McCutcheon v Commissioner of Taxation

The background facts 11 The appellants do not contest that the sequence of events described below constitute a scheme for the purposes of s 177A of the ITAA. The appellants contend that the scheme is not one to which Part IVA applies, having regard to the 'tax benefit' point. 12 The events are these. 13 Towards the end of 1997 the appellants elected to sell a Townsville based fuel distribution business and a related fuel retail business to a company controlled by Shell. The distribution business was conducted by Northern Oil Pty Limited ('NOPL' - described as Pyngrange Pty Ltd up to 1992) as trustee of the P & A Trust and the retail business was conducted by Oil Services Pty Ltd ('OSPL') as trustee of the Pine Grove Unit Trust ('PGUT'). At the date of sale, NOPL as trustee of the P & A Trust held all of the units in PGUT. The vendor under the Asset Sale Agreement is described as both NOPL and OSPL in their trustee capacities. The vendor so described contracted to receive the adjusted purchase price apportioned according to particular assets and goodwill. The completion date was 1 December 1997 or such date as would be agreed. 14 The vendor might have elected to effect a sale and purchase of the distribution and retail businesses in an entirely orthodox way by selling the assets and the vendor entities receiving the proceeds of sale upon the trusts they discharged. However, the appellants wanted to acquire two new businesses described as the 'Primemovers business' and the 'East Coast Printed Circuits business'. The acquisition of those businesses could not be financed from the proceeds of sale of the distribution and retail businesses to Shell. The appellants were referred by their accountants to Mr Collie of Cleary & Hoare, on the footing that Mr Collie might be able to solve a possible 'tax problem' by the use of an arrangement which would allow the legitimate utilisation of existing losses incurred by an entity described as Retail Technology Holdings Pty Ltd ('RTHPL'), a company supplied by Cleary & Hoare, sufficient to offset income receipts from Shell derived from the transaction. If the taxation consequences attached to the receipt by the vendor of assessable income arising out of the Shell transaction could be legitimately extinguished, the financing of the acquisition of the new businesses would be made possible. 15 The arrangements adopted by the appellants were these:

1. On 27 November 1997, the unit holder in PGUT (NOPL as trustee of the P & A Trust) authorised OSPL to authorise Mr McCutcheon to make an oral variation to the PGUT Deed. A Deed of Variation was executed that day and Mr McCutcheon declared amendments which would enlarge the class of eligible beneficiaries to include Lake Mylor Pty Ltd ('LMPL') as trustee of the Pine Grove Discretionary Trust ('PGDT'), as a beneficiary.
2. On 20 February 1998, the PGDT was settled with LMPL as trustee.
3. On 25 February 1998, NOPL as trustee of the P & A Trust made an interim distribution of $1,800,000.00 to OSPL as trustee of the PGUT.
4. On 25 February 1998, OSPL as trustee of PGUT made an interim distribution of $1,800,000.00 to LMPL as trustee of the PGDT.
5. That distribution was made by delivery of a bearer promissory note drawn by OSPL in an amount of $1,656,000.00 and a cheque in an amount of $144,000.00, to LMPL as trustee of the PGDT.
6. On 25 February 1998, LMPL as trustee of the PGDT made an interim distribution to itself in its capacity as trustee of the India Fixed Trust ('IFT').
7. That distribution was made by delivery of a bearer promissory note drawn by OSPL ($1,656,000.00) to LMPL in its capacity as trustee of the IFT together with a cheque for $144,000.00.
8. On 25 February 1998, LMPL as trustee of the IFT made an interim distribution in an amount of $1,800,000.00 to the beneficiary of the IFT, namely, RTHPL.
9. That distribution was made by delivering to RTHPL a promissory note drawn by LMPL. RTHPL wholly offset the receipt of $1,800,000.00 of income with deductions claimed by it.
10. RTHPL then made a gift of $1,750,500.00 to LMPL in its capacity as trustee of the LM Income Discretionary Trust (the 'LM Income DT').
11. The gift was made by delivery of two bearer promissory notes drawn by RTHPL: one in an amount of $1,656,000.00 and the other for an amount of $94,500.00.
12. LMPL as trustee of the LM Income DT subscribed for 16,500 'B' units in the India Unit Trust (the 'IUT') paid to $100.00 resulting in a total subscription price of $1,650,000.00.
13. Payment of the unit subscription price was made by the delivery of a bearer promissory note drawn by RTHPL in an amount of $1,650,000.00.
14. LMPL as trustee of PGDT directed OSPL to pay $144,000.00 to the Cleary & Hoare Trust Account.
15. On 2 March 1998, the AM Trust was settled by Ms Mauchlan with Farrago (NQ) Pty Ltd as trustee.
16. On 3 March 1998, the Northern Capital Trust ('NCT') was constituted, settled by Mr Collins with NOPL as trustee.
17. On 3 March 1998, LMPL as trustee of the IUT made a gift of $1,656,000.00 to NOPL as trustee of the NCT.
18. That gift was made by delivery of a bearer promissory note drawn by OSPL in an amount of $1,656,000.00.
19. On 3 March 1998, Cleary & Hoare received payment of $144,000.00 from LMPL.
20. On 6 April 1998, NOPL as trustee of the NCT lent $1,656,000.00 to Farrago as trustee of the AM Trust. 16 On 12 May 1998, a further and final distribution was made of an amount of $1,432,813.00. That distribution was effected by these steps.
