Merchant v Commissioner of Taxation

422 The figure of $51,538,205 is close to the sum of the midpoints of the upper and lower bounds calculated for the Milestone Amounts and Earn-Out Amounts. The midpoint of the Milestone bounds is $27,817,261. The midpoint of the Earn-Out bounds is $23,637,675. The precise midpoint would be $51,454,936. 423 Like SFG, Mr Samuel used a discounted cash flow valuation approach: Samuel at [108] to [110]. He concluded that the market value of the Milestone Amounts was $22.613 million and the market value of the Earn-Out Amounts was $17.579 million: Samuel at [32]. 424 The Commissioner did not adduce expert evidence on the topic. He relied on the SFG report. The Commissioner also relied on the fact that SFG's valuation was used in the context of Plantic's employee share option plan. However, little is known about that transaction, including whether it was negotiated as to price or otherwise. 425 Mr Samuel did not agree with SFG's approach of seeking to incorporate the probability of the future cash flows being received into the discount rate (used to discount for business risk). Mr Samuel described SFG's approach as "a poor proxy for doing it the right way": T181.14-22. 426 Mr Samuel built the probability of the amounts being received into the cash flow, before applying the discount rate: T179.34-37. He used a discount rate which captured normal business risks: T178.34. 427 In re-examination, Mr Samuel gave evidence that he considered that SFG's assessment of the discount rate was flawed. 428 It was not put to Mr Samuel's that his opinion contained any methodological flaw or that his opinion was not open or wrong. Rather, the case which was run was that SFG's assessment of fair value was an available opinion as was Mr Samuel's and that there was no reason to accept Mr Samuel's valuation as better than SFG's: ROS[406]. 429 I consider Mr Samuel's methodology is preferable to that employed by SFG and I agree with Mr Samuel's reasoning. The reasoning as expressed in the SFG report is insufficient for me to be satisfied that the discount rates adopted by SFG are soundly based. 430 There was an objection to part of the evidence given by Mr Samuel in reply and to the tender of Exhibit 5, which was an article referred to by SFG in its report. The point of part of the cross-examination of Mr Samuel was to seek to have Mr Samuel agree that the SFG report expressed opinions about market value which were open and that the methodology was different to Mr Samuel's, but not flawed. 431 The re-examination arose out of cross-examination and the evidence given in re-examination is admitted, as is Exhibit 5. I would have reached the same conclusion about market value even if I had rejected Mr Samuel's evidence in reply and Exhibit 5.

Conclusion in relation to the s 177D Proceeding 432 Section 177D of the ITAA 1936 applies. 433 However, for the reasons given, GSM has discharged its onus of establishing that the capital proceeds were incorrectly calculated. It follows that GSM has discharged its onus of establishing that the GSM Amended Assessment is excessive to the extent identified.

Introduction 434 As noted earlier, GSM and Tironui forgave the Plantic Loans in the sums of $50.192 million and $4.215 million, respectively, on 2 April 2015. 435 In making the s 177E Determination, the Commissioner identified the GSM Debt Forgiveness and the Tironui Debt Forgiveness as schemes "having substantially the effect of a scheme by way of or in the nature of dividend stripping" for the purposes of s 177E(1)(a)(ii) of the ITAA 1936. The GSM Debt Forgiveness Scheme and the Tironui Debt Forgiveness Scheme are referred to collectively as the Debt Forgiveness Schemes. 436 The Commissioner: (a) formed the opinion required by s 177E(1)(b) that the disposal of the debts by GSM and Tironui was a disposal of property (a chose in action within the definition of property in s 177E(3)), and represented a distribution of profits to the MFT (as "another person"); and (b) identified that, if - immediately before the Debt Forgiveness Schemes - GSM and Tironui had declared and paid dividends to Mr Merchant in the amounts forgiven, those amounts would have been included in Mr Merchant's assessable income for that year, in satisfaction of s 177E(1)(c). 437 The Commissioner made a consequential determination under s 177F(1)(a) including amounts equivalent to the sums forgiven by GSM and Tironui, being the notional amounts calculated in accordance with s 177E(1)(c), in Mr Merchant's assessable income in the 2015 income year by virtue of s 44 of ITAA 1936. The Merchant Amended Assessment was then issued for that year.

The legislation 438 Section 177E includes: 177E Stripping of company profits (1) Where: (a) as a result of a scheme that is, in relation to a company: (i) a scheme by way of or in the nature of dividend stripping; or (ii) a scheme having substantially the effect of a scheme by way of or in the nature of a dividend stripping; any property of the company is disposed of; (b) in the opinion of the Commissioner, the disposal of that property represents, in whole or in part, a distribution (whether to a shareholder or another person) of profits of the company (whether of the accounting period in which the disposal occurred or of any earlier or later accounting period); (c) if, immediately before the scheme was entered into, the company had paid a dividend out of profits of an amount equal to the amount determined by the Commissioner to be the amount of profits the distribution of which is, in his or her opinion, represented by the disposal of the property referred to in paragraph (a), an amount (in this subsection referred to as the notional amount) would have been included, or might reasonably be expected to have been included, by reason of the payment of that dividend, in the assessable income of a taxpayer of a year of income; and (d) the scheme has been or is entered into after 27 May 1981, whether in Australia or outside Australia; the following provisions have effect: (e) the scheme shall be taken to be a scheme to which this Part applies; (f) for the purposes of section 177F, the taxpayer shall be taken to have obtained a tax benefit in connection with the scheme that is referable to the notional amount not being included in the assessable income of the taxpayer of the year of income; and (g) the amount of that tax benefit shall be taken to be the notional amount. (2) Without limiting the generality of subsection (1), a reference in that subsection to the disposal of property of a company shall be read as including a reference to: … (d) any transaction having the effect, directly or indirectly, of diminishing the value of any property of the company. … (3) In this section, property includes a chose in action and also includes any estate, interest, right or power, whether at law or in equity, in or over property. 439 A "scheme" is defined in section 177A(1) as meaning: (a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and (b) any scheme, plan, proposal, action, course of action or course of conduct. 440 There are two limbs to s 177E(1). The 'first limb' concerns disposals of property resulting from "a scheme by way of or in the nature of dividend stripping". The 'second limb' concerns disposals of property resulting from "a scheme having substantially the effect of a scheme by way of or in the nature of dividend stripping". 441 The Commissioner accepts that the present case does not fall within the first limb. However, it is necessary to understand the first limb in order to understand the second limb.

The first limb of s 177E(1) 442 The term "dividend stripping" is not defined. It has been considered in a number of cases. 443 In CPH Property Pty Ltd v Commissioner of Taxation (1998) 88 FCR 21 at 47 (CPH FC), Hill J said the following about the "essential character" of dividend stripping: Clearly it involves a company which is pregnant with accumulated profits out of which a dividend would reasonably be likely to be declared or has already been declared or where the company is about to receive profits in the future out of which a dividend would reasonably be likely to be declared. In each case the result would be that shareholders would become liable to pay tax on those dividends. It involves the readying up of that company for sale, either by converting its assets into cash or purchasing back operating assets so that the substantial assets of the target company are cash or loans back. (The fact that steps had been taken before contacting a stripper would hardly, however, remove the transaction from the category of dividend stripping.) It involves the sale, or allotment of shares in the target company to the stripper. It involves the subsequent payment of a dividend to the stripper by the target company or a deemed dividend of the kind referred to in s 47 of the Act, so as to recoup the stripper for the outlay for the shares. As presently advised I see no reason why the fact that the consideration for the sale of shares in that target company is not cash but an allotment of shares necessarily excludes, as the applicants suggest, the scheme from being in the nature of dividend stripping. 444 The Full Court in Commissioner of Taxation v Consolidated Press Holdings Ltd (No 1) [1999] FCA 1199; 91 FCR 524 at [136] (French, Sackville and Sundberg JJ) (CPH FFC) stated that the four dividend stripping cases referred to by Gibbs J in Federal Commissioner of Taxation v Patcorp Investments Limited (1976) 140 CLR 247; 6 ATR 420 had the following five characteristics in common: • a target company, which had substantial undistributed profits creating a potential tax liability either for the company or its shareholders; • the sale or allotment of shares in the target company to another party; • the payment of a dividend to the purchaser or allottee of the shares out of the target company's profits; • the purchaser escaping Australian income tax on the dividend so declared; and • the vendor shareholders receiving a capital sum for their shares in an amount the same as or very close to the dividends paid to the purchasers (there being no capital gains tax at the relevant times). 445 At [137], the Full Court identified a sixth characteristic, stating of each of the schemes that: they were carefully planned, with all the parties acting in concert, for the predominant if not the sole purpose of the vendor shareholders, in particular, avoiding tax on a distribution of dividends by the target company. 446 As to the last characteristic - the predominant purpose of avoiding tax on a distribution of dividends by the target company - the Full Court in CPH FFC at [174] stated: In our view, the first limb of s 177E(1) embraces only a scheme which can be said objectively to have the dominant (although not necessarily the exclusive) purpose of avoiding tax. The requirement of a tax avoidance purpose flows from the use by Parliament of the undefined expression "a scheme by way of or in the nature of dividend stripping". What is important is the nature of the scheme, not the subjective motives or intentions of any of the participants or the beneficiaries. The purpose of the scheme is to be assessed from the perspective of the reasonable observer, having regard to the characteristics of the scheme and the objective circumstances in which the scheme was designed and operated. 447 The High Court, in CPH HC at [132] and [134], upheld the Full Court's conclusion that the first limb of s 177E requires the existence of a dominant tax avoidance purpose. The High Court implicitly endorsed Hill J's approach to determining purpose, namely to ask what conclusion an objective observer would reach as to why the scheme had taken place: at [125]. 448 The identification of these "common characteristics" of dividend stripping operations made by the Full Court in CPH FFC was referred to with apparent approval by the Full Court in Lawrence v Commissioner of Taxation [2009] FCAFC 29; 175 FCR 277 at [42] and [43] (Lawrence FFC). At [45], the Full Court in Lawrence FFC cited with approval what the Full Court had said in CPH FFC at [156], namely: The terms of the first limb of s 177E(1)(a) suggest that a scheme may fall within its scope, even though not all the elements of a standard dividend stripping scheme are present. The use of the words 'by way of or in the nature of' suggests that variations from the paradigm will not necessarily result in the scheme being excluded from the first limb, provided it retains the central characteristics of a dividend stripping scheme.

The second limb of s 177E(1) 449 As to the second limb of s 177E(1), the High Court in CPH HC observed that the term "dividend stripping" in s 177E(1)(a)(ii) must have the same meaning as in s 177E(1)(a)(i), and that the reference to "effect" in the second limb does "not require the element of [a tax avoidance] purpose to be discarded": at [138]. It follows that a dominant tax avoidance purpose must exist for the 'second limb' to be engaged. 450 It is clear that the second limb was intended to extend the operation of s 177E(1) beyond the schemes identified in the first limb. A scheme which does not fall within the first limb will be captured if the scheme has "substantially the effect" of a scheme by way of or in the nature of a dividend stripping scheme. 451 In CPH HC at [137], the High Court doubted that the second limb could be construed so as to render the first limb otiose; the High Court considered that the construction given to the second limb by Hill J at trial in CPH FC meant that it was never necessary to look past the effect of the scheme and, implicitly, that this construction was therefore incorrect. 452 In CPH HC, the High Court observed at [139] and [140]: [139] As the Full Court pointed out [at [182]], a clue to the understanding of s 177E(1)(a)(ii) is to be found in the second of the two paragraphs in the Explanatory Memorandum last quoted above. [140] The Explanatory Memorandum had earlier referred, in connection with sub-par (i), to dividends or deemed dividends which, by reason of s 47(1) of the Act, would include distributions to shareholders by a liquidator to the extent to which they represented income, other than income applied to replace paid-up capital. What sub-par (ii) was aimed at was a scheme that would be within sub-par (i) except for the fact that the distribution by the target company was not by way of a dividend or deemed dividend. Dividend stripping does not lose its connotation of tax avoidance purpose. But a scheme may have substantially the effect of a scheme by way of or in the nature of dividend stripping even though some means other than a dividend or deemed dividend is employed to make the distribution. 453 If this were taken literally, it would be a narrow construction of a provision expressed in broad terms. A literal interpretation of this passage was rejected in Lawrence v Commissioner of Taxation [2008] FCA 1497; 70 ATR 376 (Lawrence FC) and on appeal in Lawrence FFC. The taxpayer in that case relied on [139] and [140] of CPH HC in submitting that a scheme would not fall within the second limb of s 177E(1)(a) unless it would have fallen within the first limb of s 177E(1)(a) but for the fact that the profits of the target company were not distributed by way of dividend but by some other means - see: Lawrence FFC at [40] and [50]. This argument was rejected: Lawrence FC at [80] to [82]; Lawrence FFC at [50] to [53]. 454 The High Court's observation in CPH HC at [137] was referred to by the Full Court in B&F Investments Pty Ltd v Federal Commissioner of Taxation [2023] FCAFC 89; 298 FCR 449 at [116(2)], concerning the second limb of s 207-155 of the ITAA 1997, which is relevantly in the same terms to s 177E(1)(a). The Full Court considered that the second limb raised difficult issues, but did not resolve any of them, on the basis that it was not necessary for the purpose of disposing of that case. The Full Court did, however, state that it considered that the view taken by the primary judge would mean that it was never necessary to look past the effect of the scheme, and at least implicitly indicated that such a construction of the second limb would be wrong, referring to CPH HC at [137] - see: BBlood Enterprises Pty Ltd v Commissioner of Taxation [2022] FCA 1112. 455 It is possible that the Full Court in B&F Investments approached s 177E(1)(a) on the basis that what the High Court stated in CPH HC at [139] and [140] was to be taken literally. However, that is not clear and the Full Court did not address the fact that a contrary conclusion had been reached in Lawrence FFC. 456 It has long been recognised that dividend stripping schemes evolve and change in that they "have adopted one ingenious and complicated tactic after another": Investment and Merchant Finance Corporation Limited v Federal Commissioner of Taxation [1970] HCA 1; 120 CLR 177 at 179. 457 One might think, in light of the known shifting tactics, that s 177E(1)(a) was intended to capture: (i) schemes of which it could be said that they were in the nature of dividend stripping; and (ii) schemes of which it could be said that they had substantially the effect of such schemes, whether or not they were such schemes. It may be unusual for a statute to operate such that the extended operation of a provision overlaps with or subsumes the narrow operation of a provision. Nevertheless, it is a convenient legislative device to convey what is intended to be captured by the provision, and to make sure that the provision hits the intended targets in circumstances where the intended targets are schemes in the nature of dividend stripping (or with that effect) which are known to evolve and adapt by taking different forms. That is particularly so where, as here, the narrow operation of the provision (s 177E(1)(a)(i)) is an ingredient in determining the application of the extended operation of the provision (s 177E(1)(a)(ii)). 458 The end object of the process of statutory construction is to give the words of the statute the meaning which the legislature is taken to have intended them to have: Lacey v Attorney-General (Qld) [2011] HCA 10; 242 CLR 573 at [43]; Certain Lloyd's Underwriters v Cross [2012] HCA 56; 248 CLR 378 at [25] to [26]. The preferred construction is reached through common law and statutory rules or principles of construction, the application of which involves the identification of a statutory purpose from any express statement in the statute, or by inference from the text and structure of the statute, and by appropriate reference to extrinsic materials: Lacey at [44]. A construction of one provision which renders another provision otiose furnishes one reason to doubt the construction. It is difficult to see that this principle has any determinative application to s 177E(1)(a) in light of its structure and text and the mischief to which it was directed. 459 In any event, I proceed on the basis that it is not sufficient in applying s 177E(1)(a)(ii) to look only at the effect of the scheme. In particular, it is necessary to compare the effect of the scheme in question with the effect of a scheme which is by way of or in the nature of dividend stripping. This requires an understanding of what is a scheme by way of or in the nature of dividend stripping. Whether a particular scheme falls within the second limb depends on the particular facts. It is relevant to examine which of the common characteristics the scheme under consideration shares with a paradigm example of a scheme by way of or in the nature of dividend stripping. An example of a deviation which would fall within the second limb, and which was at least implicitly considered not to be in the first limb, was provided in CPH FFC at [182] and repeated by the High Court in CPH HC at [139] and [140]. 460 I proceed on the basis that what was stated by the High Court in CPH HC at [139] and [140] is not to be taken literally as was held by the Full Court in Lawrence FFC. Whilst at least some deviation from the paradigm is permissible to fall within the second limb, the scheme must always involve a dominant tax avoidance purpose. And it must be recognised that the first limb - by speaking of a scheme "by way of or in the nature of" - does not itself require strict adherence to a paradigm example of a dividend stripping scheme. In determining whether a scheme falls within the second limb, it is always necessary to examine the substantial effect of the scheme, this being the central inquiry under the second limb, and it is always necessary to compare that effect with the effect of a scheme in the nature of dividend stripping in order to reach a conclusion about whether the effect of the scheme being considered is substantially the same as the effect of a scheme by way of or in the nature of dividend stripping.

Dominant purpose 461 As has been mentioned, a dominant tax avoidance purpose is essential for a scheme to fall within either the first or second limb. The assessment of purpose is not undertaken under s 177D. 462 The applicants contended that s 177E of the ITAA 1936 requires "all the circumstances which are said to have the effect of dividend stripping - and not merely some of them - [to be] the result of steps carried out for the dominant purpose of avoiding tax": AOS [259(b)]. 463 This contention was advanced by emphasising a difference between s 177D and s 177E, namely that the former expressly refers to "the scheme or any part of the scheme" (see also Hart at [47]), whereas the latter does not. 464 The forensic point behind this contention is to facilitate the submission that a particular step was not for a dominant tax avoidance purpose, with the result that the scheme as a whole necessarily could not be for a dominant tax avoidance purpose. 465 The applicants also submitted that "dividend stripping" involves a "combination of consequences - a company disposing of property representing its profits, resulting in property equal to or very close to the amount of those profits being made available to a shareholder in tax free form by means that are 'carefully planned, with all the parties acting in concert, for the predominant if not the sole purpose of the vendor shareholders, in particular, avoiding tax…'". The applicants submitted (AOS[259(b)]: So it is all of the circumstances giving rise to that combined effect that ought to be characterised as being done with the relevant purpose in order to fall within the second limb (i.e. to be characterised as having substantially the effect of a dividend stripping scheme). 466 Unlike s 177D (which is a general anti-avoidance provision), s 177E addresses particular schemes, namely dividend stripping schemes or schemes of that nature or with substantially that effect. Under the first and second limbs, the scheme must have been carried out for a dominant tax avoidance purpose. In evaluating the dominant purpose of the relevant scheme, it is relevant to examine: (a) the purpose behind particular steps in a scheme (whether they are steps in a series of transactions or components of the one transaction); and (b) the surrounding context in which the scheme was entered into and carried out, including in particular the commercial or other objectives sought to be achieved by entering into the transaction and the various steps of the transaction. 467 However, an assessment issued to give effect to a determination made by the Commissioner under s 177E is not necessarily shown to be excessive by establishing that a particular step in the scheme, viewed in isolation, did not have the dominant purpose of tax avoidance. 468 At this point it is convenient to address a preliminary issue which arose and which was connected with the issue just addressed.

The s 177E schemes 469 The applicants submitted that the Debt Forgiveness Scheme (being two schemes) as identified by the Commissioner was not capable of being a scheme within s 177E(1). The applicants submitted that: (a) while the Debt Forgiveness Scheme in isolation can be a "scheme" within the meaning of s 177A(1), the Debt Forgiveness Scheme, as identified by the Commissioner: (i) did not have the effect of making profits of GSM and Tironui available to Mr Merchant in a tax free form because the scheme consists solely of each of GSM and Tironui "irrevocably and unconditionally forgiving and releasing Plantic" from their respective intercompany loans - see: AFAAS [87] and [88]; AOS[247] and [248]. The scheme identified by the Commissioner did not, for example, include the receipt by the MFT of the capital proceeds for the Plantic shares: AOS[248]; (ii) cannot have substantially the effect of a dividend stripping scheme because they did not have the effect of making property, in an amount the same as or close to the undistributed profits of the target company, available to shareholders of the target company in tax free form. In particular, an increase in the value of the Plantic shares resulting from the debt forgiveness is not itself in tax free form. In order to be capable of being characterised as being in effect in tax free form, there would need to be a sale of those shares, coupled with a capital loss that offset any capital gain made on the sale of those shares: AOS[249]. (b) a further difficulty with treating the Debt Forgiveness Scheme in isolation as the relevant "scheme" is that there would be, in terms of s 177E, no "disposal of property" by GSM and Tironui which can be said to have occurred "as a result of" the scheme, because the debt forgiveness is itself the disposal of property in question: AOS[250]. 470 The Commissioner submitted that his identification of the scheme as consisting solely of the debt forgiveness was permissible. This was said to follow from the decision of Jessup J in Lawrence FC. The Commissioner's position was presumably adopted in an attempt to secure the forensic advantage of focussing solely on the debt forgiveness when examining the dominant purpose of the scheme. 471 The forensic advantage comes about because various elements of the transaction as a whole have a clear commercial purpose, whereas the debt forgiveness viewed in isolation provides the Commissioner a stronger case. This is a tactic commonly employed by the Commissioner with respect to the general anti-avoidance provision: the more narrowly one can define the scheme, the more likely one can force a conclusion that the dominant purpose was one of obtaining the tax benefit. The tactic does not readily translate to s 177E which does not turn on an identification of a "tax benefit", or a purpose of obtaining a "tax benefit". Section 177E (a specific anti-avoidance provision) is structurally very different from the general anti-avoidance provisions in Part IVA. Section 177E(1) turns on identification of a scheme which falls within s 177E(1)(a) as a dividend stripping scheme or one of that nature or of that effect. One cannot - as the Commissioner sought to do in this case - select one component of what is in fact the scheme and argue that the other components are not part of the scheme but must be considered as part of the context which must be taken into account in assessing the single component of the scheme. No doubt that would provide a forensic advantage when it comes to assessing dominant purpose, but it would be an unfair one and inconsistent with the terms of s 177E. 472 The applicants' criticisms of the Commissioner's position on this issue are good ones. The debt forgiveness, viewed in isolation, is not a dividend stripping scheme. Nor, viewed in isolation, is it either a scheme in the nature of or having substantially the effect of a dividend stripping scheme. The debt forgiveness as a scheme is a scheme to forgive debts and nothing more. Contrary to the Commissioner's submissions, the point was not addressed in Lawrence FC. It does not follow from the decision in Lawrence FC that, in the present context, the single step of forgiving debts could be substantially in the nature of a dividend stripping scheme. 473 Perhaps in recognition of the weakness of his position on this issue, the Commissioner foreshadowed in opening submissions that - should his argument based on Lawrence FC be rejected (which it is) - he would seek leave at the hearing to rely upon a broader alternative definition of the scheme as follows (ROS[354]): (1) First, the MFT sold the BBG Shares to the GMSF on 4 September 2014, crystallising a capital loss of $56,561,940 in the 2015 income year. (2) Secondly, on 31 March 2015, the MFT entered a contract for the sale of the Plantic shares to Kuraray containing as Condition 3 of cl 2.1 of the SSA a condition precedent that the MFT must procure the release and forgiveness of Plantic's loans to GSM and Tironui. (3) Thirdly, on 2 April 2015, GSM and Tironui released and forgave the Plantic Loans for nil consideration from either Plantic or the MFT, with a corresponding increase in the market value of the Plantic shares. 474 No objection was ultimately taken by the applicants to the Commissioner relying upon such a scheme and leave was granted at the hearing for the Commissioner to rely upon the broader schemes. This scheme is "pleaded" at [34B] of the RAJAS lodged on 15 March 2024. 475 In her opening address for the Commissioner, Ms Brennan KC stated that the scheme "does not include the actual sale of the Plantic shares to Kuraray", but it does include the "inclusion of the term in the contract with Kuraray that as a condition to the sale, the debts are forgiven and then the forgiveness": T37.25-29. The point of this submission, I infer, was to facilitate the submission that Kuraray was not a party to the s 177E scheme, such that its purpose and what it did or did not do in terms of careful planning was irrelevant. The applicants characterise Ms Brennan's submission in this respect as a variation to the broader schemes, but addressed it in closing submissions: AOCS[49A], [49B], [53]. 476 This variation to the broader scheme, by excluding the actual sale of the Plantic shares, makes it more difficult to characterise the scheme as one in the nature of dividend stripping. 477 The debt forgiveness transforms the undistributed profits of GSM and Tironui into equity, thereby increasing the amount a purchaser would pay for the Plantic shares. There is no relevant tax avoided at this point. Without the sale of the Plantic shares to Kuraray, the scheme merely shifts value. No tax is avoided. With a sale of the shares in Plantic, the scheme is one in which the profits of GSM and Tironui have been converted to equity and - subject to matters discussed later - tax is avoided.

The issues 478 The two main issues as framed by the applicants were: (1) whether the Debt Forgiveness Scheme (being two schemes) was one which had the features required to fall within the scope of s 177E(1)(a)(ii): AOCS[50(a)]. The applicants addressed these issues under the heading "Presence or absence or relevant dividend stripping effect" in closing submissions at AOCS[51] to [60]; and (2) whether the sole or dominant purpose of the scheme was not to avoid tax on a distribution of the company profits to Mr Merchant: AOCS[50(b)]. The applicants addressed these issues in closing submissions under the heading "Dominant purpose" at AOCS[61] to [73].

Applicants' first issue: Presence or absence or relevant dividend stripping effect 479 In relation to the first issue, the applicants submitted that there were three principal reasons why neither the narrow scheme nor the broad scheme had the features required to fall within the scope of s 177E(1)(a)(ii). These were addressed under the headings "Disposal of property as the result of the scheme"; "Tax free effect"; and "Careful planning with all parties acting in concert". It is convenient to address these submissions under the same headings.

Disposal of property as the result of the scheme 480 The first submission concerned only the narrow scheme: AOCS[52]. Section 177E(1) applies "where … as a result of a scheme … any property of the company is disposed of …". The narrow scheme merely identifies a disposal of property and does not identify a scheme from which such disposal is said to be a result. This has been addressed earlier. The narrow scheme, comprising only the debt forgiveness, cannot of itself be a scheme by way of or in the nature of dividend stripping or a scheme with that effect. 481 The broader scheme is, in my view, one which falls within s 177E(1)(a)(ii) as one which has the effect of a scheme by way of or in the nature of dividend stripping.

"Tax free" effect 482 Secondly, the applicants submitted that "[t]he essential characteristic of dividend stripping is that something becomes tax free (or perhaps substantially so …) and that is missing here" because "the sum which but for the debt forgiveness might have been paid out to Mr Merchant as dividends remains in fact taxed or as potentially liable to be distributed to Mr Merchant and taxed in the same way": AOCS[53]. 483 This was said to arise in two ways (AOCS[54]): (a) First, if the Commissioner succeeds on its s 177D case, the capital loss is to be treated as not sustained. The sum of the debts forgiven have become taxable capital gains for the MFT and included in the taxable income of GSM. The "entitlement to the money is a sum which might thereafter be distributed by GSM to Mr Merchant as dividends". (b) Second and in any event, the increased sale price by reason of the amount the subject of the debt forgiveness is received by the MFT. It is not tax free in its hands. Nor is the money it holds free of tax when or if distributed to GSM and its shareholder.

