Cumins v Commissioner of Taxation

Federal Court of Australia (Full Court)|2007-03-02|Before: Nicholson J, Middleton JJ

REASONS FOR JUDGMENT THE COURT: 1 Mr Cumins, the appellant, appeals from a decision of Nicholson J made on 6 February 2006 which dismissed an appeal from a decision of the Administrative Appeals Tribunal ("the Tribunal"). The appellant contends that the Tribunal fell into legal error when it affirmed the Commissioner's decision to disallow the appellant's objection to an amended assessment of income tax for the year ended 30 June 1998. The amended assessment, which the appellant contends is excessive, arose because the Commissioner determined pursuant to s 177F(1)(c) in Part IVA of the Income Tax Assessment Act 1936 (Cth) ("the 1936 Act"), that, for income tax purposes, Mr Cumins as trustee had not incurred a capital loss of $800,000.00 resulting from the sale of a beneficial interest in shares from one family trust to another. 2 The dispute turns on the provisions of Part IVA, which provide that the Commissioner may determine that the whole or part of a capital loss was not incurred by a taxpayer if it is a "tax benefit" obtained in connection with a "scheme" to which that Part of the Act applies: see s 177F. Part IVAof the 1936 Act applies to any "scheme" as broadly defined within s 177A of that Act to include any arrangement or understanding, whether expressed or implied and whether or not enforceable by legal proceedings. 3 Mr Cumins has the burden of demonstrating that the assessment is excessive. He must establish affirmatively that the amount of taxable income for which he has been assessed exceeds the actual taxable income which he has derived during the year of income: George v Federal Commissioner of Taxation (1952) 86 CLR 183 at 201. There is no onus on the Commissioner to show that the assessment was correctly made. The question which arises is whether the taxpayer has met the onus of proving an excessive assessment, and this involves demonstrating that the transaction is not caught by Part IVA: see Commissioner of Taxation v Dalco (1990) 168 CLR 614 at 624.

THE STATUTORY PROVISIONS 4 In order for the scheme to be one to which Part IVA applies, it is necessary to look to s 177D(b) to determine whether the scheme was entered into for the sole or dominant purpose of obtaining a tax benefit. As the language is important, we set out the provision with the key concepts emphasised in bold: 'SECTION 177D Schemes to which Part applies This Part applies to any scheme that has been or is entered into after 27 May 1981, and to any scheme that has been or is carried out or commenced to be carried out after that date (other than a scheme that was entered into on or before that date), whether the scheme has been or is entered into or carried out in Australia or outside Australia or partly in Australia and partly outside Australia, where: (a) a taxpayer (in this section referred to as the "relevant taxpayer") has obtained, or would but for section 177F obtain, a tax benefit in connection with the scheme; and (b) having regard to- (i) the manner in which the scheme was entered into or carried out; (ii) the form and substance of the scheme; (iii) the time at which the scheme was entered into and the length of the period during which the scheme was carried out; (iv) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme; (v) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme; (vi) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme; (vii) any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out; and (viii) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi), it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme or of enabling the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer or is the other taxpayer or one of the other taxpayers).'

Background 5 Mr Cumins was the sole trustee and a general beneficiary of a discretionary family trust ("Trust 1") created by a deed made on 6 March 1992. He became the Managing Director of Cash Converters International Limited ("CCIL"), a company listed in Australia and the United Kingdom, in May 1995. In 1997, the founder and Chairman of the company, who is the appellant's brother, decided to retire and sell his shares in the company. Between July and October 1997, Mr Cumins, as trustee of Trust 1, participated in a management buy out and purchased 14,329,100 shares in CCIL at a price of 30 cents per share from his brother and Riverwood Park Pty Ltd, a company associated with his brother. 6 Mr Cumins, as trustee of Trust 1, borrowed $4.3 million from the National Australia Bank ("the Bank") to acquire the shares. He was advised of the approval of the loan in a letter from the Bank of 10 July 1997, which outlined certain special terms and conditions applicable to the loan. 7 Under the Loan Agreement, the loan was a fixed rate, interest only, interest in arrears loan for a fixed term of 3 years from the date of actual drawdown. The loan had to be drawn down in one instalment by 30 September 1997. The interest payment date was "the last business day of each half year commencing 31 December 1997 and on the day all monies owing under the agreement are finally repaid." At the time the loan was approved, the current indicative interest rate was 8.478%. Interest, at that rate, was quoted to and accepted by Mr Cumins, and accrued to the Bank from the date the loan was drawn down. Interest was calculated daily on the balance outstanding and debited to Trust 1's business cheque account on each interest payment date. The terms provided that if this caused the balance of the account to be placed in debt, or to exceed any credit facility, it would cause an event of default under the Loan Agreement. The Loan Agreement also specified that the appellant as borrower would not assign or transfer his rights or obligations under the Loan Agreement without the prior written consent of the Bank. It stated that events such as the appointment of a new trustee of the trust or a resettlement or setting aside of any trust funds without the prior written consent of the Bank may give rise to default. Moreover, a breach of any covenant or agreement to secure the loan would also give rise to an event of default. The arrangement to secure the loan was set out at item 6 of the schedule to the Loan Agreement. 8 On 1 August 1997, the appellant as trustee agreed to appoint a wholly owned subsidiary of the Bank called National Australia Trustees Limited ("NAT") as custodian of all securities delivered to it by the appellant. The shares were delivered to the custodian in terms of the Loan Agreement, registered electronically in the name of NAT, and NAT was given the holder identification number. Mr Cumins appointed NAT as agent and attorney with power to buy, sell and otherwise deal in any investments as properly directed by the Bank, as well as the capacity to receive all funds resulting from the sale of any investments and other investment receipts. Mr Cumins could only terminate the agreement with the custodian with the consent of the Bank. Dividends from the shares were paid to the custodian as the registered owner of the shares. Surplus dividends, after payment of interest, were to be held on term deposit under a letter of set-off as security for the facility. The loan was further secured by guarantees and indemnities from Mr Cumins, his brother and associated entities and registered mortgages over certain properties. 9 On 11 June 1998, Mr Cumins as trustee sold a parcel of shares for a purchase price of $800,000.00. This generated a capital gain of $787 375.00 which was reported in the income tax return for the Trust for the year ending 30 June 1998. 10 On 12 June 1998, the second family discretionary trust ("Trust 2") was settled with Mr Cumins as sole trustee. As in the case of Trust 1, the beneficiaries were specified in the trust deed for Trust 2 as Mr Cumins and members of his family. The settled sum was $5.00. 11 On the same date, Mr Cumins as trustee of Trust 1 sold 8 million of the CCIL shares to himself as trustee of Trust 2 for a consideration of $1.6 million. Mr Cumins signed the form as both transferor and transferee. A stamp duty assessment in respect of this transaction was issued on 4 August 1998. The notice of stamp duty assessment and the share transfer form were stamped for duty which was paid on 26 October 1998. The sale was effected by an unsigned share sale agreement dated June 1998 which was drafted as an agreement for the purchase and sale of 8 million of the shares, free from encumbrances, for the price of $1.6 million. The share agreement specified that the vendor agreed to deliver a share transfer for the shares, which were held on an uncertified register, against payment of the price. The sale was to be settled on 30 June 1998 and the vendor had the right to deliver the transfer at settlement even if the purchaser did not pay the price at settlement, in which event the purchaser was to pay interest on the price at the rate of 8.32% per annum payable six monthly in arrears until payment of the price. 12 On 12 June 1998, the closing price for the shares on the Australian Stock Exchange was $0.20 per share. Mr Cumins did not open a bank account as trustee of Trust 2, and nor did he actually pay $1.6 million for the 8 million shares. No other financial arrangements were made for this acquisition. It was the understanding of Mr Cumins, based on verbal legal advice, that, as trustee of Trust 2, he had seamlessly stepped into his shoes as trustee of that trust in relation to $1.6 million of the $4.3 million debt owed the bank. He further understood, on the basis of the same legal advice, that beneficial ownership in the shares passed from the trustee of Trust 1 to the trustee of Trust 2. At no stage was the Bank informed of the settlement of Trust 2. Nor was it advised of the transactions that followed between the trustee of Trust 1 and the trustee of Trust 2 in relation to the 8 million shares. 13 On 30 June 1999, Mr Cumins signed two share sale agreements and two share transfer forms. The first sale agreement related to the sale of 4 million shares, free from encumbrances, from Trust 1 to Mr Cumins personally for a price of $800,000.00, or $0.20 per share. This document was signed by Mr Cumins as vendor in his capacity as trustee of Trust 1, and as purchaser in his personal capacity. A corresponding Australian standard share transfer form was executed by him in the same capacities. The second sale agreement relates to the sale of 8 million shares, free from encumbrances, from Trust 2 to Mr Cumins personally for a price of $1.6 million, or $0.20 per share. In this instance, the vendor was Mr Cumins as trustee of Trust 2 and the purchaser was Mr Cumins in his personal capacity. The corresponding share transfer form was completed accordingly. The share sale agreements are otherwise identical, and the Bank was unaware of them. 14 The loan matured in August 2000 and under the arrangements negotiated with the Bank in settlement of Mr Cumins' outstanding loan facility, Mr Cumins as trustee of Trust 1 transferred the shares to a proprietary company associated with his brother at a price of $0.07 per share. This was achieved using a standard transfer form for non-market transactions and was signed by Mr Cumins, as trustee, and by his brother, as sole director and secretary of the buyer, on 9 October 2000.

THE TRIBUNAL DECISION 15 The issue before the Tribunal was whether, in the relevant year of income, the applicant as trustee of Trust 1 had incurred a capital loss in the sum of $800,000.00 under Part 3-1 of the Income Tax Assessment Act 1997 (Cth) ("the 1997 Act") and, if so, whether Part IVA of the 1936 Act operated to deem that no part of the capital loss had been incurred. 16 The Commissioner identified a scheme to which Part IVA should apply as comprising the following steps: (a) the creation of Trust 2 on 12 June 1998; (b) the purported sale of 8 million CCIL shares from Trust 1 to Trust 2 on 12 June 1998; (c) the purported realisation of a capital loss of $800,000.00 from the sale of the 8 million shares which was disclosed by Trust 1 in its income tax return for the year ended 30 June 1998; (d) the offsetting of the $800,000.00 capital loss against the capital gains of Trust 1 for the year ended 30 June 1998; (e) the distribution by Mr Cumins as trustee of Trust 1 of the net capital gains of Trust 1 for the income year ended 30 June 1998 (after the offsetting of the purported capital loss of $800,000), save for the first $27,500, to himself pursuant to the resolution of Mr Cumins as trustee made on 26 June 1998; and (f) the purported reduction of the net capital gain distribution to Mr Cumins by Trust 1 for the year ended 30 June 1998 by $800,000. 17 The Tribunal considered that the issue which required determination was whether the Commissioner had correctly determined, pursuant to s 177F(1)(c), that Mr Cumins as trustee of Trust 1 did not incur the capital loss for income tax purposes because it was a tax benefit connected with a scheme identified by the Commissioner as being one to which Part IVA should apply. The Tribunal stated that the question of whether the capital loss should be considered as a tax benefit connected to such a scheme turned on whether the evidence demonstrated that there existed a reasonable expectation that Mr Cumins as trustee of Trust 1 would have incurred the capital loss had he not entered into or carried out the scheme. It was determined that a "reasonable expectation" required more than a possibility of incurring the loss in an alternative way, because it involved a prediction as to the events which would have taken place had the scheme not been entered into or carried out. It also noted that such a prediction must be sufficiently reliable to be regarded as reasonable: see Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359 at 385. 18 In the circumstances of this case, the Tribunal was not satisfied that such a prediction could be made. It concluded that the Bank would not have consented to the alternative transactions for incurring the loss, which Mr Cumins said were available, unless the loan was repaid. Therefore the Tribunal considered that there was a "tax benefit" arising from the scheme because it was unreasonable to expect that Mr Cumins would have incurred the loss had the scheme not been entered into. 19 The Tribunal then proceeded to consider the eight matters required to be taken into account under s 177D(b) of the 1936 Act in order to determine whether Mr Cumins carried out the scheme for the dominant purpose of obtaining the tax benefit. It found that a reasonable person would conclude that Mr Cumins as trustee carried out the scheme with the sole purpose of obtaining the tax benefit in the form of the capital loss, and that therefore the scheme was one to which Part IVA applied. 20 In respect of the first matter to be considered under s 177D(b)(i), the Tribunal decided that the sale of the beneficial interest in the shares effected under the scheme was not carried out in an "ordinary" manner because the shares were mortgaged to the Bank's subsidiary in circumstances where Mr Cumins was contractually obliged to obtain the consent of the Bank in relation to any sale of the shares. 21 In relation to s 177D(b)(ii), the Tribunal found that there was a "disconnection" between the form of the agreement and the transactions as implemented by Mr Cumins. In form, the transaction appeared to be the sale of the shares free from encumbrances, with the vendor obliged to deliver a share transfer against payment of price. In substance, the legal interest was held by NAT and Mr Cumins had only a beneficial interest in the shares, which were not free from encumbrances as they were mortgaged. 22 In considering s 177D(b)(iii) and the timing and duration of the scheme's implementation, the Tribunal referred to the narrow time frame during which the key elements of the transaction occurred. It is noted that Mr Cumins settled the share sale generating a capital gain of $787 375.00 on 11 June 1998 and that Trust 2 was settled and the shares were transferred at the capital loss on 12 June 1998. 23 The Tribunal also noted that under s 177D(b)(iv), it was obliged to have regard to the fact that by entering the scheme, Mr Cumins as trustee incurred a capital loss that was offset against capital gains, and that this resulted in substantial change in his personal financial position due to the fact that under the scheme his assessable income was reduced from $939, 099.00 to $139,099.00. 24 As to the remaining four matters required to be taken into account as set out in s 177D(b)(v)(vi)(vii) and (viii), the Tribunal said: 'In relation to the matters set out in s 177D(b)(v)(vi)(vii) and (viii) the applicant submitted that a commercial benefit accrued to the applicant, and to members of his family, from the scheme because the shares that were sold to him, as trustee of Trust 2 were no longer available to the unsecured creditors and future creditors of the trust. In the event that the loan were redeemed and that the shares rose in value, Trust 2, which had no creditors, would have valuable unencumbered assets. When all the matters listed in s 177D(b) are considered in relation to the facts and circumstances of the scheme in this matter, the Tribunal finds that it would not be concluded that the applicant's purpose, or one of the applicant's purposes, in carrying out the scheme, was to shelter 8 million of the shares from any claims that the creditors, or future creditors, of the Trust may otherwise have on them.' (Emphasis added) 25 Following its consideration of all the matters referred to in s 177D(b) of the 1936 Act, the Tribunal found that a reasonable person would conclude that the appellant as trustee carried out the scheme with the sole purpose of obtaining a tax benefit. It affirmed the determination of the Commissioner that under s 177F(1)(c) of the 1936 Act, Mr Cumins did not incur the capital loss in the relevant income tax year. 26 Furthermore, in considering the issue of penalty costs, the Tribunal determined that it was not reasonably arguable that Part IVA did not apply to the scheme. Therefore, it held that the Commissioner had imposed the correct penalty percentage basis of 50%, as opposed to 25%, in calculating the additional tax payable by Mr Cumins as penalty.

