Noza Holdings Pty Ltd v Commissioner of Taxation

(a) Introduction and Summary of Findings 273 The Commissioner submitted, in the alternative, that to the extent any amount was deductible to the applicants, Pt IVA of the 1936 Act applied to cancel the tax benefit represented by that deduction. In particular, the Commissioner submitted: 1. there was a "scheme" or "schemes" within the meaning of s 177A(1) of the 1936 Act to which Pt IVA applied; 2. Noza or AFC received a tax benefit or benefits within the meaning of s 177C(1) of the 1936 Act with respect to the deductible amounts in the year or years in which those amounts were deductible in connection with the relevant scheme; and 3. having regard to the eight factors in s 177D(b), it would be concluded that Noza or AFC, or one of the persons who entered into or carried out the relevant scheme, or any part of the scheme, did so for the dominant purpose of enabling Noza or AFC to obtain the tax benefit(s) in connection with the scheme. 274 The applicants did not dispute that each of the schemes propounded by the Commissioner was a scheme within the meaning of s 177A. However, the applicants submitted there was no tax benefit in the 2003 year (or, if the alternative basis was accepted, in the 2003 to 2005 years) because the exclusion in s 177C(2)(b)(i) in the 1936 Act was engaged. Further, the applicants submitted that the dominant purpose of the ITW Group (or any other relevant participant) was to resolve the foreign exchange accounting issue in a matter consistent with the facts expressed in the Private Letter Ruling issued by the IDR and in such a way that it would not deprive the ITW Group of the benefit of US state tax deductions. 275 For the detailed reasons that follow, I accept there was a "scheme" within the meaning of s 177A to which Pt IVA applies. I also accept that Noza or AFC received a tax benefit within the meaning of s 177C(1). I reject the applicants' submission that the exclusion in s 177C(2)(b)(i) was engaged. However, I do not consider that the dominant purpose of the scheme(s) identified by the Commissioner (see [278] below) was to obtain the tax benefit identified by the Commissioner. I also reject the Commissioner's counterfactuals as neither were an alternative means of achieving the commercial objectives of Project Gemini. I consider each aspect in turn.

(b) Scheme 276 A "scheme" for Pt IVA is defined in s 177A(1) to mean: (a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and (b) any scheme, plan, proposal, action, course of action or course of conduct. 277 The definition of "scheme" is very broad: Commissioner of Taxation v Star City Pty Ltd (2009) 175 FCR 39 at [202] - [217]; Commissioner of Taxation v Hart (2004) 217 CLR 216 at [9], [43], [85] and 260-1 [87]; Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404 at 425 and Commissioner of Taxation v Peabody (1994) 181 CLR 359 at 378. 278 In the present case, the Commissioner submitted that the scheme for the purposes of s 177A(1) was constituted by either of the following "steps, matters, things or actions": 1. the transfer of the royalty income streams from CSF to AFC, the subsequent transfer of those income streams to SGTS, the issue of the SGTS Preferred Stock by SGTS, the issue of the AFC Preference Shares by AFC and the issue of the CSA Preference Shares by CSA; or 2. the issue of SGTS Preferred Stock by SGTS, the issue of the AFC Preference Shares by AFC and the issue of the CSA Preference Shares by CSA. 279 The applicants accepted that each was a scheme within the meaning of in s 177A(1) of the 1936 Act but submitted that the determination of purpose may be assisted by "looking at the wider transaction": Commissioner of Taxation v Consolidated Press Holdings Ltd (2001) 207 CLR 235 at [96].

(c) Tax benefit 280 Section 177F of the 1936 Act provides for, inter alia, the disallowance of a deduction that by reason of a scheme to which Pt IVA applies would otherwise be allowable to the taxpayer in relation to a year of income. Section 177C(1) relevantly defines a "tax benefit" in the following terms: Subject to this section, a reference in this Part to the obtaining by the taxpayer of a tax benefit in connection with a scheme shall be read as a reference to: … (b) a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out; … and, for the purposes of this Part, the amount of the tax benefit shall be taken to be: … (d) in a case to which paragraph (b) applies - the amount of the whole of the deduction or of the part of the deduction, as the case may be, referred to in that paragraph. 281 The Commissioner submitted that the common element of each scheme was the decision by the applicants to alter the planned and partially implemented structure of Project Gemini so that instead of CSA issuing ordinary shares to CSF it instead issued preference shares that qualified as a debt interest under Australian law. It was this particular change that gave rise to the tax benefit, namely, deductibility of the dividends (at least in part) paid on the CSA Preference Shares under s 25-90. In the absence of the step by which the CSA ordinary shares were converted to CSA Preference Shares, no deduction would have been available. 282 As a result, the Commissioner submitted that Noza and AFC would, but for the provisions of s 177F of the 1936 Act, obtain a tax benefit or benefits in connection with each of the schemes, namely an allowable deduction or deductions in respect of the following amounts: 1. if the applicants' first alternative is correct, then in the 2003 year (to Noza) a deduction under s 25-90 for amounts of $217,675,884 and $4,980,097, or some part of those sums, being a loss or outgoing incurred with respect to a payment to CSF of those sums as a dividend and "default dividend" pursuant to the CSA Preference Shares; 2. alternatively, if the applicants' second alternative is correct, then: 2.1 in the 2002 Year, to AFC, a deduction under s 25-90 for amounts of $108,837,942 and $207,504, or some part of those sums, being a liability allegedly incurred to CSF to pay these sums as a dividend and "default dividend" pursuant to the CSA Preference Shares; 2.2 in the 2003 Year, to Noza, a deduction under s 25-90 for amounts of $108,837,942 and $4,772,599, or some part of those sums, being a liability allegedly incurred to CSF to pay these sums as a "dividend and default dividend" pursuant to the CSA Preference Shares; 2.3 in the 2004 Year, to Noza, a deduction under s 25-90 for amounts of $108,837,942 and $207,504, or some part of those sums, being a liability allegedly incurred to CSF to pay these sums as a "dividend and default dividend" pursuant to the CSA Preference Shares; and 2.4 in the 2005 Year, to Noza, a deduction under s 25-90 for amounts of $108,837,942 and $5,187,607, or some part of those sums, being a liability allegedly incurred to CSF to pay these sums as a "dividend and default dividend" pursuant to the CSA Preference Shares. 283 It is necessary to deal with the applicants' alternative deduction cases separately. In relation to AFC in the 2002 year, the applicants accepted that AFC would, but for the provisions of s 177F of the 1936 Act, obtain a tax benefit or benefits in connection with each of the schemes in the 2002 year on an accrued basis. 284 The applicants also accepted that, but for the issue of CSA Preference Shares, there would be no debt interest which could give rise to a deduction to Noza. However, the applicants submitted that Noza's right to a deduction for an expense on a debt interest incurred by CSA was due to the election to form a MEC group pursuant to s 719-50 of the 1997 Act and the allowance of the deduction was relevantly attributable to the making of that election in the sense required by ss 177C(2)(b)(i) and 177C(3) of the 1936 Act. 285 Section 177C(2)(b) and 177C(3) relevantly provide: (2) A reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as not including a reference to: … (b) a deduction being allowable to the taxpayer in relation to a year of income the whole or a part of which would not have been, or might reasonably be expected not to have been, allowable to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out where: (i) the allowance of the deduction to the taxpayer is attributable to the making of a[n] … election … or choice …, being a[n] … election …, [or] choice … expressly provided for by this Act or the [1997 Act], …; and (ii) the scheme was not entered into or carried out by any person for the purpose of creating any circumstance or state of affairs the existence of which is necessary to enable … the election … [or] choice, … to be made, given or exercised, as the case may be. … (3) For the purposes of subparagraph … (2)(b)(i): … (b) the allowance of a deduction to a taxpayer; or … is taken to be attributable to the making of a[n] … election, …, if the … election … had not been made, given or exercised, as the case may be: … (e) the deduction would not have been allowable; or … 286 I reject the applicants' submissions that Noza's right to a deduction for an expense on a debt interest incurred by CSA was due to an election to form a MEC group and that accordingly the allowance of the deduction was relevantly attributable to the making of that election. 287 In relation to the claim for deductibility by Noza in the 2003 year and the alternative claims for deductibility by Noza on an accrued basis in the 2004 and 2005 years, the various steps identified in the schemes were taken, inter alia, by Australian companies, AFC and CSA. Following the consolidation of those entities into an Australian tax group headed by Noza on 1 December 2002, each of the steps taken by AFC and CSA is deemed by the operation of the Entry History Rule (s 701-5 of the 1997 Act) to have instead been steps taken by Noza. Also because of the operation of the Single Entity Rule (s 701-1 of the 1997 Act) for the 2003 and onwards years, the separate identity of AFC and CSA is ignored and the tax benefit is deemed to have been derived by Noza. The Commissioner did not contend that the schemes were relevantly entered into or carried out "to enable the … choice … to be made" to consolidate: s 177C(2)(b)(ii). 288 That analysis of the consolidation provisions is important. The relevant provisions are deeming provisions - the steps taken by AFC and CSA are deemed by the operation of the Entry History Rule (s 701-5 of the 1997 Act) to have instead been steps taken by Noza and the separate identity of AFC and CSA is ignored by reasons of the Single Entity Rule (s 701-1 of the 1997 Act) for the 2003 and onwards years so that the tax benefit is deemed to have been derived by Noza. 289 Noza's right to a deduction for an expense on a debt interest was not due to the election to form a MEC group. The right to the deduction was available to AFC if there was no consolidation. All the election to consolidate did was move the availability of the deduction up the chain to the head company of the consolidated group. Put another way, but for the choice made by Noza to form a consolidated MEC group pursuant to s 719-50 of the 1997 Act, Noza as provisional head entity of an MEC group, would not have been entitled to claim a deduction under s 25-90. And but for the election, AFC would be entitled to the deduction under s 25-90. 290 In this respect the allowance of each deduction is not "attributable" to the making of that election, in the sense required by s 177C(2)(b)(i) and s 177C(3). It has not been, and could not be, suggested that any of the alleged schemes were entered into for the purpose of creating a circumstance or state of affairs the existence of which was necessary to permit the applicants to make the election created by s 703-50. The exception in s 177C(2)(b)(i) is not engaged. 291 It should also be noted that but for the election to consolidate, the dividend which would have given rise to the deduction under s 25-90, was the dividend in fact paid, or payable, by AFC. The position in respect of CSA (but for consolidation) is that it would have derived an amount of assessable income, treated as being like interest under the debt / equity rules, which would be set-off against a deductible outgoing incurred by CSA. Its tax position in Australia would be neutral. As a consequence of the election to consolidate, the dividend paid or payable by AFC is not deductible but the dividend paid by CSA is deductible to Noza under s 25-90. 292 As noted earlier, the applicants accepted that a tax benefit could exist for any deductions that arise prior to the formation of the MEC group on 1 December 2002 which are the deductions of AFC in the 2002 year on an accrued basis.

(d) Application of s 177D(b) of the 1936 Act - Dominant Purpose 293 Section 177D is the key provision in Pt IVA. It provides that a scheme must be entered into or carried out by a person for a purpose of the kind identified in s 177D(b): see Hart at [16], [34], [43], [50], [56] and [92]. 294 The test posited by s 177D is objective: Spotless at 421-422, 424; Consolidated Press at [95] and Federal Commissioner of Taxation v Sleight (2004) 136 FCR 211 at [67(1)] and [205]. The test does not require, or even permit, any inquiry into the subjective motives or state of mind of any person: Hart at [65]. 295 Each of the factors set out in s 177D(b) must be considered. However, as Hill J pointed out in Peabody v Federal Commissioner of Taxation (1993) 40 FCR 531 at 543: This does not mean that each of those matters must point to the necessary purpose referred to in s 177D(b). Some of the matters may point in one direction and others may point in another direction. It is the evaluation of these matters, alone or in combination, some for, some against, that s 177D requires in order to reach the conclusion to which s 177D refers. See also Sleight at [67]. 296 In evaluating the s 177D(b) factors, the pursuit of a commercial objective is not inconsistent with the existence of a dominant purpose of enabling the taxpayer to obtain a tax benefit: Spotless at 415 and 416; Consolidated Press at [96] and Hart at [16]-[18], [52], [68], [71] and [93]-[96]. Therefore, in ascertaining objective purpose, it is important to consider the question of purpose by reference to the particular way the transaction was structured and the particular features of the transaction that gave rise to the tax benefit (Hart at [6], [12], [16]-[18], [65]-[68] and at [96]) and to compare how the scheme was structured with alternative ways of achieving the same commercial objectives: Hart at [66] and [94].

