Eastern Nitrogen Ltd v Commissioner of Taxation

LEE J: 1 These two appeals, from a judgment of a Judge of this Court (Drummond J), concern the deductibility of outgoings under s 51 of the Income Tax Assessment Act 1936 (Cth) ("the Act") and the application of Part IVA of the Act to the circumstances relied upon to support the claim of deductibility in respect of those outgoings. 2 I have had the advantage of reading the reasons of Carr J, which set out the relevant facts and it is unnecessary to repeat them. 3 With respect to the first appeal (Q285/99), I agree with Carr J, for the reasons he has provided, that pursuant to the Instalment Purchase Agreement ("IPA") the "financiers" became beneficial owners of the property purchased by the financiers from the appellant under the IPA. That interest in the property was sufficient to enable the financiers, as lessors, to grant to the appellant, as lessee, a right to possess and use the property under a lease-back arrangement made between the financiers and the appellant in an Agreement for Lease of even date under which the financiers agreed to lease the property to the appellant for a term of five years. 4 I also agree with Carr J, for the reasons expressed by him, that on their face the outgoings of rent under the Agreement for Lease were on revenue account and that the relevant facts did not establish that any part of the outgoings was of a capital nature. 5 For the following reasons, I also agree with Carr J that the learned primary judge erred in the construction he applied to s 177D of Part IVA of the Act and in failing to apply the proper construction of the Act to the relevant facts. 6 Pursuant to Part IVA (s 177A to 177G) of the Act the Commissioner may disallow the whole or part of a deduction that is a "tax benefit" obtained in connection with a "scheme" to which the Part applies. Section 177D provides that Part IVA applies to a scheme where the taxpayer obtains a tax benefit in connection with the scheme and after giving regard to the criteria specified in s 177D(b) it would be concluded that a person entering the scheme did so for the purpose, or the dominant purpose, of enabling the taxpayer to obtain the tax benefit. 7 For s 177D to apply, and a determination made under s 177F that Part IVA applies, it must be shown that the "maximised… after-tax return" has been obtained in a manner that speaks of the presence of a purpose above all others to obtain a tax benefit (Commissioner of Taxation of the Commonwealth of Australia v Spotless Services Ltd (1996) 186 CLR 404 per Brennan CJ, Dawson, Toohey, Gaudron, Gummow and Kirby JJ at 416). (emphasis added) 8 Rather than set out a separate conclusion in respect of each item of s 177D(b) the learned primary judge gave composite consideration to the criteria in deciding whether s 177D applied to the relevant facts and in par 121 of his reasons his Honour set out the matters which, if objectively considered, would lead to the conclusion, in his Honour's opinion, that s 177D applied to the circumstances of this case. 9 His Honour attached some importance to the fact that the change in the method by which the appellant obtained finance for use in its business, arose out of a proposal initiated and put to the appellant by Macquarie Bank Ltd ("MBL") and was not a step taken by the appellant after it had decided for itself that there was a need to change those arrangements. 10 In my opinion, that was a circumstance of neutral consequence. MBL carried on business, inter alia, of arranging financial facilities for operating businesses. MBL did not carry on business as the promoter of schemes in which a taxpayer may participate in order to reduce a liability to pay income tax. Indeed, so much was accepted by his Honour as is set out in par 77 of his reasons. Having regard to the foregoing it was not significant, in the terms of s 177D, that the appellant responded to, rather than initiated, the finance proposal outlined by MBL. The need to have, or to obtain, access to working capital on the best available terms was a constant requirement of the business of the appellant. The proposal put forward by MBL was directed to meeting the needs of the business conducted by the appellant and was accepted as such by the appellant. 11 His Honour then stated that the transaction was, in substance, an arrangement under which financiers advanced business funding to the appellant. Again that circumstance, on its face, did not suggest that the appellant, submitted to be the only relevant party for the purpose of s 177D, entered the arrangement with the dominant purpose of obtaining the tax benefit described. Indeed, his Honour's description of the transaction tends to undermine that conclusion. 12 His Honour further stated that the transaction of sale and lease-back had "a number of elements of artificiality about it" and in that regard referred to matters such as a sale price that was not related to "market value"; retention of "control" by the appellant of assets sold; and the "high degree of certainty" that the appellant would reacquire the assets at the end of the term of the lease. It may be assumed that these points were relevant to the issue raised by s 177D(b)(ii) of the Act, namely, the "form and substance of the scheme". 13 Where the scheme, as in this case, involves a transaction which, it is conceded, creates legally enforceable rights and obligations, an objective assessment of the purpose of the transaction must have due regard to the effect of those rights and obligations. If there are "elements of artificiality" in the context surrounding the transaction, that fact may have relevance to the purpose for which the transaction was entered into but it does not determine the purpose and nor does it remove the requirement to consider the effect of the transaction and the rights, obligations and duties arising thereunder. In the instant case regard had to be given also to the fact that the scheme was a commercial transaction, made between parties acting at arms length, concerned to protect their respective interests in the terms of their agreements. The latter characteristic will not, in itself, prevent the formation of an objective conclusion that the transaction was entered into with the dominant purpose by a party to the transaction to obtain a tax benefit for a taxpayer, but it is a matter to be duly considered. (Federal Commissioner of Taxation v Spotless at p 416 per Brennan CJ, Dawson, Toohey, Gaudron, Gummow and Kirby JJ) 14 With regard to the connection between the sale price and "market value", it was a matter of judgment for the financiers to determine whether the price paid for the assets acquired from the appellant was supported by an appropriate valuation, whether based on historical value; "fire-sale" value; value as a going concern; or a value calculated by reference to the capacity of the property to generate cash flow. To say that the price paid for the property was "unrelated to its market value" involves a restricted consideration of matters that established the relevant value. Objectively considered, the material relevant to sale price and value did not say anything about the form or substance of the agreement that was relevant to the operation of s 177D. 15 With regard to the continuity of possession of the property by the appellant and the expectation of the appellant that it would be able to reacquire the property at the termination of the lease, the respective rights of the parties were as set out in the agreements that formed the transactions. The financiers could have the assets severed from the land and sold in the event that the appellant defaulted under the Agreement for Lease. Furthermore, the appellant obtained no interest in the property leased by making payments of rent and had no recourse to equity to obtain relief in respect of the "loss" of any part of the rental payments said to be of a capital nature in the event that the financiers retook possession of the assets and terminated the lease upon default by the appellant. Any anticipation the appellant may have had as to its ability to meet its obligations under the Agreement for Lease, or that it would be able to deal with the financiers at the end of the Agreement for Lease to reacquire the property it had sold to the financier, had no consequence in law and had no bearing on the legal obligations created by the agreements. The foregoing matters referred to by his Honour do not establish that the "form and substance of the scheme" attracted the application of s 177D. 16 His Honour also had regard to the fact that the finance proposal as put to the appellant by MBL provided finance to the appellant "at lower after-tax cost than alternative methods of borrowing" and considered that feature to be the "chief attraction" for the appellant. 17 On the facts found by his Honour the "after-tax cost" of finance was always of importance to the appellant in the conduct of its business, whatever line of finance was under consideration. Due and proper management of the business required assessment to be made of the net cost of finance after taking into account the extent to which any outgoings associated with that cost were allowable deductions from assessable income. In the circumstances of this case, to say that the appellant was attracted by a proposal that provided finance at a lower after-tax cost than another means of obtaining funds for the business would not, without more, support an objective conclusion that the appellant obtained finance for the dominant purpose of obtaining the tax benefit constituted by the deductibility from assessable income of the outgoings incurred in connection with the obtaining of that finance. 18 To show that a business which depends upon financiers to provide the recirculating capital needed for the operation of the business, has obtained that finance at a net cost, after taking into account provisions of the Act, that is less than the net cost of obtaining finance by another method, will not, in itself, show that the dominant, ruling or supervening purpose of the operator of the business is to obtain the tax benefit constituted by the extent to which deductible outgoings incurred in respect of that borrowing will be greater than the deductible outgoings that would have been incurred under another method of obtaining finance. That is to say, something more must be shown than that the business has obtained finance at best available net cost after-tax before it can be said that a tax benefit has arisen to which s 177C(1)(b) applies. 19 None of the matters referred to by his Honour suggests an objective conclusion that by obtaining finance at the best "after-tax cost", the appellant had a dominant purpose in entering the transaction for the provision of finance of obtaining a "tax benefit". To so conclude involved misapplication of the law to the relevant facts. For the reasons set out above, the construction of s 177D of the Act adopted by his Honour and the application of that construction to the facts found by his Honour involved an error of law. 20 I agree with Carr J that there is no reason why this Court cannot apply s 177D, properly construed, to the facts found by his Honour. I agree, for the reasons provided by Carr J, that the facts do not show that the dominant purpose of the appellant in entering that transaction which provided for the sale and lease-back of assets of the appellant was to obtain a tax benefit. In applying s 177D it is important not to elide the question posed by Part IVA, namely, what was the dominant purpose of a relevant party in entering the transaction (or scheme), with the inquiry, would the transaction (or scheme) had been entered into "but for" the tax benefit? The dominant purpose of the appellant was to obtain funds on the best available terms for use in the conduct of the appellant's business. The fact that the arrangements entered into to provide those funds included outgoings deductible under the Act was incidental to the purpose, but not the dominant purpose, of the transaction. 21 I also agree with Carr J for the reasons he gives, that in the second appeal (Q2286/99) valuation fees and an establishment fee were outgoings incurred in the conduct of the appellant's business, the nature of the outgoings being expenditure incurred in obtaining working capital for the business with no part thereof being of a capital nature. Further, I agree, for the reasons provided by Carr J, that the relevant facts of the arrangement that provided such finance did not attract the operation of Part IVA of the Act. 22 Each appeal must be allowed and orders made as proposed by Carr J. I certify that the preceding twenty-two (22) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lee.