21. On 12 May 1998, NOPL as trustee of the P & A Trust made a final distribution of $1,432,813.00 to OSPL as trustee of the PGUT.
22. On 12 May 1998, OSPL as trustee of the PGUT made a final distribution of $1,432,813.00 to LMPL as trustee of the PGDT.
23. The distribution was made by delivery of a bearer promissory note drawn by OSPL in an amount of $1,339,376.00 and a cheque in an amount of $93,437.00, to LMPL as trustee of the PGDT.
24. LMPL as trustee of the PGDT made a final distribution of $1,432,813.00 to LMPL in its capacity as trustee of the IFT.
25. The distribution was made by delivery of a bearer promissory note drawn by OSPL in an amount of $1,339,376.00 to LMPL as trustee of the IFT together with a cheque for $93,437.00
26. LMPL as trustee of the IFT made a final distribution in an amount of $1,339,376.00 to the beneficiary of that trust, RTHPL.
27. Payment of that distribution was made by delivery to RTHPL of a promissory note drawn by LMPL.
28. RTHPL offset the receipt of $1,339,376.00 of income with deductions available to it.
29. RTHPL then made a gift of $1,400,696.00 to LMPL in its capacity as trustee of the LM Income DT.
30. The gift of that amount was made by delivery of two bearer promissory notes drawn by RTHPL: one in an amount of $1,339,376.00 and the other in an amount of $61,320.00.
31. LMPL as trustee of the LM Income DT subscribed for 13,394 'B' units in the IUT each paid to $100 constituting a total subscription price of $1,339,400.00.
32. Payment of the subscription price was effected by delivery of the bearer promissory note drawn by RTHPL in an amount of $1,339,376.00.
33. LMPL in its capacity as trustee of the PGDT directed OSPL to pay $93,437.00 to the Cleary & Hoare Trust Account.
34. On 14 and 15 May 1998, the following events occurred. The Northern Capital Investment Trust ('NCIT') was settled with NOPL as trustee. LMPL as trustee of the IUT made a gift of $1,339,376.00 to NOPL as trustee of the NCIT. The gift was made by delivery of a bearer promissory note drawn on OSPL in an amount of $1,339,376.00 and Cleary Hoare received payment of $93,437.00 from LMPL.
35. On 30 June 1998, NOPL as trustee of the NCIT lent an amount of $1,339,376.00 to Farrago as trustee of the AM Trust. 17 At the conclusion of each of these steps in relation to the distribution of $1,800,000.00 and the further and final distribution of $1,432,813.00, Farrago as trustee of the AM Trust had received $1,656,000.00 and $1,339,376.00 as loan monies from NOPL as trustee of the Northern Capital Trust and NOPL as trustee of the Northern Capital Investment Trust, respectively. NOPL was at all times the trustee of the P & A Trust and in that capacity was a vendor of the original businesses sold to Shell. Farrago as trustee of the AM Trust then made loans to Primemovers (NQ) Pty Ltd as trustee of the PM Trust (settled on 2 March 1998) and East Coast Circuits Pty Ltd (incorporated on 15 May 1998) as trustee of the East Coast Circuits Unit Trust ('ECCUT') to enable those entities to acquire the two new businesses. Note 3 to the financial statements of Farrago as trustee of the AM Trust for the year ended 30 June 2003 shows, for the year ending 30 June 1998, an unsecured loan at call by Farrago to Primemovers (NQ) Pty Ltd as trustee of the PM Trust of $1,130,000.00 and a loan of the same amount by Farrago to East Coast Circuits Pty Ltd as trustee of the ECCUT. At all relevant times Mr and Mrs McCutcheon controlled Farrago and NOPL. They were the only directors of each company and were principals under the trust deeds of NCT, NCIT and the AM Trust. 18 On 30 June 1998, the appellants vested the P & A Trust and PGUT. The appellants also vested the NCT and NCIT and distributed the capital of those trusts. On 30 June 1998, at a meeting of directors of Farrago, the appellants resolved that the income of the AM Trust for the year ending 30 June 1998 be applied to the beneficiary, 'Mr Patrick Donald McCutcheon 100%'. 19 On 6 April 2004, the Commissioner by his delegate determined under s 177F(1)(a) of the ITAA that, 'the amount of $1,616,406.00 being a tax benefit that is referable to an amount that has not been included in the assessable income of Mrs Carolyn A McCutcheon (the taxpayer) for the year of income ended 30 June 1998, shall be included in the assessable income of the taxpayer of that year'. The Commissioner's delegate further determined under s 177F(2) that the amount be deemed to be included in the taxpayer's assessable income by virtue of s 97 of the ITAA. On 16 April 2004, the Commissioner issued an amended assessment to the taxpayer in reliance upon the determination. 20 On 6 April 2004, the Commissioner's delegate determined under s 177F(1)(a) of the ITAA that $1,616,406.00 being a tax benefit referable to an amount not included in the assessable income of Mr Patrick McCutcheon for the year ending 30 June 1998 be included in the taxpayer's assessable income for that year. The Commissioner's delegate further determined that the amount be deemed to be included in the taxpayer's assessable income by virtue of s 97 of the ITAA. 21 The Commissioner's delegate made a further determination on 6 April 2004 that 'the amount of $3,232,813.00 being a tax benefit that is referable to an amount that has not been included in the assessable income of Farrago (NQ) Pty Ltd as trustee of the AM Trust (the taxpayer) for the year of income ended 30 June 1998, shall be included in the assessable income of the taxpayer of that year of income' and 'I further determine under subsection 177F(2) that the amount shall be deemed to be included in the assessable income of the taxpayer by virtue of s 97 of the [ITAA]'. On 16 April 2004, the Commissioner issued an amended assessment to Mr McCutcheon which included in his assessable income the amount of $3,232,813.00.

