Commissioner of Taxation v Mochkin

proceedings at first instance 4 The proceedings before the primary Judge were by way of appeal from objection decisions made by the Commissioner on 10 August 1999. The Commissioner disallowed the Taxpayer's objections to amended assessments that had been issued in respect of each of the six relevant years of income. The amended assessments adjusted the Taxpayer's taxable income as follows: Year ended 30 June Taxable Income as assessed Add Brokerage Income Add Finder's Fee Deduct Brokerage Outgoings Reduction in Distribution from No 1 Trust Reduction in Distribution from No 2 Trust Amended Taxable Income $ $ $ $ $ $ $ 1992 15,053 185,440 564,270 74,272 15,000 675,491 1993 78,426 267,978 97,125 77,775 171,504 1994 78,872 2,752,726 196,735 60,988 2,574,874 1995 96,863 2,251,283 249,705 53,477 2,044,964 1996 199,348 1,773,189 594,243 136,788 1,241,506 1997 201,843 5,281,355 1,768,467 1,100,000 2,614,731

5 The primary Judge held (Mochkin v Federal Commissioner of Taxation [2002] ATC 4465) that: (i) the commissions paid to Ledger were derived by it rather than the Taxpayer and thus did not form part of the Taxpayer's assessable income; (ii) the determinations made by the Commissioner pursuant to Part IVA of the ITAA could not support the amended assessments issued to the Taxpayer, since he had discharged the onus of proving that he had not entered into or carried out a scheme for the dominant purpose of obtaining a tax benefit as alleged by the Commissioner; (iii) the determination made by the Commissioner in respect of the finder's fee paid to Daccar supported the amended assessment for the 1992 taxation year, since the only purpose which could be ascribed to the Taxpayer in directing payment of the fee to Daccar was to exclude the amount from his assessable income and thus obtain a tax benefit; and (iv) the Taxpayer's attack on the formal validity of the determinations failed. The primary Judge addressed other issues that had been debated before him. However, since none of these is subject to challenge we need not refer further to them. 6 In the result, his Honour allowed the Taxpayer's appeals, other than in respect of the 1992 year, set aside each of the objection decisions and directed the Commissioner to issue an amended assessment in respect of each income year. So far as the 1992 income year was concerned, the primary Judge allowed the appeal in part, set aside the objection decision, except insofar as it related to the inclusion of the sum of $564,270 and the deduction of $15,000, and directed the Commissioner to issue an amended assessment. 7 The Commissioner has appealed from that part of the judgment which set aside the objection decisions and directed him to issue fresh amended assessments. The Taxpayer has cross-appealed against the judgment insofar as it held that Part IVA of the ITAA applied to include in the Taxpayer's assessable income the sum of $564,270 for the 1992 income year. The Taxpayer also filed a notice of contention claiming that the primary Judge erred in rejecting the formal challenges to the validity of the determinations purportedly made pursuant to Part IVA of the ITAA.

the legislation 8 Section 25(1) of the ITAA provides that, subject to presently irrelevant exceptions, the assessable income of a taxpayer shall include, where the taxpayer is a resident, "the gross income derived directly or indirectly from all sources whether in or out of Australia". Section 19 provides that income shall be deemed to have been derived by a person although it is not actually paid over to him but is reinvested or otherwise dealt with on his behalf as he directs. 9 Part IVA of the ITAA is headed "SCHEMES TO REDUCE INCOME TAX". Section 177D provides that Part IVA applies to any scheme, whether entered into or carried out in 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)." 10 Section 177A(1) defines "scheme", in the absence of a contrary intention, to mean "(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." Section 177A(3) provides that a reference in the definition of "scheme" in s 177A(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." 11 Section 177A(5) deals with the concept of "purpose": "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." 12 Section 177C(1) of the ITAA provides that a reference in Part IVA to "the obtaining by a taxpayer of a tax benefit in connection with a scheme" is to be read as reference, relevantly, 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 …". 13 Section 177F of the ITAA confers a discretion on the Minister to cancel a tax benefit. Section 177F(1) provides, relevantly, as follows: "(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 … (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." Section 177F(3) empowers the Commissioner, where a determination under s 177F(1) has been made, to make compensating adjustments to the taxpayer's assessable income where, for example, the taxpayer has included an amount or part of his or her assessable income which amount would not have been included had the scheme not been entered into or carried out.

FACTUAL background 14 The Taxpayer was born in the United States in 1962 and migrated to Australia in 1985. He is an ordained Rabbi. 15 In 1987, the Taxpayer, who had not previously worked in the stockbroking industry, entered into a commission-sharing arrangement with a firm of stockbrokers, Bridges Son & Shepherd ("Bridges"). Later that year Bridges terminated its arrangement with the Taxpayer in consequence of a dispute concerning the Taxpayer's liability for the default of his clients in completing share transactions, and the taxpayer entered into a similar arrangement with a different firm of stockbrokers, Pembroke Securities Ltd ("Pembroke"). 16 In February 1988, the Taxpayer caused Daccar, which had been constituted as trustee of the No 1 Trust in 1987, to enter into a written commission-sharing agreement with Pembroke in place of the previous agreement between the Taxpayer and Pembroke. At this stage, the litigation between Bridges and the Taxpayer was nearing finality. 17 In June 1989, Ledger was incorporated and constituted as the trustee of the No 2 Trust. In August 1989, the agreement between Pembroke and the Taxpayer was terminated, and replaced with an agreement between Pembroke and Ledger. In 1990, Ledger terminated the agreement with Pembroke and entered into a fresh agreement with McDougall & Co ("McDougall"). The following year, that agreement was replaced with one between Ledger and BOS Stockbroking ("BOS"), which had taken over McDougall. BOS changed its name to Shaw Stockbroking ("Shaw") in 1993, but the commission-sharing agreement continued. Finally, in October 1995, the agreement between Shaw and Ledger was terminated, and replaced with an agreement between Bell Securities ("Bell") and Ledger. This agreement continued in force until 1999. 18 As the table reproduced at [4] above shows, the gross commissions paid to Ledger during the relevant years of income were substantial. They ranged from $185,440 in the 1992 year to $5,281,355 in the 1997 year. Significant sums were also earned by Daccar and Ledger from the commission-sharing arrangements in earlier years. For example, in the period from 1 February 1988 to 30 June 1988, Daccar earned commission of $137,776, and in the following year it seems to have earned commissions of about $288,000. Ledger, which only came into the picture in August 1989, earned fees and commission of about $181,000 in the 1989 income year. 19 The No 1 Trust, established in 1987, was a discretionary trust. The beneficiaries eligible to receive distributions included the Taxpayer, his wife, their children, any corporation in which a beneficiary had an interest and any organisation established for charitable purposes. At all material times, the Taxpayers and his wife were the trustees of the L & M Charitable Trust, which was a tax-exempt body. There has never been any dispute that the L & M Charitable Trust was a body genuinely established for public charitable purposes. 20 The No 2 Trust, established in 1989, was also a discretionary trust. The beneficiaries included the Taxpayer, his wife, their children, the L & M Charitable Trust and the No 1 Trust. 21 In all income years from 1990 to 1997, except 1991 and 1996, Ledger made substantial distributions from its net income to the No 1 Trust. For example, in 1995, $1,948,101 of the net trust income of $2,053,101 was distributed to the No 1 Trust. In 1997, $2,333,757 of the net trust income of $3,433,758, was distributed in the same way. In the 1991 and 1996 income years, the bulk of Ledger's net income was distributed directly to the L & M Charitable Trust. 22 The bulk of the income distributed by Ledger to the No 1 Trust was, in turn, distributed by Daccar either to the L & M Charitable Trust or, in 1993 and in subsequent income years, to the Tolas Oak Unit Trust, which became a beneficiary of the No 1 Trust in 1993. Tolas Oak Pty Ltd, the trustee of the Tolas Oak Unit Trust, conducted a retirement centre business. By 1993, the Tolas Oak Unit Trust had incurred carry forward losses of over $4,000,000. It is fair to say that the distribution of Ledger's net income was tax effective, in that the L & M Charitable Trust was a tax-exempt body, while the Tolas Oak Unit Trust had very substantial accumulated and continuing losses that absorbed the distributions made to it. 23 During the period commencing with the 1989 income year and concluding with the 1997 year, the Taxpayer received a salary from Daccar or Ledger in one year only, namely a salary of $80,000 from Ledger in the 1990 income year. He did, however, receive a distribution from Daccar in the 1989 income year of $96,703. He also received distributions from the No 2 Trust in five income years, as follows: 1993 ($83,000); 1994 ($80,000); 1995 ($105,000); 1996 ($200,000); and 1997 ($1,000,000).

part iva of the itaA: the ledger scheme 24 Senior counsel for the Commissioner first addressed the operation of Part IVA of the ITAA in relation to the commission income received by Ledger. I shall follow suit.

operation of part iva 25 The operation of Part IVA of the ITAA is conveniently summarised in the joint judgment of the High Court in Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404, at 413, as follows: "Pt 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 a 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))". 26 The making of a determination under s 177F(1)(a) that the amount of a tax benefit is to be included in a taxpayer's assessable income is the "pivot upon which the operation of Pt IVA turns": Spotless, at 413. It is in this sense that Pt IVA of the ITAA is not self-executing. The Commissioner is empowered to make a determination only where there is a tax benefit obtained in connexion with a scheme to which Pt IVA applies. That is, as a matter of "objective fact", a taxpayer must have obtained a tax benefit in connection with such a scheme: Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359, at 382, per curiam. The question in every case, therefore, is whether a tax benefit that the Commissioner has purported to cancel is in fact a tax benefit obtained in connexion with a Part IVA scheme and so susceptible of cancellation at the direction of the Commissioner: Peabody, at 382. If the Taxpayer has obtained a tax benefit in connection with a scheme to which Part IVA applies, the determination will be valid. If the Taxpayer has not obtained such a tax benefit, the determination will be invalid and will not support an assessment.