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

INTRODUCTION 23 These are two appeals by the appellant taxpayer from judgments of a judge of this Court, given on 5 November 1999, dismissing appeals against objection decisions of the respondent Commissioner of Taxation. The Commissioner disallowed objections to assessments of income tax for substituted accounting periods in respect of the years of income ended 30 September 1989, 1990 and 1991. Appeal No Q 285 is in respect of the 1990 and 1991 years and Appeal No Q 286 is in respect of the 1989 year. One of the two principal issues in the appeals is whether the appellant was entitled to allowable deductions in respect of certain payments made under a lease of its ammonia plant. The deductions were claimed under s 51(1) of the Income Tax Assessment Act 1936 (Cth) ("the Act"). The other principal issue is, assuming that the lease payments were allowable deductions under that section, whether the Commissioner was entitled to make a determination under Part IVA (s 177F) of the Act to disallow part of those deductions. The deductions in issue in the appeals are, in round terms, about $20 million.

FACTUAL BACKGROUND 24 The appellant manufactures fertiliser and for that purpose produces ammonia. It owns an ammonia plant, which was commissioned in 1968, on an island known as Kooragang Island in New South Wales. The appellant became the registered proprietor of the land at Kooragang Island in 1978. It is common ground in the appeal (although that was not the case at first instance) that the ammonia plant was at all material times a fixture to the appellant's land. 25 In August 1989 the appellant entered into a sale and lease-back transaction with two financiers, BBL Australia Ltd ("BBL") and State Bank of South Australia ("SBSA") in respect of the ammonia plant. I shall refer to those two companies as "the financiers". Under an Instalment Purchase Agreement dated 2 August 1989 the appellant agreed to sell the ammonia plant to the financiers. Under an Agreement for Lease, also dated 2 August 1989, the appellant agreed to lease the plant back from the financiers for a period of five years. The land to which the ammonia plant was affixed was not part of the sale and lease-back transaction. 26 The sale price for the ammonia plant was $71.4 million, which the financiers paid to the appellant by two instalments. Under the terms of the Agreement for Lease, assuming that it ran for its full term and that the appellant (as it did) repurchased the ammonia plant at the agreed residual value, the appellant was to pay to the financiers amounts which included $71.4 million together with an agreed "packaging fee" and an amount calculated by way of interest on those two sums. The appellant paid the rental payments during the currency of the Agreement for Lease. By agreement, the term of the lease was extended by one year. The rent for that year was fixed by reference to an interest calculation relating to the then unrecouped balance of the amounts payable to the financiers. On the expiration of the extended term the appellant paid the financiers the agreed residual value of the plant and they in turn resold their interest in that plant to the appellant. Throughout the period of the lease, the ammonia plant remained affixed to the appellant's land and was operated and maintained by it for the purposes of its business of producing ammonia. 27 In the 1990 year the appellant claimed as a deduction under s 51(1) of the Act the sum of $30,991,471.84. The respondent disallowed as a deduction the sum of $12,048,711 of that amount. The corresponding figures for the 1991 year were $13,506,196 claimed by the appellant and $8,054,778 disallowed by the respondent. In respect of the 1989 year the appellant claimed deductions, under s 51(1), for valuation fees (in respect of the ammonia plant) and an establishment fee all of which totalled about $96,000. The respondent allowed deductions amounting to one-fifth of that total in each of the three years of income with which these appeals are concerned, as borrowing expenses under s 67 of the Act, but disallowed the claimed deduction for the balance of the fees.