The validity of the determinations 22 The first question of law goes to the validity of the determinations made by the Commissioner. 23 The appellants contend that all three determinations are invalid for the reason that the Commissioner has failed to identify 'a tax benefit' obtained by a taxpayer. Instead, the Commissioner is said to have identified multiple tax benefits comprising a tax benefit obtained by Farrago and further tax benefits obtained by Mr and Mrs McCutcheon as primary beneficiaries of the P & A Trust. The appellants say the Commissioner has not complied with the pre‑condition upon which s 177F operates when it can be seen that multiple determinations have been made in respect of different taxpayers (not all of whom have been assessed to tax) where each determination relates to the 'one fund of money or one stream of income'. The appellants say that the Commissioner has a statutory obligation in acting in reliance upon s 177F to define the scheme by which a taxpayer has obtained a tax benefit and then determine in respect of the stream of assessable income comprising the tax benefit, the particular taxpayer that obtained the particular benefit. The appellants say in oral submissions that the Commissioner in that sense has 'one shot' at it. 24 The appellants accept that the Commissioner as a proper exercise of the power conferred by s 177F can make on the one hand a determination that postulates an amount not included in the assessable income of a taxpayer that would or might reasonably be expected to have been included in the assessable income of that taxpayer in the relevant year of income had the scheme not been implemented and, on the other hand, make a determination that also postulates, in the alternative, an amount not included in the assessable income of another taxpayer that would or might reasonably be expected to have been included in that taxpayer's assessable income had the scheme (in connection with the same amount) not been implemented. Each of those determinations could support, in principle, an amended assessment addressed to each taxpayer the subject of the determination for the whole amount of the determination. 25 The point of departure from that principle represented by this case is said by the appellants to be this. A single stream of income the subject of the scheme has been identified by the Commissioner for treatment by the scheme ($3,232,813.00 in all). The Commissioner determined that a taxpayer, Farrago as trustee of the AM Trust, would or might reasonably be expected to have received all of that assessable income but for the scheme being implemented. Such a determination might be said to support an amended assessment raised to that taxpayer. At the same time, the Commissioner has determined that Mr McCutcheon would or might reasonably be expected to have received 50% ($1,616,406.00) of the income stream dealt with by the scheme, as assessable income as a primary beneficiary of the P & A Trust on the footing that had the scheme not been implemented, a reasonable prediction of future events involved a distribution by the trustee to each of the beneficiaries in the ratio 50/50. An amended assessment on the footing of that determination might then have issued to Mr McCutcheon reflecting the inclusion of $1,616,406.00 in his assessable income in the year of income. At the same time, on the same basis, the Commissioner has determined that Mrs McCutcheon would or might reasonably be expected to have received 50% of the income stream dealt with by the scheme as assessable income resulting in an amended assessment reflecting the inclusion of that amount in her assessable income in the year of income. 26 The appellants say that the Commissioner has made three determinations which identify two separate tax benefits obtained by (or as the appellants put it, in the hands of) different taxpayers (one by Farrago and an entirely separate benefit obtained by Mr and Mrs McCutcheon) arising out of the 'one fund' (that is, the aggregate amount of $3,232,813.00). The appellants say s 177F requires the identification of a tax benefit referable to a taxpayer in connection with a scheme for the non‑inclusion in assessable income of a relevant taxpayer of an amount. As a result, because all the determinations are said to be invalid by reason of the vice of multiple determinations referable to separate tax benefits involving different taxpayers, the amended assessments are also said to be invalid. The making of differential determinations based on separate tax benefits is said not to apply the construct required by s 177F(1)(a) having regard to the notion of a tax benefit required by s 177C(1)(a) and because a tax benefit for the purposes of s 177C(1) has not been identified, the first limb of s 177D(a) is said to fail with the result that the scheme comprising the set of interposed transactions, distributions and gifts is not a scheme to which Part IVA applies as required by the integers of s 177D. 27 Section 177F(1)(a) provides that where a tax benefit has been obtained or would but for s 177F be obtained by a taxpayer in connection with a scheme to which Part IVA applies, the Commissioner may in the case of a tax benefit that is referable to an amount not being included in the assessable income of the taxpayer of the year of income, determine that the whole or a part of that amount shall be included in the assessable income of the taxpayer of that year of income. The obtaining of a tax benefit by a taxpayer in connection with a scheme is a reference to, relevantly here, an amount not being included in the assessable income of the taxpayer of the relevant year where that amount would have been included or might reasonably be expected to have been included in the assessable income of the taxpayer for that year, if the scheme had not been entered into or carried out (s 177C(1)(a)). 