consolidated group, the Commissioner was entitled to make a determination in respect of (and subsequently issue an amended assessment to) MBL in its capacity as head company of the MBL consolidated group as the relevant "taxpayer" for these purposes. We note that this conclusion is consistent with the reasoning of the primary judge at [45] and [60], where his Honour indicated that the Commissioner's primary reliance on this combination of determination and amended assessment was: what one might expect where a subsidiary member of a consolidated group enters into a scheme to which s 177D applies: the Commissioner is authorised to make a determination under s 177F(1), but the authorised determination will be (in a para (a) case) one to include an amount in the assessable income of the head company, to which for tax assessment purposes the activities of the subsidiary member are, by s 701-1, attributed. 145 This conclusion gives effect to the legal fiction created by Pt 3-90, which in these circumstances requires that determinations and assessments under Pt IVA be administered to consolidated groups in a particular way that gives effect to the legislative purpose of both Parts. 146 We note that before both the primary judge and this Court, the Commissioner sought to rely on case law involving the making of determinations in respect of trustees, followed by the issuing of assessments to beneficiaries (notably, McCutcheon v Federal Commissioner of Taxation (2008) 168 FCR 149). It has not been necessary for us to consider such arguments in any detail, as we consider that McCutcheon involved specific provisions of the 1936 Act (such as ss 99 and 99A) that have no application in this case. In any event, this example of differential determinations and assessments administered to different parties does not change our conclusion about the interaction of Pts 3-90 and IVA. 147 Finally - and for the avoidance of doubt - we do not think that the Commissioner is prevented from relying on the combination of the MBL determination and the MBL amended assessment at this stage of the proceedings. The primary judge observed at [45] that the Commissioner's position with respect to which combination he primarily relied upon "seemed to undergo a metamorphosis during the course of the hearing". There does appear to have been a shift during the proceedings before his Honour as to which combination the Commissioner relied upon as his primary position. However, one of the Commissioner's grounds of appeal before this Court was that the primary judge erred in concluding that the MBL determination was not authorised by the 1936 Act. Further, both parties addressed all proposed permutations of the determinations and assessments in their submissions, including (albeit only to a limited extent) the MBL determination and assessment combination. Accordingly, we do not think that reliance on this combination of the determinations and amended assessments at this stage causes any undue embarrassment, prejudice or surprise to the respondents. 148 Given the foregoing, it is unnecessary to consider in exhaustive detail the parties' arguments relating to the other combinations of Mongoose and MBL determinations and amended assessments proposed by the Commissioner during the course of these proceedings. It should be clear from what we have said that the operation of Pt 3-90 precludes the direct assessment of subsidiaries under Pt IVA, as they are not separate entities for these purposes. Accordingly, the next issue for determination is the application and operation of Pt IVA in these proceedings.

[23]

Tax Benefit - Section 177C 152 In the Notices of Contention filed in these appeals, the respondents assert that the primary judge should not have held that Mongoose obtained a tax benefit in connection with a scheme to which Pt IVA applied. It will be recalled that the amount of the tax benefit identified by the Commissioner was $318,507,469 (being the proceeds of disposal of the Minara shares ($480,336,947) minus the original cost to Mongoose of acquiring the Minara shares ($161,829,478)). The counterfactual (also referred to in case law as the "alternative hypothesis" or the "alternative postulate": see Federal Commissioner of Taxation v Ashwick (QLD) No 127 Pty Ltd (2011) 192 FCR 325 at 371 per Edmonds J; Bennett and Middleton JJ agreeing) was postulated by the Commissioner to be that, in the absence of the scheme, Mongoose (or alternatively, MBL) would have or might reasonably be expected to have sold the Minara shares in accordance with the Agency Proposal. 153 The parties' submissions did not discuss in any significant detail the case law relating to the application and operation of s 177C. Notwithstanding this fact, we think it is useful to set out a number of key principles to frame our analysis of this issue. 154 It is the taxpayer who bears the onus of establishing that there is no tax benefit in connection with a scheme (Federal Commissioner of Taxation v Trail Bros Steel & Plastics Pty Ltd (2010) 186 FCR 410 at 420, citing ss 14ZZK and 14ZZO of the Taxation Administration Act 1953 (Cth); McAndrew v Federal Commissioner of Taxation (1956) 98 CLR 263 at 268-269; Gauci v Federal Commissioner of Taxation (1975) 135 CLR 81 at 89; McCormack v Federal Commissioner of Taxation (1979) 143 CLR 284 at 303, 306 and 323; Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 at 620, 623-625 and Federal Commissioner of Taxation v Lenzo (2008) 167 FCR 255 at [125]). In that case, Dowsett and Gordon JJ said (at 420 [36]; Edmonds J agreeing): How the taxpayer does that is a matter for it. It may, for example as Sackville J said in Lenzo 167 FCR 255, 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. 155 Some of the principal authorities relating to the application and operation of s 177C were summarised by Dowsett and Gordon JJ in Trail Bros (2010) 186 FCR 410 at 417-419. It is convenient to set out the relevant parts of that summary here: 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: Federal 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 Federal Commissioner of Taxation v Mochkin (2003) 127 FCR 185 at [26]. Absent a tax benefit, Pt IVA has no application: Lenzo 167 FCR 255 at [120] and Hart 217 CLR 216 at [33]. … The legislation requires a comparison between the relevant scheme and an alternative postulate: Hart 217 CLR 216 at [66]. 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 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]. 156 For the purpose of his s 177C analysis, the primary judge assumed that Mongoose was the relevant taxpayer. Operating on this assumption, the primary judge was prepared to conclude that Mongoose had obtained a tax benefit for the purpose of this section. His Honour held (at [64]-[65]): [64] The issue here is whether the tax benefit as quantified represents the tax outcome upon the hypothesis of what would have occurred, or might reasonably be expected to have occurred, if the scheme as identified had not been entered into or carried out. [65] On the evidence, and the logicality of events that are in evidence, I would conclude that Mongoose did obtain a tax benefit in connection with the scheme as identified because I am of the view, and would find, that if the scheme, as identified, had not been entered into or carried out, Mongoose might reasonably be expected to have sold the Minara shares under the Agency proposal and derived a gain equivalent in amount to the alleged tax benefit; that was the parallel course being pursued at the time and no other course presents itself as a reasonable expectation; everything else is pure speculation. This is not a case involving a sale of an asset pursuant to an internal group reorganisation where the size of the tax consequence attaching to that course of action might objectively lead one to the conclusion that it is not a reasonable expectation that the reorganisation (including the proposed sale) would have proceeded in the face of that consequence: cf, RCI Pty Ltd v Cmr of Taxation [2011] FCAFC 104 (22 August 2011). 157 The parties seemed to be in agreement that in the absence of the scheme, Mongoose would (or might reasonably be expected to) have sold the shares pursuant to the Agency Proposal. The parties' submissions on this issue before this Court principally focused on the question of whether Mongoose was capable of receiving a tax benefit as a subsidiary member of a consolidated group. 158 We have previously concluded that MBL - in its capacity of head company of the MBL consolidated group - is the relevant "taxpayer" in these circumstances for the purpose of Pt IVA, on the basis that Mongoose's actions (namely, sale of the Minara shares) and income tax consequences attaching thereto were visited upon MBL as head company by virtue of the operation of Pt 3-90. Accordingly, it is not now necessary to reproduce exhaustively the parties' submissions about the capacity of Mongoose as a subsidiary of a consolidated group to directly receive a tax benefit. However, it is necessary to address the implications for the Commissioner's case of MBL being the relevant taxpayer for the purpose of the Pt IVA analysis. 159 We have previously alluded to the primary judge's concerns regarding the MBL determination and amended assessment, namely, that if Mongoose sold the Minara shares otherwise than as a member of the MBL consolidated group, MBL could never, and did not, obtain the relevant tax benefit from such a sale. Similar concerns were echoed in the respondents' submissions to this Court. Although his Honour did not articulate these concerns in the context of his analysis of s 177C, it is this statutory inquiry to which the concerns ultimately relate. Section 177C(1)(a) relevantly provides that a reference in Pt IVA to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to: 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… 160 The words of this section are clear. There must be a sufficient connection between the taxpayer in question, their assessable income and the tax benefit that has not been included therein (but would have or might reasonably be expected to have been included if the scheme had not been entered into or carried out). Difficulties arise for the Commissioner in this case when attempts are made to marry the conclusion previously reached - that MBL is the relevant taxpayer for the purpose of this analysis - with the words of this section. 161 It is convenient at this point to repeat the counterfactual proposed by the Commissioner for the purpose of the s 177C analysis in these proceedings: Mongoose (alternatively, MBL) obtained a tax benefit in connection with a scheme of $318,507,469 (being the expected proceeds of $480,336,947 less the cost of the shares $161,829,478) being the amount not included in its assessable income for the income year ended 31 December 2004 where that amount would have been included or might reasonably have been expected to have been included if the scheme had not been entered into or carried out. Particulars If the scheme had not been entered into or carried out it might reasonably be expected that Mongoose would have sold the Minara shares in accordance with the Agency Proposal for a price equal to $2.90 per Minara share. 162 For the foregoing reasons, s 177C must be read in these proceedings as referring to MBL as the relevant taxpayer. Such a possibility was expressly contemplated by the Commissioner when issuing the relevant determinations and amended assessments in 2009, as he pleaded MBL as the relevant taxpayer in the alternative. However, this means that "tax benefit" falls to be defined under s 177C(1)(a) in the following way: an amount [$318,507,469] not being included in the assessable income of [MBL] 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 [MBL] of that year of income if the scheme had not been entered into or carried out… 163 The problems with framing the counterfactual in this way are immediately obvious when regard is had to the scheme as defined by the Commissioner: (a) On 2 March 2004, the declaration of a distribution of US$244 million by MALLC; (b) On 3 March 2004, the entry into the Loan Agreement by MBL and MALLC; (c) On 3 March 2004, the drawdown by MALLC of US$244 million pursuant to the loan agreement; (d) On 3 March 2004, the entry into the Sale Agreement pursuant to which MPGOP and MPGOPB sold their membership interests in MALLC to MBL; (e) On 3 March 2004, replacement of the existing directors of MALLC and Mongoose with MBL appointees, the convening of meetings by the new directors of MALLC and Mongoose and the resolution of the new Mongoose directors to sell the Minara shares; and (f) On 3 and 4 March 2004, the sale of the Minara shares by MECM on behalf of Mongoose, at a price of $2.90 per share. 164 Step (d) represents the entry of Mongoose into the MBL consolidated group, as a wholly-owned subsidiary of MALLC. As the primary judge found, if the scheme had not been entered into or carried out, Mongoose would have sold the Minara shares under the Agency Proposal as an independent entity, and not as a subsidiary member of the MBL consolidated group. In those circumstances, the amount of the tax benefit - $318,507,469 - would not have been (and would not have reasonably been expected to be) included in MBL's assessable income. Rather, under this counterfactual proposed by the Commissioner, the amount of the tax benefit would have been included in Mongoose's assessable income in the absence of the scheme. 165 This inconsistency was the gravamen of the primary judge's comments at [45] of his reasons for judgment (as previously alluded to). We think that this issue is fatal to the Commissioner's submission that a tax benefit was obtained in this case, as the way in which the Commissioner has pleaded the scheme and its corresponding counterfactual clashes with both the manner in which Pt 3-90 consolidated groups are to be assessed under Pt IVA (namely, by making determinations in respect of, and issuing assessments directly to, the head company), and the clear wording of s 177C. We do not think that the words of that section offer any scope to substitute a different taxpayer purely for the purpose of that part of the analysis that relates to what would or might have been included in a taxpayer's assessable income if the scheme had not been entered into or carried out. The High Court has often said that Pt IVA is to be "construed and applied according to its terms" (see Spotless Services (1996) 186 CLR 404 at 414; cited with approval in Hart (2004) 217 CLR 216 at 239). Similarly, Gummow and Hayne JJ cautioned in Hart at 239-240 that: Whether considering what is a "scheme", or considering other provisions of Pt IVA, it is necessary to eschew arguments that proceed from unstated premises about choice or the drawing of false dichotomies between "rational commercial decisions" and obtaining a tax benefit… Always the question must be whether the terms of the Act apply to the facts and circumstances of the particular case. [Emphasis added] 166 Accordingly, we do not think it permissible simply to assume that Mongoose is the relevant taxpayer for the purpose of this analysis, as the primary judge did for the purpose of his Pt IVA analysis. By virtue of the operation of Pt 3-90, as a subsidiary, Mongoose does not have "assessable income" in and of itself, and hence cannot be the subject of direct application of s 177C, for the same reasons that we previously concluded that it cannot be the direct subject of a determination under s 177F. 167 The remarks of the High Court in Peabody (1994) 181 CLR 359 at 382 are particularly apposite in these circumstances: Under s. 177f(1), the Commissioner's discretion to cancel a tax benefit extends only to a tax benefit obtained in connexion with a scheme to which Pt IVa applies. 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 if in the event the tax benefit which the Commissioner purports to cancel is not a tax benefit within the meaning of Pt IVa. That is unlikely to be the case if the error goes to the mere detail of a scheme relied upon by the Commissioner. An error of a more fundamental kind, however, may have that result - where, for example, it leads to the identification of the wrong taxpayer as the recipient of the tax benefit. But 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 connection with a Pt IVa scheme and so susceptible to cancellation at the discretion of the Commissioner. [Citations omitted; emphasis added] 168 That was a case in which the High Court found that the taxpayer identified by the Commissioner for the purpose of his Pt IVA analysis - Mrs Peabody - would not have obtained (or been reasonably likely to obtain) the tax benefit relied upon by the Commissioner in the absence of the scheme. The facts of that case were quite different to those presently before this Court, so it is not necessary to recite them here. But it is quite clear that the selection of the appropriate taxpayer, and the way in which the Commissioner pleads the scheme and the tax benefit purportedly obtained thereunder, are critical to the successful application of Pt IVA. 169 Our conclusion in this regard also heeds the caution voiced by Dawson J in Mills v Meeking (1990) 169 CLR 214 that Courts must avoid impermissibly "rewriting" legislation rather than properly construing it. In Mills, the Court was required to consider the Victorian equivalent of s 15AA of the Acts Interpretation Act, namely, s 35 of the Interpretation of Legislation Act 1984 (Vic). Dawson J said (in his dissenting judgment, at 235): The approach required by s 35 needs no ambiguity or inconsistency; it allows a court to consider the purposes of an Act in determining whether there is more than one possible construction. Reference to the purposes may reveal that the draftsman has inadvertently overlooked something which he would have dealt with had his attention been drawn to it and if it is possible as a matter of construction to repair the defect, then this must be done. However, if the literal meaning of a provision is to be modified by reference to the purposes of the Act, the modification must be precisely identifiable as that which is necessary to effectuate those purposes and it must be consistent with the wording otherwise adopted by the draftsman. Section 35 requires a court to construe an Act, not to rewrite it, in the light of its purposes. [Emphasis added] 170 This sentiment has been echoed in subsequent cases: see eg National Rugby League Investments Pty Ltd v Singtel Optus Pty Ltd (2012) 201 FCR 147 at 170, where the Full Court of the Federal Court held that it is not for the Court to re-draft a provision simply to secure an assumed legislative desire (in that case, the assumed legislative desire related to technological neutrality). 171 For the avoidance of doubt, we do not think that this conclusion means that the actions of consolidated group subsidiaries that give rise to tax consequences can never be brought within the ambit of Pt IVA. Rather, the ability to do so will depend on the scheme and counterfactual defined by the Commissioner. The problem for the Commissioner in this case was that the pivotal difference between the scheme and the counterfactual under s 177C - and therefore, the factor that gave rise to the tax benefit as described - was the change in status of Mongoose as the vendor of the shares. To accommodate the way in which the Commissioner pleaded his case would effectively require that two different taxpayers be involved in the tax benefit analysis - which, on the face of the statute, is not permissible. Our conclusion does not rely on any assumption that consolidated groups are immunised in some way from the operation of Pt IVA. 172 Accordingly, for the foregoing reasons, we find that there was no tax benefit in this case, in light of the way in which the scheme and tax benefit were sought to be defined by the Commissioner. Absent a tax benefit, Pt IVA has no application (Hart (2004) 217 CLR 216 at 231). We would therefore find in favour of the respondents in both proceedings, and dismiss the Commissioner's appeals. 173 However, if we are incorrect in reaching this conclusion, and Mongoose is the relevant taxpayer for the purpose of defining a tax benefit, then our conclusions in respect of the s 177D inquiry are as follows.

[24]

Sole or Dominant Purpose - Section 177D 174 In order for Pt IVA to apply, it must be able to be concluded that at least one person who entered into or carried out the scheme (or any part thereof) did so for the sole or dominant purpose of enabling the relevant taxpayer (or the relevant taxpayer plus one or more other taxpayers) to obtain a tax benefit in connection with the scheme. We will assume - as did the primary judge - that Mongoose is the relevant taxpayer for these purposes. 175 In applying s 177D, one must take into account the following eight matters listed therein: (i) the manner in which the scheme was entered into or carried out; (ii) the form and substance of the scheme; (iii) the time at which the scheme was entered into and the length of the period during which the scheme was carried out; (iv) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme; (v) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme; (vi) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme; (vii) any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out; and (viii) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi). 176 At [30] in his reasons for judgment, the primary judge characterised the relevant inquiry under s 177D to be, in the case of each of the parties identified by the Commissioner (MBL, Mongoose, MALLC, MPGOP and/or MPGOPB): not whether each entered into or carried out the scheme as identified by the Commissioner for the relevant dominant purpose, but whether each entered into or carried out that step or those steps (comprising part of the scheme) which each in fact entered into or carried out, for the relevant dominant purpose. The conclusion that might be drawn in terms of s 177D(b) for a party which entered into or carried out only part of a scheme, might be very different from the conclusion that might be drawn for the same party if it had entered into or carried out the whole scheme. 177 The primary judge made the following further observations at [66]-[74]: Dominant Purpose [66] As noted in [29] above, the Commissioner's case was that one or more of MBL, Mongoose, MALLC, MPGOP and/or MPGOPB entered into or carried out the scheme as identified (see [25] above) or part of that scheme for the purpose of enabling Mongoose (alternatively, MBL) to obtain a tax benefit in connection with that scheme. For the reasons given in [45] above, the MBL alternative can be put to one side. It is not clear from the particulars in para 37 of the Commissioner's amended appeal statement reproduced at [29] above whether the Commissioner's case was that it was a sole or dominant purpose upon which he relied. However, the latter is sufficient and was consistent with the Commissioner's oral argument. In any event, I propose to read those particulars as if they contained the word "dominant" before the word "purpose". [67] As I observed at [30] above, none of the identified parties entered into or carried out all the steps in the scheme identified at [25] above and it is therefore necessary to reach a conclusion, having regard to each of the matters in s 177D(b), as to whether any identified party entered into or carried out that step or those steps (comprising part of the scheme) which that party in fact entered into or carried out, for the relevant dominant purpose, namely, to enable Mongoose to obtain a tax benefit. [68] Looking at each of the steps in the scheme identified by the Commissioner and reproduced at [25] above: (i) Only MALLC entered into or carried out step (a) - the declaration of the distribution of US$244,000,000 by MALLC; (ii) MBL and MALLC entered into or carried out step (b) - the entry into the Loan Agreement; (iii) [O]nly MALLC entered into or carried out step (c) - the drawdown by MALLC of US$244,000,000 pursuant to the Loan Agreement; (iv) MPGOP, MPGOPB and MBL entered into or carried out step (d) - the entry into the Sale Agreement by MPGOP and MPGOBP agreeing to sell to MBL their membership interests in MALLC; (v) MALLC, Mongoose and MBL entered into or carried out step (e) - replacement of the existing directors of MALLC and Mongoose with MBL appointees, the convening of meetings by the new directors of MALLC and Mongoose and the resolution of the new Mongoose directors to sell the Minara shares; and (vi) Only Mongoose entered into or carried out step (f) - the sale of the Minara shares by or on behalf of Mongoose. [69] In other words, MALLC entered into or carried out steps (a) to (c) inclusive and step (e); MBL entered into or carried out steps (b), (d) and (e); Mongoose entered into or carried out steps (e) and (f); while MPGOP and MPGOPB entered into or carried out step (d). [70] To reach the conclusion specified in s 177D(b) it is necessary to have regard to each of the eight matters which are there specified, which may variously point toward or away from the requisite conclusion, or which may not point in either direction because factually they are not relevant; provided all matters are taken into account, it is possible to arrive at the conclusion as to purpose by making a global assessment of the facts: Commissioner of Taxation v Consolidated Press Holdings Ltd (2001) 207 CLR 235 at [94]; Commissioner of Taxation v Sleight (2004) 136 FCR 211 at [67]; Commissioner of Taxation v News Australia Holdings Pty Ltd (2010) 79 ATR 461 at [15]. In the circumstances, that is the approach I propose to take in the present case. [71] In relation to MALLC, I would not conclude, by reference to the eight matters in s 177D(b), that MALLC entered into or carried out any, or collectively some or all, of steps (a), (b), (c) and (e) for the dominant purpose of enabling Mongoose to obtain a tax benefit. To the contrary, I would conclude that steps (a), (b) and (c), above and together, were entered into or carried out by MALLC for the dominant purpose of avoiding any potential adverse operation of s 457 of the 1936 Act. The Commissioner eschewed reliance on such avoidance as giving rise to a tax benefit, understandably so, because those steps enabled MALLC, and not Mongoose, to obtain immunity from the operation of s 457. Step (e), so far as MALLC is concerned, involved no more than changes in the personnel of its directors and the convening by them of future meetings of the board. None of the eight matters in s 177D(b) lead me to conclude that step (e), either alone or together with steps (a), (b) and (c), was or were entered into or carried out by MALLC for the dominant purpose of enabling Mongoose to obtain a tax benefit. [72] In relation to MBL, I would not conclude, by reference to the eight matters in s 177D(b), that MBL entered into or carried out any, or collectively some or all, of steps (b), (d) and (e) for the dominant purpose of enabling Mongoose to obtain a tax benefit. To the contrary, I would conclude that steps (b), (d) and (e), either alone or together, were entered into or carried out by MLB [sic] for the dominant purpose of profit-making - making a greater profit than would otherwise be made by MBL from the Agency Proposal - albeit attended with greater commercial risk. [73] In relation to Mongoose, I would not conclude, by reference to the eight matters in s 177D(b), that Mongoose entered into or carried out any, or alternatively both, of steps (e) and (f) for the dominant purpose of enabling it to obtain a tax benefit. To the contrary, I would conclude that steps (e) and (f), either alone or together, were entered into or carried out by Mongoose for the dominant purpose of selling the Minara shares. Any tax benefit of the kind relied on by the Commissioner, came as a result, or as a consequence, that, at the time Mongoose sold the Minara shares, it was already a subsidiary member of the MBL consolidated group. Those steps, alone or together, could not have been entered into or carried out by Mongoose for the dominant purpose of obtaining a tax benefit. The tax consequences of the sale of the Minara shares flowed from the fact that, at the relevant time, it was already a subsidiary member of the MBL consolidated group. [74] In relation to MPGOP and MPGOPB, I would not conclude, by reference to the eight matters in s 177D(b), that MPGOP and MPGOPB entered into or carried out step (d) for the dominant purpose of enabling Mongoose to obtain a tax benefit. To the contrary, I would conclude that step (d) was entered into or carried out by MPGOP and MPGOPB for the dominant purpose of selling their respective economic interests in the Minara shares, and to do so without suffering Australian income tax on the profit they each made on the sale of those interests. 178 The Commissioner's grounds of appeal in relation to this issue were as follows: (a) The primary judge erred in considering, pursuant to s 177D(b) of the 1936 Act, whether one or more of MBL, Mongoose, MALLC, MPGOP and/or MPGOPB entered into or carried out the scheme described at [25] of his Honour's reasons for judgment for the dominant purpose of obtaining a tax benefit by reference only to the part of the scheme that each of them individually implemented and failing to consider the purpose of each of them in entering into or carrying out the scheme as a whole. (b) The primary judge erred in considering whether one or more of MBL, Mongoose, MALLC, MPGOP and/or MPGOPB entered into or carried out the scheme at [25] of his Honour's reasons for judgment for the dominant purpose of obtaining a tax benefit by failing to give real and genuine consideration to each of the factors in s 177D(b) of the 1936 Act. (c) The primary judge erred in failing to hold that it would be concluded, having regard to each of the matters in s 177D(b) of the 1936 Act, that one or more of MBL, Mongoose, MALLC, MPGOP and/or MPGOPB entered into or carried the scheme out at [25] of his Honour's reasons for judgment for the dominant purpose of obtaining a tax benefit. 179 In his submissions, the Commissioner purported to identify a number of "specific errors" in the primary judge's approach to dominant purpose, including: (a) the failure to consider purpose by reference to the scheme as a whole; (b) the failure to consider the eight factors in s 177D(b); (c) the failure to consider purpose by reference to the counterfactual; (d) the application of a "false dichotomy"; and (e) the failure to give effect to his Honour's own conclusions. 180 It will be apparent that the Commissioner's grounds of appeal relating to s 177D raise three broad issues: (a) whether the purpose of one or more of the scheme participants that falls to be considered under s 177D should be considered simply by reference to the discrete part of the scheme that each participant carried out, or by reference to the whole of the scheme; (b) whether the primary judge gave proper consideration to each of the s 177D factors; and (c) the proper conclusion to be reached on an application of s 177D to the circumstances of these proceedings. 181 We note that the case law relating to s 177D did not appear in any great detail in the primary judge's reasons (presumably because his Honour's comments on this issue were obiter dicta, having already concluded that the Commissioner was unsuccessful in the proceedings). Nonetheless, we think it useful to commence our consideration of these matters with an overview of some of the relevant case law principles regarding the operation and application of s 177D.

[25]