THE DECISION AT FIRST INSTANCE 28 The learned primary judge held that the ammonia plant was a fixture and that no legal title to it passed under the Instalment Purchase Agreement or the Agreement for Lease. His Honour reasoned that: "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." 29 His Honour then referred to what he described as "... the contingent right to enter and remove the plant" conferred by the Agreement for Lease on the financiers. He held that that contingent right was: "... 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." 30 His Honour rejected the appellant's submission that the advantage which it sought by assuming the obligation to pay the rental instalments was to protect itself from what might happen if it failed to pay those instalments. The appellant, for tax characterisation purposes, had to be taken to have sought some other advantage. His Honour found that the appellant could not: "... 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." 31 Furthermore, so his Honour held, the Agreement for Lease, on its proper construction, showed that the appellant undertook to pay the rental instalments in return for possession of the ammonia plant during the term of the lease, not for freedom from disruption of that possession by the financiers. His Honour held that the appellant never needed to pay the instalments to acquire possession of the plant. It had, so his Honour held, "... never lost that right." 32 In case he was wrong in those conclusions, his Honour then turned to the respondent's argument that a portion of the rental was to be characterised as having been made on capital account. His Honour rejected that argument on the basis that the advantage which the appellant sought to achieve from the rental payments was the contractual benefit it obtained in return for those payments, namely the right to use the plant. 33 His Honour then rejected the Commissioner's argument that the Instalment Purchase Agreement and the Agreement for Lease were shams. The respondent does not take issue with his Honour's conclusions in that regard. 34 Finally, in relation to the application of Part IVA, his Honour held that the sale and lease-back constituted a scheme within the meaning of s 177D of the Act and that the appellant's dominant purpose in entering into the scheme was to obtain tax benefits in the form of deductions for the whole of the lease rental payments. He held that the appellant had not discharged its burden of proof of showing that the respondent's decision to make a determination to that effect was erroneous.

THE APPEAL -SECTION 51(1) 35 In summary, the appellant contended that:

· the primary judge had erred in finding that the equitable interest in the ammonia plant obtained by the financiers was not adequate for them to assert rights of ownership which would have denied the appellant the use of that plant in its business, if it failed to pay the rent due under the Agreement;

· by making the rent payments the appellant secured undisturbed use of the ammonia plant; those payments were thus "necessarily incurred" in the conduct of its income-producing business; and

· the payments were of a recurring character, secured a periodical, not an enduring advantage, were on revenue account and thus deductible. MY REASONING WHETHER THE FINANCIERS BECAME THE OWNERS OF THE PLANT OR AN INTEREST IN THE PLANT?

The Instalment Purchase Agreement 36 The Instalment Purchase Agreement recited that the financiers, at the request of ten other companies in the same corporate group as the appellant (identified as "the Guarantors"), had acquired or proposed to acquire what were described as the "Goods". The Goods, which were listed in the Schedule to the agreement, were what I have referred to as "the ammonia plant". I shall, in the following paragraphs use the terms interchangeably. The Instalment Purchase Agreement further recited that the appellant had agreed to sell the ammonia plant to the financiers and that the financiers proposed to lease the ammonia plant to the appellant. Clauses 2 and 3 of the Instalment Purchase Agreement were as follows: "2. AGREEMENT FOR SALE AND PURCHASE: Subject to the fulfilment of the conditions specified in clause 8 and otherwise upon the terms and conditions set out in this Agreement, the Vendor hereby agrees to sell as legal and beneficial owner and the Purchaser agrees to buy the Goods for the total purchase price specified in Item 3 of the Schedule. [The price so specified was $71,400,000.00] 3. LEASE: The Vendor acknowledges that the Goods are to be purchased by the Purchaser for the purpose of leasing the same to the Vendor upon the terms of the Agreement for Lease incorporating a Guarantee ("the Agreement for Lease") and the Certificate of Acceptance annexed hereto and forming Annexure "C"." 37 Clause 4 provided that the financiers agreed to pay the purchase price in the manner set out in Item 6 of the Schedule. Item 6 provided that the sum of $5 million was to be paid on the date of the Instalment Purchase Agreement and that the balance of $66.4 million was to be paid on 31 October 1989 or such earlier date as the parties agreed, provided that such date was at least one day after the time of delivery. Delivery was provided for by Clause 5 which was as follows: "5. DELIVERY: Delivery and acceptance of each item of the Goods shall be effected by the Vendor delivering to the Purchaser at the place indicated in Item 4 of the Schedule [Green Leaf Road, Kooragang Island, Newcastle, New South Wales] on the date set out in Item4 of the Schedule [30 October 1989 or such earlier date as the parties agree] or such other date as is agreed to in writing by the Purchaser: (a) If required by the Purchaser invoices or other like documents or certificates from the suppliers of the Goods to the Vendor (which invoices or other like documents or certificates shall give full particulars of the relevant item of Goods including its cost as well as stating the serial or other appropriate identification numbers or if such invoices or like documents or certificates cannot be provided then statutory declarations from all the Directors of the Vendor in a form satisfactory to the Purchaser declaring that the Vendor is the legal and beneficial owner of the Goods),. (b) An invoice from the Vendor to the Purchaser in respect of the relevant item of Goods, and (c) A certificate signed on behalf of the Vendor by an authorised officer of the Vendor in the form of Annexure "A" hereto in respect of the Goods." 38 Clause 7 of the Instalment Purchase Agreement provided: "7. TRANSFER OF TITLE: Full and absolute ownership of and title to each item of the Goods shall pass to and vest in the Purchaser free and clear of all mortgages, liens, claims, charges and encumbrances of every kind whatsoever including, without limitation, any right or claim of the supplier, upon and by virtue of payment of the final instalment of the purchase price and not by virtue of this Agreement. In any case, no such ownership, title and property will pass to or vest in the Purchaser until one day after delivery and acceptance of the Goods in accordance with Clause 5."

