Commissioner of Taxation (Cth) v Spotless Services Ltd

High Court of Australia|1996-12-03|Before: Brennan CJ, Kirby JJ, Lockhart J

High Court of Australia Brennan CJ Dawson, Toohey, Gaudron, McHugh, Gummow and Kirby JJ Commissioner of Taxation (Cth) v Spotless Services Ltd [1996] HCA 34

Set aside the order of the Full Court of the Federal Court of Australia and in lieu thereof order:

(b) Set aside the orders of Lockhart J and in lieu thereof order that the taxpayer's appeal be dismissed with costs.

These appeals turn upon the operation of Pt IVA (ss 177A-177G) of the Income Tax Assessment Act 1936 Cth (the Act). The respondents (the taxpayers), Spotless Services Ltd (Spotless Services) and Spotless Finance Pty Ltd (Spotless Finance), are two Australian residents as defined in s 6(1) of the Act. They are related corporations, both being members of the Spotless group of companies. Spotless Services is a substantial trading corporation whose business activities essentially are conducted in Australia.

From the successful public flotation of shares in Spotless Services in about September 1986, the taxpayers held approximately $40 million of surplus funds available for short-term investment. By written agreement (the Joint Venture Agreement) made between Spotless Services and Spotless Finance and dated 8 December 1986, they agreed to associate themselves as joint venturers for the purpose of investing funds in the Cook Islands. The agreement stipulated that "for the sake of convenience" investments would be made in the name of Spotless Services.

In its return for the year of income ended 30 June 1987 (the year of income), Spotless Services claimed that $2,670,663 [1] had been received by it from European Pacific Banking Co Ltd (EPBCL) as interest derived from a deposit of $40 million made with EPBCL in the Cook Islands. In its return for the year of income, Spotless Finance similarly claimed that it had received interest of $295,688 from EPBCL. There was between Australia and the Cook Islands no "double-taxation" agreement to which the Income Tax (International Agreements) Act 1953 Cth applied. However, the taxpayers claimed that, pursuant to s 23(q) of the Act [2] , the interest was exempt from income tax on the footing that it had been derived in the Cook Islands and that withholding tax had been paid on the interest in the Cook Islands.

References to currency throughout this judgment are to Australian currency. 2. Section 23(q) had no operation with respect to assessments for the year of income commencing 1 July 1987 and thereafter. It was omitted from the Act by s 6 of the Taxation Laws Amendment (Foreign Tax Credits) Act 1986 Cth. This statute commenced on 22 July 1986. Section 23(q), in what remained of its temporal operation, was amended by the Income Tax Assessment Amendment (Capital Gains) Act 1986 Cth. This commenced on 24 June 1986. The result for the present case, which concerns the year of income ended 30 June 1987, is that, so far as is relevant, s 23(q) classified as income exempt from tax: "income (other than an amount of income attributable to a dividend, being a dividend paid on or after 19 October 1967), or profits or gains of a capital nature, derived by a resident from sources out of Australia and Papua New Guinea, where that income is not, or those profits or gains are not, exempt from tax in the country where the income is, or the profits or gains are, derived Provided that this paragraph does not apply to exempt any income, or any profits or gains of a capital nature, unless - (i) where there is a liability for tax in the country where that income is, or those profits or gains are, derived - the Commissioner is satisfied that the tax has been or will be paid; "

The Cook Islands levied withholding tax at the rate of 5 per cent of the amount of interest. The interest rate payable to the depositors was approximately 4 per cent below the Australian bank bill buying rate. However, what might be seen as the commercially unattractive aspects of the deposit with EPBCL would be more than offset if the interest were exempt from income tax in Australia. As will appear, it was this collateral tax advantage which provided the key to the whole transaction and gave it its particular commercial attraction.

The appellant (the Commissioner) brought to tax these amounts of interest on the ground that each of the taxpayers had obtained a tax benefit in connection with a scheme to which Pt IVA applied. [3] The relevant tax benefit referred to the amounts in question that would have been included or might reasonably be expected to have been included in the assessable income of the relevant taxpayer if the scheme had not been entered into or carried out.