Relevant Principles - An Overview of S 177D 182 In Spotless Services (1996) 186 CLR 404, the plurality of the High Court made the following comments about the inquiry under s 177D (at 421 to 422): The eight categories set out in par (b) of s 177D as matters to which regard is to be had "are posited as objective facts". [citing Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359 at 382] That construction is supported by the employment in s 177D of the phrase "it would be concluded that ... ". This phrase also indicates that the conclusion reached, having regard to the matters in par (b), as to the dominant purpose of a person or one of the persons who entered into or carried out the scheme or any part thereof, is the conclusion of a reasonable person. [citing Atwood Oceanics Australia Pty Ltd v Federal Commissioner of Taxation (1989) 20 ATR 742 at 750-751; 89 ATC 4808 at 4816; Roads and Traffic Authority (NSW) v Federal Commissioner of Taxation (1993) 43 FCR 223 at 238.] In the present case, the question is whether, having regard, as objective facts, to the matters answering the description in par (b), a reasonable person would conclude that the taxpayers entered into or carried out the scheme for the dominant purpose of enabling the taxpayers to obtain a tax benefit in connection with the scheme. 183 Subsequently, in Hart (2004) 217 CLR 216, Gummow and Hayne JJ provided the following overview of the operation of s 177D (at 232): The schemes to which Pt IVA applies are identified in s 177D. Leaving aside what s 177D says about the time and place at which a scheme is entered into or carried out, there are two elements that must be satisfied. First, it must be shown that the relevant taxpayer has obtained, or would but for s 177F obtain, a tax benefit in connection with the scheme. Secondly, it must be shown that having regard to eight matters ''it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme'' or enabling the relevant taxpayer and one or more other taxpayers to obtain a tax benefit in connection with the scheme. The ''person'' whose purpose is to be identified under s 177D is the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme. Section 177D makes plain that the person whose purpose is to be identified may be (but need not be) the relevant taxpayer or one of the other taxpayers mentioned in the section. 184 As noted by their Honours in that case, the meanings of several of the expressions used in s 177D are provided by s 177A. At the relevant time, s 177A(4) provided (and continues to do so) that a reference to "the carrying out of a scheme by a person" shall be read as including a reference to "the carrying out of a scheme by a person together with another person or other persons". 185 Further, the "purpose" referred to in s 177D is amplified by s 177A(5), which provided at the relevant time that a reference in Pt IVA to a scheme (or part thereof) being entered into or carried out by a person for a particular purpose shall be read as "including a reference to the scheme or the part of the scheme being entered into or carried out by the person for 2 or more purposes of which that particular purpose is the dominant purpose". 186 The plurality in Spotless Services (1996) 186 CLR 404 said that "dominant" in this regard means (at 416): that purpose which was the ruling, prevailing, or most influential purpose. In the present case, if the taxpayers took steps which maximised their after-tax return and they did so in a manner indicating the presence of the "dominant purpose" to obtain a "tax benefit", then the criteria which were to be met before the Commissioner might make determinations under s 177F were satisfied. That is, those criteria would be met if the dominant purpose was to achieve a result whereby there was not included in the assessable income an amount that might reasonably be expected to have been included if the scheme was not entered into or carried out. 187 In Hart (2004) 217 CLR 216, Gummow and Hayne JJ noted the difference between the dominant purpose of a scheme participant, and the dominant purpose of a scheme. The latter inquiry is not mandated by s 177D and is irrelevant (at 242-243). Rather, the inquiry under s 177D requires consideration "of the purposes to be attributed to relevant persons who entered into or carried out the scheme or any part of the scheme" (emphasis in original). See also Spotless Services (1996) 186 CLR 404 at 418 (where the position under s 177D was contrasted with that under the former s 260, where the purpose of the contract, agreement or arrangement was a factor expressly nominated for consideration by the legislation). 188 Further, s 177D does not require (or even permit) any inquiry into the subjective motives or state of mind of any person. To this end, Gummow and Hayne JJ said the following in Hart (2004) 217 CLR 216 (at 243): In these matters, it is, of course, true that the money was borrowed to finance and refinance the two properties. Of course the loan was structured in the way it was in order to achieve the most desirable taxation result. But those are statements about why the respondents acted as they did or about why the lender (or its agent) structured the loan in the way it was. They are not statements which provide an answer to the question posed by s 177D(b). That provision requires the drawing of a conclusion about purpose from the eight identified objective matters; it does not require, or even permit, any inquiry into the subjective motives of the relevant taxpayers or others who entered into or carried out the scheme or any part of it. [Emphasis in original] 189 Accordingly, the actual purpose of a scheme participant may be irrelevant - the conclusion regarding purpose under this section is to be reached by reference to the matters set out in s 177D(b). On this issue, the Full Court in Commissioner of Taxation v News Australia [2010] FCAFC 78; (2010) 79 ATR 461 said at [30]: Section 177D(b) of the Act requires a conclusion about a person's objective intention or purpose. That intention must be objectively ascertained by a consideration of the factors listed in s 177D(b) of the Act. It is, however, hardly surprising if objective intention in fact accords with the person's subjective intention. If subjective intention is reflected in objective evidence, no error is made by taking that evidence into account albeit that it is consistent with the person's subjective intention. 190 Two of the Commissioner's grounds of appeal regarding the s 177D inquiry go to the manner in which the primary judge approached this task, rather than his Honour's ultimate conclusion on point (which is the subject of a separate ground of appeal). These grounds of appeal are that the primary judge erred insofar as his Honour considered the purpose of each scheme participant by reference to the step/s they each carried out rather than as against the scheme as a whole; and that his Honour erred by failing to give real and genuine consideration to each of the s 177D(b) factors individually. These grounds will be addressed in turn. 191 For the purpose of his s 177D analysis, the primary judge drew a distinction between the distinct steps actually carried out by each scheme participant, and the whole of the scheme that each participant might be said to have broadly entered into. To this end, his Honour said at [30]: none of the persons identified entered into or carried out all the steps in the scheme as identified by the Commissioner. The s 177D(b) issue in the case of each of those parties is not whether each entered into or carried out the scheme as identified by the Commissioner for the relevant dominant purpose, but whether each entered into or carried out that step or those steps (comprising part of the scheme) which each in fact entered into or carried out, for the relevant dominant purpose. The conclusion that might be drawn in terms of s 177D(b) for a party which entered into or carried out only part of a scheme, might be very different from the conclusion that might be drawn for the same party if it had entered into or carried out the whole scheme… [Emphasis in original] 192 The Commissioner attacks this approach in one of his grounds of appeal. 193 We accept that when regard is had to the words of s 177D, a distinction is drawn between the entry into (or the carrying out of) part of a scheme as distinct from the entire scheme. The inquiry is: whether, having regard to [the eight factors in s 177D(b)], it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme… [Emphasis added] 194 Of this apparent distinction, the relevant Explanatory Memorandum says (at 12-13): In more detail, for a scheme to be one to which Part IVA applies by reason of section 177D it must be a scheme entered into after the date of introduction of the Bill or a scheme that technically is not "entered into" (e.g., one constituted by a unilateral course of action) but is carried out or commenced to be carried out after that date... … In more detail, if on the basis of the matters to which regard is to be had it would be concluded that the person or one of the persons who entered into or carried out the scheme, or any part of it, did so for the sole or (by reason of sub-section 177A(5)) dominant purpose of enabling the taxpayer or any other taxpayer concerned to obtain a tax benefit then (the other tests of section 177D having been satisfied), Part IVA will apply. There are some additional points of note… … Further, the relevant purpose is, having regard to the scheme as a whole, to be tested in relation to the involvement of a person in either a part of the scheme or the whole of it. It has been a feature of tax avoidance schemes of the kind that Part IVA is directed against that a considerable number of parties and of connected transactions are involved, and provisions against such schemes would fail in their purpose if limited to purposes of persons who were involved in the schemes in their entirety. 195 Such a distinction between the scheme as a whole and a part thereof was also recognised by Gummow and Hayne JJ in Hart (2004) 217 CLR 216, and Hill J in Peabody v Commissioner of Taxation (1993) 40 FCR 531 at 543 (Ryan and Cooper JJ agreeing). In Hart, Gummow and Hayne JJ noted (at 238): Far from the Part requiring reference only to the purpose of those who carry out all of whatever is identified as the scheme, s 177D(b) specifically refers to it being concluded ''that the person, or one of the persons, who entered into or carried out ... any part of the scheme'' did so for the purpose of enabling the relevant taxpayer (alone or with others) to obtain a tax benefit in connection with the scheme (emphasis added). 196 Similarly, Hill J in Peabody stated (at 543): It will be seen, from s 177d, that the conclusion that is required to be drawn is not a conclusion with respect to the scheme itself, but a conclusion as to the purpose of a particular person. In this respect, Pt IVa differs from s 260. That person may, in a particular case, have participated in only a part of the scheme. In such a case, the question will be whether the conclusion would be reached that his or her participation in that part of the scheme was for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with that scheme. In other circumstances (including those of the present case), the participation of the relevant person will be in the totality of the scheme. In such a case, the question will be whether the participation of that person was activated by that person's dominant purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme. 197 The Full Court's decision in this case was ultimately upheld by the High Court on appeal: see Federal Commissioner of Taxation v Peabody (1994) 181 CLR 259. 198 In light of the foregoing, it seems clear that the purpose of the reference in s 177D to participants entering into or carrying out the scheme or part thereof is to ensure that (as alluded to by the relevant Explanatory Memorandum) schemes are not immunised from the operation of Pt IVA simply because no single scheme participant carried out all of the steps. The purpose is not to constrain the scope of the Court's inquiry under s 177D. 199 But whilst it was not incorrect for his Honour to identify for the purpose of his analysis the fact that each scheme participant had only carried out one or more discrete steps of the scheme, such a conclusion cannot be permitted to change the underlying s 177D inquiry. This inquiry requires that conclusions regarding the purpose of scheme participants be reached having regard to each of the eight factors in s 177D(b). These factors refer to "the scheme" as a whole rather than distinguishing between the scheme and parts thereof, and must each be considered. With respect, it is this aspect of the s 177D analysis that the primary judge appears to have failed to complete. In our opinion, the primary judge does not appear to have considered each of the s 177D(b) factors in reaching his ultimate conclusions in respect of each of the scheme participants, and it is in this respect that we consider his Honour's analysis under s 177D miscarried. 200 For the avoidance of doubt, our conclusion in this regard does not stem solely from the primary judge's decision to conduct a "global assessment" of the facts, rather than setting out his analysis of each of the s 177D(b) factors individually. As the Commissioner recognised in his submissions, this is not necessarily an error in and of itself. Case law recognises that there is overlap between the eight factors. Some of them may point one way; some may point another; some may be neutral (Peabody v Federal Commissioner of Taxation (1993) 40 FCR 531 at 543 per Hill J (Ryan and Cooper JJ agreeing); and Commissioner of Taxation v Sleight (2004) 136 FCR 211 at 229 [67]). Accordingly, there is no requirement that a judge must specifically divide up their analysis under s 177D according to each criterion. All that is required is that all of the eight matters actually be considered for the purpose of the s 177D inquiry (Hart (2004) 217 CLR 216 at 241). To this end, a global assessment of the s 177D(b) factors may, in an appropriate case, be permissible: see eg Federal Commissioner of Taxation v Consolidated Press Holdings Limited (2001) 207 CLR 235 at 263; and Commissioner of Taxation v Sleight (2004) 136 FCR 211 at 229 (both cases were cited by the primary judge on this point). 201 However, we accept that it is unclear from his Honour's analysis of this matter whether in fact all of the eight s 177D(b) factors were considered in the course of carrying out a "global assessment". As previously noted, this may simply be a function of the fact that his Honour considered s 177D in the alternative after determining to dispose of the proceedings in favour of the respondents. In any event, we think it is desirable for this Court to conduct its own s 177D analysis on appeal. 202 In his submissions, the Commissioner set out "further factual background to the application of section 177D(b) of the 1936 Act", which he alleged the primary judge failed to take into account in conducting his s 177D analysis. For the purpose of our analysis, we substantially reproduce these additional facts here (emphases in original): (a) Commencing from about 5 February 2004, MECM and MatlinPatterson discussed the sale of the Minara shares on the basis that MECM would act as agent for Mongoose on the sale of the Minara shares to institutional third parties in return for a fee. Initial discussions occurred between Mr Peter Curry (Mr Curry), Mr John Prendiville, Mr Richard Phillips (Mr Phillips) and Ms Jessamy Walpole (Ms Walpole) of MECM, and Mr Gregory Eng and Mr Gustiaman Deru (Mr Deru) of MatlinPatterson. (b) On 13 February 2004, MECM sent to MatlinPatterson a letter setting out the basis on which MECM would be willing to assist MatlinPatterson and Mongoose sell down the Minara shares. Under the terms of engagement, an agency deal was proposed under which MatlinPatterson and Mongoose would appoint MECM "on a sole and exclusive basis to act as lead manager to the Selldown" for a fee structure based on a percentage of the gross proceeds of the Selldown: 0.75% with an increase up to 1% of gross proceeds if the sale price exceeded a certain amount. This was, in essence, what the primary judge referred to at [11] and [64]-[65] of his reasons as the Agency Proposal. MatlinPatterson/Mongoose suggested amendments to these terms on 16 February 2004. (c) On 16 February 2004 MBL's Underwriting Committee considered and approved in principle a Proposal Summary for MECM, as sole lead manager, to undertake a sell down of MatlinPatterson's stake in Minara. (d) On 16 and 17 February 2004, Mr Eng and Mr Deru visited Australia to meet with representatives from MECM concerning the sale of the Minara shares. The chief participants in those meetings for MECM were Ms Walpole and Mr Phillips. Mr Robert Upfold (Mr Upfold) attended only briefly, for five to ten minutes. Mr Upfold was an Executive Director of MBL with considerable background and expertise in taxation law whose role included the provision of taxation advice to other parts of MBL as required. After that meeting Mr Upfold was informed of the ownership structure of the Minara shares. Neither Mr Phillips nor Ms Walpole was called to give evidence on behalf of the respondents. (e) At or about this time a proposal emerged that the disposal of Mongoose's interest in Minara take place by way of an acquisition by MBL (or one of its subsidiaries) (as a principal) of MALLC and then an immediate sale by Mongoose of the Minara shares to third parties, with MBL receiving its remuneration from the difference between the price paid for MALLC and the price received for the Minara shares (hybrid bought deal). (f) On 17 February 2004 at 3:48 pm, Mr Upfold sent Ms Walpole an email which read as follows (emphasis in original): There are a number of ways to achieve this and they exist along spectrums of difficulty/time involved. By way of example: 1. MBL Acquisition (easy, quick) (i) MBL or SPV purchases Mongoose LLC. Change residence of LLC by appointing Australian directors. As head company in a consolidated group would be able to sell shares with no tax unless the sale price in excess of cost. (ii) no Australian tax on this for Fund. (iii) Terms of purchase: say $2.50 per share with escalation from book build; say we get a share of upside over (?)$3 with fee as present (iv) payment of total consideration deferred until sales. 