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].