The Commissioner also assessed the taxpayers on the footing that s 23(q) was inapplicable because the source of the payments of interest was Australia not the Cook Islands. At first instance and on appeal in the Federal Court, the taxpayers succeeded on this issue. It does not arise before this Court.

The question before this Court is whether the majority of the Full Court of the Federal Court (Northrop and Cooper JJ, Beaumont J dissenting) [4] erred in construing or applying the provisions of Pt IVA when dismissing appeals by the Commissioner from decisions of the primary judge (Lockhart J). [5] Lockhart J had allowed appeals by the taxpayers from decisions of the Commissioner disallowing their objections against the assessments which we have described. [6]

Federal Commissioner of Taxation v Spotless Services Ltd (1995) 62 FCR 244. 2. Spotless Services Ltd v Federal Commissioner of Taxation (1993) 25 ATR 344. 3. Lockhart J delivered judgment on 7 June 1993 after the decision of the Full Court in Peabody v Federal Commissioner of Taxation (1993) 40 FCR 531, but before that decision was affirmed, on different grounds, by this Court on 28 September 1994: Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359. That decision of this Court preceded the decision of the Full Court in the present case. The result was that the Full Court approached the question of whether there was a scheme to which Pt IVA applied on a different basis from Lockhart J.

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 [7] , 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)).

Paragraph (b) of s 177C(1) deals with tax benefits arising from allowable deductions. These appeals do not concern this type of tax benefit.

The assessments of the taxpayers gave effect to determinations by the Commissioner pursuant to par (a) of s 177F(1) that the amount of a "tax benefit" was to be included in the assessable incomes of each of the taxpayers for the year of income. The making of such a determination is the pivot upon which the operation of Pt IVA turns. In this sense, and unlike s 260, Pt IVA is not "self-executing". The Commissioner is empowered to make a determination only where the objective criteria specified in par (b) of s 177D are met. [8] In particular, it is necessary that the taxpayer has obtained a "tax benefit" in connection with a "scheme" to which Pt IVA applied. This litigation requires determination of a dispute as to whether, in respect of the taxpayers in question here, those objective criteria were met.

Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359 at 382.

Part IVA is to be construed and applied according to its terms, not under the influence of "muffled echoes of old arguments" concerning other legislation. [9] In this Court, counsel for the taxpayers referred to the repetition by the Privy Council in Commissioner of Inland Revenue v Challenge Corporation [10] of the statement by Lord Tomlin in Inland Revenue Commissioners v Duke of Westminster [11] that "[e]very man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be". Lord Tomlin spoke in the course of rejecting a submission that in assessing surtax under the Income Tax Act 1918 UK the Revenue might disregard legal form in favour of "the substance of the matter". His remarks have no significance for the present appeal. Part IVA is as much a part of the statute under which liability to income tax is assessed as any other provision thereof. In circumstances where s 177D applies, regard is to be had to both form and substance (s 177D(b)(ii)).

Ex parte Professional Engineers' Association (1959) 107 CLR 208 at 276. 2. [1987] AC 155 at 167. 3. [1936] AC 1 at 19.

In the present litigation, all members of the Full Court were agreed that there was a scheme as defined in s 177A of the Act. Cooper J identified it as follows: [12]

[T]he proposal of the taxpayer [was] to invest $40 million on deposit in the Cook Islands and to pay Cook Islands withholding tax on the interest earned, and the taking of all necessary steps to implement the proposal. [13] 1. Spotless Services (1995) 62 FCR 244 at 280. 2. His Honour also accepted the formulation by the primary judge (Spotless Services (1993) 25 ATR 344 at 366) that the scheme was: "[t]he offer and the acceptance together with the intervening acts and probably the steps commencing with the receipt by the taxpayers of the information memorandum and other documents earlier than 5 December [1986]."

