Eastern Nitrogen Ltd v Commissioner of Taxation

6 The issues raised for determination in respect of the deductibility of the rental payments in the 1990 and 1991 years are firstly, whether the plant was a fixture: if it is, the Commissioner contends that the rentals under the lease cannot have been paid for the use of the plant and so cannot be deductible, because Eastern Nitrogen retained legal title of the plant and the lease back from the financiers was therefore incapable of conferring any right to its possession or use on Eastern Nitrogen. 7 Secondly, the Commissioner contends that if the arrangement was effective to transfer title in the plant from Eastern Nitrogen to the financiers, the rental payments made under the lease should nevertheless be characterised for tax purposes as, in part, capital outgoings because they were, in part, the cost to Eastern Nitrogen of obtaining the capital sum of $72,728,613 paid by the financiers to Eastern Nitrogen under the instalment purchase agreement and also because they effected repayment of part of that sum. 8 Next, the Commissioner contends that the sale and lease back transaction was a sham: it is said that the rentals were not paid for the use of the plant because the documents executed by Eastern Nitrogen and the financiers to give effect to that transaction cloaked the true position in that the parties were "ambivalent" about whether title to the plant would ever pass from Eastern Nitrogen or, if they intended title to pass, they also intended that Eastern Nitrogen would reacquire title at the end of the lease. Finally, the Commissioner contended that the sale and lease back transaction was a scheme within Pt IVA the Income Tax Assessment Act 1936, with the result that the rental payments made by Eastern Nitrogen are not wholly deductible. 9 If any of the Commissioner's arguments succeed, the result will be that his objection decisions in respect of the three income years in question will stand.

10 In Australian Provincial Assurance Co Ltd v Coroneo (1938) 38 SR(NSW) 700 at 712, Jordan CJ said, in words frequently cited:

"The question whether a chattel has become a fixture depends upon whether it has been fixed to land, and if so for what purpose. If a chattel is actually fixed to land to any extent, by any means other than its own weight, then prima facie it is a fixture … The test of whether a chattel which has been to some extent fixed to land is a fixture is whether it has been fixed with the intention that it shall remain in position permanently or for an indefinite or substantial period … or whether it has been fixed with the intent that it shall remain in position only for some temporary purpose … In the former case, it is a fixture, whether it has been fixed for the better enjoyment of the land or building, or fixed merely to steady the thing itself, for the better use or enjoyment of the thing fixed … The intention of the person fixing it must be gathered from the purpose for which and the time during which user in the fixed position is contemplated …"

11 The modern approach to determining whether a chattel has become a fixture and thus part of the land to which it is attached or on which it stands emphasises the need to have regard to all the relevant circumstances. See NH Dunn Pty Ltd v LM Ericsson Pty Ltd [1979] 2 BPR 9241 at 9246 and Eon Metals NL v Commissioner of State Taxation (WA) (1991) 91 ATC 4,841 at 4,845. But the intention with which the chattel was attached to or placed on the land, even if not physically attached to it, remains an important consideration in determining whether the chattel has become a fixture: Eon Metals at 4,845. Whether the intention of the party fixing the chattel was to make it a permanent accession to the freehold is to be inferred from all the circumstances, including the following:

"the nature of the chattel; the relation and situation of the party making the annexation vis-ŕ-vis the owner of the freehold or the person in possession; the mode of annexation; and the purpose for which the chattel was fixed."

12 See also Reid v Smith at (1905) 3 CLR 656 at 667 and Belgrave Nominees Pty Ltd v Barlin-Scott Air Conditioning (Aust) Pty Ltd [1984] VR 947 at 951. The intention to be ascertained is "the objective intention that ought to be imputed or presumed from the circumstances of the case": Eon Metals at 4,846. The subjective intention of the party in attaching the chattel to the land, if proven, is only one piece of circumstantial evidence relevant to the question: fixture or not? Its weight will depend on the particular factual context in which that question arises. See Eon Metals at 4,846. 13 The plant was constructed at Kooragang Island, Newcastle for Eastern Nitrogen. It was commissioned in 1968. It is a "Kellogg" type plant. There is no proof of the title under which Eastern Nitrogen occupied the land in 1968. But it purchased the land from the Crown under an agreement of 21 November 1973 pursuant to which it became registered proprietor on 9 November 1978. Part of the purchase moneys payable by Eastern Nitrogen under this agreement were left outstanding and secured to the Crown by a mortgage in the form of the second schedule to the agreement. This mortgage appears to have been adapted from that agreed to be granted to the Crown by Eastern Nitrogen pursuant to an earlier arrangement not in evidence. Under this earlier arrangement, Eastern Nitrogen, apparently as lessee of the land, was to grant a mortgage over its leasehold interest that contained a covenant obliging it to expend, within the period 27 July 1967 to 31 December 1970, $20 million "in permanent and fixed improvements to the demised land for the purposes" of "a nitrogenous fertiliser works". The inference is that the ammonia plant was built at Kooragang Island by Eastern Nitrogen in fulfilment of this obligation. 14 I also infer that, at the time of construction and commissioning of the plant, Eastern Nitrogen occupied the land under some form of secure Crown development leasehold tenure. The evidence about the earlier arrangement, limited though it is, and the facts that Eastern Nitrogen was prepared to expend about $31 million in 1968 on construction of the plant and was able to purchase the freehold from the Crown four or five years later, as well as the absence of any evidence suggesting that Eastern Nitrogen around 1968 ever contemplated the possible removal of the plant point to this. 15 The agreement of November 1973 under which Eastern Nitrogen acquired the freehold does not mention the ammonia plant or any other part of the fertiliser works. Rather does it appear that this agreement treated the ammonia plant as passing to Eastern Nitrogen on completion of this agreement, though not mentioned in it, in accordance with the general rule that a conveyance of the freehold carries with it ownership of all fixtures to the freehold. See North Shore Gas Co Ltd v Commissioner of Stamp Duties (NSW) (1940) 63 CLR 52 at 67 - 68. The inference from this is that Eastern Nitrogen accepted, when it executed this 1973 agreement, that the plant was a fixture. This, together with the evidence that for a long time after commissioning the plant in 1968, Eastern Nitrogen did nothing that might have altered the status of the plant as a fixture, is capable of amounting to an admission by Eastern Nitrogen that the plant was a fixture. But there is ample other evidence that establishes that. 16 The ammonia plant itself consists of a series of structures, interconnected by process- and services-piping and electrical conduiting. The component elements of the plant, some of them very large structures, are bolted to concrete slabs, set in the ground to varying depths up to about 1.25 metres; the slabs rest on concrete piles, which are themselves driven about 50 metres into the ground. Significant parts of the electrical and water reticulation essential to the operation of the plant are also below ground level, some parts being laid underneath the concrete slabs, while other parts are embedded in those foundations. Much of the process piping, however, is above ground so that it can be readily maintained and replaced, when necessary. The location and shape of the slabs themselves were dictated by the plant design and by the plan of the base of the structure standing on each slab. The configuration in plan of all these slabs was described as the plant's "footprint" on the land and the evidence is that each ammonia plant has its own unique footprint. The plant has to be securely fixed to the ground for its proper functioning: the structures comprising it are securely bolted to their foundations to prevent movement that would otherwise occur because of vibration during operation. Eastern Nitrogen's engineering manager, Mr Bellingham, also said that an additional reason for the need for the plant structures to be securely fixed to the foundations was Newcastle's location in an earthquake area. 17 The ammonia plant is one of a number of large plants and other facilities on Kooragang Island operated by Eastern Nitrogen in the course of its business as a manufacturer of fertilisers and other chemicals used mainly in agriculture. The ammonia plant has, since commissioning, been essential to Eastern Nitrogen's operations at Kooragang Island. By 1989, they had expanded to include two nitric acid plants and two ammonia nitrate plants: the ammonia plant produces the ammonia used as feed in those other plants. 18 I am satisfied that when Eastern Nitrogen, in establishing the ammonia plant, had it fixed to the land at the Kooragang Island site in 1968, it did so in circumstances in which its intention then was to keep that plant at that site permanently. The size of the plant, the fact that it was securely fixed to its unique concrete footprint embedded in the ground and supported on deeply driven piles, with componentry essential to its operation embedded both in the ground below the foundations and in the foundations themselves, point to that. So does Eastern Nitrogen's activities subsequent to 1968 in expanding operations at Kooragang Island in which the ammonia plant has continuously formed an integral part: it can be said that the plant was placed by Eastern Nitrogen on the land to which it has long been securely fixed, not only to facilitate the plant's operations, but also in order to further its use of its Kooragang Island site as a fertiliser works. Cf Wake v Hall (1883) 8 App Cas 195 at 204 and Reid v Smith at 680. 19 I accept that the whole plant, like all its components, is capable of removal. It can sometimes be a practical exercise to move a plant such as this from one site to another, though the costs of disassembly, transport and reassembly are understandably very high. There is also evidence of sales, in various parts of the world, of ammonia plants similar to this "Kellogg" plant. But the existence of a small international market, at least in more recent times, provides no ground for inferring that ammonia plants are so frequently traded that Eastern Nitrogen, in 1968, may then have had in mind the possible future sale of the plant. There is, in any event, no evidence that Eastern Nitrogen ever considered the possibility of selling the plant, until the MBL sale and lease back proposal attracted Incitec's attention in early 1988, or that it ever considered doing anything with the plant other than to operate it at the Kooragang Island site, until it undertook a study in early 1989 of the feasibility of relocating it to another of its sites in Australia to take advantage of cheap natural gas fuel (something it ultimately decided against doing). Nor is there any evidence from anyone on behalf of Eastern Nitrogen touching on its subjective intent in establishing the ammonia plant itself on the island. Such could readily be gleaned from the evidence of those involved in making the proposal to Eastern Nitrogen's hierarchy for the establishment of the plant, a proposal which must have been approved by Eastern Nitrogen's Board, given the large cost of the plant. 20 In 1989 (and for some years prior to that), there was an ammonia storage tank in the Kooragang Island complex of sufficient capacity to enable the operations of the other plants to continue without the ammonia plant. But the fact that that complex is capable of functioning without the ammonia plant does not provide any reason to infer that that plant is not a fixture. The tank has been used to ensure the rest of the complex can stay in production on occasions when the ammonia plant has been temporarily out of commission: the tank's presence is explained by the need for an occasional back-up for that particular plant. There is no evidence from Eastern Nitrogen that the tank was installed to allow for possible removal of the ammonia plant. If that evidence once existed, it is likely to remain available. Mr Bellingham, for example, is still in Eastern Nitrogen's employ; he is one staff member who would appear to be in a position to give that evidence, if it were the position. He worked at the plant as shift manager during its commissioning in 1968. 21 For these reasons, by the time the ammonia plant was commissioned in 1968, I think that it had become a fixture to the land occupied by Eastern Nitrogen; it remained so at the time of the sale and lease back arrangement (and at all material times thereafter). 22 That, as Eastern Nitrogen correctly submits, does not necessarily determine the question whether the rental payments made by it are deductible under s 51(1) the Income Tax Assessment Act 1936. Cf London County Council v Wilkins (Valuation Officer) [1957] AC 362. The answer to that question in this case depends on the proper characterisation of the rental payments for the purposes of s 51(1), ie, in the context of the present case, on whether those payments were outgoings entirely on revenue account or outgoings, in part at least, of a capital nature. But that the plant has at all material times been a fixture has an important impact on the characterisation of those outgoings for tax purposes. 23 In Commissioner of Taxation v Email Ltd (1999) ATC 4,868; [1999] FCA 1177, this Court recently said of the task of characterising an outgoing for the purposes of s 51(1) at 4,872:

"[24] The first step in reaching a conclusion involves, as Dixon J, as his Honour then was, albeit in a dissenting judgment, made clear in Hallstroms Pty Ltd v Federal Commissioner of Taxation (1946) 72 CLR 634 at 648-9, identifying what the expenditure is for. As his Honour said:

'What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view, rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process.'

