Commissioner of Taxation v Trail Bros Steel & Plastics Pty Ltd

Federal Court of Australia (Full Court)|2010-07-29|Before: Gordon JJ

) 243 ALR 728 Repatriation Commission v Hill (2002) 69 ALD 581 Scicluna v New South Wales Land and Housing Corporation (2008) 72 NSWLR 674 Tax Agents' Board v Bray (2004) 58 ATR 118 TNT Skypak International (Aust) Pty Ltd v Federal Commissioner of Taxation (1988) 19 ATR 1067 WR Carpenter Holdings Pty Ltd v Federal Commissioner of Taxation (2007) 161 FCR 1 WR Carpenter Holdings Pty Ltd v Commissioner of Taxation (2008) 237 CLR 198

Counsel for the Appellant: M Moshinsky SC with M Brennan

Solicitor for the Appellant: Australian Government Solicitor

Counsel for the Respondent: ML Robertson with JR Ward

Solicitor for the Respondent: Cleary Hoare Solicitors

AND: TRAIL BROS STEEL & PLASTICS PTY LTD (ACN 073 482 078)

JUDGES: DOWSETT, EDMONDS AND GORDON JJ

CORRIGENDUM 1 In paragraph 34, line 5 of the Reasons for Judgment, delete the word "I" and insert "We" in lieu thereof. 2 In paragraph 44, lines 2 and 5 of the Reasons for Judgment, delete the word "I" and insert "we" in lieu thereof.

I certify that the preceding two (2) numbered paragraphs are a true copy of the Corrigendum to the Reasons for Judgment herein of the Honourable Justices Dowsett and Gordon.

AND: TRAIL BROS STEEL & PLASTICS PTY LTD (ACN 073 482 078)

The Appeal be dismissed.
The Cross-Appeal be dismissed.
Each party bear their own costs of the Appeal.

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

AND: TRAIL BROS STEEL & PLASTICS PTY LTD (ACN 073 482 078)

INTRODUCTION 1 Trail Bros Steel & Plastics Pty Ltd (ACN 073 482 078) (the Taxpayer) employed Mark Trail and Allan Trail under written employment contracts executed on 1 April 1996. 2 Each employment contract required the Taxpayer, in addition to remuneration, to make superannuation contributions to the Trail Bros Superannuation Fund (the Fund) totalling $297,000 during the first four years of trading. $120,000 was paid by the Taxpayer to the Fund in the year ended 30 June 1996, representing a $60,000 payment for each employee which was deductible from the Taxpayer's assessable income: s 82AAC(2D) of the Income Tax Assessment Act 1936 (Cth) (the 1936 Act). 3 In the year ended 30 June 1997 (the 1997 year), the operation of Pt III, Div 3, Subdiv AA of the 1936 Act (which included s 82AAC) was amended by Sch 4 of the Taxation Laws Amendment Act (No 2) 1997 (Cth), the Superannuation Contributions Tax (Consequential Amendments) Act 1997 (Cth) and the Superannuation Contributions and Termination Payments Taxes Legislation Amendment Act 1997 (Cth) to limit deductibility for superannuation contributions under the employment contracts to annual age-based deduction limits for each employee: $27,170 for Mark Trail and $9,782 for Allan Trail in the 1997 year and $28,420 for Mark Trail and $10,232 for Allan Trail in the year ended 30 June 1998 (the 1998 year). 4 In response, the Taxpayer and the two employees orally agreed to vary the employment contracts so that instead of making superannuation contributions to the Fund, the Taxpayer would make payments to the Trail Bros Pty Ltd Employee Welfare Fund (the Welfare Fund). The Welfare Fund was established by a deed of trust dated 19 June 1997. In both the 1997 year and the 1998 year, the Taxpayer paid $210,000 to the Welfare Fund. The Taxpayer claimed a deduction for each payment. The Commissioner disallowed the deductions on the basis that the amounts were not deductible or, if they were, that Pt IVA of the 1936 Act operated to disallow the deductions. 5 The Administrative Appeals Tribunal (the AAT) found the payments to the Welfare Fund were deductible under s 51(1) of the 1936 Act for the 1997 year and under s 8-1(1) of the Income Tax Assessment Act 1997 (Cth) (the 1997 Act) for the 1998 year. The AAT also found that although there was a scheme within the meaning of s 177A(1) of the 1936 Act, Pt IVA of the 1936 Act did not apply because the Taxpayer had not obtained a tax benefit under s 177C in connection with a scheme to which Pt IVA applied. The AAT did not consider the application of s 177D(b) of the 1936 Act. 6 The Commissioner appealed to the Federal Court pursuant to s 44 of the Administrative Appeals Tribunal Act 1975 (Cth) (the AAT Act). That appeal was limited to the AAT's treatment of Pt IVA of the 1936 Act. 7 The trial judge held that although the AAT identified the correct test in determining whether the Taxpayer had obtained a tax benefit within the meaning of s 177C of the 1936 Act, it in fact applied the wrong test. The trial judge found that the Taxpayer had obtained a tax benefit in each year and, contrary to the submission of the Commissioner, found that the tax benefit was not the $210,000 paid to the Welfare Fund in each of the 1997 year and the 1998 year, but the difference between the $210,000 and the superannuation age-based deduction limits (the differential). His Honour set aside the decision of the AAT and remitted the matter to the AAT.

ISSUES ON APPEAL AND BY WAY OF CROSS-APPEAL 8 The appeal and the cross-appeal raised two discrete groups of issues. The first issue raised by the Taxpayer in the cross-appeal concerned whether the Commissioner's appeal to the Federal Court was "on a question of law" as required by s 44 of the AAT Act. The second group of issues concerned Pt IVA of the 1936 Act and raised the following specific questions: 1. was the trial judge correct to conclude that the AAT applied the wrong test in relation to the "tax benefit" for the purposes of the application of Pt IVA; 2. did the trial judge err in not remitting the matter to the AAT on the basis that the Taxpayer's tax benefit in connection with the scheme was the full amount of the deductions claimed; and 3. did the trial judge err in finding that, notwithstanding that there was no evidence before the AAT to enable a sufficiently reliable prediction to be made of an alternative postulate, no payments due under the employment contracts beyond the age-based limits would have been paid into the Fund. 4. Those three questions were raised by the Commissioner on appeal. By the cross-appeal the Taxpayer contended that having determined that the tax benefit in connection with the scheme was not $210,000, the Commissioner's assessment was excessive and the trial judge should have dismissed the Commissioner's appeal.

ISSUE 1 - QUESTION OF LAW? 9 Section 44(1) of the AAT Act provides for an appeal to the Federal Court from any decision of the AAT on a "question of law". 10 By the cross-appeal, the Taxpayer contends the trial judge erred in holding that the following questions in the Commissioner's notice of appeal to the Federal Court were "on a question of law" within s 44 of the AAT Act: 2.2 Whether in taking into account the income tax objectives of the [Taxpayer] … the [AAT] took into account an irrelevant consideration or irrelevant considerations. 2.3 Whether the [AAT's] conclusion … that had the scheme not been implemented, the [Taxpayer] would have made the payments in a way that was fully tax deductible was a finding of fact that was not supported by probative evidence or was or involved an inference that was not reasonably open on the facts. 2.4 Whether in having regard to the following matters the [AAT] took into account irrelevant considerations, and / or made findings of fact that were not supported by probative evidence and / or made inferences that were not reasonably open on the facts: … 11 The Taxpayer referred to, and placed considerable reliance on, Comcare v Etheridge (2006) 149 FCR 522 at 526 - 527 in support of its submission that the questions listed in paragraph [10] above were not "pure questions of law" because they "raised" or "involved" a question of law but were not "on" a question of law. In particular, the Taxpayer submitted that a question which asked whether the AAT took into account irrelevant considerations was an impermissible mechanism to review the AAT's fact finding function and that the appropriate mechanism for a review of that kind was the Administrative Decisions (Judicial Review) Act 1977 (Cth) (the ADJR Act). 12 In Etheridge 149 FCR 522, the Full Court of the Federal Court restated two principles. First, that "on a question of law" is narrower than an appeal that merely "involves" a question of law with the result that where an appeal lies "on a question of law", the subject matter of the appeal is the question or questions of law: Etheridge 149 FCR 522 at [13] - [15]; see also Scicluna v New South Wales Land and Housing Corporation (2008) 72 NSWLR 674 at [4] and TNT Skypak International (Aust) Pty Ltd v Federal Commissioner of Taxation (1988) 19 ATR 1067 at 1069 - 1070 (per Gummow J). Secondly, a mixed question of fact and law is not a question of law within the meaning of s 44(1) of the AAT Act: Etheridge 149 FCR 522 at [16]; see also Price Street Professional Centre Pty Ltd v Commissioner of Taxation (2007) 243 ALR 728 at [40] (per Edmonds J). For present purposes it is sufficient to note that the analysis in Etheridge 149 FCR 522 was not intended to be, and is not, exhaustive of what is meant by "on a question of law" for the purposes of s 44 of the AAT Act. 13 As the trial judge's reasons for decision clearly demonstrated, what is "on a question of law" for the purposes of s 44 of the AAT Act has been analysed in many cases and includes: 1. Whether the AAT has identified the relevant legal test: Scicluna 72 NSWLR 674 at [68] and Collins v Administrative Appeals Tribunal (2007) 163 FCR 35 at [55]; 2. Whether the AAT has applied the correct test: Repatriation Commission v Hill (2002) 69 ALD 581 at [59]; Commissioner of Taxation v Zoffanies Pty Ltd (2003) 132 FCR 523 at [25]; Tax Agents' Board v Bray (2004) 58 ATR 118 at [19]; Collins 163 FCR 35 at [55]; 3. Whether there is any evidence to support a finding of a particular fact: Minister for Immigration and Multicultural Affairs v Al Miahi (2001) 65 ALD 141 at [34]; and 4. Whether facts found fall within a statute properly construed: Collector of Customs v Pozzolanic Enterprises Pty Ltd (1993) 43 FCR 280 at 287. That list is by no means exhaustive: see, by way of example, Pozzolanic 43 FCR 280 at 287. 14 The Commissioner's notice of appeal raised questions of law of the kinds identified in [13] above. As Allsop J said in Collins 163 FCR 35 at [55], a question of law "directing the Court's attention to the manner in which the Tribunal failed to discharge its obligations according to law" is a "legitimate subject of an 'appeal'" under s 44(1) of the AAT Act and nothing in the cases "limits the reach of s 44 to questions of law divorced from the need to look at facts". None of the decisions in Etheridge 149 FCR 522, Price Street Professional Centre 243 ALR 728 at [22] - [27], Federal Commissioner of Taxation v Cooper (1991) 29 FCR 177 or Commissioner of Taxation v Swansea Services Pty Ltd (2009) 72 ATR 120 detract or depart from those principles: see Collins 163 FCR 35 at [55]. 15 Grounds 1 and 2 of the Taxpayer's cross-appeal fail and should be dismissed. Each question identified in paragraph [10] above was "on a question of law" and was properly the subject of appeal under s 44 of the AAT Act. The Taxpayer's contention that the appropriate mechanism for review of those questions in the Commissioner's notice of appeal was the ADJR Act is rejected.

