The scheme
85 The respondent identified the scheme in similar terms in relation to the claims of both applicants. As set out in his reply to Mr Cooke's request for particulars for the 1988 year the scheme included the Plantation Agreement, the Trust Deed, the prospectus, the application for units in the Trust, the Letter of Credit Agreement between Growth Industries and the Plantation Manager, the loan from Midwest to the Mr Cooke, Loans from the Bank to the Plantation Manager and from the Plantation Manager to Midwest, the deposit of part of the proceeds of Mr Cooke's management fees by the Plantation Manager with a subsidiary of the Bank and by that subsidiary with the Bank in order to secure the letter of credit. The respondent identified as an alternative a scheme consisting only of the Plantation Agreement and the Trust Deed, "entered to in the context of the agreements, events and circumstances" comprising the other documents and transactions identified. The respondent also put forward a further alternative that would include all of the above as well as "other similar AHP No 1 Plantation Agreements with other investors incorporating the 'guaranteed return option' and/or similar loans from Midwest to such investors financing their participation in AHT No 1 and AHP No 1."
86 The evidence of the applicants establishes that at the time of making their investments they knew nothing about the transactions emphasised in bold in [85]. The applicants therefore submit that these transactions cannot be part of the scheme. In Commissioner of Inland Revenue v BNZ Investments Limited (2001) 20 NZTC 17,103 Blanchard J, referring to a New Zealand anti-avoidance provision dealing with tax avoidance "arrangements", made a similar point saying at [172]:
"It is a fundamental pre-requisite to the use of s 99 against the taxpayer that there be a contract, agreement, plan or understanding (the words the legislature chose to use in s 99(1) in defining "arrangement") in which the taxpayer is a participant. This state of affairs cannot exist for the taxpayer unless there has been formally or informally - even if unenforceably - a consensus between the taxpayer and another or others as to what, in general terms, will occur pursuant to the arrangement. The taxpayer does not have to know all the detail or be able to discern exactly how the arrangement will avoid tax by producing the illegitimate tax advantage, by which I mean an advantage which the legislature cannot have contemplated as flowing from the legislation. But the taxpayer must at least have a broad appreciation of the character of what is occurring."
87 Those comment of Blanchard J can equally apply to the identification of the relevant "scheme" under Part IVA. For this reason, the transactions of which the applicants were unaware at the relevant time cannot be part of the Part IVA scheme. In so far as the respondent contends that the persons who entered into the scheme or carried out the scheme include the applicants, the Plantation Manager and the other parties to the dealings and transactions identified by the respondent as included in the scheme, there is a difficulty. There is no evidence before me as to what the other investors did or did not do, for instance whether all or any of them took advantage of the guaranteed return.
88 It my view, it is only the respondent's alternative "scheme" that can be considered in this proceeding. This scheme meets the requirement noted by Hill J in Hart v Commissioner of Taxation [2002] FCAFC 222 at [44] ("Hart") that the definition of a scheme must be able to "stand on its own feet". The tax benefit identified by the respondent is the deductions that would be obtained by each applicant in respect of management fees, licence fees and guaranteed return fees. This leaves for consideration the question of whether the sole or dominant purpose of the applicants in entering into the scheme was to obtain a tax benefit having regard to the matters set out in s 177D(b); see also s 177A(5).
89 The respondent submits that although AHP No 1 was itself speculative, the provision for a guaranteed return meant that the applicants obtained deductions at little or no risk to themselves. Most of their initial outlay was secure and they were expecting a tax deduction for 95 % of their contributions. Furthermore both applicants had experienced a significant rise in income that, in the absence of a substantial tax deduction, would generate a tax liability that they would have difficulty in meeting. This it is submitted, "made the success or failure of the project a matter of indifference" to the investors and indicates that their dominant purpose was obtaining the tax deduction.