THE JUDGMENT BELOW 27 In his reasons below, Nicholson J rejected the submission that the Tribunal had erred in law in its determination of the question before it. He considered that the Tribunal had not misinterpreted its role and had exercised its own independent judgment in relation to the issues determined by the Commissioner. His Honour held that the Tribunal did not confine its determination to the question of whether the Commissioner had erred, but made a determination itself in relation to the relevant questions. 28 Second, his Honour considered that the Tribunal did not fail to take into account, or give proper weight to, the consideration that the transaction was genuine and not a sham. It was noted specifically by his Honour that the fact that the scheme may have been 'genuine or directed at crystallising a loss' does not preclude the application of Part IVA. His Honour also found that it was open to the Tribunal to find that the scheme in the present case could hardly be described as 'a genuine transaction which crystallised losses actually incurred on the value of listed shares.' This finding was based on the fact that no economic loss was suffered as a result of the scheme and the beneficial ownership of the shares remained under the complete control of Mr Cumins, although the legal ownership of the shares remained with the Bank. 29 Third, in considering the appellant's contention that the Tribunal had erred in failing to take into consideration or apply Taxation Determination 95/4 or Taxation Ruling IT 2643, which both relate to the application of Part IVA to 'wash sales,' his Honour considered that these determinations concerned quite different circumstances to those before the Tribunal and were therefore not relevant. In light of this, his Honour found that there was no requirement at law that the Tribunal take into account those rulings. 30 Fourth, his Honour was of the view that there had been no failure by the Tribunal to adequately consider the alternative transactions open to Mr Cumins. It was noted by his Honour that having regard to the scope and strength of the Loan Agreement and the fact that Mr Cumins had made no attempt to inform the Bank of the scheme in question, it was open to the Tribunal to find that the consent of the Bank would have been required for Mr Cumins to pursue the alternative transactions, unless the loan was repaid. His Honour also accepted the proposition that there was no inconsistency between the Tribunal's reasons and its findings that no part of the purpose of the scheme was referable to commercial purposes. His Honour did not agree with the appellant's contention that the scheme achieved a commercial advantage due to its protection of the shares from creditors of Trust 1. This is because the Bank, both before and after the scheme, retained legal title to the shares as security for the debt. In addition, his Honour noted that the debt created by the scheme between the two trusts was one which was open to the creditors of Trust 1 to access at some point in the future. 31 Finally, his Honour found that the Tribunal did not take into account irrelevant considerations in its discussion of the factors outlined in s 177D(b) of the 1936 Act. His Honour determined that in considering the manner in which the scheme was entered into, the form and substance of the scheme and the time at which the relevant transactions were entered into, the Tribunal had taken account of the relevant facts and circumstances. It was similarly determined by his Honour that the Tribunal had not fallen into error by failing to consider the 'normal' conduct of shareholders. As to the appellant's complaint that the Tribunal was not entitled to consider s 177D(b)(v), (vi), (vii) and (viii) globally, it was found by his Honour that the Tribunal had sufficiently set out the substance of its material findings and the reasons for reaching them in relation to these provisions. Nor did the primary judge consider that there had been a failure on the part of the Tribunal to consider the relevant issues regarding the additional tax and remission of penalty.