(1) Statutory framework in relation to Part IVA 16 Adopting what the High Court said in Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404 at 413: Part IVA operates where (i) there is a "scheme" as defined in s 177A; (ii) there is a "tax benefit" which, [in relation to a deduction, is identified in s 177C(1)(b) as the whole or a part of a deduction that would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income] if the scheme had not been entered into or carried out; (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)). 17 In the AAT, the scheme was defined "to comprise the agreements to vary the contracts of employment and the implementation of that variation, including the establishment of the … [W]elfare [F]und and the contributions made to it": these findings were not the subject of appeal. Neither the existence nor the identification of the "scheme" for the purposes of s 177A is in dispute. 18 The real controversies between the Commissioner and Taxpayer were and remain whether the Taxpayer obtained a tax benefit in connection with the scheme in the 1997 year and in the 1998 year and if so, the amount of that tax benefit. 19 The AAT held no "tax benefit", within the meaning of s 177C(1)(b) of the 1936 Act, was obtained by the Taxpayer in connection with the scheme because if the scheme had not been entered into or carried out, the Taxpayer would have made payments "in a way that would have entitled [the Taxpayer] to deduct the amount of the payments" (emphasis added). As noted earlier, the trial judge found that the Taxpayer had obtained a tax benefit in each of the 1997 year and the 1998 year and, contrary to the submission of the Commissioner, the tax benefit was not $210,000 in each year but the differential. 20 The Commissioner and the Taxpayer both complain about the way in which the trial judge addressed the tax benefit issue. The Commissioner submits that the tax benefit was the whole of the deduction in each year and not the differential. The Taxpayer submitted, by way of cross-appeal, that the trial judge erred in concluding that the Taxpayer obtained any tax benefit.