The majority of the Full Court held that Pt IVA did not apply to the scheme as so formulated. The majority decided that the "dominant purpose" of the taxpayers was to obtain the maximum return on the money invested after the payment of all applicable costs, including tax, and not to obtain a "tax benefit". Cooper J said: [14]

Where by the operation of the foreign taxation laws and the existing Australian taxation laws the net return after the payment of all applicable tax and other costs of the investment is higher investing offshore than within Australia, it cannot be said that, objectively, the dominant purpose of the investor investing offshore is to get a tax benefit; the purpose is to obtain the maximum return on the money invested after the payment of all applicable costs, including tax. In 1986, Australian tax was not payable on income derived in the circumstances specified in s 23(q) of [the Act] because it was exempt income. Earlier in his reasons, Cooper J had identified and resolved in the following terms the central issue: [15] [C]an it objectively be said that the dominant purpose of the taxpayers in making the investment was to obtain a tax benefit? In my view it cannot be said that such was their intention. In coming to this conclusion I accept that but for the operation of s 23(q) the investment would not have been made because of the operation of s 25 and other provisions of [the Act] leading to a liability to pay Australian tax on the interest earned. However a decision not to invest in the Cook Islands would be made, not for the reason that Australian tax would be payable but rather because the interest rate offered on the investment in the Cook Islands would be insufficient to admit of a rational commercial decision to invest in the Cook Islands in preference to Australia. If the interest rates offered in the Cook Islands were sufficiently high that after paying both Cook Islands and Australian tax, the net after tax return was higher than investing in Australia at lower interest rates and paying Australian income tax, the rational commercial decision would be to invest in the Cook Islands notwithstanding the incidence of double taxation. (Emphasis added.) 1. Spotless Services (1995) 62 FCR 244 at 288. 2. Spotless Services (1995) 62 FCR 244 at 287-288.

The references in this passage on the one hand to a "rational commercial decision" and on the other to the obtaining of a tax benefit as "the dominant purpose of the taxpayers in making the investment" suggest the acceptance of a false dichotomy. "Scheme" is defined in s 177A(1) as meaning:

(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. [16]

A person may enter into or carry out a scheme, within the meaning of Pt IVA, for the dominant purpose of enabling the relevant taxpayer to obtain a tax benefit where that dominant purpose is consistent with the pursuit of commercial gain in the course of carrying on a business. 1. A scheme may be unilateral: s 177A(3).

In his concurring judgment in Commissioner of Internal Revenue v Brown [17] , Harlan J said:

[T]he tax laws exist as an economic reality in the businessman's world, much like the existence of a competitor. Businessmen plan their affairs around both, and a tax dollar is just as real as one derived from any other source. 1. (1965) 380 US 563 at 579-580.

Later, the United States Supreme Court stated that it could not "ignore the reality that the tax laws affect the shape of nearly every business transaction". [18] In Australia, State and Territory stamp duty laws have been a particularly significant factor in the shaping of business transactions. [19] However, the tax laws are one part of the legal order within which commerce is fostered and protected. Another part is Pt IV of the Trade Practices Act 1974 Cth, which regulates or proscribes certain restrictive trade practices. In this broad sense, "[t]axes are what we pay for civilised society" [20] , including the conduct of commerce as an important element of that society.

Frank Lyon Co v United States (1978) 435 US 561 at 580. 2. A recent example is provided by the transaction considered in Commissioner of Stamps (SA) v Telegraph Investment Co Pty Ltd (1995) 184 CLR 453. 3. Compañia de Tabacos v Collector of Internal Revenue (1927) 275 US 87 at 100, per Holmes J, Brandeis J concurring.

A taxpayer within the meaning of the Act [21] may have a particular objective or requirement which is to be met or pursued by what, in general terms, would be called a transaction. The "shape" of that transaction need not necessarily take only one form. The adoption of one particular form over another may be influenced by revenue considerations and this, as the Supreme Court of the United States pointed out, is only to be expected. A particular course of action may be, to use a phrase found in the Full Court judgments, both "tax driven" and bear the character of a rational commercial decision. The presence of the latter characteristic does not determine the answer to the question whether, within the meaning of Pt IVA, a person entered into or carried out a "scheme" for the "dominant purpose" of enabling the taxpayer to obtain a "tax benefit".

"Taxpayer" is defined in s 6(1) as "a person deriving income or deriving profits or gains of a capital nature".

Much turns upon the identification, among various purposes, of that which is "dominant". In its ordinary meaning, dominant indicates 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.