Is the capital gain in the MFT not relevantly tax-free if the s 177D Proceeding fails? 484 In opening, the applicants submitted that, if the applicants are unsuccessful in the s 177D Proceeding (which they have been), then it cannot be said that the scheme has resulted in profits of GSM and Tironui being made available to Mr Merchant in a relevantly (or sufficiently) tax-free form: AOS[272]. 485 In closing, the applicants submitted that, if the Commissioner succeeds in the s 177D Proceeding, there is no s 177E case because there is no sum made available free of tax: AOCS[72]. The applicants submitted that (AOCS[72]): the operation of the Commissioner's s 177F determination is that the MFT did not incur a capital loss; the MFT thus made a net capital gain, and it is common ground that the MFT's net income was distributed to GSM: RAJAS at [20], [28]; by operation of the ordinary provisions of the tax legislation, GSM has been assessed as liable to pay tax on the distribution; and GSM will also, in those circumstances, have more property available to distribute as dividends to Mr Merchant (which would in turn attract top up tax). 486 It was submitted that "the s 177E scheme viewed in context of the s 177D determination is really the inverse of a dividend strip" and that: It does not ensure that company profits will be free of tax, but rather that they will be taxed at least twice (the assessments to both Mr Merchant and to GSM), and possibly a third time (if GSM pays the capital gain distributed to it on to Mr Merchant as a dividend). 487 To the extent this submission was raised as one relevant to purpose (which is where the submission was located in the AOCS), the question of purpose is assessed objectively by reference to the actual events which occurred, not by reference to what the purpose would have been if part of the scheme had not been carried out. The s 177E(1)(a)(ii) scheme here was carried out on the basis that a capital loss had crystallised in the MFT as a result of the BBG Share Sale Scheme. The question of purpose is not addressed on the basis that the Commissioner had cancelled the tax benefit arising from the BBG Share Sale Scheme. 488 To the extent the submission is advanced more broadly, ss 177D and 177E operate according to their terms. In a situation such as the present, one determines whether s 177E applies in relation to the events (the "scheme") which in fact occurred. The scheme included the BBG Share Sale resulting in the crystallisation of the capital loss. One does not determine whether s 177E applies on the basis of events which did not occur. 489 The applicants did not raise any question about the operation of s 177F(3). The Court raised this issue with the parties on the first day of the hearing and, ultimately, this led to a consent adjournment of the two penalty hearings in the AAT proceedings. 490 The fact is that, if: (a) s 177D applies to the BBG Share Sale Schemes; and (b) s 177E applies to a scheme which included the BBG Share Sale Scheme (or in respect of a scheme to which that was relevant, as in the Commissioner's narrow scheme), it is obvious that s 177F(3) has a potential role to play. This is why the matter was raised by the Court. The Commissioner has made two s 177F determinations in respect of interrelated schemes. 491 The scheme of Part IVA is that - where amounts are included in assessable income because of determinations made by the Commissioner under s 177F(1) and, if relevant schemes had not been entered into, other amounts would not have been included in assessable income of a taxpayer - then adjustments can be made under s 177F(3) where "fair and reasonable". 492 Why s 177F(3) has never been raised by the applicants was, and remains, unclear. 493 The applicants submitted that, unless the scheme involves the crystallising of the capital loss in the MFT, so as to overwhelm the capital gain, the value which passes to the MFT is subject to capital gains tax: AOCS[55(a)]. It does not matter that this might be at a lower tax rate. 494 In other words, the applicants submitted, the scheme results in the receipt of a capital sum that attracts capital gains tax, which is inconsistent with the scheme being characterised as a scheme with the substantial effect of a dividend stripping scheme, referring to CPH FFC at [162], [177] and CPH HC at [127], [133] to [134]. The applicants also referred to Lawrence FFC at [44] which was said to "hint at the contrary". 495 The applicants contended that a reduced tax is insufficient to satisfy the 'tax effect' requirement of s 177E. The applicants submitted (AOCS[55(a)]): (i) Where s 177E applies, it has the effect of deeming the 'tax benefit' 'referable to' the scheme to be an 'amount' which is fundamentally driven by the Commissioner's opinion about the amount of company profits that are represented by the disposal of property. That amount is identified without taking account of any tax paid on the sum represented by the disposal of property (ie that which is pointed to as the substitution for dividends). The Commissioner is then empowered by s 177F to include the whole (or part) of that (deemed) tax benefit in the shareholder's assessable income. (ii) That Parliament has proceeded without making express provision in this respect points strongly in favour of s 177E not being intended to operate when the effect of the scheme is not or not substantially to render something available tax free. 496 The passage referred to by the applicants in Lawrence FFC at [44] must be read with what was said at [42] and [43]. At [42], the Full Court referred to the five characteristics of first limb dividend stripping schemes identified by Gibbs J in Patcorp and then stated: [43] At [137], the Full Court [in CPH FFC] identified a further common characteristic of each of the schemes in the cases considered by Gibbs J, namely: "[T]hat they were carefully planned, with all the parties acting in concert, for the predominant if not the sole purpose of the vendor shareholders, in particular, avoiding tax on a distribution of dividends by the target company." [44] We would merely add that, notwithstanding the advent of comprehensive taxation of capital gains, this characteristic remains relevant because the methods of calculating capital gains inevitably lead to a lower amount of tax. 497 Section 177E does not require a complete, or a substantially complete, avoidance of tax to apply. Section 177E is capable of applying where the tax avoidance purpose is to avoid the higher tax which would have been payable on dividends, albeit a lower amount of tax is still payable as a result of the scheme. One of the central stated purposes of the structure of the Plantic share sale was to avoid tax on dividends from GSM, achievable "because the debt forgiveness on the loans reduces top up tax payable by [Mr Merchant] on getting cash out of GSM": CB260.

Assets remaining available to GSM and Tironui? 498 The applicants submitted that, even if the scheme involves the crystallisaton of the capital loss such that the extra $55 million received by the MFT does not attract capital gains tax, the additional amount remains in the MFT and remains able to be paid to GSM (to satisfy its unpaid present entitlement) or distributed to GSM (or other beneficiaries) and would enhance GSM's assets from which GSM could pay a dividend to Mr Merchant: AOCS[55(b)]. In these scenarios tax would be paid. Submissions to equivalent effect were made in AOS[251] to [253]. 499 By way of explanation for parts of the submission recorded in the paragraph above, GSM and Tironui are within the definition of "General Beneficiaries" pursuant to cl 1(b)(iii)(B) of the relevant trust deed, because Mr Merchant is a "Specified Beneficiary" (making him also a "General Beneficiary" pursuant to cl 1(b)(i)) and is a shareholder of those companies: CB12; CB13; CB14. 500 GSM and Tironui had significant unpaid present entitlements owing by the MFT ($179 million owing to GSM and $140,000 to Tironui). An amount of $302,055.99 was also owing to Mr Merchant: CB682. 501 The applicants submitted that the "MFT is obliged to at least pay GSM and Tironui the amounts of $179 million and $140,000 respectively for their unpaid present entitlements" and that "[t]here is no reason to conclude that MFT is unlikely to meet those obligations": AOCS[59(c)]. 502 The applicants submitted that the circumstance in this case that there were corporate beneficiaries was a significant distinction between this case and Lawrence FC. It was submitted that, in Lawrence FC, the company profits were converted into capital sums held "on trust for a class of discretionary beneficiaries which was confined to the applicant and members of his family": Lawrence FC at [2] (applicants' emphasis). 503 The Commissioner submitted that, "despite Jessup J's comment at [2] … it is not clear whether the reference to members of his family include[d] (as is typically the case) companies in which Mr Lawrence or members of his family had an interest", referring to Lawrence FC at [85]. At [85], Jessup J stated that the "applicant and his associates" were beneficially entitled to the capital of the trust. 504 Whether or not the applicants' understanding of the underlying facts in Lawrence FC is correct or not, any distinction between that case and this in that regard has little significance. 505 The point is that the assets of the target companies (GSM and Tironui) were, through the debt forgiveness in the context of the sale of Plantic, in substance transferred to the MFT. As is discussed below, objectively, the purpose of that was to enable Mr Merchant to access the profits via the trust in a tax effective manner, rather than receiving dividends from GSM and Tironui on which he would have had to pay tax at marginal rates. 506 No commercial and objective onlooker could sensibly conclude that the object of the structure was to permit GSM and Tironui to access the increase in value in the MFT. It is plain that Mr Merchant would not choose to make a capital distribution to GSM and Tironui, and thereby expose himself again to top up tax as a shareholder of those entities, rather than to distribute the profits to himself in a manner which avoided that consequence. 507 The applicants submitted that there "is no scenario in which the scheme results in the money being made - in the relevant sense - tax free or substantially so or perhaps even substantially taxed at some lower rate": AOCS[56]. 508 I do not accept that submission. For the reasons given in relation to the s 177D Proceeding above, and those given below in relation to dominant purpose, it is clear that the objective purpose of the loan forgiveness was to permit the amounts forgiven to be accessed in a way in which substantially less tax would be paid than if those amounts were repaid to GSM and Tironui and received by Mr Merchant by way of dividends. 509 If s 177E(1)(a)(ii) is otherwise engaged, an applicant will not discharge the onus of establishing that an assessment is excessive, or what it would have been, merely by demonstrating a potential reduction in the tax advantage produced by the scheme. On the other hand, the amount of tax likely to arise is relevant to purpose. If a taxpayer is demonstrated to be likely to pay substantially the same amount of tax as a consequence of a scheme, just not tax on the dividend, then the taxpayer is perhaps unlikely to have a dominant purpose of avoiding tax. 510 The statutory scheme caters for the situation in which some amount of tax is paid notwithstanding that there is a dividend stripping scheme. The tax benefit from the dividend stripping scheme is included in assessable income through s 177F of the ITAA 1936 - see: s 177E(1)(f). In situations where a taxpayer has carried out a dividend stripping scheme, but has included an amount in assessable income because of the scheme (otherwise than by receipt of the dividend), the Commissioner may determine that the amount, or a part of it, should not have been included in assessable income, if it is "fair and reasonable" that the amount not be included: s 177F(3).

Careful planning with all parties acting in concert 511 Thirdly, the applicants submitted that (AOCS[60]; see also AOCS[66A)): an essential effect absent from the Commissioner's schemes arises from the critical involvement of Kuraray and other events outside the scheme. The BBG sale in September 2014 giving rise to $56.562m in losses were not part of a 'careful plan', 'in concert' with Kuraray, to avoid tax on a distribution of dividends from GSM and Tironui to Mr Merchant. Kuraray was not then on the scene relevantly. 512 As noted earlier, the sixth characteristic of dividend stripping schemes identified by the Full Court in CPH FFC at [137] as one which was present in the four particular cases considered by Gibbs J in Patcorp was that: they were carefully planned, with all the parties acting in concert, for the predominant if not the sole purpose of the vendor shareholders, in particular, avoiding tax on a distribution of dividends by the target company. 513 A dividend stripping scheme does not cease to be one simply because the purchaser of the shares does not have a tax avoidance motive or is indifferent. It is not necessary for every party who plays a role in a scheme which has the effect of a scheme in the nature of dividend stripping to be involved in "careful planning" or to act "in concert" with the others. The more important issue is the purpose of the person who would have received the dividend. I do not consider that the Full Court in CPH FFC at [137] was intending to set a requirement, not found in the statutory language, that all parties must be involved in "careful planning" or to act "in concert" with the others before a scheme can fall within the second limb of s 177E(1)(a). The Full Court's observation was its characterisation of one aspect of what it considered was present in the four cases considered by Gibbs J in Patcorp. 514 I accept the applicants' submission that Kuraray did not engage in careful planning in concert with the MFT to achieve a tax benefit for Mr Merchant or anyone else. The structure of the transaction had, in substance, been set by the MFT. Kuraray ultimately, but reluctantly, accepted that structure after careful consideration of its own interests. As is addressed in detail below, Kuraray had significant concerns about the debt forgiveness, but Mr Merchant's interests were ultimately able to satisfy Kuraray about the impact of that forgiveness on its interests in a context in which the SSA contained tax indemnities and warranties which protected Kuraray's position in that regard - see [522] to [543] below. Whilst Kuraray did not act "in concert for a tax avoidance purpose", it was more than indifferent (Collis v Commissioner of Taxation (1996) 33 ATR 438). It was reluctantly able to be convinced.

Applicants' second issue: Dominant purpose 515 There are two key aspects to the (broader) scheme advanced by the Commissioner at hearing: first, the BBG Share Sale; and secondly, agreeing to the forgiveness of debts as a condition precedent to settlement of the SSA and forgiving the debts. 516 In the context of s 177E, as they did in relation to s 177D(1), the applicants contended that the dominant purpose of the BBG Share Sale was (AOS[271]): (a) to free up cash for the MFT, amongst other things in order to fund Plantic's expenses, and to do so without reducing the Merchant Group's stake in BBG; and (b) to give the GMSF exposure to the future economic performance of BBG in circumstances where Mr Merchant thought it was a good investment. 517 For the reasons given earlier, I reject those as being the dominant purpose of the BBG Share Sale. The BBG Share Sale was - for the purposes of s 177D(1) - carried out for the dominant purpose of obtaining a tax benefit, namely crystallising a capital loss in connection with the sale by the MFT of its Plantic shares. 518 In their closing submissions about dominant purpose, the applicants structured their arguments around eight points: AOCS[64] to [72]. 519 It is convenient to deal with the first three submissions together.