The ledger Scheme identified 27 The first element to consider in the operation of Pt IVA is the scheme. It follows from the analysis of the High Court in Peabody that a valid exercise of the power conferred by s 177F(1)(a) does not depend on the correct identification of the scheme by the Commissioner: Federal Commissioner of Taxation v Consolidated Press Holdings Ltd (No 1) (1999) 91 FCR 524, at 546, per curiam (affirmed, Federal Commissioner of Taxation v Consolidated Press Holdings Ltd (2001) 207 CLR 235). The Commissioner is entitled to put his case in alternative ways. In particular, if the Commissioner defines the scheme broadly, but also seeks to rely on a narrower scheme that is part of the wider scheme, he is permitted to do so: Peabody, at 382. 28 This proposition is, however, subject to at least two qualifications. First, the Commissioner must identify the alternative scheme at a time and in a manner that does not cause unfair prejudice to the taxpayer: Peabody, at 382-383. Secondly, any narrower scheme identified by the Commissioner must be capable of being regarded as a scheme in its own right: Peabody, at 383. The Commissioner is not permitted to take a set of circumstances and characterise them as a separate scheme if they "are incapable of standing on their own without being 'robbed of all practical meaning'": Peabody, at 383-384; Hart v Commissioner of Taxation [2002] ATC 4608 at 4619, per Hill J. 29 As I have noted, the present appeal concerns determinations made by the Commissioner in respect of the taxation years ended 30 June 1992, 1993, 1994, 1995, 1996 and 1997. Each of the determinations relating to the so-called Ledger scheme was in substantially the same form. The determination for the 1995 year was as follows: "IN RESPECT OF LEVI MOCHKIN ("the taxpayer") who in the year of income ended 30 June 1995 has obtained, or would but for the operation of section 177F obtain, a tax benefit in connection with a scheme to which Part IVA of the Act applies, namely $2, 251, 283 being an amount which would otherwise have been included in the taxpayer's assessable income in relation to the taxpayer's provision of personal services through a related [entity], namely Ledger Holding Pty Ltd in its capacity as trustee of the [No 2 Trust]." The Commissioner further determined, pursuant to s 177F(3) of the ITAA, that certain amounts which, but for the scheme, would not have been included in the Taxpayer's assessable income or would have been allowed to the Taxpayer as deductions, should not be included in his assessable income or should be allowed as deductions. 30 None of the determinations explains how the Commissioner calculated or arrived at the tax benefit. It was common ground, however, that the tax benefit identified in each determination concerned the commissions paid by the various brokers to Ledger. It was the Commissioner's contention that, since the commissions had been generated by the Taxpayer's personal services, these amounts would have been paid to the Taxpayer and formed part of his assessable income had the scheme not been in place. 31 The Commissioner identified the elements of the Ledger scheme in his Statement of Facts, Issues and Contentions filed in the proceedings at first instance. There was no application made at the trial to amend or modify the scheme so defined. The primary Judge acted on the basis that this was the scheme that he was required to consider. 32 According to the Commissioner, the Ledger scheme commenced in 1987 and was carried out in the 1988 income year and thereafter. The scheme was said to consist of: "(a) the use of Ledger to receive payment from Pembroke, [BOS], Shaw and/or Bell for the personal services of the [Taxpayer]; (b) the use of the No.2 Trust mechanism to divert income derived from the personal exertion of the [Taxpayer] to persons other than the [Taxpayer]." 33 The Commissioner provided the following particulars of the Ledger scheme: "88. The ostensible arrangement between Pembroke/[BOS]/Shaw/Bell and Ledger was that Ledger would place orders for shares or options on behalf of its clients with Pembroke/[BOS]/Shaw/Bell in return for an agreed commission. 89. The income of Ledger was distributed to persons other than the [Taxpayer] and in particular: (a) on and after the year of income ended 30 June 1990 - to Daccar which had share trading losses in each year of income (except the years of income ended 30 June 1991 and 30 June 1996); (b) on and after the year of income ended 30 June 1992 (but not including the year of income ended 30 June 1996) - to Daccar which, in turn, distributed income to: (i) the [L& M Charitable] Trust; (ii) the [Taxpayer's] wife; (iii) in the year of income ended 30 June 1992 - to the [Taxpayer]; and (iv) from the year of income ended 30 June 1993 onwards - to the [Tolas Oak] Unit Trust which had substantial current year and carry forward losses in each year of income; (v) in the year of income ended 30 June 1993 - to the [Taxpayer's] son, Josef Mochkin; (vi) in the year of income ended 30 June 1997 - to the Gold Trust which had significant current year and carry forward losses; (c) in the year of income ended 30 June 1996 to the [L & M Charitable] Trust. 90. No salary was paid to the [Taxpayer] by Ledger apart from $80,000 in the year of income ended 30 June 1990 (which is outside the relevant period). 91. On and after the year of income ended 30 June 1993, the [Taxpayer] was distributed amounts of income from the No. 2 Trust which were substantially less than the amount paid by [BOS]/Shaw/Bell for the provision of the [Taxpayer's] services. … 93. The Ledger Scheme had and continues to have the effect of diverting income from the personal exertion of the [Taxpayer] to Ledger and so reducing the assessable income of the [Taxpayer] and the tax payable by the [Taxpayer]." 34 Despite the reference to an "ostensible arrangement" between the brokers and Ledger, these particulars do not make it clear whether the Ledger scheme involved an agreement or arrangement between two or more persons, or whether it was a unilateral scheme (see s 177A(3)). The case, as conducted both at trial and on the appeal, proceeded on the basis that the scheme was a unilateral plan or course of conduct formulated and carried out by the Taxpayer. For that reason, it was the Taxpayer's purpose that had to be determined in accordance with s 177D(b) of the ITAA. 35 There are two particular aspects of the Ledger scheme as defined by the Commissioner that should be noted. 36 The first is that the scheme is said to have commenced in 1987, yet there is no mention of Daccar. It will be recalled that Daccar had been incorporated in March 1987 and in the same month was appointed trustee of the No 1 Trust. On 1 February 1988, "under the shadow" of the litigation between Bridges and the Taxpayer (as the primary Judge found), the Taxpayer caused Daccar to enter into a written consultancy agreement with Pembroke, whereby Pembroke agreed to transact business on the Stock Exchange for clients introduced by Daccar. It was not until June 1989 that Ledger was incorporated. The agreement between Ledger and Pembroke, which replaced the consultancy agreement between Daccar and Pembroke was concluded in August 1989. 37 There was a rather faint suggestion by Mr Maxwell QC, who appeared for the Commissioner with Mrs Batrouney SC on the appeal, that the Ledger scheme could be regarded as having commenced in 1989, rather than in 1987. In the end, however, he made it plain that the appeal would be conducted on the same basis as the trial, namely that the scheme had commenced in 1987. It follows that the Ledger scheme, as defined by the Commissioner, must have envisaged the use of Daccar in the first instance as the vehicle for receiving commission from the various brokers. Mr Maxwell submitted that the commencement date made no difference to the application of Pt IVA, since the substitution of Ledger for Daccar in 1989 was simply a change in the corporate vehicle required to implement the scheme. 38 Secondly, the particulars of the Ledger scheme provided by the Commissioner assert that the scheme had the effect of diverting the income from the Taxpayer's personal exertion to Ledger, thereby reducing his assessable income and his liability to tax (par 93). This is consistent with the tax benefit identified in each of the determinations. The particulars also refer to the fact that Ledger distributed to the Taxpayer less than the amounts paid by the brokers to Ledger for what was said to be the services provided by the Taxpayer. It follows from the particulars that the Ledger scheme, as defined by the Commissioner, encompasses the use of both Daccar and Ledger in order to receive commissions from the brokers, the distribution of income from Ledger to the beneficiaries of the No. 2 Trust and the failure by Ledger to pay any salary to the Taxpayer (except in the 1990 tax year). 39 The scope of the scheme as defined by the Commissioner is of considerable importance in assessing whether the primary Judge's conclusion as to the dominant purpose of the scheme was correct. The Commissioner did not suggest at the trial that he could rely, in the alternative, on a narrower scheme than the Ledger scheme. It is arguable, for example, that there was a discrete scheme commencing in 1989, whereby the Taxpayer utilised Ledger to distribute its net income as he directed, without regard to the value of the services he provided to that company. The tax benefit obtained by the Taxpayer in connection with such a scheme might have been the diversion of income that he would have derived from the services he provided to Ledger (whether by way of salary, distribution or otherwise) from himself to other beneficiaries of the No 2 Trust. The advantage from the Commissioner's perspective of a more narrowly defined scheme is, as Hely J remarked in Hart, at 4,626 [85], that: "[t]he more the scheme can be confined to the essential elements by which the tax benefit is obtained, the more likely it will be that the conclusion will be drawn that the dominant purpose for a person entering into a scheme so defined was to obtain the tax benefit." Of course, for the Commissioner to rely on a scheme defined in this way it would have been necessary for him to show, in accordance with Peabody and Hart, that the definition was not so narrow as to deprive it of all practical meaning. 40 At one point in the argument on the appeal, Mr Maxwell appeared to consider putting forward the narrower scheme as an alternative to the Ledger scheme. In the end, I did not understand him to proceed with that inchoate submission. In any event, it is plainly too late for the Commissioner to rely on an alternative scheme to the one advanced at trial. Mr de Wijn QC, who appeared with Mr Steward, asserted that had the Commissioner conducted the trial by reference to alternative versions of the scheme, the Taxpayer would have called additional evidence. Mr Maxwell did not dispute this assertion. It follows that the Taxpayer would be unfairly prejudiced if the Commissioner were permitted to change his case on the appeal so as to rely on an alternative version of the scheme.