Mr N L Williams was the Executive Director, Finance, of Spotless Services. His evidence was that the surplus funds yielded by the flotation of shares in Spotless Services were not required during the then current financial year to end 30 June 1987, but that they would be required in the following financial year for investment purposes. What the taxpayers sought was a short-term investment which, in their opinion, would yield the best return for their benefit and the benefit of their shareholders, "having regard", as Mr Williams put it, "to the importance of having the investment adequately secured". That objective, as the evidence indicated, might have been pursued by various courses of action. The issue is whether, on the footing that the steps which were taken amounted to a "scheme", there was present the necessary "dominant purpose" to obtain a "tax benefit", so as to satisfy the criteria necessary for the Commissioner then to have made the relevant determinations under par (a) of s 177F(1).

The eight necessary criteria appear in par (b) of s 177D. The section should be set out in full:

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

(i) the manner in which the scheme was entered into or carried out;

(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 [22] 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).

It will be noted that the relevant purpose is that of the person or one of the persons who entered into or carried out the scheme or any part thereof, whereas s 260 speaks of the purpose of the contract, agreement or arrangement which is rendered "absolutely void, as against the Commissioner". 1. Section 177A(5) states: "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."

In mid-1986, in anticipation of the receipt of a significant amount upon the proposed flotation of shares of Spotless Services, Mr Williams invited proposals from a number of financial institutions for the short-term investment of those moneys. These proposals were considered in consultation with the legal advisers of Spotless Services and eventually led to the Joint Venture Agreement between the two taxpayers. A number of possible avenues of "off-shore" investment were considered, including the EPBCL proposal which was adopted.

Other alternatives which had been under consideration by Spotless Services included a similar kind of investment to be made in Hong Kong. That proposal, which appears to have been made by Rothschild Australia Ltd, was rejected. It would have required the issue of a tax clearance certificate under s 14C of the Taxation Administration Act 1953 Cth (the Administration Act). The Commissioner was empowered by s 14D to refuse to issue such a certificate if not satisfied by the applicant as to various matters. These were concerned, to put it broadly, with the avoidance or evasion of Australian tax. This system of the issue of certificates under the Administration Act operated in conjunction with s 39B of the Banking Act 1959 Cth, and the Banking (Foreign Exchange) Regulations made under s 39 of the Banking Act and then in force. A tax clearance certificate was required for the placing of any currency in Australia to the credit, as a loan, of a resident of Hong Kong. This requirement did not extend to loans to residents of the Cook Islands. [23]

Notices under the Banking (Foreign Exchange) Regulations with effect 1 January 1985, published in the Gazette No S540 of 21 December 1984.

EPBCL was a wholly owned subsidiary of European Pacific Banking Corporation (EPBC), which was owned by European Pacific Investments SA, a Luxembourg publicly-listed company. EPBCL was the holder of a domestic banking licence issued pursuant to the applicable Cook Islands legislation. It did not carry on business outside the Cook Islands and was not authorised to do so.

In the course of discussions in Sydney with representatives of Bankers Trust Australia Ltd (BTA), officers of Spotless Services were provided with a pamphlet published by EPBC and titled "Information Memorandum Relating to the Issue of Certificates of Deposit". Under the heading " Nature of Investment ", the following appeared:

The interest on this investment is subject to withholding tax at its source in the Cook Islands and as no international tax treaty exists between the Cook Islands and Australia, the interest derived from the deposit should be exempt income for tax purposes in accordance with Section 23(q) of the Income Tax Assessment Act.

Attached as Appendix A, is a legal opinion from Stephen Jaques Stone James confirming that investment in the Certificates of Deposit by Australian residents produces exempt income. However, the advice in this opinion has been provided for the benefit of [EPBC] only and intending investors should seek independent legal advice upon their own particular circumstances.

In that annexed advice, consideration was given to the possible application of Pt IVA of the Act. It was said:

Although the circumstances of each investor must be examined individually, it will generally be correct to say that the dominant purpose of the investor when it enters into the proposed transaction is not to obtain a tax benefit by no longer deriving assessable income upon its current investments, but to seek a greater return upon investment by deriving income which, by virtue of the provisions of the Act, is exempt income. This may have anticipated the submission for the taxpayers to this Court that Pt IVA was not applicable because the present was not a case where the taxpayers had diverted "an existing income stream" in such a way that it would not attract tax. That may be so but, as will appear, the operation of Pt IVA is not so confined.