28 Section 177D applies Part IVA to any scheme where a taxpayer, described in s 177D(a) as 'the relevant taxpayer' has obtained or would but for s 177F obtain a tax benefit in connection with the scheme and, having regard to eight matters identified in s 177D(b), 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, for the purpose 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)'. The concepts of 'tax benefit' (s 177C), 'scheme' (s 177A) and 'scheme to which this Part applies' (s 177D) have, viewed objectively, an inter‑related operation in s 177F in deciding whether the power conferred upon the Commissioner by s 177F(1)(a) can be exercised (Commissioner of Taxation v Hart (2004) 217 CLR 216 at [37]). 29 In determining whether either appellant has obtained a tax benefit in connection with the scheme the Commissioner was required under s 177C(1)(a) to consider whether an amount not included by the taxpayer in his or her assessable income as returned would have been included had the scheme not been implemented. That consideration contemplates the most likely prediction of future events absent the sequence of distributions and gifts interposed after or from the distribution by OPSL as trustee of the PGUT. A reference to obtaining a tax benefit is also to be read as reference to an amount that 'might reasonably be expected to have been included'. That phrase seems to contemplate a lower threshold of prediction although in Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359 at p 385, the Court (Mason CJ, Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ) concluded that a 'reasonable expectation' 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'. The Court in FCT v Spotless Services Ltd (1996) 186 CLR 404 at p 424 (Brennan CJ, Dawson, Toohey, Gaudron, Gummow and Kirby JJ), observed that in establishing, for the purposes of s 177C(1)(a), a tax benefit by reason of the non‑inclusion of assessable income in a taxpayer's assessable income, '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'. 30 The Tribunal decided that even though s 97 of the ITAA enables an assessment to issue to a presently entitled beneficiary of a trust, the susceptibility of the beneficiary to tax 'does not mean that the section 177F determination referable to [Farrago] as trustee of the AM Trust is an operative determination in relation to Mr McCutcheon. This particular determination is not self‑executing or complete in that sense' [132] (emphasis added). The Tribunal also said s 177F 'does not enable the Commissioner to make and give (in the sense of serve) two separate section 177F determinations directed to two different taxpayers and then to rely on these alternative determinations as a basis for a subsequent amended notice of assessment directed to one particular taxpayer that relies on the determination which is foreign to that taxpayer' [133] (emphasis added). The Tribunal found that the determination concerning Farrago was invalid and could not support the amended assessment issued to Mr McCutcheon principally because the determination was foreign to the taxpayer to whom the assessment issued. The appellants say, in effect, there is no symmetry between the multiple determinations and the taxpayers assessed to the tax benefit obtained. 31 In order to make a valid determination under s 177F, the Commissioner must identify a taxpayer that falls within the reach of the section. If the taxpayer is Farrago as trustee of the AM Trust, the Commissioner must ask whether the trustee has obtained a tax benefit in connection with an identified scheme. The Commissioner must be satisfied that Part IVA applies to that scheme. Finally, if the tax benefit is referable to an amount not included in the assessable income of Farrago as trustee in the relevant income year, the Commissioner may determine that the whole or part of that amount shall be included in the assessable income of Farrago for the relevant year of income. If the integers defining a valid exercise of the conferred power are made out, an amended assessment can properly issue to the taxpayer. Section 177C(1)(a) is directed to the precision attaching to the notion of a taxpayer obtaining a tax benefit. Farrago as trustee of the AM Trust obtains a tax benefit if an amount not included in the assessable income of Farrago (as trustee) is an amount that would have been included or might reasonably be expected to have been included in the assessable income of Farrago (as trustee) in the year of income, if the scheme had not been 'entered into' or 'carried out'. The hypothesis of the Commissioner was that had the scheme not been entered into or carried out, the income distributed by NOPL as trustee of the P & A Trust would have been distributed to Mr and Mrs McCutcheon equally. That prediction of future conduct, had the scheme not been implemented, was said to reflect what would have occurred or alternatively that it was sufficiently plain that the relevant amount might reasonably have been expected to be distributed to each taxpayer. The Tribunal found that as to that hypothesis the taxpayers failed to advance evidence of what would otherwise have occurred and thus failed to discharge the onus cast upon the taxpayer of demonstrating that the assessment was excessive (s 14ZZO(b)(i) Taxation Administration Act 1953 (Cth)). 