Counterfactuals 297 Here, the Commissioner submitted that there were at least two potential ways in which the applicants could have addressed the foreign exchange accounting issue aside from the change in structure, namely: 1. US$ denominated preferred stock could have been issued by SGTS to AFC where repayment was conditional and not certain to occur with AFC and CSA issuing A$ denominated ordinary shares to CSA and CSF respectively; or 2. US$ denominated ordinary shares could have been issued by SGTS to AFC with AFC and CSA issuing A$ denominated ordinary shares to CSA and CSF respectively. 298 The Commissioner submitted that these counterfactuals or alternative postulates would have resolved the foreign exchange accounting issue and would have been financially or commercially advantageous (apart from the tax savings) compared with the transactions entered into. In particular, the Commissioner submitted that for both postulates, the shares issued by SGTS would have been classified as equity instruments for the purposes of US GAAP and the foreign exchange issue would have been resolved. 299 In support of that contention, the Commissioner relied upon the evidence of Ms Esther Mills, a Certified Public Accountant licensed in the State of New York who regularly provides advice on the accounting treatment for complex structured transactions. Mills provided a report in which she considered whether the following hypothetical change to Project Gemini would have resolved the foreign exchange accounting issue identified by Kropp at [66] and [67] above. The hypothetical change posed by the Commissioner was: USD preferred stock would have been issued by SGTS where the repayment was conditional and not certain to occur together with AUD ordinary shares being issued by each of AFC and [CSA]. 300 Ms Mills was not cross-examined. Her response to the hypothetical was: The description of the First Alternative Instrument to be issued by SGTS, an instrument whose repayment is conditional and not certain to occur, is general enough to meet the spirit of the criteria in ASR 268 such that it could be classified as part of stockholders' equity. The exact terms of the First Alternative Instrument would have to specify that "conditional repayment" means that the Instrument's redemption is not at a fixed or determinable price, on a fixed or determinable date; is not at the option of the holder; and is based on conditions that are not outside the control of the issuer. As long as the specific terms of the Instrument met these requirements, it would be considered an equity instrument. 301 The Commissioner contended that because the applicants chose a method of resolving the foreign exchange accounting issue that led to several financial and commercial disadvantages to the applicants (issues I will address below), but which gave rise to a very large tax benefit, it should be concluded that the applicants' objective purpose in entering into the scheme was to obtain the tax benefit. 302 For the reasons that follow, I reject the Commissioner's contentions.

Analysis of the counterfactuals 303 There are problems with the Commissioner's counterfactuals. The first counterfactual was that the SGTS preferred stock "could have been issued by SGTS to AFC where repayment was conditional and not certain to occur" with the consequence that the SGTS stock would be classified as an equity instrument for US GAAP. 304 This option was rejected by Murtaugh on 1 November 2001 when she was asked to consider it: see [93], [95] and [96] above. The option was put to Sutherland during cross examination and rejected by him: see [94] above. The principal reason for its rejection was that it was too difficult to structure an instrument that was equity for US GAAP but nonetheless debt for US tax purposes in order to comply with the IDR's Private Letter Ruling. 305 During cross examination, Sutherland confirmed that both the value of the US tax deductions and the need for compliance with the Private Letter Ruling were important. In response to a question in cross examination about these two factors, he said: [Mr Moshinsky]: You didn't see either of these two factors, loss of US tax deductibility for the dividends or a potential inconsistency with the private letter ruling as a problem at that point in time when you were proposing the permanent for GAAP purposes solution?--- [Mr Sutherland]: No, I'm not sure how you could even say that today. We went through that in great detail yesterday. Of course I did. Of course I considered it a big issue. I'm not sure what in the email doesn't suggest that, nor in any of our conversations since then. The email being discussed is the "permanent for GAAP" email of 1 November 2001 referred to at [90] above. 306 Sutherland's evidence was that he thought the possibility of finding an instrument that straddled the GAAP and tax regimes (as now suggested by the Commissioner) would have been "rare" but given the $300 million capital gains tax liability which had already been incurred "[w]hy wouldn't you try to see if you could make something work?". Murtaugh's evidence was that it had been a very difficult time trying to find a balance between the tax and the GAAP analysis resulting in many drafts of the terms of the shares to be issued and that developing an instrument that was characterised as debt for US tax purposes and at the same time as equity for US GAAP purposes would not have been an "easy task". It was not an easy task. They tried. But no instrument which straddled the GAAP and tax regimes was produced. Even Ms Mills did not produce a specific instrument or give examples of instruments which had successfully straddled the GAAP and tax regimes so that it was equity for US GAAP but nonetheless debt for US tax purposes. 307 That leads me to the IDR Private Letter Ruling. There was unchallenged evidence of the need and desire to comply with the IDR Private Letter Ruling: see the evidence of Chin and Murtaugh at [54] above, Wills at [81] above, Sutherland at [81] and [100] above and Diskin at [99] above. None of the witnesses was challenged about the reasonableness of wanting to avoid the risk of departure from the Private Letter Ruling. 308 No less importantly, it was not suggested that it was inappropriate for ITW Inc to have acted conservatively. That is not surprising given the terms of the request for the Private Letter Ruling (see [41] above), the terms of the Private Letter Ruling itself (see [44] to [48]) above), the novelty of the request for the Private Letter Ruling (see [40] above) and the size of the tax liability which had already accrued: see [56] above. As the applicants submitted, the fundamental difficulty with this aspect of the first counterfactual was the inability to identify an instrument that could have been treated in the US as debt and equity at the same time. No such instrument was ever identified. In my view, such an instrument rose no higher than being a mere "possibility": Federal Commissioner of Taxation v BHP Billiton Finance Ltd (2010) 182 FCR 526 at [68]. 309 The alternative under the first counterfactual - a possible instrument that would have been considered as equity for both US GAAP and state tax purposes - suffered from different problems. Such an instrument would have involved obvious and express potential non-compliance with the facts on which the IDR Private Letter Ruling was based and the potential loss of US state income tax deductions available to SGTS on the dividends (treated as interest) payable to AFC. For my part, I place little weight on the size of the US state income tax deductions. I accept that those deductions were a planned part of Project Gemini and ITW Inc was perfectly entitled to consider and adopt solutions which preserved them, but I do not accept that they were so great (US$10 million) as to result in the rejection of the counterfactual. However, for the reasons stated earlier (see [307] and [308] above), I consider that an instrument that was treated as equity for both US GAAP and tax purposes would have given rise to an impermissible risk that the IDR Private Letter Ruling would have ceased to have been binding. 310 For these reasons, I reject the Commissioner's first counterfactual. I do not consider that the first counterfactual constituted an alternative means of achieving the commercial objectives of Project Gemini. 311 The second of the counterfactuals - that US$ denominated ordinary shares could have been issued by SGTS to AFC with AFC and CSA issuing A$ denominated ordinary shares to CSA and CSF respectively - also suffers problems. The shares that would have been issued by SGTS would have been treated as equity for US GAAP purposes. Neither Sutherland nor Murtaugh were questioned about this second counterfactual. It was not put to either witness that the use of ordinary stock was an appropriate and effective means of achieving all of the commercial objectives of Project Gemini, including the US State tax deduction. 312 The failure to put the second counterfactual to the witnesses is important. By not putting it to the witnesses the Court does not have the advantage of those witnesses' views on whether it was an available course of action, or if available, one which would have achieved the desired commercial ends of those employed in the transactions. 313 The only witness who could recall discussing an option of this kind on 1 November 2001 was Diskin. His evidence concerning the discussion about using ordinary stock was as follows: A further option discussed was for SGTS to issue ordinary instead of preferred shares to AFC. … Sutherland was adamant that it was too risky from ITW's viewpoint to request a change to the existing ruling. The Project Gemini proposals had from the outset been premised on the basis that the preferred stock to be issued by SGTS would be regarded as debt for US purposes. The issue of ordinary shares by SGTS instead of the preferred stock was rejected. Diskin's evidence was not challenged. He was only asked whether he had advised on the potential tax outcomes of the proposal and his answer was "No". In light of this evidence it is not useful to consider the second counterfactual proposed by the Commissioner.