(2) Issue 2(1) - Test in identification of the alternative postulate under s 177C 21 The starting point in any consideration of s 177C must be the whole of Pt IVA of the 1936 Act. No one provision can be viewed in isolation. As Gummow and Hayne JJ said in Commissioner of Taxation v Hart (2004) 217 CLR 216 at [37]: Taking Pt IVA as a whole, it is clear that ss 177D and 177F(1) are the two provisions about which the Part pivots. Section 177F(1) provides: "Where a tax benefit has been obtained, or would but for this section be obtained, by a taxpayer in connection with a scheme to which this Part applies, the Commissioner may - (a) in the case of a tax benefit that is referable to an amount not being included in the assessable income of the taxpayer of a year of income - determine that the whole or a part of that amount shall be included in the assessable income of the taxpayer of that year of income; or (b) in the case of a tax benefit that is referable to a deduction or a part of a deduction being allowable to the taxpayer in relation to a year of income - determine that the whole or a part of the deduction or of the part of the deduction, as the case may be, shall not be allowable to the taxpayer in relation to that year of income; and, where the Commissioner makes such a determination, he shall take such action as he considers necessary to give effect to that determination." Part IVA falls for consideration only where the Commissioner has made a determination under s 177F(1). A determination can be made only where a tax benefit has been obtained (or, but for s 177F(1), would be obtained) by a taxpayer in connection with a scheme to which Pt IVA applies. It follows, of course, that the concepts of "tax benefit", "scheme" and "scheme to which this Part applies" all have their part to play in deciding whether the power given to the Commissioner by s 177F(1) can be exercised. But it is important to consider what the Act says about those concepts having regard to two considerations. First, the various defined terms must be given operation in the interrelated way which s 177F(1) requires. Each of the defined terms takes its place in a single provision permitting the making of a determination. Secondly, each of the definitions must be understood bearing in mind that the inquiry required by Pt IVA is an objective, not subjective, inquiry. The objective nature of the inquiry required is evident from s 177D, which identifies the schemes to which Pt IVA applies. (Emphasis added). 22 Against that background, it is necessary to turn to the words of s 177C(1) of the 1936 Act. It provides, so far as is relevant, that: (1) Subject to this section, a reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to: (a) an amount not being included in the assessable income of the taxpayer of a year of income where that amount would have been included, or might reasonably be expected to have been included, in the assessable income of the taxpayer of that year of income if the scheme had not been entered into or carried out; or (b) a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out; or … and, for the purposes of this Part, the amount of the tax benefit shall be taken to be: (c) in a case to which paragraph (a) applies - the amount referred to in that paragraph; and (d) in a case to which paragraph (b) applies - the amount of the whole of the deduction or of the part of the deduction, as the case may be, referred to in that paragraph; … 23 Section 177C (read with the other provisions in Pt IVA) identifies that it is an "objective fact" whether a taxpayer obtained a tax benefit in relation to a scheme to which Pt IVA applies: Commissioner of Taxation v Peabody (1994) 181 CLR 359 at 382; Hart 217 CLR 216 at [37]; Federal Commissioner of Taxation v Lenzo (2008) 167 FCR 255 at [119] citing Commissioner of Taxation v Mochkin (2003) 127 FCR 185 at [26]. Absent a tax benefit, Pt IVA has no application: Lenzo 167 FCR 255 at [120] and Hart 217 CLR 216 at [33]. 24 In the case of a deduction, s 177C(1)(b) provides that it is an objective inquiry as to what would have been allowed or might reasonably be expected to have been allowed as a deduction had the "scheme" not been entered into or carried out: Epov v Federal Commissioner of Taxation (2007) 65 ATR 399 at [62] and Peabody 181 CLR 359 at 385 - 386. 25 The legislation requires a comparison between the relevant scheme and an alternative postulate: Hart 217 CLR 216 at [66]. 26 The alternative postulate requires a "prediction as to events which would have taken place if the relevant scheme had not been entered into or carried out and that prediction must be sufficiently reliable for it to be regarded as reasonable" (emphasis added). "A reasonable expectation requires more than a possibility": Lenzo 167 FCR 255 at [122] citing Peabody 181 CLR 359 at 385. The question posed by s 177C(1) is answered on the assumption that the scheme had not been entered into or carried out: Lenzo 167 FCR 255 at [121]. 27 The Commissioner submitted that in identifying the alternative postulate, s 177C of the Act "requires the entirety of the scheme to be ignored" and does not permit any part of the scheme to which Pt IVA applies to continue intact: see Lenzo 167 FCR 255 at [119] - [128] and [136]. That submission hides more than it reveals. 28 When assessing the alternative postulate or predicting the events that would or might take place, that question is answered on the assumption that the scheme has not been entered into or carried out: Lenzo 167 FCR 255 at [121]. Put another way, s 177C does require the entirety of the scheme to be ignored: Lenzo 167 FCR 255 at [136]. But that is not the entire question posed by s 177C. The rest of the question involves the objective enquiry of predicting the events that would have, or might reasonably be expected to have, taken place in the absence of the scheme. As Sackville J said in Lenzo 167 FCR 255 at [128]: [I]n determining whether the particular deduction claimed by the taxpayer would or might reasonably have been allowable, the Court must consider, in the absence of the scheme, what activity the taxpayer would have undertaken. The taxpayer can satisfy the onus of showing that he or she has not obtained a tax benefit in connection with a scheme if: • he or she would have undertaken or might reasonably be expected to have undertaken a particular activity in lieu of the scheme; and … (Emphasis added). 29 The particular activity or the events that would have, or might reasonably be expected to have, taken place in the absence of the scheme and which are identified as a result of the objective enquiry are not confined or defined by the scheme. Of course, it cannot be the same complete set of events giving rise to the scheme - that would be the scheme. But at the same time, the identification of the activity or the events does not necessarily preclude any element of the scheme. As the High Court has said, "scheme" is a word of wide import: Peabody 181 CLR 359 at 383; Hart 217 CLR 216 at [87]. 