Part IVA
73 On the view I take no part of the interest payable on the notes is deductible to MFL. It follows therefore that part IVA can have no application. However, in case I am wrong, I now propose to consider whether Part IVA would apply to disallow the "interest" payable by MFL as a deduction.
74 Part IVA is the general anti-avoidance provision applicable to authorise the Commissioner inter alia to disallow as deductions amounts which otherwise are allowable deductions under either the 1936 Act or the 1997 Act. The power conferred upon the Commissioner to do so arises only where there is a scheme to which the provisions of Part IVA apply. In summary Part IVA will apply to a scheme where the following elements exist:
· there is a scheme as defined in s 177A(1).
· there is a tax benefit as defined in s 177C(1) obtained by a taxpayer in connection with a scheme.
· It would be concluded having regard to the eight matters listed in s 177D(b) that a person who entered into or carried out the scheme did so for the purpose or for the dominant purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme.
· The Commissioner makes a determination under s 177F to cancel the relevant tax benefit.
75 The definition of "scheme" is very wide. It may include a course of conduct or it may include just "an action". The Commissioner particularised the scheme in three different ways. The first particularisation in essence took what may be described as the whole of the steps entered into by MBL and MFL in issuing the preference shares and the notes including the giving of the Payment direction pursuant to the Procurement Agreement. The second particularised the scheme as being the issue of the preference shares on the terms and conditions upon which they were issued. The third particularised the scheme as being the issue of the notes on the particular terms the notes were issued. I do not think it is necessary to consider the second and third particularisations. Unless the Commissioner can succeed by reference to the whole of the steps taken it is hard to see that he could succeed by reference to some only of those steps.
76 In this connection it may be noted that despite what a reading of the joint judgment of Gummow and Hayne JJ in Federal Commissioner of Taxation v Hart (2004)78 ALJR 875may suggest, Part IVA requires identification of the scheme as an important ingredient in the operation of the Part, if only because, as Gleeson CJ points out, before a scheme can be one to which the provisions of the Part apply it must be possible to identify a tax benefit which has been obtained by the taxpayer in connexion with the scheme. That is, the tax benefit which the Commissioner is authorised to cancel. The conclusion as to dominant purpose must be made by reference to the particular scheme and the tax benefit must be related to the scheme. Indeed, it must follow that the identification of the scheme goes, as their Honours say, way beyond any issue of procedural fairness.
77 The judgment of Callinan J would likewise support the view that the identification of the "scheme" is important to the working of Part IVA.
78 The joint judgment of Gummow and Hayne JJ may be said to give the matter a different emphasis. This is not to say that their Honours would suggest that the identification of the "scheme" was of no importance. Their Honour's comments are in the context of the ability of the Commissioner to rely upon a narrower scheme than would be encompassed if the relevant scheme were taken to be the whole of the course of conduct adopted. However, I would, with respect, agree with Gummow and Hayne JJ that too much emphasis can be given to the significance of the width or narrowness of a scheme. Since the various factors in s 177D(b) cover most, if not all, of the objective facts surrounding the scheme it will probably almost always be the case that even a scheme narrowly particularised will be scrutinised by reference to other facts which surround the scheme being entered into or carried out. Whether that is the case or not I do not think that anything in the present case turns upon whether the scheme is narrowly or widely particularised.
79 In the present case the tax benefit which has been cancelled is claimed by the Commissioner to be the deduction for "interest" which on the assumptions I make for the purpose of considering Part IVA is allowable to MFL. For that "interest" to be a tax benefit it is necessary to determine whether the deduction is such that if the scheme had not been entered into or carried out no deduction would have been available to MFL or alternatively it could reasonably be expected that no such deduction would be available to MFL. In my view this is the case here. If the scheme involving the issue of Macquarie Income securities had not been entered into or carried out it may be the case (indeed I find that it was) that MBL would have needed to raise some sort of capital to satisfy the capital adequacy requirements of APRA. The simplest form of capital raising would, no doubt, have been the raising of equity capital by MBL. Such equity raising might, however, have been, on the evidence, expensive. There were other possible mechanisms as is illustrated by the attention devoted by Mr Donnelly to the structures, namely MIS and MIS II. Each involved an interest component, although neither involved as a party to the scheme MFL. On the evidence here it is clear that MFL was only brought into the scheme at the last minute and once the third version, MIS III had been devised and settled upon. Only MIS III had MFL as a party and only MIS III involved a tax deduction for interest being obtained by MFL.