General Considerations 314 Finally, before turning to consider the factors in s 177D(b), it is important to restate some facts and matters. The Commissioner accepted that: 1. the objectives of Project Gemini were legitimate commercial purposes which included the obtaining of US state tax benefits for the US group; 2. the commercial purposes could only be achieved by a series of internal transactions within the ITW Inc group both in the US and in Australia; 3. by 15 October 2001, many of the necessary transactions had already been completed in the US and had given rise to a US$4 billion capital gain; 4. neither at the time of identification of the commercial purpose nor at the time of selection of the structure to effect that purpose, was the foreign exchange accounting issue identified as a problem or even a potential problem; 5. at the end of October 2001, the foreign exchange accounting issue had been identified and required a solution; 6. the first course of action considered for dealing with the foreign exchange accounting issue that had emerged was one that was seen as having risks of disturbing the Delaware taxation consequences of the arrangement because it was thought to be arguable that the proposed solution departed from the basis on which the Private Letter Ruling had been issued by the IDR; and 7. the second course of action considered (and ultimately adopted) was one that the taxpayer believed would have substantial Australian taxation benefits. But it was preferred over the first solution to avoid the risks seen in pursuing the first course of action. 315 The fact that the transactions in issue are all intercompany transactions within a group of companies in which corporate dividends are paid otherwise than in cash, and are transactions believed to have very large Australian taxation consequences, if considered alone would very probably excite the closest attention to the possible application of Pt IVA. But once it is accepted (as it was) that the transactions are part of a legitimate series of intercompany transactions that were undertaken for reasons other than the avoidance of taxation (in Australia or the US), the question becomes whether the particular form of transactions undertaken was entered to achieve the relevant taxation purpose or effect. 316 When then it is observed (1) that the transactions had been partly effected (2) a problem emerged that required solution and (3) the solution chosen (which it was thought had very favourable taxation consequences) was chosen to avoid disturbance of the arrangements that had already been made and upon which the participants had relied in securing a favourable Private Letter Ruling from the IDR, the conclusion that Pt IVA is not engaged must follow. 317 Against that background I turn to consider the factors listed in s 177D(b) of the 1936 Act.

Manner - s 177D(b)(i) 318 The Commissioner submitted that the crucial aspect of the manner in which the scheme(s) were entered into were the changes from the planned structure of Project Gemini whereby SGTS issued A$ instead of US$ denominated preferred stock, AFC issued the AFC Preference shares instead of ordinary shares to CSA and CSA issued the CSA Preference Shares instead of ordinary shares to CSF. 319 The Commissioner submitted that the changes resulted in such disadvantageous financial and commercial outcomes for AFC, CSA and Noza that it would be concluded that the dominant purpose of the decision to proceed in this manner was the gaining of the s 25-90 deduction. The disadvantages identified by the Commissioner were: 1. the imposition of Australian interest withholding tax on dividends paid by CSA to CSF; 2. the loss of virtually all of the anticipated tax consolidation benefit which had been the business reason presented to the IDR to justify the issue of the Private Letter Ruling; 3. CSA and AFC lost the benefit of a permanent $1.9 billion contribution to their capital and instead assumed risks without commercial reward; and 4. the assumption of a risk that the IDR would regard the changes as amounting to a "pertinent change … in material facts" which would render the Private Letter Ruling non-binding on the IDR. It is necessary to address each in turn.

Withholding Tax 320 As originally planned, the dividends received by AFC from SGTS would be exempt from tax under s 23AJ of the 1936 Act. These could then be passed tax-free to CSA via the intercorporate dividend rebate (former s 46 of the 1936 Act). Further, by maintaining a foreign dividend account pursuant to Subdiv B of Div 11A of the 1936 Act, CSA could pass the foreign dividends back to CSF as dividends paid on its ordinary shares exempt from Australian dividend withholding tax. That contention is not in dispute. Indeed, the Commissioner accepted that any dividend paid in the period from 1 July 2003 to 4 December 2003 would not be subject to interest withholding tax. 321 Notwithstanding that concession, the Commissioner contended that the manner in which the scheme was entered into exposed CSA to an Australian interest withholding tax liability on dividends paid on the CSA Preference Shares because: 1. the CSA Preference Shares were classified as a debt interest under Australian debt / equity rules: see the definition of "non-equity share" in s 6(1) of the 1936 Act; 2. the dividends paid on the CSA Preference Shares did not fall within the definition of "dividend" in the withholding tax provisions and were instead classified as "interest": see definition of "dividend" in s 128A(1) and the definition of "interest" in s 128A(1AB) of the 1936 Act; and 3. accordingly, the foreign dividend account exemption would no longer apply and interest withholding tax would apply at the 10% rate on the preferred dividends paid under the CSA Preference Shares. 322 The question of withholding tax cuts both ways. The protocol to the USA DTA (see [50] above) was signed on 27 September 2001 - before the scheme was entered into. It came into effect on 1 July 2003 - after the transactions the subject of the Pt IVA determination. The Protocol exempted any dividend paid on the CSA Preference Shares from Australian withholding tax for the period from 1 July 2003. That exemption was not removed until 5 December 2003 when amendments to the USA DTA came into effect - after the transactions the subject of the Pt IVA determination had been completed. 323 The expectation at the time the scheme was entered into was that no withholding tax would be payable after 1 July 2003. That expectation was recorded in the draft advice given on 8 November 2001 by Andersen Tax which stated that: Where dividends are treated as being paid on the AFC preference shares prior to the commencement of the new double tax treaty (expected to be 1 July 2003), interest withholding tax at the rate of 10% will be applicable. However, for dividends on AFC preference shares paid after that date, it appears that the "dividend withholding tax" rules will be applicable. In this regards (sic), pursuant to the treaty it is proposed that no withholding tax would be applicable on dividends paid by an Australian company to a US company where the US company has a voting interest in the Australian company of at least 80% … Janetzki was cross examined about this advice. His evidence was that the advice was only based upon what "we had in front of us at that time". 324 At the time the scheme was entered into in 2001, there was no expectation that withholding tax would have been payable after 1 July 2003. Indeed, the Commissioner does not dispute that when CSA paid its dividend in 2003, no withholding tax was payable. Also, at the time the scheme was entered into in 2001, no amendments to the USA DTA that would have had the effect of excluding dividends payable on the CSA Preference Shares from the benefits of the Protocol had been announced by the Australian government. 325 I do not consider that withholding tax was a commercial disadvantage which resulted from the change in structure.