On 8 December 1986, on the application of EPBCL, the International Division in London of Midland Bank Plc caused to be issued to Spotless Services an irrevocable non-transferable standby letter of credit (the Midland Letter of Credit). After an amendment, the instrument was stated to be effective from 11 December 1986 and expiring no later than 8 July 1987, for an amount of $40 million plus interest of $2,966,351 less any withholding tax legally payable in the Cook Islands. Also after the amendment, the Midland Letter of Credit was available at a branch of Westpac in Melbourne and drafts drawn under it were to be accompanied by a statutory declaration specifying a default by EPBCL. The board of Spotless Services authorised Mr Williams to proceed with the EPBCL proposal after taking some time in considering the Midland Letter of Credit. To the board, this document was most important because it secured the position of the taxpayers.

The Midland Letter of Credit was provided pursuant to an agreement which had been made on 23 September 1986 between Midland International Australia Ltd (MIA), EPBC and EPBCL. The agreement recited that, in order to induce investors to make deposits with EPBCL, EPBC wished to have irrevocable standby letters of credit issued in favour of those investors as security for the obligations of EPBCL and that MIA had agreed to arrange for the opening of such letters of credit. By a charge dated 23 September 1986, EPBC secured to MIA the payment of moneys and performance of obligations under the above agreement. EPBC did so by charging to MIA all sums deposited by EPBC or for the account of EPBC with any of various banks including Midland Bank Plc-Singapore (Midland Singapore) and BT Asia Ltd.

The above events and circumstances, commencing in mid-1986 with the inviting by Mr Williams of proposals, are matters to which regard may be had for the purposes of pars (i) and (ii) of s 177D(b). That is to say, they bear upon the manner in which the scheme was entered into and the form and substance of the scheme. 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. Reference has been made earlier in these reasons to the result in relation to the operation of the Act, which, but for Pt IVA, would have been achieved by the scheme (par (iv) of s 177D(b)). We turn now to the considerations indicated by par (iii), namely the time at which the scheme was entered into and the length of the period during which it was carried out. Those considerations throw further light upon the form and substance of the scheme (par (ii)) and the manner in which the scheme was carried out (par (i)).

The movement of the funds, from the investment of which the taxpayers derived what they contended was their exempt income, was as follows. Mr Williams had arranged for the consolidation of the existing investments (which were short-term money market instruments) into two accounts with Westpac Banking Corporation (Westpac). On 11 December 1986, Mr Williams purchased at a branch of Westpac in Melbourne a bank cheque drawn by Westpac in favour of " Midland Bank Plc - Singapore " for $40 million. The funds for the purchase of the bank cheque were provided as to $36 million by Spotless Services and the balance by Spotless Finance. Mr Williams then attended the offices of BTA in Melbourne where among those present was a representative of MIA. Mr Williams handed the bank cheque to the representative of MIA, together with a letter from a managing director of Spotless Services to the managing director of Midland Singapore authorising it to apply $40 million to the account of Spotless Services with EPBCL.

Upon instructions of EPBCL, Midland Singapore directed Westpac to disburse the $40 million by crediting $118,549.54 through an account of MIA with Westpac in Sydney and by arranging for payment of $39,680,481 to the credit of an account maintained at the same branch of Westpac by Bankers Trust Co, Hong Kong. These funds did not leave Australia. However, on 12 December 1986, Bankers Trust Co, Hong Kong, confirmed to EPBC "your deposit with us" of $39,680,481 with a maturity date of 24 June 1987 and at an interest rate of 15.5 per cent per annum, to yield $3,285,869.97, so as to give the total of principal and interest of $42,966,350.97.

Mr P J Levy acted as corporate solicitor for the taxpayers. At the time when Mr Williams was in Melbourne taking the steps outlined above, Mr Levy was in the Cook Islands. As agent for Spotless Services, he drew in favour of EPBCL a cheque for $40 million on an account in the Cook Islands of Spotless Services with EPBC. In return, he received a certificate of deposit issued by EPBCL. This certified that there had been a deposit of $40 million with EPBCL at its head office and that this was repayable to Spotless Services on or after the maturity date of 23 June 1987, with interest of $2,842,192, net of withholding tax due to the Government of the Cook Islands. Mr Levy also received an instrument of undertaking by EPBCL, addressed to Spotless Services. This stated that EPBCL undertook to pay promptly, when due, all withholding taxes payable in the Cook Islands in respect of all interest paid or payable on the certificate of deposit. These steps were taken in the Cook Islands after some earlier confusion which is of no significance for present purposes.