The Principles 41 Section 177D of the ITAA provides that Part IVA applies to any scheme where the relevant taxpayer has obtained a benefit and where, having regard to the eight matters specified in s 177D(b), it would be concluded that the person entering the scheme did so for the purpose of enabling the taxpayer to obtain a tax benefit in connexion with the scheme. The reference to a person's "purpose" in s 177D includes a case where the scheme is entered into or carried out by a person for two or more purposes of which the particular purpose is the dominant purpose: s 177A(5) 42 With one minor exception, to which I shall refer later, there was no dispute between the parties as to the construction of s 177D. The contest was essentially whether the primary Judge, having regard to the factual findings and the criteria in s 177D(b), had correctly concluded that the Taxpayer's dominant purpose was not to enable him to obtain a tax benefit in connexion with the scheme. Nonetheless, it is useful to restate the general principles relevant to the present case. 43 First, the person whose purpose is relevant is the person, or one of the persons who entered into or carried out the scheme or any part thereof: Spotless, at 418. The present case has been conducted on the basis that the only person whose purpose is relevant is the Taxpayer. 44 Secondly, s 177D of the ITAA is not concerned with the subjective intentions of the scheme participants, but with "ascertaining an objective purpose by having regard to objective facts": Eastern Nitrogen Ltd v Commissioner of Taxation (2001) 108 FCR 27, at 44, per Carr J (with whom Sundberg J agreed), citing Spotless, at 421-422; Hart, at 4621 [55], per Hill J. 45 Thirdly, the question of dominant purpose is usually to be determined by reference to the time when the scheme is entered into, although there may be cases where the purpose can be tested while the scheme is still being carried out: Vincent v Commissioner of Taxation (2002) 193 ALR 686, at 707 [93], per curiam. But in making the objective determination required by s 177D(b), the Court must have regard to the eight specified criteria some of which expressly direct attention to the actual operation of the scheme and its consequences: see, for example s 177D(b)(i), (v), (vi) and (vii). 46 Fourthly, while it is necessary to consider each of the eight factors listed in s 177D(b), the High Court has stated that it is not necessary to refer in a judgment to each of the matters individually. A "global assessment of purpose" is permissible: Consolidated Press Holdings, at 263, per curiam. 47 Fifthly, the word "dominant" as used in s 177A(5) of the ITAA means "the ruling, prevailing or most influential" purpose: Spotless, at 416. Accordingly, the question posed by s 177D(b) is whether a reasonable person would conclude that the relevant taxpayer in entering and carrying out the particular scheme had, as his or her most influential and prevailing or ruling purpose, the obtaining thereby of a tax benefit in the statutory sense: Spotless, at 423. 48 Sixthly, it is established by Spotless that a person may enter or carry out a scheme for the dominant purpose of enabling the relevant taxpayer to obtain a tax benefit notwithstanding that the dominant purpose is consistent with the pursuit of commercial gain: see at 415. In Spotless itself, moneys were deposited in the Cook Islands in order to maximise the investors' after-tax returns. The interest rate available in the Cook Islands was substantially less than that available in Australia, but the Cook Islands imposed withholding tax at a very low rate. As the High Court found, the scheme "made no sense" without a tax benefit, that benefit being the exemption from Australian income tax conferred by s 23(q) ITAA on income derived from the Cook Islands which had been taxed (albeit lightly) at source. The High Court held that the taxpayers' dominant purpose was to achieve that tax benefit, notwithstanding that parties to the scheme intended to maximise the after-tax return from their investment. 49 On the other hand, this Court has recognised that Pt IVA must be applied having regard to the reality that the tax laws affect the shape of nearly every transaction. Accordingly, the form of the transaction may be tax driven, yet the scheme giving rise to the transaction may be one to which Pt IVA does not apply. As Hill J observed in Hart, at 4,619 [43]-[44], it is permissible to take into account the commercial outcome of a transaction, at least where the outcome has nothing to do with tax, even though the form of the transaction is tax-driven and generates a tax benefit for the relevant taxpayer. It follows, as Hely J noted in the same case (at 4,626 [83]), that drawing the line between commercial transactions that are and are not caught by Pt IVA is a matter of degree having regard to the eight factors specified in s 177D(b). See too Eastern Nitrogen, at 49-50, per Carr J.

The primary Judge's reasoning on dominant purpose 50 The primary Judge accepted that, having regard to the form and substance of the Ledger scheme (s 177D(b)(ii)), one of the Taxpayer's purposes in entering the Ledger scheme was to obtain a tax benefit. He identified (at 4,479 [50]) that benefit as "the ability to have the net income to be generated by the stockbroking consultancy business distributed in a tax effective way to the beneficiaries of a discretionary trust." His Honour also found (at 4,479 [51]) that the manner in which the scheme was entered into or carried out (s 177D(b)(i)) contributed to that purpose "in the sense that Ledger was constituted the trustee of the Mochkin Family Trust No 2 and distributions were apparently made from that Trust in a more tax effective way than they would have been had they been confined to [the Taxpayer] himself." 51 However, his Honour considered that the manner in which the scheme was entered into or carried out pointed to other purposes having actuated the Taxpayer. The most obvious was to immunise the Taxpayer personally, as well as the separate assets of himself and Daccar, from liability for client defaults or other debts or obligations of the business. Another purpose was to allow the business to build up goodwill, which could be detached from the Taxpayer's personality and continued participation in the business. 52 The primary Judge considered that the results in relation to the operation of the ITAA that were, or at the outset could be expected to be achieved by the Ledger scheme (s 177D(b)(iv)) were consistent with the purposes his Honour had previously identified. The results included the potential to avoid the Taxpayer receiving as assessable income such amounts as Ledger should decide to distribute to the beneficiaries of the No 2 Trust. His Honour acknowledged that the most obvious change in the Taxpayer's financial position resulting from the scheme was that his taxable income was reduced to the extent that other beneficiaries of the No 2 Trust received distributions (s 177D(b)(v)). Similarly, the change in the financial position of persons connected with the Taxpayer was that they could expect to receive distributions out of Ledger's profits (s 177D(b)(vi)). 53 Nonetheless, his Honour concluded (at 4,483 [65]) that the Taxpayer's "dominant purpose in entering into [the scheme] and carrying it out was to avoid personal exposure to the liabilities and debts which would be incurred in the conduct of the business after 1 February 1988. It is true that he was also probably actuated by other purposes relating to the conduct of the business and the potential to reduce his own taxable income, but those were, I find, subordinate to the dominant purpose which I have imputed to the [Taxpayer] …"