First to third submissions 520 First, the applicants submitted that the forgiveness served an obvious commercial objective, namely to facilitate the sale of the MFT's shares in Plantic to an arm's length purchaser who wanted Plantic free from related-party debt: AOCS[64]. 521 Secondly, the applicants submitted that the fact that GSM and Tironui forgave their debts for no consideration was explained by the relationship between the Merchant Group entities: AOCS[65]. The applicants submitted that: (a) there is nothing uncommercial about one entity engaging in a transaction that has a benefit for a related group entity, referring to Orica Ltd v Commissioner of Taxation (2016) 332 ALR 621 at [31]; (b) GSM and Tironui forgiving the debts Plantic owed them had an obvious commercial benefit to the MFT beyond any tax benefit - namely, facilitating the sale of its Plantic shares to Kuraray free of related-party debts; and (c) further, such a benefit to the MFT was also of benefit to GSM and Tironui, because they were both beneficiaries of the MFT and were owed substantial amounts by way of unpaid present entitlements: AOCS[65]; see also AOS[258] and AOCS[64]. 522 Thirdly, the applicants submitted that, to the extent that the scheme depends on receipt of increased sale proceeds via the Plantic sale, Kuraray is a key party to that arrangement. It is an arm's length party and cannot be said to have had a purpose of obtaining a tax benefit for Mr Merchant. It cannot be said that "all the parties" were "acting in concert" to enable Mr Merchant to obtain a tax benefit: AOCS[66]. The applicants raised, in this context, that Kuraray had a concern with the commercial debt forgiveness rules, but submitted that the events in this regard did not satisfy the requirement of a scheme being "carefully planned", with all the parties "acting in concert", for the predominant if not the sole purpose of Mr Merchant avoiding tax: AOCS[66A]. 523 There is no doubt that the forgiveness of debts was consistent with the commercial purpose of selling the shares in Plantic. As has been discussed and as is discussed further below, that does not mean that the dominant purpose of forgiving the debts was the commercial purpose of selling the shares. 524 Looking at the position practically and commercially, a third-party purchaser (such as Kuraray) would either: pay more for the Plantic shares if Plantic did not have the related-party loans of about $55 million (and was therefore essentially debt free); or pay less for the Plantic shares on the basis that Plantic would need to refinance or pay out the loans which had been made to Plantic. 525 An arm's length purchaser's first preference might have been for the Plantic Loans to be repaid before purchase of the shares. If that were not possible, however, it is far from clear that an arm's length purchaser's next preference would be for the loans to be forgiven, which is an assumption which underlies the applicants' submissions and which is not made out by the evidence. The fact that a debt forgiveness was to happen caused Kuraray significant concern. 526 If the loans were forgiven, that would give rise to a number of tax risks about which the incoming purchaser would need to be satisfied and in relation to which the purchaser would likely want warranties or indemnities. 527 It is more likely that an arm's length purchaser's preference would be to pay less for the shares and repay the debts itself. The applicants submitted that: it was unlikely that an arm's length purchaser would "be enthusiastic about having to get involved in any way in resolving the vendor's related-party loans, for various reasons": AOCS[64(b)(i)]; if "Kuraray were to divert part of its upfront purchase price payment towards a loan to Plantic to enable it to repay GSM and Tironui's loans, that would have the consequence of reducing Kuraray's cost base on its shares": AOCS[64(b)(ii)]; if this were to occur, "the mechanics of the sale contract would not necessarily have been straightforward, because there would be a delay between signing the sale contract and completion": AOCS[64(b)(iii). 528 Beyond these submissions, there was no clear explanation about what the "various reasons" were, and the evidence did not directly address this topic. 529 There was no need for Kuraray to loan funds to the MFT to enable Plantic to repay its debt. It is commonplace for an incoming purchaser to pay out related-party debt as part of a purchase, either directly or by refinancing. In the present case, Kuraray would have been able to repay the Plantic Loans directly as part of its acquisition of the Plantic shares. Kuraray's upfront cash payment to the MFT exceeded the amount of the Plantic Loans. If anything, the "mechanics" of such a sale would have been less complicated than the mechanics of the sale in fact entered into and would not have caused any additional delay. This would not have had any different cost base outcome - see: s 110-25(2)(b) ITAA 1997. 530 It is common to prefer repaying the debt of the company being acquired rather than having to: (a) engage in an often complex investigation of the tax consequences of a debt forgiveness to the company being acquired; and (b) obtain warranties and tax indemnities from the vendor; and (c) bear the consequent risks of: (i) the Commissioner disagreeing with the company about the consequences of the debt forgiveness and issuing an assessment to the company; and (ii) the vendor not being in a financial position to meet the indemnities given or pay damages for losses for breach of warranties. 531 The forgiveness of related party debts - the Plantic Loans - was not something which had its genesis in any requirement suggested by Kuraray. Nor was it sourced in any requirement suggested by Sealed Air. Neither Sealed Air nor Kuraray had any interest in the Plantic Loans being forgiven. 532 Rather, the forgiveness of the Plantic Loans had its origin as the preferred structure of the MFT, Mr Merchant having received, and considered, advice from EY on the issue. The first draft "Share Purchase Agreement" sent by Sealed Air on 19 August 2014 contemplated that the MFT would deliver, at completion, evidence that related party debts had been "repaid or discharged in full": CB259 at page 28, cl 5.2(c)(ii). 533 On 27 August 2014, Mr Burgess sent an email to MinterEllison in relation to Sealed Air's draft Share Purchase Agreement: CB612. The email included: As discussed, have listed below a couple of the 'easy' tax changes for you to make to the SPA before circulating the next draft to the group … 3. A key aspect of the transaction that delivers a favourable outcome to Gordon is that the amounts owed by Plantic to his related entities are waived/forgiven - it would be good to make this clearer in Clause 5.2(c) - the clause as currently drafted covers all amounts owing to/from and therefore talks about 'repaid in full or discharged' - therefore I think we need to insert a separate sub paragraph to specifically deal with the waiver (and then will need to draft the appropriate deeds of release which we will need to provide to them by completion). 534 Clause 2.1 of the SSA as ultimately entered into provided that completion of the sale must not occur until all Conditions in that clause were fulfilled or waived. One effect of Condition 3 was to require that the MFT procure the forgiveness of the Plantic Loans. 535 For its part, as would be expected, Kuraray was concerned about the tax implications to Plantic of the proposed debt forgiveness. On 18 March 2015, Mr Burgess emailed to Mr Morris, MinterEllison, and others an "updated letter on the debt forgiveness to cover the issues discussed on the call with Deloitte": CB664. Mr Pace of MinterEllison forwarded this email to Mr McGrath at 7:09am on 19 March 2015. Mr McGrath forwarded the email to Ms Lyons (copied to Ms Paull) and stated: Attached is the letter EY have prepared around the debt forgiveness strategy that will be supplied to Kuraray. Kuraray need to understand why the loans are being repaid etc. as they are actually buying the shares of the company not the assets and need to be comfortable that performing the loan forgiveness will not result in any potential liability when they own the company. Just wanted you to be aware of this and have a copy so that you were OK with the content. 536 On 19 March 2015 at 12:43pm, Mr Burgess emailed Mr Morris a "final debt forgiveness letter". The letter considered the application of the commercial debt forgiveness rules, the impact upon the available fraction of Plantic's transferred losses and share capital tainting: CB741 at page 168. On 19 March 2015 at 7:21pm, Mr Morris emailed Mr Merchant, Ms Paull, Mr McGrath, and another with an update after having "just completed a long day with the Kuraray team": CB357. It noted some key issues were still being debated with Kuraray, one being: Tax issue for debt forgiveness was a major issue this morning but hopefully the work Luke and Ian are doing with SFG consulting on the valuation should resolve this issue. 537 On 20 March 2015, SFG Consulting issued a letter to Plantic (addressed to Mr Morris) in which SFG Consulting confirmed that it had assessed the market value of the loans owing from Plantic and considered that the loans would have a value at the time of the proposed forgiveness equal to the face value of the loans: CB666. SFG Consulting explained: That is, we agree with the characterization of the EY letter that: It is clear that at the time of the forgiveness, the debtor has the capacity to repay the debts. That is, an arm's length purchaser will have entered an agreement to acquire the shares in the company (conditional on the debts being forgiven) for an amount that values the net assets of the company at an amount far in excess of the face value of the loans. Even the upfront cash consideration payable for the shares (approx A$58m) is greater than the face value of the loans. 538 On 20 March 2015 at 7:31pm, Mr Morris emailed with an update noting that all the outstanding points had been resolved and "signing is planned for next Wednesday/Thursday with settlement on 1 April": CB357. Next to the "Tax issue" mentioned in the earlier email, an update had been added stating "Valuation completed and tax indemnity once confirmed by Deloitte will be removed". The applicants did not seek to establish that: Deloitte was satisfied with whatever was said to them; or there were any changes made to the warranties or indemnities which were then contained in the draft SSA. These provided Kuraray significant protection. 539 There was no sensible commercial objective from the point of view of either GSM or Tironui in forgiving the substantial debts. The MFT gave no consideration for the forgiving of the debts. The applicants did not suggest that any consideration was received by GSM or Tironui for giving up $55 million in loans. 540 The debts were real debts and were worth their face value. The cash component of the sale price alone, being $59,803,400, exceeded the Plantic Loans, as SFG Consulting had noted. The MFT stood to benefit from the forgiving of the debts because Kuraray would pay more for the Plantic shares. It was not submitted, nor could it sensibly have been, that the debts could not have been repaid in the context of the sale to Kuraray. 541 The applicants observed that there was no "evidence led to contradict Mr Burgess's statement in correspondence tendered by the Commissioner that 'forgiveness of related party debt is a common aspect of a share sale transaction'": AOCS[64(b)(iv)]. There was no need for the Commissioner to lead evidence contradicting this comment made by Mr Burgess in a document which was amongst the many thousands of pages in evidence. The question of whether or not debt forgiveness in share sale transactions is common is not of great significance. Of more significance is the question why there was a debt forgiveness in this case. 542 The applicants bear the onus of establishing that s 177E of the ITAA 1936 does not apply. The applicants have not established that the debt forgiveness was not motivated predominantly because of the tax benefit it would deliver. Objectively assessed, the point of introducing the forgiveness of GSM and Tironui's loans to Plantic into the sale transaction, was to avoid the payment of "top up tax" on GSM's and Tironui's undistributed profits. If those loans had been repaid, GSM's and Tironui's retained earnings would have increased commensurately. Mr Merchant would have had to pay tax at the marginal rate on any dividends, receiving an offset to the extent those distributions were franked. The practical effect of structuring the transaction in the way it was, was that the capital received by the MFT was augmented rather than GSM's and Tironui's retained earnings being augmented. The advantage was increased by the fact that the BBG Share Sale had occurred, because the capital losses crystallised by that transaction offset the capital gains from the sale. 543 As to the third submission advanced by the applicants, for the reasons given earlier, it does not matter that Kuraray cannot be said to have been engaged in "careful planning", or "acting in concert" with the relevant entities in the vendor's group, with a view to Mr Merchant avoiding tax.