32 The alternative hypothesis said to enliven s 177F(a) was that had the scheme not been entered into or carried out, an amount of $3,232,813.00 would have been included or at least might reasonably have been expected to be included in the assessable income of Farrago. It seems to have been contended before the Tribunal that that hypothesis could not be reasonably held by the Commissioner as the AM Trust was settled as late as 2 March 1998 as a vehicle integral to the implementation of the scheme. Therefore, it would not have existed had the scheme not been entered into or carried into effect. Because Mr and Mrs McCutcheon as directors of Farrago elected to distribute all of the income of the AM Trust to Mr McCutcheon, an ex post facto examination of the sequence of events comprising the scheme might be thought to support a reasonable prediction that since the appellants, in fact, sought to ultimately place all of the monies distributed by NOPL as trustee of the P & A Trust in the hands of Mr McCutcheon through the vehicle of the scheme, they would have done so had the scheme not been entered into or carried out. 33 However, the appeal to this Court is confined to the resolution of the question of law only. The Commissioner made a determination in reliance upon s 177F(1)(a) that Farrago as trustee of the AM Trust had obtained a tax benefit of $3,232,813.00 being an amount not included in its assessable income in its trustee capacity. That determination posits a prediction which is an alternative to and different from the prediction that NOPL would have distributed the stream of income it received to each appellant equally. The Commissioner is entitled to adopt, especially in the context of complex arrangements, alternative views of what would or might reasonably have been expected to have occurred and make alternative determinations of an amount not included in the assessable income of particular taxpayers (Richardson v Federal Commissioner of Taxation (1932) 48 CLR 192; Deputy Commissioner of Taxation v Moorebank Pty Ltd (1988) 165 CLR 55; Deputy Commissioner of Taxation v Richard Walter Pty Limited (1995) 183 CLR 168 per Mason CJ at p 188, Brennan J at p 202, Deane and Gaudron JJ at p 214, Dawson J at p 217, Toohey J at p 229 and McHugh J at p 238). The issue of the validity of the determination made by the Commissioner concerning Farrago is not (as it could not be) that no basis on the facts subsisted for the making of the determination. The question of law concerning validity is the lack of symmetrical treatment between the alternative and multiple determinations made to the particular taxpayers and the issue of amended assessments to different taxpayers in respect of what is described as the one stream of income. The appellants say that FCT v Richard Walter is to be distinguished on its facts from the present case as although the Court recognised that 'alternative assessments' might properly issue to 'two [different] taxpayers' in respect of the 'same item of income' (per Brennan J at p 202) the Court necessarily although implicitly recognised that the validity of such alternative assessments involves the making of alternative determinations (based on the prediction contemplated by s 177C(1)(a)) in respect of the two or more taxpayers leading to an assessment issued to each taxpayer the subject of each determination. Thus, it is contended that a determination made in respect of a tax benefit in a particular amount obtained by taxpayer A cannot support an assessment issued to taxpayer B for the inclusion of that amount in the assessable income of B. As a result, the appellants say not only is the determination made in the alternative to Farrago invalid as a proper exercise of the conferred power as it resulted in an amended assessment to Mr McCutcheon but the alternative determinations addressed to Mr McCutcheon and Mrs McCutcheon are also invalid. 34 It may well be, in the relevant case, that differential or alternative determinations concerning a contended tax benefit obtained by taxpayers A, B and C in respect of particular (and potentially different) amounts not included in the assessable income of those taxpayers, will not or can not support an assessment issued to anyone other than taxpayers A, B and C. However, the capacity in which a taxpayer acts is central to assessments which issue consequent upon a determination. In this case, a determination was made that Farrago obtained a tax benefit through the non‑inclusion of assessable income in the relevant income year. Farrago is a taxpayer the subject of the determination but it is also a trustee of the AM Trust. One of the beneficiaries of that trust was at 30 June 1998 'presently entitled' to all of the income of the trust. Since the trustee in its trustee capacity obtained a tax benefit in an amount of $3,232,813.00 and that amount was determined to be included in the assessable income of the trustee in its capacity as trustee of the AM Trust with a beneficiary entitled to 100% of the assessable income, the determination supports an assessment issued to Mr McCutcheon. Accordingly, there is the necessary symmetrical relationship contended for by the appellants between the alternative determination in respect of a tax benefit obtained by a taxpayer and the assessment issued to Mr McCutcheon, presently entitled to the income of the trust. In that respect, having regard to the capacity in which Farrago acted and the present entitlement of Mr McCutcheon, it seems to me that the determination can not properly be described as 'foreign to [Mr McCutcheon]' in the sense described by the Tribunal at [133]. There is thus a tax benefit obtained by Farrago as trustee of the AM Trust relied upon by the Commissioner in making the determination addressed to Farrago in that capacity which supports the assessment issued to Mr McCutcheon. There is also an alternative tax benefit obtained by Mr and Mrs McCutcheon in the manner previously described. Each of these tax benefits are, by operation of the inter‑related provisions, a tax benefit for the purposes of s 177D. There is no contended error going to s 177D(b). 35 Since the invalidity of the other alternative determinations made concerning Mr and Mrs McCutcheon is said to necessarily arise out of the invalidity in the determination concerning Farrago due to the multiplicity and lack of coherence between the determinations, the taxpayers and the assessments that issued, it follows, on the appellants' argument, that since the Farrago determination is valid, the alternative determinations are also valid. In any event, there is no demonstrated error on the part of the Tribunal in concluding, subject to the remaining grounds of appeal, that the determinations made concerning Mr and Mrs McCutcheon and the assessment issued to Mrs McCutcheon is valid.