Loss of Anticipated Consolidation Benefit 326 The original plan in early 2001 was for the SGTS Preferred Stock to be a "reset cost base asset" (rather than a retained cost base asset) for tax consolidation purposes so that the value of the asset could be allocated to the intellectual property: see [26] above. 327 The Commissioner submitted that by changing the denomination of the SGTS Preferred Stock to A$ in November 2001, the character of AFC's Preferred Stock investment was changed to a "retained cost base asset" for tax consolidation purposes (s 705-25(5) of the 1997 Act) with the consequence that the ITW Group lost virtually all of the anticipated consolidation benefit because the value of the SGTS Preferred Stock could no longer be allocated to the intellectual property. As a result, the Commissioner submitted the main rationale for the transaction as put forward to the IDR was lost: see [23] above. In support of this contention, the Commissioner pointed out that there was no contemporaneous evidence that the directors of the Australian entities met to discuss the impact on the anticipated tax consolidation benefit brought about by the changes to the denomination of the SGTS Preferred Stock. 328 The applicants rejected the Commissioner's contentions legally and factually. The applicants submitted that the consolidation objective of preserving cost base was not lost. 329 First, the history. The New Business Tax System (Consolidation) Bill 2000 Exposure Draft (the Exposure Draft) included Subdivision 168-F - "Consequences for asset treatment if entities become members of a consolidated group: group formation case". Section 168-400 (which was page 40 of the Exposure Draft) provided the following Guide to the subdivision: When a consolidated group comes into existence, the *head entity of the group is to be treated as if it purchased the CGT assets of each subsidiary member for a payment that reflects the cost to the group of acquiring those assets. To achieve this, the rules in Subdivision 168E (which deal with an entity joining an existing consolidated group) are applied subject to modifications. 330 The proposed Subdivision 168-E included proposed rules for the setting of cost bases for a consolidated group when a company joined a consolidated group. Pursuant to s 168-225 of the proposed Subdivision 168-E, the head entity of a consolidated group was deemed to purchase each of the CGT assets of an entity joining the group in consideration for a payment generally determined as follows: 1. the joining entity's cost base of the asset, if the asset was a 'retained cost base asset': s 168-230 of the Exposure Draft; or 2. an amount calculated under a four step method, if the asset was a 'reset cost base asset': s 168-235 of the Exposure Draft. 331 A reset cost base asset was defined as any CGT asset that was not a retained cost base asset: s 168-235(2) of the Exposure Draft. The proposed definition of a "retained cost base asset" as contained in s 168-230(3) of the Exposure Draft was: A retained cost base asset is: (a) Australian currency, other than *trading stock or *collectables of the joining entity; or (b) a right to receive a specified amount of such Australian currency, other than a right that is a marketable security within the meaning of section 70B of the Income Tax Assessment Act 1936. Example: A debt or a bank deposit. The definition of retained cost base asset changed slightly when the provision was ultimately enacted in 2002 (as s 705-25(5) of the 1997 Act): see [337] below. 332 The applicants submitted that having regard to the content of the proposed definition of retained cost base asset, the SGTS Preferred Stock could not reasonably be thought to be a debt or a right to receive Australian currency. They pointed to the evidence of Mr Balotti who said that the amount payable on the redemption of the preferred stock was not regarded by Delaware law as an obligation of SGTS and therefore it was quite understandable that no-one sought to question the availability of the consolidation objective of preserving cost base in early November 2001. 333 Indeed, the applicants submitted that the absence of concern about the loss of the anticipated consolidation benefit was, in retrospect, well founded because the objective was not lost as the SGTS Preferred Stock subscribed by AFC were not "a right to receive a specified amount of such Australian currency" for the purposes of the definition of 'retained cost base asset' in s 705-25(5) of the 1997 Act. In particular, the applicants submitted that being shares, the SGTS Preferred Stock represented "an interest consisting of a congeries of rights in personam" (Archibald Howie at 154 per Dixon J) and were therefore a reset cost base asset. 334 Finally, the applicants submitted that there was no contemporaneous evidence to suggest that any witness thought that the consolidation objective had been lost by entering into the scheme. Sutherland was cross examined about this issue. His evidence was as follows: [MR MOSHINSKY]: … It seemed to be a fairly significant issue earlier on. Can you explain why you didn't receive advice on whether the changes to the structure impacted on this issue? [MR SUTHERLAND]: Yes. It was a critical issue. That's why we did the plan the way we did. And no one expected, nor does anybody believe, that it truly changes the outcome. All we did was move an instrument, an SGTS preferred, from US dollar to A dollar. No one viewed that that was a change to the way the consolidation rules would work. [MR MOSHINSKY]: Was it something that you specifically were advised on at the time, or is it something that [just] wasn't looked at at the time? [MR SUTHERLAND]: I'm not sure it was either one, that it wasn't looked at or that I wasn't advised. The expectation is that it was looked at and we agreed that it was a reset - it still was a reset cost base asset at the time. 335 Before turning to consider the definition of a retained cost base asset in s 705-25(5) of the 1997 Act and whether the SGTS Preferred Stock satisfied that definition, two matters should be noted. First, I reject the proposition that the terms of the SGTS Preferred Stock are to be interpreted in accordance with Delaware law. Delaware law is the governing law for determining the rights between SGTS and AFC: cf [225] to [229] above. However, Delaware law is not the law for determining whether it was a retained cost base asset under the 1997 Act for the purposes of determining the tax consequences of Noza, the head entity of the MEC. 336 Secondly, it was common ground that there was an absence of concern about the loss of the anticipated consolidation benefit in November 2001. 337 What then was the status of the SGTS Preferred Stock under the consolidation regime of the 1997 Act? At the relevant time, s 705-25 of the 1997 Act provided: (1) This section states what the *tax cost setting amount is for a *retained cost base asset. Australian currency (2) If the *retained cost base asset is covered by paragraph (a) or (b) of the definition of that expression and is not covered by another subsection of this section, its *tax cost setting amount is equal to the amount of the Australian currency concerned. Qualifying securities (3) If the *retained cost base asset is a qualifying security (within the meaning of Division 16E of Part III of the [1936 Act]), the *tax cost setting amount for the qualifying security is instead equal to the joining entity's *terminating value for the asset. … Retained cost base asset (5) A retained cost base asset is: (a) Australian currency, other than *trading stock or *collectables of the joining entity; or (b) a right to receive a specified amount of such Australian currency, other than a right that is a marketable security within the meaning of section 70B of the [1936 Act]; or Example: A debt or a bank deposit. (c) a right to have something done under an *arrangement under which: (i) expenditure has been incurred in return for the doing of the thing; and (ii) the thing is required or permitted to be done, or to cease being done, after the expenditure is incurred. (Emphasis added.) 338 It is common ground that the SGTS Preferred Stock is not covered by paragraph (a) of the definition in s 705-25(5). What about paragraph (b) of the definition? Did the SGTS Preferred Stock grant AFC "a right to receive a specified amount of … Australian currency" which was not a "marketable security within the meaning of s 70B of the [1936 Act]"? "Marketable security" was defined in s 70B(7) of the 1936 Act to mean a traditional security covered by paragraph (a) of the definition of security in s 159GP(1) of the 1936 Act. Section 159GP(1)(a) of the 1936 Act defined security as "stock, a bond, debenture, certificate of entitlement, bill of exchange, promissory note or other security". Interestingly, subparagraph (d) of the definition of security in s 159GP(1) ("any other contract, whether or not in writing, under which a person is liable to pay an amount or amounts, whether or not the liability is secured") was not included in the definition of "marketable security". 339 I accept the Commissioner's contention that the SGTS Preferred Stock fell within the plain words of s 705-25(5) of the 1997 Act. In its terms it granted AFC "a right to receive a specified amount of … Australian currency". It is true (as the applicants contended) it also provided other benefits, however that was not the test prescribed by statute. That construction is supported by the exclusion in s 705-25(5)(b). All marketable securities fall within the definition, except those that are "(a) stock, a bond, debenture, certificate of entitlement, bill of exchange, promissory note or other security". Importantly, subparagraph (d) of the definition of security in s 159GP(1) ("any other contract, whether or not in writing, under which a person is liable to pay an amount or amounts, whether or not the liability is secured") was not excluded. In other words, a marketable security that satisfied subparagraph (d) of the definition of security in s 159GP(1) of the 1936 Act fell within paragraph (b) of the definition of retained cost base asset in s 705-25(5) of the 1997 Act. In my view, the SGTS Preferred Stock was a "contract, … in writing, under which [SGTS was] liable to pay an amount or amounts" to AFC. 340 For those reasons, I accept that despite the extensive consideration of the potential for resetting the cost base benefit of the proposed Gemini Project transactions prior to 2 November 2001, the applicants did not turn their minds to this issue in the period between 2 and 15 November 2001. However, for the reasons above and for the reasons that follow, I do not accept the Commissioner's contention that this fact "suggests that the tax benefit was the main driver" for the changes identified in the scheme.