Fourth submission 544 Fourthly, the applicants submitted that the negotiations regarding the Plantic sale (with both Sealed Air and with Kuraray) show that obtaining a tax benefit from the debt forgiveness was not what drove the transaction: AOCS[67]. The applicants submitted that: (a) the tax consequences (including tax benefits) - and the tax consequences of alternative structures - were discussed between the parties in the context of negotiating price; (b) what was contemplated was that adopting one structure or the other would result in a change in the overall price, referring to CB269, CB270 and CB636. The applicants observed that: (i) the relative magnitude of the tax that would have been incurred under other structures is relevant to assessing dominant purpose in that the less the tax would have been, the less likely it is that avoiding it was the dominant purpose; (ii) the top up tax on a dividend from GSM to Mr Merchant was identified contemporaneously as being around $12 to $13 million; and (iii) even this amount overstates the 'tax advantage' because of the 'cost' in using up capital losses which are then no longer available to offset future capital gains. This too was expressly taken into account in the contemporaneous communications: CB634 at page 7; and (c) if the dominant purpose had been to carry out a dividend strip, then no other form of transaction would have been considered to be negotiable at all. That is not what is shown in the contemporaneous communications. 545 The applicants submitted that the assessment of purpose is informed by looking at the course of negotiations with Sealed Air, given that the structure of the sale to Kuraray adopted the structure which had been negotiated with Sealed Air: AOS[265]. The applicants submitted that - if accessing GSM and Tironui's profits in tax free form was more important than selling Plantic (in one form or another) - then when Sealed Air raised objections to a structure involving a sale of shares with a forgiveness of related party debts (because of the potential tax costs on Sealed Air's side of the transaction), then the deal would have been off the table, but that is not what occurred: AOS[266] to [268]. 546 The applicants submitted that, instead (AOS[267]): (a) On 28 August 2014, Mr Burgess did calculations of the cost of an asset sale structure so that "if you are deep in negotiation next week trying to get the transaction across the line and it appears that an asset sale might be the only way to get that done, that you have an understanding of what the fall back positions might be for [Mr Merchant] to help make the judgment on price etc": CB269. (b) Mr Burgess explained in his 3 September 2014 email that "if the 'cost' of getting Sealed Air to accept a share sale is much more than $2m-$3m, then it might be better to agree to an asset sale and aim for an increase in the sale price to compensate [Mr Merchant] for his increased costs" and going on to give the example that if Sealed Air wanted a reduction in sale price of $5 million to compensate for their extra tax costs, then "it would appear to be better to accept an asset sale and ask for a $5m increase in the price to compensate for [Mr Merchant's] extra tax cost": CB269. (c) Those communications indicate that what was more important than any tax benefit of any particular structure was "trying to get the transaction across the line". 547 I do not accept these submissions. 548 The debt forgiveness was undertaken for the dominant purpose of moving value away from GSM and Tironui into the MFT. The BBG Share Sale was undertaken for the dominant purpose of obtaining a tax benefit, namely the crystallisation of a capital loss. These transactions were entered into with the purpose of maximising the outcome for Mr Merchant on the basis of a share sale in which the potential purchasers were prepared to pay the amounts they were relevantly offering. 549 It may be accepted that it is possible that Mr Merchant might have structured the transaction differently if the incoming purchaser was prepared to pay more. If an offer had been received for an asset sale at a price which meant that Mr Merchant stood to benefit more from that form of transaction than he would benefit under the proposed share sale transaction, he may well have accepted such an offer. That did not happen. 550 Allied to these submissions, in their opening submissions the applicants also submitted that: (a) the receipt by the MFT of the capital proceeds for the Plantic shares sold to Kuraray points against a conclusion that there was any dominant purpose of avoiding tax on the profits of GSM and Tironui: AOS[260]; (b) the purpose of the payment by Kuraray to the MFT was for Kuraray to acquire, and the MFT to dispose of, the shares in Plantic (and the associated economic exposure associated with owning and running the business): AOS[261]; and (c) to say that such a purpose could have been achieved by a differently structured transaction at a higher tax cost does not establish that the structure adopted was adopted for the dominant purpose of tax avoidance; so long as selling Plantic was the predominant purpose, the fact that it resulted in less tax does not bring it within s 177E: AOS[262]. 551 In their opening submissions, the applicants emphasised the observations that Emmett J in Metal Manufactures Ltd v Commissioner of Taxation [1999] FCA 1712; 43 ATR 375 at [260] to [261] made in relation to the general anti-avoidance provisions, rather than s 177E: [260] Thus a taxpayer may have a particular objective or requirement that is to be met or pursued by a particular transaction. The shape of such a transaction need not necessarily take one form. It is only to be expected that the adoption of one form over another may be influenced by revenue considerations. However, the fact that a particular course of action may bear the character of a rational commercial decision does not determine the answer to the question of whether a person entered into or carried out a scheme for the dominant purpose of enabling a taxpayer to obtain a tax benefit - Spotless Services Ltd at 416. Nor, in my opinion, does the fact that a taxpayer chooses one of two or more alternative courses of action, being the one that produces a tax benefit, determine the answer to that question. [261] Pt IVA will be satisfied if it was the obtaining of the tax benefit that directed the relevant persons in taking steps they otherwise would not have taken by entering into the scheme - Spotless Services Ltd at 423. However, more is required than that a taxpayer has merely arranged its business or investments in a way that derives a tax benefit. The scheme must be examined in the light of the eight matters set out in s 177D(b). Further, that examination must give rise to the objective conclusion that some person entered into or carried out the scheme or part of the scheme for the sole or dominant purpose of enabling the Taxpayer to obtain a tax benefit in connection with the scheme. Such a conclusion will seldom, if ever, be drawn if no more appears than that a change of business or investment has produced a tax benefit for a taxpayer - Spotless Services Ltd at 425. Nor should such a conclusion be drawn if no more appears than that a taxpayer adopted one of two or more alternative courses of action, being the alternative that produces a tax benefit. 552 The applicants also referred to Commissioner of Taxation v Metal Manufacturers Ltd [2001] FCA 365; 108 FCR 150 and Macquarie Bank at [260]. 553 It may be accepted that the mere fact that a taxpayer selects one form of transaction over another, influenced by revenue considerations, does not establish that the form of transaction that was chosen was pursued for the dominant purpose of tax avoidance. A good example of that proposition was furnished by Gleeson CJ and McHugh J in Hart at [15]: … A taxpayer wishing to obtain the right to occupy premises for the purpose of carrying on a business enterprise might decide to lease real estate rather than to buy it. Depending upon a variety of circumstances, the potential deductibility of the rent may be an important factor in the decision. Yet, if there were nothing more to it than that, it would ordinarily be impossible to conclude, having regard to the factors listed in s 177D, that the dominant purpose of the lessee in leasing the land was to obtain a tax benefit. The dominant purpose would be to gain the right to occupy the premises, not to obtain a tax deduction for the rent, even if the availability of the tax deduction meant that leasing the premises was more cost-effective than buying them. 554 But the presence of a rational commercial objective, or a discernible commercial end, does not preclude a finding that a particular form of transaction was selected for the dominant purpose of tax avoidance. As Gleeson CJ and McHugh then stated in Hart at [16] (footnotes omitted): Even so, a transaction may take such a form that there is a particular scheme in respect of which a conclusion of the kind described in s 177D is required, even though the particular scheme also advances a wider commercial objective. In Federal Commissioner of Taxation v Spotless Services Ltd, Brennan CJ, Dawson, Toohey, Gaudron, Gummow and Kirby JJ, after noting that revenue law considerations influence the form of most business transactions, and that the presence of a fiscal objective does not mean that a person entered into or carried out a scheme for the dominant purpose of obtaining a tax benefit, said: Much turns upon the identification, among various purposes, of that which is 'dominant'. In its ordinary meaning, dominant indicates that purpose which was the ruling, prevailing, or most influential purpose. In the present case, if the taxpayers took steps which maximised their after-tax return and they did so in a manner indicating the presence of the 'dominant purpose' to obtain a 'tax benefit', then the criteria which were to be met before the Commissioner might make determinations under s 177F were satisfied. 555 The applicants invited a comparison between the present case and Macquarie Bank: AOS[269]. After referring to the facts of that case, the applicants relied in particular on the following observations of Middleton and Robertson JJ (with whom Emmett J agreed; applicants' emphasis in bold): [258] For the foregoing reasons, there is no overwhelming evidence in respect of the manner in which the scheme was entered into or carried out that the dominant purpose of any party was enabling Mongoose to obtain a tax benefit. Rather, it seems to us that the dominant purpose indicated by this criterion is the commercial purpose of selling the Minara shares at a profit, in a manner that was to the satisfaction of all parties to the transaction. We find that the MatlinPatterson vendors were willing to accept a fixed price under the bought deal that was lower than would have been the case under the Agency Proposal as consideration for the market and other risks assumed by MBL under the scheme. Similarly, [Macquarie] was willing to accept these risks (after doing what it could to minimise their impact) in order to make a significantly larger profit than would otherwise be available, as well as to complete a large-scale resources deal to the satisfaction of a new client (with the future business opportunities that might result from a successful transaction). On the evidence, we do not consider that this is a case like Hart, where entry into the scheme was explicable only by the tax benefit defined by the Commissioner (at 244). [259] This conclusion does not ignore the fact that the scheme as implemented appears to have been selected at least in part on the basis that no tax would be directly payable by MatlinPattison, and that the consolidation provisions were the mechanism by which [Macquarie] (as the head company) could sell the Minara shares with no tax unless the sale price exceeded the cost of the shares. Nor does it fall into the trap of the false dichotomy adverted to in Spotless Services. The mere fact that taxation considerations may have, to some extent, driven the deal or played a part in enabling the profit to be made by all parties does not require a finding of the requisite dominant purpose under s 177D. Such considerations clearly existed, but the presence of these factors may be expected in a deal of this magnitude, involving corporate groups from different jurisdictions. To this extent, we do not find the evidence relied upon by the Commissioner (in particular the extracts from the Macquarie Board papers set out above) as probative as he would seek to portray them. … [301] We do not think that enabling Mongoose to obtain a tax benefit was the dominant purpose of [Macquarie] entering into the scheme. On balance, our analysis of the s 177D factors as they apply in this case does not support that proposition. Rather, [Macquarie]'s dominant purpose was to make a profit by effecting a sale of the Minara shares in a manner that met its client's objectives. The real risks associated with entry into the scheme meant that there was potential for [Macquarie]to earn significantly more profit on the sale of the Minara shares than would have been the case under the Agency Proposal (but there was also the potential for [Macquarie] to incur a loss, given factors such as the share price volatility, and the fact that MatlinPatterson was unwilling to grant any termination events or give more than minimal warranties). The fact that the operation of the consolidation provisions was the mechanism by which this profit could be made is not enough in and of itself to give rise to a finding of dominant purpose under s 177D. Although the taxation consequences produced by the operation of the consolidation provisions were doubtless a consideration for [Macquarie] when determining whether to enter into the scheme (as evidenced by the advice obtained on the subject), neither these consequences nor the possibility of Mongoose getting a tax benefit were the ruling, prevailing or most influential purpose of MBL in deciding to do so. As Gummow and Hayne JJ noted in Hart, tax laws affect the shape of nearly every business transaction (citing Frank Lyon Company v United States (1978) 435 US 561 at 580; at 239). Further, the bare fact that a taxpayer pays less tax if one form of transaction is pursued rather than another does not demonstrate that Pt IVA applies (at 240). This was not a case in which entry into the scheme was explicable only by the relevant taxation consequences (Hart at 244). 556 A comparison between the facts and outcomes in different cases is rarely particularly useful - see, in a quite different context: CEU22 v Minister for Home Affairs [2024] FCAFC 11 at [63]. This is particularly so in cases such as the present which require a careful examination of often complicated facts. What is important is the correct identification and application of legal principles to the particular facts of the case. 557 Macquarie Bank involved a situation in which the structure adopted was recorded as having beneficial tax outcomes, but was also found to have had other non-tax advantages that the Court concluded were dominant in the decisions taken. In the present case: (a) Mr McGrath, and through him Mr Merchant, were advised that the Debt Forgiveness Schemes are "what gives Gordon the big [tax] benefit from the share sale": CB261. The evidence did not suggest that any genuine commercial consideration was given to following what might be thought to be the common commercial practice of repaying loans. (b) An element of the scheme was the BBG Share Sale which, for the purposes of s 177D(1), was carried out for the dominant purpose of obtaining a tax benefit and which, objectively, was not for the purpose of increasing cash in the MFT or providing the GMSF with a "good investment". (c) It is true that the structure adopted was consistent with securing the commercial end of selling Plantic. It is also true that the broader transaction within which the BBG Share Sale and the Debt Forgiveness Schemes occurred was the sale of the Plantic shares and that the purpose of the sale was for Mr Merchant to divest himself of his interest in Plantic and the associated requirement to provide funding - see: AOS[255], [259], [260], [261], [266]. However - as mentioned - that does not prevent a conclusion that there was a scheme with a tax avoidance purpose. It may be accepted that the sale of the Plantic shares to Kuraray was a genuine commercial transaction. It does not follow from that fact that the schemes carried out in pursuit of that ultimate objective did not have the dominant purpose of tax avoidance - see, in addition to the cases already mentioned: British American Tobacco Australia Services Limited v Commissioner of Taxation [2010] FCAFC 130; 189 FCR 151 at [51] and [53].

Fifth submission 558 Fifthly, the applicants noted that Angourie was a discretionary trust rather than a company with retained profits and that this was presumably why the amount of the forgiveness of the Angourie loan was not included in the Commissioner's s 177F determination based on s 177E: AOS[257]; CB783 at [157]. The applicants submitted that: (a) a further indicator against a dominant tax avoidance purpose was that the deed forgiving the debts owed by Plantic to GSM and Tironui also forgave debts owed by Plantic to Angourie in identical terms: AOCS[68]; AOS[256]; CB340; (b) the Angourie forgiveness could not have been for the dominant purpose of enabling shareholders to receive profits in a tax free form and that it was objectively likely that the dominant purpose of the GSM Debt Forgiveness and Tironui Debt Forgiveness was no different from the dominant purpose of the forgiveness of the debt owed to Angourie: AOS[257]. 559 These submissions are unpersuasive. The loan forgiven by Angourie was comparatively small at $790,854. The fact that the forgiving of this loan could not form part of a dividend stripping scheme or a scheme having substantially the effect of a dividend stripping scheme does not indicate that the GSM Debt Forgiveness and Tironui Debt Forgiveness were not entered into with the dominant purpose of tax avoidance. The forgiving of the debt owed to Angourie also operated to increase the amount of capital received by the MFT. It was convenient to forgive that debt in circumstances where the decision had been taken to forgive the far larger debts owed to GSM and Tironui. 560 It may also have caused even more concern to Kuraray if the Angourie loan had been treated differently to the GSM and Tironui loans.

Sixth submission 561 Sixthly, the applicants submitted that the deed effecting the forgiveness of the loans was only executed after the SSA was executed and only had effect at completion: AOCS[69]; CB340. If the dominant purpose of the Debt Forgiveness was to make GSM and Tironui's profits available by increasing the value of the MFT's assets, then that could have been done at any time: AOS[254]. The Debt Forgiveness did not occur until there was agreement with a purchaser of the shares of Plantic. According to the applicants, this pointed in favour of the dominant purpose of the Debt Forgiveness being to facilitate the sale of the MFT's shares in Plantic: AOS[255]. 562 It is true that the debt forgiveness was connected to the sale of the Plantic shares. The idea of forgiving debts was conceived in connection with the sale of the Plantic shares, together with the idea of the MFT selling the BBG Shares to the GMSF, as ways in which to maximise the return to Mr Merchant by minimising the amount of tax payable. 563 As mentioned earlier, the sale of the Plantic shares required the debts to be addressed. The sale of Plantic provided an opportunity to forgive Plantic's debts and increase the capital return for the MFT from that sale, rather than repay those debts. This occurred in a context where the MFT had crystallised a loss by selling the BBG Shares to the GMSF in anticipation of a sale of the shares in Plantic. 564 In this context, the timing of the debt forgiveness is not persuasive in suggesting a non-tax purpose. The real point of significance is that the structure was designed to involve the forgiveness of debts as part of the sale of the MFT's shares in Plantic. As Mr Burgess stated in his email on 21 August 2024, the debt forgiveness "is what gives [Mr Merchant] the big benefit from a share sale": CB261.