The evidence issue 36 The second ground of appeal is a contended error of law on the part of the Tribunal in excluding particular evidence sought to be given by Mr McCutcheon. The Tribunal excluded the evidence on the basis that Mr McCutcheon sought, by his affidavit, to swear the ultimate issue to be determined by the Tribunal rather than give evidence of facts relevant to the matters in issue. The evidence excluded by the Tribunal is contained in para 68 of Exhibit 4 before the Tribunal which is an affidavit sworn by Mr McCutcheon. Paragraphs 66 to 68 of the affidavit deal with the distributions made by NOPL as trustee of the P & A Trust on 25 February 1998 and 12 May 1998. Mr McCutcheon sought to establish that had the scheme not been entered into or carried out, the trustee of the P & A Trust would not have made the distributions to Mr and Mrs McCutcheon as the Commissioner had hypothesised. The first sentence of para 68 is in these terms: 'Further, the P & A Trust has never distributed large amounts of income to either my wife or I and would never have distributed such a substantial portion to either my wife or I'. The Commissioner objected to the reception into evidence of the words in italics on the footing that the evidence is a statement of the ultimate issue to be determined. 37 It is perfectly clear that a deponent in seeking to demonstrate (and discharge the onus of proof) that an assessment is excessive having regard to a prediction as to whether an amount might reasonably have been included in the assessable income of the taxpayer, can not simply give evidence that the answer is to be found in the deponent speculating as to what he or she would or would not have done in the absence of the scheme (WD & HO Wills (Australia) Pty Ltd v FCT (1996) 65 FCR 298). The Commissioner accepted in the course of argument on the appeal that it is perfectly proper for a deponent in the position of Mr McCutcheon to say in evidence that the trustee (controlled by the taxpayers) would not have made distributions of the amounts postulated by the Commissioner to the taxpayers, provided the foundation for that observation or conclusion is given in evidence. In other words, Mr McCutcheon might have said that 'the trustee would never have distributed such a substantial portion to either my wife or I' because (or for that reason that) and then identify factual circumstances which support the proposition. The vice said to exist in Mr McCutcheon's evidence is that it is simply speculative evidence on the ultimate question unsupported by any evidence of material facts from which the conclusion Mr McCutcheon contends for could be drawn. 38 It seems to me that the evidence goes to the question of whether the determinations made by the Commissioner are properly founded upon a prediction that an amount of approximately $1.6m might reasonably have been included in the assessable income of Mr and Mrs McCutcheon had the scheme not been entered into or carried out thus giving rise to a tax benefit being one of the integers upon which s 177F operates. That question seems to me to be an element of the ultimate question. Accordingly, it is not open to Mr McCutcheon to simply swear the issue by providing what he may consider to be a complete answer to the question in issue based on his speculation as to what might have occurred. However, it seems to me that the statement in para 68 needs to be assessed in context. Paragraph 66 also asserts that had the distributions from the P & A Trust not been made in the manner reflected in the transactions comprising the scheme, distributions would not have been made to Mr and Mrs McCutcheon in the ratio 50/50. That paragraph is gathered up in the words objected to in para 68. Both para 66 and the words in para 68 are sought to be explained by two factual contentions. In para 67, Mr McCutcheon says that the first reason that no such distributions would have been made is that OSPL as trustee of the PGUT was also a vendor of the retail business and was, as a result, entitled to a part of the proceeds of sale and thus a substantial part of the stream of income received by NOPL as trustee of the P & A Trust was, in any event, due and payable to OSPL as trustee of the PGUT. Whether that statement is correct or incorrect it nevertheless represents a contended reason or material fact said to support a conclusion that the P & A Trust distributions would not otherwise have gone equally in their totality to Mr and Mrs McCutcheon. The second factual contention is contained in para 68 to the effect that the largest amount of income ever distributed to Mr and Mrs McCutcheon by the P & A Trust was $25,000.00 to Mr McCutcheon and $13,000.00 to Mrs McCutcheon in the income year ending 30 June 1997. Mr McCutcheon goes on to say that the history of distributions by the trustee of the P & A Trust shows that the bulk of the trust's income has been distributed to particular entities and only very small amounts have historically been distributed to Mr and Mrs McCutcheon or their daughters Sally and Claire McCutcheon. Moreover, Mr McCutcheon says that the P & A Trust has a history of distributing large amounts of income to the trustee of the PGUT. 39 It seems to me that the Tribunal is entitled to receive into evidence the statement objected to by the respondent provided foundation facts are given in evidence which support what would otherwise be a bald speculative statement. Those foundation facts would in the ordinary course of events be detailed and comprehensive and seek to explain why the prediction could not reasonably be entertained in the context of a full understanding of the matrix of fact. Such an approach would be consistent with principle and enable the taxpayer to state a position derived from a factual foundation. In this case, the foundation facts are confined to the matters identified. However, factual matters were deposed to which were said to support the excluded evidence. Although of course the Tribunal by s 33 of the AAT Act is not bound by the rules of evidence but may inform itself on any matter in such manner as it thinks appropriate, the Tribunal might usefully be guided by the foundation rule in relation to the relevance of evidence contained in s 55(1) of the Evidence Act 1995 (Cth) in these terms: 'The evidence that is relevant in a proceeding is evidence that if it were accepted, could rationally affect (directly or indirectly) the assessment of the probability of the existence of a fact in issue in the proceeding'. The excluded statement by itself, could not possibly rationally affect directly or indirectly the assessment of the probability of the existence of a fact in issue. However, it seems to me that the excluded evidence ought to have been admitted by the Tribunal as a statement to be contextually understood having regard to the evidence of material facts (although put in controversy by the respondent) in paras 67 and 68 of the affidavit said to support the excluded evidence. Those material facts were admitted by the Tribunal. 40 Accordingly, the Tribunal erred in refusing to admit the evidence of Mr McCutcheon identified by the italicised words above. Because the italicised words were simply given meaning by the statements identified, the exclusion of the italicised words made no difference to the deliberations of the Tribunal.