THE AGREEMENT FOR LEASE 39 The parties to the Agreement for Lease were the same as the parties to the Instalment Purchase Agreement, namely the financiers (described as the "Lessor"), the appellant (described as the "Lessee") and the ten related companies (described as the "Guarantors"). I shall refer to them variously by one or other of those descriptions. 40 The Agreement for Lease recited that, at the request of the appellant Lessee and the Guarantors, the Lessor financiers would "acquire the Goods" described in Item 3 of the Schedule (the ammonia plant) and that the Lessor financiers had agreed, at the request of the appellant Lessee and the Guarantors, upon purchase of the Goods to lease them to the appellant Lessee. By Clause 2, when read with the Schedule, the financiers leased the ammonia plant to the appellant for a term of five years from the date upon which title to the ammonia plant passed to the financiers, at the rent provided for in the Agreement for Lease. The rent payable was calculated in accordance with a specified formula. It had to be paid yearly in advance. Clause 4.3 of the Agreement for Lease provided: "4.3 The Lessor has acquired or will acquire (as the case may be) the Goods for the sole purpose of leasing and nothing herein contained shall confer on the Lessee and the Lessee warrants that the Lessee has not and will not have (apart from these presents) any right or property or interest in the Goods other than as bailee only." 41 Clause 4.8 contained an acknowledgment by the Lessee that the Goods would at all times be and remain personal property. Clause 10.1, 10.7 and 10.11 were in the following terms: "10.1 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. . . . 10.7 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. 10.11 If the Lessor shall become entitled to retake possession of the Goods pursuant to the terms of the Lease, the Lessor may enter upon any land or premises where the Lessor or any Authorised Officer reasonably suspects that the Goods are, and for the purpose of such entry, if permission is not given to enter, to break open any inside or outside gate door or fastening and trespass upon any land or premises and detach, dismantle and remove the Goods from any part of the land or premises to which they may have been affixed." 42 Clause 14 comprised a list of events, upon the happening of one or more of which, the financiers became entitled to enforce performance of the lease, recover damages or terminate the lease and repossess the ammonia plant. 43 Clause 15 required the appellant to surrender and deliver up the Goods to the financiers in first class order and repair upon the expiry or sooner determination of the lease. 44 Clause 16, in summary, provided for the disposal of the Goods at the expiry of the term of the lease. Clause 16.1 provided that if the Goods were returned to the Lessor financiers, they could choose either to submit the ammonia plant for sale at a public auction or by private treaty. In the event that the appellant failed to return the Goods within 14 days of the expiration of the lease it was obliged forthwith to pay to the financiers the residual value (Clause 16.5). Clause 16.6 contained an indemnity whereby the appellant agreed to indemnify the financiers for any capital loss suffered as a result of entering into the lease. 45 It may well be that the Instalment Purchase Agreement was effective at common law to pass property in the ammonia plant to the financiers, even though it was a fixture and part of the land owned by the appellant. During the course of argument I raised with counsel the possibility that there may have been town planning legislation which might have an impact on the appellant's ability to vest legal title in the financiers in part of its interest in the land (i.e. the ammonia plant). We were not taken to anything that might have presented problems from that quarter. The subject is discussed by Mr Peter Butt in a note "Conveyancing and Property" (2000) 74 ALJ 130. I do not see anything in the authorities discussed in that note which would prevent ownership of the ammonia plant passing at common law to the financiers under the Instalment Purchase Agreement. What the appellant contracted to sell, and may well have sold, to the financiers was no mere "bundle of rights" [Melluish (Inspector of Taxes) v MBI (No 3) Ltd [1996] AC 454 at 475], it was full legal and beneficial ownership. 46 However, it is not necessary to decide the point because, in my view, the effect of the Instalment Purchase Agreement, when read with the Agreement for Lease, was to create and confer upon the financiers ownership in equity of the ammonia plant. See Kay's Leasing Corp Pty Ltd v CSR Provident Fund Nominees Pty Ltd [1962] VR 429 at 436; Re Samuel Allen & Sons Ltd [1907] 1 Ch 575; Re Morrison, Jones & Taylor Ltd [1914] 1 Ch 51 at 54-55,58 and 60-61. 47 The terms of the Instalment Purchase Agreement quite clearly evidenced the intention of the parties that property in the ammonia plant was to pass from the appellant to the financiers, following which there would be a lease-back of that plant from the financiers to the appellant. Furthermore, valuable consideration ($71.4 million) had been paid and received as part of those arrangements. In my view, the full panoply of equitable remedies would have been available to the extent necessary to protect the financiers' equitable interest in the ammonia plant at any stage, whether in the face of a challenge to its equitable title or a denial of its rights of access to the ammonia plant. As between the appellant and the financiers, the appellant would have been estopped from denying that it had sold the plant to them: Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387; Commonwealth v Verwayen (1990) 170 CLR 394; Industrial Properties (Barton Hill) Ltd v Associated Electrical Industries Ltd [1977] 1 QB 580 (C.A.). It would have been unconscionable in equity for the appellant to take the benefit of the payment of $71.4 million under the Instalment Purchase Agreement and to disregard its obligations under that agreement and the Agreement for Lease: Stern v McArthur (1988) 165 CLR 489 at 523, 526-527. This is particularly so, given the expressed interdependence of the two agreements. 48 The uncontradicted evidence of the financiers was that if the appellant had failed to perform its obligations under the Agreement for Lease they were quite prepared to exercise their rights, conferred by that agreement, to take possession of the ammonia plant and deny the appellant the use of it until satisfactory payment arrangements were made to remedy such default [AB 960-961, 659-660, 968, 665, 981-982, 309, 315]. 49 In my respectful opinion, the learned primary judge erred in concluding that the appellant had never lost the right to possession of the ammonia plant. In my view, the correct characterisation is that it did lose that right, probably at common law, but certainly in equity, following execution of the Instalment Purchase Agreement when payment, constructive delivery and acceptance of "the Goods" took place in accordance with clauses 4, 5 and 7 of that agreement. 50 I agree, respectfully, with the opinion expressed by Emmett J in very similar circumstances in Metal Manufactures Ltd v Commissioner of Taxation [1999] FCA 1712 at paras 189-190 and 194-201. In particular, to adapt his Honour's language to this case, in my opinion the Instalment Purchase Agreement and the Agreement for Lease were effective to create an equitable interest in the ammonia plant, in the nature of property, in the financiers, which was sufficient to support the "leasing" by the financiers of the ammonia plant to the appellant and the "taking on lease" of the ammonia plant by the appellant. I shall, as a matter of convenience, use in these reasons the language of real property leasing (which seems appropriate given that it is common ground that the ammonia plant was a fixture) although the parties thought that they were dealing with personalty to which bailment principles were more appropriate.

WHETHER THE LEASE PAYMENTS WERE ON REVENUE ACCOUNT? 51 I think that it is useful to make some preliminary observations. First, as I have mentioned, there is no suggestion that the documents executed by the parties were a sham. That is, they were genuine and took effect in accordance with their terms which gave effect to the intentions of the parties. 52 Secondly, it needs to be borne in mind that a taxpayer's income is assessed on an annual basis i.e. by calculating the income received during the relevant tax year less the allowable deductions incurred during that year. In some cases (including, in my opinion, this case) that factor itself assists in the characterisation of particular expenditure. 53 Another pertinent matter, in my view, is that finance leases have been commonplace in Australia and elsewhere for some 40 years. By referring to finance leases I mean arrangements whereby a financier (being already the owner of plant or equipment or who becomes the owner for the purpose of leasing it to another person) leases plant or equipment on the basis that the lessee will probably acquire the plant and equipment at the expiration of the lease (but without any entitlement thereto) at a rental and residual value which will recoup the financier's capital and a commercial rate of interest. The first relevant income tax ruling on the subject was issued on 6 July 1960. 54 I accept the appellant's submissions that although the overall arrangement was a financing arrangement, it did not involve a loan. There was no obligation to repay a sum advanced. The authorities recognise that arrangements can be made for financial accommodation without a loan being involved: Chow Yoong Hong v Choong Fah Rubber Manufactory [1962] AC 209 at 216-217; Prime Wheat Association Ltd v Chief Commissioner of Stamp Duties (1996) 42 NSWLR 505 at 511-512; Australia and New Zealand Savings Bank Ltd v Commissioner of Taxation (1993) 42 FCR 535 at 560; N.M Superannuation Pty Ltd v Young (1993) 113 ALR 39 at 56-58. 55 A determination about whether an outgoing is made on revenue or on capital account usually starts with the three matters identified in Sun Newspapers Ltd & Associated Newspapers Ltd v Federal Commissioner of Taxation (1938) 61 CLR 337 at 363, namely:

· the character of the advantage sought by the outgoing;

· the manner in which the advantage is to be used, relied upon or enjoyed by the taxpayer; and

· the means adopted to obtain the advantage, such as by recurring payments. 56 As the High Court of Australia observed in G P International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1990) 170 CLR 124 at 137: "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 sought by the making of the expenditure is the chief, if not the critical, factor in determining the character of what is paid: Sun Newspapers Ltd and Associated Newspapers Ltd v Federal Commissioner of Taxation (1938) 61 CLR 337 at 363; Colonial Mutual Life Assurance Society Ltd v Federal Commissioner of Taxation (1953) 89 CLR 428 at 445-447, 454; Cooper v Federal Commissioner of Taxation (1957) 97 CLR 397 at 404 (affirmed on other grounds: (1958) 100 CLR 131)…" 57 The primary judge found that if he was wrong in his conclusion that the sale and lease back transaction was legally ineffectual to create the relationship of lessor and lessee with respect to the ammonia plant, the whole of the lease rentals were deductible. His Honour identified the advantage which the appellant sought by making the rental payments as " ... 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 from this." 58 I agree, respectfully, with his Honour's reasoning, but I would identify further advantages which the appellant obtained by making the rental payments. The main further advantage was obtaining a finance facility, by which I mean the use of a very substantial amount of money. The Instalment Purchase Agreement and the Agreement for Lease were interdependent. The financiers would not pay over the $71.4 million on the strength of the Instalment Purchase Agreement alone. That agreement was conditional upon the execution of the Agreement for Lease and compliance by the appellant with its terms. The financiers can be seen to have been prepared to make the $71.4 million available to the appellant upon various conditions, including the periodical payment of rent at levels fixed by agreement between the parties. From a practical and business point of view, payment of the rent not only secured the use of the ammonia plant, the rent also paid for the use of the $71.4 million. This was clearly the main purpose of the whole arrangement - to provide financial accommodation, though not by way of loan, for the appellant's business. 59 Another advantage obtained by the appellant arose out of the nature of the financing arrangement. The term of the agreements was quite long - five years. The evidence was that before entering into these transactions the appellant was dependent upon short-term debt finance, largely unsecured, and mainly in the form of rolling over bills of exchange. This exposed the appellant to the risks of interest rates moving against it and the possibility that financiers could not be found to purchase their bills of exchange. 60 The arrangements enabled the appellant to get access to funds by a mechanism which put to use the going-concern value of the ammonia plant. The ammonia plant was in its books at approximately $110 million. Its break-up value was found to be in the vicinity of $10 million. The sale and interdependent lease-back provided a convenient alternative to raising funds by way of charging or mortgaging the ammonia plant. The evidence of the financiers was that the lease arrangement gave them more commercial leverage than if they had become secured creditors. 61 In Chandler Investment (No 5) Co Ltd v Commissioner of Taxation (1993) 47 FCR 588 a Full Court of this Court considered whether a receipt in the nature of an incentive payment was to be characterised as income or capital. At 598 Hill J, with whom von Doussa J agreed, said this: "But to accept that the circumstances in which a payment is made will be relevant to a determination of that character in the hands of a recipient is not to say that surrounding circumstances can be used to contradict the words of an agreement reached between parties bargaining at arm's length as to what the consideration for a particular payment is to be, except in a case (and the present is not such a case) where it is claimed that the agreement is a sham and does not represent the true intention of the parties to it." 62 Although in the present appeal we are concerned with the character of a payment rather than a receipt, I think that the above observations are useful when identifying what the rent payments were "for". It tends to narrow the focus. 63 Next I consider that it is relevant to have regard to the fact that the rent was paid annually; it was a recurrent payment. If the assessment of income can be likened to the taking of an annual "snapshot" or, more aptly, a video of what relevantly has happened in the appellant's business activities, the rent has the appearance of a payment necessary to enable those activities to continue throughout the relevant year. 64 So far as the manner in which these advantages were to be used, relied upon and enjoyed by the appellant is concerned, in my view this factor points squarely towards the rent payments being on revenue account. The main advantages were the uninterrupted use of the ammonia plant for the appellant's business and the use of the funds representing the proceeds of the sale of that plant, also for the purposes of that business. The rent payments were made recurrently to secure the continued enjoyment of those advantages. 65 It is quite true that the appellant expected that it would, having observed its obligations under the Agreement for Lease, be offered the opportunity to re-purchase the ammonia plant at the residual value. Objectively or subjectively the strong likelihood of being given that opportunity can be seen from the evidence to have been a matter of considerable importance to the appellant. The ammonia plant was a key component of its production facility. In the sense that the more that was paid in rent, the less that had to be paid for the ammonia plant at the end of the lease, some part of the rent might be regarded as being "on account" of or partially in reduction of what was probably to become the re- purchase price for that plant. But, in my view, that advantage was too indirectly connected with the annual payments of the rent. By "indirectly connected" I mean that there is lacking the sufficiently immediate connection for the payments of rent to be linked to the reduction in re-purchase price. On the authorities there needs to be more than a causal relationship in the "but for" sense. Too many things might have happened between payment of the rent (it should be remembered that these appeals concern rent paid in the first two years of the lease) and whatever transpired at the end of the lease for the connection to be sufficiently immediate, despite the confident expectation of all concerned that a re-purchase would occur. The relevant technology might have changed, making it worthwhile physically to re-deliver the plant to the financiers and pay them the residual value. The plant might have been destroyed by accident. Another entity in the appellant's corporate group might have purchased it from the financiers at the expiry of the lease. The appellant could have become insolvent and, by default, have caused the financiers to terminate the lease. Those factors contribute in one sense to the indirectness to which I have referred. But there is, in my opinion, another equally if not more important aspect of indirectness. Even if all had gone as the parties contemplated and the re-purchase had occurred, the rent payments were not immediate enough in time or quality to the capital benefit. Something of the flavour of this can be seen in the distinction between the benefits taken into account to reduce the deductions for the cost of the trading stock in the first of the Europa cases; Commissioner of Inland Revenue v Europa Oil NZ Ltd [1971] AC 760 (Europa No 1) but not in Europa Oil NZ Ltd v Inland Revenue Commission [1976] I WLR 464 (Europa No 2). I acknowledge that those cases were not concerned with capital/revenue determinations, but they were concerned with matters of directness. In Europa No 1 the arrangements with Pan-Eastern Refining Co Ltd, which assured the albeit indirect discount, were held to be sufficiently direct for the discount to be brought to account. But in Europa No 2 the new evidence showed that there was an interposed entity through which oil had been purchased and which enjoyed the share of profits derived by Pan Eastern Refining Co Ltd. 66 The question of sufficient directness is one of degree over which reasonable minds may well differ. 67 A more recent example of remoteness, this time between expenditure and derivation of income, was seen in Federal Commissioner of Taxation v Email Ltd (1999) 99 ATC 4,868 (Full Court of this Court - special leave refused by the High Court on 16 June 2000). There the taxpayer was a holding company of a sub-subsidiary company which stood to obtain $20.775 million from the sale of some shares. To secure the sale, the taxpayer had to give an indemnity to the purchaser in respect of claims which might be made by dissatisfied customers of the sub-subsidiary. The taxpayer paid some $5.2 million pursuant to that indemnity and claimed that sum as an allowable deduction. At first instance the taxpayer was successful. The primary judge found that the giving of the indemnity was part of the normal business activities of the taxpayer which was the sort of holding company which took an active part in the administration of the affairs of its subsidiaries. The advantage sought by the taxpayer was an increase in the likely flow of dividends from the sub-subsidiary. The indemnity was given, so his Honour found, to promote and preserve the size of future dividends. Similar indemnities had been given by the taxpayer on a number of occasions. The Full Court allowed the appeal on the basis that the expenditure was too remote from the generation of dividends. At 4,875 their Honours said: "The fact that the ultimate result of an outgoing and a result to which the outgoing is directed is the receipt of income is, in a case such as the present, too remote from the immediate advantage which the outgoing is designed to effect." 68 In my view, on the facts of the present case, the reduction in any future re-purchase price worked by each payment of rent was too remote from the immediate advantages (principally the use of the ammonia plant and the use of a very substantial amount of money) which those rental outgoings were designed to effect. 69 I do not think that any portion of the rental payments should have been disallowed as being outgoings of capital or of a capital nature.