Seventh submission 565 Seventhly, the applicants submitted that the schemes in the present case bear none of the contrivance or artificiality that is present in the cases where s 177E has been applied: AOCS[70]. 566 In their opening submissions, the applicants emphasised the Full Court's comments in CPH FFC at [171] (it is also necessary to set out [170]): [170] This conclusion is reinforced by the extrinsic materials to which we have also referred. The Explanatory Memorandum and second reading speech accompanying the 1981 Bill emphasised that Part IVA, which includes s 177E, was concerned with "tax avoidance arrangements that ... are blatant, artificial or contrived". According to the Explanatory Memorandum, Part IVA was not designed to catch arrangements of a normal business or family kind. Section 177E itself was to be a "self-contained code, within the framework of Part IVA" and was to deal with "dividend-stripping schemes of tax avoidance and certain variations on such schemes". [171] These carefully formulated observations, in our opinion, clearly indicate that s 177E was intended to apply only to schemes which can be said to have the dominant purpose of tax avoidance. The section was not intended, in our view, to apply to a "scheme" entered into or carried out primarily for business or other purposes unconnected with avoidance of tax, even if the scheme is implemented in a manner that produces taxation advantages: Spotless at 425 per McHugh. (We recognise, of course, that a taxpayer may have the dominant purpose of avoiding tax consistently with the pursuit of commercial gain in the course of carrying on a business: Spotless at 415.) Since the section is directed at vendor shareholders participating in or benefiting from dividend stripping schemes, the required tax avoidance purpose is ordinarily that of enabling the vendor shareholders to receive profits of the target company in a substantially (if not entirely) tax-free form, thereby avoiding tax that would or might be payable if the target company's profits were distributed to shareholders by way of dividends. 567 The question is whether the terms of s 177E, properly construed in context, apply. It may be accepted that the context includes the history of the legislation. The question is not whether one should describe what occurred as artificial and contrived, less still whether it is appropriately so described in comparison to other cases. 568 Notwithstanding, the broader scheme - which included the BBG Share Sale - was structured in order to avoid top up tax being payable by Mr Merchant, and involved steps only sensibly explicable by the tax advantage which was sought and, in this sense, is appropriately described as "contrived".

Eighth submission 569 Eighthly, the applicants submitted that the timing and circumstances of the BBG Share Sale point against a dominant purpose of avoidance: AOCS[71]. The applicants accepted that, at the time of the BBG Share Sale, Mr Merchant's advisers specifically identified the possible benefit of a capital loss on that sale in the context of a sale of the MFT's shares in Plantic together with a debt forgiveness by GSM and Tironui. However, the applicants submitted, that is not what drove the BBG Share Sale. That argument has been rejected earlier.

Conclusion on purpose 570 The main purpose of the broader scheme was to avoid the payment of top up tax by Mr Merchant on GSM's and Tironui's undistributed profits. This is a sufficient tax avoidance purpose for the purposes of s 177E(1)(a)(ii).

Conclusion in relation to the s 177E Proceeding 571 Were it not for the forgiveness of the Plantic Loans, GSM (the target company) would have had substantial undistributed profits creating a potential tax liability for Mr Merchant who would have had to pay tax at marginal rates on dividends paid to him. No consideration was provided for the forgiveness of the loans such that the forgiveness had the effect of: reducing the undistributed profits of GSM and Tironui; and converting the Plantic Loans to equity, thereby increasing the value of Plantic's shares and the consideration paid by Kuraray for those shares. 572 Because of the BBG Share Sale, the MFT would not have a capital gain. The effect of the scheme was, in substance, to transfer undistributed profits in GSM and Tironui to the MFT from where they could be distributed (including to Mr Merchant) at substantially lower rates of tax. 573 Mr Merchant has not discharged the onus of establishing that the broader scheme did not have substantially the effect of a scheme by way of or in the nature of dividend stripping.

Introduction 574 As mentioned, the purchase price under the SSA included contingent rights to future payments, referred to earlier as the Future Payment Rights: (a) the Milestone Amounts and the Extrusion Coating Milestone; and (b) the Earn-Out Amounts, which comprised amounts calculated on the basis of sales target amounts in US dollars under cl 4.5 of the SSA for the years 2018 to 2024. 575 The issues raised in the TOFA Proceeding are: (1) Are the MFT's rights to receive the Milestone Amounts financial arrangements for the purposes of the TOFA Provisions? (2) If those rights are financial arrangements, are the MFT's rights to receive the Milestone Amounts the subject of the exception in (former) s 230-460(13) of the ITAA 1997? 576 There is no dispute that, if the TOFA Provisions apply, then the MFT is entitled to the deductions claimed and Mr Merchant is entitled to a consequential reduction in assessable income in each of the 2017 and 2018 income years. Likewise, if the TOFA Provisions do not apply, either because there was no financial arrangement or because of the exception in former s 230-460(13) of the ITAA 1997, then the TOFA Objection Decision refusing the deductions must be affirmed. 577 It is convenient first to outline how the Milestone Amounts and Earn-Out Amounts were calculated.

The Milestone Amounts 578 Clause 4.4 of the SSA provided for payment of "Milestone Amounts", with a maximum aggregate amount of US$25 million: CB370, cl 4.4(b). There were a variety of milestones for different categories of sales. The sales were categorised geographically, and by reference to particular customers: Australasian Sales, International Sales, J&G Foods sales and Valley Fine Foods sales. The milestones identified a target sales volume (in metric tonnes, or MT) to be met in a specified calendar year. 579 There were also "top-up" milestones, so that if one calendar year's target volume milestone was not met, the MFT could be entitled to a "top-up" payment (in the same amount as the original milestone amount) if the target volume milestone was met in the following year. 580 There was also an "Extrusion Coating Milestone". As was mentioned earlier, Plantic manufactures and distributes packaging materials that are a plant-based substitute for plastic. Plantic's products are manufactured by extruding resin from high-amylose corn starch. The products are considered by Plantic to have a variety of benefits over traditional plastic alternatives, including environmental benefits and providing greater shelf-life for certain food products: Morris at [7]. 581 One of Plantic's products was called Plantic HP (standing for "High Performance"). It was typically used to make chocolate and biscuit trays: Morris at [9(a)]. Plantic HP is soluble in water and biodegradable. It provides a gas barrier, which can extend shelf-life of certain perishable food products. 582 Plantic developed products called Plantic E and Plantic R which involved gluing a layer of water soluble Plantic HP between layers of other petroleum-based plastics that Plantic purchased from other manufacturers: Morris at [9(b)]. These products permitted the gas-barrier benefits of Plantic HP being used for packaging wet food products. 583 In 2014 and 2015, Plantic was developing a more cost-effective way of manufacturing Plantic E and Plantic R: Morris at [9(d)]. Instead of gluing a layer of Plantic HP between layers of other plastics, the new technique involved Plantic buying resin from which those other plastics were made and extruding layers of resin directly onto the Plantic HP product. To adopt this new technique, Plantic needed to install a new extrusion coating line at its premises in Altona, Victoria. By 31 March 2015, when the Plantic Sale agreement was signed, Plantic had been negotiating for a quote to supply the equipment required for the extrusion coating line. 584 The Extrusion Coating Milestone provided, in substance, that if Kuraray approved the capital expenditure required to build the new extrusion coating line, and 100MT of product was supplied to customers utilising the new extrusion coating line, then Kuraray would pay the MFT an amount of US$5 million. If Kuraray did not approve the capital expenditure, then that $5 million milestone was effectively spread across (by increasing the amount that would be paid for achieving) the first sales milestones for Australasian sales and the milestones for two particular customers (J&G Foods and Valley Fine Foods). This was achieved by the following provisions of the SSA: (a) Clause 4.4(a)(vi) required Kuraray to pay the MFT "the Extrusion Coating Milestone Amount on the Extrusion Coating Milestone Amount Payment Date" if the "Extrusion Coating Milestone" was satisfied on or before the "Milestone Drop Dead Date". (b) The "Milestone Drop Dead Date" was defined as being the date on which milestone amounts of US$25 million had been paid or, subject to cl 8.15(d), 31 December 2017. Clause 8.15(d) provided for the date to be extended if Kuraray was in breach of certain obligations. (c) The "Extrusion Coating Milestone" was defined to mean, if cl 8.17(b) applied, the date on which the Kuraray Group (including Plantic) has supplied, in aggregate, to one or more of its customers at least 100MT of Product utilising the Extrusion Coating Line. The "Extrusion Coating Line" was defined to mean such a line "to be established at" Plantic's Altona property as identified in particular due diligence documents. (d) Clause 8.17(b) applied on and before 1 September 2015, and if "Formal Corporate Approval" was obtained on or before 1 September 2015, then from that time until the Milestone Drop Dead Date. It specified that the amount of the "Extrusion Coating Milestone Amount" would remain, for that period, as US$5 million. (e) "Formal Corporate Approval" was defined to mean the grant of corporate approval by the Kuraray Group for a capital expenditure program for the installation and commission of the Extrusion Coating Line in a specified manner. (f) Clause 8.17(a) applied if "Formal Corporate Approval" was not obtained on or before 1 September 2015. In that event, the Extrusion Coating Milestone would be "no longer applicable and cannot be satisfied" and the amounts payable for the satisfaction of various sales milestones would be increased. 585 There were two "Australasian Sales Milestones" (the first achievable in either 2015 or 2016 and the second achievable in either 2016 or 2017). There was also an "International Sales Milestone (achievable in either 2016 or 2017), a "J&G Foods Milestone" (achievable in either 2015 or 2016) and a "Valley Fine Foods Milestone" (achievable in either 2015 or 2016). 586 The first Australasian Sales Milestone was 3,724MT, which could be achieved in either calendar year 2015 or 2016. If achieved, the amount payable by Kuraray would either be $3.4 million (if Kuraray had approved the capital expenditure required so as to make the US$5 million Extrusion Coating Milestone capable of being achieved) or US$5.1 million (if Kuraray had not approved such expenditure - in which case part of the amount of the US$5 million Extrusion Coating Milestone was effectively added to the first Australasian Sales Milestone. 587 The second Australasian Sales Milestone was 5,134MT, which could be achieved either in calendar year 2016 or 2017. If achieved, the amount payable by Kuraray would be US$5 million. The provisions of the SSA which achieved this were as follows: (a) Clause 4.4(a)(i)(A) provided for Kuraray to pay the MFT "the CY Australasian Sales Milestone Amount within 30 days of the CY15 Australasian Sales Milestone being satisfied". "CY" was defined to mean "calendar year". (b) The "CY15 Australasian Sales Milestone" was defined to mean "the CY15 Australasian Sales Amount reaching the Sales Volume referred to in the first row in the table set out in part 1 of schedule 9". The CY15 Australasian Sales Amount was defined to mean "the Sales Volume in Australia and New Zealand during CY15". "Sales Volume" was defined, in effect, to mean the aggregate volume in MT of products sold by Plantic less the aggregate volume of any of those products that are defective and returned. (c) The "CY15 Australasian Sales Amount" was identified in the first row of the table in part 1 of sch 9 as greater than or equal to 3,724MT. That row identified the "CY15 Australasian Sales Milestone Amount" as being US $3.4 million if cl 8.17(b) applies, and US$5.1 million if cl 8.17(a) applies. The reference to cl 8.17(a) and (b) is the adjustment to increase the sales milestone if it became impossible for the Extrusion Coating Milestone to be triggered because Kuraray decided not to incur the capital expenditure required to build the new extrusion coating line, as explained above. (d) Clause 4.4(a)(i)(B) provided that if the CY15 Australasian Sales Milestone is not satisfied but the CY16 Australasian Sales Top-Up Milestone is satisfied, then Kuraray would pay the MFT "the CY16 Australasian Sales Top-Up Milestone Amount within 30 days of" the milestone being satisfied. (e) The CY16 Australasian Sales Top-Up Milestone Amount was defined to mean "the CY16 Australasian Sales Top-Up Amount reaching the Sales Volume amount referred to in the first row in the table set out in part 2 of Schedule 9". (f) The CY16 Australasian Sales Top-Up Amount was defined to mean "the Sales Volume in Australia and New Zealand during CY16". (g) The CY16 Australasian Sales Top-Up Amount was identified in the first row of the table in part 2 of sch 9 as greater than or equal to 3,724MT (the same target volume as the CY15 Australasian Sales Amount). That row identified the CY16 Australasian Sales Top-Up Milestone Amount as being US$3.4 million if cl 8.17(b) applies, and US$5.1 million if cl 8.17(a) applies (the same milestone amount as the CY15 Australasian Sales Milestone). (h) There are similar provisions for a "CY16 Australasian Sales Milestone" and a "CY17 Australasian Sales Top Up Milestone". (i) The "CY16 Australasian Sales Amount" was 5,134MT and the "CY16 Australasian Sales Milestone Amount" was US$5 million. Schedule 9 makes clear that "the CY16 Australasian Sales Milestone Amount is independent of whether the CY16 Australasian Sales Top-Up Milestone Amount is US$3,400,000 or US$5,100,000 or zero". (j) The "CY17 Australasian Sales Top-Up Amount" was also 5,134MT and the "CY17 Australasian Sales Top-Up Milestone Amount" was also US$5 million. 588 The other milestones were structured in a similar way.