90 In assessing whether the dominant purpose of the applicants in entering into the scheme was to obtain a tax benefit, it is the objective purpose that must be ascertained not the subjective purpose or state of mind of the applicants; Commissioner of Taxation (Cth) v Spotless Services Ltd (1996) 186 CLR 404 ("Spotless") at 421 - 422; Eastern Nitrogen Ltd v Commissioner of Taxation (2001) 108 FCR 27 at [81] - [82] and [87] - [88] per Carr J with whom Sundberg J agreed. In Spotless, at 416, the majority of the High Court stated that a dominant purpose, in its ordinary meaning, is one "which was the ruling, prevailing or most influential purpose". This must be assessed having regard to the matters set out in s 177D(b) and the conclusion must be one to which a reasonable person would come; Spotless, at 422. The matters stated in s 477D(b) are comprehensive and as Hill J (with whom Ryan and Cooper JJ agreed) stated in Peabody v Commissioner of Taxation (1993) 40 FCR 531 at 543:
"In arriving at his conclusion, the Commissioner must have regard to each and every one of the matters referred to in s 177D(b). This does not mean that each of those matters must point to the necessary purpose referred to in s 177D. Some of the matters may point in one direction and others may point in another direction. It is the evaluation of these matters, alone or in combination, some for, some against, that s 177D requires in order to reach the conclusion to which s 177D refers."
91 There has been no suggestion that the AHP No 1 was a sham. Nor has it been denied by either of the applicants that the taxation advantages of their investment in the project was an important aspect. The evidence of Mr Cooke and Mr Jamieson has already been summarised (see [18] to [26] above). Their evidence was that they were within some years of retirement and that they had not made adequate provision for income during their retirement. They wanted to provide an income for their retirement and for that reason they wanted a relatively long-term project. At their stage of life there was not much time in which to achieve these goals. The reality of their respective financial positions at that time was that they did not have significant personal resources to finance investment and therefore they needed to borrow for investment. It was also a reality that at the relevant time both were experiencing an increase in income that would generate additional tax liability that had to be met. An investment that did not carry with it a substantial tax deduction would significantly compromise their ability to make an income producing investment for their retirement.
92 The fact that both applicants elected to take the option of receiving a guaranteed return is consistent with the applicants prudently protecting their investment. While it may not have been of great concern if the investment were not to produce substantial income immediately, it was important not to incur liabilities that would prejudice their retirement situation. It seems to me to be objectively reasonable that the applicants would have regarded the success of AHP No 1 as important, even while they took steps to protect themselves if it were not successful. Moreover, the guaranteed return did not entirely protect them as the amount of the return was taxable in the hands of the applicants and therefore only the after-tax portion would be available for repayment of their loans.
93 It is also reasonable to assume that the purpose of the Plantation Manger in providing for a guaranteed return was to facilitate promotion of the scheme and thereby generate more fee income. The fact that the tax deductibility of the outgoings was an integral part of the structure of the arrangement does not support the conclusion that there was a dominant purpose to produce a tax benefit in the hands of the applicants.
94 In my view the manner in which the scheme was entered into and carried out, the form and structure of the scheme, the time at which it was entered into, and the duration of the scheme are all consistent with the applicants having a dominant purpose of generating income for their retirement rather than enabling them to obtain a tax benefit.
95 Subparagraph (iv) of s 177D(b) requires one to assume that the applicants would be entitled to the deductions claimed, apart from Part IVA. In relation to the applicants the result would be that they would be entitled to deductions in respect of the outgoings. This is not sufficient to point to the dominant purpose of the scheme being to obtain that benefit. Subparagraph (v) directs attention to any change in the applicants' financial position resulting from, or reasonably expected to result from, the scheme. At the time the applicants invested in AHP No 1, being the time at which the purpose of persons involved in the scheme must be objectively assessed, they could reasonably expect retirement income if AHP No 1 succeeded, a comparatively small loss if it failed and, in any event, a significant tax deduction. As was pointed out in the applicants' submissions, that tax deduction was "offset by inclusion in their assessable income of an equivalent amount in the 1994 year of income". In the applicants' submission this gave them a timing advantage but does not of itself point to a dominant purpose of obtaining a tax benefit. Subparagraphs (vi), (vii) and (viii) of s 177D(b) are not relevant here.
96 While the tax benefit that each applicant obtained through their investment in AHP No 1 was important and, as a practical matter, may have made their investments feasible, objectively viewed it is not the case that the investment made no sense without the tax benefit. The scheme here is distinguishable from the scheme considered in Spotless. That scheme involved off-shore investment to obtain exemption from taxation under Australian taxation law through a series of artificial steps. The High Court agreed that the scheme made no sense without the advantage; see Spotless at 422. McHugh J, at 425, referred to the "elaborate nature of the scheme and its attendant circumstances" stating that this led 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". Similarly comments could be made in relation to the schemes considered in Federal Commissioner of Taxation v Consolidated Press Holdings Ltd (2001) 179 ALR 625 and Hart.