80 If capital raising was not to be pursued by the issue of some form of preference shares then it was inevitable that if there was to be a borrower then some company in the group would have to pay "interest". It is self evident that it would be desirable that any interest payable should be a tax deduction. Clearly the availability of a deduction affects the cost of finance. On the other hand there was, it must be said, no obvious reason why MFL was inserted into the scheme as against any other company in the group so long as the company inserted could be seen to be using the money raised in its business activity in such a way as to entitle it to a deduction. If there was any particular reason why MFL would have been chosen it would seem to be because it was virtually a dormant company. The corporate name Macquarie Finance Limited suggested that MFL was a finance company and this, no doubt, was desirable for a public issue. Further MFL had undertaken some financing transactions in the past so that it could be said to have had a history of being engaged in financing.
81 In determining whether there was a tax benefit to MFL obtained from the scheme entered into it is necessary to consider what might reasonably be expected to have happened had the present scheme not been entered into or carried out. That requires the making on reasonable grounds of what may be termed "the alternative hypothesis". It seems to be quite clear that if this particular scheme had not been entered into or carried out then while some company may have obtained a tax deduction that company would not have been MFL. Indeed, given that the first two alternative proposals did not involve MFL it is clear that MFL was not critical to the scheme at all, although it may well have been critical to any alternative scheme that some company pay interest. In my view there is, accordingly, a tax benefit to MFL.
82 The question then to be considered is whether, having regard to the factors set out in s 177D(b) the relevant conclusion would be reached as to the dominant purpose of some person, whether or not MFL, who entered into or carried out the scheme. The eight factors to be considered are:
· the manner in which the scheme was entered into or carried out;
· the form and substance of the scheme;
· the time at which the scheme was entered into and the length of the period during which the scheme was carried out;
· the result in relation to the operation of the Act that, but for Part IVA would be achieved by the scheme;
· any changes 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;
· any other consequence for the relevant taxpayer or for any person referred to in the last dot point of the scheme having been entered into or carried out; and
· the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in the 6th dot point.
While it is unnecessary for the Court to consider individually each of these matters, some of which may point in the one direction and others in the other direction, and it could consider them globally, it is useful here to consider these factors individually: cf Commissioner of Taxation v Consolidated Press (2001) 207 CLR 235. Further it is clear that the conclusion required by s 177D(b) is a conclusion as to the "ruling, prevailing or most influential purpose" (see Federal Commissioner of Taxation v Spotless Services (1996) 186 CLR 404 at 416 and 423) decided by reference to the objective matters to be found in the eight paragraphs enumerated.
83 The conclusion to be reached requires an understanding of what the High Court decided in its recent decision in Hart. It is thus necessary to consider that decision carefully.
84 Hart involved a "product" sold by a bank to customers or potential customers called the "wealth optimiser". The product involved a borrowing which permitted the borrower to allocate some of the borrowed funds to financing the acquisition of an income producing property and the remainder to a non-income producing property such as a family home. Interest on that part of the borrowing allocated to the income producing property was allowed to accumulate subject to interest compounding upon it whereas interest on that part of the borrowing allocated to the non-income producing property was payable in the normal course. The effect was to permit that part of the borrowing related to the non-income producing property to be repaid faster than otherwise would have been the case had interest been payable rateably on the loans so far as they related to both properties and in consequence to increase the deduction available to the borrower for interest attributed to the income producing property.