THE APPEAL FROM THE DECISION OF THE PRIMARY JUDGE 32 The grounds of appeal outlined in the Notice of Appeal have been grouped by counsel for the appellant into four broad submissions which describe the alleged errors in these terms: '(A) The failure by the Tribunal to exercise or properly exercise its discretion under s 177F(1) in Part IVA ("Part IVA") of the Income Tax Assessment Act 1936 (Cth) ("the Act") - ground 2, in conjunction with grounds 3 to 6. (B) The finding of a relevant "tax benefit" by the Tribunal without proper consideration of the alternative transactions available and in breach of natural justice - ground 7. (C) Errors of law made by the Tribunal in its findings relating to specific aspects of s 177D(b) of the Act - grounds 8 to 13 (D) The Tribunal's failure to properly consider the issues of additional (penalty) tax (ground 14) and remission of additional tax (ground 15).'

SECTION 177F(1) AND EXERCISE OF DISCRETION - GROUNDS OF APPEAL 2, 3 AND 6 33 Section 177F(1) provides: '177F (1) Where a tax benefit has been obtained, or would but for this section be obtained, by a taxpayer in connection with a scheme to which this Part applies, the Commissioner may: (a) in the case of a tax benefit that is referable to an amount not being included in the assessable income of the taxpayer of a year of income- determine that the whole or 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.' (Emphasis added) 34 In relation to the issue of discretion, it is submitted by the appellant that the application of Part IVA involves two distinct decisional stages and inquiries with the discretion relevant only at the final stage. The appellant contends that the reasoning of the Tribunal indicates that it failed to consider or give proper consideration to the exercise of the discretion conferred by use of the expression 'may' in the wording of the section. It is submitted that the first stage of the inquiry concerns whether there is a tax benefit obtained in connection with a relevant scheme to which Part IVA applies, and involves the determination of matters of "objective fact" and inferences to be drawn from primary facts as found by the relevant decision-maker. During what is claimed to be this first stage of the inquiry, it is put forward that the decision-maker should exercise its 'judgment' rather than 'discretion.' Following this first stage, it is claimed, there is then a discretionary step that the decision-maker is required to take, namely whether to cancel the tax benefit and, if so, whether to cancel it in whole or in part. The submission is that the Tribunal did not address the exercise of the discretion as it should have done. 35 It is submitted that in carrying out the final stage in this exercise, the Tribunal should have taken into account certain matters and failed to do so. The appellant claims that at this stage, the Tribunal should have taken account of the fact that the transaction was a genuine share sale transaction, the effect of which was to crystallise losses on the value of listed shares sold at market value, in addition to the fact that the relevant transactions were similar in character to 'wash sales.' The appellant contends that such transactions have been the subject of favourable treatment in Taxation Determination 95/4 and Taxation Ruling IT 2643. 36 It is settled law that s 177D requires an "objective determination" of the matters set out therein. Upon reaching the conclusion that the person who entered into the scheme did so for the purpose of obtaining a tax benefit in connection with a scheme to which Part IVA applies, the Commissioner is entitled to determine that the appellant should be disallowed from objecting to the amended notice. The matters which the Commissioner is expressly bound to take into account are listed under s 177D(b). The Act does not require the Commissioner to address circumstances which are not raised in the section in relation to whether the deduction should not be disallowed. Once the Commissioner has reached its conclusion under s 177D as to the purpose of the scheme, there is no super-imposed obligation to take into account other matters when deciding whether to disallow the whole or part of the deduction. 