2. Demerger (harder/time involved and we do not want too many people to see this) (i) MBL forms FloatCo (ii) FloatCo raises equity (prospectus) by book build to ensure Mongoose P/L's shares are transferred directly to FloatCo's shareholders (iii) FloatCo takes up equity in LLC (iv) P/L transfers shares in target directly to FloatCo shareholders (v) This would be a demerger under our CGT relief rules; no CGT for P/L or Fund (assume for present not going to be a revenue profit) and no DWT (vi) Wind up FloatCo in due course. (g) Later that evening, by email at 6:48 pm, Mr Upfold advised Mr Andrew McWhinnie (Mr McWhinnie), of MBL's Taxation Division, of the proposed hybrid bought deal. Mr Upfold informed Mr McWhinnie (emphasis in original): ... we are endeavouring to buy the offshore holding company (a Delaware LLC) of a group. That company owns only an Australian company which owns only a significant %age of a listed company. We want to deal only with the vendor of the LLC and want to give them a price for their shares so we can deal with the sell down of this stock. That price obviously also would be after tax (none) as they would be selling shares in a USCo. We would be taking market risk on sale. MBL would buy the LLC and appoint our directors. LLC would become an Australia resident. Consolidations would push down our price and when we sell the shares the excess over that pushed down cost would be assessable. Change in residence of LLC does not trigger tax. Seems pretty straightforward that we get consolidation push down. (h) On 18 February 2004, Mr Upfold met with advisors from Greenwoods & Freehills (G&F) to discuss the tax consequences of the proposal. (i) The proposal that MBL (or a subsidiary) acquire MALLC gave rise to a number of regulatory issues including the form of any relief required from the Australian Securities and Investments Commission from compliance with regulatory requirements governing takeovers, the filing of substantial shareholder notices and notification to the Australian Prudential Regulatory Authority. (j) Between 16 and 17 February 2004 and 24 and 25 February 2004 the Agency Proposal and the hybrid bought deal were pursued in parallel. Further suggested amendments to the terms of the Agency Proposal were made by MBL on 19 February 2004 and by MatlinPatterson or Mongoose on 20 February 2004. By 20 February 2004 MBL and MatlinPatterson or Mongoose had reached broad agreement on the commercial terms by which MBL would act as Mongoose's agent for the sale of the Minara shares. Also on that day, solicitors for MatlinPatterson (and Mongoose) wrote to ASIC seeking relief under the Corporations Act 2001 (Cth) in relation to the Agency Proposal and solicitors for MBL also wrote to ASIC seeking relief under the Corporations Act in relation to both the Agency Proposal and the hybrid bought deal. (k) Between 18 and 20 February 2004, MBL undertook a due diligence review of Mongoose's investment in Minara. The Credit Department of MBL was consulted. On 20 February 2004 Mr Mark Fay of the Credit Department stated in an email that was passed on to Mr Phillips, Mr Wayne Kent (Mr Kent) and Ms Walpole that: [F]or the proposed "bought deal" we would require that prior to us buying the stock as principle [sic], we would need iron-clad sell-down agreements for a large majority of the stock with very high quality fund managers. (l) On 20 February 2004, Mr Upfold received a draft written advice from G&F concerning the tax consequences of the hybrid bought deal. (m) On 23 February 2004, the Underwriting Committee of MBL approved a further Proposal Summary for the sale of the Minara shares which had been submitted by Mr Phillips. That Proposal Summary considered both the proposed hybrid bought deal and the Agency Proposal. It: (a) noted that the price at which MBL would purchase MALLC under the hybrid bought deal was to be a price that represented a discount of between 20 and 30 cents per share on the price at which MBL obtained verbal commitments from a small number of institutional investors to purchase between 30-50% of the Minara shares prior to entering into the agreement to purchase MALLC (the Cornerstone price); (b) noted that a number of "termination events" upon which MBL could terminate the agreement to purchase MALLC dependent on adverse movements of the stock market, commodity prices or other material adverse events were proposed, but it was noted that those matters were yet to be the subject of negotiation with MatlinPatterson; and (c) noted that, should the hybrid bought deal not be possible, the Agency Proposal would be implemented, using a price range of between $2.90-$3.10 per Minara share, with MBL obtaining a fee of 0.75% of the gross proceeds of sale and an incentive dependent on the extent to which the price obtained exceeded the bookbuild range. (n) On 24 February 2004 the approval of two non-Executive Directors of MBL, Ms Helen Nugent and Mr John Niland, was sought to enter into the hybrid bought deal. MBL's Board papers record, against the heading "Purpose", that (emphasis added): To facilitate the sell down of an approx 36% stake in Minara held by MatlinPatterson (a US based fund manager). The shares are held via a wholly owned subsidiary, Mongoose Pty Ltd (Mongoose) whose only assets are Minara shares. MBL has offered a principal sell-down solution to MatlinPatterson which suits the tax planning of the client. (o) The "Details of the Transaction" were explained to the directors of MBL as follows: MBL will purchase the offshore holding company of Mongoose for a price set at a significant per share discount to the current Minara price. MBL will place up to 50% of the shares immediately, then upon an institutional bookbuild offer to sell-down the remainder. (p) The directors queried whether there had "been any comparable tax driven deals over the past 2-3 years". The approval of the directors of MBL was given, subject to conditions which included the following (emphasis added): That the proposed tax outcome driving the deal is signed off internally and covers an assessment of whether this deal would attract the ire of the ATO given relatively aggressive perceived stance of that office lately. (q) Between 20 February 2004 and 2 March 2004 further negotiations took place between MBL and MatlinPatterson. MatlinPatterson refused to accept the inclusion of any of the "termination events" sought by MBL, and MBL and MatlinPatterson agreed to bear their own tax risks in connection with entry into the transaction. By 26 February 2004 MBL and MatlinPatterson had committed to pursuing the hybrid bought deal. (r) On 27 February 2004, Mr McWhinnie sent an email to MBL's taxation advisers (G&F) relating to the advice MBL required in relation to the hybrid bought deal. Mr McWhinnie stated that "it is vital that the advice satisfactorily covers the following key matters", which included: The liability of the LLC to MBL should be included in the cost base pushed down into the listed shares. The cost base of the listed shares should be MBL's total cash outlay (ie., loan+shares) The LLC should not have any tax liabilities arising from the contemplated transactions. Mongoose Pty Limited should not have any liabilities arising from the contemplated transactions (including Pt IVA & consolidations). (s) On 29 February 2004 Mr Eng sent to Ms Walpole, Mr Upfold, Mr Phillips and Mr Kent an email outlining a proposed series of steps by which the hybrid bought deal would be effected. (t) G&F provided a draft advice on 1 March 2004 and a final advice on 2 March 2004. (u) On 1 March 2004 the MBL Underwriting Committee considered and approved an updated draft Proposal Summary relating to the sale of the Minara shares and asked for a final form to be circulated. The Updated Proposal Summary of 2 March noted that it had been agreed with MatlinPatterson that the sale price for MALLC was to be a price representing a discount of 25 cents to Cornerstone price and there were to be no termination events. The Updated Proposal Summary went on to say: Although this is somewhat unusual in the context of a conventional equity underwriting ... it is considered acceptable given the level of cornerstone commitments sought and the relatively short risk period (24-36 hours) before allocations are announced and confirmed with the institutions. (v) Ultimately, the sale of the Minara shares to the institutions did not proceed by way of bookbuild price, but by way of a fixed price sale at $2.90 per share. The final price paid by MBL for MALLC equated to $2.65 per Minara share. (w) On 2 and 3 March 2004 the events set out at [15] of his Honour's reasons for judgment occurred. To that the following should be added by way of supplementation: (a) under the Loan Agreement referred to at [15(2)], MALLC was required to use the proceeds for the payment of a dividend and distributions to its members; (b) prior to the entry into the Sale Agreement referred to at [15(4)] of his Honour's reasons, MECM sent letters to cornerstone investors to confirm each investor's commitment to acquire a specified number of ordinary shares in Minara at a fixed price of $2.90 per share and provided for a return acknowledgement to be sent to MECM on or before 11am Sydney time on 3 March 2004. It was Mr Kent's evidence that around 67% of the Minara shares were the subject of verbal commitments by institutional investors to purchase them prior to entry into the Sale Agreement and that the transaction would not have gone ahead unless at least 50% of the Minara shares were covered by such commitments; (c) the Sale Agreement referred to at [15(4)] of his Honour's reasons expressly stated that no warranty or indemnity was given concerning the tax consequences of the transaction. Schedule 3 of the Sale Agreement provided that: [b]efore the execution of this agreement, the Buyer (through its related bodies corporate) has entered into contractually binding arrangements concerning the sale to certain cornerstone investors of the Minara Shares. Consequently, the Minara Shares the subject of those commitments are Encumbered. (d) immediately following the execution of the Sale Agreement, a board meeting of MALLC was held in Sydney and officers of MBL were appointed as directors of MALLC and Mongoose was directed to sell the Minara shares; (e) immediately following that meeting, a board meeting of Mongoose was held at which MBL officers were appointed as directors and it was resolved to sell the Minara shares. Mr Kent indicated that MECM was "confident of a sale of the whole stake at $2.90 per share at a fixed price, rather than book range" [and that] "it move to sell as quickly as possible"; and (f) at 4pm on 3 March 2004 the directors of Mongoose were informed that book "was now over 1x covered". At 6 pm on 3 March 2004 the Board of Mongoose reconvened and were informed that the book "was well covered" and "allocations were being made to various institutions". (x) On 10 March 2004, the directors of Mongoose met. It was confirmed that the sell down had been completed. The Minara shares had been sold by Mongoose for A$480,336,947. Of this amount, A$318,507,469 represented the excess over Mongoose's cost of acquisition (A$161,829,478). MBL itself netted a profit of A$41,408,357 from the transaction, being the amount by which A$480,336,947 exceeded the sum of the purchase price of the MALLC interests and the amount of the loan to MALLC (totalling $438,928,590). 203 Before commencing our analysis of each of the s 177D(b) factors, we note that one of the Commissioner's arguments on appeal was that his Honour erred in failing to consider purpose by reference to the counterfactual, and to this end, invoked the decision of British American Tobacco Australia Services Ltd v Federal Commissioner of Taxation (2010) 189 FCR 151. 204 Unlike s 177C, s 177D does not expressly contemplate what would have happened if the scheme had not been entered into or carried out. We have already noted the High Court's warning that, in applying Pt IVA, Courts should construe and apply it according to its terms, not "under the influence of 'muffled echoes of old arguments' concerning other legislation" (Spotless Services (1996) 186 CLR 404 at 414, citing Ex parte Professional Engineers' Association (1959) 107 CLR 208 at 276). 205 Similar warnings have been issued in relation to the need for Courts to strictly confine their analysis under s 177D to the matters referred to therein. In Citigroup Pty Ltd v Commissioner of Taxation [2010] FCA 826; (2010) 81 ATR 412 (judgment affirmed on appeal to the Full Court: see Commissioner of Taxation v Citigroup Pty Ltd (2011) 193 FCR 380), Edmonds J said (at [24]-[25]): The conclusion which the court is required to draw under s 177D(b) is one which must be drawn having regard to such of the eight matters or considerations referred to therein as are relevant to the scheme under scrutiny (in many cases they may not all be relevant), and to no other matters. This does not exclude consideration of particular matters which fall within the wider umbrella of one or more of the eight matters or considerations referred to, but if they do not, they cannot be taken into account as part of the process of conclusion-drawing that the court is required to undertake. In my view, this still leaves the court with considerable latitude in the matters or considerations it can have regard to in the conclusion-drawing process. 206 Additionally, Gummow and Hayne JJ noted in Hart (2004) 217 CLR 216 at 238 (albeit in the context of a discussion of what may constitute a "scheme" for the purpose of Pt IVA): there is no basis to be found in the words used in Pt IVA for the introduction of some criterion additional to those identified in the Act itself. 207 Nonetheless, after proceeding to read ss 177C and 177D together in that case, their Honours concluded that (at 243-244): It becomes apparent that the inquiry directed by Pt IVA requires comparison between the scheme in question and an alternative postulate. To draw a conclusion about purpose from the eight matters identified in s 177D(b) will require consideration of what other possibilities existed. 208 This statement was picked up by the Full Court in British American Tobacco Australia Services Ltd v Federal Commissioner of Taxation (2010) 189 FCR 151, where it was said that (at 163): In addressing s 177D(b)(i) to (v) and (vii), the trial judge compared the Scheme as carried out with the counterfactual... Such an approach was not only open but is usually required in assessing the dominant purpose of a scheme. A comparison between the Scheme carried out and the counterfactual was important in the present case because it revealed that the manner in which the Scheme was formulated and carried out was, when compared with the counterfactual, explicable only by taxation consequences: s 177D(b)(i). 209 In determining this point, we note the comments of Edmonds J (Bennett and Middleton JJ agreeing) in Federal Commissioner of Taxation v Ashwick (QLD) No 127 Pty Ltd (2011) 192 FCR 325, where the comments of Gummow and Hayne JJ in Hart (2004) 217 CLR 216 at 243-244 were noted (along with the part of the British American Tobacco Australia Services Ltd v Federal Commissioner of Taxation judgment extracted above). Edmonds J commented (at 376): Accepting for present purposes the correctness of what Gummow and Hayne JJ said in Hart at [66] extracted […] above, it is difficult to discern its legislative foundation. It certainly does not appear as one of the matters enumerated in s 177D(b) and, as their Honours said (at [47]) in Hart (in response to a submission that the term "scheme" had to be understood by reference to criteria outside the statute itself - namely, that the term does not encompass circumstances that are incapable of standing on their own without being "robbed of all practical meaning": Peabody at 384): There is no basis to be found in the words used in Pt IVA for the introduction of some criterion additional to those identified in the Act itself. 210 Despite the fact that s 177D does not expressly refer to possibilities other than the scheme that was implemented, the High Court in both Spotless Services (1996) 186 CLR 404 and Hart (2004) 217 CLR 216 considered it necessary to invoke this concept for the purpose of the s 177D analysis. In Spotless Services, the Court acknowledged the "other alternatives which had been under consideration by Spotless Services" (at 418) and the "[v]arious courses of action" that were considered before the relevant scheme was carried out (at 422) in the course of setting out the events and circumstances "to which regard may be had for the purposes of pars (i) and (ii) of s 177D(b))" (at 420). It was in part by reference to these other possibilities that the Court was ultimately able to conclude that, under s 177D, the dominant purpose of the taxpayers was to obtain the tax benefit in question, as "[w]ithout that benefit, the proposal would have 'made no sense'" (at 422). Similarly, in Hart (2004) 217 CLR 216, Gummow and Hayne JJ confirmed in relation to their analysis of s 177D(b)(i) that "[t]he conclusions as just described, as being indicated by the manner in which the scheme was entered into or carried out, are indicated by a consideration of how else the loan might have been arranged" (at 244). 211 In light of this authority, it is clear that, where appropriate, regard may be had to the other possibilities that existed for the purpose of conducting the s 177D analysis. This does not mean that the s 177D inquiry merely becomes a "but for" test (as was the subject of express warning in Citigroup Pty Ltd v Commissioner of Taxation [2010] FCA 826 at [24]; see also British American Tobacco Australia Services Ltd v Federal Commissioner of Taxation (2010) 189 FCR 151 at 162). That is clearly not required - or permitted - on the face of the statute. But from a practical perspective, if the s 177D(b) analysis were to be carried out without any consideration of the other possibilities that may have been open to the relevant taxpayer/s at the relevant time, the analysis would risk being artificial and sterile. Accordingly, we consider that reference to such other possibilities as may have existed at the relevant time is a necessary constituent of a number of the factors set out in 177D(b) (a conclusion that we consider is harmonious with the warning administered by Edmonds J in Citigroup Pty Ltd v Commissioner of Taxation [2010] FCA 826 set out above). 212 We now proceed to consider the s 177D(b) factors.

