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: