154 The impact of franking credits, which were said to be the holder's share of tax paid by the Bank, was explained in the prospectus. If the potential value of the franking credits were to be taken into account, a fully franked distribution rate of 4.676% would be the equivalent of an unfranked distribution rate of approximately 6.680%. That corresponded, of course, to the Bank Bill Swap Rate and the margin, unadjusted by reference to the corporate tax rate. If for any reason a distribution were not fully franked, it would generally be adjusted to compensate holders for the unfranked portion thereof, pursuant to the following provision in the prospectus:
If any interest payment before the application of this clause 4.2:
(1) due to be made on a Note does not have a "franking percentage" of 100% CBA must notify the Holders as soon as practicable and (regardless of whether that notice is actually given) CBA must increase the interest concerned; or
(2) made on a Note is subsequently found not to have, or is treated by the Commissioner as not having, a "franking percentage" of 100% other than as a result of any actions by the Holders, CBA must notify the Holder as soon as practicable and (regardless of whether that notice is actually given) must pay within 30 Business Days of CBA becoming aware of such finding or treatment an amount which represents the difference between the Interest payment made and the increased interest concerned.
so that the additional interest to be paid (the Gross-Up Amount) is the amount calculated in accordance with the following formula as adjusted by clause 4.2(a)(3):
I x T x (1 - f1)
1 - T
where
I = the Interest for the Interest Period calculated, prior to any increase, in accordance with clause 4.1;
T = the Australian corporate tax rate applicable at the relevant Interest Payment Date, expressed as a decimal; and
f1 = the "franking percentage" of the Interest payable (excluding any payment under this clause 4.2) expressed as a decimal to four decimal places,
provided that:
(3) any payment under this clause 4.2 will be adjusted in accordance with the following formula:
Gross-Up Amount x (1 - T)
[1 - T + (T x f2)]
where f2 = the "franking percentage" of the Gross-Up Amount expressed as a decimal to four decimal places.
In this clause 4.2, "franking percentage" has the meaning given by section 203-35 of the Tax Act or any section that replaces or revises that section.
155 The prospect of an adjustment of the kind referred to in the previous paragraph having to be made was in fact the subject of an agreement between the Bank and the Commissioner, the essence of which, and the consequences of the court making a ruling on a challenge to any s 177EA determination which was adverse to a security-holder, were the subject of the following passage in the prospectus:
The Bank expects that Distributions will be fully franked. If Distributions are fully franked, Holders will receive a combination of cash Distributions and franking credits.
However, Distributions payable on PERLS V may be unfranked or not fully franked. If a Distribution is unfranked or not fully franked, the cash Distribution will generally be increased by a cash amount to compensate Holders for the unfranked portion of the Distribution.
The Bank understands that the ATO may form the view that the benefits of the franking credits should be denied to Holders even if the Bank has franked the relevant Distribution. If the ATO forms the view that franking credits should be denied to Holders, the Bank intends to have that view tested in court.
The Bank and the ATO have agreed to certain arrangements that will ensure that Holders will not be impacted by this process. In the event that the ATO view is sustained the Bank has agreed to make a payment to the ATO to compensate it and in practice the benefits of the franking credits will be allowed to Holders.
In the event that the ATO view is sustained, the Bank will elect that an Assignment Event occurs in respect of all Notes, such that Holders will hold the Preference Shares (see Section 1.8.2 "What happens of an Assignment Event occurs?"). The benefits of the franking credits attached to Dividends paid on Preference Shares should not be denied to Holders.
156 On 23 December 2009, the New Zealand branch of the Bank lodged an application for a private binding ruling with the New Zealand Inland Revenue Department. The application sought confirmation that distributions on the notes forming part of the securities would be deductible against the income of the New Zealand branch of the Bank. It is common ground that those distributions were so deductible.
157 This last-mentioned feature of the securities was significant in the case advanced on behalf of the Commissioner. That case was founded upon the perception of a dichotomy as between an equity interest and a debt interest in a company. An equity interest would give rise to a distribution of post-tax profits. As such, the amount of the distribution would not be a tax deduction for the company, but the tax paid by the company on it would be reflected in the franking credit passed down to the interest holder. By contrast, a debt interest would give rise to a distribution on the nature of interest on the debt. The amount of the distribution would be a pre-tax operating expense of the company, and would entitle the company to a tax deduction. But the distribution would not be franked. How the distribution stood in the accounts of the interest holder would be of no concern to the company but, generally speaking, it would count as income under the 1997 Act. What is presently important is that no tax would have been paid by the company on the distribution.
158 Absent his determination under s 177EA of the 1936 Act, the Commissioner submits that the Bank would be getting the best of both worlds in the present case. It is said that the architecture of the securities was such that, because the income out of which interest on the notes was payable had been derived in New Zealand, it was, pursuant to s 23AH of the 1936 Act, excluded from the Bank's assessable income in Australia. That income would presumably have attracted tax in New Zealand in the normal course, but a deduction was allowed for the interest payments. The amount of the Bank's income which represented that interest, therefore, was not subject to tax in either country. At the same time, however, the interest-holder - in most cases, by design, an Australian resident - would obtain an imputation credit by reference to the circumstance that, under the 1997 Act, the security was an equity interest rather than a debt interest. The Bank thus achieved, by one and the same outlay, the franking benefit of the equity interest status of the security and the deductibility benefit of the interest payment on the note. On any objective view of the matter, according to the Commissioner, it is likely to have been a purpose of the bank, in designing the securities, to enable the appellant to obtain an imputation benefit.
159 The primary Judge agreed, and I shall turn next to his Honour's reasoning in that regard. Before doing so, I set out hereunder the provisions of s 177EA which are relevant to the question of purpose as it arises under para (e) of subs (3):
(4) It is not to be concluded for the purposes of paragraph (3)(e) that a person entered into or carried out a scheme for a purpose mentioned in that paragraph merely because the person acquired membership interests, or an interest in membership interests, in the entity.
….
(17) The relevant circumstances of a scheme include the following:
(a) the extent and duration of the risks of loss, and the opportunities for profit or gain, from holding membership interests, or having interests in membership interests, in the corporate tax entity that are respectively borne by or accrue to the parties to the scheme, and whether there has been any change in those risks and opportunities for the relevant taxpayer or any other party to the scheme (for example, a change resulting from the making of any contract, the granting of any option or the entering into of any arrangement with respect to any membership interests, or interests in membership interests, in the corporate tax entity);
(b) whether the relevant taxpayer would, in the year of income in which the distribution is made, or if the distribution flows indirectly to the relevant taxpayer, in the year in which the distribution flows indirectly to the relevant taxpayer, derive a greater benefit from franking credits than other entities who hold membership interests, or have interests in membership interests, in the corporate tax entity;
(c) whether, apart from the scheme, the corporate tax entity would have retained the franking credits or exempting credits or would have used the franking credits or exempting credits to pay a franked distribution to another entity referred to in paragraph (b);
(d) whether, apart from the scheme, a franked distribution would have flowed indirectly to another entity referred to in paragraph (b);
(e) if the scheme involves the issue of a non-share equity interest to which section 215-10 of the Income Tax Assessment Act 1997 applies - whether the corporate tax entity has issued, or is likely to issue, equity interests in the corporate tax entity:
(i) that are similar, from a commercial point of view, to the non-share equity interest; and
(ii) distributions in respect of which are frankable;
(f) whether any consideration paid or given by or on behalf of, or received by or on behalf of, the relevant taxpayer in connection with the scheme (for example, the amount of any interest on a loan) was calculated by reference to the imputation benefits to be received by the relevant taxpayer;
(g) whether a deduction is allowable or a capital loss is incurred in connection with a distribution that is made or that flows indirectly under the scheme;
(ga) whether a distribution that is made or that flows indirectly under the scheme to the relevant taxpayer is sourced, directly or indirectly, from unrealised or untaxed profits;
(h) whether a distribution that is made or that flows indirectly under the scheme to the relevant taxpayer is equivalent to the receipt by the relevant taxpayer of interest or of an amount in the nature of, or similar to, interest;
(i) the period for which the relevant taxpayer held membership interests, or had an interest in membership interests, in the corporate tax entity;
(j) any of the matters referred to in subparagraphs 177D(b)(i) to (viii).
(18) The following subsection lists some of the cases in which a taxpayer to whom a distribution flows indirectly receives a greater benefit from franking credits than an entity referred to in paragraph (17)(b). It is not an exhaustive list.
(19) A taxpayer to whom a distribution flows indirectly receives a greater benefit from franking credits than an entity referred to in paragraph (17)(b) if any of the following circumstances exist in relation to that entity in the year of income in which the distribution giving rise to the benefit is made, and not in relation to the taxpayer if:
(a) the entity is not an Australian resident; or
(b) the entity would not be entitled to any tax offset under Division 207 of the Income Tax Assessment Act 1997 because of the distribution; or
(c) the amount of income tax that would be payable by the entity because of the distribution is less than the tax offset to which the entity would be entitled; or
(d) the entity is a corporate tax entity at the time the distribution is made, but no franking credit arises for the entity as a result of the distribution; or
(e) the entity is a corporate tax entity at the time the distribution is made, but cannot use franking credits received on the distribution to frank distributions to its own members because:
(i) it is not a franking entity; or
(ii) it is unable to make frankable distributions.
Note: Where the distribution is made directly to the taxpayer, see subsections 204-30(7), (8), (9) and (10) of the Income Tax Assessment Act 1997 for a list of circumstances in which the taxpayer will be treated as deriving a greater benefit from franking credits than another entity.
160 As will be seen, para (j) of s 177EA(17) picks up subparas (i)-(viii) of s 177D(b). They read as follows:
(i) [T]he manner in which the scheme was entered into or carried out;
(ii) the form and substance of the scheme;
(iii) the time at which the scheme was entered into and the length of the period during which the scheme was carried out;
(iv) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme;
(v) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme;
(vi) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;
(vii) any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out; and
(viii) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi)….
161 With respect to para (a) of s 177EA(17), the primary Judge referred at some length to the evidence of Prof John Handley, an Associate Professor of Finance at the University of Melbourne called by the appellant. According to his Honour, Prof Handley concluded that the securities had features that exposed investors to equity-like risks in that, as with ordinary shares, payment of the periodic distribution was subject to the discretion of the Bank and to payment tests, including the availability of profits in the current period; and the holders generally ranked behind other creditors of the Bank in a winding up, although they ranked ahead of the holders of ordinary shares. At the same time, the securities had some debt-like features, albeit qualified by the equity-like aspects. Like senior debt, the periodic distribution was based on an external benchmark interest rate, but the significantly higher margin indicated that the market was of the view that the risk of an investment in the securities was greater than the risk of an investment in senior debt of the Bank at the time of issue. Further, like senior debt, the holders of securities expected to have their capital repaid at maturity. However, unlike senior debt, repayment might be in the form of a parcel of ordinary shares rather than cash. That exposed investors to movements in the price of ordinary shares in the Bank around the time of conversion - and beyond, if a holder continued to hold the ordinary shares.
162 The primary Judge regarded the opinions of Prof Handley as unremarkable, observing that his conclusions were derived from the nature of the rights attached to the securities. His Honour said that, ultimately, Prof Handley was "more or less equivocal" as to the extent to which the holder of the securities would be exposed to the risk of loss and have the opportunity for profit or gain. His Honour's own conclusion with respect to para (a) was as follows:
In any event, the language of s 177EA(17)(a) calls for consideration of the risk of loss or the opportunity for profit from holding … securities that are borne by or accrue to parties to the scheme, and whether there is any change in those risks and opportunities. I do not consider that this analysis of risk and opportunity in relation to the holding of the … securities is a relevant matter under s 177EA(17)(a). There is no suggestion that the [appellant] entered into an arrangement that modified his exposure to the risk of loss or the opportunity for gain arising from the holding of the … securities. Nor is there any suggestion that the [appellant] entered into any arrangement that transferred the exposure to risk or the opportunity for gain to a third party. The terms of the … securities and the rights arising from holding them are stated in the Note Terms and the Preference Share Terms forming part of the Prospectus. While the rights of holders change from time to time, in the circumstances described above, the risk of loss and the opportunity for gain are determined at the time when the … securities are issued. While the … securities have some equity-like aspects, the distribution rights are very similar to rights to receipt of interest. However, those rights remain static from the time of issue.
His Honour did not consider that the relevant matter required to be taken into account under para (a) pointed towards a purpose of enabling the appellant to obtain an imputation benefit. But neither did it point away from such a purpose.
163 The words "derive a greater benefit from franking credits than other entities" in para (b) of s 177EA(17) are given content by subss (18) and (19) of the section. It was para (a) of subs (19) upon which the Commissioner principally relied below, and to which the primary Judge gave his attention. The securities issued by the Bank were, with certain very limited exceptions, offered to Australian residents only. Under the 1997 Act, only security holders in such a situation could take advantage of franking credits. His Honour said that it was possible that, because of matters relating to the regulation of public offerings, and the cost of satisfying regulatory bodies in other jurisdictions, the securities were not offered to investors other than Australian residents. There was, however, "no evidence as to why the … securities were not offered to prospective investors outside Australia". His Honour observed that, for a holder who could not make use of the franking credit, the securities were "not of as great a value" as they were to an Australian resident, who could take advantage of the franking credit. Dealing with a point made on behalf of the appellant, his Honour said that "the fact that holders of ordinary shares in the Bank are also mostly Australian residents is equivocal in circumstances where all distributions on ordinary shares in the Bank have been fully franked." His Honour's conclusion was the matter described in s 177EA(17)(b) pointed to the existence of the purpose referred to in subs (3)(e).
164 With respect to para (c) of s 177EA(17), the primary Judge noted the appellant's contention that, if the Bank had not issued the securities, it would most likely have satisfied its need for Tier 1 capital by an issue of perpetual non-cumulative preference shares. Such securities, from an investor's viewpoint, would have had the same characteristics and attraction. Distributions on such a capital raising would have been franked in the same way and to the same extent as were the securities that were issued. His Honour dealt with that submission as follows:
However, even if that were a likely alternative to the … securities, s 177EA(17)(c) requires a judgment about purpose, having regard to all the relevant circumstances, most of which do not depend upon an alternative circumstance. The Bank implemented a scheme whereby investors obtained an imputation benefit. Their return was calculated by reference to that benefit. The payment was nevertheless deductible to the Bank against its New Zealand income. While the fact that the Bank could otherwise have used the franking credits in a different transaction may be relevant, it is far from determinative. I do not consider that the matter in s 177EA(17)(c) points towards or away from the relevant purpose.
165 With respect to para (d) of s 177EA(17), his Honour said that the consideration referred to therein was relevant to the "streaming or deflection" of franking credits away from shareholders to whom they were of little value. His Honour was of the view that the consideration did "not point towards the relevant purpose".
166 The primary Judge took the view that para (e) of s 177EA(17) was of no relevance to the case before him.
167 With respect to para (f) of s 177EA(17), the primary Judge pointed out that the return to the holders of the securities issued by the Bank in the present case was calculated by reference to franking credits. The Bank was obliged to compensate holders to the extent that franking credits were unavailable, "thus ensuring that the total return to the holder of … securities is always equal to the sum of the distribution paid together with the financial benefit of the attached franking credit'. His Honour considered that the imputation benefit was "integral to the return on the Note". It was "the very thing that makes an investment in the … securities commercially acceptable". His Honour considered that the circumstance mentioned in para (f) pointed towards the existence of the non-incidental purpose mentioned in subs (3)(e).
168 With respect to para (g) of s 177EA(17), the primary Judge noted that the Commissioner accepted that there was no deduction available against Australian tax for distributions made by the New Zealand branch of the Bank. His Honour said that para (g) was concerned not with whether a deduction was allowable for, or a capital loss was incurred by, the distribution itself, but with whether the assessable income derived on receipt of the distribution was offset by a loss deductible or allowable to the recipient of the dividend, such as was the position with schemes by way of dividend stripping or franking credit trading. There was no such scheme in the present case, and his Honour concluded that the circumstance referred to in para (g) tended to point away from the existence of the relevant purpose.
169 According to the primary Judge, the Commissioner relied heavily upon para (ga) of s 177EA(17), the construction of which was subject to dispute between the parties. His Honour continued:
The distribution in question is, at least in legal form, a payment of interest on a promissory note. As such, it is not a distribution of, or a payment that is sourced from, profits of the Bank, in the sense in which that expression is used in the context of company law. The reference to profits in the provision must be construed in the context of the provision as a whole, namely as an anti-avoidance provision that applies equally to schemes involving a dividend on shares as well as to schemes in which the distribution is in respect of a non-share dividend, and thus not necessarily involving a distribution of profits in the company law sense. Thus, s 177EA applies, according to s 177EA(12), to a non-share equity interest in the same way as it applies to a membership interest, to an equity holder in the same way as it applies to a member, and to a non-share dividend in the same way as it applies to a distribution.
The distribution in the case below was paid by the New Zealand branch of the Bank, the income of which was exempt from tax in Australia under s 23AH of the 1936 Act. It was accepted by the appellant that the funds used by the Bank's New Zealand branch to pay the distribution were earned by the branch itself. The distributions were not sourced from the Bank's share capital account. His Honour observed that it was contended by the Commissioner that, in those circumstances, the distribution was sourced directly or indirectly from untaxed profits of the Bank. His Honour's own conclusion with respect to para (ga) was as follows:
The conclusion to be drawn from this circumstance is that the Bank had a purpose of providing imputation benefits. The imputation system attempts to align companies and their members for tax purposes, but only those members who are the true economic owners of the company, being members who will ultimately take their share of its taxed income. The fact that the … securities subject the Bank to an expense of deriving profits, from which dividends are paid, to be met from an income source that bears no Australian income tax, indicates that the circumstances of the holders of the … securities are very far removed from those of the real economic owners of the Bank taking their share of its taxed income. I consider that this circumstance points towards the relevant purpose.
170 With respect to para (h) of s 177EA(17), the primary Judge took the view that the payment of the distribution was a payment of interest in point of form, notwithstanding that it was deemed to be a frankable distribution by reason of the operation of other provisions of the legislation. The fact that the payment had a particular character for some purposes did not obviate the need to characterise the payment for the purposes of s 177EA(17)(h). There was no reason why a payment that was deemed to be a distribution on non-share equity, by the operation of Division 974, could not also be treated as being equivalent to a payment of interest for the purposes of s 177EA(17)(h). His Honour continued:
The nature of the payment received by the [appellant] that is in question can be described as being similar to interest in numerous respects. The payments are regular and in a fixed amount. They are paid in respect of a specific outlay which, as a matter of commerce, the holders of the … securities expect to be returned to them either in cash or in kind. The rate of the Distribution is variable but is not dependent in any way upon the fortunes of the Bank. Rather, any variation is the result of a variation in the benchmark interest rate, not in the profitability of the Bank. The receipt of a Distribution in question by the [appellant] is equivalent to the receipt of interest or of an amount in the nature of or similar to interest.
His Honour concluded that this circumstance pointed towards the existence of the relevant purpose.
171 With respect to para (i) of s 177EA(17), the primary noted that there was no arrangement whereby the securities should be held only briefly. They were to be held until sale, and were not redeemable. His Honour considered that this circumstance pointed away from the relevant purpose.
172 As required by para (j) of s 177EA(17), the primary Judge then referred to the matters set out in s 177D(b) of the 1936 Act, noting that many of them had no application beyond the extent to which the corresponding circumstances had already been taken into account. His Honour considered that subparas (ii) and (iv) of s 177D(b) had particular relevance to the facts before him. As to subpara (ii) - form and substance of the scheme - his Honour took the view that the distributions on the notes took the form of frankable distributions, but, in substance, represented a deductible expense to the Bank. The substance of what they achieved for the Bank - deductible and frankable capital - pointed towards the existence of the relevant purpose.
173 As to subpara (iv) of s 177D(b) - the result, in relation to the operation of the tax legislation that, but for Part IVA, would be achieved by the scheme - his Honour noted that, but for the operation of s 177EA, the securities would deliver imputation benefits on deductible interest payments. He referred to the appellant's argument that the result achieved in relation to the operation of the tax legislation was precisely the result mandated by the legislation. The tax character attributed to the securities, and to distributions upon them, was that directed by the deeming effect of Div 974. That result was that the Bank was denied a deduction for the interest on the notes, and was obliged to attach franking credits to the payments as non-share dividends against the risk of losing the imputation credits. The legislation, in accordance with the policy evinced in s 974-5, treated the securities according to their economic substance, which was the equivalent of preference shares. Notwithstanding those considerations, his Honour expressed the conclusion that the circumstance arising under s 117D(b)(iv) pointed towards the existence of the relevant purpose.
174 The primary Judge expressed his overall conclusion under s 177EA(3)(e) as follows:
Having regard to all the relevant matters and circumstances, some of which do not point towards the relevant purpose, I consider, on balance, that overall they point towards the purpose of enabling holders of … securities, such as the [appellant], to obtain an imputation benefit. That is a basic and fundamentally important aspect of the terms of the Notes. The characteristics of the … securities are much more like those of debt than of equity. By issuing the … securities in New Zealand, the Bank was able to achieve the result that it obtained a deduction in New Zealand in respect of the Distributions on the … securities, but had the advantage, in terms of cost, of offering Australian residents the imputation benefit.
175 Before considering the appellant's particular challenges to the reasoning of the primary Judge, there are certain general observations which should be made about s 177EA(3)(c). First, unlike other provisions of Pt IVA of the 1936 Act, it is not the person's dominant purpose which is the subject of inquiry. Rather, it is any purpose for which he or she entered into or carries out the scheme, other than an incidental purpose. That is to say, a non-dominant, non-incidental, purpose will be sufficient. Secondly, the content of the purpose required by the provisions is not that the taxpayer should obtain a benefit or advantage as such, or even a tax benefit. Rather, it is that the "relevant taxpayer" (see para (d) of subs (3)) should be enabled to obtain an "imputation benefit", ie a tax offset arising by reason that a particular distribution had been franked. Thirdly, unlike s 177D(b), which states exclusively the circumstances to which regard must be had in arriving at a conclusion about purpose, the effect of para (e) of subs (3), of subs (17) and of the definition of "relevant circumstances" in subs (1), of s 177EA, is that the matters listed in subs (3)(e) are not exclusive of the circumstances that may be taken into account. Those matters must be taken into account, but ultimately the question is whether it would be concluded that the person referred to entered into or carried out the scheme for the purpose indicated.
176 My fourth observation relates to the concept of "enabling" around which para (e) of subs (3) is built, and its relationship with subs (4). The sense in which "enabling" is used in para (e), in my view, is that of "supplying with the requisite means or opportunities to an end of for an object": Oxford English Dictionary, 2nd ed. In the typical case, a scheme for the disposition of membership interests in a company would enable the recipients of the interests to share in the profits of the company by way of dividends. Consistently with the apparent objects of Pt 3-6 of the 1997 Act, such dividends would often be franked. There could be no suggestion that s 177EA was, in effect, intended to strip away from shareholders the benefits which conventionally arise under Pt 3-6. Yet paras (a)-(d) of subs (3) seem to go no further than to describe the characteristics of the typical case in which, for example, membership interests are disposed of on the expectation that distributions will be franked and recipient shareholders will receive corresponding imputation benefits. On one view of the matter, a disposition which had these characteristics would inevitably have the purpose of "enabling" the shareholders to obtain imputation benefits. Yet the Commissioner does not suggest that para (e) should be understood as having application to conventional dispositions such as this, whether the shares in question be ordinary shares or, perhaps, preference shares. These constructional issues are not, at least directly, resolved by subs (4) of s 177EA, which relates only to the purpose of the person by whom the membership interests were acquired. It says nothing about the purpose of the issuer.
177 It seems that the way the legislature is to be understood as addressing this question is in the parenthetical exclusion of "an incidental purpose" in para (e) of subs (3) itself. The Explanatory Memorandum to the Bill which became the Taxation Laws Amendment Act (No 3) 1998 (Cth), by which s 177EA was introduced into the 1936 Act, explained the matter thus:
8.76 A purpose is an incidental purpose when it occurs fortuitously or in a subordinate conjunction with another purpose, or merely follows another purpose as its natural incident. For example, when a taxpayer holds shares in the ordinary way to obtain the benefit of any increase in their share price and the dividend income flowing from the shares, a franking credit benefit is generally no more than a natural incident of holding the shares, and generally the purpose of obtaining the benefit simply follows incidentally a purpose of obtaining the shares: it is therefore merely an incidental purpose.
What this passage described as "a franking credit benefit" is now what para (e) describes as "an imputation benefit", but (at least relevantly to the present question) the sense is unchanged.
178 In the present appeal, the appellant relied on this understanding of "incidental". He accepted that, in issuing the securities, the Bank had a purpose of enabling him to obtain imputation benefits. Indeed, as noted above, the prospectus stated that distributions were expected to be franked, and that, in such an event, "holders will receive a combination of cash distributions and franking credits". However, it was submitted on behalf of the appellant that the imputation benefits were no more than "a natural incident of holding the [securities]" as contemplated by the Explanatory Memorandum. It did not matter that the purpose of enabling the appellant to obtain imputation credits may have been a very real one, and by no means an insignificant one: it was, the appellant contended, an incident of the issue of the securities for which he subscribed and was not, therefore, caught by para (e).
179 The position taken by the appellant has a particular consequence for the way in which the deliberative task required by s 177EA(3)(e) must be approached. We are not required to consider whether the securities were issued for purposes which included that of enabling him to obtain an imputation benefit: so much has been conceded. Rather, we must consider whether that purpose was more than merely incidental to some other purpose. It is in that rather limited context that the circumstances referred to in subs (17) need to be addressed.
180 The appellant's challenges to the reasoning of the primary Judge were fourfold. First, it was said that a s 177EA was to be found in a series of provisions of the 1936 Act which were concerned with tax avoidance and, in addition to the matters specifically required to be addressed under subs (17), it was necessary that there have been a general purpose of tax avoidance before the Commissioner's power to make a determination under subs (5) could be invoked. It was said that his Honour did not apply this limitation. Secondly, it was said that his Honour treated subs (17) as involving a kind of head-counting exercise, the result of which was that he decided the case adversely to the appellant without any genuine assessment of the Bank's purpose from a broad perspective. Thirdly, it was said that his Honour, in several places in his reasons, placed emphasis upon the Bank having obtained a tax deduction in New Zealand in respect of the distributions under the securities, when that circumstance was irrelevant to whether the appellant obtained an imputation benefit, and necessarily to the question whether the Bank had the non-incidental purpose that he should do so. And, fourthly, each of his Honour's adverse findings under the various paragraphs of subs (17) was challenged.
181 With respect to his first point, the appellant relied on Commissioner of Taxation v Consolidated Press Holdings Ltd (2001) 207 CLR 235, in which it was held that s 177E of the 1936 Act, which concerns the practice known as dividend stripping, was to be read as implicitly limited to schemes which had a tax avoidance purpose. It was submitted that the same limitation should be read into s 177EA. I do not agree. The problem in Consolidated Press was that s 177EA, unlike both s 177D and s 177E, operated without any ostensible requirement of purpose at all. Unless limited as the High Court held it should be, s 177E had the potential to catch corporate reorganisations which were fiscally uncontroversial and benign. By contrast, the purpose by reference to which s 177EA operates is the subject of specific mention in the section. Indeed, it is the fulcrum around which the other provisions of the section turn. It would, in my view, be quite at odds with the express words chosen by the legislature if we were to engraft upon subs (3) an additional requirement as to purpose as proposed by the appellant.
182 With respect to the appellant's second point, I would reject the contention that the primary Judge approached subs (17) as though it required no more than a head-counting exercise. Unless an entirely cynical approach is to be taken to his Honour's reasons - an approach which we were not invited to take - his overall conclusion, referred to at para 174 above, is fatal to any such contention. In any event, this aspect of the appellant's case on appeal is not going to be relevant to my own consideration of the matter since, as will appear, I feel obliged to differ from his Honour in a number of respects under subs (17) of s 177EA. Whatever may have been the shortcomings in the way his Honour drew all the threads together, I shall have to undertake such an exercise for myself, having regard to the view I take about the various subs (17) circumstances.
183 It is likewise with respect to the appellant's third point. Such contribution as the New Zealand tax deductibility issue may properly make to the determination of purpose is not a matter which can be resolved in isolation. It would be wrong to commence with an a priori view that that circumstance could never be relevant. That tax deductibility was a reality in the scheme which the primary Judge had to consider. It could not be ignored. Whether it properly contributed to the drawing of an inference as to the Bank's purpose was a question for consideration in the context of all the issues which arose under subs (17). That was the course followed by the primary Judge and, while I do not always agree with his Honour in relevant respects, I do not think that he erred by adopting that approach.
184 That brings me to the major burden of the appellant's case, which involved a consideration of the circumstances listed in subs (17). Before turning to those circumstances, however, I should say something generally about the structure of subs (17). It will be noted that each of paras (b) - (h) thereof requires an answer to be given to a "whether" question. That is to say, each such question must first be answered yes or no. It seems that the legislature supposed that an affirmative answer would normally count as a factor indicating the existence of the purpose referred to in para (e) of subs (3), but subs (17) does not, at least in the present case, have to be approached on such a categorical basis. It is sufficient to proceed by first obtaining a yes or no answer in each instance, and by then considering how that answer, and the facts which give rise to it, assist in dealing with the issue of non-incidental purpose. It must be said that the primary Judge did not consistently approach the matter in this way (in relation to paras (b)-(h)), but nothing turns on that. In each instance, his Honour did make it clear how each subject contributed to the resolution of the matter of non-incidental purpose.
185 The appellant did not challenge the primary Judge's reasoning under para (a) of s 177EA(17), save at the point where his Honour concluded that, because there was no change in the risks and opportunities borne by, or available to, the appellant under the scheme, the circumstance pointed neither towards nor away from the existence of the relevant purpose on the part of the Bank. It was submitted that, having found the absence of facts which the legislature contemplated might well be indicative of the existence of such a purpose, his Honour ought to have recognised that his conclusion under para (a) pointed away from it. The Commissioner supported his Honour's conclusion that the pointer was neither towards nor away from the purpose, but, on the hearing of the appeal, he accepted that there was nothing in the circumstance which tended to indicate the existence of purpose. Apropos s 177EA(3)(e), this circumstance was effectively benign, and provided no basis for a conclusion that the relevant purpose existed.
186 That was effectively the thinking of the primary Judge on the matter. I am not persuaded that it involved an error on his Honour's part to take the view that the pointer went neither one way nor the other. With respect to the appellant's criticism of his Honour's reasoning, I accept the Commissioner's submission that there was nothing in the circumstance referred to in para (a) which would positively incline one to infer that the relevant purpose did not exist. Put differently, if otherwise the facts of the case provided support for the conclusion that the relevant purpose existed, the facts which related particularly to para (a) were not such as would undermine that support. The para (a) facts as good as made no contribution to the exercise required by para (e) of subs (3), one way or the other. That was the conclusion of the primary Judge, and I agree with it.
187 Under para (b) of s 177EA(17) the first matter to be resolved is whether subs (19) of the section had any part to play in the analysis required by the facts of the present case at all. As is clear from para (b) of subs (3), the section is concerned both with the direct and with the indirect receipt of a frankable distribution. This dichotomy is reflected in para (b) of subs (17). Where the distribution flows directly to the taxpayer, the question posed by para (b) is to be answered with respect to the year in which the distribution is made. Where the distribution so flows indirectly, the question is to be answered with respect to the year in which that flow occurs, which may not be the year in which the distribution is made. It is only the latter circumstance with which subs (19) is concerned. That circumstance, and that subsection, were of no relevance to the present case, since the distribution with which the proceeding was concerned flowed directly to the appellant.
188 As pointed out by counsel for the Commissioner on appeal, in the 1936 Act the expression "greater benefit from franking credits" has a meaning affected by subss (7) and (8) of s 204-30 of the 1997 Act: 1997 Act, s 995-1(1). Those subsections, in turn, provide as follows:
(7) The following subsection lists some of the cases in which a member of an entity derives a greater benefit from franking credits than another member of the entity. It is not an exhaustive list.
(8) A member of an entity derives a greater benefit from franking credits than another member of the entity if any of the following circumstances exist in relation to the other member in the income year in which the distribution giving rise to the benefit is made, and not in relation to the first member:
(a) the other member is a foreign resident;
(b) the other member would not be entitled to any tax offset under Division 207 because of the distribution;
(c) the amount of income tax that, apart from this Division, would be payable by the other member because of the distribution is less than the tax offset to which the other member would be entitled;
(d) the other member is a corporate tax entity at the time the distribution is made, but no franking credit arises for the entity as a result of the distribution;
(e) the other member is a corporate tax entity at the time the distribution is made, but cannot use franking credits received on the distribution to frank distributions to its own members because:
(i) it is not a franking entity; or
(ii) it is unable to make frankable distributions;
(f) the other member is an exempting entity.
These are the provisions which must be read into para (b) of s 177EA(17) of the 1936 Act where the distribution flowed directly to the "relevant taxpayer", as in the present case.
189 As so understood, the question posed by para (b) would have to be answered in the affirmative. However, merely to do so does not necessarily reflect on the Bank's inferred purpose. It is in this respect that I cannot find any satisfactory analysis in the reasons given by the primary Judge for opining that the circumstances pointed towards the existence of the purpose to which para (e) of subs (3) refers. His Honour found that only 9.7% of the ordinary shareholders in the Bank, who between them held only 1.5% of the share capital, resided outside Australia. Why the Bank would want to disadvantage them, or to favour the appellant by comparison with them, was never explained. The Commissioner disavowed any suggestion that the scheme in the present case involved anything in the nature of streaming, with which s 204-30 of the 1997 Act is primarily concerned. Given the very substantial predominance of Australian residents amongst the Bank's ordinary shareholders, if there is some plausible explanation of why the securities were not offered to others, I would view the mere fact that they were not so offered as unhelpful in deciding whether it was a non-incidental purpose of the Bank to enable the appellant to obtain an imputation benefit.
190 As it happens, there was such a plausible explanation. According to the prospectus, which the appellant put into evidence, the securities offer was not made to residents of other countries "due to regulatory requirements". The passage to which I have referred at para 148 above was set out in terms in the affidavit of the Group Treasurer of the Bank. The primary Judge did not refer directly to this passage, but he may have had it in mind when he said that it was "possible" that, because of matters relating to the regulation of public offerings and the cost of satisfying regulatory bodies in other jurisdictions, the securities were not offered to investors other than Australian residents. That observation was, in my respectful view, an inappropriately limited way in which to deal with a subject which had been covered in the prospectus in the terms I have indicated, although I readily accept that his Honour may not have had his attention drawn to those terms with the emphasis that I have given them here. In the light of those terms, his Honour's further statement that there was no evidence as to why the securities were not offered to prospective investors outside Australia was not, with respect, correct. I accept that the way the matter was covered in the prospectus was cursory, but I cannot think of any reason why it need have been otherwise. Only with an eye keenly attuned to the operation of s 204-30(8)(a) of the 1997 Act would the significance of residence have been apparent. We were told that the Group Treasurer was not cross-examined below. In those circumstances, the statement in the prospectus was in, in my respectful view, entitled to be taken at face value: it provided a reason why the securities were not offered to prospective investors outside Australia. That reason left little room for the inference that they were offered to the appellant, an Australian resident, for the purpose of enabling him to obtain an imputation benefit.
191 Accordingly, although I would answer "yes" to the question posed by s 177EA(17)(b), I do not consider that that answer points towards the existence of the purpose of enabling the appellant to obtain an imputation benefit. In this respect, I do not agree with the primary Judge.