85 It is important to note that in Hart the tax benefit was not the whole of the interest payable on the loan for had the scheme not been entered into but a borrowing on normal terms and conditions proceeded that part of the interest as was payable in respect of the loan on the investment property would in any event be an allowable deduction. It followed that the tax benefit from the scheme was the amount of interest representing the difference between the interest payable to the lender on so much of the principal sum as was related to the income producing property and the interest that would have been payable to the lender had interest been charged rateably on the loans in respect of the two properties. Another way of putting this is to say that the tax benefit was the difference between the interest deductions obtained from the scheme and the interest deductions that would have been available from a scheme that represented the alternative hypothesis.
86 In the Full Federal Court it was found that the relevant conclusion to be reached under s 177D was that the taxpayers entered into or carried out the scheme for the dominant purpose of obtaining a loan for the refinancing (the case did not involve a financing for acquisition but a refinancing, but nothing turns on that distinction) of the income producing property and financing the acquisition of a non-income producing property (a house in which the taxpayers proposed to live). That conclusion was unanimously rejected by the High Court. Indeed, their Honours seem hardly to mention the commercial purpose at all. It is necessary to seek to understand why the High Court did so.
87 The starting point of the way Part IVA operates in cases such as Hart is to be found in the earlier decision of the High Court in Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404. That case involved a scheme which, in its simplest form had the taxpayer taking funds off deposit with an Australian Bank and instead depositing the funds at a lower rate of pre tax-interest with a bank overseas in a country that imposed a low rate of tax on the interest derived. Under the Australian income tax legislation at the time income derived from sources outside Australia which was subject to tax in the country of the source of the income was exempt from Australian Income Tax (s 23(q) of the 1936 Act). Accordingly the after tax return which the taxpayer received on implementing the scheme was greater than the after tax return had the funds remained on deposit in Australia. The actual steps to achieve this result were rather complicated and need not be here narrated.
88 It seems to have been argued by the taxpayer in the Full Federal Court and also in the High Court that the conclusion that would be reached as to dominant purpose should be taken to be the derivation of the greater after tax return and not as such the derivation of income exempt from tax. That was, it was argued a commercial advantage. That argument was rejected and with respect, one must say rightly since the commercial advantage being the greater after tax return was available only if the income derived under the scheme was exempt from tax.
89 The leading judgment of the Court was that of Brennan CJ, Dawson, Toohey, Gaudron, Gummow and Kirby JJ. McHugh J delivered a separate judgment although his Honour concurred with the majority of their Honours in the result.
90 Their Honours pointed out that there was no real dichotomy between commercial gain on the one hand and tax benefit on the other. Tax affects the shape of nearly every business transaction. A particular course of action might be both "tax driven" and as well display the character of a "rational commercial decision". The other way in which the same proposition could have been made in that case was, as already stated, that the commercial benefit said to be the object in mind, was only available if the tax benefit was obtained by the taxpayer from the scheme so that it was not correct to say that the predominant purpose was the commercial purpose when the commercial purpose was dependant upon the tax purpose. In the case before the Court their Honours were of the view that a reasonable person would conclude that the taxpayers entered into or carried out the scheme for the dominant purpose of obtaining a tax benefit (ie the exemption of the interest from Australian tax so that the taxpayer derived no assessable income).
91 McHugh J in his separate judgment was careful to distinguish the scheme employed in Spotless from a mere rearrangement by a taxpayer of its business so as to pay less tax. Spotless involved much more than the mere switching of investments from one attracting tax to another investment having a tax advantage. So to describe the scheme in Spotless would be simplistic.
92 The taxpayers in Hart sought to argue that the conclusion as to dominant purpose which a reasonable person would reach on the facts of that case was that the taxpayer entered into the scheme for the dominant purpose of borrowing monies to invest in a non-income producing property and an income producing property. That argument was, as already noted, accepted by the Full Federal Court which reversed the decision of the Primary Judge who had taken a different view as to the conclusion which would be reached as to the predominant purpose. The Full Court reached the view it did notwithstanding that the manner in which the scheme was formulated was explicable only by the taxation benefits which the scheme provided.