Should the question of dominant purpose be re-considered? 54 The Commissioner submitted that the primary Judge made errors of fact and law that vitiated his reasoning process on the question of dominant purpose. Mr Maxwell identified what he said were three errors in the primary Judge's reasoning. It was said that his Honour had: · made findings on the basis of the Taxpayer's subjective purpose, rather than the objective purpose required by s 177D(b); · incorrectly assumed that any distribution by Ledger to the L & M Charitable Trust would have been an allowable deduction had the distribution taken the form of a gift to the Trust by the Taxpayer personally; and · misconstrued the criterion specified in s 177D(b)(iv). Mr Maxwell invited the Court to consider afresh the question of dominant purpose having regard to the statutory criteria. He pointed out that the Full Court had adopted this course in Eastern Nitrogen after their Honours found that the primary Judge had taken into account an irrelevant consideration and thereby erred in law: see at 46, per Carr J. Mr Maxwell submitted that when the objective evidence was reconsidered, it would be seen that the dominant purpose of the Taxpayer was to divest himself of all but a small proportion of the income generated by his activities and to distribute that income to individuals or entities so as to minimise the overall incidence of tax. 55 I do not think there is any substance in the contention that the primary Judge failed to appreciate that he was required to apply an objective test in ascertaining the Taxpayer's dominant purpose. His Honour relied on findings as to the objective facts concerning the formulation and implementation of the scheme, including the factual context. He was entitled to do so. Moreover, the primary Judge expressed his ultimate finding in terms of the dominant purpose to be "imputed" to the Taxpayer, indicating that he was well aware that s 177D(b) requires an objective assessment of dominant purpose. 56 There is more substance to the criticism that his Honour mistakenly assumed that the distributions by Ledger for charitable purposes would have been fully allowable as deductions if made as gifts by the Taxpayer himself. It was common ground that the L & M Charitable Trust was a tax exempt body in the sense that it was a charitable institution the income of which was exempt from tax pursuant to s 23(e) of the ITAA. However, gifts to the L & M Charitable Trust were not allowable as deductions pursuant to s 78 of the ITAA. 57 As I have noted, very substantial distributions were made to the L & M Charitable Trust, either directly by Ledger or through the No 1 Trust. It is not entirely clear whether or not his Honour appreciated that the distributions to the L & M Charitable Trust would not have been allowable deductions to the Taxpayer if made in the form of gifts by him personally. On balance, however, it would seem that his Honour did not appreciate that fact. In assessing the change in the Taxpayer's financial position brought about by the scheme, he observed (at 4,480-4,481 [57]) that: "[t]o the extent that Ledger made, or could be expected to make, gifts to charities of the same magnitude as the [Taxpayer] would have made had he derived the income which Ledger received after the implementation of the scheme, there was no change in his financial position." This passage rather suggests that the primary Judge assumed that gifts to the L & M Charitable Trust would have been allowable deductions if made by individuals, including the Taxpayer himself. The possibility that this erroneous assumption may have influenced his Honour's assessment of the Taxpayer's dominant purpose cannot be ruled out. 58 The contention that the primary Judge misconstrued s 177D(b)(iv) was based on the following passage in the judgment (at 4,479 [53]): "at the time of entry into the scheme, the result in relation to the Act was potentially neutral in the sense that Ledger might decide to distribute income to beneficiaries liable to pay tax at the same marginal rate as [the Taxpayer], or to charities as donations for which [the Taxpayer] would have obtained full deductions from his taxable income had he made them himself." Mr Maxwell submitted that his Honour had mistakenly confined himself to the prospective effects of the scheme, and had overlooked the actual experience of the scheme, as s 177D(b)(iv) required him to take into account. 59 Sub-paragraph (iv) of s 177D(b) seems to be directed to the result "in relation to the operation of the Act" that would be achieved by the scheme, if carried out in accordance with its evident intent, objectively assessed. On this basis, the result of the scheme in the present case would have been that income generated (at least in part) by the Taxpayer's activities would have been received by Ledger and distributed to the beneficiaries of the No 2 Trust in a tax effective manner. This, in turn, would produce a tax benefit to the Taxpayer, to the extent that income attributable to his personal services provided to clients and brokers would not be assessable income in his hands. 60 To the extent that his Honour erred in his approach to sub-paragraph (iv), the error lies not so much in the failure to consider the actual operation of the scheme (other provisions in s 177D(b) require this to be done), but in his taking an unduly narrow view of the result that would be achieved by the scheme. Even if the result of the scheme had to be considered prospectively, it was hardly likely that, if assessed objectively, it would be tax neutral when compared with the situation that would have been obtained had the Taxpayer received all income generated by his personal services. The use of Daccar and Ledger to carry on the stockbroking business in association with the discretionary trusts was not calculated to produce the same result, so far as the operation of the ITAA was concerned, as the conduct of the business by the Taxpayer personally. 61 It is not, in my view, necessary to decide finally whether his Honour made errors that would justify considering afresh his finding on dominant purpose. I am content to approach the question on this assumption, without deciding, that his Honour's apparent mis-apprehension of the tax status of the L & M Charitable Trust and his construction of s 177D(b)(iv) of the ITAA vitiated his conclusion on the question of dominant purpose. Making this assumption, it is necessary to consider the question of dominant purpose independently of his Honour's assessment of the primary facts.

The Primary Judge's Findings 62 The Commissioner challenged some of the findings made by the primary Judge. It will be necessary to refer to that challenge later. It is convenient here to record the findings made by the primary Judge of particular significance to the question of dominant purpose. 63 The primary Judge found that on 11 February 1988, the Taxpayer compromised proceedings that had been brought against him by Bridges. In those proceedings, Bridges had sought an indemnity from the Taxpayer personally in respect of defaults made by clients introduced to Bridges by the Taxpayer. The settlement required the Taxpayer to pay Bridges $150,000 and to forego $200,000 in commission otherwise payable by Bridges to him. The Taxpayer settled the proceedings after being advised by senior counsel that the Supreme Court of New South Wales would be likely to find that he had been an independent contractor to Bridges and that the defaulting clients had been his clients, rather than Bridges' clients. 64 As I have noted, his Honour found that the written consultancy agreement between Pembroke and Daccar had been entered into on 1 February 1988 "under the shadow of the Bridges' litigation". The primary Judge accepted the Taxpayer's explanation that he utilised Daccar as the vehicle to carry on the business he had previously conducted on his own account because Daccar was the only available entity that could provide limited liability for the undertaking. 65 Shortly before Pembroke and Ledger entered into a consultancy agreement in August 1989, Pembroke had asked the Taxpayer to sign a personal guarantee of Ledger's performance of its obligations. The Taxpayer, however, had declined to do so. The Taxpayer also declined an offer by BOS in 1991 to enter into a consultancy agreement with him personally. The agreement ultimately concluded between BOS and Ledger provided for Ledger to be "personally liable" to BOS for payments to be made by clients as if Ledger were a principal. The agreement also contemplated that Ledger would have its own employees and equipment and meet its own expenses. 66 A similar term was incorporated into Ledger's agreement with Shaw. The primary Judge accepted the Taxpayer's evidence that amounts due in respect of defaults by clients were usually deducted or withheld from commissions due by Shaw to Ledger. On one occasion, Ledger procured an interest-free "loan" of $500,000 from Daccar to Shaw, as a means of providing security to the latter in respect of a default by a client (the default was later remedied). 67 Prior to Bell and Ledger entering into a commission-sharing arrangement in October 1995, Bell asked the Taxpayer to give a personal guarantee of Ledger's performance of its obligations under the agreement, but the Taxpayer declined to do so. Ledger, however, agreed to be liable to Bell for the defaults or bad debts of clients. This term of the agreement was implemented by Ledger making "loans" to Bell as security for defaults by clients, subject to the loans being repaid if and when the client made good the default. Over a period of time loans of this kind exceeded $10,000,000. 68 While the arrangement with Bell subsisted, Ledger maintained an extensive array of information technology, much of it purchased from Bell. Ledger also expended money on a computer and undertook an extensive advertising campaign to promote its services. 69 The primary Judge also found that at all relevant times, the Taxpayer was the head of what could be regarded as the "Ledger team". The team included

• Mr Humphrey, the principal of Morgrae Pty Ltd, which had a commission-sharing agreement with Ledger and who made Mr Humphrey's services available to Ledger on a full-time basis;
• for part of the relevant period, a part-time book-keeper and a full-time secretary;
• a full-time accountant from May 1996;
• from July 1995, a full-time employee, Mr Herzog who took orders from clients and placed them with Bell; and
• from approximately the same time, another person who provided services to clients, in return for interest-free loans from Ledger to himself and entities associated with him. 70 The primary Judge further found that, at least after 1993, the Taxpayer was often absent overseas or attending to matters other than the stockbroking business. During these periods, other members of the "team" took orders, conducted trades and provided services to clients without reference to the Taxpayer himself. 71 The various brokers provided Ledger with facilities to enable it to service clients. For example, the primary Judge found that Shaw provided Ledger with extensive facilities, including floor space, research facilities, telephone and courier services and a kosher kitchen. Bell, too, provided similar facilities to Ledger, but was paid a monthly fee for the facilities and services it provided.

The Challenge to the Findings 72 The Commissioner challenged the primary Judge's finding that the Taxpayer had declined to accept personal responsibility for the default of clients that he or Ledger had introduced to the brokers. The Commissioner submitted that the finding was inconsistent with the evidence of Mr Troy, an experienced stockbroker. The primary Judge did not refer to Mr Troy's evidence. 73 Mr Troy acknowledged that he had no personal knowledge of the business relationship between Ledger and the various brokers. Mr Troy also acknowledged that a proper authority holder (that is, an adviser who has an authority from a principal holding a Dealer's Licence) could enter an agreement which avoided that person incurring personal liability for the default of clients. In these circumstances, it is difficult to see how Mr Troy's evidence could override the specific evidence given by the Taxpayer (and accepted by the primary Judge) of the arrangements entered into with the individual brokers. None of the other complaints made by the Commissioner about this finding has any substance. 74 The Commissioner also challenged the finding that members of the Ledger "team", other than the Taxpayer, made substantial contributions to Ledger earning commission income. As the document prepared by the Taxpayer headed "Factual Errors in Appellant's Outline and Reply" demonstrates, this challenge was largely based on misconceptions as to the evidence before the primary Judge. For example, the Commissioner submitted that there was no evidence that Ledger had assets other than a laptop computer, but this submission overlooked documentary evidence such as a depreciation schedule. This challenge, too, must be rejected.

What was the Taxpayer's Dominant Purpose? 75 The Commissioner argued that, having regard to the matters listed in s 177D(b) of the ITAA, the only conclusion reasonably open was that the Taxpayer entered into the Ledger scheme for the dominant purpose of obtaining a tax benefit, namely diverting assessable income from himself to other beneficiaries under the discretionary trust. According to Mr Maxwell, the scheme bore "ex facie the stamp of tax avoidance": cf Peate v Federal Commissioner of Taxation (1964) 111 CLR 443, at 469, per Kitto J. 76 Mr Maxwell submitted that it was significant that the scheme had been implemented and managed by the Taxpayer himself; that the Taxpayer's own activities had generated the income and ensured that sufficient capital was available for the enterprise; and that the Taxpayer and his wife controlled the various trusts, including the L & M Charitable Trust. Mr Maxwell further submitted that the object of tax minimisation provided the only cogent explanation for the creation of the No 2 Trust in 1989 and the making of large distributions to the beneficiaries of the Trust. The substance of the scheme, so he argued, was that the Taxpayer was to receive only a fraction of the income generated by his activities, while distributions of income were made in a tax-effective manner. The Taxpayer had provided services of the same kind to clients both before and after the Ledger scheme had been implemented. Moreover, so he argued, Ledger added nothing of value to the Taxpayer's personal services and the corporate structure was not required for the purpose of raising capital for the "team" to carry out its activities. 77 In support of his submissions, Mr Maxwell relied particularly on three cases: Tupicoff v Federal Commissioner of Taxation (1984) 4 FCR 505 (Full Fed Ct); Bunting v Commissioner of Taxation (1989) 24 FCR 283 (Beaumont J); and Case W58 (1989) 89 ATC 524 (AAT). Tupicoff and Bunting were cases decided under the now-repealed s 260 of the ITAA, while Case W58 was decided under Part IVA. The difficulties facing the Commissioner's submissions become clearer when a comparison is made between the facts of the three cases relied on by the Commissioner and the circumstances of the present case. Since the facts in all three cases were similar, it is convenient to refer in detail only to Case W58. 78 The taxpayer in that case, who was seeking work in computer sales, was required by X company to provide his services through his own company, an arrangement that apparently provided advantages for X company. The taxpayer accordingly acquired a shelf company and, on the advice of his accountant, set up a discretionary family trust of which the family company became trustee. The family company provided the taxpayer's services to X company under various consultancy agreements. The taxpayer agreed in evidence that "in a sense the company operated as an extension of himself". X company paid fees to the family company. After payment of direct expenses, the family company's income was paid to the taxpayer as salary, with the balance being distributed to family members. The amounts distributed in this way increased over time. The Commissioner, relying on s 177F of the ITAA, included in the taxpayer's assessable income that portion of consultancy fees that was distributed to beneficiaries of the trust (other than the taxpayer himself). 79 The AAT (Hartigan J) found that the scheme involved at least three steps:

• the use of the family company as a vehicle for supplying the taxpayer's personal services to X company;
• the use of the family company to provide a mechanism by which surplus income could be distributed to persons other than the taxpayer; and
• the payment by the family company of the taxpayer's salary at a level which was less than the amount paid by X company for the provision of those services. The AAT held that, having regard to the eight matters listed in s 177D(b) of the ITAA, the dominant purpose of the taxpayer was to obtain a tax benefit. The benefit was the diversion of surplus income generated by the personal exertions of the taxpayer to beneficiaries of the discretionary trust. 80 The circumstances of Case W58 would be strikingly similar to the present if the Commissioner had identified a narrower scheme than the Ledger scheme, rather than the one he in fact identified (see [39]-[40] above). As I have noted, the scheme relied on by the Commissioner is said to have commenced in 1987 and to have involved the use of Daccar as the vehicle for receiving commission from the various brokers and for distributing "surplus" funds to the beneficiaries of the No 1 Trust. Ledger itself came into the picture later, as did the No 2 Trust. 81 In the present case, the objective facts indicate clearly that, following the settlement of Bridges' claim against him, the Taxpayer was not prepared to conduct the stockbroking business on his own account. He had not merely been exposed to possible personal liability in respect of client defaults, but had actually been required to make good defaults by his clients. The Taxpayer thereafter, on the primary Judge's findings, resolutely resisted all attempts by the brokers to secure his agreement to provide guarantees or indemnities in support of liabilities incurred by Daccar and Ledger to the brokers. The Taxpayer's unwillingness to provide services on his own account after February 1988 was not tax driven, but the product of commercial imperatives. Unlike the taxpayer in Case W58, the Taxpayer in this case was not prepared to provide services on his own account. 82 Nor is the present case one where the Taxpayer simply substituted a corporate entity for his own services. Daccar and Ledger accepted that they were liable for the default of their clients. Ledger made good such defaults. The willingness of Daccar and Ledger to indemnify the various brokers against client defaults was essential, from a commercial perspective, to the conduct of the business. In this sense, Daccar and Ledger provided a "service" that, on the objective evidence, the Taxpayer was simply not prepared to provide. Unlike the taxpayer in Case W58, the Taxpayer in this case was unwilling at any time after February 1988 to provide the full range of services essential to generate commission income in his own right. 83 Furthermore, unlike the three cases relied on by the Commissioner, in this case the income received by Daccar and Ledger was not generated simply by the personal exertion of the Taxpayer. Doubtless, he played an important role in the business. But the primary Judge's findings establish that Daccar and Ledger each employed or acquired substantial facilities for which they paid. The companies also utilised the services of persons other than the Taxpayer. On the primary Judge's findings, it cannot be that this was merely a one person business. There was some suggestion by the Commissioner that the "team" approach adopted by Daccar and Ledger was common within the stockbroking industry. While this may be true, it is of little assistance in determining the Taxpayer's dominant purpose in entering into or carrying out the Ledger scheme. 84 It is undoubtedly true that the discretionary trust structure adopted by the Taxpayer had substantial tax advantages when compared with other structures that might have been adopted to achieve the same commercial objectives. The primary Judge, with respect, was clearly correct in accepting that one of the purposes of the Taxpayer in entering into the Ledger scheme was to obtain a tax benefit in the form of the ability to have the net income generated by the stockbroking consultancy business distributed in a tax effective way to the beneficiaries of the discretionary trusts. But, as Eastern Nitrogen and Hart show, the fact that aspects of the scheme are tax driven does not establish that the "dominant purpose" of the relevant person, objectively assessed, was to obtain a tax benefit. Unlike Spotless, the scheme in the present case, even without the tax benefits, would have made commercial sense. 85 I turn to the matters listed in s 177D(b) of the ITAA.

The Manner in which the Scheme was entered into or carried out 86 The scheme was entered into in consequence of commercial imperatives facing the Taxpayer. These imperatives were not tax related. The scheme was carried out in a manner which ensured that the commercial imperatives were satisfied. In particular, Daccar and, subsequently, Ledger provided the indemnities to the brokers that were necessary for the conduct of the business. The business itself was conducted through the "team", some members of whom received substantial remuneration for their services. 87 The manner in which the scheme was carried out also ensured that distributions of net commission income would be made in a tax effective manner. Nonetheless, it is incorrect to suggest, as the Commissioner did, that the object of tax minimisation is the only cogent explanation for the creation of Ledger and its role as the contracting party with the various brokers. Daccar had been used as the contracting party with Pembroke for valid commercial reasons. Ledger, in effect, was substituted for Daccar in 1989. 88 It is true, as the Commissioner pointed out, that not all of the agreements made between Ledger and the brokers were reduced to writing. The Commissioner has, however, disavowed any suggestion that the arrangements with the brokers (which were negotiated at arm's length) were a sham. On the contrary, it is clear that the commercial arrangements described by the Taxpayer were carried into effect. This is not a case where the arrangements entered into can be described as "blatant, artificial or contrived": to use the expression adopted in the Second Reading Speech: Commonwealth Parl Deb, HR, 27 May 1981, at 2684 (the Hon J Howard).