On 22 June 1987, EPBC instructed Midland Singapore upon receipt from BT Asia Ltd of $42,966,350.97 "being the maturity of our deposit on behalf of Spotless Services" to remit "value date 24 June 1987", $42,842,192 to an account of Spotless Services with a branch of Westpac in Brisbane. The balance, being an amount equal to withholding tax payable in the Cook Islands, was to be remitted to Midland Singapore for the account of EPBC. On 23 June, Mr Levy wrote to EPBCL acknowledging repayment of the principal $40 million together with interest amounting to $2,842,192.

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". [24] 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. [25] 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.

Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359 at 382. 2. cf 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.

The taxpayers had sought adequately secured short-term investment, until the end of the current financial year, which would yield the best return for their benefit and the benefit of the shareholders. Various courses of action were considered before the taxpayers concluded their Joint Venture Agreement and went ahead with the proposal for the deposit with EPBCL. The rejection of other proposals involving an "off-shore" investment left, as Cooper J put it, "no other particular non-Australian sourced proposal". [26] Beaumont J, in his dissenting judgment [27] , held that the form and substance of the EPBC proposal had been to take steps to ensure that the source of the interest was located in the Cook Islands. The "dominant purpose" of the taxpayers in doing this was to achieve a tax benefit in Australia in the form of the exemption under s 23(q) of the Act. Without that benefit, the proposal would have "made no sense". [28] We agree with those conclusions.

Federal Commissioner of Taxation v Spotless Services Ltd (1995) 62 FCR 244 at 284. 2. Spotless Services (1995) 62 FCR 244 at 270. 3. Spotless Services (1995) 62 FCR 244 at 271.

[T]he reasonable expectation is that the taxpayers would have invested the funds to earn interest and absent any other proposal would have invested the funds in Australia. The income earned on the investment of the $40 million in Australia would have been assessable income for the purpose of s 25 of [the Act]. As the interest rate earned on the investment in the Cook Islands was, on the evidence, some 4 per cent below the applicable bank rates available in Australia at that time the amount of money which it is reasonable to expect that the taxpayer would have received would not have been less than the interest in fact received. [30] 1. Spotless Services (1995) 62 FCR 244 at 285. 2. Beaumont J spoke to similar effect: Spotless Services (1995) 62 FCR 244 at 270.

In those circumstances, a reasonable person would conclude that the taxpayers in entering into and carrying out the particular scheme had, as their most influential and prevailing or ruling purpose, and thus their dominant purpose, the obtaining thereby of a tax benefit, in the statutory sense. The scheme was the particular means adopted by the taxpayers to obtain the maximum return on the money invested after payment of all applicable costs, including tax. The dominant purpose in the adoption of the particular scheme was the obtaining of a tax benefit. In reaching the contrary conclusion, or, rather, placing the matter on a different footing, the majority of the Full Court fell into error. It is true that the taxpayers were concerned with obtaining what was regarded as adequate security for an investment made "off-shore". However, the circumstance that the Midland Letter of Credit afforded the necessary assurance to the taxpayers does not detract from the conclusion that, viewed objectively, it was the obtaining of the tax benefit which directed the taxpayers in taking steps they otherwise would not have taken by entering into the scheme.

From this it would follow that the appeal should be allowed. However, the taxpayers seek to support the decision of the Full Court on further grounds which did not commend themselves to the Full Court.

All members of the Full Court accepted that a "tax benefit" in the statutory sense had been obtained and that the amount thereof was the interest remaining after payment of Cook Islands withholding tax. So far as relevant, s 177C(1) states:

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;

and, for the purposes of this Part, the amount of the tax benefit shall be taken to be -

The taxpayers submit that the Full Court erred in holding that, if the scheme had not been entered into or carried out, an amount of income from the use of the sum on deposit would have been, or could reasonably be expected to have been, included in the assessable incomes of the taxpayers for the year of income. They submit that there is no possible way of knowing whether the amount actually derived from the investment, or any other particular amount, would have been included in the assessable income of the taxpayers had they chosen not to make the investment that they did. It is said that, if the taxpayers had not entered into the scheme, there would have been no interest and no amount would have been included in assessable income with the result that the definition of "tax benefit" set out above makes no sense in the context of the present case.