93 Despite the discussion of how the "scheme" should be identified in the various judgments in Hart, and particularly the comment in the joint judgment of the Chief Justice and McHugh J that it was essential that the scheme be defined so as to include the borrowing which produced the funds to enable the investment property to be refinanced and the residential property to be purchased it seems that all members of the High Court really regarded that which produced the tax benefit to the taxpayers to be what is referred to as the "wealth optimiser benefits" of the scheme. The wealth optimiser aspects of the scheme were, in essence, the ability of the taxpayer to allocate the one loan to two different purposes so as to ensure that interest payable on the non-income producing property was payable until the loan to acquire the residential property had been paid off while the interest on the balance of the loan accumulated at interest. In other words, the form in which the loan arrangements were structured was critical to the scheme and it was from these aspects that the tax benefit in the way defined above was derived.
94 If the right question to ask was what conclusion should be drawn as to the dominant purpose of the taxpayers entering into the two loans the answer may well have been the acquisition of the new residential property and the refinancing of the previous house for use as an investment property. This commercial factor was what caused the Full Federal Court to come to the conclusion it did that Part IVA had no application. However, that was clearly not what the members of the High Court regarded as being the correct question to ask.
95 Part IVA requires the drawing of a conclusion from the eight matters listed in s 1277D(b) as to the dominant purpose of some person, including the taxpayer, for entering into or carrying out the scheme. If the scheme is defined to be all the steps taken, including the loan itself but placing emphasis upon those matters which gave rise to the tax benefit (ie the differential interest) obtained by the taxpayer from the scheme, then the question required to be asked is whether having regard to the scheme as so defined which, while it includes the making of the loan has, as its emphasis the wealth optimiser features which produce the tax benefit, it would be concluded that some person entered into it to obtain the tax benefit. That, I think, is the explanation of the judgment of the Chief Justice and McHugh J. Another way this may be stated is that the conclusion in a case like Hart which has to be drawn by reference to the eight relevant factors is a conclusion which has to be drawn by reference to the way the borrowing is structured and not a conclusion as to the borrowing itself. It is a conclusion not as to why the borrowing itself is entered into but why a borrowing on the particular terms and conditions is entered into, that is to say the terms and conditions which were essential to the wealth optimiser product. On this basis the answer to be drawn is the obtaining of the differential interest saving and not any commercial purpose. That this is the way their Honours approached the issue in Hart appears in the following passages. First, at [10], their Honours said:
"While the fact of the borrowing cannot be left out of consideration, it was what the mortgage broker described as the 'wealth optimised structure' of the loan arrangements that secured the tax benefits, that is not the deduction of the interest on loan account 2, but part of that deduction".
96 Later their Honours said at [12]:
"It was the wealth optimising aspect of the structure, not divorced from the borrowing, but giving the borrowing its distinctive character, that constituted the scheme".
97 On one view, it may be said that their Honours in the circumstances of the case regardedthe conclusion as to purpose to be a conclusion required to be drawn in regard to the form of the borrowing, tested, of course, by reference to the eight relevant matters set out in s 177D(b) one of which includes form itself. That view presents some difficulty. Alternatively, it may be said their Honours adopted a definition of the scheme as not being all the steps taken but what may be described as be the Wealth Optimiser features of the loan package. On the other hand that is not what their Honour said they were doing. Rather, it seems to me that the proper analysis of the judgment is that while the scheme could be defined as being all the steps taken by the parties the conclusion as to purpose had to be addressed by reference to the particular scheme, that is to say all the steps which included the wealth optimiser features. In their Honour's view the only conclusion that could be drawn as to the purpose of the Hart's entering into the particular scheme having those particular features was the tax conclusion.