[26]

S 177D(b)(i): The Manner in Which the Scheme Was Entered Into or Carried Out 213 In relation to this criterion, the plurality in Spotless Services (1996) 186 CLR 404 said (at 420): In the context in which they appear in par (i), the terms "manner" and "entered into" are not given any restricted meaning. "Manner" includes consideration of the way in which and method or procedure by which the particular scheme in question was established. 214 The manner in which the scheme that is the subject of these proceedings was entered into or carried out is substantially as set out above. However, it is convenient to make some further observations about this criterion and the relevant evidence before this Court. 215 Some of the evidence (both documentary and oral) and submissions in these proceedings referred to "Macquarie" or "MatlinPatterson" rather than to specific entities within those groups. We note the respondents' concerns about conflating parties for the purpose of the s 177D analysis, given that the Commissioner ultimately pleaded his case in terms of MBL, Mongoose, MALLC, MPGOP and MPGOPB being the relevant parties. We agree that it is in respect of these parties that the Commissioner must present his case - not merely in relation to imprecisely defined corporate groups or entities. However, having made this acknowledgement, we think it is acceptable to refer generally to "Macquarie" or "MatlinPatterson" for the purpose of the following paragraphs (unless the context otherwise requires or permits). 216 The first point to make in respect of the analysis of this s 177D(b) criterion is that case law on s 177D is very clear - Courts must avoid the "false dichotomy" drawn between a "rational commercial decision" and the "obtaining of a tax benefit". Gummow and Hayne JJ stated in Hart (2004) 217 CLR 216 that (at 243): Pointing to the ''commercial end'' of the scheme reveals the adoption of the same, or at least a substantially similar, false dichotomy. The presence of a discernible commercial end does not determine the answer to the question posed by s 177D. As Hely J rightly said (69): A particular course of action may be both tax driven, and bear the character of a rational commercial decision. The presence of the latter characteristic does not determine in favour of the taxpayer whether, within the meaning of Pt IVA, a person entered into or carried out a 'scheme' for the dominant purpose of enabling a taxpayer to obtain a tax benefit. 217 Recognition of this principle is essential for the purpose of our analysis of this criterion, because this is a case in which both commercial and taxation considerations motivated the entry into the scheme in question. The parties were motivated by their respective desires to sell the Minara shares at a profit. But there is also evidence to suggest that one or more of the parties were cognisant of the way in which the consolidation provisions were proposed to operate, and had tax considerations that may have affected their decision-making. These purposes are not necessarily mutually exclusive. Accordingly, our task is to determine what was the ruling, prevailing or most influential purpose at the relevant time (Spotless Services (1996) 186 CLR 404 at 416). It is appropriate to remind ourselves at this point that the inquiry under s 177D is whether a scheme participant had the dominant purpose of enabling Mongoose to obtain a tax benefit in connection with the scheme. It is not sufficient for these purposes simply to demonstrate that one or more scheme participants had other tax considerations in mind at the relevant time. It is necessary to be vigilant against loose language in this regard lest it inadvertently divert attention from the inquiry as it is prescribed by the statute. 218 By way of background, at the time the scheme was entered into, MBL was a major equity raiser for the resources sector on the ASX. In the two years preceding 2004, MBL had been involved in more than half of the resources sector share issues above $20 million on the ASX. 219 One of the roles of an investment bank is to assist clients to sell down existing parcels of securities where the nature or size of the holding is not conducive to simply being traded on-market. It appears that in early 2004, MBL and/or related Macquarie entities sensed an opportunity to assist MatlinPatterson - a US-based private equity group established with the objective of investing in financially distressed companies, and which, in 2004, had approximately US$2.2 billion in assets under management - to sell down the Minara shares held by Mongoose, which was a MatlinPatterson subsidiary at the time. 220 It appears that MBL was keen to work with MatlinPatterson at this time. MBL had previously declined MatlinPatterson's request to assist with the take-over bid made for Minara in 2003, on the basis that there was insufficient time to become familiar with the proposed transaction. 221 Mr John Prendiville, who at the relevant time was an Executive Director of Macquarie Capital Advisors Limited and head of the Global Natural Resources Team (Metals & Mining, Forestry and Oil & Gas), gave evidence that in his opinion, MatlinPatterson was not "a natural long term holder" of its shareholding in Minara, as MatlinPatterson had sought and failed to acquire a majority shareholding in Minara (as set out in the facts at the commencement of these reasons), and also because, in early 2004, Minara was no longer a distressed stock (the typical focus of MatlinPatterson's investments). In Mr Prendiville's opinion, it was a good time for MatlinPatterson to consider an exit from its shareholding in Minara, as the market was experiencing a high demand for nickel and nickel stocks such as Minara. This "represented an ideal opportunity to exit a large holding in a company with the operational characteristics of Minara". 222 MBL's assistance with this process was required because MatlinPatterson's shareholding in Minara was of a nature or size that meant it was not able to be easily traded on-market. There is no evidence that MBL ever sought to purchase and retain the Minara shares for itself. Rather, the discussions between Macquarie and MatlinPatterson representatives at the relevant time concerned the common objective of sale of the Minara shares to institutional investors for profit. 223 At the relevant time, there were different options by which the sale of the Minara shares could be achieved. These included the scheme as ultimately implemented (which was referred to in evidence as a "bought deal"), the Agency Proposal, and an "underwritten deal". We note that the Commissioner sought to characterise the scheme as ultimately implemented as a "hybrid bought deal". We do not think anything turns on this characterisation, and have elected to describe the scheme (where relevant) as a "bought deal" as frequently referred to in evidence. 224 Macquarie originally suggested an agency deal to MatlinPatterson as the manner in which its holding in Minara could be sold down. As Mr Wayne Kent (an Executive Director of Macquarie Group Limited) explained in his affidavit, an "agency deal" involves the least risk for an investment bank. By way of contrast, both an underwritten deal and a bought deal involve the investment bank (as the underwriter) bearing the risk of being able to sell the underlying securities during the proposed selldown at an acceptable price, and the cost of holding them on its books until such time in the future as they may be sold. Accordingly, under the Agency Proposal, the majority of the risks (and the rewards) connected with the selldown were to be borne by MatlinPatterson, as principal. Macquarie bore some risks in respect of such a transaction, but they principally related to not being paid a fee, or suffering reputational ramifications if the deal was not completed or in the event of market weakness in Minara stock following the selldown. For its role in the Agency Proposal, the proposed fee structure for Macquarie was a base fee of 0.75% of the gross proceeds of the selldown, plus an incentive fee based on the ultimate discount to the market price achieved in the selldown. 225 By mid-February 2004 or thereabouts, it appears that the bought deal and the Agency Proposal were being pursued in tandem as options for the sale of the Minara shares. For example, on 20 February 2004 Allens Arthur Robinson wrote to ASIC on behalf of its client, MBL, stating that "there are two possible structures surrounding the transaction that may be used to facilitate the receipt of the sale proceeds by MP". 226 By late February, however, it seems clear that the bought deal (being the scheme ultimately implemented) was the preferred vehicle for effecting the sale of the Minara shares. 227 It is not entirely clear why the bought deal became the preferred manner in which the sale of the Minara shares was to be achieved. The Commissioner submits that the scheme was a "deviation" from the Agency Proposal for reasons explicable only by the tax consequences (namely, "obtaining a tax benefit of a sale of the Mongoose shares substantially free from Australian tax"). The main planks of the Commissioner's argument in support of this assertion are as follows: (a) the interposition of the sale of MALLC to MBL at a discount to the market value of the underlying Minara shares before the sale by Mongoose of those Minara shares; (b) the contents of Mr Upfold's emails and the Macquarie Board papers, which the Commissioner submitted were evidence that this was the dominant purpose of the scheme; and (c) the taxation advice (both internal and external) sought by MBL in respect of the scheme. 228 However, it is suggested by both the respondents' submissions and some of the evidence that the Agency Proposal did not proceed because it was ultimately not acceptable to MatlinPatterson. The respondents' submissions state in respect of the Agency Proposal that: [u]ltimately MatlinPatterson did not accept that offer: no agency deal was consummated. Instead, concurrently from the first meetings in mid-February the parties negotiated, and eventually agreed on, a different transaction, with different commercial consequences: MBL took the risk on timing and amount of realisations, and MatlinPatterson received immediately a fixed sum for its interest in MALLC and indirectly its interest in the Minara shares. 229 There was some dispute about this issue before this Court. In oral argument on appeal, Counsel for the respondents stated that: At trial we presented initially a case that the agency deal had been abandoned at the outset and my learned friend presented me, on the second day, with a series of documents which made it quite clear that that wasn't so, so we dropped - abandoned that proposition… We don't make a case that it was rejected at any point. What we do say is that it wasn't adopted in the event - although it remained a second alternative almost to the end, what was done from very early on was to prefer the bought deal. 230 Dealing generally with the question of why the bought deal became the preferred manner of effecting the sale of the Minara shares at the relevant time, we note that MatlinPatterson's "desired transaction" was, according to an email sent by Mr Upfold to Mr Mark Ferrier of G&F (and others) on 20 February 2004 at 6:30 am, the bought deal featuring sale of MALLC (and therefore Mongoose) to MBL. 231 However, at this stage, the Agency Proposal was still an option being considered by the parties: the final Proposal Summary circulated on 23 February 2004 for signing by the non-Executive Directors of Macquarie states that "[s]hould the [bought deal] not be possible for regulatory or other reasons, it is proposed that a non-underwritten deal be pursued whereby Macquarie would build a book of demand on an agency basis". 232 An email from Mr Upfold to Mr McWhinnie and others on 24 February 2004 (sent at 2:28 pm) states that "their preferred sale process" (we understand the use of "their" in this context refers to MatlinPatterson) was as follows: 1. Declare all profits out of LLC. Distribution payable T+3 2. Fund would sell/assign debt to MBL. Payable T+3 3. LLC would appoint Australian directors and ensure foreign directors resign (see generally here Tim's step plan for this). Share register moves to Victoria (as per stamp duty advice) 4. MBL sub (who??) buys LLC equity interests from Fund for cost. Payable T+3 5. Tax consolidation. ECM does its thing 6. At T+3 deliver Fund two cheques, one for debt and one for shares. 233 An email sent by Mr McWhinnie to Mr Ferrier and others on 27 February 2004 at 5:26 pm states "following a discussion with Brian Shaw QC this morning we have decided to accept the vendor's offer to make a short term loan to the LLC and then acquire the members['] equity thereof". 234 In his email of 28 February 2004, sent to a number of people (including G&F advisers), Mr Upfold refers to that part of the G&F draft legal advice that acknowledges the argument that MBL would obtain no "tax benefit" under the transaction for Pt IVA purposes (because MBL would not have entered into the bought deal if exposed to a s 457 risk, as the amount of tax payable by MBL in those circumstances would exceed the economic benefits of the transaction), and states: You state only that the tax benefit argument "has merit". We thought it was stronger than that given this is the only transaction on offer and that if we decide not to purchase the LLC, there is no hypothhetical [sic] where any income could be generated… 235 The Updated Proposal Summary dated 1 March 2004 states: Investment Banking Group ("IBG") requests that the approval provided on 23 February 2004 be reconfirmed to take into account a number of developments over the past week in relation to the proposed selldown of MatlinPatterson's shareholding in Minara. The key developments over the past week are set out below. 1. Transaction Structure On 23 February 2004, IBG sought approval for two alternative transactions structures: − a "Fully Underwritten Deal" in which Macquarie would acquire Mongoose Acquisition LLC ("MAL"), the parent company of the company that holds the Minara shares. The acquisition would be for fixed consideration to be negotiated with MatlinPatterson and would be executed by entering into an agreement to acquire MAL ("Acquisition Agreement"); or − an "Agency Deal" in which Macquarie would conduct a bookbuild and sell the Minara shares on behalf of MatlinPatterson on an agency basis. Over the last week, MatlinPatterson has committed to pursuing the Fully Underwritten Deal. The consideration paid to MatlinPatterson will be for the equity of MAL (to be documented through the Acquisition Agreement) and by way of a loan to MAL, with Macquarie then assuming the debt through the acquisition of MAL (the loan will be documented through a Loan Agreement). 236 From the foregoing examples, it appears to us that the preferred transaction changed from the Agency Proposal to the bought deal at the relevant time at least in part as a result of MatlinPatterson's commercial needs and wishes as the client in this process (and MBL's desire to accommodate those needs and wishes). One would expect that this would not be unusual in commercial deals of this nature involving the sorts of negotiations that occurred. This would tend to favour the respondents, in that it suggests that the manner in which the scheme was entered into was a function of the parties' commercial purposes. 237 Nonetheless, turning to the Commissioner's specific arguments on point, it is convenient to deal first with the argument concerning the interposition of the sale of MALLC to MBL at a discount to the market value of the underlying Minara shares before the sale by Mongoose of those Minara shares. As we have already indicated, we are prepared to accept that tax considerations were relevant to the parties in preparing to effect the sale of the Minara shares. But such tax considerations were certainly not the only motivations driving the entry into the bought deal. By way of overview, Mr Kent noted in his affidavit in respect of the bought deal (citing ASIC Regulatory Guide 31) that by selling the whole parcel directly to a broker (here, MECM) rather than trying to dispose of it in smaller parcels on-market, the holder (MatlinPatterson) achieves a firm price. The broker assumes the risk that the share price will fall in the period between acquisition from their client and on-sale, but also secures business and has the opportunity to profit. 238 In respect of the first part of the Commissioner's argument, we are not persuaded that the "interposition" of the sale of MALLC to MBL was a significant factor in the circumstances. The evidence suggests that MatlinPatterson eventually favoured the sale of MALLC as a means of disposing of the Minara shares - but on the evidence before us, we are not prepared to infer the requisite dominant purpose of enabling Mongoose to obtain a tax benefit from that fact. 239 As for the significance of the sale of MALLC to MBL at a discount to the market value of the underlying Minara shares before the sale by Mongoose of those Minara shares, the evidence suggests that this was predominantly a function of the prevailing market conditions, and the risks and difficulties associated with the sale of the Minara shares at the relevant time. 240 These matters were the subject of evidence given by Mr Kent. In his affidavit, Mr Kent explained that a selldown of the size proposed would "likely require a relatively large discount to the prices at which Minara shares had recently traded on-market in order to attract the requisite level of demand (here 15 to 30 cents)". In his opinion, as Chairman of the Underwriting Committee, Executive Director and Head of both the Investment Banking Group and Equity Capital Markets, to entice investors to buy the stock, a discount of 10%-15% to the prevailing share price would be fairly typical and a good outcome for the vendor. The risks to Macquarie of the bought deal identified by Mr Kent (on the basis of due diligence and other inquiries) were as follows: (a) Market and commodity price risk: Minara predominantly produced nickel during 2004. Its share price was therefore highly exposed to movements in the nickel price. Mining stock prices also tend to rise and fall with the A$/US$ exchange rate. Around the time of the transaction, both nickel prices and the A$/US$ exchange rate were very volatile. Accordingly, during the selldown period, Macquarie would be exposed to any significant movement in the price of nickel or the A$/US$ exchange rate, in which case it stood to lose money. (b) Operating performance risk: Minara's sole substantial asset was a 60% interest in the Murrin Murrin mine located in Western Australia, which had "unique plant technology which was operating in an extreme environment". It also had a history of processing plant problems. Any adverse and untimely operations news from the mine could, therefore, immediately adversely affect the price that investors were prepared to pay for Minara shares. (c) Underwriting risk: if Macquarie was to acquire 100% of MALLC at a fixed price with minimal termination events then Macquarie would be exposed to market risk to the extent of its "open" position prior to completing the selldown. Given the demonstrated share price volatility, these risks could be substantial. (d) Institutional commitment risk: there was the risk (albeit acknowledged by Mr Kent as being rare) that the verbal commitments from institutions for 30-50% of the selldown shares would not be honoured, and possibly be incapable of being enforced. More will be said below about the risks associated with unsold shares (notwithstanding the existence of a fixed percentage of verbal commitments). (e) Reputational risk: this type of risk was explained by Mr Kent as being multifactorial, in the sense that damage could be done to Macquarie's reputation if the proposed selldown was not successful, or if there was market weakness in Minara stock following the selldown. Mr Kent noted that "the offering of a few bad issues can cause serious damage to an investment bank's reputation and hence future loss of business". This type of risk was said to be amplified with a bought deal if the price at which Macquarie acquired MALLC was leaked to the market, and where this price was lower than the selldown price, and the shares subsequently traded at lower prices than this selldown price. In those circumstances, Macquarie could attract criticism. 241 In the course of negotiating with MatlinPatterson about the manner in which the sale of the Minara shares was to be implemented, the evidence shows that Macquarie attempted to reduce these risks as much as possible, by - for example - seeking warranties and termination events from MatlinPatterson, and obtaining a certain level of verbal commitments from institutional investors in respect of Minara shares. However, ultimately only minimal warranties were secured in relation to the bought deal. Termination events were not ultimately agreed upon with MatlinPatterson. This was a matter of concern to Mr Kent (and presumably others within Macquarie), given the Minara share price volatility. Further, Mr Kent deposed to the fact that it is rare for an IPO or sell-down of the nature of the bought deal to not have termination events such as those sought by Macquarie. This fact materially increased the transaction's risks for Macquarie. 242 The absence of termination events was acknowledged in the Updated Proposal Summary dated 1 March 2004, where it was conceded that: Although this is somewhat unusual in the context of a conventional equity underwriting (although not in the case of a "block trade"), it is considered acceptable given the level of cornerstone commitments sought and the relatively short risk period (24 - 36 hours) before allocations are announced and confirmed with institutions. 243 However, notwithstanding the commitments sought from investors, we accept that (contrary to the Commissioner's submissions) the risks associated with the bought deal remained. The volatility of the Minara share price at the relevant time was evidenced by the examples provided by Mr Prendiville in his affidavit, in particular, the fact that the 20 February 2004 closing price for the Minara shares was $3.43, whereas the 1 March 2004 closing price was $2.94. This represented a drop in the value of the share price of 14.3% over just six working days. Further, the share price of Minara shares did in fact drop in the days following entry into the scheme. 244 Finally on this point, the evidence of Messrs Kent and Prendiville shows that the risks to Macquarie subsisted until the sale of all of the Minara shares was completed, regardless of the fixed percentage of binding commitments obtained from investors prior to entering into the scheme. Both witnesses gave evidence that the unsold "tail" of shares has the potential to affect the price of those shares that are subject to binding verbal commitments. 245 We are therefore satisfied that the risks associated with the scheme as ultimately implemented readily explain why the sale of MALLC to MBL factored in a discount to the then current market value of the Minara shares. 246 The Commissioner also sought to rely on a number of emails of Mr Upfold and certain internal Macquarie documents in support of his assertion that the manner in which the scheme was entered into was explicable only by the "beneficial taxation consequences which flowed from MALLC (and Mongoose) becoming a member of the MBL tax consolidation group prior to the sale". We understand this to be a submission that these documents support a finding that the manner in which the scheme was entered into assists in establishing the requisite dominant purpose on behalf of the scheme participants, namely, to enable Mongoose to obtain a tax benefit in connection with the scheme. 247 The relevant emails of Mr Upfold are set out at [154(f) and (g)] above. As these emails (and the evidence of Mr Upfold more generally) formed a separate ground of appeal, this matter is dealt with further below. It is sufficient for present purposes to note that we do not accept that the sole or primary purpose of Mr Upfold's correspondence was to address how the sale of the Minara shares could be undertaken so as to achieve a certain tax effect, namely avoidance of Australian capital gains tax on the gain in the hands of Mongoose - rather, we would accept Mr Upfold's evidence that the primary purpose of the email to Ms Walpole was to advise more generally on how Macquarie could buy MALLC. Certainly, both emails consider potential tax consequences of the bought deal. But such a thing is to be expected of someone in Mr Upfold's position who is asked about a proposed transaction (more about the significance of obtaining taxation advice in circumstances such as these is said below). Mr Upfold stated in the course of cross-examination before the primary judge that "I can't help writing about tax. That is what I do". We do not consider that either this email or the subsequent email sent to Mr McWhinnie constitutes conclusive evidence of the existence of the requisite purpose under s 177D. 248 In respect of the internal Macquarie documents, the Commissioner relies on the Memorandum dated 24 February 2004 entitled "Non Executive Director Approvals of 'Minara' and 'Pacific Brands'". This document recorded a telephone conversation between (among others) Mr John Niland and Ms Helen Nugent, both non-Executive Directors of MBL. Mr Niland apparently asked during this conversation whether there had been "any comparable tax-driven deals over the past 2-3 years". The document records that verbal approval for the deal was granted on the basis that (among other things) ASIC approval was received, tax requirements were met, and "[t]hat the proposed tax outcome driving the deal is signed off internally and covers assessment of whether this deal would attract the ire of the ATO given relatively aggressive perceived stance of that office lately". 249 Further, the Commissioner highlighted in his submissions the Extracts from Macquarie Bank Limited Board Risk Committee Papers, which included the following summary under the heading "Purpose": To facilitate the sell-down of an approx 36% stake in Minara held by MatlinPatterson (a US based fund manager). The shares are held via a wholly owned subsidiary, Mongoose Pty Ltd ("Mongoose") whose only assets are Minara shares. MBL has offered a principal sell-down solution to MatlinPatterson which suits the tax planning of the client. 250 In a similar vein to this evidence expressly relied upon by the Commissioner, we note that the Updated Proposal Summary dated 2 March 2004 specifically contemplated the operation of the consolidation provisions under the bought deal: The cost of acquiring the shares, together with the loan outstanding to MAL, will, under the new tax consolidation rules, be the tax basis of acquiring the ultimate assets of the new acquisitions: the Minara shares. Accordingly, the Macquarie Bank tax group will be treated as acquiring the Minara shares at our total cost. When those shares are sold following the bookbuild, Macquarie Bank group will be assessed only on the profit made from the sales (after allowing for our total cost). The original cost to the MAL subsidiary is irrelevant. We do not expect any other tax consequences from this transaction. 251 Further, the draft of the Engagement Letter attached to Gregory Eng's email to Messrs Richard Phillips of Macquarie and Gustiaman Deru of MatlinPatterson of 16 February 2004 (sent at 8:04 pm) contained tracked changes. The main amendment featured therein is the deletion of most of the references to "MatlinPatterson", and replacement with references to "Mongoose". Accordingly, whilst earlier drafts of the Engagement Letter contemplated that MECM would assist MatlinPatterson, the 16 February draft expressly stated that it was Mongoose to whom advice and assistance would be provided. Further, this letter specifically states that MECM's role would include providing "advice with respect to structuring of the Selldown so as to maximise the proceeds received by Mongoose". 252 The Commissioner submits that the evidence relied upon is "powerful contemporaneous, objective evidence that the form which the scheme took was chosen for the dominant purpose of obtaining the tax benefit of a sale of the Mongoose shares substantially free from Australian tax". We are not sure that this evidence does, in fact, constitute "objective" evidence. But it does demonstrate the point made earlier - tax considerations were clearly a purpose of entering into the relevant scheme. The same is true for the references in the Updated Proposal Summary to the expected operation of the consolidation provisions. But the question is whether the requisite dominant purpose existed. 253 We think that the reference in an internal Macquarie document to a "solution" that "suits the tax planning of the client" tends to support the conclusion reached above, namely, that (at least insofar as MBL was concerned) the manner in which the scheme was entered into or carried out was influenced by the demands of its client, MatlinPatterson. This is supported by the reference in the amended Engagement Letter to MECM's proposal to advise Mongoose on the structuring of the sale of the Minara shares so as to maximise profits. We also consider it to be probative that the "Purpose" of the transaction was described in the first sentence of the Updated Proposal Summary as "[t]o facilitate the sell-down of an approx 36% stake in Minara held by MatlinPatterson". This is consistent with the notion that the dominant purpose of the parties was to sell the Minara shares at a profit, in a manner that was satisfactory to all involved. These are all clear commercial purposes. 254 As for the references apparently made by non-Executive Directors to "tax-driven deals" and "the proposed tax outcome driving the deal", these were made only in the context of enquiries and questioning by these non-Executive Directors in the course of the transactions being implemented. They cannot be elevated to establishing, as objective criteria, the relevant purpose the Court is investigating. 255 Another factor relied upon by the Commissioner was the advice obtained by MBL regarding the bought deal - for example, the advice sought by MBL from G&F on the Australian tax risks potentially associated with it completing the transaction. Although the application of Pt IVA was addressed in this advice, the bigger concern appeared to be the potential application of the Controlled Foreign Corporation provisions; in particular, s 457. Mr Upfold stated in an email sent to Messrs Fergus Walshe (one of Mr McWhinnie's assistants) and McWhinnie on 24 February 2004 at 10:05 pm that he: [s]poke to Ferrier about his final advice given where we ended up. He agrees it would be very difficult to find a tax benefit but it would for us most likely be the 457 problem (there really is not anything else for us) but as the Com is unlikely to be happy he will try anything. He agrees nevertheless that it is vendor that is more at risk. If he takes the point he cannot say no risk of Part IVA given the discussions over the last few days and something (a narrow scheme) might be identified. 256 But as we have previously concluded in respect of other factors relied upon by the Commissioner, the mere fact that advice is sought on the taxation implications of a particular transaction, or that risks associated with a transaction are sought to be minimised, is not conclusive evidence of the purpose required under s 177D. Nor is the fact that the parties were alive to the possibility of the application of Pt IVA by the ATO (in fact, this may stray dangerously close to impermissible consideration of the subjective purposes of scheme participants, which is not the focus of the s 177D inquiry). To this end, we note the comments of the High Court in Consolidated Press Holdings (2001) 207 CLR 235 (at 264): it is to be expected that those who participate in a complex, international, commercial transaction will be concerned about its tax implications, and will seek expert advice. Attributing the purpose of a professional adviser to one or more of the corporate parties in the present case is both possible and appropriate. In some cases, the actual parties to a scheme subjectively may not have any purpose, independent of that of a professional adviser, in relation to the scheme or part of the scheme, but that does not defeat the operation of s 177D. If, in the present case, there had been evidence which showed that no director or employee of any member of the group had ever heard of s 79D, that would not conclude the matter in favour of the taxpayer. One of the reasons for making s 177D turn upon the objective matters listed in the section, it may be inferred, was to avoid the consequence that the operation of Pt IVA depends upon the fiscal awareness of a taxpayer. 257 Ultimately, this was a large commercial transaction negotiated between entities from two large corporate groups. The manner in which the scheme was implemented - involving extensive negotiations between the parties, as well as (for MBL, at least) internal consultations with committees and executives whose approval was required for the deal to proceed, numerous draft proposals, approval from the relevant regulators, and advice from taxation advisers and legal advisers - is what one would expect would occur in respect of a deal of this magnitude, entered into by sophisticated corporate parties. 258 For the foregoing reasons, there is no overwhelming evidence in respect of the manner in which the scheme was entered into or carried out that the dominant purpose of any party was enabling Mongoose to obtain a tax benefit. Rather, it seems to us that the dominant purpose indicated by this criterion is the commercial purpose of selling the Minara shares at a profit, in a manner that was to the satisfaction of all parties to the transaction. We find that the MatlinPatterson vendors were willing to accept a fixed price under the bought deal that was lower than would have been the case under the Agency Proposal as consideration for the market and other risks assumed by MBL under the scheme. Similarly, MBL was willing to accept these risks (after doing what it could to minimise their impact) in order to make a significantly larger profit than would otherwise be available, as well as to complete a large-scale resources deal to the satisfaction of a new client (with the future business opportunities that might result from a successful transaction). On the evidence, we do not consider that this is a case like Hart (2004) 217 CLR 216, where entry into the scheme was explicable only by the tax benefit defined by the Commissioner (at 244). 259 This conclusion does not ignore the fact that the scheme as implemented appears to have been selected at least in part on the basis that no tax would be directly payable by MatlinPattison, and that the consolidation provisions were the mechanism by which MBL (as the head company) could sell the Minara shares with no tax unless the sale price exceeded the cost of the shares. Nor does it fall into the trap of the false dichotomy adverted to in Spotless Services (1996) 186 CLR 404. The mere fact that taxation considerations may have, to some extent, driven the deal or played a part in enabling the profit to be made by all parties does not require a finding of the requisite dominant purpose under s 177D. Such considerations clearly existed, but the presence of these factors may be expected in a deal of this magnitude, involving corporate groups from different jurisdictions. To this extent, we do not find the evidence relied upon by the Commissioner (in particular the extracts from the Macquarie Board papers set out above) as probative as he would seek to portray them. 260 Finally, we note the comments of Emmett J in Metal Manufactures Ltd v Commissioner of Taxation [1999] FCA 1712; (1999) 99 ATC 5229 (his Honour's judgment was affirmed by the Full Court of the Federal Court on appeal: see Commissioner of Taxation v Metal Manufactures Ltd (2001) 108 FCR 150) at [260]-[261]: Thus a taxpayer may have a particular objective or requirement that is to be met or pursued by a particular transaction. The shape of such a transaction need not necessarily take one form. It is only to be expected that the adoption of one form over another may be influenced by revenue considerations. However, the fact that a particular course of action may bear the character of a rational commercial decision does not determine the answer to the question of whether a person entered into or carried out a scheme for the dominant purpose of enabling a taxpayer to obtain a tax benefit - Spotless Services Ltd at 416. Nor, in my opinion, does the fact that a taxpayer chooses one of two or more alternative courses of action, being the one that produces a tax benefit, determine the answer to that question. Pt IVA will be satisfied if it was the obtaining of the tax benefit that directed the relevant persons in taking steps they otherwise would not have taken by entering into the scheme - Spotless Services Ltd at 423. However, more is required than that a taxpayer has merely arranged its business or investments in a way that derives a tax benefit. The scheme must be examined in the light of the eight matters set out in s177D(b). Further, that examination must give rise to the objective conclusion that some person entered into or carried out the scheme or part of the scheme for the sole or dominant purpose of enabling the Taxpayer to obtain a tax benefit in connection with the scheme. Such a conclusion will seldom, if ever, be drawn if no more appears than that a change of business or investment has produced a tax benefit for a taxpayer - Spotless Services Ltd at 425. Nor should such a conclusion be drawn if no more appears than that a taxpayer adopted one of two or more alternative courses of action, being the alternative that produces a tax benefit. 261 We would adopt his Honour's comments here. We are not satisfied that the manner in which the scheme was entered into or carried out indicates the existence of the requisite dominant purpose on the part of the scheme participants. This factor favours the respondents.