Form and Substance of the Scheme 89 There was no disconformity between the form and substance of the scheme. The corporate vehicles were essential to achieve the Taxpayer's commercial objectives of avoiding exposure to personal liability. Daccar and Ledger provided services to brokers (including indemnifying them against any defaults by clients). The services to brokers and clients were not provided exclusively by the Taxpayer. Clearly, he played an important role in the conduct of the business, but so did other members of the "team". The scheme, as a matter of substance, had the effect of permitting the net income derived by Daccar and Ledger to be distributed through the Trusts in a tax-effective manner.

Timing 90 The timing of the scheme is of considerable significance in the present case. The scheme was formulated and implemented under the shadow of the Bridges litigation. The timing had little to do with tax planning, but much to do with the legal proceedings instituted by Bridges against the Taxpayer. The scheme was carried out over a number of years, although in the early stages Ledger was substituted for Daccar. While the scheme was in operation, the business was conducted and the income distributed in the manner I have described.

Result of the Scheme 91 The result in relation to the operation of the ITAA that, apart from Part IVA, would be achieved by the scheme, included the distribution of income generated by Daccar and Ledger to the beneficiaries of the No 1 and No 2 Trusts. As I have already noted, it is difficult to see how the result of the scheme, in the sense in which that term was used in s 177D(b)(iv), could be said to be tax neutral. Viewed objectively, the result sought by the scheme, so far as the ITAA was concerned, was the opportunity to distribute net commission income derived by Daccar and Ledger in a tax effective manner. This result nonetheless must be weighed against other aspects of the scheme in order to determine the Taxpayer's dominant purpose.

Change in the Taxpayer's financial position 92 The Taxpayer achieved the objective of immunising himself from personal liability for the conduct of the stockbroking business. He also received less by way of salary or distributions than his contributions to Ledger, in particular, might have been worth, although he did receive substantial distributions from Ledger from time to time, in one year amounting to $1,000,000. As I have noted, the fact that the Taxpayer, in effect, forewent remuneration for his services to Ledger would have had more significance in this case had a narrower scheme been identified.

Change in the Financial Position of Other Persons 93 As Mr Maxwell pointed out, the financial position of beneficiaries under the No 1 and No 2 Trusts changed, in that they received distributions in consequence of the scheme. The major beneficiaries were the L & M Charitable Trusts and the Tolas Oak Unit Trust. The former was set up for charitable public purposes, and the latter received distributions from 1993 onwards, which it was able to offset against its substantial accumulated and continuing losses. 94 There were doubtless also changes in the financial position of members of the Ledger "team" and of the brokers in consequence of the carrying out of the scheme. These consequences were commercial in character, reflecting the arm's length arrangements made between Ledger and the brokers, on the one hand, and Ledger and members of the "team" on the other.

Any Other Consequence for the Taxpayer 95 There seem to be no other relevant consequences for the Taxpayer that bear on the question of dominant purpose.

The Nature of the Connection between the relevant Taxpayer and any Person connected with the Taxpayer 96 As the primary Judge pointed out, the connection between the Taxpayer, on the one hand, and his family members and the entities he controlled, on the other, were such as to lead those family members and entities to expect the exercise of a discretion to make distributions in their favour, to a greater or lesser extent. As the primary Judge also pointed out, the connection between the Taxpayer, on the one hand, and the brokers and the Ledger "team", on the other, were such as to suggest that business efficacy was the Taxpayer's dominant purpose for entering into and carrying out the scheme. 97 As Hill J observed in Hart, a case such as this involves the weighing up of the commercial side of the scheme against its tax advantages. The Taxpayer entered into and carried out the Ledger scheme because of commercial considerations that were unrelated to tax advantages. It was carried out in a manner that involved Daccar and Ledger in providing genuine commercial services to clients and brokers, in return for which commission income was received. The services provided by the companies included indemnifying brokers against client defaults, something the Taxpayer was unwilling to provide on his own account. As I have explained, the business conducted by Daccar and Ledger proved to be substantially more than a one person operation. 98 It can readily be concluded that the Taxpayer had tax advantages in mind in choosing a discretionary tax structure as the means of carrying out the scheme. Doubtless, there were other ways in which he could have chosen to conduct the stockbroking business and to immunise himself from personal liability. But the question posed by s 177D(b) is not whether the Taxpayer could have chosen a less tax effective means of achieving his commercial objective of immunising himself from personal liability to the brokers. The question is whether, in view of the matters identified in s 177D(b) it is reasonable to conclude that the Taxpayer's ruling, prevailing or most influential purpose in entering into or carrying out the scheme was to obtain the tax benefit identified by the Commissioner. In my respectful opinion, the primary Judge was correct in finding that a reasonable person would conclude that the tax advantages of the scheme were subsidiary to the commercial objectives. The Taxpayer has therefore established that a reasonable person would not conclude that he entered into or carried out the scheme for the dominant purpose of obtaining a tax benefit in connection therewith.

tax benefit 99 In view of the conclusion I have reached on the question of dominant purpose, it is not necessary to consider whether the Taxpayer has obtained or would but for s 177F obtain a tax benefit in connection with the scheme (s 177D(a)). This issue, however, presents another obstacle in the Commissioner's path. 100 Section 177C(a) provides that a reference to obtaining a tax benefit in connection with a scheme is to be read as a reference to an amount not being included in the assessable income of a taxpayer in a year of income, where that amount might reasonably be expected to have been included in the taxpayer's assessable income in that year if the scheme had not been entered into or carried out. In Peabody, the Court explained (at 385) that a "reasonable expectation requires more than a possibility. It involves a prediction as to events which would have taken place if the relevant scheme had not been entered into or carried out and the prediction must be sufficiently reliable for it to be regarded as reasonable." 101 Mr de Wijn pointed out on behalf of the Taxpayer that the tax benefit identified by the Commissioner was the diversion of income from the personal exertion of the Taxpayer to Ledger, thereby reducing the Taxpayer's assessable income. Mr de Wijn submitted that on the findings made by the primary Judge, the commission income derived by Ledger could not reasonably be expected to have been included in the Taxpayer's assessable income, had the Ledger scheme not been entered into or carried out. 102 In my view, the Taxpayer's submission has considerable force. On the primary Judge's findings, once the Taxpayer found himself personally liable to Bridges, he would not have carried on the stockbroking business in his own right. Given the Taxpayer's unwillingness to accept personal liability for client defaults, it was virtually inevitable, as the Taxpayer submitted, that the business would have been carried on through a limited liability entity. That entity, not the Taxpayer, would have derived the commission income from the brokers. 103 The Commissioner attempted to meet this formidable difficulty by asserting that, even if a corporate entity had carried on the business, that entity would have paid or distributed to the Taxpayer the income that in fact was distributed to the beneficiaries through the No 2 Trust. However, this submission seems to assume, contrary to the primary Judge's findings, that the commission income was generated solely by the Taxpayer's own efforts and that the so-called Ledger team was (in Mr Maxwell's words) "largely ephemeral". 104 In view of the findings made by the primary Judge, it is difficult to see why, assuming the Ledger scheme had not been entered into or carried out, the net commission income derived by the hypothetical corporation substituted for Ledger, would have found its way to the Taxpayer. It might have been expected that some of that income would have come to the Taxpayer, in the form of a fair reward for the services he would have provided to the corporation. But the primary Judge was not asked to and did not make a finding as to what a fair salary might have been for the Taxpayer, if his salary was to reflect his contributions to Ledger or to a hypothetical corporation conducting the business. Nor did the Commissioner ask this Court to make any such finding. In short, the Commissioner's case has always been that the tax benefit obtained by the Taxpayer in connection with the Ledger scheme was the total of the net commission income derived by Ledger. 105 In these circumstances, I think the evidence precludes a finding that there was a reasonable expectation that, had the Ledger scheme not been entered into or carried out, the Taxpayer would have derived the whole of the net commission income that was in fact paid to Ledger. This provides an independent basis for setting aside the assessment decisions (other than in respect of the 1992 income year) insofar as they were based on the determinations made pursuant to Part IVA of the ITAA.

the facts 106 In mid-1991, the Taxpayer, while in New York, was given the opportunity to place a parcel of shares with a value of $9.5 million in Great Central Mine NL ("Great Central"). When it became apparent to the Taxpayer that the placement could be made to clients of Ledger, he requested permission from BOS to make the placement through it. BOS declined. Accordingly, those of Ledger's clients who had agreed to take up the shares made arrangements directly with Great Central. 107 The Taxpayer requested Mr Gutnick, the principal of Great Central, to pay a finder's fee because (as the primary Judge found): "his own efforts in securing the placement had imposed a moral, if not a legal, obligation on Great Central to pay it [the fee] to him." According to the Taxpayer, he took the view that it was not appropriate that the fee be paid to Ledger because the placement had not proceeded through BOS. In May 1992, the fee of $564,270 was paid, at the Taxpayer's direction, to Daccar.