192 As his Honour pointed out, para (c) of subs (17) requires consideration of what would have happened in the absence of the scheme. The question was whether the Bank would have retained the franking credits or used the franking credits to pay a franked distribution to another entity referred to in para (b). In his Honour's reasons - paraphrased at para 164 above - these elements of the question which arise under para (c) were not, so far as I can see, directly addressed. His Honour recorded the submission of the appellant - repeated on appeal - that, in the absence of the scheme, the Bank would have raised Tier 1 capital by a conventional share issue, in relation to which the dividends would be franked. His Honour then observed, correctly in my respectful view, that that would, of itself, not be determinative of purpose for the purposes of para (e) of subs (3). This seems to have led to the conclusion that the matter referred to in para (c) of subs (17) pointed neither towards nor away from the relevant purpose.
193 In my opinion, the correct answer to both parts of the question posed by para (c) was, on the facts of the present case, in the negative. That is to say, absent the scheme the Bank would not have retained the franking credits and would not have used them to pay a franked distribution to the non-Australian residents, who were presumptively the "other entities" referred to in para (b). His Honour appeared to accept the appellant's factual case that the Bank would in other circumstances have raised Tier 1 capital by issuing shares which carried franking entitlements. Whether or not he did so, I would reach that conclusion on the facts of the case. It is a conclusion which should feed into the general analysis required by subs (3)(e) in a way that is favourable to the appellant's position in the sense that it provides no basis for finding the existence of the relevant purpose. Of itself, it is not fatal to the existence of such a purpose, but the position, in my respectful view, is somewhat more favourable to the appellant than that conveyed by his Honour's conclusion that the para (c) matter pointed neither towards nor away from the relevant purpose.
194 Likewise, I consider that the question posed by para (d) ought to have been answered in the negative. Absent the scheme, the non-Australian shareholders of the Bank would not have received franked distributions. His Honour seemed to accept that, but his conclusion that the circumstance referred to did "not point towards the relevant purpose" was criticised by the appellant as being, in effect, too tentative. It was said that the circumstance ought to have been perceived as pointing away from the relevant purpose. The Commissioner's position was that the circumstance was neutral. I would reach the same conclusion with respect to para (d) as I have above under para (c).
195 The appellant did not challenge the primary Judge's opinion that para (e) of subs (17) was of no relevance in the circumstances of the case.
196 The answer to the question posed by para (f) of subs (17) is self-evidently yes. It was submitted on behalf of the appellant, however, that that answer did not go any distance towards justifying the conclusion that the Bank had the non-incidental purpose of enabling him to obtain an imputation benefit. His submission proceeded along the following lines. The Bank's dominant purpose was to raise Tier 1 capital. Because of the effect of Div 203 of the 1997 Act, any distributions made on the securities issued pursuant to the scheme would, as a matter of practical necessity if not of hard legal obligation, have to be franked. The franking of those distributions, and the obtaining by the appellant of an imputation benefit, were, therefore, as good as inevitable consequences of the raising of Tier 1 capital. They were no more than incidents of the dominant purpose of raising that capital. This was so regardless of the particular architecture of the securities issued to the appellant: it was the raising of Tier 1 capital as such which brought with it the imputation benefit for the appellant, the purpose of enabling which, on the part of the Bank, could, therefore, be no more than incidental.
197 I have two difficulties with this framework of analysis. First, it tends to disconnect the various elements of the scheme by taking it as a given that the Bank had a dominant purpose - the raising of Tier 1 capital - to which all other purposes associated with the scheme were subordinate. But the inquiry required by subs (3)(e) of s 177EA relates to the purpose or purposes which a person has for entering into or carrying out the scheme as a whole. In the present case, the Bank devised the scheme. It involved the raising of Tier 1 capital and, necessarily, the terms upon which that capital would be raised. In exchange for the contribution of their capital, security-holders were offered the benefits stipulated in the prospectus. The principal benefits were the distributions and, no less importantly as it seems to me, the conditional assurance that they would be franked together with the guarantee that, if they were not, an equivalent adjustment to the distribution rate would be made. The consideration being offered by the Bank thus had two elements, neither of which was merely incidental to the broader purposes of the scheme as a whole. Indeed, as the scheme was devised, each was a central element of what was offered. In my view, the primary Judge was correct to perceive the availability of imputation benefits as amongst those which lay close to the centre of the scheme, and as implying the existence of a non-incidental purpose on the part of the Bank.
198 My other difficulty with the appellant's framework of analysis is that it tends to shift the focus of inquiry to questions of how else the Bank might have raised Tier 1 capital save by an offering which carried with it the expectation of franking. Much of the appellant's argument on the hearing of the appeal in effect challenged the Commissioner to identify how Tier 1 capital could have been raised without the Bank being under a practical, if not a legal, obligation to frank the relevant distributions. As mentioned above, Div 203 of the 1997 Act was relied on in this respect. But, whatever might be the case elsewhere in Pt IVA, s 177EA(3)(e) is not concerned with alternative courses or counterfactuals. Rather, to the extent that the paragraph requires one to contemplate different scenarios, it is more in the nature of a "before and after" analysis. The presumptive starting point is that the taxpayer in question is not able to obtain imputation benefits. The question which must be asked about the scheme is whether it was someone's purpose to "enable" the taxpayer to obtain such benefits. How that person might have proceeded otherwise is not, at least directly, to the point.
199 It does not, in my view, satisfactorily come to grips with the question which arises under para (e) to propose that the Bank could not have raised Tier 1 capital save in a way that carried the consequence that distributions would have to be franked. The existence of such a state of affairs is not inconsistent with the Bank having the non-incidental purpose, in relation to the scheme which was in fact entered into and carried out, of enabling security-holders to receive the benefits which conventionally flow from franking. The facts would, of course, have to be such as would include the existence of that purpose. The primary Judge held that they were: specifically in connection with para (f) of s 177EA(17), his Honour held that the circumstance that the distributions were calculated by reference to the imputation benefits which were to be obtained by the appellant supported the inference that such a non-incidental purpose existed in the present case. For reasons which I have attempted to explain, I agree with that conclusion.
200 The primary Judge held that the circumstance referred to in para (g) of subs (17) pointed away from the existence of the relevant purpose, and no attempt was made on behalf of the Commissioner to persuade the Full Court that his Honour had been in error in relevant respects.
201 Paragraph (ga) of s 177EA(17) was, in the assessment of the primary Judge, an important consideration tending to support the inference that the Bank had the non-incidental purpose of enabling the appellant to obtain an imputation benefit. However, rather than answer directly the question posed by the paragraph, his Honour seems to have been moved by the consideration that the circumstances of the security-holders were "very far removed from those of the real economic owners of the Bank taking their share of its taxed income". On appeal, the appellant had two points about this paragraph. The first was that para (ga) had no application at all to the kind of situation which was before the primary Judge. The submission was based on the terms of the Tax Laws Amendment (2007 Measures No 3) Act 2007 (Cth), by which para (ga) was inserted into s 177EA(17). That Act repealed ss 46G-46M of the 1936 Act, which contained the so-called "dividend tainting rules". Relevantly to the present case, those rules included the operation of s 46M, under which a dividend that had been debited against a "disqualifying account" - which included a share capital account and a reserve to the extent that it consisted of profits from the revaluation of assets of the company - was not frankable. Upon that repeal in 2007, these provisions were replaced by a substitute of para (e) in s 202-45 of the 1997 Act, by which a distribution that was "sourced, directly or indirectly, from a company's share capital account" was brought within the concept of "unfrankable distributions", and by the insertion of para (ga) into s 177EA(17) of the 1936 Act. The effect of these changes was described by the Explanatory Memorandum as follows:
The dividend tainting rules (sections 46G to 46M of the ITAA 1936) will be repealed. Consequential amendments will:
ensure that distributions from a share capital account (including a tainted share capital account) continue to be unfrankable; and
modify a general anti-avoidance rule (section 177EA of the ITAA 1936) that applies in relation to the imputation system so that, when considering whether to apply the rule, the Commissioner can take into account whether a distribution is sourced directly or indirectly from unrealised or untaxed profits.
