Futuris Corporation Limited v Commissioner of Taxation

The Facts 11 There is no dispute between the parties about the transactions which took place in September and October 1997. There is no dispute about their legal effect and, if Part IVA of the Act does not apply, their consequences in terms of the Act. 12 At all relevant times, the applicant was a listed public company which owned, directly or indirectly, a number of subsidiaries. Two of the applicant's wholly owned subsidiaries owned, either directly or indirectly, assets which comprised its "Building Products Division". The two wholly owned subsidiaries were Vockbay Pty Limited ("Vockbay") and Walshville Holdings Pty Limited ("Walshville"). Vockbay owned the Bristile entities or assets, as they were referred to in the submissions made by the parties, and Walshville owned the Prestige entities or assets. The evidence is that the enterprise value of the Building Products Division was in the order of $250 million with the Bristile assets or entities worth in the order of $210 million and the Prestige entities or assets worth in the order of $40 million. 13 I attach to these reasons a document entitled "Structure Diagram A". It shows the corporate structure of the applicant and its relevant subsidiaries immediately before the transactions which are described below. 14 On 3 September 1997, Bristile Limited ("Bristile") changed its name to Bristile Holdings Ltd and Walshville changed its name to Bristile Limited. However, in order to avoid confusion, I will refer throughout to the companies as they were known before 3 September 1997. 15 In late 1996 or early 1997, the applicant decided that it would dispose of its Building Products Division and it decided that it would do that by means of a public float of Walshville. 16 In order for the applicant to dispose of the Building Products Division by means of a public float of the Walshville shares, the assets of the Building Products Division held by Vockbay and its subsidiaries had to be transferred to Walshville. A number of transactions were carried out on 2 September 1997 whereby the assets of the Building Products Division came to be held by Walshville. Those steps were followed by a public float of Walshville in October 1997. The steps carried out were not in dispute and they were as follows: Step 1: Before 2 September 1997, the applicant held 37 per cent of the shares in Bristile and Vockbay held 63 per cent of the shares in Bristile. The first step involved a transaction whereby the applicant transferred to Vockbay its 37 per cent shareholding in Bristile for the sum of $5,094,495.74. The applicant and Vockbay elected that s 160ZZO of the Act applied to the disposal of the Bristile shares by the applicant to Vockbay. That section dealt with roll-over relief. Step 2: On 13 August 1997, a new subsidiary of Bristile was incorporated and that company was called Bristile Operations Pty Limited ("Bristile Operations"). The second step involved a transaction on 2 September 1997 whereby Bristile transferred its assets to Bristile Operations for the sum of $210 million. Bristile and Bristile Operations elected that s 160ZZO applied in relation to the assets that were transferred by Bristile to Bristile Operations. The transfer of assets by Bristile to Bristile Operations gave rise to an accounting profit in Bristile of $146 million. Step 3: The third step involved a transaction whereby Bristile declared a dividend of $146 million to Vockbay, paid out of the accounting profit made from the sale of its net assets to Bristile Operations. The dividend was rebateable pursuant to s 46 of the Act. The third step also involved a transaction whereby Vockbay declared a dividend of $63 million to the applicant. That dividend was also rebateable pursuant to s 46 of the Act. Step 4: The fourth step involved a transaction whereby, on 2 September 1997, the debt owed by Bristile to Vockbay in respect of the dividend was capitalised by Bristile issuing 94,193,548 fully paid $0.5 shares to Vockbay at a premium of $1.05 per share (94,193,548 x $1.55 = $146,000,000). As a result of that transaction, the cost base and indexed cost base ("ICB") of Vockbay's shareholding in Bristile increased by $146 million. As a consequence, the cost of Vockbay's shareholding in Bristile increased from $33,996,437 to $179,996,437 and the cost base increased from $37,881,692 to $183,881,692. The fourth step also involved a transaction whereby, on 2 September 1997, the debt owed by Vockbay to the applicant in respect of the dividend was capitalised by Vockbay issuing 630,000 fully paid $1 shares to the applicant at a premium of $99 per share (630,000 x $100 = $63,000,000). As a result of that transaction, the cost base and ICB of the applicant's shareholding in Vockbay increased by $63 million from $2 to $63,000,002. Step 5: The fifth step involved a transaction whereby, on 2 September 1997, Vockbay sold all of its Bristile shares (116,134,148 shares) to Walshville for the book value of the Bristile assets, being $97,313,000. As part of the fourth step, the applicant lent Walshville $97,313,000 to enable it to pay for Vockbay's shares in Bristile. The value of the applicant's shareholding in Vockbay decreased because Vockbay disposed of the Bristile shares at a discount of more than $82 million to their market value. The value of the applicant's shareholding in Walshville increased because Walshville acquired the Bristile shares at a discount of more than $82 million to their market value. For Capital Gains Tax ("CGT") purposes the parties were not dealing at arm's length and thus under s 160ZD(2) the consideration deemed to have been received by Vockbay was the market value ($180,263,088) and the consideration deemed to have been paid by Walshville was the market value of the Bristile shares, namely $180,263,088 and, thus, the cost base to Walshville of the Bristile shares was $180,263,088. As the Bristile shares were transferred between group companies for less than their cost base or market value, Division 19A of Part IIIA of the Act applied. The adjustment was $82,950,088, being the difference between $180,263,088 and $97,313,000. The effect was that the cost base and ICB of the Vockbay shares to the applicant was decreased by $63,000,002 to $0, and, under s 160ZZRE(4), the cost base and ICB of the applicant's loan to Vockbay was reduced by $19,950,086 (the difference between the $82,950,088 and $63,000,002) and the cost base and ICB of the Walshville shares to the applicant was increased by $82,950,088 (from $2 to $82,950,090). Step 6: The sixth step involved the making of payments by Walshville to the applicant on 9 October 1997. The payments totalled $87 million comprising a debt owed by Bristile to the applicant of $16,936,912, a previous debt owed by Walshville to the applicant of $22,957,088 and repayment to the applicant of $47,106,000 of the $97,313,000 lent by the applicant to Walshville. In accounting terms, Bristile lent Walshville $87 million and Walshville paid $87 million to the applicant. Walshville then owed Bristile $16,936,912. On 9 October 1997, the balance of the debt owed by Walshville to the applicant (that is, $97,313,000 - $47,106,000 = $50,207,000) was capitalised when Walshville issued to the applicant 88,235,285 fully paid shares at approximately $0.569 per share. As a result of that capitalisation of the debt of $50,207,000 the cost base to the applicant of its shareholding in Walshville increased by $50,207,000 and the total cost base/ICB was increased to $133,157,090. Step 7: The seventh step involved the disposal by the applicant of its Walshville shares on 9 October 1997 for the sum of $150 million. The shares were sold for $1.70 each. I attach to these reasons a diagram and description for each of the seven steps set out above and a diagram, entitled "Step O" showing the position before any of the steps were carried out. On 16 October 1997, Walshville was listed on the Australian Stock Exchange and, as I said earlier, by this time its name had been changed. The total of the cost base to the applicant in respect of its Walshville shareholding (excluding costs of disposal of the shares) was $133,157,090. The costs of disposal were $7,053,658. The capital gain made by the applicant on the disposal of the Walshville shares was $9,789,252, being $150,000,000 - $133, 157,090 (cost base) - $7,053,658 (cost of disposal). The applicant had prior year net capital losses of $7,396,611. In its 1998 income tax return, the applicant declared total capital gains of $9,842,908 and net capital losses of $7,396,611. It also declared the dividend from Vockbay in the amount of $63 million. The description by the applicant in its income tax return of the calculation of the capital gain upon the sale of the shares it held in Walshville was as follows: "Disposal of Walshville During the year ended 30 June 1998, Futuris Corporation Limited disposed of one of it's [sic] subsidiaries, namely Walshville. In calculating the cost base of Walshville for capital gains tax purposes, the following has to be taken into consideration. During the year, Walshville acquired Bristile Ltd from Vockbay for book value which was less than the market value and the indexed cost of the shares. Hence pursuant to Division 19A share value shifting provisions, Futuris Corporation Limited was required to reduce it's [sic] cost base in Vockbay and subsequently increase it's [sic] cost base in Walshville by the same amount. During the year, Futuris Corporation Limited also capitalised a debt of $50,207,000 which also increases the cost base of Walshville. The cost base of Walshville is therefore calculated as follows: Cost Base Original Cost $2 Division 19A Value Shift **$82,950,090 Capitalised Loans $50,207,000 Incidental Costs of Disposal $7,053,658 Walshville Cost Base $140,210,750

Consideration received 88,235,295 x $1.70 per share $150,000,000

Capital Gain on Sale Consideration $150,000,000 Less: Cost Base $140,210,658 $9,789,250 Less: prior year capital losses $7,396,611 Net capital gain $2,392,639

** Bristile was sold to Walshville for the book value of the net assets in the Bristile economic entity, being $97,313,000. As this consideration is less than the market value of the Bristile economic entity, section 160ZD(2) of the Act will deem a consideration equal to the market value of the Bristile group, being $180,263,088 (ie. $210 million less the debt of $16,936,912 owed to the Futuris group less external leases of $12,800,000). The $210M value is determined ultimately by the market as the value of the brick making division was estimated at $250M without any debt. After including external debt of $100M, price was $150M which is what was sold on market. Of the $250M the estimated allocation was $210M to Bristile group and $40M to Prestige group. The reduction of $16,936,912 and $12,800,000 are therefore required to arrive at the market value of the group disposed of with debt included. As assets have been transferred between group companies, a cost base adjustment will apply to the shares FCL holds in Vockbay and Walshville pursuant to the value shifting provisions contained in Division 19A of the Act. As provided by the value shifting provisions of the Act, FCL's cost base in Vockbay decreases by the difference between the lower of the indexed cost base or market value of the shares in Bristile and the actual sale price of the shares ($97,313,000). The indexed cost base held by Vockbay in Bristile was $183,881,692 which at market value is deemed to be $180,263,088 (as above). Therefore the resulting adjustment in FCL's cost base in Vockbay reduces by $82,950,090 (i.e $180,263,088 - $97,313,000) and FCL's cost base in Walshville increasing by $82,950,090." 17 This explanation refers to the operation of Division 19A Part IIIA of the Act. It is convenient at this point to detail the operation of Division 19A in the circumstances of this case. 18 By reason of s 160ZZRH of the Act, at the time at which the applicant disposed of its interest in Walshville, the indexed cost base to the applicant of its interest in Walshville was increased by such amount as was reasonable having regard to: (a) the increase in the value of the Walshville shares resulting from the acquisition of the Bristile shares; and (b) the amount of any relevant reductions made under s 160ZZRE. 19 In the circumstances of this case, s 160ZZRE operated in the following way. At the time Vockbay sold its Bristile shares to Walshville, the applicant owned all the shares in Vockbay. The consideration for the sale of $97,313,000 was less than both the indexed cost base of the Bristile shares ($186,859,875) and the market value of those shares ($180,263,088). By reason of subsection (3), the applicant was taken: (a) to have disposed of (each) share in Vockbay, at the time Vockbay sold the Bristile shares, for a consideration equal to the indexed cost base to the applicant of the share; and (b) for the purpose of ascertaining whether a capital gain accrued to the applicant in the event of a subsequent disposal of a share by the applicant - to have immediately re-acquired the share in Vockbay for a consideration equal to the indexed cost base to the applicant of the share, reduced by the indexed share reduction amount calculated by the formula in s 160ZZRE(3)(b). 20 In effect, the cost base of the Vockbay shares, if the applicant subsequently disposed of them, is reduced by the amount by which value has left Vockbay by the Bristile shares being sold for less than the indexed cost base of those shares. 21 As at the time of the fifth step, the relevant cost base/indexed cost base of the Vockbay shares held by the applicant was $63,000,002. The relevant cost base/indexed cost base of the Bristile shares was $186,859,875. The market value of the Bristile shares was $180,263,088 and the consideration on the sale was $97,313,000. The indexed share reduction amount was the difference between the market value and the consideration being the sum of $82,950,088. The relevant cost base/indexed cost base of the Vockbay shares, should the applicant subsequently dispose of them, is reduced by $63,000,002 to nil. 22 The transactions also affected the treatment of the applicant's loans to Vockbay under s 160ZZRE(4). As, under s 160ZZRE(3), the applicant was taken to have acquired the shares in Vockbay for nil consideration, the applicant was also taken, under s 160ZZRE(4), to have disposed of its loans to Vockbay for a consideration equal to the indexed cost base to the applicant of the loan, and, for the purpose of ascertaining whether a capital gain accrued to the applicant in the event of a subsequent disposal of the loan by the applicant, to have immediately re-acquired the loans for a consideration equal to the indexed cost base to the applicant of the loans, reduced by the amount calculated by the formula in subsection (4)(d). That amount was $19.95 million being the difference between the indexed share reduction amount of $82.95 million and the reduction in the cost base/indexed cost base to the applicant of the Vockbay shares under subsection (3) of $63 million. In this case, that amount exceeded the value of the loans and resulted in a zero cost base for the loans. 23 As a result of the transactions comprising the second to fourth steps or the second to fifth steps, the relevant cost base/indexed cost base of the Vockbay shares held by the applicant was increased to $63,000,000, the relevant cost base/indexed cost base of the Bristile shares to Vockbay was increased to $186,859,875 and the shares in Bristile were sold to Walshville for book value. This resulted in the indexed cost base to the applicant of its shares in Walshville being increased by $82,950,090 being the sum of the whole of the increase in the relevant cost base/indexed cost base of Vockbay, and the whole of the relevant cost base/indexed cost base of the Vockbay loans. 24 On 9 November 2004, the respondent's delegate determined, under paragraph 177F(1)(a) of the Act, that the amount of $82,950,090, being a tax benefit referable to an amount that had not been included in the applicant's assessable income for the year of income ended 30 June 1998, should be included in the assessable income of the applicant of that year of income and he further determined under subsection 177F(2) of the Act that the amount should be deemed to be included in the assessable income of the applicant by virtue of s 160ZO of the Act. Section 160ZO provides that a net capital gain accrued to a taxpayer in respect of a year of income is part of the assessable income of the taxpayer of the year of income. 25 As I have said, the second amended assessment was issued on 12 November 2004. The applicant lodged a notice of objection against the second amended assessment on or about 23 December 2004. The respondent disallowed the objection on or about 4 April 2005. 26 In his Response to the applicant's Statement of Grounds, the respondent alleges that the applicant obtained, or would have obtained but for the operation of Part IVA of the Act, a tax benefit in connection with a scheme to which Part IVA applied being an understated amount of $82,950,090. The respondent alleges that the amount of the tax benefit would have been included, or might reasonably be expected to have been included, in the assessable income of the applicant in the 1998 year. He alleges that, before entering into or carrying out the scheme as he defines it, the applicant had decided to dispose of the Building Products Division of the applicant's group of companies through directly or indirectly owned wholly owned subsidiaries; in particular, Bristile, Bristile Operations, Vockbay and Walshville. He alleges that the disposal of the Building Products Division produced a capital gain for the purpose of the Act. He alleges that the applicant increased the indexed cost base of its shareholding in Walshville under s 160ZZRH of Part IIIA of Division 19A of the Act by entering into or carrying out the scheme and thereby reduced the capital gain upon the disposal. The respondent alleges that there was a scheme for the purposes of Part IVA of the Act and that it consisted of Steps 2, 3 and 4 as described in [16] above. He alleges an alternative scheme consisting of Steps 2, 3, 4 and 5. 27 The above matters were established by the evidence put forward at the hearing. I turn now to consider the other evidence put forward at the hearing. 28 The applicant tendered a number of affidavits as part of its case. It tendered two affidavits of Mr Lawrence John Clark, an affidavit of Mr Jeffrey Lewis Hall and an affidavit of Mr Johan Simon Duivenvoorde. Only Mr Duivenvoorde was required for cross-examination and he was briefly cross-examined by counsel for the respondent. 29 I accept the evidence given by each of the applicant's witnesses. 30 Mr Clark was the company secretary of the applicant from September 1992 to July 2000. Before joining the applicant, Mr Clark was the general manager, corporate services and company secretary of Bristile Ltd from October 1988 until September 1992. Mr Clark describes the history of the applicant's acquisition of its Building Products Division. He sets out the ownership structure of the Building Products Division and it is as shown on the "Structure Diagram A". 31 In late 1996, a draft prospectus involving Bristile was prepared. The following statement appears in the draft prospectus: "The company [ie., Bristile] is currently owned by the Futuris Corporation Limited group of companies. The Futuris group is selling its entire investment in Bristile in order to focus on its core operations which comprise automotive component manufacture and the provision of services to the rural industry." 32 The applicant received advice about the disposal of its Building Products Division from SBC Warburg Australia Corporate Finance, Poynton Corporate Limited and Porter Western. 33 In a board paper prepared by Mr David Gilham (managing director of Bristile) and dated 18 April 1997, the following appears: "The recommended strategy is by a public float which will enable Futuris to retain a shareholding of 25%-30%, whilst still receiving full value for the 70%-75% sold. We believe that 100% of Building Products can be valued at $250 million and selling 70% will result in a pre-tax cash return to Futuris of $200 million.

The accounting pre-tax profit will be approximately $49 million, with maximum tax of $32 million payable.

Based on a $250 million market capitalisation of the new floated company ($150 million equity and $100 million debt), Futuris' remaining 30% holding would be valued at $75 million with a book value of $10 million." 34 Arthur Andersen, chartered accountants, provided advice to the applicant about the proposed sale of its Building Products Division by letter dated 26 May 1997. The seven steps outlined in the letter from Arthur Andersen are similar to the steps ultimately carried out, although, at that stage, the intention was that the applicant would retain 25-30 per cent of Walshville. 35 On 24 June 1997, Arthur Andersen, on behalf of the applicant, made a request of the respondent for a private ruling in relation to the sale of the Building Products Division. At that stage, the applicant was proposing to sell only 70 per cent of the shares it held in Walshville. 36 The rationale for the float was described in a board paper dated 11 July 1997 as follows: "The merging of Metro Brick, Prestige Brick and International Brick & Tile and the upgrading of their plants and the rationalisation of costs created a viable second force in the brick market in WA. The combination of Metro Brick and Bristile Clay Tiles, which has now recently taken place is the final structural initiative which management can implement.

From henceforward the Building Products Division will benefit from the growth of the Western Australian economy, but is unlikely to diversify outside that state to any great extent. Consequently its growth prospects are limited and its prime characteristic from an investment point of view, will be its strong cash generation ability.

At an average level of housing starts the Division is capable of producing an EBIT of approximately $25 million and a public float is possible at ten times this figure in the current market.

Accordingly, the Group is faced with a decision whether to hold an asset of undoubted quality but of limited growth prospects for the foreseeable future or to take the opportunity that the market now affords for its disposal.

If we can earn 11% - 12% on the proceeds the disposal will be EPS neutral. In the medium term the growth of Elders' loan book will probably allow such earnings to be generated.

In the short term however, EPS will suffer. On the assumption that the $186 million proceeds of a 70% float are used to retire all bank debt (currently $65 million), with the balance held as cash, EPS for 1997/98 will drop from the budgeted 11 cents per share to 9.8 cents per share. Net profits after tax decline from $53 million to $48 million.

Notwithstanding this short term effect management feel that the partial float of the Division to be an essential step to allow funds to be channelled into growth areas, particularly into the Elders range of financial products, and to maintain a conservative level of gearing. The float will also be of assistance if the Group wishes to apply for a banking license at a future date." 37 On 8 August 1997, Arthur Andersen, on behalf of the applicant, made a second request of the respondent for a private ruling in relation to the sale of the Building Products Division. By that stage the applicant had decided to sell all the shares it held in Walshville. 38 Mr Clark states that on 2 September 1997 a number of company meetings were held, resolutions passed and transactions prepared and executed, whereby the Building Products Division was restructured prior to the public float. The transactions are summarised above and are not in dispute; in the circumstances, it is not necessary for me to go through the details. The meetings of the various companies were minuted as having taken place five minutes apart and all minutes were signed on 2 September 1997. 39 The prospectus for the float of Walshville was issued on 3 September 1997. An amended prospectus was lodged with the Australian Securities Commission on 15 September 1997. 40 Mr Clark said that Vockbay was what he described as a corporate office company, that is to say, an intermediary holding company of the acquired entities. It did not maintain its own accounting records; its accounting records were held and maintained by the applicant. Vockbay did not maintain a bank account with any financial institution. It was the applicant's practice to act as banker to corporate office companies that did not have bank accounts, including Vockbay. 41 Mr Clark's second affidavit was, for the most part, directed to the issues arising in relation to the first amended assessment (WAD 153 of 2003). As I have said, that proceeding has been resolved. 42 Mr Jeffrey Lewis Hall is a chartered accountant. He is the founder and director of Summer Hall Associates Pty Limited which is a specialist advisory firm providing corporate advisory services in relation to mergers and acquisitions, capital raisings, corporate restructuring and financial matters generally. Mr Hall prepared a report dated 5 March 2009 and in it he provides a valuation of a parcel of 116,134,418 fully paid ordinary shares in Bristile immediately prior to the transfer of those shares from Vockbay to Walshville on 2 September 1997. Mr Hall uses the capitalised earnings valuation methodology to arrive at a value of the shares of between $193 million and $207 million being the gross value of the building materials business minus lease liabilities and intercompany borrowings totalling $29,700,000. 43 In a second report dated 3 July 2009, Mr Hall addresses whether goodwill arose on the acquisition by Walshville of the shares in Bristile and, if so, what was the goodwill which arose on the assumptions that, as at 2 September 1997, the market value of the assets of Bristile was $210 million, that Vockbay transferred its shares in Bristile to Walshville for market value and the market value of the Bristile shares was $180,263,088. Mr Hall expresses the opinion that goodwill in the amount of $28.9 million would have arisen as a result of the acquisition by Walshville of the Bristile shares. Mr Hall expresses the opinion that the goodwill would have been recognised in the balance sheet of Walshville and it would have been amortised on a straight line basis over twenty years at a rate of $1.5 million per annum. Finally, Mr Hall expresses an opinion on whether it is probable that the float of Walshville would have proceeded and achieved the same sale price for the shares as was in fact achieved. Mr Hall expresses the opinion that the recognition and amortisation of the goodwill would not have had any significant adverse impact on the initial public offering of shares in Walshville. He expresses the opinion that the initial public offering of shares in Walshville would have proceeded in the same manner, and at the same issue price, as it did in the absence of the recognition of this goodwill. Mr Hall's opinion on goodwill is relevant to the likelihood of what I refer to below as Futuris Counterfactual 2 (see the discussion in [123]). 44 Mr Johan Simon Duivenvoorde is a chartered accountant. He is a partner in the firm, Deloitte Touche Tohmatsu, and he specialises in corporate finance. Mr Duivenvoorde has substantial experience in capital raising, business valuation for acquisition and takeover purposes, and large due diligence projects. Mr Duivenvoorde was asked by the applicant to provide an opinion on what might reasonably be expected to have occurred in selling the Building Products Division of the applicant if the scheme, or the alternative scheme (as identified by the respondent), "had not been entered into or carried out". 45 Mr Duivenvoorde identifies those matters which would be taken into account in any decision-making process involving the selection of the appropriate structure for the listing of the Building Products Division on a public stock exchange. Those matters are the costs of implementation, the attractiveness of the financial structure of the listed company for the purpose of marketing pursuant to a public float (including book value of equity and assets and book value debt/equity ratios), the impact on forecast profitability of the listed company, taxation consequences to the vendor and listed company and any consequences in terms of existing significant contracts. 46 Mr Duivenvoorde states that the options or broad alternatives, assuming the sale of the applicant's Building Products Division by a public float, were the transfer of the Bristile entities to the Prestige entities or the transfer of the Prestige entities to the Bristile entities. The third possibility, namely, the transfer of the Bristile entities and the Prestige entities to a new entity was, he considered, unlikely because of the stamp duty which would have been payable. 47 Mr Duivenvoorde expresses the opinion that if the scheme or the alternative scheme had not been carried out, the most likely course of action by the applicant was the disposal of the Prestige entities by Walshville to Bristile for the sum of $40 million and then a public float of Bristile. 48 The applicant outlined the steps involved in Mr Duivenvoorde's most likely course of action as follows: Step 1:The applicant transfers its shares in Bristile (37 per cent) to Vockbay at cost with the parties electing to take advantage of the roll-over relief provisions. Step 2:Walshville transfers the Prestige entities to Bristile for $40 million. Walshville realises a capital gain of $19.9 million. Walshville loans $40 million to Bristile and that amount is later repaid by external debt. Step 3:To achieve a debt/equity ratio of $100 million/$150 million Bristile would sell assets to a new company and pay a dividend of $30.3 million to Vockbay, paid in cash from the proceeds of external bank debt. Step 4:Bristile sells shares in the float (then buys back Vockbay shares). Vockbay realises a capital gain on the buyback of $74.8 million being $150 million - $68.2 million (Vockbay's cost base) - $7 million (cost of disposal). 49 The applicant's case is that Mr Duivenvoorde's most likely course of action would result in capital gains to the applicant group of $95.7 million, being $19.9 million in Walshville and $74.8 million in Vockbay. 50 As to the third step outlined in [48] above, Mr Duivenvoorde addresses the debt to equity ratio in the Bristile group and his evidence is that for good commercial reasons Bristile would sell its assets to a newly created entity in order to support the payment of a dividend to Vockbay and the increase in accumulated losses in the Bristile group by $30.3 million. Mr Duivenvoorde was not challenged on this aspect of his evidence. 51 Mr Duivenvoorde considers a structure for the disposal of the Building Products Division which involves a public float of Walshville but without the scheme or the alternative scheme. He considers this alternative less likely than his first alternative for two reasons. First, a public float of Walshville would mean that the Bristile entities would have to be transferred to the Prestige entities. That would be more expensive in terms of transaction taxes, such as stamp duty, than a transfer of the Prestige entities to the Bristile entities. Secondly, there was potential, if the Bristile entities were transferred to the Prestige entities at market value, for higher goodwill or uplift to the fair value of non-monetary tangible assets within the consolidated financial statements of Walshville with a consequent reduction in profitability. Mr Duivenvoorde states that this reduction may have reduced the value of the equity due to lower earnings before interest and tax for the listed company. 52 Mr Duivenvoorde's alternative involves the shares in Bristile being transferred from Vockbay to Walshville for their market value of $180.3 million. He expresses the view that the applicant would have funded Walshville with share capital of $133 million and loans of $47.3 million to enable it to make the purchase. 53 The applicant outlined the steps involved in Mr Duivenvoorde's alternative course of action as follows: Step 1:The applicant transfers its shares in Bristile (37 per cent) to Vockbay at cost with the parties taking advantage of the roll-over relief provisions. Step 2:Vockbay sells its shares in Bristile to Walshville for $182 million and thereby realises a capital gain of $142.3 million. Step 3:The applicant subscribes capital of $133 million for shares in Walshville. Step 4:The applicant sells the shares it holds in Walshville for $150 million and thereby realises a capital gain of $10 million. 54 The applicant's case is that Mr Duivenvoorde's alternative course of action would result in capital gains to the applicant group of $152.3 million, being $142.3 million in Vockbay and about $10 million in the applicant. 55 A number of matters emerged from the respondent's short cross-examination of Mr Duivenvoorde. First, Mr Duivenvoorde said that he was asked to consider the matter on the basis that the applicant had decided to dispose of its Building Products Division and he was asked to consider how the applicant might go about implementing that decision. Secondly, Mr Duivenvoorde agreed that the level of return to the applicant group and the profitability of the structure chosen would be an important factor. Thirdly, he agreed that in considering the two alternatives he had not had any regard to the return to the applicant. He agreed that, in considering the return to the applicant, the tax consequences would be an important consideration and those tax consequences would include other members of the applicant group as well as the applicant. He agreed that in referring to the two alternatives he had not discussed the tax consequences of the structures to Vockbay or other members of the applicant group. 56 The applicant submits that I should find that the respondent sought the advice of experts in respect of the opinions expressed by Mr Duivenvoorde in his report. It points to the fact that the respondent did not call an expert to contradict the opinions expressed by Mr Duivenvoorde. The applicant submits that I can infer that the experts engaged by the respondent would not have assisted his case and that the respondent's failure to call an expert means that I can more readily accept Mr Duivenvoorde's evidence. The applicant referred to Jones v Dunkel (1959) 101 CLR 298 and Brandi v Mingot (1976) 12 ALR 551. 57 I find that the respondent did engage experts to consider the opinions expressed by Mr Duivenvoorde. That fact is established by the letter from the respondent's solicitor to the applicant's solicitors dated 9 October 2009. The respondent did not call an expert who contradicted Mr Duivenvoorde's evidence. There is no evidence of the identity of the experts engaged by the respondent or of the work that was performed by those experts. 58 I accept Mr Duivenvoorde's evidence subject to the qualifications to which he agreed in cross-examination (see [55] above). In view of that conclusion, there is no need for me to consider whether the process of reasoning outlined in Jones v Dunkel should be, or could be, used in a case where the experts engaged by the respondent are not identified and the extent of their work is unknown. I would only make the observation that medical evidence from doctors who had either treated or seen the plaintiff may be in a different category from the evidence said not to have been called in this case (see Brandi v Mingot (1976) 12 ALR 551). 59 The respondent tendered a number of documents and an affidavit as part of his case. First, he tendered a bundle of ten documents which were created at various times in 1997. Secondly, he tendered an affidavit of Mr Brendan Patrick Halligan affirmed on 21 May 2009. Mr Halligan was not required for cross-examination. Thirdly, he tendered the applicant's income tax return for the year ended 30 June 1998 and the schedules which accompanied that return. 60 Mr Halligan is a chartered accountant and the principal of the firm Halligan and Co. Mr Halligan has substantial experience in the valuation of assets and in providing forensic accounting services. Mr Halligan prepared two reports, both dated 21 May 2009. He was not cross-examined and his opinions were not challenged. I accept his evidence. 61 In his first report, Mr Halligan addresses the question of whether the prior sale of net assets from Bristile to Bristile Operations and the declaring of a dividend by Bristile affected the value of the shares in Bristile prior to their transfer to Walshville. 62 I start with the prior sale of net assets from Bristile to Bristile Operations. Mr Halligan expresses the opinion that there was an economic entity consisting of at least Bristile as the parent entity and Bristile Operations as a subsidiary. In his opinion, the market value of the issued share capital of Bristile should be determined having regard to the consolidated financial performance and position of the economic entity of which Bristile was the parent entity. In Mr Halligan's opinion, the sale of the net assets from Bristile to Bristile Operations had no effect on the market value of the equity in Bristile. From the perspective of the economic entity, the sale did not result in the disposition of any net assets or the receipt of any consideration; the sale was internal not external. Furthermore, the sale of the net assets from Bristile to Bristile Operations had no effect on the market value of the equity in Bristile even from the perspective of the parent entity. That conclusion follows from the fact that the market value of the parent entity included the market value of its investment in its subsidiary, Bristile Operations, and the market value of that investment was equal to the market value of the net assets of Bristile Operations. Any change to the market value of the net assets of Bristile Operations because of Bristile Operations' purchase of the net assets of Bristile would have resulted in a corresponding change in the market value of Bristile's investment in Bristile Operations. 63 I turn now to the declaring of the dividend by Bristile. On 2 September 1997, Bristile declared a dividend of $146 million to Vockbay. On the same day, the payment of this dividend was satisfied by Bristile issuing shares to Vockbay. Mr Halligan expresses the opinion that the net effect of the declaration of the dividend and the payment of the dividend was that there was no change to the market value of the equity in Bristile. 64 In his second report, Mr Halligan addresses the question of whether Accounting Standard AASB 1013 "Accounting for Goodwill", or any other relevant accounting standard, would have required Walshville to recognise goodwill arising as an amortised asset in its accounts if the consideration for its purchase of the shares in Bristile had been greater than the book value of the net assets. Mr Halligan expresses the opinion that the relevant accounting standards are AASB 1013 "Accounting for Goodwill", AASB 1015 "Accounting for the Acquisition of Assets" and AASB 1024 "Consolidated Accounts". 65 Mr Halligan expresses the opinion that if the cost of acquisition incurred by Walshville in acquiring all of the issued share capital of Bristile had exceeded the fair value of the net identifiable assets acquired, then Walshville would have been obliged by the relevant accounting standards to recognise the purchased goodwill as a non-current asset in the consolidated balance sheet of the economic entity of which it was the parent entity for the financial year ended 30 June 1998. The amount of the purchased goodwill that Walshville would have been obliged to recognise by the relevant accounting standards was the amount of the excess of the cost of acquisition over the fair value of the identifiable net assets acquired. 66 Mr Halligan expresses the opinion that if there was purchased goodwill then Walshville would have been obliged by the relevant accounting standards to amortise that goodwill over time by recording a periodic amortisation expense in the consolidated profit and loss statement of the economic entity of which it was the parent entity. Walshville would have been prohibited from recognising that goodwill as a non-current asset in its own balance sheet. Walshville would have been prohibited from amortising the goodwill over time by recording a periodic amortisation expense in its own profit and loss statement.

A Summary of the Applicant's Submissions 67 The applicant made the following submissions: 1. The clear scheme of the Act is that the cost base of the Walshville shares was to be determined in accordance with the specific anti-avoidance provisions of Division 19A of Part IIIA of the Act. 2. The scheme and the alternative scheme were not schemes within the meaning of Part IVA of the Act because neither was capable of giving rise to a tax benefit. 3. There was no tax benefit within the meaning of Part IVA because any benefit did not arise in connection with the scheme or the alternative scheme. 4. There was no tax benefit in connection with a scheme within Part IVA because it could not be predicated that any amount might reasonably be expected to have been included in the assessable income of the applicant if the scheme or the alternative scheme had not been carried out. 5. If a tax benefit was obtained by the applicant in connection with the scheme, or the alternative scheme, the amount of the tax benefit was no more than $19,950,090 because the scheme resulted in the inclusion of $63 million in assessable income. 6. If a tax benefit was obtained by the applicant in connection with the scheme, it could not be concluded that any person entered into or carried out the scheme for the dominant purpose of obtaining that tax benefit. 68 I will deal with each of these submissions in turn.

The Operation of PART iiiA Division 19A and Part IVA of the act 69 The applicant submits that Division 19A was introduced into Part IIIA of the Act as a specific anti-avoidance provision. It submits that when regard is had to the evident legislative purpose behind Division 19A and the effect of applying Part IVA to only one aspect of the operation of Division 19A, it is clear that the Legislature could not have intended that Part IVA operate to negate or partially negate the operation of Division 19A. As I understand it the applicant's argument is that an increase in the cost base or indexed cost base by the operation of Division 19A and, in particular, s 160ZZRH, could not be a tax benefit within s 177C(1) and s 177D(a) of Part IVA or, in the alternative, any scheme which brought Division 19A into operation could not be entered into or carried out for the dominant purpose of obtaining a tax benefit within s 177D(b) of Part IVA. 70 In ascertaining the legislative intent in enacting Division 19A (Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation (1981) 147 CLR 297), I may have regard to material such as the relevant Explanatory Memorandum and Second Reading Speech for the purpose of determining the context and the mischief which the legislation was designed to address: CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 at 408 per Brennan CJ, Dawson, Toohey and Gummow JJ (see also Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355). 71 The Explanatory Memorandum to the Taxation Laws Amendment Bill (No 6) 1990 (Cth) contained an example of the type of transaction with which Division 19A was designed to deal. It was as follows: company A owns two subsidiaries, company X and company Y. Company A has subscribed $1,000 share capital to each of the subsidiaries which in turn have each acquired an asset at a cost of $1,000. Company X transfers its asset worth $1,000 to company Y for no consideration. Company X would not realise a capital loss because, by reason of s 160ZD(2) of Part IIIA, company X would be deemed to have received as consideration in respect of the disposal, "an amount equal to the market value of the asset at the time of the disposal". 72 The problem identified in the Explanatory Memorandum arises at the next level of ownership, that is to say, company A's ownership of the shares it holds in company X and in company Y. As a result of the transaction between company X and company Y, the shares which company A holds in company X are worthless. However, company A has a cost base for those shares of $1,000. It can trigger a capital loss on the disposal of the shares, for example, by liquidation or the sale of the company X shell. Although there is an increased accrued gain on the shares in company Y, which are now worth $2,000 with a cost base of $1,000, what the Explanatory Memorandum calls "a significant avoidance opportunity" is available "because of the capacity to obtain a tax benefit for the 'loss' on disposal of the company X shares, notwithstanding that ownership by the group of underlying assets has not changed". 73 The amendments effected by Division 19A are described in the Explanatory Memorandum as "anti-avoidance amendments" and "a new, general, anti-avoidance provision in Part IIIA" and what they do, putting the matter generally for present purposes, is to reduce the cost base of shares and loans in one wholly owned subsidiary and increase it in another wholly owned subsidiary. 74 The Explanatory Memorandum also contains the following statements: "Clause 61 will insert new Division 19A in Part IIIA of the Act. The Division is intended to prevent artificial timing advantages from arising where assets are transferred between companies sharing common ownership. In circumstances, if an asset acquired after 19 September 1985 is transferred for actual consideration less than its indexed cost base (or, if less, its market value), tax advantages can be obtained by the owner of shares in (or, in some cases, loans to) the transferor, as a result of the reduction in value of those shares (or loans) following the transfer of the asset.

To ensure that no such tax advantages arise, the Bill proposes that the cost bases of such shares (or loans) may be reduced having regard to the difference between any actual consideration paid or given in respect of the asset's transfer and its indexed cost base or reduced cost base (or, if less, the market value of the asset). However, consistent with the intention of the amendments to ensure that the consequences of such asset transfers are tax-neutral, it will be necessary in certain circumstances to make off-setting increases to the cost bases of shares in the transferee. These increases would normally be necessary only where assets are transferred from one subsidiary of a holding company to another. In other cases (e.g. on the transfer of an asset from a subsidiary to a holding company), part of the overall value of the transferee will already reflect the value of the transferred asset, because of the transferor's subsidiary status. Also, the amount of any cost base increases for shares in the transferee will generally be limited to the amount by which the cost bases of shares (or loans) held directly in the transferor have been reduced. By subclause 79(11), new Division 19A will apply to transfers of assets on or after 7 December 1990." 75 In the Second Reading Speech in the House of Representatives on the Bill for the Taxation Laws Amendment Act 1991 (Cth), the Minister said: "The Bill also proposes a number of technical measures to ensure that no artificial timing advantages are obtained by shareholders in a company as a result of the transfer of an asset to another group company for reduced consideration. At present, such asset transfers between 100 per cent commonly owned company groups can result in the early realisation of capital losses or reduced capital gains on the disposal of shares in the transferor company. Advantages can also arise in some cases in respect of loans made to the transferor company.

The Government believes that no taxpayer should obtain tax advantages by reason of an internal reorganisation of a company group's affairs, as a result of which assets are transferred within the group. To prevent this, the Bill proposes a series of cost base adjustments to shares or loans held, directly and indirectly, in the respective companies, that is, the transferor and transferee of the asset. The adjustments are intended to reflect changes in the value of shares or loans held within the group following the transfer of assets from one group company to another.

These provisions will apply only where actual consideration paid for the transfer of an asset is less than its indexed cost base or, if less, its market value. In other words, companies will be able to avoid the need to make any cost base adjustments by ensuring that consideration equal to the indexed cost base of an asset is paid for its transfer." 76 The respondent accepts that the market value of the Bristile shares at the time of their transfer from Vockbay to Walshville was $180,263,088. The consideration paid by Walshville to Vockbay was $97.313 million. As I have said, Division 19A had the effect of increasing the applicant's cost base and ICB of the Walshville shares by $82,950,088 and reducing the applicant's cost base and ICB of the Vockbay shares from $63,000,002 to $0 and the applicant's cost base and ICB of its loan to Vockbay by $19,950,086. 77 There is no express provision in Division 19A to the effect that the Division qualifies the operation of Part IVA of the Act. It is true, as the applicant submits, that Division 19A was introduced as a specific anti-avoidance provision. It is also true that Division 19A operated to "shift" the cost base of an investment held in one wholly owned subsidiary to the investment in another wholly owned subsidiary; it was not intended to operate so as to eliminate the cost base. The applicant submits that the effect of applying Part IVA to the applicant's cost base in the Walshville shares will be to eliminate the cost base because Division 19A has already operated to reduce the applicant's cost base in respect of its shares in and loans to Vockbay. It submits that the application of Part IVA of the Act in the present circumstances will give Division 19A a "lop-sided" operation and therefore an operation which could never have been intended by the Legislature. The applicant's submission is that if it was the Legislature's intention that Part IVA could operate to negate one side of the operation of Division 19A then one would have expected that the operation of the Division would be subject to the making of an election or choice by the taxpayer or the vesting in the respondent of a specific discretion to set it aside. Another way of putting the applicant's submission is that if it was intended that Part IVA operate in relation to transactions which engaged Division 19A, then one would have expected to see it operate on both sides, that is, the reduction in the cost base and ICB, as well as the increase in the cost base and ICB. 78 The applicant submits that to give effect to the legislative scheme it should be concluded that it did not obtain a "tax benefit" in circumstances where the specific anti-avoidance provisions of Division 19A operated in the manner in which the legislative scheme intended that they should operate. Alternatively, it should not be concluded that the applicant, which was subject to the operation of that specific anti-avoidance provision, entered into or carried out a scheme with the dominant purpose of obtaining a tax benefit. 79 I reject the applicant's submission. 80 Section 177C(1) of Part IVA deals with the obtaining of a tax benefit in connection with a scheme and it relevantly provides: "(1) Subject to this section, a reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to - (a) an amount not being included in the assessable income of the taxpayer of a year of income where that amount would have been included, or might reasonably be expected to be included, in the assessable income of the taxpayer of that year of income if the scheme had not been entered into or carried out; … and, for the purposes of this Part, the amount of the tax benefit shall be taken to be - (c) in a case to which paragraph (a) applies - the amount referred to in that paragraph; …" 81 I am unable to see how this description can be read down so as to exclude from its operation an amount which was, or was part of, a "transfer" of the cost base of an investment pursuant to Division 19A. It is even harder to see how that could be the case where the scheme, or the alternative scheme, did not include the disposition (in this case the sale by the applicant of its shares in Walshville) which operated to increase the applicant's cost base in respect of its investment in Walshville. In fact, the scheme (as distinct from the alternative scheme) did not even include the transfer of the Bristile shares from Vockbay to Walshville. The scheme consisted of the transactions which had the effect of increasing the aggregate cost base of the shares in Bristile held by Vockbay, and the shares in Vockbay held by the applicant. Section 177C(1)(a) does not call for a consideration of the provision or provisions of the Act which operated to produce the alleged tax benefit. 82 There are other provisions in Part IV of the Act which support the rejection of the applicant's submission. 83 First, there is s 177B(1) which provides: "(1) Subject to subsection (2), nothing in the provisions of this Act other than this Part or in the International Tax Agreements Act 1953 or in the Petroleum (Australia-Indonesia Zone of Cooperation) Act 1990 shall be taken to limit the operation of this Part." That is a clear statement of legislative intent. 84 Secondly, there is s 177F(3), (5), (6) and (7) which empowers the respondent, having made a determination under s 177F(1) or (2A), to make adjustments in an appropriate case. Those subsections relevantly provide as follows: "(3) Where the Commissioner has made a determination under subsection (1) or (2A) in respect of a taxpayer in relation to a scheme to which this Part applies, the Commissioner may, in relation to any taxpayer (in this subsection referred to as the 'relevant taxpayer') - (a) if, in the opinion of the Commissioner - (i) there has been included, or would but for this subsection be included, in the assessable income of the relevant taxpayer of a year of income an amount that would not have been included or would not be included, as the case may be, in the assessable income of the relevant taxpayer of that year of income if the scheme had not been entered into or carried out; and (ii) it is fair and reasonable that that amount or a part of that amount should not be included in the assessable income of the relevant taxpayer of that year of income, determine that that amount or that part of that amount, as the case may be, should not have been included or shall not be included, as the case may be, in the assessable income of the relevant taxpayer of that year of income; or … and the Commissioner shall take such action as he considers necessary to give effect to any such determination. … (5) Where, at any time, a taxpayer considers that the Commissioner ought to make a determination under subsection (3) in relation to the taxpayer in relation to a year of income, the taxpayer may post to or lodge with the Commissioner a request in writing for the making by the Commissioner of a determination under that subsection. (6) The Commissioner shall consider the request and serve on the taxpayer, by post or otherwise, a written notice of his decision on the request. (7) If the taxpayer is dissatisfied with the Commissioner's decision on the request, the taxpayer may object against it in the manner set out in Part IVC of the Taxation Administration Act 1953." 85 The existence of the power in Part IVA of the Act to alleviate what are considered unfair and unreasonable consequences of applying Part IVA suggests that the Part is to be given a wide operation. The respondent correctly submitted that if the applicant was to sell the shares in Vockbay realising a capital gain because of the operation of s 160ZZRE, the respondent would have the power under s 177F(3) to make such a determination as would avoid what the applicant said was "double tax". There is power to ask the respondent to make a determination under s 177F(3) and to object to his decision (s 177F(5)-(7)). 86 For similar reasons, I also reject the applicant's submission that s 177D(b), which deals with the purpose of obtaining a tax benefit, should be read down where the alleged tax benefit arises by reason of the operation of Division 19A. That conclusion is not to say, however, that the circumstances in which the tax benefit was obtained may not be relevant to the exercise to be performed under s 177D(b) by reason of the eight factors (or any one of them) referred to therein.

A Tax Benefit in connection with a Scheme to which Part IVA applies 87 The applicant put three related submissions which include the second and third submissions summarised in [67] above. They are as follows: 1. A scheme to which Part IVA of the Act applies must include the transaction or event which gives rise to the alleged tax benefit and neither the scheme or the alternative scheme does that because neither includes the sale by the applicant of the Walshville shares. 2. The respondent is obliged to identify the alternative postulate or counterfactual which it submits is appropriate and the respondent has failed to do that in this case. 3. There was no tax benefit within s 177C(1)(a) because the benefit was not obtained in connection with the scheme or the alternative scheme. 88 The word "scheme" is defined in s 177A(1) and (3) of Part IVA. Those subsections provide as follows: "(1) In this Part, unless the contrary intention appears:

'scheme' means: (a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable or intended to be enforceable, by legal proceedings; and (b) any scheme, plan, proposal, action, course of action or course of conduct; …

(3) The reference in the definition of 'scheme' in subsection (1) to a scheme, plan, proposal, action, course of action or course of conduct shall be read as including a reference to a unilateral scheme, plan, proposal, action, course of action or course of conduct, as the case may be." 89 Section 177A(4) provides as follows: "A reference in this Part to the carrying out of a scheme by a person shall be read as including a reference to the carrying out of a scheme by a person together with another person or other persons." 90 I have already set out the relevant part of s 177C(1) (at [80]). 91 Section 177D is in the following terms: "This Part applies to any scheme that has been or is entered into after 27 May 1981 and to any scheme that has been or is carried out or commenced to be carried outafter that date (other than a scheme that was entered into on or before that date), whether the scheme has been or is entered into or carried out in Australia or outside Australia or partly in Australia and partly outside Australia, where -

(a) a taxpayer (in this section referred to as the 'relevant taxpayer') has obtained, or would but for section 177F obtain, a tax benefit in connection with the scheme; and (b) having regard to - (i) the manner in which the scheme was entered into or carried out; (ii) the form and substance of the scheme; (iii) the time at which the scheme was entered into and the length of the period during which the scheme was carried out; (iv) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme; (v) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme; (vi) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme; (vii) any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out; and (viii) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi), it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme or of enabling the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer or is the other taxpayer or one of the other taxpayers)." 92 The description of tax benefit in s 177C(1)(a) requires consideration of the state of affairs "if the scheme had not been entered into or carried out". 93 The applicant contends that the tax benefit identified by the respondent namely, the sum of $82,950,090, is said to be an amount not included in the assessable income of the applicant for the year of income ended 30 June 1998. However, the applicant submits that, on any view, that amount would only be included where there had been a sale of the Walshville shares by the applicant. That was an essential transaction in terms of the respondent's allegation that the applicant obtained a tax benefit. Neither the scheme or alternative scheme include the sale by the applicant of the Walshville shares. The scheme, as distinct from the alternative scheme, does not even include the transaction which triggered the transfer of the cost base or ICB in relation to the applicant's investment in Vockbay to its investment in Walshville, namely, the sale of the Bristile shares from Vockbay to Walshville. 94 The applicant referred to Federal Commissioner of Taxation v Hart (2004) 217 CLR 216 ("Hart"). That case concerned an alleged tax benefit within s 177C(1)(b), namely, a deduction. Gleeson CJ and McHugh J made the following observations about the significance of the definition of the scheme. Their Honours said (at 223 [5]): "As Hill J correctly pointed out, the definition of the scheme is important, because any tax benefit identified must be related to the scheme, as must any conclusion of dominant purpose, and also the ultimate determination. The significance of the definition of the scheme extends beyond a question of procedural fairness to the taxpayer. It is central to the application of ss 177C, 177D and 177F." A little later, their Honours said (at 225 [9]): "The point of departure between the reasoning of Gyles J and that of the Full Court concerned the application of s 177D to the facts of the case. In that respect, the Full Court accepted an argument that Gyles J appeared to have found that the scheme was to be defined in a way that omitted the actual borrowing. The members of the Full Court were correct to insist that it is inappropriate to exclude the fact of borrowing from the putative scheme. The tax benefit in question was the obtaining of part of a deduction of interest on borrowed money. A taxpayer is not allowed such a deduction for agreeing to a term in a contract of loan, or giving a direction about allocation of payments, or taking some other step in the exercise of rights conferred under the contract. The definition of 'scheme' in s 177A is wide, but it must be related to the tax benefit obtained. The deduction here was for the incurring of a liability to pay interest on borrowed money. The tax benefit in connection with the relevant scheme was part of an allowable deduction for interest. This, it seems to us, is what was meant by references in the judgments in the Full Court to the scheme being capable of standing on its own feet. The judges were making the point, which is undoubtedly correct, that, where the tax benefit in question is part of an allowable deduction for interest, a search for the purpose of a scheme, identified in a manner that does not include the borrowing, is not an undertaking that conforms with the requirements of the legislation. In a given case, a wider or narrower approach may be taken to the identification of a scheme, but it cannot be an approach which divorces the scheme from the tax benefit. Here, the borrowing was an indispensable part of that which produced the tax benefit. A description of the scheme that did not include the borrowing would make no sense." 95 It is correct to say that the alleged tax benefit only arose upon the sale by the applicant of its shares in Walshville in the sense that it was this act which, on the respondent's case, would, but for the scheme, have given rise to a capital gain of $82,950,090. However, I do not think that that means the sale of the Walshville shares by the applicant must be included in the scheme identified for the purposes of Part IVA. The phrase "in connection with" is a phrase of wide import: Minister for Immigration and Multicultural Affairs v Singh (2000) 98 FCR 469 at 477; Burswood Management Limited v Attorney-General (Cth) (1990) 23 FCR 144 at 146. No doubt the precise breadth of the phrase is to be determined by having regard to the statutory context in which it appears. Having regard to the terms of s 177C(1)(a) and s 177D I see no reason not to give the phrase a broad operation, and I think the respondent is right in his submission that if the alleged tax benefit would not have arisen but for the scheme then that is a sufficient connection between the scheme and the alleged tax benefit for the purposes of s 177C(1)(a). 96 The applicant complained about the respondent's failure to identify an alternative postulate or counterfactual for the purposes of determining whether there was a tax benefit within the terms of s 177C(1)(a). 97 The respondent, in his Response to the applicant's Statement of Grounds, identified the tax benefit as the sum of $82,950,090 and gave the following particulars in support of his assertion that that amount would have been included, or might reasonably be expected to have been included, in the assessable income of the applicant in the 1998 year: "(a) Futuris (before entering into or carrying out the scheme) had decided to dispose of the building products division of the Futuris group of companies through directly or indirectly wholly owned subsidiaries; in particular Bristile, Bristile Operations, Vockbay and Walshville; (b) The disposal of the building products division produced a capital gain for the purposes of the ITAA 1936. (c) Futuris increased the indexed cost base of its shareholding in Walshville under section 160 ZZRH in Division 19A by entering into or carrying out the scheme and thereby reduced the capital gain upon the disposal." 98 The applicant applied for particulars of the events and transactions the respondent alleged would have occurred had the scheme identified by him not been entered into and the essential terms on which it was alleged that those events and transactions would have been implemented. That application was refused by a judge of this Court: Futuris Corporation Limited (ACN 004 336 636) v Commissioner of Taxation [2009] FCA 600. In the course of his reasons, Mansfield J said ([34]-[35]): "It would be nonsensical for the Commissioner to "suggest" a possible series of transactions that the applicant might have undertaken which might have led to the relevant amount being included in the assessable income, because such suggestion could only be a matter of conjecture and, if disproved, would leave the Court no better informed and having come no further to answer the question of whether Part IVA of the ITAA 1936 applies. It is for the applicant, who bears the onus, to establish the series of transactions or arrangements which, it contends, would have or might reasonably be expected to have been entered into or carried out and which would have or might reasonably be expected to have resulted in the relevant amount being obtained as a tax benefit regardless of the scheme. In addition, as was acknowledged in the course of submissions, it is not enough for the applicant to disprove any alternative postulate put up by the respondent (assuming the scheme is shown to exist as asserted by the respondent). If it is to succeed on its application, it must also adduce evidence which satisfies the Court that it had an alternative postulate which it would have been able to implement and which would have resulted in the same taxable position as if the scheme which (arguendo) has been set aside had remained in place, or which would have resulted in some other taxable position." 99 The applicant's third submission under this heading (see [87] above) is in effect the first submission put in another way. The first submission is that there was no "scheme" in connection with which a tax benefit was obtained for the purposes of s 177C(1)(a) and s 177D(a) and the third submission is that there was no "tax benefit" in connection with a scheme for the purposes of s 177C(1)(a) and s 177D(a). It must be rejected for the same reasons I have rejected the first submission.

Section 177C(1)(a) and the Alternative Postulate or counterfactual 100 The respondent's case is that had the transfer of assets from Bristile to Bristile Operations, the declaration of dividends and, in particular, Vockbay's declaration of dividends in favour of the applicant and the subsequent capitalisation of the debt created by the declaration of dividends not taken place, the "transfer" of the cost base of the applicant's investment in Vockbay to the applicant's investment in Walshville would not have taken place. In those circumstances, the capital gain made by the applicant upon the sale of its shares in Walshville would have been $92,739,342 (that is, the consideration received of $150,000,000 minus a cost base of $50,207,000 and costs of disposal of $7,053,658). 101 In Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359 ("Peabody"), the High Court considered whether the respondent had obtained a tax benefit under s 177C(1)(a) in connection with a scheme identified by the appellant. The Court made the following observations about the concept of a reasonable expectation within s 177C(1)(a) (at 385 and 386): "The Commissioner contended that the purchaser might reasonably be expected to have been TEP Holdings had there been no devaluation of the Kleinschmidt shares. A reasonable expectation requires more than a possibility. It involves a prediction as to events which would have taken place if the relevant scheme had not been entered into or carried out and the prediction must be sufficiently reliable for it to be regarded as reasonable. …

But the method adopted by Loftway, apart from the devaluation of the Kleinschmidt shares, was found below to be entirely explicable upon a commercial basis and it could not be said of any of the examples advanced that, even if commercially possible, they would have been adopted in the absence of the devaluation as a matter of reasonable expectation." 102 In Hart, Gummow and Hayne JJ referred to the need to make a comparison between the scheme in question and an alternative postulate. Their Honours said (at 243 [66]): "In the present matters, the respondents would obtain a tax benefit if, in the terms of s 177C(1)(b), had the scheme not been entered into or carried out, the deductions 'might reasonably be expected not to have been allowable'. When that is read with s 177D(b) it becomes apparent that the inquiry directed by Pt IVA requires comparison between the scheme in question and an alternative postulate. To draw a conclusion about purpose from the eight matters identified in s 177D(b) will require consideration of what other possibilities existed." 103 In Federal Commissioner of Taxation v Spotless Services (1996) 186 CLR 404 ("Spotless") the High Court considered the proper construction of s 177C(1)(a). The Court said (at 423-424): "The taxpayers submit that the Full Court erred in holding that, if the scheme had not been entered into or carried out, an amount of income from the use of the sum on deposit would have been, or could reasonably be expected to have been, included in the assessable incomes of the taxpayers for the year of income. They submit that there is no possible way of knowing whether the amount actually derived from the investment, or any other particular amount, would have been included in the assessable income of the taxpayers had they chosen not to make the investment that they did. It is said that, if the taxpayers had not entered into the scheme, there would have been no interest and no amount would have been included in assessable income with the result that the definition of 'tax benefit' set out above makes no sense in the context of the present case.

The submission turns upon the use in par (a) of s 177C(1) of the expression 'an amount not being included'. This applies where, but for the scheme, 'that amount' would have been included in the assessable income or might reasonably have been expected to be so included. The submission is that the reference in this case is to the amount of interest actually received from EPBCL after the imposition of withholding tax. It is said that without the scheme there would have been no investment in EPBCL, that amount would not have existed, and par (a) of s 177C(1) would have had no subject matter upon which to operate.

In our view, the amount to which par (a) refers as not being included in the assessable income of the taxpayer is identified more generally than the taxpayers would have it. The paragraph speaks of the amount produced from a particular source or activity. In the present case, this was the investment of $40 million and its employment to generate a return to the taxpayers. It is sufficient that at least the amount in question might reasonably have been included in the assessable income had the scheme not been entered into or carried out." 104 In Federal Commissioner of Taxation v Lenzo (2008) 167 FCR 255 ("Lenzo"), the Full Court of this Court considered whether the respondent had obtained a tax benefit by way of a deduction (s 177C(1)(b)) in connection with a scheme and whether the dominant purpose of the scheme was to obtain a tax benefit. Sackville J (with whom Siopis J agreed) made a number of points about the operation of s 177C(1)(b). First, his Honour said that for the purposes of s 177C(1) the Court must assume the scheme had not been entered into or carried out; it is not permissible to assume that only part of the scheme had not been entered into or carried out. Secondly, his Honour referred to the passage from Peabody which I have set out above. Thirdly, his Honour considered the meaning of "that deduction" in s 177C(1)(b) and, in the course of doing so, the meaning of "that amount" in s 177C(1)(a). His Honour said (at 278-279 [125]-[128]): "If the expression 'that deduction' has a wider meaning, it may be open to a taxpayer to satisfy the onus of showing the Commissioner's assessment is excessive by demonstrating that, had the scheme not been entered into or carried out, he or she would have or might reasonably be expected to have incurred a liability of the kind actually claimed as a deduction. For example, in WD & HO Wills (Australia) Pty Ltd v Federal Commissioner of Taxation (1996) 65 FCR 298, the taxpayer argued that had it not entered the scheme (involving payment of insurance premiums by it to a 'captive' insurer), the taxpayer would have paid an equivalent sum in premiums to another insurer. On that hypothesis, even without the scheme, the whole of the deduction claimed by the taxpayer would have been an allowable deduction. The argument failed on the facts, but was accepted in principle: WD & HO Wills (Aust) Pty Ltd v Federal Commissioner of Taxation 65 FCR at 329.

The better view is that s 177C(1)(b) should be given the wider interpretation. Otherwise, there would seem to be little point to the words 'or might reasonably be expected not to have been allowable' in the subparagraph. In the absence of the scheme, at least if it is defined to include the incurring of a deductible liability, the identical deduction would never be allowable. The wider view seems to be implicit in the approach taken in FCT v Peabody 181 CLR 359 ([124] above), since in that case the High Court considered events that would have taken place if the relevant scheme had not been entered into. There would have been no point in undertaking the inquiry if, in the absence of the scheme, the deduction claimed by the taxpayer could not have been allowable. The wider view was also implicitly adopted in Federal Commissioner of Taxation v Consolidated Press Holdings Ltd (2001) 207 CLR 235 at 261-262, where the High Court analysed the likely course of events had the taxpayer not entered into the relevant scheme.

The wider view is also consistent with the construction of s 177C(1)(a), the companion subparagraph to s 177C(1)(b), adopted by the High Court in FCT v Spotless Services 186 CLR 404. The Court in that case rejected a contention that the phrase 'that amount', as used in s 177C(1)(a), referred only to the amount of interest actually received by the Australian taxpayer from the offshore borrower under the impugned scheme. The Court considered (at 424) that the subparagraph referred to the amount 'produced from a particular source or activity'. In FCT v Spotless Services 186 CLR 404 itself, the activity was the investment of $40 million (the sum invested by the taxpayer under the offshore scheme) and its employment to generate a return to the taxpayer.

By parity of reasoning, in determining whether the particular deduction claimed by the taxpayer would or might reasonably have been allowable, the Court must consider, in the absence of the scheme, what activity the taxpayer would have undertaken. The taxpayer can satisfy the onus of showing that he or she has not obtained a tax benefit in connection with a scheme if:

· he or she would have undertaken or might reasonably be expected to have undertaken a particular activity in lieu of the scheme; and · the activity would or might reasonably be expected to have resulted in an allowable deduction of the same kind as the deduction claimed by the taxpayer in consequence of the scheme." 105 The latter part of this passage was referred to with approval in the recent decision of the Full Court of this Court in Commissioner of Taxation v Trail Bros Steel & Plastics Pty Ltd [2010] FCAFC 94 at [28] per Dowsett and Gordon JJ. That was an alleged tax benefit under s 177C(1)(b), not paragraph (a). Nevertheless, the following observations (at [30], [35] and [36]) are relevant to the question I must consider: "A scheme is usually comprised of a number of 'steps' or 'integers'. It is conceivable that a scheme (comprising just some of the integers of a wider scheme to which Pt IVA applies) may be a scheme to which Pt IVA does not apply. If the narrower scheme is the particular activity or the events that would have or might reasonably be expected to have taken place in the absence of the scheme, then that is the alternative postulate. The difference between the deduction claimed in relation to the scheme and the allowable deduction from the narrower scheme is the tax benefit. Similarly, the alternative postulate may comprise some of the integers of the scheme to which Pt IVA applies and other integers which do not form part of that wider scheme. The express words of s 177C require a prediction about what would happen or might reasonably be expected to happen. It is necessarily a hypothetical analysis. But it is a hypothetical analysis directed at ascertaining what particular activity would have been (or might reasonably have been) undertaken if the scheme was not entered into. The "integers" that are relevant to that objective enquiry are not limited and "may not always permit the precise identification of … all the integers of a particular 'scheme'": Hart 217 CLR 216 at [43]. The integers will be different for each case and the onus is on the taxpayer to identify those integers which establish the alternative postulate.

It is the taxpayer who bears the onus to establish that there is no tax benefit in connection with a scheme: s 14ZZK (and s 14ZZO) of the Taxation Administration Act 1953 (Cth) (the TAA); McAndrew v Federal Commissioner of Taxation (1956) 98 CLR 263 at 268-9; Gauci v Commissioner of Taxation (1975) 135 CLR 81 at 89; McCormack v Commissioner of Taxation (1979) 143 CLR 284 at 303, 306 and 323; Commissioner of Taxation v Dalco (1990) 168 CLR 614 at 620, 623 - 625 and Lenzo 167 FCR 255 at [125].

How the taxpayer does that is a matter for it. It may, for example as Sackville J said in Lenzo 167 FCR 255, lead evidence that the taxpayer would have undertaken a particular activity, or adopted a particular course, in lieu of the scheme. It is also conceivable that a taxpayer may not lead positive evidence of an alternative postulate because, for example, the result of any objective enquiry of the alternative postulate is inevitable. In the end, the Court will decide what would have been done, or might reasonably be expected to have been done, in lieu of the scheme having regard to all of the evidence that is led. If a taxpayer has given evidence of what he or she would have done but for entering the scheme, that evidence will be relevant and useful to the extent to which it reveals facts or matters that bear upon the objective determination of the alternative postulate." 106 The applicant's contention in this case is that under the applicable alternative postulate or counterfactual the alleged tax benefit would not have been included in its assessable income as a matter of reasonable expectation. 107 Leaving to one side for the moment the fact that the applicant carries the burden of proving that the second amended assessment is excessive, in determining whether there is a tax benefit within s 177C(1)(a), it is necessary for the decision-maker: (1) to assume that the scheme had not been entered into or carried out; (2) to address his or her attention to an amount of $82,950,090 being an alleged capital gain arising from a sale of the applicant's Building Products Division; and (3) to determine whether the amount would have been included in the assessable income of the applicant as a matter of reasonable expectation. 108 As Peabody makes clear, s 177C(1)(a) requires a prediction as to the events which would have taken place if the relevant scheme had not been entered into or carried out. A reasonable expectation is more than a possibility and the prediction must be sufficiently reliable for it to be regarded as reasonable. It is not sufficient that alternatives which would see the amount included in assessable income are commercially possible; it must be concluded that they would be adopted as a matter of reasonable expectation. 109 Section 177C(1)(a) refers to an amount not being included in the assessable income of the taxpayer and it refers to the amount produced from a particular source or activity (see Spotless). In this case, the source or activity is the sale by the applicant and its subsidiaries of its Building Products Division by way of a public float of one of the companies in the group. 110 Adapting the words of Sackville J in Lenzo and now bringing to account that the taxpayer carries the burden of proving that the assessment is excessive, in order to show that no tax benefit was obtained in connection with the scheme or the alternative scheme identified by the respondent, the applicant must show that it would have undertaken or might reasonably be expected to have undertaken a particular activity in lieu of the scheme and that that activity would or might reasonably be expected to have resulted in a net capital gain of no more than $9,789,250 being included in its assessable income for the year ended 30 June 1998. 111 There is no direct evidence from the applicant as to what would have happened as a matter of reasonable expectation had the scheme not been entered into or carried out. There is evidence that in about November 1996 persons within the applicant were considering the disposal of the Building Products Division by a public float of Bristile, and that consideration had advanced to the point of the preparation of a draft prospectus.

The Three Counterfactuals 112 The evidence before me consists of three counterfactuals (or alternative postulates). Of course, as the respondent submits, it is possible that on the evidence I am not able to make a reliable prediction and, in those circumstances, the applicant's challenge to the respondent's conclusion that the applicant obtained a tax benefit must fail. 113 The counterfactual must not itself be a scheme with a dominant tax purpose: Commissioner of Taxation v Trail Bros Steel & Plastics Pty Ltd [2009] FCA 1210 at [52].

The Presumed Counterfactual 114 The first counterfactual consists of the transactions which in fact occurred but without the steps comprising the scheme identified by the Commissioner. This was referred to by the applicant as the Commissioner's Presumed Counterfactual. I will simply refer to it as the Presumed Counterfactual. 115 I am satisfied that had the scheme not been entered into or carried out the Presumed Counterfactual would not have happened as a matter of reasonable expectation. 116 The Presumed Counterfactual involves four steps. First, the applicant transfers its shares in Bristile to Vockbay at cost, that is to say, its 37 per cent shareholding, for $5,094,495.74 and the applicant and Vockbay elect that s 160ZZO (that is, roll-over relief) apply to the disposal. Secondly, Vockbay sells its shares in Bristile to Walshville for $97.3 million giving rise to a capital gain in Vockbay of $142.3 million (that is, market value of $180.2 million - cost base $37,881,000). Thirdly, the applicant subscribes $50,207,000 for capital in Walshville. Finally, the applicant sells all Walshville shares for the sum of $150 million. The sale of the Walshville shares would give rise to a capital gain in the applicant of $92.74 million (that is, $150 million - cost base of $50,207,000 - costs of disposal of $7,053,658). The total capital gains incurred by the applicant group as a result of these transactions would be $235 million, being $142.3 million in Vockbay and $92.74 million in the applicant. 117 The effect of the Presumed Counterfactual is that there would be two sales: an internal sale of the bulk of the Building Products Division and an external sale of the Division. The effect of the two sales would be a doubling up of capital gains in respect of essentially the same assets. A sale of the Building Products Division on that basis would not be a rational commercial decision. 118 The "enterprise value" of the Building Products Division was an amount of $250 million (carrying debt of $100 million, Walshville was sold in the float for $150 million). I do not think that it can be concluded as a matter of reasonable expectation that the applicant would have sold its Building Products Division, worth $250 million, in a manner which would have given rise to capital gains totalling $235 million. It is highly likely that if this was the only option, the applicant would not have disposed of its Building Products Division. The Division was profitable with a good cashflow and the applicant was alive to the capital gains tax implications of the transactions into which it entered. 119 Before leaving the Presumed Counterfactual, I accept Mr Duivenvoorde's evidence that it would not have been feasible to avoid the capital gains consequence of the sale of Bristile shares from Vockbay to Walshville by relying on roll-over relief under s 160ZZO of the Act. If such relief had been relied on, the capital gain would have been realised in Walshville and, to use the words of Mr Duivenvoorde, "[i]n commercial terms it would not have been possible to float a company on the basis that it incurred a liability to tax in respect of a capital gain of $142.4 million as a direct consequence of being floated".

The Applicant's Counterfactuals 120 The applicant presented two counterfactuals based on the two alternatives identified by Mr Duivenvoorde in his evidence which it said would result in no greater amount for capital gains being declared by the applicant for the year of income ended 30 June 1998 than was in fact declared. 121 As I have said, Mr Duivenvoorde's two alternative structures were a float of Bristile on the one hand and a float of Walshville on the other. They were referred to by the applicant in its submissions as Futuris Counterfactual 1 and Futuris Counterfactual 2. 122 It will be recalled that Mr Duivenvoorde considered that if the steps in the scheme identified by the respondent had not been carried out, it is probable Walshville would have sold the Prestige Entities to Bristile and Bristile would have been floated (Futuris Counterfactual 1). The steps and the capital gains implications of such a structure are set out above (at [48]-[49]). The total capital gains to the applicant group under Futuris' Counterfactual 1 would be $94.7 million, but those capital gains would have been realised by Walshville ($19.9 million) and Vockbay ($74.8 million). No capital gain would have been realised by the applicant. 123 Mr Duivenvoorde's evidence is that Futuris Counterfactual 2 is much less likely than Futuris Counterfactual 1. It proceeds on the assumption of no scheme, but a sale of the Building Products Division through a float of Walshville. The steps and the capital gains implications of such a structure are set out above (at [53]-[54]). Under Futuris Counterfactual 2 the total capital gains to the applicant group would be $152.3 million being $142.3 million realised by Vockbay and about $10 million realised by the applicant. The applicant submits that the significant point is that under the Futuris Counterfactual 2 the amount identified by the respondent would not be included in the applicant's assessable income. In fact, its net capital gains would be of the same order as resulted from the scheme. 124 In my opinion, absent the steps identified by the respondent as constituting the scheme, the applicant would not, as a matter of reasonable expectation, have carried out the sale of its Building Products Division by way of a public float in the manner described in the Presumed Counterfactual. I have already given my reasons for reaching this conclusion. 125 In my opinion, absent the steps identified by the respondent as constituting the scheme, I do not think the applicant would, as a matter of reasonable expectation, have carried out the sale of its Building Products Division in the manner described in Futuris Counterfactual 2. I have reached that conclusion for the reasons identified by Mr Duivenvoorde in his evidence (see [45-46] above) and because implementation of Futuris Counterfactual 2 would have resulted in a significantly larger capital gain than implementation of Futuris' Counterfactual 1. 126 I have considered carefully whether the applicant has established that, assuming the scheme identified by the respondent had not been entered into or carried out, it would, as a matter of reasonable expectation, have carried out the sale of its Building Products Division by the public float of Bristile in accordance with the steps in Futuris Counterfactual 1. It seems clear that there would have been good commercial reasons for the less valuable assets of the Building Products Division being transferred to the entity holding the significantly more valuable assets (that is, Bristile). It seems clear there would have been good commercial reasons for assets of Bristile to be transferred to a new entity and for the payment of a dividend of $30.3 million to Vockbay. Those reasons were explained by Mr Duivenvoorde in his evidence and, as I have said, Mr Duivenvoorde was not challenged on that aspect of his evidence. No doubt those making a decision on the appropriate structure, assuming the scheme or the alternative scheme was not entered into or carried out, would take into account the tax consequences of alternative structures to both the applicant and its subsidiaries. Even so, the commercial reasons point to an alternative structure whereby Walshville transfers the Prestige entities to Bristile and the Bristile shares are sold in a public float. I am satisfied that the applicant has established that had the scheme identified by the respondent not been entered into or carried out, it would, as a matter of reasonable expectation, have carried out the sale of its Building Products Division by the public float of Bristile in accordance with the steps in Futuris Counterfactual 1. That leads to the conclusion that there was no tax benefit in connection with the scheme or the alternative scheme within s 177C(1)(a) and the appeal must be upheld. 127 The conclusion set out above is sufficient to dispose of the appeal. However, in case I am wrong, I propose to consider the other issues raised by the applicant on the assumption that it did obtain a tax benefit.

The Amount of the Tax Benefit 128 The applicant submits that even if it has not discharged the onus of proving that it did not obtain a tax benefit, the amount of the tax benefit under paragraph 177C(1)(a) could not be more than $19,950,090. That figure is reached by subtracting from the respondent's figure of $82,950,090 the figure of $63 million. The applicant points to the fact that the third step in the scheme involved, among other things, Vockbay declaring a dividend to the applicant of $63 million. The applicant included those dividends in its 1998 income tax return. As I have said, the dividends were rebateable under Part III Division 2, Subdivision D of the Act. The applicant submits that a proper application of what it called "scheme and non-scheme scenarios" involves removing the dividends from the no scheme scenario. 129 I reject the applicant's submission. I agree with the respondent's submission that the question posed by s 177C(1)(a) is whether, because of the scheme, an amount of net capital gain has not been included in the applicant's income. It is not relevant to that question to consider whether the applicant's assessable income included some other amount, such as a dividend. The amounts - capital gains and dividends - are different amounts. 130 The fact that the scheme resulted in a dividend being declared may be relevant to the question of whether there was a dominant tax purpose under s 177D(b), but in that context it would also be relevant to consider the fact that the dividends were rebateable. Furthermore, the power in s 177F(3) seems designed to meet any unfairness that might result from the fact that a scheme has led to an amount being included in the assessable income of a taxpayer. 131 I am satisfied that if (contrary to my earlier conclusion), no counterfactual negating a tax benefit had been established by the applicant, then the amount of the tax benefit would be $82,950,090.

Section 177D(b) and dominant tax purpose 132 The terms of s 177D(b) are set out above (at [91]). There are a number of well-established general propositions dealing with the proper construction and application of the paragraph and I will refer to them briefly. 133 First, the relevant inquiry under s 177D(b) is as to the purpose (objectively ascertained) of the person or persons who entered into or carried out the scheme and it is not an inquiry as to the purpose of the scheme: Spotless at 417; Hart at 242-243 [63]. The person or persons may be, but need not be, the taxpayer: Hart at 232 [355]; Commissioner of Taxation v Sleight (2004) 136 FCR 211 ("Sleight") at 229 [67] per Hill J (with whom Hely J agreed). 134 Secondly, the central question under s 177D(b) is whether it would be concluded, having regard to the eight matters listed in the paragraph, that the person who entered into or carried out the scheme, or any part of the scheme, did so for the dominant purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme: Hart at 240-241 [56]. 135 Thirdly, the inquiry into the purpose of the relevant person is an objective one having regard to, and only to, the eight matters identified in paragraphs (i) to (viii). The actual purpose of the relevant person is irrelevant: Hart at 243 [65]; Commissioner of Taxation v Zoffanies Pty Ltd (2003) 132 FCR 523 at 538 [53]-[54]; Sleight at 229-230 [67]. 136 Fourthly, where the relevant person is found to have had two or more purposes, the circumstances will fall within s 177D(b) if the relevant person's dominant purpose is to obtain a tax benefit (s 177A(5)). "Dominant" purpose means the "ruling, prevailing or most influential purpose": Spotless at 416 and 423; Sleight at 229 [67]. 137 Fifthly, the mere fact that a taxpayer pays less tax, if one form of transaction rather than another is made, does not demonstrate that Part IVA applies: Hart at 240 [53]. 138 Sixthly, although each of the eight matters must be taken into account, it is permissible to take a global assessment of purpose: Federal Commissioner of Taxation v Consolidated Press Holdings Ltd (2001) 207 CLR 235 at 263-264 [94]. Some of the matters may point one way, others may point in the opposite direction and some may be neutral. All of the matters must be evaluated in order to reach a conclusion concerning dominant purpose: Sleight at 229-230 [67]. 139 Seventhly, a person may enter into or carry out a scheme within the meaning of Part 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. For example, an overall transaction might be aimed at profit making and yet it would not be artificial and inappropriate to conclude that part of the structure of the transaction is to be explained by reference to a dominant tax purpose: Consolidated Press Holdings at 264 [96]. 140 Finally, where the scheme forms part of a wider transaction, there is nothing contrary to the section in looking at the wider transaction in order to understand and explain the scheme and the eight matters listed in s 177D(b). 141 I turn now to consider the eight matters which are relevant to the determination of purpose. It must be borne in mind that I am doing so on the assumption (contrary to my earlier conclusion) that the applicant obtained a tax benefit of $82,950,090 in connection with the scheme. 142 The respondent submits that the purposes of the following persons are relevant: the applicant, Arthur Andersen, Bristile, Bristile Operations, Vockbay and Walshville. I will proceed on that basis; neither party suggested that any one of these persons had a different purpose from the others.

The manner in which the scheme was entered into or carried out. 143 In Spotless the High Court said (at 420) that the terms "manner" and "entered into" are not to be given any restricted meaning and that "manner" includes consideration of the way in which, and method or procedure by which, the particular scheme in question was established. 144 The applicant submits that the scheme steps were part of a larger transaction and can only be properly understood in the context of the larger transaction and its commercial purposes. It submits that the steps comprising the scheme were routine commercial transactions implemented in a manner appropriate to achieve their evident commercial purposes, that is to say, the sale of assets, the payment of dividends, the subscription for shares and the sale of the Bristile shares. 145 The applicant also submits that the steps were implemented in a routine, thorough and appropriate commercial manner and that it acted on the basis of advice provided by appropriate professional advisers. As I have already said, the applicant was advised by SBC Warburg and Poynton Corporate in relation to the restructure. Furthermore, the restructure was carried out with the use of a due diligence committee and with advice from Freehill Hollingdale and Page, and the applicant was advised by a large and well known firm of accountants, Arthur Andersen. The wider commercial transaction including the steps comprising the scheme and the alternative scheme was previously disclosed to the respondent in the requests for private binding rulings. The applicant also points to the fact that there is no suggestion that the parties to the transactions did not intend to enforce the agreements as between themselves. 146 The matters identified by the applicant are supported by the evidence and must be taken into account. However, there are other matters which must also be taken into account. The direct consequence of the steps comprising the scheme was that they enabled the applicant to maximise the cost base of its investment in Walshville by the operation of Division 19A of the Act. Neither those steps nor the operation of Division 19A would affect the value or pricing of the Building Products Division float. Secondly, the sale of assets from Bristile to Bristile Operations was financed by an internal loan from Bristile to Bristile Operations made by book entries and no actual funds were transferred. As the evidence of Mr Halligan makes clear, the sale did not affect the market value of Bristile or Bristile Operations or the net value of Vockbay. The sale had no capital gains tax implications because of the roll-over relief provided by s 160ZZO of the Act. The sale did generate an accounting profit within the Bristile sub-group enabling the declaration of dividends by Bristile and then by Vockbay. The dividends declared by Bristile ($146 million) and Vockbay ($63 million) respectively, were not paid in cash but were satisfied by the issue of shares. The dividends were subject to the inter-corporate dividend rebate of tax under s 46 of the Act. The respondent submits, correctly in my view, the following: "The net effect of the payment of the dividends and their classification in each case was to reclassify amounts that would have been recognised on the equity side of the balance sheets of Bristile and Vockbay, without any change to the total amount of equity. Such a reclassification was irrelevant to the market value of the total equity." 147 The respondent submits, correctly in my view, that there is no evidence that the scheme had any commercial imperative. 148 It seems to me that it is proper to conclude from the manner in which the scheme was designed and carried out that the objective purpose of those who structured it in the way it was structured was to achieve a maximum saving on capital gains tax in the year ended 30 June 1998 through the operation of Division 19A. The disposal of the Building Products Division might have been aimed at profit making, but it would not be artificial and inappropriate to conclude, at least as far as the first factor is concerned, that the scheme is to be explained by reference to a dominant tax purpose (refer [139] above).

The form and substance of the scheme 149 The applicant submits that if on the facts of a particular case there is no difference between the form and substance of a scheme then this factor cannot be used to indicate a dominant tax purpose. It refers to observations made by Hill J in Sleight at 233 [81]. It submits that in this case the form and substance of the scheme are consistent. 150 I do not accept the submission that if the form and substance of the scheme are consistent the form and substance of the scheme cannot point to a dominant tax purpose. No doubt a difference between form and substance may be a significant matter in determining that there is a dominant tax purpose. However, it is not necessary that there be a difference between form and substance before the form and substance of the scheme becomes relevant. Hill J did not lay down a principle to that effect and the section itself does not identify a need for a difference between form and substance. 151 The transfer of the assets from Bristile to Bristile Operations did not take the assets out of the Bristile sub-group. They remained in that sub-group ready for disposal to Walshville by Vockbay selling its Bristile shares to Walshville and then for disposal as part of the Building Products Division through the public offer of shares in Walshville. After the transactions comprising the scheme, the respective market values of the Vockbay and Bristile shares were materially the same as they were immediately before the transactions took place. 152 The transactions resulted in an increase in the cost base/indexed cost base of the applicant's shares in Vockbay by $63 million in circumstances where there was no change in the net assets or value of Vockbay or Bristile and no further expenditure by the applicant in Vockbay. When Vockbay sold its shares in Bristile to Walshville for $97 million when both the market value and cost base of the Bristile shares was approximately $180 million, and the indexed cost base of the Bristile shares was approximately $186 million, the value of the increase in the cost base/indexed cost base of the Vockbay shares, in effect, shifted to the cost base of the Walshville shares held by the applicant. Furthermore, in effect, the indexed cost base of Futuris' loans to Vockbay were also transferred to the indexed cost base of the Walshville shares held by the applicant. 153 In my opinion, a consideration of the matters relevant to the second factor suggest a dominant tax purpose.

The time at which the scheme was entered into and the length of the period during which the scheme was carried out. 154 The scheme was carried out before the public float of the Walshville shares. The transactions comprising the scheme were carried out on 2 September 1997 and the applicant disposed of the Walshville shares by public offer on 9 October 1997. The transactions comprising the scheme were all undertaken and carried out to completion within minutes of each other. 155 It seems that the loan from Bristile to Bristile Operations was not the subject of a resolution by Bristile's board of directors and it seems to have been the subject of journal entries made some months later. The loan from the applicant to Walshville to acquire the Bristile shares also appears to have been evidenced by journal entries made some months later. 156 The applicant points to the fact that restructuring within the group was necessary before the public float of Walshville. The steps were not carried out in a "flurry of activity" shortly before the end of the financial year (see Sleight at 233 [83]). 157 It seems to me that the matters relevant to this factor point to a dominant tax purpose, but not as strongly as the first two factors.

The result in relation to the operation of the Act that, but for this Part, would be achieved by the scheme. 158 In considering this factor, I reiterate that I am proceeding on the assumption that the applicant obtained a tax benefit of $82,950,090 in connection with the scheme or the alternative scheme. 159 But for the operation of Part IVA of the Act, there would be a significant reduction in the tax liability of the applicant on the proceeds it received from the disposal of its Walshville shares by an indexed cost base adjustment to those shares under s 160 ZZRH (Part IIIA Division 19A) of the Act. Tax was assessed and paid by the applicant on a capital gain on the disposal of the applicant's equity interest in the Building Products Division reduced by $82,950,090 to $9,789,250. 160 The applicant puts two submissions in support of its contention that this factor is neutral. 161 The first submission is that neither the scheme nor the alternative scheme resulted in the alleged tax benefit because the tax benefit only arose on the sale of the Walshville shares and that event was not part of either scheme. This submission is similar to the submission that there was no tax benefit in connection with a scheme (see [87]-[99]). The submission must be rejected because it involves too narrow a view of the expression, "the result … that … would be achieved by the scheme". That expression is wide enough to include a situation where, as here, but for the scheme, the tax benefit would not have been obtained. 162 The second submission is that the scheme did not "result" in the obtaining of the alleged tax benefit because the same result in terms of the applicant's assessable income would have followed from Futuris Counterfactual 2. I reject that submission. As I have said, it is unlikely the applicant would have carried out the sale of its Building Products Division in the manner described in Futuris Counterfactual 2. In any event, the fact that the alleged tax benefit may have been the result of another structure does not mean that it cannot be described as the result that would be achieved by the scheme within s 177D(b)(iv).

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. 163 Leaving aside the tax savings, the scheme or the alternative scheme has no other financial impact on the applicant. It did not change the value of its interest in Vockbay or the value of Vockbay's interest in Bristile. The dividends paid to the applicant by Vockbay were subject to the inter-corporate dividend rebate of tax under s 46 of the Act. 164 The cost base/indexed cost base to the applicant of its shares in Vockbay and in its loans to Vockbay were reduced. As the respondent submits, these decreased cost bases will be relevant to the calculation of capital gains should the applicant subsequently dispose of its shares in Vockbay or the loans to Vockbay. There is no evidence relating to any disposal of the applicant's interest in Vockbay.

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. 165 The scheme did not affect the market value of the Bristile shares or the net financial position of Bristile. There was no capital gains tax payable on the sale of the assets from Bristile to Bristile Operations because of the rollover relief provided by s 160ZZO of the Act. The dividends which were declared were not paid in cash, but were satisfied by the issue of shares at a premium. The dividends were subject to the inter-corporate dividend rebate of tax under s 46 of the Act. 166 The applicant lent Walshville $97,313,000 to pay Vockbay for its shares in Bristile. No actual funds were drawn down for this loan. Walshville then repaid that amount and other debts owed by it ($22,957,088) and Bristile ($16,936,912) to the applicant by external finance of $87 million and by issuing shares in Walshville (88,235,285 fully paid ordinary shares in Walshville at $0.569 cents per share).

Any other consequence for the relevant taxpayer, or for any other person referred to in paragraph 6, of the scheme having been entered into or carried out. 167 As a result of the scheme, Bristile Operations held the Bristile assets and as a result of the alternative scheme Walshville held the shares in Bristile. As a result of the scheme, the applicant's cost base in Vockbay was reduced to nil.

The nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any other person referred to in paragraph 6. 168 The applicant was the ultimate holding company of Bristile, Bristile Operations, Vockbay and Walshville.

Global Assessment 169 Had I reached the conclusion that the applicant obtained a tax benefit of $82,950,090, I would have concluded that the applicant and its relevant subsidiaries entered into or carried out the scheme for the dominant purpose of enabling the applicant to obtain the tax benefit. I would have done so having regard to the eight factors in s 177D(b) and, in particular, the matters relevant to the first and second factors.

Conclusion 170 I have concluded that the applicant did not obtain a tax benefit of $82,950,090 in connection with a scheme within ss 177C(1)(a) and 177D(a) of the Act. In those circumstances, the appeal in proceeding SAD 110 of 2005 must be allowed. I will hear the parties as to the final orders to be made in that proceeding. I will also hear the parties as to the final orders to be made in proceeding WAD 135 of 2003. I certify that the preceding one hundred and seventy (170) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Besanko.