The Earn-Out Amount 589 The "Earn-Out Amounts" were provided for in cl 4.5 of the SSA. The maximum that the MFT could receive in respect of the Earn-Out Amounts was capped at US$70 million: cl 4.5(c)(iii). In summary: (a) Clause 4.5 provided for Kuraray to pay the MFT an Earn-Out Amount each calendar year from 2018 to 2024, calculated as a percentage of "Gross Sales" above certain levels. "Gross Sales" was defined as follows: Gross Sales means the invoice price of the Products Sold anywhere in the world (provided that if any Products are Sold in a transaction that is not at arm's length, then the invoice price of those Products will be the price that would have been paid by an independent Third Party customer in a bona fide arm's length transaction, as determined by the Purchaser or otherwise subject to clauses 9.2 and 9.3) less any returns, customer allowances, customer discounts, customer rebates and sales, use and value added taxes including goods and services tax. (b) "Product" was defined to capture specified products and "any other packaging materials as manufactured by the Group as at the date of this agreement". "Sold" was defined to mean "invoiced and / or delivered". (c) Up until the point that the MFT received US$25 million either by way of Milestone Amounts or by way of Earn-Out Amounts (if it did), an Earn-Out Amount would be payable at 2.5% of gross sales exceeding US$20 million in a given year. The percentage would increase to 4.5% to the extent that the gross sales exceeded specified targets (being a number varying from US$55 million in the 2018 calendar year up to US$290 million in the 2024 calendar year). (d) After the MFT received the US$25 million either by way of Milestone Amounts or by way of Earn-Out Amounts (if it did), then the MFT would only be entitled to an earn-out payment if the Gross Sales in a given year exceeded the specified targets (in which case, the Earn-Out Amount would be 6.5% of the amount by which the Gross Sales for the year exceeded that year's specified target). 590 Clause 4.5(a) addressed the Earn-Out Amounts during the period where the amounts paid by Kuraray by way of Milestone Amounts (or Earn-Out Amounts) were less than the maximum of US$25 million. (a) The specification of the relevant period is achieved by the clause stating that it applies if "the Aggregate Pre-Earn Out Purchase Price Amount" is less than the "Maximum Pre-Earn Out Purchase Price Amount". The "Maximum Pre-Earn Out Purchase Price Amount" was defined to mean the aggregate of the first component of the purchase price (the "Initial Purchase Price", subject to the working capital adjustment under cl 4.2) plus US$25 million (being the maximum that could be paid in respect of the milestone amounts discussed above). The "Aggregate Pre-Earn Out Purchase Price Amount" was defined to mean the aggregate of the first component of the purchase price plus the Milestone Amounts actually paid by Kuraray. (b) Where cl 4.5(a) applies, if the aggregate amount of Gross Sales during a given calendar year (called an "Earn-Out Period") is less than US$20 million (called the "First Target Amount"), then no earn out amount is payable that year: cl 4.5(a)(i). (c) If the aggregate amount of Gross Sales during a given calendar year exceeds US$20 million but does not exceed certain specified targets (called being "within the Second Sales Target Amount"), then the Earn-Out Amount is 2.5% of the amount by which the "Gross Sales" for that year exceed US$20 million: cl 4.5(a)(ii). The "Second Sales Target Amount" (which is in fact a range from US$20 million up to specified amounts) is set out in part 1 of sch 10 of the SSA. (d) If the aggregate amount of Gross Sales during a given calendar year exceeds the specified targets that are the top end of the Second Sales Target Amount (called being "within the Third Sales Target Amount"), then the Earn-Out Amount is 2.5% of the amount by which the upper limit of the Second Sales Target Amount for the year exceeds US$20 million, plus 4.5% of the amount by which the Gross Sales for the year exceed the upper limit of the Second Sales Target Amount: cl 4.5(a)(iii). The "Third Sales Target Amount" is again set out in part 1 of sch 10 and is specified as the same number each year as the top end of the "Second Sales Target Amount" range "or above". 591 Clause 4.5(b) concerns the period of time after the amounts paid by Kuraray - by way of Milestone Amounts or amounts paid under cl 4.5(a) - exceed the maximum of US$25 million: (a) The first is if the "Aggregate Pre-Earn Out Purchase Price Amount" is equal to the "Maximum Pre-Earn Out Purchase Price Amount" (that is, if Kuraray has paid the US$25 million by way of Milestone Amounts). (b) The second is if the "Aggregate Pre-Earn Out Purchase Price Amount" is less than the "Maximum Pre-Earn Out Purchase Price Amount" and Kuraray has paid the "Purchase Price Make Up Amount" in accordance with cl 4.5(a), where "Purchase Price Make Up Amount" is defined as the "Maximum Pre-Earn Out Purchase Price Amount" less the "Aggregate Pre-Earn Out Purchase Price Amount" (that is, if what Kuraray has paid by way of Milestone Amounts plus whatever extra it has paid by way of Earn-Out Amounts under cl 4.5(a) equals US$25 million). (c) Once cl 4.5(b) applies - that is, once Kuraray has effectively paid an amount equal to the US$25 million maximum Milestone Amount - then an Earn-Out Amount is only payable if the aggregate amount of Gross Sales during a calendar year exceeds the year's Fourth Sales Target Amount: cl 4.5(b)(iii). The "Fourth Sales Target Amount" is a number rather than a range, being the exact same number each year as is both the top end of the Second Sales Target Amounts and the bottom end of the Third Sales Target Amounts. (d) If an Earn-Out is payable in accordance with the foregoing, then the amount of the Earn-Out payable is 6.5% of the aggregate Gross Sales during the year less the amount of the Fourth Sales Target Amount for the year: cl 4.5(b)(iv). 592 Each of the Milestone Amounts were calculated in a similar way. Each was calculated by reference to sales in MT. 593 In the events which occurred: (a) the Extrusion Coating Milestone was met on 30 September 2016 and payment was received by the MFT shortly thereafter in the amount of US$5 million (A$6,577,040): CB773 at page 12, [2.6]; CB801 at [56(b)]; and (b) the CY15 Valley Fine Foods Sales Milestone was not met, but the CY16 Valley Fine Foods Sales Top-Up Milestone was met on 31 October 2016, which entitled the MFT to payment of US$3.3 million (A$4,415,310): CB773 at [2.9]; CB801 at [56(e)]. 594 However, the following Milestones were not met: CY15 Australasian Sales Milestone; CY16 Australasian Sales Top-Up Milestone; CY16 Australasian Sales Milestone; CY17 Australasian Sales Top-Up Milestone; CY16 International Sales Milestone; CY17 International Sales Top-Up Milestone; CY15 J&G Foods Sales Milestone; and CY16 J&G Foods Sales Top-Up Milestone: CB773 at page 12, [2.7], [2.8]; CB774 at page 13, [2.6], [2.7]; CB801 at [56(c)], [56(d)], [56(g)], [56(h)]. 595 Mr Merchant contended that the rights to the Milestone Amounts expired at the following times and in the following ways (CB801 at [30] to [31]; AOS[323] to [324]) (together, the Expired Future Payment Rights): (a) The CY15 Australasian Sales Milestone required a sales target of 3,724MT in Australasia to be met, which was capable of being met by 31 December 2015 and, if not achieved in that year, in the following year via the CY16 Australasian Sales Top-Up Milestone. As neither sales target was met in CY15 or CY16, the right to receive the CY15 Australasian Sales Milestone Amount expired on 31 December 2016, in the 2017 Financial Year: CB773 at page 12, [2.7]. (b) Similarly, the CY15 J&G Foods Sales Milestone required a sales target of 100MT to be met. It could be met by 31 December 2015 and, if not achieved in that year, in the following year via the CY16 J&G Foods Sales Top-Up Milestone. As the relevant target was not met in CY15 or CY16, the right to receive the CY15 J&G Foods Sales Milestone Amount expired on 31 December 2016, in the 2017 Financial Year: CB773 at page 12, [2.8]. (c) The CY16 Australasian Sales Milestone required a sales target of 5,134MT in Australasia to be met by 31 December 2016 and, if not achieved in that year, in the following calendar year by meeting the CY17 Australasian Sales Top-Up Milestone. As the sales target was not met in either CY16 or CY17, the right to earn the CY16 Australasian Sales Milestone Amount expired on 31 December 2017, in the 2018 Financial Year: CB774 at page 13, [2.6]. (d) The CY16 International Sales Milestone required a sales target of 3,100MT (excluding Australia and certain overseas jurisdictions) to be met by 31 December 2016 and, if not achieved in that year, in the following year by the CY17 International Sales Top-Up Milestone. As the sales target was not met in either CY16 or CY17, the right to earn the CY16 International Sales Milestone Amount expired on 31 December 2017, in the 2018 Financial Year: CB774 at page 12, [2.7]. 596 On 15 May 2018: (a) the MFT lodged its tax return for the income year ended 30 June 2017, where it reported net income of $5,724,671, all of which was assessable to Mr Merchant who was presently entitled to 100% of the trust's income; and (b) Mr Merchant lodged his tax return for the income year ended 30 June 2017, where Mr Merchant reported his taxable income to be $7,466,253 which included his 100% share of the MFT's net income of $5,724,671: CB739. 597 On 22 May 2018, Mr Merchant was issued an assessment which disclosed a taxable income of $7,466,253 and resulted in an amount payable of $1,126,789.90: CB740. 598 On 28 February 2019: (a) the MFT lodged its tax return for the income year ended 30 June 2018, where it reported its net income to be $6,147,243, all of which was assessable to Angourie , which was presently entitled to 100% of the MFT income; and (b) Angourie lodged its tax return for the income year ended 30 June 2018, where it reported its net income to be $5,172,158 (which included its 100% share of the MFT's net income of $6,147,243) of which Mr Merchant's share was 100%.

Procedural background 599 On 1 April 2019, Mr Merchant lodged his tax return for the income year ended 30 June 2018, where he reported his taxable income to be $6,431,852 which included his 100% share of the Angourie net income of $5,172,158: CB761. 600 On 9 April 2019, Mr Merchant was issued with an assessment for the 2018 year. This disclosed a taxable income of $6,413,852 and resulted in an amount refundable of $485,302.17: CB765. 601 On 23 April 2019, Mr Merchant was issued with an amended notice of assessment for the 2018 year. This disclosed a taxable income of $6,415,542 and resulted in an amount refundable of $484,761.37: CB765. 602 On 24 September 2019, Mr Merchant lodged an objection to the 2017 and 2018 assessments and later, on 1 March 2021, expanded the grounds of objection in relation to the 2018 assessment: CB773; CB774. 603 In relation to the 2017 assessment, Mr Merchant submitted that the share of the MFT's net income on which he is assessable should be adjusted from $5,724,671 to nil and that his taxable income should therefore be reduced by that amount, being from $7,466,253 to $1,741,582. The basis for the reduction in the amount of the MFT's net income assessable to Mr Merchant was said to be that the MFT was entitled to deduct, on revenue account, the net losses on the expiry of rights to relevant Milestone Amounts by virtue of the operation of the TOFA Provisions in Division 230 of the ITAA 1997. 604 In relation to the 2018 assessment, Mr Merchant submitted that Angourie's share of the MFT's net income should be adjusted from $6,147,243 to nil, that his share of Angourie's net income should therefore be reduced from $5,172,158 to nil, and that his taxable income should be reduced from $6,413,852 to $1,241,695. Mr Merchant contended that the MFT is entitled to deduct losses under the TOFA Provisions. 605 The expanded objection, made on 1 March 2021, concerned a claimed error in the forex data used to convert foreign currencies to Australian dollar amounts for the purposes of calculating forex gains and losses for the purposes of Division 775 of the ITAA 1997 with respect to foreign currency bank accounts held by the MFT. In broad terms, Mr Merchant raised that the reported error impacted the 2018 assessment because it resulted in: (i) an understatement of forex losses deductible in the 2018 year pursuant to s 775-30 of the ITAA 1997; and (ii) an overstatement of forex gains of the MFT in the 2019 year. 606 On 10 September 2021, the Commissioner disallowed Mr Merchant's objections on the basis that: (a) the Plantic rights are the subject of the exception from Division 230 in (former) s 230-460(13) of the ITAA 1997; and (b) Mr Merchant had not provided any contemporaneous evidence to support his expanded objection grounds that the MFT made an additional forex realisation loss under s 775-30 of the ITAA 1997 for the income year ended 30 June 2018 from an asserted forex realisation event that happened on or around 19 September 2017 under s 775-20 of the ITAA 1997. 607 On 10 November 2021, the applicant filed a notice of appeal against an appealable objection decision under s 14ZZ of the TAA 1953 contending that the 2017 and 2018 assessments are both excessive. All issues related to forex gains and losses have been abandoned.