98 The judgment of Gummow and Hayne JJ clearly expresses a different view as to the significance of "scheme" to the operation of Part IVA. In particular their Honours emphasised that Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359 should not be taken as deciding more than that procedural fairness required the Commissioner to identify the "scheme". What was said in Peabody was not to be taken as imposing a test which required that a single act, for example, could not itself be a "scheme" in the defined sense unless as a scheme it stood on its own feet. Certainly, until Hart, Peabody had been read in this way. It may be said that both the joint judgment of the Chief Justice and McHugh J and the judgment of Callinan J would suggest that there was a restriction upon the Commissioner extracting from a series of acts some single step which produced a tax benefit and treating that out of context as the scheme to which Part IVA applied. How that restriction should be defined may be a question for a later time. Whatever may ultimately be found to be the ratio of Hart in respect of a definition of scheme, that is not a matter which, in my view, need arise in the present case.
99 In Hart the Commissioner had, in the alternative, identified two schemes. The first was a wider scheme consisting of all the steps which the parties took. The narrower scheme was "the provision in the loan for the division into two portions and the direction of the repayments to one or other portion and the direction by the (taxpayers) of the repayments to the home loan portion" (at [48]). It is clear that Gummow and Hayne JJ and probably all of their Honours, would have reached the same result whichever way the scheme was defined.
100 After discussing the definition of scheme Gummow and Hayne JJ proceeded to discuss the principle first enunciated in Spotless that there was no real dichotomy between what might be described as a "rational commercial decision" and the obtaining of a tax benefit. They noted, as was obvious, that the loan in Hart was structured so as to obtain the most desirable taxation result. Their Honours at this point in the judgment discard as irrelevant the fact that the taxpayers in Hart wished to obtain finance to purchase a new residence and to refinance the mortgage over their existing residence to enable it to be obtained for use as an investment property. Their Honours make the point, as an apparent explanation why these matters were irrelevant, that s 177D(b) did not permit or require consideration to be given to subjective motives. That is clearly correct, with respect, but leaves open the question why the objective circumstances including the manner in which the scheme was entered into would not have led to the same conclusion anyway. If the facts had been that the taxpayers first were introduced to the borrowing transaction before they had considered the acquisition of a new residence and using the existing residence for income producing purposes, the point made by their Honours would have been more easily understood. My understanding of the facts in Hart does not suggest this to be the case.
101 Their Honours then proceeded to consider the eight matters in s 177D(b). As to the manner in which the scheme was entered into their Honours said that, whether the scheme was identified as the wider or narrower scheme, the conclusion was evident, as indeed the Full Federal Court had held, that the taxpayers entered into that scheme with the dominant purpose of obtaining the tax benefit in fact obtained. Their Honours reached a similar conclusion in respect to the other seven matters, to the extent they were relevant. No reference is anywhere to be found in this discussion to the commercial aspect of the transaction, namely the use of the borrowed funds. It must be concluded that their Honours did not do so, either because, as their Honours had earlier indicated, the actual purpose of the borrowing was a subjective matter to be ignored or alternatively, because in their Honours' view, it was only if the tax benefit by way of interest differential was available that the financing or refinancing as the case may be was commercially possible. This latter position, while not specifically stated, would fit well with the analysis in Spotless to which I have earlier pointed.
102 That the latter explanation may have been significant to the way the issue was approached by their Honour is reinforced by the importance their Honours placed upon the need to consider how else the loan in question might have been arranged. Although their Honours do not say so directly it may be implicit in their reasons that there was no way the taxpayers could have borrowed in separate loan transactions to be arranged at least with separate lenders, such that the payment of interest was deferred upon the loan in respect of the investment property. At first instance, Gyles J had said that such loan transaction would not have been available to the Harts. It may be said that there was, so far as I am now aware, no evidence before the Court either way as to whether any lender would be prepared to lend upon terms that the loan was not only repayable at the end of the loan term but that interest would accumulate upon it and likewise be payable at the end of the term. This was not a matter which appears to have been explored in the course of evidence.