The identification of what expenditure is calculated to effect involves both a consideration of the character of the expenditure and in many cases an examination of the business structure and the operations of the business in the course of which the expenditure has been incurred."

24 In further explanation of how the task of identifying what the expenditure in question is calculated to effect can be carried out, the Court added, at 4,873 - 4,874:

"[29] Another matter, often relevant to the distinction between income and capital will be whether the expenditure is made 'once for all' on the one hand, when it will usually be capital, or is 'repeated, recurrent or continual' when it will usually be on revenue account: cf Sun Newspapers at 361. As is clear enough, there are certain sorts of outgoings, interest and rent being the most obvious, which through their recurrence are clearly deductible, at least in the usual case…

[30] One thing is clear, and that is that recurrence will be an aid to the determination of the question to consider the essential character of the outgoing or liability. In Sun Newspapers, Dixon J propounded three matters which in his Honour's view fell to be considered. His Honour said at 363:

'There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment.'

[31] Of these three factors, it is the character of the advantage sought which will generally provide the greatest guidance for it tells most about the essential character of the expenditure itself. More recently, albeit in a rather different context, the High Court in a unanimous decision in GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1990) 170 CLR 124 at 137 looked at the question how the character of expenditure may fall to be determined. Their Honours said:

'The character of expenditure is ordinarily determined by reference to the nature of the asset acquired or the liability discharged by the making of the expenditure, for the character of the advantage sort by the making of the expenditure is the chief, if not the critical factor in determining the character of what is paid.'"

25 In the ordinary case of a payment under a contract, the nature of an outgoing, so far as its proper tax characterisation for the purposes of s 51(1) is concerned, will commonly be determined by reference to the contractual quid pro quo: Magna Alloys Research Pty Ltd v Federal Commissioner of Taxation (1980) 49 FLR 183 at 208 and Commissioner of Taxation v Just Jeans Pty Ltd (1987) 16 FCR 110. In characterising an outgoing for the purposes of s 51(1), the advantage sought by the taxpayer, or its purpose for making the disbursement, depends upon an objective consideration of the circumstances, though where the outgoing is made voluntarily, the taxpayer's subjective motive for making it will be a relevant, though not decisive consideration: see Ure v Federal Commissioner of Taxation (1981) 34 ALR 237 at 242 and Fletcher v Federal Commissioner of Taxation (1991) 173 CLR 1 at 17 - 18. 26 If the ammonia plant had, at the time of the sale and lease back transaction, been a chattel rather than a fixture, the sale element of that transaction would have been effective to transfer title and thus the right to possession of the ammonia plant from Eastern Nitrogen to the financiers, while the lease element of the transaction would have been effective to transfer the legal right to possession and thus the right to the use of the plant in carrying on its business during the term of the lease back from the financiers to Eastern Nitrogen. In that situation, the rental payments would prima facie have been made to secure to Eastern Nitrogen possession of and the right to use the plant in its income producing activities. However, the fact that the plant was a fixture when that transaction was entered into and at all other material times makes the question of the proper characterisation of the rental payments a simpler one. 27 Since the plant is a fixture, the lease, despite its terms, cannot have any operation in conferring on Eastern Nitrogen the right to possession and thus the right to use of the plant in order to carry on its income producing activities: the instalment purchase agreement was incapable of divesting Eastern Nitrogen of its title and thus of its right to possession and use of the plant. So the financiers never acquired the legal title to the plant and thus were never in the position of being able to deny Eastern Nitrogen possession or use of the plant. It follows that the rental payments cannot be characterised, even in part, as outgoings within s 51(1). 28 The applicant, however, contends that, even if the plant was at all material times a fixture, the financiers acquired certain rights under the sale and lease back transaction sufficient to require the rental payments made by Eastern Nitrogen under the lease agreement still to be characterised as outgoings wholly of a revenue nature and so deductible under s 51(1). 29 In order to deal with this argument, it is necessary to turn to the provisions of the two agreements. The Instalment Purchase Agreement provides for the sale by Eastern Nitrogen to the financiers of all the plant components above slab level, described as "the Goods", for a total purchase price of $71,400,000 (cl 2), payable in two instalments (cl 4). Delivery and acceptance of the Goods was to be effected at Kooragang Island by the vendor delivering to the purchaser on 30 October 1989 certain documentation relating to the Goods (cl 5). By cl 7, it was provided that "full and absolute ownership of and title to each item of the Goods shall pass to and vest in the Purchaser … upon and by virtue of payment of the final instalment of the purchase price and not by virtue of this Agreement", but not, in any event, "until one day after delivery and acceptance of the Goods in accordance with clause 5". The contract provided for the final instalment to be paid on 31 October 1989 or such earlier date as the parties may agree "PROVIDED THAT such date shall be at least one day after the time of Delivery". 30 Quite apart from what is revealed by the factual matrix against which the two agreements must be construed, it is not only the delivery stipulation in cl 5 of the purchase agreement that shows that the parties did not intend that there would be either physical delivery to the financiers of that part of the plant sold or severance of any part of the plant from the land to which it was attached on or before completion of the purchase agreement: by cl 3, Eastern Nitrogen acknowledged that the plant was to be purchased by the financiers "for the purpose of leasing the same to the Vendor upon the terms of the Agreement for Lease" annexed to the purchase agreement and, by cl 8, Eastern Nitrogen was obliged, "on or before execution" of the purchase agreement to deliver to the financiers that Agreement for Lease duly executed by it. The Instalment Purchase Agreement and the Agreement For Lease are inter-dependent: see the recitals and cll 3, 5, 8(d) and 10(b) of the former and cl 4.1 of the latter, which obliges the financiers "[c]ontemporaneously with the completion of the purchase of the Goods under the Instalment Purchase Agreement on the Purchase Date" to give Eastern Nitrogen possession of the goods. 31 In the lease, the "Goods" are defined to include the goods the subject of the Instalment Purchase Agreement and any substitutions for any of those goods made by Eastern Nitrogen: cl 1.1.10. Clause 10.1 of the lease agreement provides:

"The Lessee paying the Rent and duly and punctually observing and performing the covenants, obligations and provisions of this lease on the part of the Lessee to be observed and performed shall peaceably, possess and enjoy the Goods during the currency of this lease without any interruption or disturbance from the Lessor or any other person lawfully claiming by, from or under the Lessor."

"No option to purchase the Goods is hereby conferred or implied on the Lessee and there is no option or agreement whether express or implied in the Lessee's favour for the sale of the goods to the Lessee on expiry of the lease or at any other time."

33 By cl 14, it is provided that if, the lessee fails to pay any rent on the due date for payment or commits any other act of default under the lease, the lessor, at its option, may:

"B Terminate this Lease and the Lessee's rights of possession hereunder as to the Goods … and the Lessor may, directly or by its agent, take possession of the Goods … and thenceforth hold, possess and enjoy the same free from any right of the Lessee … to use the Goods for any purpose whatsoever or may, at the Lessor's election, require the Lessee at the Lessee's expense to dispose of the Goods."

34 By cl 15.1, it is provided that "… upon the expiry or sooner determination of this lease … the Lessee shall at its own expense surrender and deliver up the Goods to the Lessor at" Kooragang Island. By cl 16, it is provided that if the Goods are returned to the lessor within fourteen days of the expiry of the lease: "the Lessor shall as soon as is practicable" submit the goods for sale at public auction or sell the goods by private treaty and provision is made for the lessor having entitlements to additional payments by the lessee depending upon the results of any such sale. By cl 16.6, the lessee agrees to indemnify the lessor "in all circumstances … in respect of any capital loss which the Lessor may suffer as a result of entering into this lease …". "Capital loss" is therein defined to mean the difference between "the depreciated value of the Goods" and "the amount of the realisable value of the Goods", (with certain adjustments in the event of "early return to [the Lessor] of its capital or otherwise"). 35 By cl 12.1 of the purchase agreement, it is provided that none of the Goods should be affixed to the land so as to become a fixture, without the purchaser's prior written consent. By cl 4.9 of the lease agreement, it is provided that Eastern Nitrogen: "shall not affix the Goods to any real or personal property without the prior written consent of the Lessor …". But these provisions can only operate prospectively from the date of the agreements, 2 August 1989. They do not purport to create any obligation on Eastern Nitrogen or any right in the financiers to sever any of the goods the subject of the sale that may have become fixtures prior to the transaction. 36 By cl 4.8 of the lease agreement, Eastern Nitrogen "acknowledges that the Goods shall at all times be and remain personal property". In view of the objective nature of the test for determining whether an object is a fixture, the subjective intention of the person who affixed the property to the land, though a relevant consideration in determining whether it has become a fixture, cannot govern the question: see Melluish v BMI (No 3) [1996] AC 454 at 473 and Reid v Smith at 680 - 681; Anthony v Commonwealth (1973) 47 ALJR 83 at 89. The agreement of parties that a fixture objectively intended to remain in situ shall nevertheless be regarded as a chattel cannot alter the fact that the property in question has become attached to the land so as to form part of it. Such an agreement cannot affect the legal position as between any of the parties to it, on the one hand, and third parties, including the Commissioner, on the other. 37 Even though the plant has at all relevant times been a fixture, that does not mean that the instalment purchase agreement and the agreement for lease back dated 2 August 1989 are devoid of all legal effect. In Palmer and McKendrick's Interests in Goods, 2nd ed, the authors conclude at 229, that an agreement conferring "a right to a fixture not contemplated for severance will rank as an interest in land" and so will only be enforceable if evidenced in writing. See also Benjamin, Sale of Goods, 4th ed, par 1-094 at p 76. Jarvis v Jarvis [1893] 63 LJ Ch 10, one of the authorities relied on by Palmer and McKendrick, does support this proposition. It was there accepted, without explanation, that the owner of land, and thus of a fixture to it which the owner had bought from a failed tenant, could effectively promise to assign the fixture to a lender by way of security, even though, as the lender well knew when it was promised the assignment, the owner could not in fact assign the fixture to the lender unless and until the owner's new tenant defaulted under its separate lease of the fixture or declined to exercise its option to remove the fixture, at the end of the ten year term of that lease. But the case does not throw any light on the nature of such an interest. Nor does the other case relied on by Palmer and McKendrick, Horsfall v Thomas Hey (1848) 2 Exch 778. 38 The nature of the interest that arises where a fixture is sold that is not contemplated for severance can only be equitable, since the entire legal title to a fixture not agreed to be severed remains with the owner of the freehold. In Emanuel (Rundle Mall) Pty Ltd v Commissioner of Stamps (SA) (1986) 86 ATC 4,004, affirmed on appeal at 86 ATC 4,394, White J said, at 4,009 - 4,010:

"Fixtures in situ and intended to remain in situ are intrinsically part of the land and have no separate legal existence or entity apart from the land. It is true that fixtures can by agreement be excluded from sale and removed; but if they are not severed by the time when the conveyance operates, they are still part of the soil and pass with the conveyance of the land."