The legislation 608 Division 230 of the ITAA 1997 taxes certain financial arrangements that certain entities start to have on or after the start of their first applicable income year. 609 There is no issue that the MFT met the relevant threshold tests in the 2010 income year so as potentially to enliven the TOFA provisions. 610 Section 230-1 explains that the Division is about the tax treatment of gains and losses from "financial arrangements", allowing a taxpayer to recognise the gains and losses, as appropriate, over the life of a financial arrangement and to ignore distinctions between income and capital, unless specific rules apply. Subsections 230-45(1), 230-50(1) and 230-50(2) provide tests which specify when a financial arrangement has arisen. 611 Section 230-15(2) permits the deduction of a loss made from a "financial arrangement" to the extent that it is made in gaining or producing assessable income or is necessarily made in carrying on a business for the purpose of gaining or producing assessable income. 612 Section 230-45(1) provides: 230-45 Financial arrangement (1) You have a financial arrangement if you have, under an *arrangement: (a) a *cash settlable legal or equitable right to receive a *financial benefit; or (b) a cash settlable legal or equitable obligation to provide a financial benefit; or (c) a combination of one or more such rights and/or one or more such obligations; unless: (d) you also have under the arrangement one or more legal or equitable rights to receive something and/or one or more legal or equitable obligations to provide something; and (e) for one or more of the rights and/or obligations covered by paragraph (d): (i) the thing that you have the right to receive, or the obligation to provide, is not a financial benefit; or (ii) the right or obligation is not cash settlable; and (f) the one or more rights and/or obligations covered by paragraph (e) are not insignificant in comparison with the right, obligation or combination covered by paragraph (a), (b) or (c). The right, obligation or combination covered by paragraph (a), (b) or (c) constitutes the financial arrangement. Note 1: Whether your rights and/or obligations under an arrangement constitute a financial arrangement can change over time depending on changes either to the terms of the arrangement or external circumstances (such as particular rights or obligations under the arrangement being satisfied by the parties). For example, a contract may provide for the transfer of a boat in 6 months time and payment of the contract price at the end of 2 years. Until the boat is delivered, there is no financial arrangement because of the operation of paragraphs (d), (e) and (f) above. Once the boat is delivered, there is a financial arrangement because those paragraphs are no longer applicable. … 613 The term "arrangement" is defined in s 995-1 as follows: arrangement means any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings. 614 Section 974-160 states: 974-160 Financial benefit (1) In this Act: financial benefit: (a) means anything of economic value; and (b) includes property and services; and (c) includes anything that regulations made for the purposes of subsection (3) provide is a financial benefit; even if the transaction that confers the benefit on an entity also imposes an obligation on the entity. (2) In applying subsection (1), benefits and obligations are to be looked at separately and not set off against each other. (3) The regulations may provide that a thing specified in the regulations is a financial benefit for the purposes of this Act. 615 Section 230-50 provides two further tests for financial arrangement. Subsection 230-50(1) provides that an equity interest constitutes a financial arrangement. Under s 230-50(2), you have a financial arrangement if you have, under an arrangement, one or more legal or equitable rights to receive or provide something that is an equity interest. 616 However, for the purposes of Div 230, specific grouping and disaggregation rules apply. 617 Section 230-55 provides: 230-55 Rights, obligations and arrangements (grouping and disaggregation rules) Single right or obligation or multiple rights or obligations? (1) If you have a right to receive 2 or more *financial benefits, you are taken, for the purposes of this Division, to have a separate right to receive each of those financial benefits. (2) If you have an obligation to provide 2 or more *financial benefits, you are taken, for the purposes of this Division, to have a separate obligation to provide each of those financial benefits. (3) Subsections (1) and (2) apply for the avoidance of doubt. Matters relevant to determining what rights and/or obligations constitute particular arrangements (4) For the purposes of this Division, whether a number of rights and/or obligations are themselves an *arrangement or are 2 or more separate arrangements is a question of fact and degree that you determine having regard to the following: (a) the nature of the rights and/or obligations; (b) their terms and conditions (including those relating to any payment or other consideration for them); (c) the circumstances surrounding their creation and their proposed exercise or performance (including what can reasonably be seen as the purposes of one or more of the entities involved); (d) whether they can be dealt with separately or must be dealt with together; (e) normal commercial understandings and practices in relation to them (including whether they are regarded commercially as separate things or as a group or series that forms a whole); (f) the objects of this Division. In applying this subsection, have regard to the matters referred to in paragraphs (a) to (f) both in relation to the rights and/or obligations separately and in relation to the rights and/or obligations in combination with each other. 618 The Explanatory Memorandum to the Taxation Laws Amendment (Taxation of Financial Arrangements) Bill 2008 (Cth) stated: 2.47 The various rights and obligation subsisting under a contract will typically constitute the relevant arrangement for the purposes of Division 230. That is, the contract is typically viewed on a 'stand alone' basis. In this context, the contract is neither aggregated with another contract (or contracts), nor disaggregated into component parts, when determining the relevant arrangement to be considered under Division 230. 619 Division 230 is subject to various exceptions, which are set out in Subdiv 230-H. If an exception applies to the relevant right or obligation that gives rise to the gain or loss, then that right or obligation is not subject to the operation of the Division. The exception presently in issue is contained in s 230-460, which provided, as at 31 March 2015 (which is the relevant time for the purposes of this part of the proceeding): (1) This Division does not apply to your gains and losses from a *financial arrangement for any income year to the extent that your rights and/or obligations under the arrangement are the subject of an exception under any of the following subsections. … Proceeds from certain business sales (13) A right to receive, or an obligation to provide, *financial benefits arising from the sale of: (a) a business; or (b) shares in a company that operates a business; or (c) interest in a trust that operates a business; is the subject of an exception if the amounts, or the values, of those benefits are contingent only on the economic performance of the business after the sale. 620 Neither the term "economic performance", nor the phrase "contingent only on the economic performance of the business", is defined in the Act. 621 However, the applicants relied upon s 974-85(1), which is found in Div 974 of the ITAA 1997. Division 974 is entitled "Debt and equity interests" and sets out whether an interest is a debt interest or an equity interest for tax purposes. Subdivision 974-C is entitled "Equity interests in companies". Within Subdiv 974-C, s 974-85(1) provided, as at 31 March 2015: (1) A right, or the amount of a return, is not contingent on the economic performance of an entity, or a part of the entity's activities, merely because the right or return is contingent on: (a) the ability or willingness of an entity to meet the obligation to satisfy the right to the return; or (b) the receipts or turnover of the entity or the turnover generated by those activities. 622 The section currently defines the phrase "contingent on aspects of the economic performance". 623 Section 974-85 was introduced by the New Business Tax System (Debt and Equity) Act 2001 (Cth). The Explanatory Memorandum for that Act contained the following: Disregarded kinds of economic performance - de minimis contingencies and turnover based payments 2.32 There can be circumstances where a right to a return or an amount of return is based on the turnover of the entity obliged to make the relevant payments. An example is a lease contract where part of the rentals are based on the lessee's turnover. Generally speaking, turnover based returns will be excluded from being regarded as contingent on economic performance in the relevant sense. [Schedule 1, item 34, paragraph 974 85(1)(b)] 2.33 However, there may be types of contracts where turnover is a close proxy for an economic performance indicator other than turnover (e.g. profitability) of the payer. Regulations may be made to treat such contracts as equity interests. Regulations may also be made to clarify when a particular return is or is not contingent on economic performance. [Schedule 1, item 34, subsection 974 85(2)] 2.34 Where a right to a return or an amount of return on an interest is contingent on profitability or some other economic performance indicator (other than turnover) to a minor extent, regulations may be made to exclude such types of interests from being equity interests. [Schedule 1, item 34, subsection 974 85(2)]

Are each of the Expired Future Payment Rights a "financial arrangement"? 624 The applicants submitted that each of the Expired Future Payment Rights was a "financial arrangement" within the meaning of s 230-45 of the ITAA 1997 because: (a) each was a cash settlable legal right to receive a "financial benefit"; and (b) the MFT did not have, under the arrangement, a right to receive or an obligation to provide, anything that was not a "financial benefit". 625 The Commissioner contended that the SSA was a single arrangement, including after the shares were transferred, with the result that there was no "financial arrangement" under s 230-45 because the arrangement included non-cash settlable rights which were "not insignificant": ROS[529]. In this regard, the Commissioner relied upon (ROS[531]): (a) the rights to information contained in cl 8 and 9; (b) the duties imposed on Kuraray by cl 8 and 9 in regard to the management of the Plantic Business in the period between Completion and the point at which the Milestones were due to be completed and the Earn-Out Period; and (c) the obligation imposed upon the MFT not to engage in a competitive business or solicit clients contained in cl 5. 626 The Commissioner submitted that these obligations were plainly significant because they "formed part of the value being exchanged between the parties, and were intrinsic to the value of the cash settlable rights that comprised the Milestone Amounts and Earn-Out Amounts" and that "[w]ithout them, the value of those rights would have changed significantly for both parties": ROS[532]. 627 For the reasons set out below, the exception in s 230-460(13) applies such that it unnecessary to reach a conclusion about whether the Expired Future Payment Rights constitute one or more financial arrangements. Nevertheless, I will address the issue briefly. 628 Had it been necessary to decide, I would have been inclined to conclude that the rights relied upon by the Commissioner set out at [625] above were "insignificant in comparison with the right[s]" otherwise attracting the operation of the provision, namely the rights to receive the future payments. The contractual provisions were important because of the protections they afforded, and in that sense significant, but they were in the nature of typical contractual protections associated with post-completion financial benefits. The statutory question raised by s 230-145(1)(f) is not whether a right is "insignificant" when looked at on its own. The question is whether it is "insignificant in comparison with the right" otherwise attracting the operation of the provision. 629 The Commissioner submitted that the expired rights could, in any event, not individually constitute a financial arrangement: ROS[493]. 630 It is to be accepted that the Milestone Amounts and the Earn-Out Amounts were interlinked. Earn-Out Amounts were payable at differing rates depending on what amount had been received in respect of the Milestone Amounts. Specifically: (a) up until the time when the MFT had received the maximum US$25 million Milestone Amounts, an Earn-Out Amount would be payable at 2.5% of gross sales exceeding US$20 million in a given year. The percentage would increase to 4.5% to the extent that the Gross Sales exceeded specified targets (being a number varying from $55 million in the 2018 calendar year up to $290 million in the 2024 calendar year); and (b) once the MFT had received amounts equal to the maximum US$25 million Milestone Amounts (either by way of Milestone Amounts or by way of Earn-Out Amounts), then the MFT would only be entitled to an earn out payment if the Gross Sales in a given year exceeded specified targets, in which case, the Earn-Out Amount would be 6.5% of the amount by which the Gross Sales for the year exceeded that year's specified target. 631 Further, the Milestone Amounts were affected by the Extrusion Coating Milestone or whether "Formal Corporate Approval" was obtained. 632 However, whether aggregation is appropriate is "question of fact and degree": s 230-155(4). Had it been necessary to decide, I would have been inclined to the view that the Expired Future Payment Rights were appropriately treated as individual financial benefits when assessing the matter in a commercial, practical way in light of the apparent object of the TOFA Provisions.

Does the exception in former s 230-460(13) apply? 633 The applicants accepted that each of the Expired Future Payment Rights was a right to receive financial benefits "arising from the sale of … shares in a company that operates a business", within the meaning of s 230-460(13): AOS[337]. However, the applicants submitted that it should not be concluded that the "the amounts, or the values" of those benefits "are contingent only on the economic performance of the business after the sale". The applicants submitted that the contingencies that affected the expired future payment rights were (AOS[338]): (a) whether "Formal Corporate Approval" was obtained for the Extrusion Coating Line - failing which, the Extrusion Coating Milestone would be unavailable and cl 8.17(a) would operate to make the higher sales milestone amount applicable; and (b) whether "Sales Volume" in each category and period met the targets specified in sch 9 of the SSA. Sales Volume referred to the aggregate volume in metric tonnes of products sold by Plantic (less the aggregate volume of any products returned). 634 According to the applicants (AOS[339]): (a) these contingencies do not make the Future Payment Rights "contingent only on the economic performance of the business after sale"; (b) s 974-85(1) makes clear that a right does not meet that description "merely because the right ... is contingent on … the receipts or turnover of the entity or the turnover generated by those activities"; and (c) "economic performance" must be understood as directed at profitability, which is independent of turnover. 635 The applicants submitted that this understanding of the expression "economic performance" is confirmed by the explanatory memorandum, referred to earlier, which gives the example of turnover rents not being contingent on economic performance in the relevant sense. Similarly, according to the applicants, contingencies fixed by whether corporate approval is given for a project or by reference to volume of sales (regardless of profitability) do not fall within the section: AOS[339]. 636 At the relevant time, s 974-85(1) in Div 974 defined the phrase "contingent on the economic performance". The definition in s 974-85(1) is not a definition provided for the purposes of the whole Act (compare s 975-60, set out at [614] above). The phrase "contingent only on the economic performance" in s 230-460(13) is not defined by s 974-85(1) and that section provides no real assistance in construing the different phrase in s 230-460(13). The Divisions address quite different issues. Division 974 addresses debt and equity interests. Subsections 974-85(2) to (4) contemplated that regulations might specify the circumstances in which a right or return is to be taken to be contingent, or that s 974-85(1)(b) might not apply in circumstances specified in the regulation. Section 230-460(13) addresses financial benefits arising from the sale of a business under an earn out arrangement. 637 The Explanatory Memorandum to the Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2008, which, when enacted, inserted (former) s 230-460(13), relevantly provides: 2.184 A right to receive, or an obligation to provide, financial benefits arising from the direct or indirect sale of business, including those rights or obligations arising from the sale of shares in a company (or interests in a trust) that operates the business, may be the subject of an exception. These rights and obligations will only be the subject of this exception where the amounts or the values of the financial benefits to be received or provided are contingent on the economic performance of the business after the sale. [Schedule 1, item 1, subsection 230-460(13)] 2.185 This exception applies to exclude arrangements commonly known as 'earn-outs'. 638 The words "contingent only on the economic performance of the business after the sale" mean what they say. The phrase "economic performance" is not the same as, or equivalent to, the word "profitability". Profitability is one way to measure the success or otherwise of a business's "economic performance", but "economic performance" refers to a business's performance, not its profitability. 639 If the legislature had wanted to limit the exception to profitability, it could have done so by using the phrase "contingent only on the profit of the business after sale". 640 It is clear enough that the exception was intended to address, amongst other things, earn-out arrangements. These are commonly structured by reference to performance of the business other than by way of profit. Earn-out arrangements might be structured, for example, by reference to numbers of clients retained or gained or volume of sales. These are both appropriately described as matters of "economic performance". They are indicators of performance or profitability and are commonly used because they do not turn on choices that the incoming purchaser might make about business operations or the cost of sales being matters which affect profitability. 641 The Milestone Amounts were contingent only on sales volumes. They were contingent only on the economic performance of the business after the sale. Each of the rights said to have expired was a right contingent only on the economic performance of the Plantic business after the sale, and so is within the exception set out in s 230-460(13). It does not matter that the contingency (volume of sales) does not also factor in the cost of sales such that the contingency is not one which calculates profit. 642 It is true that the amount to be paid in respect of the Australasian sales milestones and the milestones for J&G Foods and Valley Fine Foods was affected by whether or not the Extrusion Coating Milestone was met (which it was not), but that does not mean that the rights which expired were relevantly contingent on anything other than the economic performance of the Plantic business after the sale. The Extrusion Coating Milestone was not a contingency which affected whether or not the sales milestones were payable. And, in any event, it was appropriately classified as a contingency about economic performance.

Conclusions in relation to the TOFA Provisions 643 On the assumption that the Future Payments Rights were "financial arrangements" to which the TOFA Provisions would otherwise have applied, the rights were subject to the exception in (former) s 230-460(13) of the ITAA 1997. 644 It follows that the TOFA Proceeding should be dismissed.

7 CONCLUSION 645 The parties should confer with a view to agreeing orders to give effect to these reasons within 14 days. I certify that the preceding six hundred and forty five (645) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Thawley.