[27]

S 177D(b)(ii): The Form and Substance of the Scheme 262 The Commissioner submits that the form of the scheme departed from its substance, in that the commercial substance of the scheme was the sale of the Minara shares by Mongoose to third parties for the best obtainable price (which was ultimately $2.90 per share). However, the form of the scheme (the Commissioner submits) involved the interposition of a sale of MALLC to MBL at a sub-market price (equivalent to $2.65 per share) between the original economic owners of the Minara shares (MatlinPatterson) and the ultimate owners (being the third party purchasers), in circumstances where MBL never intended that the Minara shares would form part of the group's assets for any material length of time. In this regard, the Commissioner pressed his characterisation of the scheme as a "hybrid bought deal" (which characterisation we have previously dismissed as being of little consequence). 263 We do not accept the characterisation of the form and substance of the scheme that the Commissioner propounds. We understand this criterion to relate to whether there are material differences between the form and substance of a scheme - one example might be where a comparison of the form and substance of a scheme reveals that despite its form, in reality, it is effectively a sham (see the comments of Emmett J in Metal Manufactures Ltd [1999] FCA 1712 at [289]-[290]). We consider that this criterion requires a direct evaluation of the extent to which the form of the scheme adopted matches the outcome achieved. 264 We do not perceive any remarkable differences between the substance and the form of the scheme in this case. This is not a case like Commissioner of Taxation v Sleight (2004) 136 FCR 211, in which there was a notable difference between the form and substance of the scheme. In that case, Hill J held that the particular shape that the investment took was "clearly fashioned in a way that would maximise the tax deductions", and but for these deductions, "the form the investment might be expected to take would clearly relate more to the substance of what happened" (at 233). 265 Accordingly, we consider that this factor favours the respondents.

[28]

S 177D(b)(iii): The Time at Which the Scheme Was Entered Into and the Length of the Period During Which the Scheme Was Carried Out 266 This factor is not particularly determinative in this case. There is some evidence that the scheme in question was finalised and entered into in a "rush" in early March 2004. For example, in an email he sent to Mr Walshe on 22 February 2004, Mr Upfold alludes to "the rush" being a concern. Objectively, it may be said that the timeframe in which the deal was done was - as evidenced by the foregoing facts - a short one. However, this would primarily seem to be a function of the market sensitivity of the proposed transaction, as suggested by other correspondence sent by Mr Upfold at the relevant time. For example, in his email to Mr Brian Shaw QC of 23 February 2004, Mr Upfold states: As it is especially market sensitive, we are trying to decide today whether to be involved. 267 Further, in an email sent to Messrs James Pettigrew and Ferrier of G&F and Messrs McWhinnie and Walshe on 28 February 2004 at 6:58 pm, Mr Upfold noted: The market sensitive nature of the transaction has made its timing very difficult and your assistance at unusual hours has been extremely helpful. 268 This conclusion is further buttressed by the evidence given by Mr Kent about the volatility of the Minara share price, and the "thin" volumes of that stock being traded at that time. Accordingly, we accept the respondents' submissions that the expedition with which the transaction was effected is explained by the need to preserve confidentiality so that knowledge of an impending transaction would not affect the market, and by the volatility of the underlying Minara stock. 269 The Commissioner submits that the following matters demonstrate that the time at which the scheme was entered into support a finding that the requisite dominant purpose under s 177D existed: (a) First, that MBL acquired the shares in MALLC only after it had received commitments from third parties to purchase a substantial majority of the Minara shares from Mongoose for a price significantly in excess of the price it was paying MatlinPatterson; and (b) Secondly, that MALLC and Mongoose became members of the MBL tax consolidated group immediately prior to the disposal of the Minara shares - yet MBL never intended to retain ownership of the underlying assets of MALLC. 270 We do not agree that such a conclusion can be drawn from these matters. As will be apparent from the foregoing discussion of the manner in which the scheme was entered into, we consider that on the evidence the first matter is predominantly explained by commercial considerations (such as profit-making, and the desire to minimise risks as much as possible). As for the second matter, it is not in contention that MBL never intended to retain ownership of the Minara shares for any significant period of time. However, we have concluded that the precise structure of the scheme - in particular, the entry of MALLC and Mongoose into the MBL consolidated group prior to sale of the Minara shares - was principally dictated by commercial considerations. These include the fact that this was MatlinPatterson's preferred form of transaction, and the fact that all parties sought to maximise their profits in a manner that was satisfactory to all concerned. 271 Accordingly, we find that this factor does not favour a finding that the dominant purpose of the parties was to enable Mongoose to obtain a tax benefit. Rather, this factor favours the respondents.

[29]

S 177D(b)(iv): The Result in Relation to the Operation of This Act That, But For This Part, Would Be Achieved By the Scheme 272 The Commissioner submits that, but for the operation of Pt IVA in this case, the result achieved by the scheme is that the capital gain arising from the sale by Mongoose of the Minara shares is reduced from $318,507,469 (reflecting the increase in the value of the shares over their historical cost to Mongoose) to $41,408,357, being the amount of the capital gain derived by MBL on the sale of the Minara shares as a result of the operation of the consolidation cost setting rules in s 701-60 of the 1997 Act. Those rules had the effect of increasing the cost base of the Minara shares prior to their sale from $161,829,478 (or 97.70 cents per share) to $438,928,590 (or $2.65 per share), notwithstanding that the MBL consolidated group never intended to retain ownership of the Minara shares. 273 We accept that but for the operation of Pt IVA (assuming it applies), technically less tax would be payable in respect of the sale of the shares under the scheme than would be the case if Mongoose had sold the shares whilst not a member of the MBL consolidated group. We also accept that this outcome is mechanically a function of the operation of the consolidated group provisions in Pt 3-90. However, in analysing this criterion, it is important to recall the comments of Gummow and Hayne JJ in Hart (2004) 217 CLR 216 that (at 240): the bare fact that a taxpayer pays less tax, if one form of transaction rather than another is made, does not demonstrate that Pt IVA applies. Simply to show that a taxpayer has obtained a tax benefit does not show that Pt IVA applies. 274 If this criterion simply requires a comparison between the result achieved under the alleged scheme in the absence of Pt IVA, and the result achieved with the application of Pt IVA, one would think that such a comparison will always point to the existence of the requisite dominant purpose - by definition, the comparison will simply identify the tax benefit that the Commissioner seeks to cancel. 275 Clearly all cases must turn on their own facts. But this is not a case like Sleight (2004) 136 FCR 211 where consideration of this criterion revealed that, absent the operation of Pt IVA, the scheme operated to provide the taxpayer with deductions in certain years of income that were "considerably in excess of the funds he contributes with his wife" (at 234). Rather, in this case, but for the operation of Pt IVA, the tax consequences of the scheme were expressly provided for by the 1997 Act (by virtue of the operation of the consolidated group provisions). In light of the comments of Gummow and Hayne JJ in Hart (2004) 217 CLR 216, we do not think that (without more) the fact that more tax might be payable if Pt IVA applied automatically attracts the inference that the scheme participants entered into or carried out the scheme for the dominant purpose of enabling Mongoose to obtain a tax benefit. Accordingly, we find that this criterion is neutral at best.