103 Callinan J after summarising at some length the legislative provisions then turned to the question of the definition of "scheme". His Honour said that on the facts in Hart both the series of steps and individual steps could qualify as a "scheme" in the defined sense. His Honour explained the comments about "scheme" in Spotless as indicating that it was not for the Commissioner to attempt to seize upon an isolated event which standing alone might appear to have a complexion which in the context of the overall circumstances it did not have. That view is closer to the view taken by Gleeson and McHugh JJ.
104 His Honour found also that there was a tax benefit in the defined sense obtained by the taxpayers in connexion with the scheme, although there may be some difficulty in his Honour's comments if taken literally that the scheme produced a tax benefit being a deduction of the whole of the interest relating to the residential property. However, it can be assumed that this is not what his Honour meant.
105 His Honour then turned to consider the eight factors listed in s 177D(b). Both "manner" and "form and substance" led, his Honour said, to tax deductibility as the relevant dominant purpose. His Honour considered whether the substance of the transaction, tax implications apart, could "more conveniently, or commercially, or frugally" have been achieved by a different transaction or form of transaction and suggested that arguably it could have been. His Honour pointed out that as the scheme was implemented the debt in respect of the residential premises would have been quickly discharged but the mortgage on it would remain as security for the outstanding debt as the investment property would likely not be of sufficient value to be security for the debt that would remain after repayment of the loan in respect of the residential premises had been repaid. This was a matter which, his Honour suggested, was not given sufficient weight by the Full Court. His Honour found that it was easy to conclude, in fact, inevitable that a Court would do so, that the dominant purpose was tax minimisation. His Honour continued at [95] - [96]:
"What other purpose or purposes could have made commercial or other sense? There was no material before the Court to show that the purchase of the investment property was in fact a good investment in the sense that even if it did not yield a rental sufficient to cover interest and other outgoings there was a reasonable chance that it would appreciate in value. Repayment of the principal owing in respect of the residence did not make it immune to recourse by the lender in the event of default or shortfall in payment or value of the investment property.
It may be that the respondents did wish to make an investment and to change their residence. These were entirely irreproachable and proper objectives. But the means adopted to achieve these results could readily, and should be objectively concluded to be a scheme for the [dominant] purpose of enabling the respondents to obtain a tax benefit, and this is so no matter which of the alternative definitions as to the width of the schemes, within which what occurred here falls, is preferred."
106 It may be accepted that in Hart there was no evidence as to the quality of the investment decision which the taxpayers took. With respect, it is difficult to see why the quality of the investment in the new residence and use of the old residence as an investment property would matter. In any event this was not a matter adverted to in the other judgments of the High Court and may be here put to one side. What is, however, significant is that like Gleeson CJ and McHugh J his Honour in his consideration of purpose directed attention ultimately to the form of the scheme.
107 I have dealt in considerable detail with the three judgments in Hart, because it is important to determine what the case decided. Particularly, it is important to understand why (perhaps with the exception of Callinan J) none of their Honours seemed to give any weight to the purpose of the taxpayer's borrowing in balancing the obvious taxation advantage against any commercial purpose. If, as it would seem from the judgment of Gummow and Hayne JJ, the investment purpose was required to be excluded from consideration in Hart because the evidence of it was evidence of subjective motivation then it can be said that the desire of MBL for capital might likewise be excluded. On the other hand the objective facts in the present case are such that it is clear that there was a need on the part of MBL for Tier 1 capital. If Hart was decided upon the basis that the investment purposes should be excluded because the investments could not proceed without the taxation benefit available through the wealth optimiser package, that part of the decision would have no reference here as it was quite possible for MBL to raise capital without there being any taxation benefit attached. The lack of taxation benefit not only to MFL but to MBL or any company in the MBL Group, might increase the cost to the group of obtaining finance. And there could be a taxation benefit to MBL or some company other than MFL if finance was obtained through a borrowing which did not involve MFL. If Hart stands, as I have suggested, for the proposition that the scheme to be considered was the loan carrying with it the particular terms and conditions which constituted the wealth optimiser features then the scheme to be considered here would be the capital raising with the particular features it had, and in particular the use of notes (or more accurately beneficial interests in notes) carrying interest but stapled to the issue of preference shares; the procurement agreement between Deutsche and MBL involving return to Deutsche of an amount equivalent to the face value of the note and the possibility that at any time MBL could by notice require capital and interest on the notes to be payable to it and thereby ensure that thereafter dividend and capital rights would become applicable to the share holding. If Hart stands for the proposition that the particular form of the loan agreement was the scheme (which is really another way of putting the last proposition) then the present case requires consideration to be given to the particular form of the agreements relating to the preference shares and the notes.