Detriment to Australian Entities 341 The third factor relied upon by the Commissioner was that there was no evidence in the manner that the scheme was entered into that any consideration was given to the disadvantages and financial risks to the Australian entities resulting from the change to the scheme. In particular, the Commissioner submitted that contrary to the original plan, CSA (and then AFC) was no longer to be provided with a $1,927,700,000 contribution to their permanent share capital but rather what was in substance 100% debt funding via a subscription to preference shares which were redeemable in five years with yearly obligations to fixed preferred dividends. 342 In addition to the loss of permanent share capital and its replacement with temporary debt funding, the Commissioner also submitted that the change had two further adverse consequences for the Australian entities: 1. the Australian entities were dependant on SGTS paying dividends under the SGTS Preferred Stock in order to be able to finance their own dividend obligations from profits as required by s 254T of the Corporations Act. The ability of SGTS to pay a dividend depended on it having sufficient accumulated earnings under Delaware law which was uncertain as it depended on the level of net royalties received by SGTS as compared to its interest expenses and other outgoings, costs and losses; and 2. the Australian entities assumed an obligation to repay $1,927,700,000 within five years. Because of the requirements of s 254K of the Corporations Act the preference shares could only be redeemed from profits or the proceeds of a new issue of shares made for the purpose of the redemption. 343 In the context of the factors just identified, the Commissioner raised two further issues. First, that the funding for a five-year term would require refinancing if it was proposed to retain the 15 year rights to the income streams in SGTS (see [129] and [130] above) which would not have been a relevant factor or consideration if capital funding been provided to CSA. Secondly, the manner in which the scheme was entered into failed to reward the Australian entities for their role in facilitating the transfer of the royalty income streams (that is, assumption of risk without commercial reward). I will deal with each in turn. 344 The applicants rejected these factors, but not on the basis that they were an inappropriate description of what occurred. Instead, the thrust of the applicants' submission was that it was more appropriate to analyse the application of the eight factors in s 177D(b) on the basis of the purposes of the ITW Group, rather than individual group entities. The applicants referred, by example, to the decision of the Full Court of the Federal Court in Commissioner of Taxation v News Australia Holdings Pty Limited [2010] FCAFC 78 at [19]-[20]. I do not accept the applicants' submission. News Australia is not authority for the proposition you should consider the purposes of the group rather than the purposes of the individual group entities. And nor could it be. It is the legislation and, in particular, s 177D(b), which prescribes the factors to be considered. 345 One of the factors, s 177D(b)(vi), requires the Court to consider "any change in the financial position of any person who has, or has had, any connection … with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme". As will become apparent (see [370] and [371] below), the application of s 177D(b) resulted in the identification of a number of changes to many companies within the ITW Group that had resulted or were expected to result from the scheme. 346 At one level, the changes in the financial position of other ITW Group companies could be seen to 'net out' the position of CSA. On the other hand, following execution of the transactions AFC owned all of the common stock of SGTS and US$1 billion of preferred stock with rights to 6% dividends for the five year term of the stock. Although the rights to 6% dividends were offset by its own obligations to pay 6% dividends, a commercial benefit of the transaction to AFC arose from its ownership of the common stock of SGTS. SGTS owned royalty rights valued at $4 billion. The value of those rights was tied to the revenues of a company with revenues of US$9 billion per annum. Income derived by SGTS in excess of its liabilities would increase the value of the common stock owned by AFC. As can be seen, the changes are complex and interwoven. No general statements should be or can be made. 347 Finally, the Commissioner points to absence of any evidence of negotiation between the Australian entities and ITW Inc regarding the potential commercial benefits such as a transaction fee or margins on the returns on the investment, the amount paid for either of the royalty income streams or the method of financing. So much may be accepted, but again I do not consider it significant to the extent suggested by the Commissioner that it "suggests that the tax benefit was the main driver" for the changes identified in the scheme.