30 A scheme is usually comprised of a number of "steps" or "integers". It is conceivable that a scheme (comprising just some of the integers of a wider scheme to which Pt IVA applies) may be a scheme to which Pt IVA does not apply. If the narrower scheme is the particular activity or the events that would have or might reasonably be expected to have taken place in the absence of the scheme, then that is the alternative postulate. The difference between the deduction claimed in relation to the scheme and the allowable deduction from the narrower scheme is the tax benefit. Similarly, the alternative postulate may comprise some of the integers of the scheme to which Pt IVA applies and other integers which do not form part of that wider scheme. The express words of s 177C require a prediction about what would happen or might reasonably be expected to happen. It is necessarily a hypothetical analysis. But it is a hypothetical analysis directed at ascertaining what particular activity would have been (or might reasonably have been) undertaken if the scheme was not entered into. The "integers" that are relevant to that objective enquiry are not limited and "may not always permit the precise identification of … all the integers of a particular 'scheme'": Hart 217 CLR 216 at [43]. The integers will be different for each case and the onus is on the taxpayer to identify those integers which establish the alternative postulate. 31 It is contrary to the express words of s 177C (including s 177C(2)), its context and its purpose to exclude particular integers from a prediction about what would happen or might reasonably be expected to happen. Put another way, absent particular integers, the enquiry would not be an objective enquiry as required by s 177C but a prediction of what would happen or might happen having regard to only a sub-set of the integers available to a taxpayer. That is not the object of Pt IVA. 32 In the present appeal, the trial judge approached the tax benefit question posed by s 177C(1)(b) by asking "what activity would the [T]axpayer have undertaken or might reasonably be expected to have undertaken absent the scheme?" His Honour's first step was to isolate the particular activity that would or might reasonably be expected to have occurred and, in undertaking that step, stated that it was relevant to have regard to the evidence of the taxpayer as to the steps it says it would have undertaken or would have been likely to undertake in the absence of the scheme: Spotless 186 CLR 404 at 423 - 424. 33 His Honour concluded that although the AAT formulated the correct test, it applied a different test. The trial judge found the AAT's error arose because it did not have before it any evidence from the Taxpayer of the activity it would have undertaken or might reasonably be expected to have undertaken in the absence of the scheme. In particular, as his Honour stated: 1. the Taxpayer did not identify any particular arrangement that might actually have been in contemplation or might reasonably have been adopted in the absence of the scheme; 2. the Taxpayer called no evidence providing a foundation for an objective assessment, on all the evidence, that the Taxpayer would or might reasonably have been expected to take a particular course of action that would or might reasonably be expected to have given rise to an allowable deduction under the scheme; 3. no likely variation to the contracts was put in evidence nor the likely central terms of any potential variation; 4. none of the other directors of the Taxpayer were called to give evidence of the Taxpayer's likely course of conduct had the scheme not been entered into having regard to the potential frustration of the employment contracts by the legislative changes; and 5. no other director of the Taxpayer gave evidence that a common assumption upon which the contractual obligations rested had failed and, in consequence, in order to adjust the terms of the employment relationship, the Taxpayer would have been likely to undertake particular steps for a particular reason giving rise to particular payments that would or might reasonably be expected to have given rise to an allowable deduction. 34 The Taxpayer submitted that the Commissioner, not the Taxpayer, had the burden of identifying the alternative postulate and that only when the Commissioner had established an alternative postulate did the burden shift to the Taxpayer to show that the Commissioner's alternative postulate was only a "possibility not a prediction sufficiently reliable for it to be regarded as reasonable". I reject that submission. 35 It is the taxpayer who bears the onus to establish that there is no tax benefit in connection with a scheme: s 14ZZK (and s 14ZZO) of the Taxation Administration Act 1953 (Cth) (the TAA); McAndrew v Federal Commissioner of Taxation (1956) 98 CLR 263 at 268-9; Gauci v Commissioner of Taxation (1975) 135 CLR 81 at 89; McCormack v Commissioner of Taxation (1979) 143 CLR 284 at 303, 306 and 323; Commissioner of Taxation v Dalco (1990) 168 CLR 614 at 620, 623 - 625 and Lenzo 167 FCR 255 at [125]. 36 How the taxpayer does that is a matter for it. It may, for example as Sackville J said in Lenzo 167 FCR 255, lead evidence that the taxpayer would have undertaken a particular activity, or adopted a particular course, in lieu of the scheme. It is also conceivable that a taxpayer may not lead positive evidence of an alternative postulate because, for example, the result of any objective enquiry of the alternative postulate is inevitable. In the end, the Court will decide what would have been done, or might reasonably be expected to have been done, in lieu of the scheme having regard to all of the evidence that is led. If a taxpayer has given evidence of what he or she would have done but for entering the scheme, that evidence will be relevant and useful to the extent to which it reveals facts or matters that bear upon the objective determination of the alternative postulate. 37 In the present case, the trial judge was correct to conclude that the AAT was not in a position to identify as a sufficiently reliable alternative postulate that the Taxpayer would have discharged its contractual obligations to Mark Trail and Allan Trail under the employment contracts in a way that was fully deductible. As his Honour said, "[t]here was simply no evidence of the counterfactual as found" and, in particular, "no evidence to support the alternative postulate that 'a way' would have been found by the [T]axpayer to make the payments to the two brothers that would or might reasonably be expected to have resulted in an allowable deduction of the same kind as that claimed" (emphasis added). 38 His Honour was correct to set aside the decision of the AAT. The AAT did apply the wrong test.