the daccar scheme identified 108 The Commissioner made a determination on 14 April 1999, pursuant to s 177F(2) of the ITAA to the effect that the sum of $564,270 should be included in the Taxpayer's assessable income for the 1992 income year. The determination identified the tax benefit in connection with the scheme as "an amount which would otherwise have been included in the [Taxpayer's] assessment income in relation to the [Taxpayer's] provision of personal services through a related entity, namely Daccar Pty Ltd in its capacity as trustee of the Mochkin Family Trust". 109 The Commissioner's Statement of Facts, Issues and Contentions specified that the Daccar scheme consisted of: (a) the payment of $564,270, ostensibly as commission for services provided by it to Great Central; (b) the use of the No 1 Trust as a mechanism to distribute the commission income (mostly to the L & M Charitable Trust); (c) the absence of any salary paid by Daccar to the Taxpayer; and (d) the receipt by the Taxpayer of only $15,000 as a distribution from the No 1 Trust in the 1992 income year.

the primary judge's reasoning 110 The primary Judge found that, even if the payment of the finder's fee was properly to be characterised as gratuitous, it was made to the Taxpayer or at his direction in the course of, or as a result of his vocation as a stockbroker or investment adviser. Accordingly, it would have formed part of his income on the application of principles enunciated in cases such as Federal Commissioner of Taxation v Squatting Investment Co Ltd (1954) 88 CLR 413, and Scott v Federal Commissioner of Taxation (1966) 117 CLR 514. 111 The primary Judge held that the Daccar scheme, as identified by the Commissioner, involved the taking of steps, principally by directing payment of the fee to Daccar, for which no other purpose could objectively be ascribed to the Taxpayer than that of excluding the amount from his personal income, thereby obtaining a tax benefit. His Honour continued (at 4,484 [71]): "It was open to [the Taxpayer] to retain the fee as his personal income without jeopardising his, or Ledger's, relationship with BOS because he could justifiably have claimed that all income derived from that relationship was channelled through Ledger…. [T]he main concern of BOS was that it should not be associated with a placement which its principal, the Bank of Singapore, had not assessed for risk and compliance with legal requirements. It is difficult, in those circumstances, to see why BOS would have regarded receipt by [the Taxpayer] personally of the 'finder's fee' in any different light from its payment at his direction to the trustee of his family trust". 112 The primary Judge considered that there were other courses that might have been open to the Taxpayer but which he did not take. These included distributing the finder's fee to other members of the Ledger "team" in the form of a bonus or directing that it be paid to a charity or charities nominated by him. The fact that the Taxpayer did not take those steps, "inexorably vindicate[d]" the Commissioner's decision to include the sum of $564,270 in the Taxpayer's assessable income. 113 The primary Judge did not expressly refer to the requirement in s 177D(a) of the ITAA that a taxpayer must have obtained, or would but for s 177F obtain, a tax benefit in connection with the scheme. However, it is implicit in his Honour's reasoning that he took the view that, but for the scheme, the finder's fee might reasonably be expected to have been included in the Taxpayer's assessable income in the 1992 income year.

reasoning 114 It is fair to say that the Taxpayer only faintly argued in support of the cross-appeal. Mr de Wijn submitted that the use of Daccar as the vehicle to receive the finder's fee was consistent with its "former role as the owner of legal rights to receive commission income". It was also said that, given Ledger's inability to receive the fee, Daccar was the "logical and obvious recipient of the moneys". 115 There was no dispute that the Commissioner was entitled to identify the Daccar scheme as he did. On his Honour's findings, the fee was paid by reason of the efforts of the Taxpayer personally in securing the placement of shares. Unlike the payment of commissions to Ledger, the Taxpayer advanced no substantial commercial reasons for directing that the payment be made to Daccar. In this respect, a suggestion was made on the appeal that the payment to Daccar merely evidenced the Taxpayer's continuing resolve to be a man of straw. The Taxpayer's subjective intent is, however, not relevant to the question posed by s 177D(b). In any event, his Honour made no finding that this was the reason for the Taxpayer directing that payment of the fee should be made to Daccar. It is hardly surprising that no such finding was made, since by 1992, the Taxpayer had already taken steps to immunise himself from liability to the brokers in respect of client defaults. 116 The manner in which the scheme was carried out involved the Taxpayer directing Great Central to pay the fee attributable exclusively to his personal efforts to Daccar, a company which had nothing to do with the placement of shares. The result that would be achieved by the scheme, for the purposes of s 177D(b)(iv), was the distribution of income equivalent to the amount of the finder's fee in a tax effective manner (mostly to a tax exempt body). The Taxpayer's position changed in that he received no part of the fee and thus, but for Part IVA, it would not have formed part of his assessable income. The position of the recipients of the distribution (all of whom were associates of the Taxpayer) changed because they received tax effective distributions. Having regard to the matters specified in s 177D(b), it is not easy to see how the primary Judge could have reached any conclusion other than the one he did, namely that it would be concluded that the Taxpayer entered or carried out the scheme for the dominant purpose of obtaining a tax benefit. 117 The Taxpayer did not dispute that he would have obtained, but for s 177F, a tax benefit in connection with the scheme. Accordingly, the Taxpayer's contentions in relation to the Daccar scheme must be rejected.

validity of the determination 118 In the proceedings at first instance, the Taxpayer challenged the validity of the determination made in respect of the Daccar scheme on two grounds:

• the determination had been made "in the name of Jennie Granger, Acting Deputy Commissioner of Taxation (Large Business and International)", but Ms Granger had never authorised Mr Alcock, the officer who in fact made the determination, to sign a determination in her name; and
• Mr Alcock had not taken into account the fact that he had a discretion whether or not to make the determination and thus the purported exercise of the power pursuant to s 177F(1) of the ITAA had miscarried. The primary Judge had rejected both contentions. 119 The Taxpayer's written submissions on the appeal essentially repeated these contentions. Mr de Wijn did not elaborate further on the written submissions in oral argument.

the question of authority 120 The primary Judge reasoned as follows on the question of whether the decision-maker had authority to make the determination:

• On 29 January 1998, the Commissioner had delegated all his powers and functions under the ITAA to the persons from time to time holding, occupying or performing the offices of, among others, the Deputy Commissioner of Taxation - Large Business and International Program ("DCTLBIP"). Although his Honour did not say so, this delegation was presumably made pursuant to the power of delegation conferred on the Commissioner by s 8(1) of the Taxation Administration Act 1953 (Cth).
• On 28 April 1998, the then DCTLBIP authorised, among others, officers holding the position of Senior Officer Grade B to exercise in the name of the Deputy Commissioner all the powers and functions of the DCTLBIP, subject to certain irrelevant exceptions.
• The powers conferred by s 177F of the ITAA are not intended to be exercised only by the Commissioner or his delegate personally, but can be exercised by a properly authorised officer: O'Reilly v The Commissioners of the State Bank of Victoria (1982) 153 CLR 1, at 12-13, per Gibbs CJ (with whom Murphy J agreed).
• Since Mr Alcock was performing the duties of a Senior Officer, Grade B, he was authorised to exercise all powers and functions delegated to the office of the DCTLBIP, including the power to make determinations under s 177F(1). Mr Alcock was therefore empowered to make determinations in the name of Ms Granger, who had succeeded to the office of DCTLBIP.
• It was not necessary for Ms Granger personally to authorise Mr Alcock to exercise the relevant powers and functions. The authority had been conferred by the holder of the relevant office. 121 The only step in this reasoning challenged by the Taxpayer on the appeal was the last. It was submitted that, in order validly to constitute the relationship of principal and agent between Ms Granger, as the DCTLBIP, and Mr Alcock, it was necessary for Ms Granger herself to consent to the relationship coming into force. This proposition was said to flow from the general principle that the relationship of principal and agent can be established only with the consent, express or implied, of both parties to the agency arrangement: Garnac Grain Co Inc v HMF Faure & Fairclough Ltd [1968] AC 1130, at 1137, per Lord Pearson. 122 There is a distinction between the exercise of power by a delegate and the exercise of power by a person authorised to carry out particular powers or functions: Re Reference Under Section 11 of Ombudsman Act 1976 for an Advisory Opinion; Ex parte Director-General of Social Services (1979) 2 ALD 86, at 94, per Brennan J. In the former case, the delegate may validly exercise the power in his or her name; in the latter case, that must be done in the name of the authority that has authorised the exercise of the powers or functions: Re Reference at 94. Whether a particular statutory power is to be exercised only by a designated officer (such as the Commissioner) or his or her delegate personally, or whether the power may be exercised by a properly authorised officer, is a question of construction of the statute: O'Reilly v State Bank, at 12-13, per Gibbs J. 123 The fact that an authority, such as a Deputy Commissioner, authorises a subordinate officer to perform specified functions or exercise specified powers does not import into the "relationship" between the authority and the subordinate the principles governing a principal/agent relationship under the general law. There is nothing in O'Reilly v State Bank to support such a suggestion. On the contrary, the judgment of Gibbs J emphasises (at 12) the importance of construing the ITAA in a manner that acknowledges the practical difficulties of administering legislation which, for example, requires assessments to be issued annually to millions of taxpayers. Potentially serious problems would be created if fresh authorisations had to be executed every time a Deputy Commissioner, for whatever reason, leaves office. I see no reason for incorporating into the construction of the ITAA concepts derived from a different field of discourse that served no discernible legislative policy. The Taxpayer's submission must be rejected.