Risk to the Private Letter Ruling 348 As was clear from the outset (see [37] and [38] above), the transfer of the rights to the income streams from CSC in Illinois to CSF potentially exposed CSC to a tax liability of approximately $US300 million in Illinois. It was for that reason that ITW Inc made a private letter ruling request to the IDR seeking confirmation, inter alia, that any "capital" gain on the transfer of the royalty income streams from CSC to CSF would be treated as tax free in Illinois: see [37] above. 349 To obtain the Private Letter Ruling, ITW Inc needed to identify a commercial or non-tax basis for the transfer of the royalty income streams out of Illinois. The commercial or non-tax basis put forward to the IDR was an Australian business purpose, namely, the consolidation consequences in Australia: see [39(1)] above. 350 The Private Letter Ruling was issued on 15 September 2001: see [44ff] above. It can only be relied upon to the extent that there is no "pertinent change in … material facts": see [45] above. If there was a pertinent change in material facts, then the IDR could treat the Private Letter Ruling as non-binding and impose a very substantial tax liability on the ITW Group. 351 The Commissioner submitted that following the change in the structure (which the Commissioner submitted led to a substantial decrease in the anticipated Australian tax consolidation benefit), ITW Inc did not advise the IDR that the basis it had put forward for the transaction and the Private Letter Ruling was arguably no longer correct. In support of that contention, the Commissioner referred to the evidence of Mr Marcus (a principal of an Illinois law firm and Chairman of that firm's state and local tax practice group), which was in large part received by the Court as a submission: see Noza Holdings Pty Ltd v Federal Commissioner of Taxation [2010] FCA 996. Mr Marcus submitted that the change from CSA and AFC issuing ordinary shares to issuing preference shares would amount to a "pertinent change in … material facts" if the change resulted in CSA and AFC failing to be classified as disregarded entities for US federal income tax purposes, with the consequence that CSF could no longer be classified as a 80/20 company for Illinois income tax purposes. The applicants did not lead any evidence on this question. The applicants' evidence was that Sutherland "was not prepared to take the risk of departing from the [Private Letter Ruling]". 352 I reject the Commissioner's submission. Taking the Commissioner's own submissions at their highest, the commercial or non-tax basis for the transfer of the royalty income streams out of Illinois did not disappear and was not lost; it was at best a "substantial decrease". Further, as stated above, when the scheme was undertaken (1) the transactions had been partly effected giving rise to a capital gain of approximately $300 million (2) a problem emerged that required solution and (3) the solution chosen (which it was thought had very favourable taxation consequences) was chosen to avoid disturbance of the arrangements that had already been made and upon which the participants had relied in securing a favourable Private Letter Ruling from the IDR. Put another way, the applicants not only turned their mind to the Private Letter Ruling, but structured the scheme so as to comply with the terms of the Private Letter Ruling.

Conclusion - manner 353 During the course of 2001, ITW Inc undertook extensive planning to prepare and complete the transactions which formed Project Gemini in order to achieve a higher level of legal protection for its customer-based intangibles and substantial US state tax savings. As executed, each of these commercial objectives was still achieved. 354 From the outset, the transactions were carefully planned to be tax neutral in Australia (but for the protection against a future consolidation measure that never eventuated) and would have remained so but for the foreign exchange accounting issue identified by Kropp. There is nothing contrived or artificial about the changes made to Project Gemini to resolve the foreign exchange accounting problem. The ITW Group chose a natural and logical solution: it matched the terms of issue of the SGTS Series B preferred stock with the preference shares issued by AFC and CSA. There is nothing about this matching which supports the conclusion that the ruling, prevailing, or most influential purpose of any of the persons who entered into or carried out such schemes was to obtain the alleged tax benefit. As a step, the matching of preferred stock to the preference shares was not an artificial or distorted means of resolving the foreign exchange accounting issue. The solution was in fact proposed by Murtaugh following advice from Kropp that it would resolve the foreign exchange accounting issue: see [80] above. Neither Kropp nor Murtaugh are experts in Australian tax and they did not, nor could they objectively be expected to understand s 25-90. 355 Nor is there anything artificial or contrived about the terms of the Series A and B Preferred Stock issued by SGTS and the Preference Shares issued by CSA. The evidence is that prior to Sutherland's trip to Australia the terms of issue of the SGTS Preferred Stock remained uncertain. On the one hand, ITW Inc's Australian advisers wanted to introduce terms that would make a future application of s 23AJ, even an amended s 23AJ, more certain. However, these changes resulted in the stock looking more like equity and not debt for US state tax purposes. The compromise solution was to provide an "unwind strategy". This involved the issue of two classes of preferred stock. The Series B would be drafted to be debt for US purposes. In the event of s 23AJ being amended, the Series B would be converted to Series A to be equity under Australia's debt / equity rules. The solution was devised in consultation with ITW Inc's US advisors. That solution was not driven to obtain deductions under s 25-90. It was not until the foreign exchange accounting problem was solved that Diskin advised Sutherland of the peculiar provisions of s 25-90 and the peculiar application of the thin capitalisation rules, the combination of which was required to give rise to an allowable deduction: see [115] above. 356 Although I have concluded that the applicants did not turn their mind to the potential resetting of the cost base between 2 and 15 November 2001 and there did not appear to be negotiation between the Australian entities and ITW Inc regarding the potential commercial benefits, the manner in which the scheme was entered into does not support the contention that the dominant purpose of any part of the Commissioner's scheme was to obtain a tax benefit.