The submission turns upon the use in par (a) of s 177C(1) of the expression "an amount not being included". This applies where, but for the scheme, "that amount" would have been included in the assessable income or might reasonably have been expected to be so included. The submission is that the reference in this case is to the amount of interest actually received from EPBCL after the imposition of withholding tax. It is said that without the scheme there would have been no investment in EPBCL, that amount would not have existed, and par (a) of s 177C(1) would have had no subject matter upon which to operate.

In our view, the amount to which par (a) refers as not being included in the assessable income of the taxpayer is identified more generally than the taxpayers would have it. The paragraph speaks of the amount produced from a particular source or activity. In the present case, this was the investment of $40 million and its employment to generate a return to the taxpayers. It is sufficient that at least the amount in question might reasonably have been included in the assessable income had the scheme not been entered into or carried out.

Section 177D presents the question whether, having regard to the eight categories of matter identified in par (b), posited as objective facts, in the present case a reasonable person would conclude that the taxpayers entered into the scheme for the dominant purpose of enabling each to obtain a "tax benefit" in the necessary sense. A particular application of the definition provision of tax benefit in s 177C(1) thus involves consideration of the particular materials answering the various categories in par (b) of s 177D.

The taxpayers were determined to place the $40 million in short-term investment for the balance of the then current financial year. The reasonable expectation is that, in the absence of any other acceptable alternative proposal for "off-shore" investment at interest, the taxpayers would have invested the funds, for the balance of the financial year, in Australia. The amount derived from that investment then would have been included in the assessable income of the taxpayers. The interest rate in the Cook Islands was 4.5 per cent below applicable bank rates in Australia. It reasonably could be concluded that the amount the taxpayers would have received on the Australian investment would have been not less than the amount of interest in fact received from the investment with EPBCL. Accordingly, there is no error adverse to the taxpayers in identifying the amount of the "tax benefit" as an amount equal to the interest less the Cook Islands withholding tax.

The submissions by the taxpayers on their notice of contention should be rejected.

The appeals should be allowed with costs. The orders made by the Full Court should be set aside. In place thereof, the appeals to the Full Court should be allowed, the orders of the primary judge set aside and the applications made by the taxpayers at first instance should be dismissed. The taxpayers should bear the costs of the Commissioner in the Full Court and at first instance as well as in this Court.

The appeals turn on the application of the very general words of Pt IVA of the Income Tax Assessment Act 1936 Cth to a very special set of facts. They are set out in the joint judgment of Brennan CJ, Dawson, Toohey, Gaudron, Gummow and Kirby JJ. Upon those facts, this case is far removed from 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. "Scheme" is defined widely for the purposes of Pt IVA and includes any "action, course of action or course of conduct" (s 177A(1)(b)). The unilateral act of a taxpayer may therefore constitute a "scheme" for the purpose of that Part (s 177A(3)). However, Pt IVA does not authorise the Commissioner to make a determination under par (a) of s 177F(1) merely because a taxpayer has arranged its business or investments in a way that derives a tax benefit. More is required before the Commissioner of Taxation can lawfully make a determination under that paragraph. First, the scheme must be examined in the light of the eight matters set out in par (b) of s 177D. Second, that examination must give rise to the objective conclusion that the taxpayer or some other person entered into or carried out the scheme or a part of the scheme for the sole or dominant purpose of enabling the taxpayer or the taxpayer and some other person to obtain a tax benefit in connection with the scheme. That 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 the taxpayer.

The facts of the present case show much more than a switch of investments resulting in a tax benefit. The elaborate nature of the scheme and its attendant circumstances lead inevitably to the conclusion that the scheme was not merely tax driven but that its dominant purpose was to enable the taxpayer to obtain a tax benefit by participating in the scheme. That being so, the appeals must be allowed.

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Judgment (84 paragraphs)

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Cases Cited (6)