The appellant submitted that the 2007 amendments had gone no further than to give different expression to the statutory concepts previously found in the repealed ss 46G-46M.
202 The commissioner resisted that suggestion. It may be, he submitted, that so much of para (ga) as related to "unrealised profits" was a reflection of the previous s 46M, but the part that related to "untaxed profits" was new. This appears to be so, and would, in my view, be enough alone to render unsound the proposition advanced on behalf of the appellant. Further, the application of para (ga) to what the Explanatory Memorandum described as "a general anti-avoidance rule" makes inappropriate an a priori restriction devised by reference to earlier provisions which had specific, not general, application. I would, therefore, reject this aspect of the appellant's case.
203 The appellant's second point under para (ga) was that PERLS V distributions were to be sourced from the earnings of the Bank's New Zealand branch. For the Bank, they would be an expense and thus, in normal terminology, could not be regarded as being sourced from profits, whether directly or indirectly. The Commissioner's response was to support the reasoning of the primary Judge as set out in the first quoted passage in para 169 above. In the case of the Commissioner, it was critical that s 177EA(12) made the section applicable to a non-share equity interest in the same way as it was to a membership interest, and to a non-share dividend in the same way as it was to a "distribution". By a series of definitions in the 1997 Act ultimately coming down to s 974-75(1), a non-share equity interest may be an interest which carries the right to a return which will not be, or at least need not be, in the nature of a payment out of profits, as understood in the conventional sense. It follows, according to the Commissioner, that s 177EA extends to distributions which are not made from profits as such, and that para (ga) should be given a meaning which accommodates that situation.
204 Construing para (ga) by reference to considerations internal to s 177EA itself, I could not accept the Commissioner's submission. Let it be accepted that the section extends to a wide range of distributions, including those which are not made out of profits as conventionally understood. It does not follow that, when the word "profits" is used in the section, it must carry some special meaning. It follows only that, in a scheme which does not involve distributions by way of profits as such, para (ga) will be inapplicable to the matter of purpose, much as para (e) of subs (17) was irrelevant to the facts of the present case. Or, to put it another way, if a scheme involves distributions which are made from unrealised or untaxed profits, para (ga) may have a very useful role to play. In other situations, it may, and presumably would, have no role to play at all. The fact that situations of the latter kind do occur from time to time is no reason to impress upon the words of para (ga) a meaning other than that which they naturally carry.
205 I would add that the circumstances associated with the enactment of para (ga) in 2007, to which I have referred above, also makes some contribution to a consideration of the Commissioner's argument based on subs (12). Those circumstances show that the concept of "unrealised or untaxed profits" may well have application to a range of situations which do not involve non-share dividends. They tend to support the view that the terms of subs (12) provide no warrant for giving an unconventional interpretation to the words of para (ga) as they appear in the statute.
206 With respect, the difficulty which I have with the reasoning of the primary Judge in relation to para (ga) is that his Honour has provided no clear limit to the reach of the paragraph, if its meaning is not, as he considered, the conventional one. His Honour did refer to the rather unusual nature of the distributions made in the present case, but considerations of that kind were not apt to impress a particular construction on a provision of general application. If one's lodestar is subs (12), it may be that any distribution by way of non-share dividend should be regarded as having been sourced from unrealised or untaxed profits within the meaning of para (ga). I cannot, with respect, read the paragraph in that way. I am disposed to the view that the primary Judge made rather too much use of the prism provided by the facts of the present case in his search for the true construction of para (ga). I can see no satisfactory reason to depart from the conventional meaning of "profits".
207 In my view, the question posed by para (ga) should be answered in the negative. It follows that I do not agree with the primary Judge that this circumstance tended to indicate the existence of the purpose referred to in s 177EA(3)(e). More importantly, perhaps, I take the view that the fact that the distribution expected to be made in favour of the appellant was not to be sourced from unrealised or untaxed profits throws no light on the question whether, given that it was a purpose of the Bank to enable him to obtain an imputation benefit, that purpose was other than merely incidental.
208 Turning next to para (h), the appellant challenged the primary Judge's reasoning that distributions under the PERLS V prospectus were "equivalent to the receipt by the [appellant] of interest or of an amount in the nature of, or similar to, interest". It was said that, although in form the distributions were interest, they were not so in substance. They ranked behind all creditors, they were payable at the discretion of the Bank, they were non-cumulative, they could not be paid unless the Bank had sufficient profits to meet prudential requirements, and they were required, by the 1997 Act and the 1936 Act, to be treated in the same way as dividends, in that they were not tax-deductible but were both frankable and, as a practical matter, required to be franked. I must say that I regard the last-mentioned characteristic of the distributions as something of a question-begging one in the setting in which para (h) is to be used. The starting point under s 177EA is that a distribution would be frankable and would be, or be expected to be, franked. It is only in such a case that the matter of purpose falls to be examined under para (e) of subs (3). It would seem to be quite unhelpful to attempt to resolve that matter by reference to a circumstance which is taken as a given, namely, that the distributions in question would otherwise be frankable, or even required to be franked, under the legislation.
209 There are two aspects of the wording of para (h) which, in my view, have the potential to be important in the facts of the present case. The first is that the paragraph (unlike perhaps para (c)) does not include an internal alternative. That is to say, the question is not whether the distribution is the equivalent of interest or, alternatively, is the equivalent of a conventional dividend. Rather, the question is whether the distribution is the equivalent of interest (etc) as such. If the answer to that question is in the affirmative, it may not be undermined by the fact, if it be the fact, that the distribution also displays some of the characteristics of a dividend. The second aspect is that it is the character of the distribution as received by the taxpayer, rather than as paid by the company, that must be considered. If what the taxpayer receives is the equivalent of interest, it may not count against an affirmative answer to the question posed by para (h) that the corresponding outgoing, from the perspective of the company concerned, did not clearly present in that way.
210 It is true that the distributions ranked behind creditors, and were payable only at the discretion of the Bank. But para (h) is concerned with a distribution which is in fact received by the relevant taxpayer. In the case of such a distribution, it cannot be gainsaid that the interest-like features referred to by the primary Judge were present under PERLS V. The distribution which, at the time of the institution of the proceeding, was expected to be made on 1 February 2010 would have those features. The amount to be received by the appellant was, in my view, at least "similar to interest" within the meaning of para (h). I agree with the primary Judge that the question posed by that paragraph should be answered in the affirmative.
211 As the appellant submitted, however, it does not follow that it should be considered the more likely that the Bank had the purpose to which s 177EA(3)(e) refers. With respect, I accept the appellant's submission that the primary Judge took that additional step without any (at least revealed) reasoning as to the existence of the purpose which he inferred. Just what the legislature had in mind in this respect, when it enacted para (h), is not clear on the face of the paragraph, but the relevant provision in the Explanatory Memorandum was in these terms:
8.90 Some dispositions of shares or an interest in shares may cause the character of a dividend or distribution to be equivalent for the relevant taxpayer to interest or a like amount. In these cases, a franking credit benefit is often being provided to allow another party to obtain tax effective finance.