108 Just as in Hart it was necessary to consider the conclusion as to purpose with regard to the particular form of the finance agreement which included the wealth optimiser aspects, so here, what has to be considered under s 177D(b) is the particular form of capital raising involving the particular features which distinguished the scheme, namely the procurement agreement and the payment direction pursuant to it and the particular terms of the preference share and note issues.
109 It may be said in favour of Macquarie that the present is not a case where the transaction was given a particular form dictated by tax which made the commercial end achievable. While Hart may, like Spotless be a case where the commercial benefits obtained were unavailable without the tax benefit, that may be said not to be the case here, in that other types of securities could have been issued to the public without a tax deduction, although presumably the stapled securities represented the cheapest alternative, not merely because of the potential tax deduction but because of market perceptions.
110 Ultimately, it seems to me that what is to be considered in the present case is whether, having regard to the eight factors in s 177D(b) it would be concluded that the dominant purpose of some person who entered into or carried out the scheme with the particular features I have mentioned was the obtaining for MFL of tax deductions for the "interest' or whether it would be concluded that the dominant purpose of all persons who entered into or carried out the scheme with those particular features was the obtaining of Tier 1 capital. While a strict application of the view of Gummow and Hayne JJ might be thought to exclude the raising of Tier 1 capital as a purpose because this was a subjective matter I do not think it can be excluded both because that was not the approach adopted by Gleeson CJ and McHugh J and perhaps Callinan J and because, in any event, the need for capital may be seen to be objectively determined.
111 The first factor to be considered is the manner in which the scheme was entered into. Clearly the scheme took the form it did (its shape) because of the ability of MFL to obtain a taxation deduction. That deduction would only be available if funds were the subject of a loan at interest to a company which used the funds borrowed in making loans to other group companies at interest. A capital raising by MBL say of preference shares would not produce any deduction to any taxpayer and obviously therefore, none for MFL. Even if it were possible for there to be a raising of Tier 1 capital by MBL in such a way as would give MBL a tax deduction for interest that would not be a deduction available to MFL. The manner in which the scheme was entered into (that is to say, its form or shape) was thus here dictated by the desire to have the substance of a share offer to the public which qualified as Tier 1 capital, without the constraints of a share issue and, obviously, no interest to be available by way of deduction. The procurement agreement and payment direction were explicable only by reference to the desire to have both the benefits of a share capital raising and the allowance of an interest deduction. The participation of MFL was clearly influenced by the desire to ensure a tax deduction to a company in the group, a deduction that would be unavailable had there been a share issue.
112 It is clear from the fact that three alternative proposals were considered by staff of MBL that the raising of additional Tier 1 capital could have been achieved in a number of different ways. Despite a suggestion to the contrary I would find that it was commercially desirable, perhaps even necessary that the MBL group increase its Tier 1 capital. Perhaps it was not essential to do so just for the purpose of the acquisition of BTIB but the acquisition even if completed by capital available rendered it necessary for additional capital to be raised. The obtaining of Tier 1 capital was clearly a purpose of MBL and a significant purpose. Tax deductibility for interest payable by MFL was likewise important to the group. It is important to note here, however, that debt financing was a cheaper as well as more flexible way of raising finance for the group. That this was so was only partly attributable to the tax deductibility of interest. The question then is whether the tax purpose or the commercial capital raising purpose was the predominant purpose in adopting the arrangement in fact entered into and having the particular features I have noted. I find the question very difficult. However, in my view what may be called the tax purpose (that is to say the interest deduction to MFL, being the relevant tax benefit) predominates here, although only marginally.