39 A right to remove a fixture would not, in any event, alter the status of a fixture as part of the land and thus in the legal ownership of the owner of the freehold until the right is exercised. Cf The North Shore Gas Co Ltd at 68 and Eon Metals at 4,844. 40 In the Rundle Mall case, M sold its freehold department store to E under a contract which excepted from the sale certain fixtures, such as lifts; these were to remain the property of M to be enjoyed by it during the term of a fifteen year lease of the store which E was to grant to M and could be removed by M at the end of that term. It was held that the purported exception of the fixtures was ineffective to preserve M's legal title to the fixtures after completion of the sale since severance was not intended to occur by the time of completion: the result was that title to the fixtures necessarily passed to the purchaser, E, with the title to the freehold. But it was held that the right to remove the fixtures at the end of the lease gave M an equitable interest, although it is not clear from the judgment whether White J considered it was an equitable interest in the whole of the land or in the fixtures only. At 4,007, White J spoke of M's equitable interest "in protection of its fixtures and its later right of removal of fixtures", which he said arose after the legal title passed to the purchaser on completion of the sale agreement. The content of the equitable interest must, I think, be limited to the right to protect the fixtures against interference by the owner of the freehold or anyone else during the term of the lease and the right, as against the original purchaser of the freehold and any subsequent purchaser with notice of the right of removal, to remove the fixtures at its end. See also Kay's Leasing Corporation Pty Ltd v CSR Provident Fund Nominees Pty Ltd [1962] VR 429 at 436. 41 The contractual arrangements in question in the Rundle Mall case are quite different from those of present concern. In that case, the vendor's entire legal interest in the land and fixtures was transferred to the purchaser on completion of the sale agreement, the exception in the contract of the fixtures from the sale being ineffective to achieve that; the purchaser, by the lease back, gave the vendor for a time, the former's newly acquired right to possession of the freehold, which included the fixtures, and the right, at the end of the lease term, to sever and remove the fixtures from the freehold. Here, all that Eastern Nitrogen ever attempted to transfer to the financiers was a fixture to its land without severance of the fixture being provided for by the sale agreement and with severance only being provided for under the lease agreement on default by Eastern Nitrogen or on termination of the lease, to facilitate the financiers' right then to sell the fixture. 42 In Melluish v BMI (No 3), A purchased goods which it affixed to its freehold, sold them to B and leased them back from B under a lease entitling B to take possession of the goods on default by A in complying with the terms of the lease and also on termination of the lease. The goods in question became fixtures to A's freehold before the sale and lease back transaction. It was there said that the concept of a fixture which remains personal or removable property is "an impossibility in law" and that, on attachment to the freehold, the goods in question became fixtures and formed part of the land, notwithstanding the purported sale and lease back transaction. It was held that B's right to re-enter and remove the equipment on default by A was capable of giving B an equitable proprietary right in the fixture. But it was also held that the property right so created is a contingent right to become the owner at a future date. It only "indicates that there are rights relating to the equipment which belong to the [lessor], not that the equipment itself belongs to them". (476) 43 The question there in issue was whether property, which had become a fixture by annexure to the lessee's land, could be said, in view of the rights conferred on the lessor by the subsequent lease, to "belong" to the lessor for the purposes of s 44 the Finance Act 1971 (UK), which gave the lessors of equipment used in trade certain depreciation allowances for tax purposes. But I think the decision, based as it is on reasoning of general application, is nevertheless authority for the proposition that the contingent right to enter and remove the plant conferred by the agreement for lease on the financiers here is incapable of amounting to the kind of right to deny Eastern Nitrogen access to the plant upon execution of the agreement for lease that would be necessary before it could be said that the rental payments were paid by Eastern Nitrogen to obtain access to and use of the plant. 44 It was submitted, on behalf of Eastern Nitrogen, that even if the plant was a fixture during the currency of the lease, the immediate advantage which Eastern Nitrogen obtained by the payment of the rental instalments was the continued uninterrupted possession of the plant under the lease agreement free of any assertion by the financiers of their rights to enter and remove the plant: on default by Eastern Nitrogen, which would include failure to pay any instalment of rent (cl 14.1.1), the lessor could terminate both the lease "and the Lessee's rights of possession hereunder as to the Goods" and take possession of the Goods. The lessor also had the right, on default, to enter Eastern Nitrogen's site, forcibly if necessary, and dismantle and remove the Goods from any part of the land to which they may have been affixed (cl 10.11). Reference was also made to the covenant in cl 10.1 by the lessor for quiet enjoyment of the plant by Eastern Nitrogen. 45 One difficulty with Eastern Nitrogen's submission arises from the nature of the particular rights which the sale and lease back may have conferred on the financiers. That that arrangement may be capable of having some legal effect, viz, by conferring on the financiers the right, on default by Eastern Nitrogen in paying the rent instalments and otherwise, to enter Eastern Nitrogen's site and dismantle and remove the plant, cannot mean that the advantage that Eastern Nitrogen sought by assuming the obligation that it did not hitherto bear, to pay the rental instalments, was to protect itself from what might happen if it failed to pay those same instalments. Eastern Nitrogen must, for tax characterisation purposes, be taken to have sought some other advantage: it cannot sensibly be regarded as having assumed a new obligation to pay rental instalments in order to obtain the advantage of protecting itself against a detriment capable only of arising if it were to fail to pay one or more of those same instalments. 46 Another difficulty with Eastern Nitrogen's submission is that it ignores those provisions of the lease that expressly state that the consideration given by the financiers for "the rent", ie, for "the Rent … by way of rental instalments as calculated in accordance with this Part 3" (cl 1.1.24 and cl 3.1), was the lease by them of the goods to Eastern Nitrogen (cl 2.1 and cl 3.1), ie, the vesting in Eastern Nitrogen of possession of the plant from the start to the expiry of the lease. Under a lease of land, the modern conception of rent is a payment which the tenant is bound by his contract to pay to the landlord for the use of his land: see United Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904 at 935, 947 and 956; Commissioner of Stamp Duties v JV (Crows Nest) Pty Ltd (1987) 7 NSWLR 529 at 531 - 532 and 538. The consideration for which the lessee's payment of rent is promised and made under a lease of land is governed entirely by the agreement. The agreement for lease of Eastern Nitrogen's plant, on its proper construction, shows that Eastern Nitrogen undertook to pay the rental instalments in return for the "lease", ie, possession of the plant, during the term of the lease, not for freedom from disruption of that possession by the financiers. Clause 2.1 says that expressly. But it never needed to pay the instalments to acquire possession of the plant. It never lost that right. 47 The covenant for quiet enjoyment in cl 10.1 of the agreement for lease is in form typical of similar covenants in leases of land: cf Edge v Boileau (1885) 16 QBD 117. It is well-established, as that case at p 120 shows, that the payment of rent is not a condition precedent to the right to quiet possession: they are independent covenants. It is also well-established that a covenant for quiet possession operates to secure the tenant in both the possession and the enjoyment of the premises throughout the term of the lease for all permitted purposes. See Martins Camera Corner Pty Ltd v Hotel Mayfair Ltd [1976] 2 NSWLR 15 at 23 - 24. There is nothing in the agreement for lease to suggest that cl 10.1 should be given any different interpretation here. The payment of the rentals cannot therefore be characterised as outgoings incurred by Eastern Nitrogen on revenue account within s 51(1) as the consideration given by Eastern Nitrogen for quiet enjoyment of the plant. Since Eastern Nitrogen never lost the rights to possession and enjoyment of the plant that it had immediately prior to entry into the sale and lease back transaction, this clause conferred no advantage on Eastern Nitrogen. 48 Given that the plant was a fixture with the consequence that the lease agreement was legally ineffective to give Eastern Nitrogen any right to possession of the plant, the question remains whether the whole of the valuation fees and the MBL establishment fee incurred by Eastern Nitrogen are deductible under s 51(1). An Eastern Nitrogen witness, Professor Walker, offered the opinion that the cost of the valuations could be deductible as a compliance cost incurred by Incitec in carrying on its business. But that cannot justify deductibility of those fees: the valuations were obtained for a wholly different purpose. The valuation fees and the establishment fee were all incurred by Eastern Nitrogen for the purpose of the sale and lease back transaction, ie, to facilitate, in part at least, the disposal by Eastern Nitrogen of its capital asset. For that reason, they cannot bear the character of outgoings incurred wholly on revenue account. Eastern Nitrogen bears the onus of proving that the Commissioner's assessments in question in which he disallowed the entirety of those fees were excessive and it has not attempted to discharge that burden. The result is that the Commissioner's decisions with respect to the fees must stand. 49 It remains to note that there is authority that mistakes whether of fact or law, including mistakes as to the efficacy in fact or law of a particular transaction to achieve a desired business objective of the taxpayer, do not necessarily mean that outgoings incurred because of the mistaken belief cannot be deductible under the second limb of s 51. See Magna Alloys at 208 and Just Jeans at 125 - 126. The latter was a case in which the Commissioner ultimately abandoned his contention that the arrangement there in question was a sham and concentrated instead on showing that it was legally ineffective to implement the parties' intention of transferring certain property rights and was also accompanied by unusual features that took the outgoings under the arrangement beyond what could be regarded as business outgoings necessarily incurred. But it was not contended by Eastern Nitrogen that the rental payments and the fees might, on this basis, be deductible under the second limb of s 51(1). It is therefore unnecessary to deal with that question (which would involve consideration of whether the unusual features of this transaction, including the purported sale of a fixture not intended to be severed from the vendor's land, at a price greatly in excess of its market value, would tell against such an argument). 50 In case I am wrong in concluding that Eastern Nitrogen's challenge to the Commissioner's decisions should fail because the sale and lease back transaction was legally ineffectual to create the relationship of lessor and lessee with respect to the plant between the parties and so ineffectual to stamp the rentals with the character of revenue outgoings, it is necessary to consider the Commissioner's arguments that Eastern Nitrogen is not entitled to claim deductions for the whole of the lease rentals, even if the sale and lease back transaction was effective to make Eastern Nitrogen lessee of the plant.