37 Furthermore, the questions concerning the genuineness of the relevant transaction and the purported applicability of Taxation Determination 95/4 and Taxation Ruling IT 2643 regarding "wash sales" were issues put before the Tribunal, and there is no evidence they were not considered. The Commissioner's discretion in relation to these matters was exercised after these issues were raised, and the decision was made to disallow the appellant's objection. There was no submission made to the Tribunal to the effect that there must be an independent discrete consideration as to the exercise of discretion after the decision-maker has formed the view that (i) there was a tax benefit and (ii) that benefit was connected with a scheme to which Part IVA applied. 38 The Tribunal's reasons disclose that it considered all the prescribed matters in the light of the evidence before it. The Tribunal affirmed the determination of the Commissioner and, in so affirming, it exercised its own discretion while seised of all relevant material. On a fair reading of the Tribunal's reasons, it cannot be said that it misunderstood its function. The reasons of the Tribunal indicate that it proceeded to decide the merits of the objections put forward by Mr Cumins by way of full administrative review standing in the role of the Commissioner and performing the Commissioner's statutory function. 39 It is also submitted that the Tribunal erred in not giving weight to the consideration that there was a "genuine" share sale transaction which in fact crystallised losses actually incurred. The Tribunal appreciated that the transaction was genuine and expressly did not treat it as a sham. It was well aware that the transaction was effected at the prevailing market value of the shares. However, it also observed that no economic loss was actually incurred when the matter was looked at in substance. Furthermore, it is significant that the genuineness of the transaction is not an issue to be considered under Part IVA. Finally, it should be noted that the provisions of Part IVA also apply to 'genuine' transactions. 40 In considering the applicability of the Taxation Determination and the Taxation Ruling cited by the appellant, the Tribunal considered they were not relevant to its determination. In our view, the Tribunal was correct in forming this view because both instruments relied on by the appellant related to quite distinct circumstances and were heavily qualified as to the particular facts. As noted below by Nicholson J, because the Determination and Ruling were not relevant, it was therefore not incumbent on the Tribunal to deal with their effect. There was no error of law in not expressly dealing with them or not giving weight to them. In addition, there was clear reference to the fact that the rulings were also subject to the application of Part IVA. 41 In summary, many matters which are alleged by the appellant to be relevant for the purposes of discretion are considerations which were before the Tribunal during its consideration of the matters spelt out in s 177D. One difficulty with the proposition advanced by the appellant in relation to the issue of discretion is that the word "may" is used in the terms and context of a power which arises when it has been found there is a tax benefit in connection with a scheme to which Part IVA applies. If these matters are established, the Commissioner is entitled to act on these findings and disallow the benefit. The matters set out in the Grounds 3-6 are matters which the Tribunal took into account in reaching a conclusion under s 177D, and it is somewhat artificial to require these considerations to be reconsidered as part of a separate exercise of a discretionary power which is in limited terms. They are part of the global conclusion. The fundamental problem with the first broad submission for the appellant is that there is no over-arching or final discretion to be exercised independently under s 177F. The matters required to be considered which are referred to by the appellant in the Notice of Appeal were taken into account by the Tribunal to the extent they were relevant.