[30]

S 177D(b)(v): Any Change in the Financial Position of the Relevant Taxpayer That Has Resulted, Will Result, or May Reasonably Be Expected to Result, From the Scheme 276 In respect of this criterion (and on the assumption that Mongoose is the relevant taxpayer for these purposes), the Commissioner submits that: as a result of the scheme Mongoose sold its Minara shares for a consideration of $480,336,947 or $2.90 per share and in so doing made an economic profit of $318,507,469. However, as a result of the scheme, the capital gain assessed with respect to Mongoose's disposal of the Minara shares was only $41,408,357. Thus, the change in the financial position of Mongoose as a result of the scheme is that $277,099,112 of Mongoose's economic profit from the sale of the Minara shares was immunised from tax. This factor indicates that the scheme was entered into or carried out for the dominant purpose of obtaining the tax benefit. 277 The respondents acknowledge that absent the scheme, Mongoose might not have sold the shares, or might only have done so whilst owned by MatlinPatterson, using MBL as agent for the sale. In the latter circumstances, the respondents submit, Mongoose might not have been able to sell the shares for the same proceeds, because in its capacity as agent for a bookbuild, MBL would not have been able to deliver the same assurance to its clients as it could as principal, and so may not have achieved the same price. Nonetheless, the respondents acknowledge that, on the assumption that Mongoose would have sold the shares whilst owned by the MatlinPatterson group, it would have incurred a larger liability to tax. They further acknowledge that when this is considered in isolation from all else, this criterion may point to the existence of a relevant tax purpose - but that when considered in context, the fiscal outcome is a consequence, not a purpose, of the transaction. 278 In respect of this criterion, we accept the Commissioner's arguments. When the position of the relevant taxpayer (Mongoose) is considered, this criterion suggests that the dominant purpose of the scheme participants in entering into the scheme was to enable Mongoose to obtain a tax benefit, as the only financial advantage Mongoose obtained depended upon the operation of the scheme.

[31]

S 177D(b)(vi): Any Change in the Financial Position of Any Person Who Has, or Has Had, Any Connection (Whether of a Business, Family or Other Nature) With the Relevant Taxpayer, Being a Change That Has Resulted, Will Result or May Reasonably Be Expected to Result, From the Scheme 279 The Commissioner's submissions in this regard focus on "MatlinPatterson" and MBL. Putting aside for one moment arguments that "MatlinPatterson" is not an entity in and of itself, the Commissioner submits that, for the following reasons, this criterion points towards the scheme being entered into or carried out for the dominant purpose of enabling Mongoose to obtain a tax benefit: (a) MatlinPatterson: under the scheme MatlinPatterson received $438,928,589.50 for the shares in MALLC without Australian income tax consequences. Under the counterfactual, Mongoose would have sold the Minara shares for $480,336,947, but $318,507,469 would have been taken into account as a capital gain in determining Mongoose's assessable income thereby giving rise to an Australian tax liability. Thus, the after tax return to MatlinPatterson would have been lower than the amount it received under the scheme; and (b) MBL: under the scheme MBL purchased MALLC for $438,928,590 and its subsidiary Mongoose sold the Minara shares for $480,336,947, resulting in a profit to MBL of $41,408,357. Under the counterfactual, MBL (by its subsidiary MECM) would have sold the Minara shares as agent for a commission of up to 1% of the gross proceeds… resulting in a maximum profit of around $4.8 million. In the result, by reason of the scheme, MBL increased its profit from the sale of the Minara shares by just under a factor of 9. The proper explanation of this differential in profit earned by MBL is that candidly put in the Board minutes of MBL referred to above, namely MBL was being paid for the "solution" it offered which "suited the tax planning of the client", viz., MatlinPatterson. 280 It is true that changes in the financial positions of both MatlinPatterson and MBL have resulted from the scheme. After all, the scheme was the means chosen by the parties by which the sale of the Minara shares was to be effected, and profits were to be made. But we do not think that it is sufficient for the purpose of this criterion for the Commissioner to - without more - simply show a financial change in the position of a relevant party (for example, through paying less tax, or being able to retain more profit). 281 This is not a case in which it is claimed (for example) that any of the respondents manipulated their financial position, or that the transaction in question is a sham (see eg Federal Commissioner of Taxation v Ashwick (QLD) No 127 Pty Ltd (2011) 192 FCR 325). Further, the increased profit retained by both the vendors and MBL under the scheme was mechanically a function of the operation of the consolidated group provisions. The steps taken by the MBL consolidated group in selling the shares and returning only that amount that represented the difference between the proceeds of sale of the Minara shares and MBL's cost of bringing Mongoose into the MBL consolidated group was something that was provided for by the law at the time of the scheme (a matter considered to be relevant to this inquiry in Noza Holdings [2011] FCA 46 at [438]). The same can be said in respect of the fact that MatlinPatterson was not required to pay Australian tax on this transaction. As for the "proper explanation" of the difference in profit earned by MBL, we have already held that this was a function of the risk that MBL was willing to take on under the scheme. 282 Accordingly, we consider that at best for the Commissioner, this criterion is neutral. At worst, the changes in the respective financial positions of MatlinPatterson and MBL resulting from the scheme point towards an underlying commercial purpose.

[35]

MPGOPB and MPGOP: 292 As is correctly submitted by the respondents, there is no evidence of the actual purpose of the vendors, as attempts to obtain evidence from MatlinPatterson executives were unsuccessful. But that is largely immaterial - as already noted, the question in s 177D is to be answered without regard to actual or subjective purpose and only by recourse to the eight identified matters (Hart (2004) 217 CLR 216 at 243). 293 We have already observed the phenomenon in both the evidence and submissions of occasionally referring to "MatlinPatterson" (which is not in and of itself an entity for these purposes) rather than to MPGOPB or MPGOP. As we have already said, we do not think much turns on this - we are content to impute the general "MatlinPatterson" purpose to all members of that corporate group, as appropriate. However, we reject any suggestion by the Commissioner that, at this stage of the proceedings, he is permitted to condense the entities in respect of whom the s 177D inquiry is to be carried out down to just MBL and "MatlinPatterson". Having defined the relevant scheme participants for the purpose of his case as being MBL, MPGOP, MPGOPB, MALLC and Mongoose, he cannot now resile from that. 294 We consider that the conclusion to be drawn from consideration of all of the s 177D(b) matters is that the vendors ultimately had a choice of two commercial transactions with different financial consequences. Effectively they chose to take an immediate and certain payment of full proceeds of a sale (albeit at a lower price than might have been the case) over the uncertain prospect of a float of the Mongoose holding in a volatile market. 295 To some extent, tax considerations were clearly relevant to the vendors' decision to proceed with the bought deal. But there is nothing in the evidence (or that arises from our consideration of the eight factors) that indicates that the purpose of enabling Mongoose to obtain a tax benefit was the dominant purpose. The distinction between a purpose, and the dominant purpose, is critical. On the basis of the evidence before us, it is clear that MatlinPatterson (including MPGOPB and MPGOP) wanted to make a profit on the sale of the Minara shares. This was their dominant purpose in entering into or carrying out the scheme or parts thereof. The fact that obtaining profit under the scheme also meant that Mongoose would obtain a tax benefit may have been a consideration, but was by no means the dominant one. Although the "adoption of one particular form of over another may be influenced by revenue considerations and this … is only to be expected" (Spotless Services (1996) 186 CLR 404 at 416), Pt IVA is not attracted to the "ordinary case of a taxpayer switching an investment from one which had no tax advantages to one from which it would or might obtain tax benefits" (Spotless Services (1996) 186 CLR 404 at 425 per McHugh J). In Hart (2004) 217 CLR 216 at 222, Gleeson CJ and McHugh J gave the example of a taxpayer who: took out two separate loans, and the terms of the loan for the investment property were different from the terms of the loan for the residential property in that they provided for a higher ratio of debt to equity, and for payments of interest only, rather than interest and principal, during a lengthy term… 296 Their Honours concluded that "ordinarily that would give rise to no adverse conclusion under s 177D", as: [i]t may mean no more than that, in considering the terms of the borrowing for investment purposes, the taxpayer took into account the deductibility of the interest in negotiating the terms of the loan. How could a borrower, acting rationally, fail to take it into account? [Emphasis added] 297 Accordingly, the Commissioner has not demonstrated that either MPGOPB or MPGOP had the dominant purpose of enabling Mongoose to obtain a tax benefit. Rather, their dominant purpose was purely commercial - to sell the Minara shares in a manner that was satisfactory to them (having regard to matters including tax considerations), and to make a profit.

[37]

MBL: 300 We find that MBL had a clear dominant purpose of making a profit from its dealings with MatlinPatterson, in respect of which the primary objective was sale of the Minara shares. As previously set out, MBL initially proposed an agency arrangement by which to sell the Minara shares on behalf of MatlinPatterson, and under which MBL was to receive fees and take little financial risk. Eventually the preferred transaction (the change to which, as we have previously concluded, appears on the evidence to have occurred at least in part at the behest of the vendors) became the scheme as implemented, being a riskier, but potentially more profitable, venture. 301 We do not think that enabling Mongoose to obtain a tax benefit was the dominant purpose of MBL entering into the scheme. On balance, our analysis of the s 177D factors as they apply in this case does not support that proposition. Rather, MBL's dominant purpose was to make a profit by effecting a sale of the Minara shares in a manner that met its client's objectives. The real risks associated with entry into the scheme meant that there was potential for MBL to earn significantly more profit on the sale of the Minara shares than would have been the case under the Agency Proposal (but there was also the potential for MBL to incur a loss, given factors such as the share price volatility, and the fact that MatlinPatterson was unwilling to grant any termination events or give more than minimal warranties). The fact that the operation of the consolidation provisions was the mechanism by which this profit could be made is not enough in and of itself to give rise to a finding of dominant purpose under s 177D. Although the taxation consequences produced by the operation of the consolidation provisions were doubtless a consideration for MBL when determining whether to enter into the scheme (as evidenced by the advice obtained on the subject), neither these consequences nor the possibility of Mongoose getting a tax benefit were the ruling, prevailing or most influential purpose of MBL in deciding to do so. As Gummow and Hayne JJ noted in Hart (2004) 217 CLR 216, tax laws affect the shape of nearly every business transaction (citing Frank Lyon Co v United States (1978) 453 US 561 at 580; at 239). Further, the bare fact that a taxpayer pays less tax if one form of transaction is pursued rather than another does not demonstrate that Pt IVA applies (at 240). This was not a case in which entry into the scheme was explicable only by the relevant taxation consequences (Hart (2004) 217 CLR 216 at 244). 302 For the foregoing reasons, we do not consider that the Commissioner could succeed in his case against the respondents under s 177D, even if it were assumed that Mongoose was the relevant taxpayer for the purpose of the Pt IVA analysis.

[39]