51 The Commissioner submits that if the sale and lease back transaction was legally effective to transfer title from Eastern Nitrogen to the financiers under the sale component and to transfer the right to possession back to Eastern Nitrogen under the lease component, the lease rental payments are nevertheless not wholly deductible under s 51(1). 52 He submits that the rental payments under the lease should be characterised as having been made, in part, on capital account because, from a practical and business point of view, the parties should be taken to have been concerned with the provision and repayment of finance, rather than with issues of title and possession: the rentals were part of the consideration given by Eastern Nitrogen for the capital sum of $72,728,613 paid to Eastern Nitrogen by the financiers under the instalment purchase agreement. He relies on a number of features of the transaction said to lead to this conclusion. They include the point that acquisition of the plant by the financiers cannot of itself explain payment of the $72 million to Eastern Nitrogen because that was a figure very greatly in excess of the plant's market value; that the rent provisions of the lease show that each of the rentals comprised a sum referable to the sale figure of $72 million, ie, a capital component, and a component of interest; and that the convention, inflexible according to the evidence, that the financier under a finance lease will offer to sell the leased property back to the lessee at the residual value at the end of the lease shows, with other matters, that Eastern Nitrogen had the right to repurchase the plant on expiry of the lease term. But the Commissioner relies here on these features of the Eastern Nitrogen lease only for the purpose of showing that the rentals should be taken to be, in part, outgoings of a capital nature: he does not rely on them to show that the lease was part of a transaction that was in substance a loan or that it was a sham or that Pt IVA applies to it. 53 Eastern Nitrogen, in answer to this argument of the Commissioner's, relies on the legal rights and obligations it assumed when it entered into the lease component of the transaction to show that the rental payments shall be characterised as outgoings entirely of a revenue nature. 54 The Commissioner's argument that the rental payments under the lease here in question should be characterised as, in part, concerned not with issues of title and possession, but rather with the provision of finance and the repayment of that finance is true of the rental payments made by the lessee under any typical finance lease, long used as a method of providing finance to a business. In Austin v United Dominions Corporation Ltd [1984] 2 NSWLR 612 at 623 - 624, Priestly JA discussed standard features of such leases. He referred to the commercial practice of the lessors of chattels so calculating the rental charges and residual values as to ensure that, at the end of the lease, the lessor will recoup from the rental payments and the sale of the chattel at its residual value at the end of the lease the capital laid out initially and a commercial return on that capital "in a way analogous to that in which it is finally reimbursed at the conclusion of a hire purchase agreement which has run its normal course by the receipt throughout that agreement of instalments only, without any residual payment". That is how the rentals under Eastern Nitrogen's lease were structured. 55 It is apparent from public taxation ruling IT28 of 6 July 1960 that, provided the Commissioner's guidelines are observed, he has long been prepared to determine the tax positions of the parties to a finance lease on the basis that the lease is effective to create the relationship of lessor and lessee, and to allow the lessee a deduction for the whole of the lease rentals, even though the lease is a device for providing loan finance to the lessee's business and even though the rentals have the same mixed character as the rentals paid by Eastern Nitrogen which the Commissioner says is sufficient of itself to deny Eastern Nitrogen's claim to deduct all its rental payments. 56 According to Mr Foy of BBL, the sale by a business to a financier of an asset and the lease back by the business of that asset has also long been a common financing technique in Australia. This financing technique is now the subject of public taxation ruling TR95/30 of 30 August 1995 under Pt IVAAA of the Taxation Administration Act; in terms, it applies to years commencing both before and after that date (par 28). Again, it shows that, provided the Commissioner's requirements are met, he is prepared to allow the lessee full deductibility for lease rentals, even though the sale and lease back is in truth a device by means of which the financier provides loan finance to the business of the vendor/lessee and the latter repays the loan capital advanced, at least in part, by the rental instalments, something acknowledged by the Commissioner in par 3 of the ruling. 57 The commercial utility of the finance lease, either by itself or as part of a sale and lease back transaction, may be the Commissioner's justification for this approach. As he remarks in par 4 of the 1995 ruling, the Income Tax Assessment Act 1936 itself at that time also recognised the legal effectiveness of sale and lease back as a financing device for certain limited purposes, not however of any present relevance. The Commissioner's rulings suggest that he has concentrated on protecting the revenue by limiting the deductions taxpayers can obtain from finance leases by insisting that the sale that always precedes such leases and by reference to which the rentals payable by the borrower/lessee are set and (subject to s 60 the Income Tax Assessment Act 1936) depreciation claimable by the lender/lessor is determined, is at the market value of the leased asset and by insisting that the borrower/lessee has no right to acquire the asset, ie, that the lender/lessor is truly entitled to claim depreciation as the owner of the asset. 58 But the Commissioner has for nearly four decades publicly accepted that the fact that finance lease rentals paid by the lessee comprise a capital as well as a revenue component is not of itself sufficient to require the rentals to be apportioned and deductibility allowed only for the revenue component. Yet he now wants to say that it is that very feature of this lease that requires Eastern Nitrogen to be denied full deductibility of the rental instalments. 59 If the Commissioner has, for so long, been prepared to accept that the fact that finance lease rentals are not to be denied full deductibility just because they include a capital component, I think public knowledge of the Commissioner's attitude in that respect can be taken into account in identifying the advantage that a lessee under such a lease should be taken to have sought by making the rental payments. 60 This is not, I think, to say that the Commissioner is estopped from applying s 51(1) to Eastern Nitrogen's claim to deduct the whole of the rentals under the lease here in question; nor is it to bind the Commissioner to what might be described as part of the philosophy underlying public taxation ruling TR95/30 (rather than to the matters expressly dealt with in the ruling). Neither contention can be raised against the Commissioner: see Bellinz v Commissioner of Taxation (1998) 84 FCR 154 at 164 and 169 (although it is no longer correct to say the Commissioner can never estop himself from enforcing the tax laws according to their true interpretation: by publishing a ruling under Pt IVAAA the Taxation Administration Act reflecting a view of the tax laws not truly in accord with them, he may do just that with respect to the application of the law to the subject matter of the ruling. See, eg, ss 14ZAAE, 14ZAAH and 14ZAAL the Taxation Administration Act and s 170BA(3) the Income Tax Assessment Act 1936). Rather is the Commissioner's long standing and widely known attitude a piece of evidence that can be taken into account in identifying, on an objective view of all the circumstances, what Eastern Nitrogen should be taken to have sought to achieve by making the rental payments. 61 People in commerce have for many years known of the Commissioner's attitude in that regard. The evidence shows that Eastern Nitrogen and its financiers did enter into the sale and lease back transaction here in question with that knowledge. Accordingly, on the assumption that the transaction was legally effective to create the relationships contemplated by the two agreements, I would reject the Commissioner's narrow argument that the lease rentals are not wholly deductible because they are, in part, of a capital nature and hold that the advantage Eastern Nitrogen sought to achieve from the rental payments is the contractual benefit it obtained in return for those payments, viz, the right to use the plant. The lease rentals take their character for the purposes of s 51(1) from this. This does not mean, however, that the transaction cannot still come within Pt IVA: if the dominant purpose of the taxpayer or other participant in the transaction was to enable the taxpayer to obtain a tax benefit, deductibility of the whole or part of the rentals may still be denied to the taxpayer, despite their characterisation as revenue outgoings.

62 The Commissioner's argument here suffers from a fundamental flaw. 63 In Snook v London and West Riding Investments Ltd [1967] 2 QB 786, Diplock LJ described a sham transaction or document as requiring that "all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating". Although Australian cases have slightly recast this description, it remains an essential feature of a sham transaction that all the parties to it must have an intention to the effect here stated. See, eg, Richard Walter Pty Ltd v Commissioner of Taxation (1996) 67 FCR 243 at 245 and 257 - 258. 64 One of Eastern Nitrogen's key objectives in entering into the sale and lease back transaction was to obtain a deduction for the whole of the lease rentals. It could only achieve that objective if the purchase agreement and the lease agreement were effective to create the legal rights and obligations they purported to create, ie, to effect a transfer of title to the plant from Eastern Nitrogen to the financiers and then to transfer back to Eastern Nitrogen, for the term of the lease, the right to possession which the financiers had acquired with the title to the plant. 65 The documents, though incapable for the reasons given of having this effect, reflect Eastern Nitrogen's intentions precisely. That is sufficient to show that the transaction consisting of the purchase and lease agreements cannot be a sham and it is unnecessary to examine what the intentions of the financiers may have been in executing those agreements. 66 There is a sharp difference between a transaction entered into by a taxpayer in the belief that it is legally effective to create a state of affairs sufficient to require outgoings to be given a particular tax characterisation when, in truth, the transaction is legally ineffectual to bring into existence the desired state of affairs, on the one hand, and a transaction which is a sham because it was never intended to have any effect, but rather to conceal some other different transaction truly intended by the parties, on the other hand. In my opinion, Eastern Nitrogen's intention was that the transaction would be effective to make the rental instalments the quid pro quo for its right to use the plant. Its belief was mistaken because the plant was a fixture. That does not make the transaction a sham. Cases such as Just Jeans and Magna Alloys show that just because a taxpayer enters into a transaction intended to give rise to deductible outgoings that is legally ineffective to bring about the state of affairs necessary to stamp the outgoings with the character of deductible expenditure, the taxpayer does not necessarily fail to be entitled to the deductions. It is therefore impossible to equate legal ineffectiveness with sham.