In other words, it was contemplated that the architecture of a scheme might be such as to justify the view that the company concerned clothed what was in reality a debt-finance-raising exercise with the appearance of an equity issue so as to be able to deliver imputation benefits as part of the consideration to be received by lenders. Although I am reluctant to limit the natural wording of a statutory provision by reference to materials such as explanatory memoranda (ie absent circumstances calling for the application of s 15AB of the Acts Interpretation Act 1901 (Cth)), in the present case the Commissioner advanced no argument as to why an affirmative answer to the question posed by para (h) should yield a positive conclusion on the matter of purpose under para (e) of subs (3). Absent some other indication of what the legislature had in mind, we have only the Explanatory Memorandum as a guide.
212 If there is one thing which is abundantly clear in the present case, it is that the Bank was never going to the market for debt finance. It needed to raise Tier 1 capital, and what it did raise was Tier 1 capital, both in substance and in form. PERLS V took the form it did not because the Bank desired to utilise franking credits by making what was in reality a borrowing look like the issue of equity, but because it represented the financial and commercial reality of the capital-raising which the Bank both needed to do and did do. In my opinion, although an affirmative answer was to be given to the question posed by para (h), that answer went no distance towards making good the inferential case that the Bank's purpose of enabling the appellant to obtain imputation benefits was other than incidental.
213 The primary Judge's opinion that the matter referred to in para (e) of subs (17) pointed away from the existence of the relevant purpose was not controversial on appeal.
214 Turning to subpara (ii) of s 177D(b) of the 1936 Act, the appellant challenged the premise on which the primary Judge's consideration of "the form and substance of the scheme" was based, namely, that, in making distributions under PERLS V, the Bank's outlays would be both "deductible and frankable". He submitted that, although the distributions were frankable in Australia, they were not deductible here. It was wrong, the appellant contended, for his Honour to have, in effect, assimilated the advantage of tax deductibility in New Zealand to the benefits which the Bank presumptively derived under Australian tax law in relation to the distributions. I would not accept that criticism of the primary Judge's reasons. While in point of form the scheme involved distributions which were frankable, but not deductible, under Australian law, in point of substance it involved an outlay which reduced the figure by reference to which the Bank's income tax obligations would be calculated in New Zealand. That was a benefit for the Bank, and none the less so because the deduction arose otherwise than under Australian law. I am disposed to the view that the situation presented by the design of PERLS V is an exemplar of what the legislature had in mind when it posited a distinction between "form" and "substance" in subpara (ii).
215 Frankability of the distributions was a central feature of the securities. It was a conspicuous aspect of the "substance" of the scheme. When the substance of the scheme is looked at as such, the proposition that the Bank's admitted purpose of enabling the appellant to obtain an imputation benefit was more than merely incidental is, in my view, a rather obvious one. Thus I agree with the primary Judge in relation to the matter required to be considered under s 177D(b)(ii) of the 1936 Act.
216 The appellant's position with respect to subpara (iv) of s 177D(b) was that the issue of the securities "had exactly the result that the [1936 and 1997] Acts mandate", that is, that the distributions were franked rather than being treated as interest. I do not consider that to be an entirely satisfactory response to the Commissioner's case under this subparagraph. The legislature appears to have had it in mind that a taxpayer, or some other relevant person, might well see an advantage in the very way that the Acts do operate, and have it as a purpose to tap into that advantage. Subsections (2) and (2A) of s 177C, which have no application to a s 177EA scheme, are consistent with that perception of s 177D(b)(iv). In a sense, the consideration referred to in this subparagraph informed the whole of the debate in the present case, both before the primary Judge and on appeal. The result mandated by the 1997 Act - that the distributions would be franked - was on any view a central element of the scheme. So the subpara (iv) matter had to be considered. When considered, there is, again, a rather obvious sense in which the obtaining of imputation benefits by the appellant is to be seen as something more than a merely incidental purpose of the Bank. This was the view of the primary Judge, and I agree with it.
217 Although the primary Judge did not consider subpara (vi) of s 177D(b) of the 1936 Act, on appeal it was an element of the Commissioner's defence of his Honour's judgment that the scheme delivered a beneficial change in the financial position of the Bank, in that it was able to attract Tier 1 capital, frank the relevant distributions, and secure tax deductions for those same distributions in New Zealand. So much may be granted, but I do not consider that facts of that kind, alone, would justify the conclusion that the financial position of the Bank changed in a particular way. All that can be said without controversy is that, as a result of the scheme, the Bank secured Tier 1 capital which it previously did not have. Because the point was not dealt with by his Honour - and, I would infer, not raised before him - we do not have the advantage of a finding on the question of change of position. In those circumstances, I do not consider that it would be safe for us to rely upon subpara (vi) in the way proposed by the Commissioner.
218 It remains to consider what is the correct inference to draw as to the Bank's purpose, having regard to such of the circumstances mentioned in subs (17) of s 177EA as, in accordance with my reasons set out above, are of utility in that respect. Here I accept the submission of the appellant that there is but one inference to be drawn, and thus but one decision to be made. In so proceeding, the court must take into account its findings under subs (17), but is not limited to them.
219 As it happens, the circumstance which cuts most strongly in favour of the appellant, and which was front and centre of his case on appeal, is not mentioned in subs (17) at all: the Bank's need to raise Tier 1 capital and the practical inevitability that any distributions made in consequence of the raising of such capital would be franked. I accept that this circumstance must, in effect, be the starting point for any determination of whether other purposes on the part of the Bank were more than incidental. However, the fact that the appellant would most likely have obtained an imputation benefit as the result of a scheme which did nothing except raise Tier 1 capital does not conclude the matter of purpose adversely to the Commissioner where the actual scheme entered into and carried out by the Bank involved more than merely raising such capital.
220 Under the scheme in the present case, the delivery of imputation benefits to the appellant was not simply something that happened as the natural incident of the capital raising undertaken by the Bank. It was intended by the Bank. The architecture of PERLS V - specifically the rewards made available to the appellant in return for his investment - included the fact of franking as a specific component. Absent franking, the distribution rate would, I infer, be quite unattractive to the appellant. Recognising this, the prospectus provided for a kind of Plan B under which the distribution rate would be adjusted if imputation benefits were denied the security-holders. Any conclusion that the purpose of enabling the appellant to obtain imputation benefits was, on the part of the Bank, only incidental would, in my view, be quite at odds with the important features of PERLS V as I have attempted to explain them.
221 As will now be apparent, I have found the circumstance referred to in para (f) of subs (17) most helpful in providing a conceptual framework for the consideration of the question whether the purpose of enabling the appellant to obtain imputation benefits was for the Bank, more than incidental. I refer to what I have said in paras 196-199 above. As against this, there are several of the circumstances so referred to which do not positively support the Commissioner's case. However, save to say that circumstances of that character are benign, one would not find in them any clear indication that the Bank's relevant purpose was only incidental. Indeed, once the appellant's point that it was a complete answer to the Commissioner's case that the raising of Tier 1 capital would necessarily have involved him obtaining imputation benefits is rejected, there is nothing in the subs (17) circumstances which is inconsistent with the existence of the non-incidental purpose for which the Commissioner contends.
222 For the reasons set out above, I would dismiss the appeal.
I certify that the preceding one hundred and three (103) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jessup.