Grounds of Appeal Relating to the Primary Judge's Treatment of Evidence 304 Two of the Commissioner's grounds of appeal concerned the primary judge's treatment of the evidence before him at trial. These grounds alleged that the primary judge had erred in the following ways: (a) by accepting the evidence of Mr Upfold set out at [40] of the judgment in that the primary judge misused his advantage, the evidence was glaringly improbable and was contrary to compelling inferences; and (b) in respect of the failure of MBL and Mongoose to call Mr Phillips, Mr Curry and Ms Walpole, by failing to infer that the evidence of those persons would not have assisted MBL and Mongoose; by failing to conclude that the failure of MBL and Mongoose to call those persons cast a "great slur" over the whole of MBL and Mongoose's case; and by failing to conclude that the Court should therefore more readily draw inferences in favour of the Commissioner's case. 305 In respect of this first ground of appeal, [40] of the primary judge's reasons for judgment (and the surrounding paragraphs required for context) is as follows: [38] The Commissioner's grievance - or the "taxation Alsatia" as he called it in his written submissions - is that the parties availed themselves of the Consolidated Groups provisions of Pt 3-90, in particular, the express provision of the legislation that where a subsidiary member joins a consolidated group, and subsequently disposes of an asset, the subsidiary member is not taxed on the difference between proceeds and cost (the profit actually or "in fact" made by the subsidiary), because of the operation of s 701-1, while the head company is taxed not on the profit "in fact" made by the subsidiary, but on the economic profit made by the head company (the cost to the head company of the acquisition of the subsidiary is pushed down to become the tax cost setting amount of the asset disposed of by the subsidiary (Div 705)), to avoid tax on a substantial portion of the gain on a once and for all transaction - the sale of the Minara shares - and not for purposes consistent with the objects of Pt 3-90 as set out in s 700-10. [39] The Commissioner's senior counsel articulated it in the following way: MBL devised a solution to realise a substantial part of the unrealised gain on the Minara shares without MatlinPatterson paying tax on that part of the gain and as a quid pro quo, MatlinPatterson ceded the balance of the gain to MBL. In his words: "[T]hey split [the proceeds] on a commercial basis. MatlinPatterson might have made a whole lot more profit on the deal [than MBL], but then they owned the [Minara] shares before this started, and so their bargaining position might have been thought to be a whole lot stronger". [40] This scenario was never put to any witness called on behalf of MBL; certainly not in those terms. Certain questions were put to Mr RN Upfold, an Executive Director within Macquarie Group Ltd, in cross-examination concerning an email he sent to Ms Jess Walpole at MBL on Tuesday, 17 February 2004. The transcript reads (at 188): Now, going through the material in the email, it starts: There are a number of ways to achieve this and they exist along spectrums of difficulty and time involved. The first option, which you describe as easy and quick, is for MBL or SPV - is that special purpose vehicle? - Yes. Continuing: Acquires Mongoose LLC. Change residence of LLC by appointing Australian directors as head company in a consolidated group. We would be able to sell shares with no tax payable unless sale price in excess of cost, and no Australian tax on this for fund. Who was "fund"? - That was my impression at the time for the vendor, MatlinPatterson. So you are referring there to the MatlinPatterson entity, or the vendor. Now, you were addressing there, were you not, the tax consequences of different possible structures for the Australian tax position of MatlinPatterson entities? - I was addressing how Macquarie might be involved in a transaction involving various entities, yes. That was what I was advising on. But this - these paragraphs, paragraph 2 deals with the tax consequences for a MatlinPatterson entity; is that correct? - Yes, it would, insofar as Macquarie could be involved in the transaction. There would be consequences for the other side of the transaction. And ensuring that no Australian tax was paid on this for the MatlinPatterson Fund was a matter at the forefront of your consideration in this email? - Not especially. I was more concerned with how Macquarie could be involved in the transaction. How in a tax sense Macquarie could be involved in it? - Only tax, yes. Because given your role and your expertise, the question that you understood you were being asked to advise on didn't simply concern how Macquarie Bank could buy Mongoose: it was how Macquarie could buy Mongoose with certain tax consequences; is that correct? - No, this question was only about buying an LLC. Jess Walpole was at the meeting when that was discussed, and she was puzzled as to what on earth Macquarie would do in buying an LLC if that was available. That is what this was responding to. And it was responding to the tax consequences of buying the LLC? - That is what I put in the email. She didn't ask me that question. But you understood, in light of your role at Macquarie and your expertise, you understood that she was asking you for assistance in relation to the tax consequences, rather than corporate law or some other consequence? - For Macquarie Bank, yes. And you included in your consideration tax consequences for the MatlinPatterson Fund, at least in 1(ii)? - Yes, I did. And you understood that to be included in the questions on which you were asked for assistance? - No, I wasn't. She only asked me about how Macquarie could buy an LLC. She was puzzled at the meeting when it arose. Now, the issues in (i) about change of residence by appointing Australian directors, that is significant only for tax reasons, is it not? - Yes and now. It is significant for tax reasons, but it is part of Macquarie's corporate policy. If we buy a company, you have to appoint directors, and there is a policy on that. So, yes we would, once we acquired a company, appoint directors. And appoint Australian directors? - We would in this case, certainly. That is a Macquarie policy. And you would certainly do so in this case because appointing Australian directors would have consequences for the entity's ability to enter the Macquarie Consolidated Group? - Well, that doesn't - I was certainly comfortable that that would be the effect, and that was an effect that I was very happy with. But just to be clear, that is a Macquarie policy. I can't do anything about that. But Ms Walpole wasn't coming to you to ask for your assistance in respect of Macquarie's policy as to residence of directors, was she? She was asking for assistance about tax? - Correct. Well, she was asking me for a comment about the LLC. I can't help writing about tax. That is what I do. In terms of acquisition of the LLC, there were potentially two groups of issues, were there not? One group of corporate law issues, and one group of tax issues? - Yes, I think that is right. As far as I was aware, there were corporate and tax issues. And you understood that your assistance had been sought in respect of the tax issues rather than the corporate issues? - I am not sure anyone asked me for my assistance in acquiring an LLC at this stage, but that is what I would be advising on. Now, when we come further down to the demerger question, you see the steps there. See (iv)P/L. Was that a reference to the Australian resident company, Mongoose Pty Ltd? - Yes, it is. And in (v) you are advising about demergers under CGT relief rules? - I am commenting on them, yes. And you're commenting on capital gains tax for Mongoose Proprietary Limited - ? - Yes. - and capital gains tax for MatlinPatterson fund? - Capital gains and revenue profit, it says, but yes. Well, capital gains - you make an assumption in parentheses that there wasn't going to be a revenue profit? - Yes. That was a - at that stage I had no facts really. Well, you had enough facts to give this outline of - ? - Certainly had a structure diagram, yes. Yes. And you also there refer to no dividend withholding tax? - Yes. Right. Who would that be significant for? Would that be significant for Macquarie or fund? - That would be significant for Mongoose Pty Limited. The reference - the discussion under 2 is focussed primarily upon capital gains tax, but also on dividend withholding tax. Agree with that? - Yes, it is. The Australian tax you refer to in 1(ii) would include capital gains tax? - Yes, it would. And that, indeed, would be a primary issue for consideration in relation to a transaction of this kind? - For MatlinPatterson, yes, it would. The capital gains tax implications were at the forefront of consideration in both options you put forward. Is that correct? - Yes. What you were putting forward here was a solution to capital gains tax issues which might suit the tax planning needs of the MatlinPatterson entities? - I'm not sure I was presenting a solution. I was presenting an explanation of what role Macquarie might have in acquiring the LLC, but yes. Both would have tax impacts for MatlinPatterson, the vendor. You were putting forward a possible solution? - Possible involvements of how we would buy the - the question that Jess raised was, what role would Macquarie have in buying an LLC? That's what I was trying to say, because this is a spectrum, and there are elements of risk, funding, management that vary between these two ends of the spectrum and - and a number of situations that are possibly in between. I had no idea what role Macquarie would play other than in answering a question that she asked, what role would we have in buying an LLC? What could we do? But she didn't need to consult you if buying the LLC where the only objective; you were consulted with a view to obtaining a very specific tax outcome - that of no CGT on the disposition of the Minara shares held by Mongoose? - That's not true. Well, that's what these two matters are directed to, is it not? - They mention those, yes, but she asked me - she was puzzled as to what role Macquarie could have in buying an LLC. I don't think she had experience in it, and I was telling her we could have all sorts of roles, depending on how we were going to fund it, if we were funding it, how much risk we were going to take. So the range. That's all it's doing. A spectrum, and yes, it's dealing with tax because that's what I do. [41] After a short consultation with his junior counsel, the Commissioner's senior counsel then put to Mr Upfold: Could I suggest that the answers that you've given about the questions that were put to you are not frank?' Mr Upfold effectively rejected this suggestion before objection was taken to the question. The questions to which reference was being made in that question were not identified, but even if it is a reference to some or all questions in the extract from the transcript in [40] above, I do not agree that Mr Upfold's answers were "not frank". My review of the transcript confirms my view at the time that Mr Upfold answered all questions put to him in a direct and forthright manner and to the best of his recollection, conceding as he did, that his tax expertise was the catalyst for much of what he put in the email because: "That is what I do". It was subsequently submitted by the Commissioner that I should not accept Mr Upfold's evidence. I make it quite clear, that I accept Mr Upfold's evidence without reservation. On the other hand, insofar as his evidence is seen as going to the s 177D(b) issue (I am unable to perceive as to what else it might go to), it needs to be said at the outset that the s 177D(b) issue, if it arises in this case and on my view of other issues it does not, is to be determined objectively, by reference to the eight matters referred to therein, and not by reference to the personal or subjective purposes of those involved in the process, be they advisers or participants. The contemporaneous documents in evidence and their explication by reference to the events that occurred are more likely to contribute to an informed conclusion on the s 177D(b) issue than the oral evidence, over seven years later, of a witness involved in those events; particularly if the latter is inconsistent with the former. 306 The email referred to in this cross-examination has been substantially extracted in our reasons for judgment at [202] above. 307 The Commissioner submits that the compelling inference to be drawn from this email is that it was written by Mr Upfold in response to a question from Ms Walpole as to how MBL could purchase MALLC in a manner that achieved specific tax consequences, namely, the disposal of the Minara shares without attracting Australian capital gains tax. The Commissioner further submits that Mr Upfold denied this meaning in the course of cross-examination, and that the primary judge's credibility finding in relation to Mr Upfold should be given no weight as it was based on an assessment of Mr Upfold's demeanour whilst giving evidence with no assessment made "against the inferences arising from the contemporaneous documents and the logic of events" (citing Fox v Percy (2000) 214 CLR 118 at 129). Further, the Commissioner submits that "the primary judge's prior professional and social relationship with Mr Upfold makes his assessment of Mr Upfold's demeanour an unsound basis for the resolution of a disputed issue of fact" (citing CSR Ltd v Della Maddalena [2006] HCA 1; (2006) 224 ALR 1 at [107]-[108], [162]-[163]). Instead, the "proper conclusion" (as submitted by the Commissioner) is that Mr Upfold's email to Ms Walpole of 17 February 2004 was "a powerful indicator" that the scheme as ultimately implemented emerged from tax advice, and was directed to achieving the tax objectives of MatlinPatterson, thereby improving the yield to MBL. The Commissioner further submits that this is relevant to s 177D(b)(i), and is a "powerful indicator of dominant tax purpose". 308 We do not accept the Commissioner's submissions in this regard. We do not understand Mr Upfold to have been denying that the email in question dealt with tax consequences of the bought deal - rather, he was simply not willing to concede that the principal or sole purpose of his email was to specifically provide a "solution" as to how a certain tax outcome could be achieved, namely, sale of the Minara shares with no CGT implications for MatlinPatterson (and involving an acquisition of MALLC by MBL). We do not find that Mr Upfold's evidence in this regard was "glaringly improbable" when assessed against the contemporaneous documents. We see no reason to reject his evidence on the issue and overturn the primary judge's decision on point. The Commissioner's assertions that Mr Upfold has "considerable expertise in tax law" and was at the time "an internal MBL tax adviser" do not alter this conclusion. We note that Mr Upfold states in his affidavit that in his role as Executive Director of the Investment Banking Group, he "did not provide formal advice to Macquarie Bank or its clients (this was the role of external advisers from legal or accounting firms)". It will be apparent from the foregoing s 177D analysis that we accept that tax considerations played some part in determining the shape of the transaction, but did not comprise the dominant purpose of entry into the scheme by its participants. Mr Upfold's evidence as extracted at [40] of the primary judge's reasons for judgment is entirely consistent with this conclusion. 309 As to the suggestion made in submissions about the trial judge's relationship with Mr Upfold, this is a matter that would only be relevant to an allegation of bias, and no such allegation has been made before this Court. 310 Ultimately, the weight to be accorded to the evidence of witnesses is a matter for the primary judge, and we are not persuaded that the exercise of his Honour's discretion in this regard miscarried so as to require this Court to intervene. Accordingly, we would dismiss this ground of appeal. 311 We would similarly dispose of the grounds of appeal regarding the alleged failure of MBL and Mongoose to call Messrs Phillips and Curry and Ms Walpole to give evidence, and the findings that the Commissioner submits should have been drawn therefrom by the primary judge. The principal submission put by the Commissioner in this regard is that an adverse inference should be drawn in respect of the failure to call these witnesses in accordance with Jones v Dunkel (1959) 101 CLR 298 (although we note that it appears from the Commissioner's submissions that this argument is ultimately pressed only in respect of Ms Walpole and Mr Phillips). 312 Putting aside arguments about the precise role played by Ms Walpole and Mr Phillips in the implementation of the scheme, it is not correct to say that no adequate explanation was given for the failure to call these witnesses. The two affidavits of Mr Nicholas Mavrakis (as one of the solicitors for MBL) set out the relevant facts in this regard. 313 In respect of Ms Walpole (who was still working at Macquarie at the relevant time), an approach was made in July 2010 to ascertain whether she was prepared to give evidence. It appears that she was not prepared to do so voluntarily at that time, for reasons including health concerns and "bad experiences" with previous litigation. After the issue was revisited in May 2011, Ms Walpole's doctor provided a letter recommending that she not be involved in or give evidence in the proceedings. 314 In respect of Mr Phillips (who by then had moved on to a corporate advisory firm), contact was made in or about May 2010 regarding the proceedings. Mr Phillips expressed the view that he was reluctant to give evidence voluntarily, but would consult with others within his firm about the matter. In late May 2010, Mr Phillips informed Mr Mavrakis that from a business perspective, the partners consulted did not want him involved in the matter and would not support his involvement on a voluntary basis. Mr Phillips indicated that he would review his position if compelled to give evidence. 315 In respect of both Ms Walpole and Mr Phillips, much was sought to be made by the Commissioner of the fact that the correspondence from MBL's solicitors effectively sought to confirm their disinclination to give evidence in the proceedings (rather than asking the question of willingness and availability in a manner that did not presuppose the response). It was also submitted that the Commissioner suffered prejudice as a result of only learning in June 2011 that, on the asserted basis of unavailability, the respondents did not seek to call either Ms Walpole or Mr Phillips to give evidence, such that there was then insufficient time remaining to serve these witnesses with subpoenas. Specifically in relation to Ms Walpole, the Commissioner submits that the letter from her doctor "rises only as high as a recommendation", and does not suggest any unfitness to give evidence. In relation to Mr Phillips, the Commissioner submits that he was a witness plainly "in Macquarie's camp" at the relevant time. 316 Counsel for the Commissioner acknowledged that no attempts were made either to communicate with Mr Phillips regarding his evidence, or to subpoena him. If this witness, or Ms Walpole, were important witnesses for the Commissioner, they could have been called upon to give evidence. If the Commissioner wanted more time to serve subpoenas, this could have been applied for. No such application to the Court was made, and no reason was given by the Commissioner for not making such an application. 317 Efforts were made by MBL to get Ms Walpole and Mr Phillips to cooperate in giving evidence and they refused to do so. These circumstances do not enliven the Jones v Dunkel (1959) 101 CLR 298 principles. Accordingly, we do not think that the primary judge was required to draw the sorts of inferences from the absence of these witnesses at trial as are contended for by the Commissioner. We would dismiss these grounds of appeal.

Parties

Applicant/Plaintiff:

Commissioner of Taxation

Respondent/Defendant:

Macquarie Bank Limited

Legislation Cited (9)

Pt IVA and Income Tax Assessment Act 1997(Cth)

Income Tax Assessment Act 1986(Cth)ss 4, 5

Income Tax Assessment Act 1936(Cth)s 177F, ss 6, 73BAC, 160ZP, 160ZZO, 177A, 177B, 177C, 177D, 177F, 177G

Acts Interpretation Act 1901(Cth)s 15AA

Income Tax Assessment Act 1997(Cth)ss 4-15, 102-5, 126-B, 700-1, 700-10, 701-1, 701-60, 701-85, 705-5, 705-10, 705-15, 995-1

Taxation Administration Act 1953(Cth)

Income Tax Act 1986(Cth)

Interpretation of Legislation Act 1984(Vic)

Corporations Act 2001(Cth)

Cases Cited (47)

168 CLR 614 Federal Commissioner of Taxation v Futuris Corporation Limited (2008) 237 CLR 416 Federal Commissioner of Taxation v Lenzo (2008) 167 FCR 255 Federal Commissioner of Taxation v Mochkin (2003) 127 FCR 185 Federal Commissioner of Taxation v Trail Bros Steel & Plastics Pty Ltd (2010) 186 FCR 410 Fox v Percy (2000) 214 CLR 118 Futuris Corporation Ltd v Federal Commissioner of Taxation (2007) 159 FCR Gauci v Federal Commissioner of Taxation (1975) 135 CLR 81 Jones v Dunkel (1959) 101 CLR 298 McAndrew v Federal Commissioner of Taxation (1956) 98 CLR 263 McCormack v Federal Commissioner of Taxation (1979) 143 CLR 284 McCutcheon v Federal Commissioner of Taxation (2008) 168 FCR 149 Metal Manufactures Ltd v Commissioner of Taxation [1999] FCA 1712; (1999) 99 ATC 5229 Metwally v University of New South Wales (1985) 60 ALR 68 Mills v Commissioner of Taxation (2012) 293 ALR 43 Mills v Meeking (1990) 169 CLR 214 National Rugby League Investments Pty Limited v Singtel Optus Pty Ltd (2012) 201 FCR 147 Noza Holdings Pty Ltd v Commissioner of Taxation [2011] FCA 46 Peabody v Commissioner of Taxation (1993) 40 FCR 531 Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 RCI Pty Ltd v Commissioner of Taxation [2011] FCAFC 104 Rompibon v Commissioner of Taxation (1949) 78 CLR 47 Dates of hearing: 9 and 10 May 2012 Date of last submissions: 26 October 2012 Place: Sydney Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 318 Counsel for the Appellant: Mr NJ Williams SC with Mr MJ O'Meara Solicitor for the Appellant: Australian Government Solicitor Counsel for the Respondents: Mr AH Slater QC with Mr JO Hmelnitsky Solicitor for the Respondents Clayton Utz

[1985] HCA 28

Cited By (6)

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PepsiCo, Inc v Commissioner of Taxation