(3) Issues 2(2) and (3) - Amount of tax benefit and remitter 39 Absent the scheme ("the agreements to vary the contracts of employment and the implementation of that variation, including the establishment of the … [W]elfare [F]und and the contributions made to it": see [17] above) and any evidence from the Taxpayer that it would have undertaken a particular activity in lieu of the scheme, the trial judge then considered what would have occurred or might reasonably be expected to have occurred in the absence of that scheme. 40 His Honour dealt with that issue by making a finding about the alternative postulate. His Honour stated: [58] The alternative postulate that represents a reasonable prediction of future events absent the scheme is that the taxpayer would have made payments to the two brothers up to the age-based limits provided for by the Act and would have sought to negotiate a variation to the contracts as to the balance payments which may have resulted in a new set of arrangements that may have given rise to an allowable deduction. However, in the absence of any real content or evidence of the relevant activity, it cannot be said that a deduction of the kind claimed under the scheme would have been allowable to the taxpayer or might reasonably be expected to have been allowable to the taxpayer absent the scheme, and thus the taxpayer has obtained a tax benefit in connection with the scheme in the amount of the allowable deductions in excess of the age-based limits. … [60] The matter is to be remitted to the Tribunal to determine the questions before it by applying the test so as to determine whether there is evidence which supports an hypothesis that the taxpayer would have undertaken or might reasonably be expected to have undertaken a particular activity in lieu of the scheme and whether that activity would or might reasonably be expected to have resulted in an allowable deduction of the same kind as the deduction claimed by the taxpayer under the scheme consistently with the methodology identified in the authorities and in particular, Commissioner of Taxation v Peabody (1994) 181 CLR 359; Commissioner of Taxation v Hart (2004) 217 CLR 216; and Federal Commissioner of Taxation v Lenzo (2008) 167 FCR 255 at 278 [121] to [125] and [128]; Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404. [61] If there is no evidence before the Tribunal that enables a sufficiently reliable prediction to be made of an alternate hypothesis that would or might reasonably be expected to have resulted in an allowable deduction of the kind claimed under the scheme, the hypothesis that represents a sufficiently reliable prediction of future events in the absence of the scheme, is that the taxpayer would have made payments to the Trail Bros Superannuation Fund of amounts equal to the age-based limits under the Act on behalf of each brother, and no sufficiently reliable prediction can be made as to the course of conduct that would or might reasonably be expected to have been adopted as to the balance payments due under the contracts except that no payments beyond the age-based limits would have been paid into the Trail Bros Superannuation Fund. (Emphasis added). 41 It is these paragraphs that raise the next issues on appeal. First, whether the predicted events (or the activity) that would or might reasonably be expected to have taken place in the absence of the scheme have to result in an allowable deduction of the same kind as the deduction claimed by the taxpayer as a result of the scheme (see para [60] of the trial judge's reasons for decision referred to in para [40] above). Secondly whether the trial judge was correct to conclude that the tax benefit was the differential and thirdly, whether the matter should be remitted to the AAT and, if so, on what basis? 42 The trial judge approached the question of the identification of the tax benefit (by reference to Peabody 181 CLR 359; Hart 217 CLR 216; Lenzo 167 FCR 255 at [121] - [125] and [128] and Spotless 186 CLR 404) by stating that part of the enquiry posed by s 177C was whether there was an allowable deduction of the same kind as that claimed under the scheme. 43 In the present appeal, that conclusion was significant because the Commissioner submitted that the trial judge erred when he held that the tax benefit was the differential. The Commissioner submitted that the tax benefit in this case was the whole of the amount claimed as a deduction under the scheme because the Taxpayer had not and could not identify any allowable deduction from any alternative postulate of the same kind (i.e. a deduction under the same section in the Act) as that claimed under the scheme. 44 Again, it is important to start with the statute, its context and its purpose. This Court is not construing the phrase "same kind", but the statute. For the reasons that follow, I do not consider that on the proper construction of s 177C, the allowable deduction identified in the alternative postulate must be of the same kind as that claimed as a deduction under the scheme. In fact, I consider that such a construction of s 177C is not consistent with the context and purpose of Pt IVA or with the decision of the High Court in Spotless 186 CLR 404. 45 First, the statute. In the context of s 177C(1)(b), it critically provides that: … 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: … (b) a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out; … (Emphasis added). 46 The Part is, of course, Pt IVA of the 1936 Act. As Gummow and Hayne JJ said in Hart 217 CLR 216 at [37], "tax benefit" is a defined term which "must be given operation in the interrelated way which s 177F(1) requires" and "must be understood bearing in mind that the inquiry required by Pt IVA is an objective, not subjective, inquiry". 47 Section 177F seeks to achieve a particular purpose - to cancel tax benefits which should not have been obtained. The focus of s 177C is the identification of an activity - the predicted events that would have or might have taken place in the absence of the scheme: see [24] - [33] above. Having identified the activity, the next task is to determine the allowable deduction as a result of that activity. 48 The notion of "kinds" of deduction may itself have enough difficulty or uncertainty to warrant rejecting it as a useful idea in this field. After all, the general provision of s 51 of the 1936 Act, and s 8-1 in the 1997 Act, encompass many kinds of outlays or outgoings without any firm basis for further classification of those deductible outlays into classes marked as "the same", "similar" and "different". But even if that is not a sufficient reason to discard any recourse to the notion of a "kind" of deduction, the more fundamental question remains - where, in Pt IVA, is there any basis for imposing a requirement that what is being compared to reveal the amount of a tax benefit must be capable of classification as the same kind of deduction? When the tax benefit that is to be identified requires consideration of a deduction that has been claimed (and is to be the subject of a calculation of a tax benefit for the purposes of Pt IVA) the determination of the amount of the benefit obtained from entering the scheme depends upon comparison of what has happened with what would have happened, or might reasonably be expected to happen, but for the entry into the scheme. That comparison does not assume, let alone require, that if the scheme had not been effected, the taxpayer would have ordered its affairs in a way that engaged the same provisions of the Act (or engaged the same provisions in the same way) as were said to be applicable to the events and transactions comprising the scheme. Imposing the notion that to determine the amount of the tax benefit, a comparison must be made between deductions of the same kind or class assumes, wrongly, that tax benefits follow only in cases where, but for the scheme, a taxpayer would have sought to engage the same provisions of the Act in ordering its affairs. There is no warrant for making that assumption. 49 In this case the positions to be compared are payment by an employer to the Welfare Fund and payment by an employer to a superannuation fund. Both are deductible in the hands of the employer but what matters for Pt IVA purposes is that the amount that was paid differs from (it was greater than) the amount that would have been paid if the scheme had not been adopted. It is the difference that is the tax benefit. 50 That construction of s 177C(1)(b) is consistent with the decision of the High Court in Spotless 186 CLR 404 at 424 which dealt with s 177C(1)(a). In Spotless 186 CLR 404, the taxpayer submitted that in the absence of the scheme (investment of funds on short term deposit in a bank account in the European Pacific Banking Co Ltd (EPBCL) in the Cook Islands), there would have been no investment in EPBCL and paragraph (a) of s 177C(1) would have had no subject matter upon which to operate: at 424. The Court rejected that submission and, in relation to the expression "an amount not being included" in s 177C(1)(a), stated: 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. (Emphasis added). 51 Four points are worth repeating. First, there is an interrelationship between the provisions and they must be construed accordingly. Secondly, ss 177C(1)(a) and (b) each speak of an amount produced from a particular source or activity - either to be included as income or allowed as a deduction. Thirdly, what that particular source or activity is will in each case turn on the facts. Fourthly, having identified the amount from the particular source or activity, it is sufficient that at least the amount in question might reasonably: 1. have been included in the assessable income (under s 177C(1)(a)); or 2. have been allowable as a deduction (under s 177C(1)(b)), had the scheme not been entered into or carried out. 52 As that analysis reveals, in the identification of the tax benefit, no part of the enquiry posed by s 177C enquires whether there was an allowable deduction of the same kind as that claimed under the scheme. Any suggestion to the contrary in earlier authorities (e.g. Lenzo 167 FCR 255 at [121] - [125] and [128]) may now be put to one side as explained in Spotless 186 CLR 404. 53 In the present appeal, the trial judge was right to conclude that the reasonable expectation was that, in the absence of the scheme, the Taxpayer would have paid superannuation to the Fund up to the aged-based limits and it reasonably could be concluded that the amount the Taxpayer would have received as an allowable deduction would have not been less than the amount of that payment. However, that identification of the tax benefit does not depend on the allowable deduction being of the same kind as that disallowed. 54 Consequently, the trial judge did not err in not remitting the matter to the AAT on the basis that the Taxpayer's tax benefit in connection with the scheme was the full amount of the deductions claimed. The tax benefit was not $210,000 but the differential. Further, the trial judge did not err in finding that, notwithstanding that there was no evidence before the AAT to enable a sufficiently reliable prediction to be made of an alternative postulate, no payments due under the employment contracts beyond the age-based limits would have been paid into the Fund. In the circumstances of this case, no other conclusion was open. The Commissioner's appeal grounds 2 to 7 (inclusive) and the Taxpayer's grounds of cross-appeal numbered 3 to 5 (inclusive) are dismissed.