ASSESSMENT OF THE TAX BENEFIT AND ALTERNATIVE TRANSACTIONS - GROUND 7 42 The combined effect of s 177D(b), s 177F and s 177C is that the Court must give consideration as to whether the deduction might reasonably be expected to have been allowable if the scheme had not been carried out. This question is also referred to in s 177D, under which consideration must be given to the question of whether the taxpayer has obtained, or would but for s 177F obtain, the tax benefit in connection with the scheme: see Federal Commissioner of Taxation v Hart (2004) 217 CLR 216 at 243. The Commissioner must compare the consequences of the scheme and those of alternative postulates. In the present case, the alternative postulated transactions are said to be: '17.1 The bank ("NAB") and its subsidiary ("NAT") which held the mortgage over the shares, and the Trust, co-operate so that the legal and beneficial ownership on the 8 million shares is sold by the Trust to Trust 2. This occurs by means of a crossing on-market. Trust 2 would then immediately upon receipt of the title to the shares, transfer the legal ownership back to NAT as continuing security for the loan and Trust 2 would become a guarantor in respect of the loan of the Trust. 17.2 The same as in 17.1, but the sale is off-market (so avoiding publicity and issues of arguable market manipulation). 17.3 A variant of 17.2: the sale is of the beneficial interest in the shares only - with NAT as mortgagee/registered shareholder acknowledging it holds the beneficial interest in the shares for Trust 2, subject to NAT's continuing security over the shares. 17.4 Under the control of NAT/NAB, the shares are sold on market by the Trust and an equivalent number of shares repurchased immediately which becomes subject to the same security.' 43 It is submitted by the appellant that the Tribunal should not have determined that the Bank would have insisted on repayment of the loan before giving its consent to the alternative transactions. The appellant argues that this was a matter not in issue before the Tribunal, and also that there would be a breach of natural justice if the Commissioner were entitled to rely on this argument at this stage. In our opinion, because the statutory onus lay on the appellant, he had to satisfy the Tribunal that the Bank would have consented to the form and substance of the alternative arrangements. This consideration was required in the context of each alternative. At the conclusion of the hearing, the Tribunal considered there was not sufficient evidence that this consent would be forthcoming in the event the loan remained unpaid. In our view, the Tribunal was therefore entitled to reach the conclusion that the suggested alternative arrangements could not have been expected to take place as contemplated as it was not satisfied on the evidence that the Bank would have given the required consent. 44 The appellant also contends that the Tribunal failed to give proper weight to several important commercial considerations for adopting the scheme as distinct from one of the alternative arrangements. The main advantage as submitted by the appellant was that that the scheme would protect the beneficiaries of the trusts from creditors. This is a vague and generalised assertion. The main creditor - by a large margin - was the Bank, and it held security over the shares. At the time of the transaction, the debt to the Bank was over $4 million. The amount of debt to third party creditors was substantially less. It was therefore open to the Tribunal on the evidence to reach the conclusion that protection from creditors was not a significant factor in carrying out the scheme, and that the scheme's dominant purpose was to obtain a tax benefit in the form of a deduction. There is no evidence as to any pressure or threats, imminent or otherwise, in relation to any of the contingent creditors of Trust 1. Nor is there any indication that any individuals were in the process of or contemplating taking action against the assets of Trust 1. In these circumstances, we are not persuaded that the Tribunal failed to take into account or give proper weight to the submission that protection against creditors was a significant purpose of the scheme. In addition, it is significant that the Bank was never informed until after the scheme was implemented. There were no steps taken to obtain the consent of, warn, or even inform the Bank of the transaction. The way the scheme was implemented was in breach of the appellant's obligation under the Loan Agreement to inform and obtain the consent of the Bank in relation to any transaction concerning the shares. Indeed, the substantial advantage of the transaction to the parties was that the consent of the Bank did not need to be obtained to give it effect.