PART IVA 70 Section 177F of the Act relevantly provides that: "(1) Where a tax benefit has been obtained, or would but for this section be obtained, by a taxpayer in connection with a scheme to which this Part applies, the Commissioner may ... in the case of a tax benefit that is referrable to ... a part of a deduction ... determine that ... the part of the deduction ... shall not be allowable to the taxpayer." 71 In his determination, made pursuant to s 177F, the respondent identified the tax benefit that would, but for s 177F, be obtained by the appellant as "the capital component of the lease payments". There is no dispute between the parties about the tax benefit being thus identified. Nor is there any dispute between them about the relevant scheme. The scheme relied upon by the respondent and identified by the primary judge was that "constituted by the making and implementation of the sale and lease-back of the ammonia plant". The appellant conceded that this fell within the very wide definition of a "scheme" in s 177A(l). 72 The test for whether a "tax benefit has been obtained ... in connection with a scheme to which this Part applies" is set out in s 177D(b). The test is whether, " ... having regard to: (i) the manner in which the scheme was entered into or carried out; (ii) the form and substance of the scheme; (iii) the time at which the scheme was entered into and the length of the period during which the scheme was carried out; (iv) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme; (v) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme; (vi) any change in the financial position of any person who has, or has had any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme; (vii) any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out; and (viii) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi), it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme …" 73 Section 177A(5) provides: "A reference in this Part to a scheme or part of a scheme being entered into or carried out by a person for a particular purpose shall be read as including a reference to the scheme or the part of the scheme being entered into or carried out by the person for 2 or more purposes of which that particular purpose is the dominant purpose." 74 The primary judge accepted the respondent's submission that the parties to the scheme included the appellant, its parent company Incitec Ltd, and the other 9 guarantor companies together with the promoter of the scheme and the financiers. 75 At first instance and on appeal the case was fought on the basis that the relevant persons were Incitec Ltd and the appellant, because the business of the corporate group of which the appellant was a member was conducted as a single business without any attempt to identify the individual interests of each of the group members. 76 The Commissioner contended at first instance, and again before us, that the subjective intentions of the relevant person were irrelevant. The primary judge expressed the view that the Commissioner went too far in that submission. He indicated hesitation in reaching that conclusion, in view of 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. 77 At para 80 of his reasons the primary judge said this: "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." [a reference to Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404.] 78 His Honour then devoted approximately eleven pages of his reasons to an analysis of the evidence relating to the subjective purpose of the appellant in entering into and carrying out the scheme comprising the sale and lease-back of the ammonia plant. His Honour concluded that the appellant's dominant purpose, in the sense of its subjective purpose for entering into the transaction, was to obtain the tax benefit available from full deductibility of the lease rentals - see para 104. 79 In my respectful opinion, by taking that course, his Honour erred in law. 80 Part IVA is to be construed and applied according to its terms: Spotless at 414. At 424 in the main judgment their Honours said this: "Section 177D presents the question whether, having regard to the eight categories of matter identified in par (b), posited as objective facts, in the present case a reasonable person would conclude that the taxpayers entered into the scheme for the dominant purpose of enabling each to obtain a "tax benefit " in the necessary sense." 81 The whole tenor of the language in which s 177D(b) is expressed is that of ascertaining an objective purpose by having regard to objective facts. 82 In my view, the following passage from the reasons for judgment in Spotless (at 421- 422) also indicates that the focus should be not on the actual purpose of the taxpayer but on that purpose as objectively assessed: "The eight categories set out in par (b) of s 177D as matters to which regard is to be had 'are posited as objective facts'. That construction is supported by the employment in s 177D of the phrase 'it would be concluded that ...'. This phrase also indicates that the conclusion reached, having regard to the matters in par (b), as to the dominant purpose of a person or one of the persons who entered into or carried out the scheme or any part thereof, is the conclusion of a reasonable person. In the present case, the question is whether, having regard, as objective facts, to the matters answering the description in par (b ), a reasonable person would conclude that the taxpayers entered into or carried out the scheme for the dominant purpose of enabling the taxpayers to obtain a tax benefit in connection with the scheme." [Footnotes omitted.] 83 In Peabody v Commissioner of Taxation (1993) 40 FCR 531 at 542 Hill J (with whom Ryan and Cooper JJ concurred) observed: "It will be seen that the determination of what schemes fall within s 177D requires an objective conclusion to be drawn, having regard to the matters referred to in par (b ) of the section, but no other matters. It is notable that the actual subjective purpose of any relevant person is not a matter to which regard may be had in drawing the conclusion. In this way, the provisions of Part IVA stand in contrast to similar provisions subsequently enacted in other legislation, for example, s 67 of the Fringe Benefits Tax Assessment Act 1986 (Cth)." 84 Sackville J in CC (NSW) expressed a similar view at 4,147, citing the above extract from Hill 1's reasons in Peabody, and noting that those observations were consistent with the manner in which the joint judgment in Spotless stated the question in the passage from their Honours' reasons which I have set out at para 60 above. 85 At par 103 of his Honour's reasons for judgment in this matter he referred to the fact that the appellant bore the persuasive burden of proving the facts necessary to show that the respondent was wrong in invoking Part IVA. He referred to the evidence of Messrs Eddey, Lawrence and Spriggs (being respectively a director and two successive finance managers of the appellant) and then said: " ... 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." 86 In my respectful opinion, the appellant had no such burden to discharge. In the terms of s 14ZZ0(b)(i), the appellant had the burden of proving that the respondent's assessments were excessive. In evidentiary terms, I think that means that if the appellant failed to establish objective facts, under the various categories set out in par (b) of s 177D, from which a reasonable person would not conclude that its dominant purpose in entering or carrying out the scheme was to obtain a tax benefit, it failed to discharge its statutory onus of proof. 87 In Metal Manufactures (at par 274) Emmett J regarded the subjective state of mind of the taxpayer's directors as not being relevant for the purposes of Part IVA. I agree respectfully, with his Honour's view. 88 In his written submissions, the respondent contended, in my view correctly, that the conclusion required by s 177D was not directed at a person's actual dominant purpose or motive. 89 The primary judge, in my respectful opinion, fell into error on one other point. At pars 117 and 118 it can be seen that his Honour took into account, and regarded as important, the additional tax benefits derived by the appellant through having the sale and lease-back transaction occur during the year ended 30 September 1999. That benefit was identified as being the offsetting of a balancing charge by certain depreciation allowances arising out of the completion by the appellant of its new nitrate plant expansion. 90 The tax benefit identified by the respondent, and upon which he relied for the determination made under s 177F, was the deduction of the rentals. He did not rely on the offsetting of the balancing charge which resulted from the sale of the ammonia plant occurring in the same tax year as the commissioning of the new expansion to the appellant's nitrate plant. That factor would have no bearing on the amount of the rentals which might be deductible in that year. Had he so chosen, the respondent might well have included the depreciation advantage as a relevant tax benefit. In that situation, the timing of the sale and lease-back of the ammonia plant would clearly have been relevant. But that was not the tax benefit referred to in the respondent's determination and that was not the basis upon which the case was fought. The timing to which his Honour referred would not have affected the deductibility of the rentals. The net total of the appellant's deductions might well have been affected. But that, in the circumstances to which I have just referred, was in my view a separate matter. 91 At par 121 of his reasons, his Honour listed seven matters as being relevant to the application of s 177D(b). The seventh matter was: "(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." 92 His Honour then said that an objective consideration of these matters led to the conclusion that the appellant'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. 93 In my respectful opinion, when his Honour took into account the fact that the transaction had been timed to enable the balancing charge to be off-set, he took into account an irrelevant consideration and thereby erred in law. 94 I think that we are in as good a position as the primary judge to apply the relevant test to the facts as found by his Honour and that we should do so. 95 In Peabody at 543 in a passage the correctness of which was not questioned by the High Court on appeal (which, as the appellant points out in its written submissions was concerned only with the existence of a tax benefit and the identification of the relevant scheme), Hill J, expressing reasons which are to be regarded as the reasons of the Full Court, said: "In arriving at his conclusion, the Commissioner must have regard to each and every one of the matters referred to in s 177D(b). This does not mean that each of those matters must point to the necessary purpose referred to in s 177D. Some of the matters may point in one direction and others may point in another direction. It is the evaluation of these matters, alone or in combination, some for, some against, that s 177D requires in order to reach the conclusion to which s 177D refers." 96 I propose to take the course outlined in that passage and consider each of the relevant matters in turn.