67 It is only relevant to consider Pt IVA on the assumption, contrary to the view I have formed, that the sale and lease back transaction was legally effective with respect to changing title to and thus the right to possession of the plant. 68 At one point in argument the Commissioner contended that the "tax benefit" within the meaning of that term in s 177C the Income Tax Assessment Act 1936 which Eastern Nitrogen obtained by reason of its involvement in this scheme was the deduction in respect of the whole of the lease rentals. In his statement of facts, issues and contentions including his further particulars thereof, the Commissioner identified the relevant tax benefits as the deductions he has disallowed of the now agreed capital components of the lease rentals paid in 1990 and 1991, viz, $12,038,711 and $8,054,378 respectively, in addition to the deductions he has also disallowed in respect of the 1989 year of most of the valuation and establishment fees. 69 Conformably with ss 177C(1)(b) and 177F(1)(b) the Income Tax Assessment Act 1936, the Commissioner can, I think, treat the "tax benefit" obtained by Eastern Nitrogen either as the whole or part of the lease rentals, but deny it a deduction in respect of only part of those lease rentals. But there is, in my opinion, no practical significance to be attached to the different formulations of the tax benefit by the Commissioner: in his decisions under challenge, he has accepted Eastern Nitrogen's entitlement to a deduction in respect of the interest components of the lease rentals and a small part of the fees, so that if Eastern Nitrogen's attack on those decisions fails, they will stand and with them, the Commissioner's recognition of Eastern Nitrogen's entitlement to those deductions. 70 I accept the Commissioner's submission that there was here a "scheme" within the meaning of that term in s 177A(1), constituted by the making and implementation of the sale and lease back of the ammonia plant. The term "scheme" is defined in very wide terms, deliberately so, in my opinion, to ensure that any way in which a taxpayer organises its affairs will be caught by Pt IVA, if the circumstances of the particular case give rise to the conclusion that what the taxpayer has done was done for the purpose referred to in s 177D. 71 I also accept the Commissioner's submission that the parties to this scheme included Incitec and the other nine companies listed in the relevant schedules to both the Instalment Purchase Agreement and the lease agreement as the guarantors of Eastern Nitrogen's obligations under the sale and lease back agreements, as well as MBL, Eastern Nitrogen and the financiers. All, save perhaps MBL, were involved in carrying out the scheme; MBL was at least involved with Incitec, Eastern Nitrogen and the financiers, if not with the other nine guarantors, in the entering into of the scheme. 72 The Commissioner is only able to invoke the power conferred on him by s 177F if the conclusion to be drawn from the considerations referred to in s 177D(b) is that the dominant purpose of at least one of the persons who entered into or carried out the scheme was enabling the taxpayer to obtain a tax benefit in connection with it: see the definition of "purpose" of scheme in s 177A(5). In identifying whether enabling the taxpayer to obtain a tax benefit was the dominant purpose of at least one of the parties to the scheme, the search is for "the ruling, prevailing, or most influential purpose" of the person or persons whose activities fall to be scrutinised: Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404 at 416. 73 In determining whether the obtaining by the taxpayer of a tax benefit was the dominant purpose of the scheme, the conclusion that is relevant is not the subjective opinion of the Commissioner, but rather that which would be formed by a reasonable person: Spotless at 422. The inquiry is confined to whether a reasonable person would, after having regard to the evidence establishing each of the eight matters in s 177D(b), arrive at that conclusion: Spotless at 421 - 422. As is implicit in this passage, the Court must determine whether the conclusion referred to in s 177D is that to be reached by evaluating the resultant effect of the determinations it has arrived at on each of the matters listed in s 177D(b), a proposition explicitly stated by the Full Court in Peabody v Commissioner of Taxation (1993) 40 FCR 531 at 543. A global assessment may suffice: Commissioner of Taxation v Consolidated Press Holdings Ltd [1999] FCA 1199 at [93]. In a particular case, what the evidence establishes with respect to one or more of these matters may be of no assistance to the decision-maker in determining whether there is a purpose of obtaining a tax benefit. 74 One further point is established by Spotless at 415 - 416, where it was said:

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

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

75 This is a significant holding. That a scheme may achieve for the taxpayer real commercial advantages or objectives, as well as the tax advantages that would flow to the taxpayer from the scheme, Pt IVA apart, is not sufficient to immunise a scheme from the reach of Pt IVA. The taxpayer must still show that the dominant purpose of entering into and implementing the scheme was other than to obtain a tax benefit for it. The transaction here in question was implemented prior to the decision in Spotless, at a time when the obtaining of genuine commercial advantages by a taxpayer from a transaction may have been widely thought to be of more significance in preventing an assessment under Pt IVA than that decision has now revealed to be the true position. 76 Eastern Nitrogen's case in essence is that it entered into the sale and lease back transaction not for the purpose of tax avoidance, but as the result of a normal corporate decision-making process designed to achieve certain commercial objectives. The chief of those objectives was said by it to be the opportunity to obtain long-term finance that that transaction offered it, thereby reducing the risks it then faced, by reason of its heavy reliance on short-term funds for its financing needs. 77 The Commissioner submits that, upon a consideration of the evidence relevant to the matters listed in s 177D(b), it should be concluded that the sale and lease back transaction was entered into or carried out by Eastern Nitrogen, Incitec, MBL and/or the financiers, as well as the other parties to it, for the dominant purpose of enabling Eastern Nitrogen to obtain the tax benefits in the form of deductions of the lease rentals paid by it. It is difficult to accept that that was the main purpose of MBL or the financiers' involvement in the scheme: their concern was to achieve commercial profits for themselves, from brokerage fees in the one case, and from interest on money lent in the other. But as the submission recognises, it is sufficient if any one of these organisations entered into or carried out the scheme with that as that organisation's dominant purpose. 78 Attention at the hearing was focused on Incitec and Eastern Nitrogen's purpose in entering into and implementing the transaction, both their subjective purpose and that the subject of s 177D. It was said by Eastern Nitrogen that the companies' purpose, ie, its subjective purpose, was that of the persons who were "the directing mind and will of the company": Allied Pastoral Holdings Pty Ltd v Federal Commissioner of Taxation [1983] 1 NSWLR 1 at 5. The evidence is that the activities of Incitec and its subsidiaries, including Eastern Nitrogen, were managed as a single business, without any attempt to identify the individual interests of each of the group members. Eastern Nitrogen's subjective purpose is therefore that of the controllers of Incitec, ie, its Board. The purposes of Incitec's finance managers, Messrs Lawrence and Spriggs, are also relevant to identification of Eastern Nitrogen's purposes, in so far as their purposes are reflected in the recommendations they made and in the advices they gave to Incitec's Board which were accepted by it. Eastern Nitrogen's purpose of decisive significance can be taken to be the purpose of those controllers which a reasonable person would conclude that they had in committing Eastern Nitrogen to enter into and implement the scheme, in so far as that purpose is identifiable by inference from the matters listed in s 177D(b). 79 In my opinion, the Commissioner goes too far in submitting that evidence of the Eastern Nitrogen witnesses who were involved in considering and agreeing upon the sale and lease back transaction as to their subjective intentions and as to what they sought to achieve for Eastern Nitrogen from the transaction is irrelevant to consideration of whether the conclusion referred to in s 177D is established. I reach this view with hesitation, given the contrary conclusion of Sackville J in CC (New South Wales) Pty Ltd (In Liq) v Federal Commissioner of Taxation (1997) ATC 4,123 at 4,146 - 4,147. But as Sackville J there pointed out, neither in Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359 nor in Spotless has the High Court expressly considered the point. When the Court in Spotless, at 421 - 422, referred to the matters listed in s 177D(b) as "posited as objective facts", it was concerned to emphasise that each of these eight matters involved issues of fact that had to be established by evidence: the Commissioner's discretion to cancel a tax benefit under s 177F(1) arises only once each of those matters is established as an objective fact and the necessary conclusion is drawn from them; his discretion is only capable of being exercised on the basis of proof of those matters and is not capable of exercise merely on his opinion or satisfaction about those particular matters. See the passage in Peabody in 181 CLR at 382 to which the Court in Spotless here makes reference. The Court in Spotless was not concerned at 421 - 422 with identifying the range of evidence admissible in proof of the matters in s 177D(b). Accordingly, I read this passage in Spotless as showing that the discretion under s 177F(1) to cancel a tax benefit is dependent upon proof, by any relevant evidence, as objective facts of the eight matters in s 177D(b) and upon the inference being drawn that a reasonable person would conclude, on the basis of those eight matters only, that a relevant person's dominant purpose in entering into or in carrying out a scheme was to enable the taxpayer to obtain a tax benefit in connection with the scheme. 80 Evidence of the subjective intentions of scheme participants is, I think, well capable of assisting in the proper understanding of the activities engaged in and well capable in other ways of being relevant, at least to proof of the matter or issue the subject of s 177D(b)(i), in view of the wide meaning the term "manner" was said to have in Spotless at 420. 81 The decision that Eastern Nitrogen should enter into the sale and lease back transaction, taken by Incitec's Board on 22 June 1989, resulted from extensive discussions between MBL and Eastern Nitrogen/Incitec officers and their various external advisers which commenced in early 1988. Mr Lawrence, Incitec's finance manager, was the person on the Eastern Nitrogen side of the transaction most closely involved with the development and finalisation of the sale and lease back transaction, although he retired at the end of April 1989, when Mr Spriggs took his place. Mr Eddey was an Incitec Board member from June 1986 to March 1991; he was a member of the two man Board Committee that considered the proposal and reported to the full Board at its 22 June 1989 meeting. Mr Lattimore was the MBL officer who had the carriage of the transaction for his organisation. 82 The form of MBL's proposal changed in a number of respects as a result of discussions between Mr Lawrence and Mr Lattimore through 1988 into 1989. These discussions culminated with Mr Lawrence giving MBL a written mandate on 8 February 1989 to seek funds of $72 to $78 million by means of the sale and lease back transaction. A tender process followed, culminating in BBL and SBSA submitting a written offer to MBL on 21 March 1989. It was their revised offer that Incitec accepted following the Board meeting of 22 June 1989. 83 The present case is not one in which a business identified concerns that needed attention and then adopted the transaction in question as the means of meeting those concerns. Rather is it a case in which a finance broker solicited business for itself by promoting to others financing products that it could arrange with financiers and so attracted the interest of Incitec in a particular product, as a means of meeting the group's major financing needs, in which Incitec had hitherto shown no interest (though it had previously made limited use of finance leases, eg, to acquire vehicles used in its operations, because of the cost savings that method of acquisition of its truck fleet offered over alternatives). 84 Mr Lawrence makes it clear that the transaction originated with Incitec receiving an MBL promotional package in late 1987. He said that this package demonstrated how a sale and lease back transaction with respect to any suitable item of plant could be used to raise finance on more advantageous terms than other methods of financing a business's operations. 85 Mr Lattimore was an Associate Director with the Corporate Finance and Leasing Services Division of MBL. He was involved in promoting a range of "financial product types", including sale and lease back transactions, which MBL presented to companies it had identified as likely to be interested in a particular product. Incitec was one of the companies so targeted. MBL earned income from these promotional activities by way of brokerage fees paid by the company which took up one of its products. 86 Although Incitec had relied on term finance to fund its business operations in earlier times and into the 1970s, through most of the 1980s, particularly with bank deregulation, it had become attractive to Incitec to move its funding requirements from long-term borrowings to borrowings on the short-term money market: not only was Incitec able to obtain cheaper finance on the short-term market, but it gave it the important advantage of being able to match its borrowings to seasonal stock levels, its fertiliser business being essentially seasonal. 87 Mr Lawrence first met with Mr Lattimore to discuss MBL's proposal on 12 February 1988. It is apparent from Mr Lawrence's memorandum of 15 March 1988 to the Incitec Board that in recommending continued reliance on short-term borrowings for Incitec's finance needs until the end of its current financial year on 30 September 1988, Mr Lawrence then had regard to the ready availability of short-term money and "the groups strong balance sheet position" as making the payment of fees for committed lines of credit unnecessary. The strength of the group's balance sheet is evidenced by Mr Lawrence's note in this memorandum that Westpac Banking Corporation, unlike other lenders to Incitec, had no lending limits currently in place and had indicated that they were keen to participate in lending to the group. Mr Lawrence said that this report to the Board was typical of the kind of report about future borrowing policy that would have been submitted to the Board at least once a year, and possibly more frequently. No later examples from which might be identified the significant change said to have taken place after early 1988 in Incitec's financing policy, of which entry into the sale and lease back transaction was a reflection, were, however, pointed to. 88 The opportunity that short-term borrowing gave Eastern Nitrogen to take advantage of favourable interest rates movements that Mr Lawrence noted in March 1988 was thought to be still attractive in June 1989. Mr Spriggs, in his recommendation of 14 June 1989 in favour of the sale and lease back transaction, records an intention to defer shifting from floating rate to fixed rate borrowing, notwithstanding entry into the transaction, because of the current interest rate levels which Incitec officials expected to fall, ie, he recommended that Incitec should continue to seek the interest rate advantages offered by short-term finance. Mr Eddey said Mr Spriggs' recommendation reflected the Board's view in mid 1989 (a view subsequently vindicated by the falls in rates). Even after entry into the transaction, Incitec accordingly sought the greatest flexibility then available to it to take advantage of its views as to future interest rate movements. The sale and lease back transaction, by cl 3 of the agreement for lease, gave Eastern Nitrogen access both to long-term funding and the opportunity to select, once a year, the then current floating rate as that to be used to calculate lease repayments for the ensuing year. Eastern Nitrogen took advantage of this at the commencement of the lease to pursue its longstanding attraction to securing maximum flexibility for itself, so far as it could within the confines of the transaction, by fixing the interest rate governing the calculation of lease rentals for one year, the shortest period it could select; at the end of the first year of the lease term, it again fixed the interest rate then prevailing for the same minimum period. This flexibility was written into the lease at Eastern Nitrogen's insistence: see the information memorandum which MBL distributed to prospective financiers in February 1989. 89 But despite this evidence of the continued attractiveness to Eastern Nitrogen of being able to borrow at short-term rates, the central pillar of Eastern Nitrogen's case was said to be its concern through 1988 and into 1989 at the too heavy reliance it had been placing on short-term debt to meet its financing needs and its associated concern to reduce the risks of such reliance by moving to greater reliance on long-term funding. It is said that the sale and lease back transaction provided a mechanism for achieving this risk reduction strategy. It was acknowledged that the transaction gave Eastern Nitrogen other commercial advantages, including taxation advantages, by providing it with the cheapest source of after-tax financing compared with other financing mechanisms which it might have adopted, and the option of returning the profit on sale of the plant to shareholders not otherwise available to it. But that is how Eastern Nitrogen's witnesses identified the matter of central importance. 90 Mr Lawrence said that although "it was always at the back of my mind" that Incitec should not continue to rely on short-term borrowings, as Incitec moved into the 1980s it had done well by relying on such funds; he said that in early 1988 he still thought it was "the right strategy" for Incitec to rely heavily for its funding needs on short-term borrowing. Speaking of the period in mid March 1988, ie, immediately after his initial discussions with Mr Lattimore, Mr Lawrence said "my interest in a sale and lease back transaction was in the opportunity which it offered to change the 'mix' of methods by which finance might be obtained by Incitec, especially in the medium to long term". Mr Spriggs said that by early 1989, Incitec was relying on short-term borrowings for about 90% of its financing requirements and he had become concerned at how this left Incitec's profitability exposed to adverse seasonal influences, import competition and high domestic interest rates. Mr Spriggs said these factors had almost halved Incitec's profit in 1989, compared with the preceding 1988 year. This comparison was of Incitec's years ending 30 September. He says that by the Board meeting of 20 April 1989 he regarded it as important that Incitec substantially increase its proportion of long-term finance, compared with short-term borrowings. 91 Mr Eddey gave similar evidence. He pointed to how sensitive Incitec's profitability was to such changes in its trading environment, a consideration that had "by 1989, led the Board to adopt a treasury policy which had as its aim" to increase the proportion of both Incitec's committed facilities and of its fixed versus floating rate debt. According to his evidence, that was his own opinion throughout. He said he saw the proposal when it was first put to the Board in March 1988 as redressing the problem Incitec then faced due to its heavy reliance on short-term, uncommitted debt: "not a sound financing practice at the time". He also said Mr Spriggs' recommendation of 14 June 1989 reflected this same long-standing view of his. Mr Eddey said at one point that he considered the change of Incitec's debt mix to more reliance on committed funding that was provided for by the sale and lease back transaction was its "primary advantage" over Incitec's hitherto reliance on short-term financing: this "would enable Incitec to obtain more attractive rates for its short term funding requirements". But elsewhere he put the matter differently, emphasising his "great concern" at the risks presented by Incitec being "almost wholly reliant" on short-term borrowings and how he was, by 1989, "strongly of the view" that the company needed a better mix of funds. He here said that he "and the Incitec Board considered [it] to be of primary importance in restructuring the funding facilities … to reduce the company's exposure to an inability to raise funds to repay maturing debt". The sale and lease back transaction enabled the company's funding mix to be stabilised, but did so "at what appeared to be a very good effective cost". Mr Eddey said the transaction was never put to the Board by anyone as a tax avoidance arrangement that Incitec might enter into, though the tax ramifications of the transaction were taken into account: "I always regarded it as a method of raising large scale finance in accordance with Board approved treasury policy". He here added that achieving a better balance in its funding structure would enable Incitec to negotiate better margins on its short-term debt. But the effect of his evidence is that this was an advantage offered by the sale and lease back transaction secondary to it enabling Incitec to achieve a better funding mix and to reduce the risks to its profitability of relying on short-term funding. It was but one of a number of secondary advantages presented by the transaction referred to in Eastern Nitrogen's evidence. 92 The importance of changing Incitec's mix of funds to rely more heavily on long-term borrowings was thus put forward by its financial officers in their evidence as the major matter of concern with respect to the group's financial arrangements in the period from about late 1988 to June 1989, when the decision was made to commit Eastern Nitrogen to the transaction. It was identified in Eastern Nitrogen's closing submissions as its objective of primary importance in entering into the transaction. 93 The Board is said to have adopted a "Treasury Policy" for Incitec which reflected this aim. Both Mr Eddey and Mr Spriggs described it as the "Board approved Treasury Policy". Mr Spriggs describes the sale and lease back transaction in his important memorandum of 14 June 1989, adopted by the Incitec Board on 22 June 1989, as an effective mechanism to enable achievement, or at least partial achievement, of the objective of this Treasury Policy. He explains how, in Appendix 1 to his memorandum. According to Eastern Nitrogen's witnesses, this policy recording a significant shift in Incitec's financing policies was reduced to writing, as might be expected. 94 At various times during the hearing, emphasis was placed on the importance of production of a copy of the Policy. None was however produced in evidence and no Incitec Board Minute recording approval of the Policy or any other documentary confirmation of its existence was produced either. This lacuna in Eastern Nitrogen's case, that its dominant purpose in entering into the sale and lease back transaction was something other than obtaining a tax benefit, is striking. No explanation was proffered for Eastern Nitrogen's failure to produce documentary confirmation of the existence of this Policy prior to reference to it in the Board papers of June 1989, on which the decision to enter into the transaction was made. Contrary to Eastern Nitrogen's submission, Mr Eddey did not offer any such explanation. All that was put was counsel's submission on behalf of Eastern Nitrogen in respect of the absence of any written record of the Treasury Policy that the inability to locate such documentation "a decade later" is not inherently improbable. In a case not characterised by a lack of documentary records on Eastern Nitrogen's side, that submission, standing as it does bare of any explanation in the evidence for why such important documentation may have been mislaid or lost or destroyed, is rejected. 95 Quite apart from the absence of any documentary confirmation of the existence of this Treasury Policy prior to Mr Spriggs' reference to it in his memorandum of 14 June 1989, there is also an absence of reference in Incitec and Eastern Nitrogen's records to what their witnesses now say about their growing concerns through the period the sale and lease back transaction was being negotiated with MBL's intermediation about the need to deal with the perceived risk to Incitec's profitability presented by its reliance on short-term finance for its business needs. There is no such reference until the matter is taken up in the material prepared by Mr Spriggs in mid June for submission to Incitec's Board at its 22 June 1989 meeting. And Incitec's reliance through 1988 into mid 1989 on short-term funding, already mentioned, is inconsistent with the existence then of the concerns now described. 96 The absence of such evidence is the more striking when regard is had to the fact that the Incitec Board considered MBL's sale and lease back proposal on numerous occasions between its meeting of 23 March 1988, when Mr Lawrence's initial memorandum raising the proposal for consideration was tabled, and 22 June 1989, when the Board made the decision to proceed with that proposal in the form it had then come to take, and when regard is had to the extent to which development of the proposal occupied Mr Lawrence's attention up to his retirement and then Mr Spriggs' attention. 97 Mr Lawrence's initial memorandum to the Incitec Board of 16 March 1988 recommending further investigation of the MBL sale and lease back proposal lists it as having:

"a number of advantages over traditional financing methods in that it:

98 This list simply reproduced what Mr Lattimore had to say in the summary in his detailed proposal which he gave to Mr Lawrence under cover of his early letter of 29 February 1988. It is reproduced in all Mr Lawrence's subsequent Board memoranda through to March 1989. These advantages, copied by Mr Lawrence from Mr Lattimore's list, were not unique to Eastern Nitrogen: they are the advantages that a sale and lease back transaction typically offers to large business taxpayers. None can be read as referring to what is now said to have been the main attraction of the MBL proposal for Eastern Nitrogen as a risk reduction strategy. When Mr Lawrence repeated the MBL comment about sale/lease back methods improving the balance sheet structure, he was referring to the balance sheet ratios, a matter to which he made specific reference at p 3 of his memorandum and in oral evidence. Improved ratios would no doubt assist Incitec to obtain cheaper finance, something demonstrated by the rating which Mr Spriggs procured from Australian Ratings in August 1989. But that has nothing to do with changing the mix of Incitec's funding arrangements from emphasis on short-term funding to long-term funding undertaken as a risk-reduction strategy of the kind relied on by Eastern Nitrogen's witnesses. 99 Mr Lattimore nowhere in his evidence suggested that he was told that an attractive feature of the sale and lease back proposal for Eastern Nitrogen was the opportunity it presented for changing to a more satisfactory mix of funds. He was keen to persuade Incitec to adopt the sale and lease back proposal. That was how MBL made its money. If Mr Lawrence had mentioned this as a possibly attractive feature of the proposal to Mr Lattimore, it is highly likely that Mr Lattimore would have taken up the suggestion and developed it in this initial proposal or at least in one of the subsequent communications he directed to Mr Lawrence. Yet he makes no mention of ever being told that what is now said to be the major concern that attracted Eastern Nitrogen to the transaction was ever mentioned to him. Instead, when asked about his reference in his February 1988 proposal to how the sale and lease back transaction might provide an attractive funding alternative for future expansion/refinancing of existing debt, Mr Lattimore agreed that he was not referring here to limiting Incitec's exposure because of its reliance on short-term borrowings and added that limiting that exposure "was never represented to be a benefit". 100 From time to time, in advices Eastern Nitrogen received from its external accounting and legal consultants, there is reference to their being instructed that Eastern Nitrogen's purpose in entering into the sale and lease back transaction was to enable it to restructure its financing arrangements. But it is clear that that does not purport to record any information provided by Eastern Nitrogen that it considered such restructuring was important to reduce the risks of reliance on uncommitted short-term funding now said by its witnesses to have then loomed so large in their minds. For example, counsel's advice of 16 December 1988, in dealing with Eastern Nitrogen's request for advice on the possible application of Pt IVA to the transaction, contains the following:

"In this regard I am invited to assume that the dominant purpose of the lessee in entering into this transaction is to enable the lessee to restructure its financing arrangements so as to take advantage of the commercial benefits that a sale and lease back arrangement has over more traditional methods of financing. These benefits include an estimated reduction in after tax interest costs, increased reported profits and improved cash flow and balance sheet structure."

101 Furthermore, the course Eastern Nitrogen took leading up to the decision in late June 1989 to enter into the transaction was a leisurely one, in so far as it extended from early 1988 to June 1989, without there being any indication in the documentation, including the material that went up to the Incitec Board, of a sense of concern to adjust Incitec's funding mix. 102 Eastern Nitrogen submits that the points made in closing submissions by the Commissioner as to the unacceptability of Eastern Nitrogen's evidence that the opportunity it provided for Eastern Nitrogen to obtain a better mix of loan funds was critical to its decision to enter into the sale and lease back transaction amount to an accusation of recent invention. It is further submitted that the Commissioner cannot sustain such an argument because of his failure to comply with the rule in Browne v Dunn in cross-examining the relevant Eastern Nitrogen witnesses and, in particular, Messrs Eddey, Lawrence and Spriggs. 103 I do not think this is the only view of the case that is open. It is Eastern Nitrogen which bears the persuasive burden of proving the facts necessary to show that the Commissioner was wrong in invoking Pt IVA to limit, in his assessments, Eastern Nitrogen's claims to deduct the whole of the lease rentals paid in the relevant years. See s 14ZZO(b) the Taxation Administration Act, Federal Commissioner of Taxation v ANZ Savings Bank Ltd (1994) 181 CLR 466 at 479 and Richard Walter Pty Ltd v Commissioner of Taxation (1996) 67 FCR 243 at 258 - 259. The assertion by Eastern Nitrogen that it entered into the sale and lease back transaction primarily out of concern to reduce reliance on short-term funding in favour of committed long-term funding and not to obtain a tax benefit was an important element of the case sought to be made by it that the transaction was not caught by Pt IVA. If it were accepted that Eastern Nitrogen's own chief purpose was to control the risks to its future profitability from continued reliance on short-term funding that its witnesses said they perceived Eastern Nitrogen to be facing, that would be significant evidence supporting a conclusion that it could not be said to be a scheme for obtaining a tax benefit. In concluding that that was not Eastern Nitrogen's dominant subjective purpose in entering into the transaction, it is not necessary for me to find that Messrs Eddey, Lawrence or Spriggs are unworthy of credit. But, in the absence of production by Eastern Nitrogen of the kind of contemporaneous documentation confirmatory of its funding concerns, which could be expected to be available in the company records, and which are said to be of such moment as to have attracted Eastern Nitrogen to the sale and lease back proposal, I am not prepared to accept their oral evidence as sufficient to justify a finding that Eastern Nitrogen has discharged the burden of proving that its dominant subjective purpose in entering into the transaction was that deposed to by its main witnesses. 104 The picture presented by the evidence is of a company content with its existing financing arrangements, but attracted to the sale and lease back transaction, when that was drawn to its attention by a finance broker, because of the tax benefits it provided, benefits expected to result in cheaper after tax finance because of the full deductibility of the rentals and other tax benefits, including depreciation on the plant after reacquisition at the end of the lease. The attraction of those tax benefits was enhanced for Eastern Nitrogen by the prospect that it would not have to include the balancing charge arising on the sale of the depreciated plant in its income because it knew it could delay the implementation of the transaction until it was in a position to set that charge off against planned new plant. Its dominant purpose, in the sense of its subjective purpose for entering into the transaction, was thus to obtain the tax benefit available from full deductibility of the lease rentals thereby lowering its costs of finance. 105 It is, I think, clear that Messrs Lawrence, Spriggs and Eddey were attracted, in evaluating the proposal, to the taxation advantages offered by the sale and lease back transaction compared with other methods of raising finance; they were also concerned, by seeking appropriate external advice, for assurance that those advantages could be realised by Eastern Nitrogen, if it went ahead with the proposal. 106 The material Mr Lattimore provided to Mr Lawrence showed that the tax benefits for the borrower of a sale and lease back transaction as a means of raising $75 million of finance were central to the attractions MBL presented the transaction as offering to Eastern Nitrogen. The sensitivity analyses produced by Mr Lattimore for Eastern Nitrogen's consideration showed that the sale and lease back proposal had financial advantages over other methods of finance, notably in the form of lower after tax costs, resulting from the tax deductions available for the lease rentals and deductions for depreciation on the plant after its reacquisition by Eastern Nitrogen at the end of the lease and the opportunity to offset the balancing charge that would arise on the sale of the plant, if the transaction went ahead, against new plant that Eastern Nitrogen had already decided to build. Mr Lattimore acknowledged that these analyses showed this lower cost as a net benefit to Incitec from the sale and lease back transaction compared with traditional borrowings regardless of the residual value adopted for the lease element of the transaction. He acknowledged that before tax was allowed for, the transaction would offer Eastern Nitrogen no benefit in terms of cost of funds, though there were, as he pointed out, the other benefits he mentioned in his proposals. In the proposal forwarded by Mr Lattimore to Mr Lawrence under cover of his letter of 10 August 1988, Mr Lattimore recorded the view that the anti-avoidance provisions of the tax laws should not apply "since Incitec Limited's primary purpose in entering into the transaction is to raise funds and reduce its borrowing costs and not to obtain a tax advantage", information that he could only have obtained from Mr Lawrence. 107 Mr Eddey considered that the taxation consequences of the sale and lease back proposal were an important consideration in its favour and that it was that which "certainly made the difference" in making that proposal cheaper than alternative methods of borrowing. Mr Spriggs, the author of the memorandum of 14 June 1989 which the Incitec Board accepted in committing Eastern Nitrogen to the sale and lease back transaction, gave this evidence:

"Yes. It is fair to say, is it not, that it was the fact that the after tax cost was cheaper than other forms of finance that you regarded as critical to the decision to enter into the sale and lease back transaction?‑‑‑Yes, that's correct.

And was it also your belief that what made the after tax costs cheaper was the taxation treatment of the sale and lease back as opposed to alternative borrowings?‑‑‑Yes, that's correct."

108 Eastern Nitrogen's quite protracted evaluation of the proposal also involved a lot of consideration to structuring the sale and lease back transaction in a way which would ensure that Eastern Nitrogen would get the taxation advantages that were said to be available from it. Accounting, valuation and legal advice was sought. Eastern Nitrogen's major concern appears to have been for the transaction to be structured in a way which would be acceptable to the Commissioner so that it would be assured of obtaining deductibility of the whole of the lease rentals, something that senior counsel in his advice of 16 December 1988 described as "the main question" for his consideration. It was on the basis of these advices that Eastern Nitrogen ultimately abandoned its desire for a lower residual value (and larger rental deductions) for the higher residual value of 45% which it ultimately adopted and had the financiers include in the lease agreement. It was on the basis of these advices that Eastern Nitrogen also decided not to adopt the MBL suggestion of making provision in the transaction for a company associated with it taking an option to buy the plant at the end of the lease period: accounting advice was that the inclusion in the transaction of such a provision might well result in the Commissioner not considering it "to be a genuine lease for income tax purposes". 109 The desire to obtain the tax benefits of the transaction prevailed over Incitec's concern for assurance that, at the end of the term of the lease, it would recover ownership of the plant because it was essential to Eastern Nitrogen's continued operations. From 1987 to 1994, Mr Bellingham was Incitec's Manufacturing Manager, responsible for all of the manufacturing operations of Incitec and its subsidiaries, including Eastern Nitrogen. He learned of the sale and lease back proposal from Mr Lawrence and recalls that it was discussed at group executive meetings in 1988 and 1989. There was never any suggestion made to him that this transaction would interrupt in any way Eastern Nitrogen's manufacturing operations in which the ammonia plant played an essential part. It was always intended that Eastern Nitrogen would have uninterrupted possession and use of the plant before, during and after the sale and lease back transaction. This intention on the part of Eastern Nitrogen is reflected in the way Incitec accounted for the profit on the sale of the ammonia plant, which involved a departure from the approved accounting standard in its 1990 and 1991 accounts: see, eg, par (d) of the Directors' Statement in the notes to Incitec's accounts for the 1990 year where the directors record their view that the ammonia plant would continue to be of use to Eastern Nitrogen for a further five years after expiry of the lease. (This treatment changed thereafter because of the change in the law requiring Incitec to adhere in its accounts to certain accounting standards.) Eastern Nitrogen's intention is also reflected in Mr Lawrence's desire, recorded eg, in his Board memorandum of 16 August 1988, to ensure that Incitec would be able to insist on acquisition by a member of the group of the plant at the end of the lease, a desire abandoned by the Board because of the adverse taxation consequences such an arrangement was considered likely to attract to the whole transaction. Eastern Nitrogen ultimately accepted that its assurance of acquiring ownership of the plant at the end of the lease term lay in the quite rigid convention referred to by Mr Foy, pursuant to which the lessor under a finance lease could be counted on to offer the leased asset to the lessee on expiry of the lease at the residual value, something that occurred here. The risk that Eastern Nitrogen might lose control of the plant at the end of the lease was assessed to be but a slight one, particularly since, for practical reasons, no one else was likely to out-bid Eastern Nitrogen for the plant if, contrary to every expectation, the convention was not followed, given the very high costs another bidder would have to meet by way of removal and reassembly of the plant. 110 I accept that the sum of $72,728,613 which the financiers paid under the instalment purchase agreement was far in excess of the market value of the plant. 111 Mr Mason, who was retained by Incitec at the request of the financiers, estimated the value in May 1989 to Incitec of the plant, on the basis that it was installed and operating, at $71.4 million. However, he said its value, if it were to be sold as a separate item and not as part of a going concern, was only about $4 - $5 million. Mr Robert, an engineer with Davey McKee also retained by Eastern Nitrogen to value the plant, provided a number of valuations of the plant from late 1988. In early 1989, he estimated the appropriate figure as $78 million on the same installed, going concern basis that Mr Mason valued the plant. He also expressed the opinion that the cost of then replacing the plant would be in the vicinity of $110 million. These valuations of the plant on a going concern basis were made on the assumption that Eastern Nitrogen would continue to operate the plant for a period well in excess of the five year term of the lease it ultimately entered into. 112 Mr Stokes, an engineer with considerable international experience in the sale of ammonia plants, gave evidence for Incitec of sales internationally of ammonia plants for relocation. He expressed the opinion that the cost to a person who buys and relocates a second-hand ammonia plant is about 70% of the cost of constructing a new plant. But he said that the most that the vendor of a plant sold for relocation could expect to receive from the total outlay made by the person purchasing it and establishing it at its new location was a figure of approximately only 9% of the cost of a new plant. Taking Mr Robert's new replacement cost figure for the Eastern Nitrogen plant of $110 million, Mr Stokes suggests that the maximum price that could be realised on the sale of Eastern Nitrogen's plant for removal offsite would be about $10 million. The low return to be expected from the sale of an ammonia plant like Eastern Nitrogen's for removal from the site, which is not much more than its scrap value, reflects the high costs of disassembly, transport to the new site and reassembly there. 113 In various of his rulings relating to finance leases, the Commissioner indicated he would require the sale of an asset the subject of a finance lease by the financier/purchaser to the user/lessee to be at the market value of an asset to parties at arm's length, if the user/lessee were to have its claim to deduct the lease rentals accepted. Eastern Nitrogen's advisers made reference to this aspect of the Commissioner's rulings in the advices they gave Eastern Nitrogen in the twelve months prior to its entry into the transaction. The valuations of the order of $70 million for the plant were, I think, obtained by Eastern Nitrogen to support the claims for deductions for the rentals it planned to make in reliance on the transaction. The amount of the rentals were governed by the price paid by the financiers for the plant under the sale element of the transaction, its residual value set under the lease and the rate of return on the sale price that the financiers were to receive through the rentals. Given that the financiers' entitlement to claim depreciation on the plant purchased by them was limited by s 60 the Income Tax Assessment Act 1936, they had little interest in being able to demonstrate to the Commissioner that the valuation figure of $70 million odd represented the plant's market value, something confirmed by Mr Foy's evidence: the financiers did not depreciate the plant either for their own accounting or tax purposes. Their interest in the transaction was not dependent on the open market value of the asset acquired, but on the prospects of being able to recoup the capital amount of the advances made by them with an appropriate interest return. That was governed much more by their commercial judgment as to the likelihood of Eastern Nitrogen complying with the payment provisions of the lease and the worth of the guarantees from Incitec and the other members of the group. Mr Walkom, formerly of SBSA, and Mr Rutkowski, of BBL, said as much. The evidence indicated that the financiers never anticipated having to realise the plant. Their lack of interest in what the plant might bring if sold separately from Eastern Nitrogen's operation was demonstrated by their lack of inquiry as to that. 114 Even if the value to Eastern Nitrogen or Incitec of the plant in situ and in operation as part of a going concern might be of some relevance for reporting purposes under the Corporations Law, as Professor Walker pointed out, the valuations of the plant were not sought by Eastern Nitrogen for that purpose. 115 Mr Robert provided Eastern Nitrogen with valuations on a range of different bases to identify that part of its plant for which it could justify a sale price of the $75 million or so it required for its financing needs and still get the taxation advantages offered by the lease element of the transaction. Refinement over time of Mr Robert's advices led Mr Lawrence to identifying in his proposals to the Board the ammonia plant, rather than any more extensive range of Eastern Nitrogen's plant at Kooragang Island, as sufficient to subject to the sale and lease back transaction. Despite some evidence he gave suggesting that there were technical operational reasons for selecting the ammonia plant at Kooragang Island, rather than any other item of Eastern Nitrogen's plant, Mr Lawrence acknowledged that the criterion which resulted in selection of the ammonia plant for sale under the transaction was that Eastern Nitrogen was able to obtain a valuation of it at about $75 million, the amount of finance it planned to raise by the transaction: "We were seeking a sum of money and I would always have looked to sell as few assets as we possibly could for as much as we possibly could". 116 The rentals were, in effect, set by Eastern Nitrogen at the level necessary to achieve the deductions productive of the low financing costs sought. It achieved this by adopting a price for the sale of the plant that equated to the total of its finance needs, a price which, because of the rental calculation provisions in the lease element of the whole financing transaction, including the lease term and the residual value also set by Eastern Nitrogen, as is evidenced by, eg, the MBL Information Memorandum on which BBL and SBSA bid for the opportunity to provide the finance Eastern Nitrogen required, would lead to deductions of the order required. The sale price was a reflection of that, not the market value of the plant. 117 The lack of urgency on Eastern Nitrogen's part through 1988 and well into 1989 in making the final decision to commit itself to the transaction is, in my opinion, explained by the fact that Eastern Nitrogen was keen to avoid paying tax on the balancing charge of nearly $25 million that would arise on the sale by it of its ammonia plant, pursuant to s 59(2) the Income Tax Assessment Act 1936, if that part of the transaction was consummated prior to commissioning of its new nitrate plant at Kooragang Island. The need for Eastern Nitrogen to time entry into the sale and lease back transaction to coincide with completion of the nitrate plant expansion was identified by Mr Lawrence as a requirement of the attraction of the transaction to Eastern Nitrogen at the very outset of his involvement: in his notes of their first meeting in early February 1988, Mr Lattimore records a discussion with Mr Lawrence about this very matter, including a comment by Mr Lawrence to the effect that Eastern Nitrogen might not have the capacity to recapture the balancing charge "in less than two years". As Mr Lawrence's memorandum to the Board of 16 March 1988 shows, the reason why the ammonia plant, rather than some other element of Eastern Nitrogen's assets, was selected for the sale and lease back proposal was that it yielded additional tax benefits to Eastern Nitrogen not available if other items of its plant had been used for that proposal. These benefits were "[t]he ability to offset recaptured taxation depreciation against the capital expenditure" on the new nitrate plant at Kooragang Island in the 1988/89 year and lower stamp duty rates in New South Wales than in Queensland (where other items of Eastern Nitrogen's plant were located). The calculations that Mr Lattimore prepared for Mr Lawrence in early 1988 took into account recapture under s 59(2A) the Income Tax Assessment Act 1936 of the balancing charge. As Mr Eddey mentioned, the decision to build the new nitrate plant had been made prior to the MBL proposal with respect to the sale and lease back transaction being first made. As appears from p 2 of the Incitec Board memorandum of 14 June 1989, Eastern Nitrogen well realised that it was not appropriate to complete the sale and lease back of the ammonia plant before the start up of Eastern Nitrogen's new nitrate plant, something which did not occur until early in its 1990 financial year. It was for the purpose of ensuring that Eastern Nitrogen was in a position to offset the balancing charge against the cost to it of its new nitrate plant that, following the Board's decision of 22 June 1989, the transaction originally intended to be consummated before the end of Eastern Nitrogen's then current financial year was, in fact, deferred until October 1989. 118 The scheme took the form of an absolute sale of the plant by Eastern Nitrogen to the financiers and a lease by them of their newly acquired plant back to Eastern Nitrogen. In substance, the scheme was a vehicle for providing extensive finance to Eastern Nitrogen which enabled it to replace its existing borrowings. By itself, that fact would be of little relevance to whether Eastern Nitrogen's purpose in entering into the scheme should be taken to have been to obtain a tax benefit. I have already referred to the long acceptance by business and the Commissioner of finance leases as a means of raising business funds even though they take a form quite different from the older methods of raising such funds. But this particular scheme had features that served to increase the tax advantages that Eastern Nitrogen sought to obtain from it: the sale was made at a figure very greatly in excess of the plant's market value, something that served to increase the tax deductions available to Eastern Nitrogen under the lease component and thus the lower cost of finance. The variation agreed to under which the completion of the transaction was postponed may, in form, be regarded as neutral. But that variation was made to ensure that Eastern Nitrogen would not have to include in its assessable income the balancing charge that arose under the sale element of the plant, ie, to ensure that the transaction would yield the lower after tax financing costs that was Eastern Nitrogen's objective. An element of artificiality is provided by the nature of the asset sold and leased back - plant essential to Eastern Nitrogen's operations that was a fixture to Eastern Nitrogen's land and which was never intended to be severed from the land on which it stood or to leave Eastern Nitrogen's control, even after expiry of the lease. This feature of the transaction was also relied on by Eastern Nitrogen to enhance the tax advantages of the transaction in offering Eastern Nitrogen depreciation deductions after expiry of the lease. 119 The relaxed time frame within which Eastern Nitrogen moved, from receipt of the MBL proposal in early 1988 to committing itself to the proposal in mid 1989, was adopted from the outset by Eastern Nitrogen to ensure that the tax advantages it anticipated obtaining from the transaction, particularly in the form of lease rental deductions, would not be diluted by Eastern Nitrogen having to include the balancing charge that would arise on the sale element of the transaction in its assessable income. 120 There is no reason to doubt the considered view of Eastern Nitrogen's witnesses, Messrs Eddey, Spriggs and Lawrence, that the scheme, if it had the result intended, would have brought about an advantageous change in Eastern Nitrogen's financial position by reducing, by reason of the tax treatment the scheme was planned to attract, the costs it would have incurred in meeting its finance needs. 121 The following matters relevant to s 177D(b) are established by the evidence:

(1) The transaction originated in an approach to the taxpayer by a finance broker with a proposal for changing the basis upon which the taxpayer obtained its finance requirements. It did not originate in a need to make such a change first perceived by the taxpayer.

(2) The taxpayer's evidence that its own primary objective in entering into the transaction was to obtain an advantage that was not tax related is not sufficient to establish that.

(3) Though in form the transaction involved the sale of the taxpayer's asset and its lease back, it was, in substance, an arrangement under which financiers advanced business funding to the taxpayer.

(4) The transaction, by way of sale and lease back, had a number of elements of artificiality about it: the asset was a fixture not intended to be severed from the taxpayer's land despite its sale to the financiers; it was sold at a figure unrelated to its market value, but arrived at entirely by reference to the taxpayer's financial requirements; the taxpayer entered into the transaction with the intention of retaining control of the asset at the end of the lease because it would continue, for a time thereafter, to be essential to its manufacturing operations; there was a high degree of certainty that it would reacquire ownership of the asset at the end of the lease because of its nature as a large item of plant fixed to the taxpayer's soil.

(5) The broker's proposal offered the taxpayer finance at lower after-tax cost than alternative methods of borrowing and it was that feature that was its chief attraction to the taxpayer, although the proposal had other, secondary advantages for the taxpayer.

(6) The lower after-tax costs of finance offered by the proposal included full deductibility of lease rentals, large in amount because the plant the subject of the transaction was sold to the financiers at a figure greatly in excess of its market value. The taxpayer also anticipated an enhancement to the tax benefits in the form of rental deductions by way of the depreciation to which it would be entitled after its intended reacquisition of the plant at the end of the lease period.

(7) Completion of the transaction was timed to ensure that the tax advantages offered by it to the taxpayer already referred to would not be diluted by the taxpayer having to pay tax on the balancing charge that arose on the sale of the asset.

122 An objective consideration of these matters, in my opinion, leads to the conclusion that Eastern Nitrogen's dominant purpose in entering into the scheme was to obtain the tax benefits in the form of deductions for the whole of the lease rental payments. In view of the burden of proof resting on Eastern Nitrogen to show that the Commissioner's decision, reflected in his 1989 year assessment, with respect to the valuation and establishment fees was erroneous, and the failure of Eastern Nitrogen to lead evidence establishing error, there is no ground for interfering with the Commissioner's application of Pt IVA to the fees. The challenge to the Commissioner's decisions, in so far as they involve the application of Pt IVA to the transaction, therefore fails. 123 The result of the case is that Eastern Nitrogen's appeals are dismissed. This means the Commissioner's amended assessments the subject of objection stand.

I certify that the preceding one hundred and twenty three (123) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Drummond.

Counsel for the Applicant: Mr D Bloom QC, Mr A Slater QC and Mr J Logan

Counsel for the Respondent: Mr G Davies, Ms A Richards and Dr M Robertson

Solicitor for the Respondent: Australian Government Solicitor

Dates of Hearing: 1 - 4, 9 - 11 and 25 June 1998