113 Among the factors which reinforce the conclusion I have reached is that whether MFL would ever be under a need to repay the lenders was a matter within the control of its parent company MBL. MBL likewise had no obligation to pay dividends on the preference shares so long as interest was payable on the notes. Interest payable was limited to there being profits in MBL available.
114 The second factor to be considered is form and substance. Here the substance of the transaction was a raising of share capital. The form was a combination of debt and equity capital raising. The difference between the two can be accounted for, in my opinion, by the availability of the tax deduction to MFL. That the substance was a capital raising by MBL follows the interrelationship of the rights to interest under the notes and the rights applicable to the preference shares stapled with the notes. While as a matter of form there was both a capital raising of $400,000,000 and a debt raising of the same amount as a matter of substance the real cost to the group after the procurement agreement and payment thereunder by MBL to Deutsche was only $400,000,000, that amount representing the amount required to be shown as a liability in the consolidated balance sheet of MBL as paid up capital. Further, it can be seen that in substance (and through its guarantee) MBL really incurred a liability to pay dividends in an amount in effect commensurate with the liability of MFL to pay "interest". There was no obligation to pay interest unless MBL had profits just as would be the case had there been a dividend payable by MBL under an alternative arrangement.
115 However, again it will be important to note that there is a commercial advantage in both cost of finance and flexibility that must be taken into account in weighing up which purpose predominates. While the conclusion to be reached involves a question of judgment I think here that it is the tax purpose which predominates. I should add that unlike Spotless and perhaps, unlike Hart the present is not a case where the commercial purpose can only be achieved if the tax purpose is also achieved.
116 The third factor, timing, has little part to play. The timing of the arrangement and the period during which the scheme was to be carried out were both consequences of commercial factors and unaffected by taxation matters. If anything the third factor may militate against a conclusion of tax purpose. It was submitted for the Commissioner that the decision to adopt the structure in fact implemented was taken soon after the obtaining of taxation advice concerning the alternative structures under consideration. With respect, even if this is so, I do not think that the inference should be drawn that the Macquarie Income Securities took the form they did as a result of taxation advice.
117 The fourth factor requires consideration of the taxation result. Clearly here this points to taxation as amounting to the dominant purpose of MBL and MFL and those directing these companies.
118 The fifth factor requires consideration of changes in the financial position of MFL resulting from the scheme. But for the scheme MFL would not have had funds available to it to onlend to Macquarie Leasing and likewise no interest to pay out on its borrowing or interest to receive from onlending. On the other hand, the financial position of MBL (a matter to be considered as a separate factor) changed because it had issued fully paid preference shares. These matters on balance, however, are in my view either neutral or favourable to a conclusion of a non tax purpose.
119 The remaining matters for consideration are either neutral or do not suggest a conclusion that the dominant purpose of MFL, MBL or any person who entered into or carried out the scheme (for example, Deutsche) was the obtaining by MFL of a deduction for interest.
120 It follows, therefore, that if, contrary to my view, the "interest" payable on the notes was an allowable deduction to MFL in the year of income, then that deduction constituted a tax benefit which MFL obtained from a scheme to which the provisions of Part IVA applied and in respect of which the Commissioner was entitled to make a determination under s 177F disallowing to MFL the deduction. I might add that I reach this conclusion with some reluctance. I doubt if the legislature would have regarded the present "scheme" as involving the application of Part IVA when the Part was enacted in 1981. However, it seems to me that the approach of the High Court in Hart requires me to reach the conclusion I have.
121 Accordingly I would dismiss the application and order MFL to pay the respondent Commissioner's costs of it.
I certify that the preceding one hundred and twenty-one (121) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Hill.