(i) The manner in which the scheme was entered into or carried out 97 The first step was an approach to the appellant by a Mr N Lattimore of Macquarie Bank Ltd ("MBL"). MBL 's initial approach was made in late 1987 when he forwarded what was described as a "promotional package of materials" concerning sale and lease-back transactions. MBL eventually became entitled to and was paid a fee for its services in bringing the scheme to the attention of the appellant, introducing the financiers and generally seeing the matter through to completion. 98 As the appellant pointed out in its written submissions, there was a lengthy process of deliberation, on the part of the appellant's Finance Managers and Board before the Instalment Purchase Agreement and the Agreement for Lease were entered into. The proposal was exhaustively researched and the benefits, costs and risks involved were examined at length. Advice was taken on legal, accounting, taxation and financial implications. That, in summary, was the manner in which the scheme was entered into. 99 The scheme was carried out by compliance with the terms of those two agreements. The agreements were not shams. They reflected real transactions which the parties had agreed upon. The parties carried out the scheme by honouring the respective obligations which the agreements imposed. 100 In my view, the manner in which the scheme was entered into and carried out were neutral in terms of indicating objectively an objective purpose on the appellant's part of obtaining a tax benefit. A merchant bank had a financial service to sell and it did so successfully. There were negotiations about the terms and conditions of the transaction, but there was nothing unusual, uncommercial or unexpected about either the manner in which the scheme was entered into or in which it was carried out. A large amount of money was involved. Thus it was to be expected that there would be important formal issues to be resolved and that the agreements would be prepared by lawyers. But the basic transactions were simple and straight forward. The ammonia plant was selected as the asset to be sold and leased back. The sale transaction was evidenced by an appropriate agreement, as was the lease-back. If there is a scale upon which to measure the degree to which a scheme was entered into and carried out in an unusual, convoluted or complicated manner, the facts of this case put it at the very low end of the scale.

(ii) The form and substance of the scheme 101 It may be that this factor is intended to require a comparison between the form of the scheme and its substance. If so, in this matter it can be seen that the form and substance were one and the same. The transaction was not dressed up as something which it was not. It was a sale and lease-back both legally and in substance. 102 However, there is nothing in the statutory context to limit the consideration of this factor to merely a comparison between the form and substance of the scheme. Both have to be considered separately and together, so far as may be relevant. 103 For present purposes, the form and substance of the scheme being the same, I consider that this factor points to an objective purpose of obtaining a tax benefit in the form of deductions for the full amount of the rentals. This was a significant aspect of the substance of the matter. A reasonable person would, I think, regard that tax benefit as being an important factor in the appellant's decision to enter into and carry out the scheme. (iii) The time at which the scheme was entered into and the length of the period during which the scheme was carried out 104 The scheme was entered into at a time when the appellant had a need for a finance facility. It was not entered into at a time when, for example, some legislative change was pending. The length of the period during which the scheme was carried out (five years) was, in my view, of no assistance in determining the dominant purpose. If anything, I would regard this factor as pointing away from a dominant purpose of obtaining a tax benefit. The tax benefit was not immediate, but spread over the period of the scheme. (iv) The result in relation to the operation of the Act that, but for Part IVA, would be achieved by the scheme 105 The relevant result would be that the applicant would be entitled to a deduction for the whole of the rental payments. This points, as I have mentioned above, towards a purpose of obtaining that tax benefit. (v) Any change in the financial position of the appellant that has resulted, will result, or may reasonably be expected to result from the scheme 106 The evidence shows that there were some significant changes in the financial position of the appellant which resulted from the scheme. First, the scheme resulted in the appellant having $71.4 million in cash available to it for the purposes of its business. Secondly, it can be seen that instead of being reliant from time to time upon the short-term money market, the appellant secured a financial facility which extended over a period of 5 years. Again in financial terms, the scheme reduced its exposure to interest rate risks. The appellant had previously relied on short-term debt for its largely seasonal or cyclical financial requirements. It had to take rates on offer from time to time. Under Clause 3 of the Agreement for Lease the appellant had the right to choose between a variable rate of interest or a fixed rate of interest to be applied in the calculation of the rental for the year in question or for two years, or for three years or for the balance of the term of the lease. 107 There was evidence that, in terms of financial position, a company which could obtain financial accommodation without having to charge or mortgage its assets, was regarded as being more financially sound than one which took that course. In August 1989 Australian Ratings Pty Ltd conducted a credit rating review of Incitec Ltd and its group of companies. As part of this review it considered a report. At p 11 of that report [AB 1138] there was reference to the sale and lease-back of the ammonia plant, followed by the following observation: "The transaction may not take affect (sic) until fiscal 1990 with delivery to be no later than October 31, 1989. The capital gain on sale will be brought forward to account over the remaining useful life of the plant. As regards borrowings, it will substantially lengthen the company's debt maturity profile and help reduce the average costs of finance." 108 At the time of the report Incitec Ltd had no rating history. By letter dated 14 August 1989 to Incitec Ltd, Australian Ratings Pty Ltd advised it that: "Our Rating Committee has had the chance to review the report on Incitec and have decided to assign the company a long term (3 year) debt rating of A‑." 109 There was also evidence that this method of finance enhanced the balance sheet structure by improving certain balance sheet ratios. 110 In my view, a reasonable person would regard the above factors as being important. None of them point to a purpose of obtaining a tax benefit. 111 However, on the other side of the balance, the tax benefit of deductible rentals would result in an increased after tax profit greater than would have been the case if there had been payments of principal and interest under a loan. That factor points in the direction of a purpose to obtain a tax benefit. (vi) Any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the appellant, being a change that has resulted, will result or may reasonably be expected to result, from the scheme 112 The evidence does not suggest any such change. (vii) Any other consequence for the appellant, or for any person having any connection with the appellant, of the scheme having been entered into or carried out 113 As the appellant pointed out in its written submissions, the use of the word "other" suggests that, under this category, the consequences to be considered are other than fiscal or financial. The obvious consequences were that the appellant ceased to be the owner of the ammonia plant and became the lessee of it. As the appellant submitted, it was liable to be deprived of possession and use of the ammonia plant if it defaulted in meeting its obligations under the Agreement for Lease. There was a slight risk of the appellant being unable to re- purchase the ammonia plant for an acceptable price at the expiration of the lease. So far as persons having a connection with the appellant were concerned, the guarantors assumed obligations to the financiers under both agreements. 114 I would regard these factors as being neutral to the question of the significance or otherwise of the obtaining of a tax benefit. (viii) The nature of any connection (whether of a business, family or other nature) between the appellant and any person having a connection with the appellant 115 Once again there does not appear to be any relevant connection, the nature of which requires examination.

MY EVALUATION 116 In my opinion, it is clear that the appellant entered into and carried out the scheme for more than one purpose. One of the purposes was to obtain a tax benefit. The question is whether, having regard to the eight categories of factors referred to above, a reasonable person would conclude that the appellant entered into or carried out the scheme for the dominant purpose (objectively assessed) of enabling it to obtain the tax benefit identified and described above? 117 In Spotless at 415-416 the High Court observed that: "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 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." 118 At 417, their Honours said this about the word "dominant": "Much turns upon the identification, among various purposes, of that which is the "dominant". In its ordinary meaning, dominant indicates that purpose which was the ruling, prevailing, or most influential purpose. In the present case, if the taxpayers took steps which maximised their after-tax return and they did so in a manner indicating the presence of the "dominant purpose" to obtain a "tax benefit", then the criteria which were to be met before the Commissioner might make determinations under s 177F were satisfied." 119 In my view, balancing the various factors above, it cannot be said that the ruling, prevailing or most influential purpose of the appellant was to obtain a tax benefit. I think that a reasonable person would form the view that although that factor was important, the ruling prevailing or most influential purpose was to obtain a very large financial facility on the best terms reasonably available.

THE VALUATION AND ESTABLISHMENT FEES 120 The sole issue in Appeal No Q286 of 1999 is whether the establishment and valuation fees were deductible in the 1989 financial year. 121 His Honour's conclusions on this point were expressed as follows: "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."

THE APPELLANT'S CONTENTIONS 122 The appellant submitted that re-financing, with its attendant fees, is a recurrent aspect of any business, including its own business. That recurrent quality, so it submitted, made these expenses allowable under s 51(1). The appellant submitted that so far as the respondent's contention as to non-deductibility of the establishment and valuation fees depended upon in part characterising the rent as capital, that contention failed if the appellant's submissions on the deductibility of the rent were accepted.

THE RESPONDENT'S CONTENTIONS 123 The respondent pointed to the primary judge's finding that the valuation fees and the establishment fee were all incurred by the appellant for the purposes of the sale and lease- back transaction. The respondent submitted that the fees could not thus be regarded simply as a cost of the lease of the plant for a period of time. The transaction as a whole, involving the purported sale of the ownership in the plant, the lease-back and the subsequent re- acquisition, concerned, so the appellant submitted, a dealing in a capital asset. The valuation and establishment fees were a cost of that dealing. Accordingly the fees were, on the respondent's case, of a capital nature and were not deductible under s 51(1) of the Act. In the alternative, the respondent relied upon Part IVA of the Act for the disallowance of these fees and expenses.

MY REASONING 124 Part IVA of the Act does not apply to the fees because, for the reasons given above, Part IVA does not apply to the scheme. It was not contended that the payment of these fees was a relevant part, in its own right, of a scheme. In my view, the proper characterisation of the transaction was that of a financing arrangement. This particular type of financing arrangement was a "one off" in the sense that it was the first time that the appellant had entered into a transaction in this form. 125 However, the evidence was that on a regular annual basis the appellant raised funds for the purposes of its business. Its business was seasonal or cyclical, being concerned with the production of fertiliser for the primary industry sector. In my view, given this element of regularity and the use made of the finance raised, these fees were allowable deductions because they were either incurred in gaining or producing assessable income, or were necessarily incurred in carrying on the appellant's business for the purpose of gaining or producing such income. I do not regard any part of the fees as being outgoings of capital or of a capital nature. They were necessarily incurred as part of a fund-raising arrangement which was engaged in recurrently. They were thus on revenue account.

CONCLUSION 126 For the above reasons I would allow each of the appeals, set aside the orders made at first instance, order that the appellant's appeals against the respondent's objection decisions be allowed in full, order that the assessments be set aside and remit the matters to the respondent to assess the appellant's taxation liability according to law. The respondent should pay the appellant's costs both at first instance and of the appeal. I certify that the preceding one hundred and four (104) numbered paragraphs are a true copy of the Reasons for Judgment of Justice Carr.

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

127 For the reasons given by Carr J and the additional reasons given by Lee J I agree with the orders proposed by Carr J. I certify that the preceding paragraph is a true copy of the Reasons for Judgment herein of the Honourable Justice Sundberg.

Counsel for the Appellant: DH Bloom QC, AH Slater QC and JA Logan SC

Counsel for the Respondent: DF Jackson QC, G Davies QC and A Richards QC

Solicitor for the Respondent: Australian Government Solicitor