THE TRIBUNAL'S APPROACH TO SECTION 177D - GROUNDS OF APPEAL 8 -13 45 As noted earlier in these reasons, the Tribunal, after finding that the capital loss was a tax benefit connected with the scheme, proceeded to consider whether the scheme was one to which Part IVA applied. In answering this question, it had regard, as required, to the eight matters as set out in s 177D(b) of the 1936 Act. It noted that the inquiry was objective and addressed the eight specified matters in reaching its global conclusion. 46 In relation to the first factor, the Tribunal noted that the share sale was not carried out in an ordinary manner because (i) the shares were encumbered to the Bank's subsidiary; and (ii) Mr Cumins, as trustee, was contractually obliged to obtain the Bank's consent and this was not obtained. The Tribunal noted that in relation to the second factor, the form and substance of that transaction, that whereas the share sale agreement referred to a sale of shares "free from encumbrances," the transaction as effected was a sale of the beneficial interest in the shares, meaning that they were in fact encumbered. 47 Regarding the third factor which deals with the timing of the various elements of the transaction, it is common ground that the 'gain' and 'loss' transactions took place within one day, and that the sale transaction itself was carried into effect over a short period. 48 In relation to the fourth factor and the change in financial position of Mr Cumins, it was correctly noted by the Tribunal that the appellant incurred a capital loss which was off-set against the capital gain so there was a substantial change in his personal financial position. 49 The inter-related remaining factors listed in s 177D(b)(v)-(viii) were dealt with during the Tribunal's consideration of the possible commercial benefits resulting from the scheme. The appellant contends that this paragraph in the Tribunal's reasons demonstrates that there was a failure to give proper reasons because the last four matters specified in s 177D(b) were referred to globally, in what is claimed to be "an impermissible shorthand form". In this respect, it should be noted that the subject matters of paragraphs (v)-(viii) are inter-related in that they concern changes in financial position and the consequences of certain steps, and there is a specific cross-reference as between parts of the latter three paragraphs. Moreover, there is no express requirement in Part IVA for each paragraph to be considered independently of or discretely from any other paragraphs. The considerations are in some respects closely inter-related and can overlap in the circumstances of any specific case. They may, in particular cases, also point to different conclusions. The requirement is that the Commissioner and the Tribunal have regard to the matters and reach a global conclusion having directed attention to the specified matters. 50 It was found by the Tribunal that the scheme was not established for the dominant purpose of protecting the beneficiaries of Trust 1 by sheltering the shares from creditors. In our view, it was not necessary for the Tribunal to separately deal with each of the factors outlined in s 177D(b)(v)-(viii). The requirement in s 177D(b) is that the specified matters be taken into account. The Tribunal did consider these matters and reached a factual conclusion in the light of those considerations. We can see no error in the way in which the Tribunal approached the question before it, and we find that the matters were addressed to the extent required. 51 Counsel for the appellant also advanced the proposition that many other people regularly entered into transactions similar to the scheme implemented by Mr Cumins. It was contended that it is a common practice to enter into such transactions. It was open to the Tribunal, however, to conclude that this proposition was not proven by the appellant and that it was a matter of pure assertion. In any event, this is not one of the matters required to be taken into account by the Commissioner or the Tribunal under s 177D. Similarly, the appellant's contention that holders of share portfolios regularly enter into transactions near the end of the financial year is a vague generalisation, and as such is unhelpful. There was no evidence put to the Tribunal or the Court in relation to this proposition or its relevance. 52 It was also put to the Court that there had been a "concession" made on behalf of the Commissioner that any inaccurate description of the share sale arose from the use of a standard form. However, this does not lessen the force of the consideration that the form of the transaction was not in conformity with the reality of the transaction - namely, that it was the beneficial interest in the shares which was being sold and that these shares were encumbered. Moreover, in its consideration of the form of the transaction, it was open to the Tribunal to give weight to the fact that the transaction took place without the appellant having attempted to obtain the consent of the Bank.

ADDITIONAL (PENALTY) TAX AND REMISSION OF ADDITIONAL TAX - GROUNDS OF APPEAL 14 - 15 53 There is a general assertion put forward by the appellant that the Tribunal erred in its application of the relevant principles in deciding the issue of additional tax, having regard to the decision in Walstern v Commissioner of Taxation (2003) 137 FCR 1. However, we are not persuaded that the Tribunal incorrectly applied the approach as set out in [108] of Walstern. 54 The appellant further contends that he was legally permitted to take steps to realise genuine capital losses, and therefore that Part IVA should not apply. It is maintained that the scheme consisted of a regular sale of a beneficial interest in a parcel of shares, and that a reasonable person would not reach the conclusion that such a transaction would fall within Part IVA. The Tribunal found against the appellant on these issues and considered that Part IVA did not support the position taken by the appellant in any material sense. The Tribunal made a finding that it was not reasonably arguable that Part IVA does not apply to the scheme implemented by the appellant. In our view, this approach was in accordance with settled principle and was open to the Tribunal. We are not persuaded that this order should be vacated. It was also submitted that the Tribunal did not take into account the existence of the Taxation Determination 95/4 or Taxation Ruling IT 2643, referred to earlier, which were said to have led Mr Cumins to believe that the scheme would be effective. These considerations were expressly rejected by the Tribunal as being irrelevant, and no error was disclosed by the Tribunal's failure to take these matters into account when fixing the additional tax payable. 55 Accordingly, for the above reasons, this appeal is dismissed with costs.

I certify that the preceding fifty-five (55) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Ryan, Tamberlin and Middleton.

Associate: Dated: 2 March 2007 Counsel for the Appellant: Dr J T. Schoombee with Ms F F Halsey

Counsel for the Respondent: Mr G. J. Davies QC. with Mr J D Allanson

Solicitor for the Respondent: Australian Government Solicitor

At a glance

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