ALLEGED INVALIDITY OF PART IVA ASSESSMENT 55 The Taxpayer then contended (by cross-appeal grounds 6 and 7) that the consequence of the trial judge's finding that the tax benefit was not the $210,000, but the differential, was that the Commissioner's power to make a determination under s 177F of the 1936 Act was never enlivened. As a result, the Taxpayer submitted that this necessitated the trial judge to have dismissed the Commissioner's appeal on the basis that the Taxpayer had established that the Commissioner's assessment was excessive. 56 The Taxpayer conceded that its submission was contrary to authority and, in particular, the decision of Hill J in Commissioner of Taxation v Sleight (2004) 136 FCR 211 at [103] - [107]. The Taxpayer invited us to overrule Sleight 136 FCR 211 on the basis that the decision was inconsistent with earlier authority including Peabody 181 CLR 359 and Commissioner of Taxation v Jackson (1990) 27 FCR 1 at 9. We refuse to do so. 57 It is not open to a taxpayer to challenge the validity of an assessment under Pt IVA of the 1936 Act by showing some error in the making of the determination. The following propositions are now well established: 1. Section 177(1) of the 1936 Act provides that production of a notice of assessment or a copy, even in proceedings challenging an assessment under Pt IVC of the TAA, will be conclusive evidence "of the due making of the assessment". Section 175 of the 1936 Act (read with s 175A) ensures the validity of an assessment is not affected by the fact that any provision of the tax legislation has not been complied with. As a result, the issue on appeal under Pt IVC of the TAA is whether the assessment is excessive: Sleight 136 FCR 211 at [104]; see also Commissioner of Taxation v Futuris Corporation Ltd (2008) 237 CLR 146 at [24]. 2. "[T]he due making of the assessment" was intended to cover and does cover all procedural steps other than those, if any, going to substantive liability and thereby contributing to the excessiveness of the assessment: Sleight 136 FCR 211 at [105] and George v Federal Commissioner of Taxation (1952) 86 CLR 183. 3. The making of a determination under s 177F of the 1936 Act is not open to challenge in Pt IVC proceedings by showing some error in the making of the determination: WR Carpenter Holdings Pty Ltd v Federal Commissioner of Taxation (2007) 161 FCR 1 at [43] - [44] and [56]; WR Carpenter Holdings Pty Ltd v Commissioner of Taxation (2008) 237 CLR 198 at [6] and [9]; Sleight 136 FCR 211 at [106] - [107]; Deputy Commissioner of Taxation v Richard Walter Pty Limited (1995)183 CLR 168 at 184 and Peabody 181 CLR 359 at 382. The making of a determination is procedural and does not go to substantive liability: WR Carpenter 161 FCR 1 at [43] and [50] and Peabody 181 CLR 359 at 382. As the Court said in WR Carpenter 161 FCR 1 at [48]: [T]he Commissioner's determination under s 177F is posited not on the Commissioner's opinion about the tax benefit or that such a benefit results in connection with the scheme, for these are matters of objective fact. They are elements or criteria for liability to tax, but the Commissioner's opinion about them is not. In that sense, the determination is procedural and the due making of it is beyond examination. (emphasis added). See also and cf WR Carpenter 161 FCR 1 at [56] and Richard Walter 183 CLR 168 at 184. 4. A determination having been made by the Commissioner, the issues of objective fact in a Pt IVC proceeding will be whether there was a scheme to which Pt IVA applied and if so, whether there was a tax benefit obtained in connection with that scheme: WR Carpenter 161 FCR 1 at [45], [48] and [50] citing Sleight 136 FCR 211 at [110]; Jackson 27 FCR 1 at 9; Peabody 181 CLR 359 at 382. The onus is on the taxpayer to show objectively that there was no scheme in connection with which the taxpayer obtained a tax benefit: Sleight 136 FCR 211 at [110]. As Hill J said in Sleight 136 FCR 211 at [110]: If the taxpayer satisfies that burden he or she will have shown the assessment was excessive. That will not be shown by the taxpayer demonstrating that the person who made the determination in some way erred in making it so that the discretion conferred upon the Commissioner miscarried. 5. Consequently, the erroneous identification by the Commissioner of the scheme, or the misconception by him as to the connection of a tax benefit with such a scheme, will not be fatal to the application of Pt IVA: WR Carpenter 161 FCR 1 at [45] citing Peabody 181 CLR 359 at 382. 58 The Taxpayer's cross-appeal as to the validity of the assessment should be dismissed. The assessment is not invalid. The making of the Commissioner's determination is procedural - it is not open to challenge. The Taxpayer's submissions are contrary to the express words of the 1936 Act (ss 175, 175A and 177) and contrary to long established authority. If the Taxpayer's submission was taken to its logical conclusion, a clerical overstatement of a very small amount in the calculation of the tax benefit would result in the invalidity of the determination and the resulting assessment, thereby entitling a taxpayer to wholly succeed on appeal. Such a result demonstrates the fallacy in the Taxpayer's submission. 59 The fact that the tax benefit, objectively determined, is the differential does not lead to the dismissal of the Commissioner's appeal. It is neither necessary nor appropriate to consider overruling Sleight 136 FCR 211. That decision was and remains consistent with both the Act and authority. Grounds 6 and 7 of the Taxpayer's cross-appeal are dismissed.