The tax benefit issue 41 The appellants contend that the Tribunal erred in determining whether a taxpayer had obtained a tax benefit. As to the contended equal distribution to Mr and Mrs McCutcheon of an amount totalling $3,232,813.00, the appellants contend that the Tribunal applied an incorrect methodology. The appellants say that the Tribunal disregarded the history of previous determinations; concluded that there was no evidence before the Tribunal upon which it could act in order to determine what the appellants would have done if the scheme had not been entered into or carried into effect; and concluded that it would be speculative to adopt the submissions of the appellants as to what might have happened had the scheme not been implemented. The appellants contend that there was no evidence before the Tribunal admissible or otherwise to support the conclusion that there would have been or might reasonably be expected to have been a distribution by the trustee of the P & A Trust to Mr and Mrs McCutcheon equally. It follows, it is said, that since there was no evidence to support that conclusion, no tax benefit in connection with the scheme has been identified and thus the determination is invalid. 42 The appellants say that they use the term 'no evidence' in the 'strict sense' of an error of law on the part of the Tribunal in reaching a conclusion unsupported by any evidence before the Tribunal rather than as an impermissible attempt to challenge a finding of fact on an appeal concerned only with questions of law (TNT Skypak International (Aust) Pty Ltd v Federal Commissioner of Taxation (1988) 82 ALR 175). The appellants say, 'where is the evidence upon which the Tribunal could conclude as a reasonable prediction of events, absent the scheme, that Mr and Mrs McCutcheon would have been likely to receive an equal distribution of the income stream of $3,232,813.00?' The appellants say the evidence of historical distributions by the trustee of the P & A Trust is entirely inconsistent with such a hypothesis. The Tribunal reached these conclusions. At [145], the Tribunal agreed, 'with the reasons and submissions advanced by [the Commissioner] in connection with the quantification of the tax benefit in the case of each of Mr and Mrs McCutcheon for reasons which will be explained next'. At [146], the Tribunal said this: 146. The Tribunal is of the opinion that while the scheme was entered into for the purpose of obtaining a tax benefit in the case of both Applicants (the non‑inclusion of assessable income within section 177C(1)(a)), nevertheless it is not correct to say, as the respondent contended that the full amount of the non‑included assessable income would have been shared equally by the applicants. 43 The Tribunal noted that the previous distribution history concerning the P & A Trust indicated that there were persons apart from the appellants who had received distributions. The Tribunal concluded that there was no evidence before it upon which it could act in order to determine what distributions the appellants might have caused the trustee to make, had the scheme not been entered into or carried out. The appellants contended before the Tribunal that evidence of historical distributions provided a basis on which the Tribunal could conclude that distributions would not have been made consistent with the hypothesis. The Tribunal examined the history of distributions and was unpersuaded that those distributions provided support for the appellants' contentions. 44 At [147], the Tribunal addressed the second limb of the prediction test in s 177C(1)(a) as interpreted in Federal Commissioner of Taxation v Peabody (supra) to determine whether the Commissioner's hypothesis as to the distributions from the P & A Trust to Mr and Mrs McCutcheon equally was 'sufficiently reliable for it to be regarded as reasonable'. In considering that matter, the Tribunal concluded: In cross‑examination, the respondent was able to show and the Tribunal finds, that Mr McCutcheon was motivated by the desire to receive the sale proceeds stemming from the sale of two businesses in as tax effective a manner as was possible and to reinvest those proceeds. In and of itself, this is not indicative of a purpose to gain a tax benefit within section 177D but it is a fact which is relevant to consider and give appropriate weight to. [147] 45 The Tribunal also concluded that it was a matter for the Commissioner to demonstrate to the Tribunal that a basis for sufficiently reliable prediction subsisted once the appellants put the determination and assessments in issue. There is no doubt that the onus and burden of proof falls upon the appellants to demonstrate that the assessment issued to each taxpayer is excessive. That necessarily involves each taxpayer adducing evidence which would discharge the onus of demonstrating that the Commissioner's prediction or hypothesis was not sufficiently reliable for it to be regarded as reasonable. The appellants sought to do that by reliance upon the history of distributions. 46 The Commissioner, although not bearing the onus, sought to support the hypothesis on the following basis. The appellants ultimately owned and controlled each of the P & A Trust, the PGUT, the NCT, the NCIT and the AM Trust. The appellants were the economic owners of the income derived from the sale of the businesses leading to the adoption of the scheme. The appellants led no evidence as to what distributions would have been made by the P & A Trust, if any, had the scheme not been entered into. A consideration of previous distributions showed that PGUT and another beneficiary, Pennant Fuels Pty Ltd received substantial distributions in earlier years. Distributions were made to PGUT in the income years ending 30 June 1991 and 1995. In those years, the P & A Trust held all of the units in PGUT. In those years, the PGUT had tax losses available to offset income receipts. In the 1998 year, the trust vested. The Commissioner contended that a distribution to PGUT of the proceeds of sale of the Townsville businesses would have served no purpose given that but for the scheme, the P & A Trust was the sole unit holder in the PGUT. The Commissioner contended before the Tribunal that distributions appear to have been made for tax effective purposes. The appellants' accountants of 14 November 1997 in a letter to Cleary & Hoare described the PGUT and Pennant Fuels as a loss trust and loss company in relation to distributions. Pennant Fuels carried on business from 1984 to 1990 and appeared to serve no purpose after that time other than to receive distributions in the income years ending 30 June 1995, 1996 and 1997 as it had carried forward losses. Upon voluntary liquidation on 27 May 1998, Pennant Fuels distributed all of its income and capital to the appellants. It was deregistered on 7 December 1998. The Commissioner contended before the Tribunal that it was improbable that the sum of $3,232,813.00 would have been distributed to that entity but for the scheme as it only had tax losses in the income year ending 30 June 1998 of $15,449.00. The Commissioner contended that the children of the appellants received nominal distributions in the income years ending 1996 and 1997 and it was therefore improbable that they would have received the income stream or a significant component of it as minors are taxed at the top marginal rate. 47 Accordingly, the Commissioner contended before the Tribunal that it was reasonable to conclude, based on these considerations (and thus the prediction was sufficiently reliable), that had the scheme not been entered into or carried out, the income stream received by NOPL as trustee of the P & A Trust would have been distributed to the appellants as the ultimate beneficial owners of the business of the P & A Trust. 