exercise of discretion 124 The Taxpayer argued at first instance that the Commissioner had not lawfully exercised his discretion under s 177F(1) of the ITAA. The primary Judge accepted, on the authority of Avon Downs Pty Ltd v Federal Commissioner of Taxation (1949) 78 CLR 353, that if the decision-maker had taken into account extraneous considerations or failed to consider relevant matters, his discretion would have miscarried. His Honour, however, rejected the Taxpayer's contention (at 4,488 [87]): "I have been unable to discern on the face of the instrument embodying the determinations that Mr Alcock, when he made them, took into account an irrelevant consideration or failed to take into account some relevant consideration. By contrast with a case which confronted Lockhart J in Citibank [Ltd v Federal Commissioner of Taxation (1988) 83 ALR 144], there is no evidence to support an inference, even with the assistance afforded by the [Commissioner's] failure to call Mr Alcock, that he took into account some extraneous consideration or failed to take into account a relevant matter. Nor is this a case where an unreasonable result was arrived at so as to create a presumption that an error occurred in the exercise of the discretion or statutory power, notwithstanding the inability of the court to identify the error." 125 In his written submissions on the appeal, the Taxpayer argued that the evidence warranted an inference that the decision-maker (Mr Alcock) had failed to take into account the fact that he had a discretion whether or not to make a determination under s 177F(1) of the ITAA. It was said that the failure of the Commissioner to adduce evidence from Mr Alcock gave rise to the inference that his evidence would not have disclosed that he had actually turned his mind to the exercise of discretion required by s 177F. 126 The onus was on the Taxpayer to show that the decision-maker had failed to have regard to the fact that s 177F(1) confers a discretion on the Commissioner to determine that an amount should be included in the assessable income of a taxpayer. It is true that the determination, of itself, is equivocal, in the sense that it merely refers to the relevant statutory provisions and does not expressly state that the decision-maker had decided to exercise his discretion adversely to the Taxpayer. Equally, however, there is nothing in the determination to indicate that the decision-maker had failed to appreciate that he was exercising a discretion conferred by statute. Mr Alcock's absence from the witness box does not constitute affirmative proof that he failed to take into account the fact that he was exercising a discretionary power. In this state of the evidence, the primary Judge correctly held that the Taxpayer had failed to discharge the onus which rested on him.

DID THE TAXPAYER DERIVE INCOME? 127 The Commissioner submitted, both to the primary Judge and on the appeal, that the fees or commissions paid to Ledger by the various brokers should be regarded as income derived by the Taxpayer within the meaning of s 25(1) of the ITAA. Reference was made to s 19 of the ITAA as emphasising the difference between derivation of income and entitlement to receive income. 128 The primary Judge rejected the argument. His Honour pointed out that the Commissioner had disavowed any suggestion that the arrangements between Ledger and the various brokers had been a sham. Ledger could have sued in its own name to recover the fees and commissions and was responsible to the broker for client defaults. It followed that fees and commissions payable pursuant to the arrangement constituted income derived by Ledger. No income was derived by the Taxpayer otherwise than as an employee of Ledger, until a determination was made to distribute income to him as a beneficiary of the relevant trust. 129 Mr Maxwell argued that the primary Judge had erred because the proper conclusion from the evidence was that the income was the product of the personal services provided by the Taxpayer. He identified the personal services at first as those provided to the clients acquiring shares but later in his submissions included services provided to the brokers. Mr Maxwell accepted that this submission depended on a finding that at all times from its establishment Ledger was effectively a one-person business. He also accepted that the primary Judge had made no such finding. Nonetheless he invited the Court to find that the Taxpayer had established a "nominal corporate structure" and had carried on business in exactly the same way as he had prior to the establishment of that structure. 130 The Commissioner's submissions face two obstacles, each of which, in my opinion, is fatal to their success. The first is that the findings of fact made by the primary Judge are inconsistent with the contention that Ledger was a "one-person business". As I have explained, Ledger provided an important service to brokers that the Taxpayer himself refused to provide, that is, a guarantee of the obligations of defaulting clients. Ledger had a "team" of persons who provided services to clients and brokers. When the Taxpayer was absent, which was often the case after 1993, the team took orders, conducted trades and provided services to clients without reference to the Taxpayer himself. Moreover, Ledger maintained an administrative structure, including an extensive array of information technology. As Mr de Wijn said, from a factual point of view, this was not the case to assert that income paid to a corporation was in truth wholly due to the personal exertion of an individual. 131 Secondly, as Mr Maxwell frankly acknowledged, his submission was inconsistent with the decision of the Full Court in Tupicoff. In that case, the taxpayer, an insurance agent, procured the appointment of a company, controlled by him, as an agent in his stead. Commission was thereafter paid to the company rather than to the taxpayer. The Full Court rejected the Commission's submission that, independently of the anti-avoidance provisions of s 260, the arrangement between the taxpayer and the company should be ignored as an ineffective attempt by the taxpayer to assign future earnings which were the product of his exertion. Beaumont J, with whom Fisher and Jenkinson JJ agreed, said this (at 519): "But here, whatever practical importance the parties attached to the continued participation of the taxpayer in the affairs of the company, the legal source of the company's income, in the form of remuneration or commission earned by it, was the contract of agency made between National Mutual and the company. If, in accordance with that contract, commission becomes payable to the company by National Mutual, then, at law, the operation of s 260 apart, it is income derived by the company: it is not technically income derived by the taxpayer, however instrumental he may have been in the performance of the company's contract with National Mutual." 132 Section 19 of the ITAA does not advance matters from the Commissioner's perspective. Section 19 does not say that income is deemed to be derived whenever it is dealt with as a taxpayer directs. As was pointed out by the High Court in Permanent Trustee Co of New South Wales v Commissioner of Taxation (1940) 6 ATD 5, at 12, the section "says that it shall be deemed to be derived income on the assumption that it is income and in other respects is derived notwithstanding that there is no actual payment over but a capitalisation or other dealing on behalf of the taxpayer or under his direction". (Emphasis added.) See also Brent v Federal Commissioner of Taxation (1971) 125 CLR 418, at 430-431, per Gibbs J. 133 Mr Maxwell relied on the decision of the Privy Council in Hadlee & Sydney Bridge Nominees Ltd v Commissioner of Inland Revenue (NZ) [1993] AC 524, which held that an assignment of a share in a partnership was ineffective to transfer the tax liability in respect of the income assigned. But Hadlee is inconsistent with the decision in Federal Commissioner of Taxation v Everett (1980) 143 CLR 440, which is binding on this Court: see Liedig v Commissioner of Taxation (1994) 50 FCR 461, at 468-470, per Hill J. In any event, the facts of Hadlee are different from those of the present case. 134 The primary Judge was correct to conclude that the commission income paid to Ledger was not derived by the Taxpayer.

CONCLUSION 135 The appeal and cross-appeal should be dismissed. The Commissioner should pay the costs of the appeal and the Taxpayer the costs of the cross-appeal. I certify that the preceding one hundred and thirty five (135) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice SACKVILLE.

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

MERKEL J: 136 I agree with the orders proposed by Sackville J and with the reasons given by his Honour for making those orders. I certify that the preceding one (1) numbered paragraph is a true copy of the Reasons for Judgment herein of the Honourable Justice Merkel.

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

REASONS FOR JUDGMENT KENNY J: 137 I have had the benefit of reading in draft the reasons for judgment of Sackville J and, for the reasons he gives, I agree that the appeal and cross-appeal should be dismissed and that the orders proposed by his Honour should be made. I certify that the preceding one (1) numbered paragraph is a true copy of the Reasons for Judgment herein of the Honourable Justice Kenny.

Associate: Dated: 19 February 2003 Counsel for the Applicant: Mr C M Maxwell QC & Mrs J J Batrouney SC with Ms J Jacobson

Solicitor for the Applicant: Australian Government Solicitor

Counsel for the Respondent: Mr J W de Wijn QC with Mr S H P Steward

Solicitor for the Respondent: Herbert Geer and Rundle

Date of Hearing: 18 & 19 November 2002