ORDERS 60 For those reasons, we would dismiss the appeal and the cross-appeal. The effect of those orders is that the decision of the AAT of 12 October 2007 is set aside and the matter is remitted to the AAT to be determined in accordance with the reasons of the Court. The AAT will be required to complete its analysis of the application of Pt IVA and, in particular, the application of s 177D(b) of the 1936 Act. 61 On the question of costs, each party should bear their own costs of the appeal. Both the Commissioner and the Taxpayer were unsuccessful. I certify that the preceding sixty-one (61) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Dowsett and Gordon.

REASONS FOR JUDGMENT EDMONDS J: 62 I have had the great advantage of reading the reasons of Dowsett and Gordon JJ in draft. I agree with their Honours that both the Commissioner's appeal and the Taxpayer's cross-appeal should be dismissed and generally for the reasons given by their Honours. However, I want to add some observations of my own. 63 Where I use undefined terms or acronyms in these reasons which are defined in the reasons of Dowsett and Gordon JJ, the undefined terms or acronyms shall bear the same meaning as they have in their Honours' reasons.

Grounds 4 and 5 64 The Commissioner submitted that the primary judge erred when he concluded that the tax benefit was not the $210,000 paid to the Welfare Fund in each of the 1997 and 1998 years, but the difference (what Dowsett and Gordon JJ called 'the differential') between $210,000 and the superannuation age-based deduction limits for Messrs Mark and Allan Trail in each of those years. The basis of this submission was that any allowable deduction under the alternative postulate (or hypothetical construct as it is sometimes called) had to be of the same kind, in the sense of being allowable under the same provision, as the deduction under the impugned scheme is allowable, before it went in reduction of the quantum of the tax benefit obtained in connection with a scheme. In other words, in the present context, because any deductions for contributions to the Fund were only allowable (up to the superannuation age-based deduction limits) under s 82AAC and not under s 51(1) of the 1936 Act (1997 year) or s 8(1) of the 1997 Act (1998 year) whence contributions to the Welfare Fund were allowable as deductions, the quantum of the tax benefit was the whole of the amounts contributed to the Welfare Fund and not the differential. 65 I am in total agreement with their Honours that there is no foundation for such a construction of s 177C(1)(b) of the 1936 Act; when it speaks of 'a deduction being allowable to the taxpayer … where the whole or a part of that deduction … might reasonably be expected not to have been allowable, to the taxpayer', it is speaking quantitatively and is not requiring symmetry between the provision under which the deduction is allowable under the impugned scheme and the provision under which a deduction is allowable under the alternative postulate, before the latter can reduce the quantum of the tax benefit. This does not mean that the taxpayer is at large in pointing to some alternative allowable deduction, having no relevance to the impugned scheme, to reduce the quantum of the tax benefit; unless a deduction is allowable under the alternative postulate, it would not be taken into account in reducing the quantum of the tax benefit. In other words, it is the alternative postulate that provides the limitation; not the requirement of symmetry between the provision under which the scheme deduction is allowable and the provision under which an alternative postulate deduction is allowable, before the latter can be taken into account in reducing the quantum of the tax benefit. 66 It is true that the learned primary judge did refer to 'an allowable deduction of the same kind as the deduction claimed by the taxpayer under the scheme' (emphasis added) in [60] of his reasons. However, that has to be read in context. What his Honour said was this: '[60] The matter is to be remitted to the Tribunal to determine the questions before it by applying the test so as to determine whether there is evidence which supports an hypothesis that the taxpayer would have undertaken or might reasonably be expected to have undertaken a particular activity in lieu of the scheme and whether that activity would or might reasonably be expected to have resulted in an allowable deduction of the same kind as the deduction claimed by the taxpayer under the scheme consistently with the methodology identified in the authorities … [61] If there is no evidence before the Tribunal that enables a sufficiently reliable prediction to be made of an alternate hypothesis that would or might reasonably be expected to have resulted in an allowable deduction of the kind claimed under the scheme, the hypothesis that represents a sufficiently reliable prediction of future events in the absence of the scheme, is that the taxpayer would have made payments to the Trail Bros Superannuation Fund of amounts equal to the age-based limits under the Act on behalf of each brother, and no sufficiently reliable prediction can be made as to the course of conduct that would or might reasonably be expected to have been adopted as to the balance payments due under the contracts except that no payments beyond the age-based limits would have been paid into the Trail Bros Superannuation Fund.' (Emphasis added). I have two observations to make on this passage from his Honour's reasons. First, the references to 'claimed by' in [60] and 'claimed' in [61] should be to 'allowable to' and 'allowable'; s 177C(1)(b) is concerned with deductions allowable not with deductions claimed. Second, when read in context, it is clear, in my view, that his Honour's references to the 'same kind' and 'kind' are quantitative references, namely, as meaning 'same amount' and 'amount'. If that not be right, then, with respect, I would have to disagree with his Honour.

Grounds 6 and 7 67 I do not understand the import of these grounds. If, for the purposes of analysis only, one accepts that the primary judge erred in finding that it would or might reasonably be expected that, in the absence of the scheme, 'no payments [due under the contracts by the Taxpayer] beyond the age-based limits would have been paid into the Trail Bros Superannuation Fund' ([61]) (Ground 6) and that the primary judge ought to have held that it would or might reasonably be expected that, in the absence of the scheme, the Taxpayer would have made the payments it was required to make under the employment contracts into the Fund (Ground 7), the Taxpayer would still be entitled to allowable deductions in each of the years under the alternative postulate up to the superannuation age-based deduction limits with the consequence, under the analysis in [64] and [65] above, that the quantum of the tax benefit was limited to the differential.

Grounds 6 and 7 68 There are two strings to these grounds of appeal; both are out of tune, if not broken. First, the Taxpayer submitted that because the primary judge found that the tax benefit obtained by the Taxpayer in connection with the scheme was not the $210,000 paid to the Welfare Fund in each of the 1997 and 1998 years, but the differential, the Commissioner's assessment was excessive and the primary judge erred in allowing the Commissioner's appeal from the AAT; according to the Taxpayer, his Honour should have dismissed the Commissioner's appeal. 69 With respect, this involves a total misconception of the consequences of what occurred below. 70 A taxpayer carries the onus of proving that an assessment is excessive: ss 14ZZK(b) and 14ZZO(b) of the TAA. If the Commissioner disallows a taxpayer a claimed deduction of say $1,000 and the taxpayer, on reference to the AAT, succeeds in overturning the disallowance of his objection, he will have shown that the assessment is excessive. However, if the Commissioner appeals the AAT's decision to this Court and this Court allows the deduction but only to the extent of $400, the taxpayer will have proven that the assessment is excessive but only to the extent of $400. The Court would not dismiss the Commissioner's appeal; on the contrary, it would allow it (in part) and remit the matter to the Commissioner for amendment in accordance with its reasons. 71 Similarly, in the present case involving the application of Pt IVA, the fact that the Court found that the tax benefit was limited to the differential and not the total amount of the contributions to the Welfare Fund as assessed by the Commissioner does not mean that the Taxpayer has proven that the assessment is excessive such as to lead to the dismissal of the Commissioner's appeal from the AAT's decision. What it means is that if, on remitter to the AAT, the AAT decides the s 177D(b) issue against the Taxpayer, the Taxpayer will have proven that the assessment is excessive, but only to the extent of the differential. If, on the other hand, on remitter to the AAT, the AAT decides the s 177D(b) issue in favour of the Taxpayer, then the Taxpayer will have proven that the assessment is excessive. In either event, the Commissioner must take such action as is necessary to give effect to the AAT's decision: s 14ZZL of the TAA. 72 Second, the Taxpayer submitted that because the primary judge found that the tax benefit obtained by the Taxpayer in connection with the scheme was not the $210,000 paid to the Welfare Fund in each of the 1997 and 1998 years, but the differential, the making of the determination and the assessment to give effect to it are invalid. As their Honours, Dowsett and Gordon JJ, say at [57] of their reasons, it is not open to a taxpayer to challenge the validity of an assessment to give effect to a determination made under Pt IVA by showing some error in the making of the determination: ss 175, 175A and 177(1) of the 1936 Act; Commissioner of Taxation v Futuris Corporation Ltd (2008) 237 CLR 146 at [24]. The only issue on appeal under Pt IVC of the TAA is whether the assessment is excessive. The Taxpayer may prove that the assessment is excessive in a number of ways but none of them will lead to the invalidity of the assessment. I certify that the preceding eleven (11) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Edmonds.

Superannuation Contributions Tax (Consequential Amendments) Act 1997(Cth)

Superannuation Contributions and Termination Payments Taxes Legislation Amendment Act 1997(Cth)

(Cth), the Superannuation Contributions Tax (Consequential Amendments) Act 1997(Cth)

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Judgment (25 paragraphs)

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