48 The point of making reference to the submissions and contentions of the Commissioner before the Tribunal is that having considered those matters, the Tribunal said at [145] that it agreed with the 'reasons and submissions' of the Commissioner in connection with the 'quantification' of the tax benefit in the case of Mr and Mrs McCutcheon. Plainly, the Tribunal was persuaded on the facts that a basis subsisted for a sufficiently reliable prediction and thus the prediction was reasonably made. More importantly, the Tribunal concluded that the appellants had failed to put evidence before the Tribunal which demonstrated a basis for concluding that the prediction or hypothesis of the Commissioner was unreasonable. Thus, the appellants failed to discharge the onus of demonstrating that an assessment reliant upon the determination was excessive. 49 In addition, the Tribunal at [147] relied upon the cross‑examination of Mr McCutcheon. The reference to that cross‑examination is a reference to an answer by which Mr McCutcheon said that he 'strove to get the most effective - tax effective means of selling the businesses of Northern Oil and Oil Services and in the process of buying the others, the whole arrangement would be the most tax effective arrangement' and that Mr McCutcheon wanted to keep the whole of whatever was possible of the amount received from Shell to pay for the new businesses. 50 Accordingly, there is no demonstrated error on the part of the Tribunal in the methodology it adopted in determining whether Mr and Mrs McCutcheon had obtained a tax benefit in the form of the non‑inclusion of an amount of $1,616,406.00 in the assessable income for each individual having regard to the prediction that such an amount might reasonably be expected to have been included in the assessable income of each taxpayer on the footing of the postulated distributions to each taxpayer by the trustee of the P & A Trust had the scheme not been entered into or carried out.

The application of s 177F(2) 51 The final question of law concerns the terms of the determination made by the Tribunal pursuant to s 177F of the ITAA. In making that determination the appellants say the Tribunal failed to comply with s 177F(2) by failing to identify in the determination the provision under which it determined that the relevant amount should be deemed to be included in the assessable income of the taxpayer. The appellants say that if the Tribunal had expressly stated in the determination that the assessable income was deemed to be included by virtue of s 97 of the ITAA then the appellants would have no criticism. In the result, the determination is said to be invalid and the matter must be remitted to the Tribunal. 52 Section 177F(2) provides that where the Commissioner [or the Tribunal exercising the powers of the Commissioner pursuant to s 43 of the AAT Act] determines under s 177F(1)(a) that an amount is to be included in the assessable income of a taxpayer of a year of income, that amount shall be deemed to be included in the assessable income by virtue of such provision of this Act as the Commissioner determines. The Tribunal in exercising the power under s 177F(1)(a) determined that 'the tax benefit that is referable to an amount that has not been included in the income of the Applicant [Mr McCutcheon] in the income year ended 30 June 1998 is an amount of $1,616,406.00'. The Tribunal remitted the matter to the Commissioner for reconsideration and the issue of an amended assessment that 'gives effect to the Tribunal's determination pursuant to section 177F …'. The appellants say in oral submissions that they do not make a great deal of this ground of appeal but simply point out an apparent assumption on the part of the Tribunal that the determination as made captures a reference to the provision of the ITAA that deems the amount, as determined, 'to be included' in the assessable income of the taxpayer. The appellants say that such assumptions are dangerous and by reason of the assumption the determination fails as a matter of law. 53 The Commissioner says that a determination under s 177F(1)(c) or s 177F(2A) must by operation of s 177F(2B) be in writing and since there is no reference in s 177F(2B) to s 177F(2), it follows that the determination of the provision of the ITAA by virtue of which the relevant amount forms part of the assessable income of the taxpayer (consequent upon the determination), need not be made by the decision‑maker in writing. In this case, the Tribunal has made a determination coupled with a remitter to the Commissioner for reconsideration in accordance with the determination for the purpose of enabling an amended assessment to issue that gives effect to the determination. It seems to me to be implicit in the determination that the Tribunal has formed a view, that is to say, the decision‑maker has determined (in the sense contemplated by s 177F(2)) that the amount is to be included in the assessable income of the taxpayer by virtue of the provisions of the Act that support the amended assessment. The role of the Commissioner is to give effect to the determination by issuing an amended assessment under the provisions of the ITAA which give expression to the determination. Accordingly, the determination does not fail for want of compliance with s 177F(2). 54 No submissions were addressed by either party in relation to the ground of appeal concerning s 226H of the ITAA. 55 Having regard to all of these matters it follows that each appeal is to be dismissed. The Commissioner expresses acceptance of the determination made by the Tribunal even though made on the footing of an error in setting aside the objection decision of the Commissioner in relation to the objections made by Mr McCutcheon to the amended assessment issued to him [Transcript p38, line 35].

56 The orders will be that each application is dismissed with costs. I certify that the preceding fifty-six (56) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Greenwood.

Associate: Dated: 12 March 2008 Counsel for the Applicant: Mr C D Coulsen

Solicitor for the Applicant: Tucker & Cowen Solicitors

Counsel for the Respondent: Mr G T Pagone QC, Ms J Davies SC and Mr R Niall

Solicitor for the Respondent: The Australian Government Solicitor