Form and Substance - s 177D(b)(ii) 357 As to form and substance, the Commissioner alleged that the schemes "carefully exploited [the] distinction between legal form and economic substance so as to create a deduction". I reject that contention. 358 The 1997 Act (as it applied in 2001) drew a distinction between debt and equity. Following the introduction of Div 974, the form of a capital instrument could not be used to defeat its substance. So, for example, it required instruments to be characterised by reference to general law for some purposes and by reference to Div 974 of the 1997 Act for other purposes. Moreover, Parliament expressly recognised the way the 1997 Act addressed those distinctions in s 25-90, which drew upon both Div 974 of the 1997 Act and the general law characterisation of dividends in s 23AJ of the 1936 Act. 359 In the present case, the form of the issue of the preference shares involved a share issue. But in substance, by their terms, the shares gave rise to schemes which created debt interests. Division 974 recognised this and s 25-90 provided a deduction for the cost of servicing this debt in the unusual situation where non-assessable income was derived. 360 When the form and substance of the schemes identified by the Commissioner are considered, there is no divergence between the form and substance of those schemes that would give rise to an inference that the transactions undertaken were objectively motivated by taxation reasons. The substance of the change in the structure in each case was to avoid a significant foreign exchange accounting problem arising for ITW Inc and to secure the US state tax savings.

Time scheme entered into and length of period - s 177D(b)(iii) 361 The Commissioner submitted that there were "no relevant matters" in relation to this factor. I reject that submission. Timing is not determinative, but it is significant. As the chronology of events demonstrates (see Section B of these reasons for decision), at the time the alleged schemes were entered into (October and November 2001), the dominant purpose was unrelated to the obtaining of an Australian tax benefit. The timing was the result of other important events: 1. transactions that had been partly effected giving rise to a potential capital gain of approximately $300 million: see [56] above; 2. a foreign exchange accounting problem that had emerged and required solution: see [65] to [67] above; and 3. the choice of a solution (which it was thought had very favourable taxation consequences) to avoid disturbance of the arrangements that had already been made and upon which the participants had relied in securing a favourable Private Letter Ruling from the IDR. 362 Timing favours the applicants.

Result of scheme but for the Act - s 177D(b)(iv) 363 The applicants accepted (as they had to) that the tax effect but for the scheme was the deduction claimed (allowable as a deduction when the dividends were paid or declared and paid by Noza in 2003 or when the dividends accrued by AFC in 2002, and by Noza in 2004 and 2005) arising from the application of s 25-90 to the dividends paid. 364 However, in considering this factor, the applicants submitted (and I accept) that one should recall what the High Court said in Hart at [53]: The bare fact that a taxpayer pays less tax, if one form of transaction rather than another is made, does not demonstrate that Part IVA applies. Simply to show that a taxpayer has obtained a tax benefit does not show that Part IVA applies.

Change in the financial position of the taxpayer from the scheme - s 177D(b)(v) 365 Noza and AFC need to be considered separately. 366 As to the financial position of Noza (as head entity of the MEC group), the changes made to Project Gemini did not affect it. It received the royalties as head entity that it expected to receive. It paid dividends it expected to pay. And as the owner of the ordinary stock in SGTS, the value of the stock grew with the growth in value of the royalty streams. 367 As for AFC in the 2002 year, there was a change in its financial position because it had the benefit of the tax deduction under s 25-90. 368 Contrary to the submissions of the Commissioner, I do not accept that the change in the financial position of the taxpayer (Noza or AFC) from the scheme included the imposition of withholding tax (see [320] to [323] above) or the adoption of significant risk by the Australian entities for no reward (see [341] to [347] above). The Commissioner also identified the following changes in the financial position of the Noza and AFC: 1. the loss of the potential resetting of the cost base; 2. the making of an unsecured investment in the Preferred Stock of SGTS; 3. the incurring of obligations to pay dividends and redeem the Preference Shares; and 4. the exposure to default interest rates. Whilst I accept that these financial changes occurred, I do not accept that they are determinative or provide support for the contention that the dominant purpose of the scheme was obtaining the tax benefit. 369 Project Gemini, whilst principally concerned with US state tax planning, brought an advantage to the Australian ITW Inc group. The royalties received by SGTS of over US$2.1 billion benefitted the Australian group in that SGTS could then pay a dividend to AFC on either the preferred or ordinary shares it held (bearing in mind that AFC was the sole shareholder of SGTS).

Change in the financial position of a person other than the taxpayer from the scheme - s 177D(b)(vi) 370 As to the financial position of connected parties, the changes made to Project Gemini were important. Those changes preserved the commercial objectives sought by those parties - including the increased legal protection given to ITW Inc and Miller's customer-based intangibles. But for those changes, the objectives may not have been achieved. 371 The primary object of Project Gemini was to change the financial position of other parties, namely members of the US ITW group. That position was to be changed by savings in US state taxes, which were expected to be in excess of US$243 million at the time Project Gemini was executed: see [19] above.

Consequences for the taxpayer or any other person from the scheme - s 177D(b)(vii) 372 The Commissioner submitted that there were no other consequences. I reject that submission. From the outset, Project Gemini had commercial objectives which included the increased legal protection given to ITW Inc and Miller's customer-based intangibles. Those objectives were secured. 373 In addition, the changes to Project Gemini were effected to ensure that ITW Inc avoided reporting any (potentially substantial) foreign exchange fluctuations in its quarterly reporting. That was achieved.

Nature of any connection between the taxpayer and person referred to in (vi) - s 177D(b)(viii) 374 It is common ground that all of the parties are wholly owned subsidiaries of ITW Inc.

Conclusion 375 For those reasons, I do not consider that the dominant purpose of either of the schemes identified by the Commissioner (encompassing changes to Project Gemini) was to obtain the tax deduction. Instead, the dominant purpose was to resolve the foreign exchange accounting issue in a manner consistent with the Private Letter Ruling issued by the IDR. 376 Further, for the reasons expressed at [303] to [313] above, I do not accept the Commissioner's counterfactuals. Each was not an alternative means of achieving the commercial objectives of Project Gemini.

(4) PENALTIES 377 The Commissioner, by notice of assessment of penalty, imposed a penalty on Noza in respect of a purported tax shortfall in the 2003 to 2005 income years at the rate of 25%, determined on the basis that Pt IVA applied to disallow the deduction claimed by Noza in each year and that there was a reasonably arguable position that Pt IVA did not apply. 378 As I have concluded that part of the deduction is allowable and that Pt IVA does not apply to disallow the deduction claimed by Noza, it is necessary to consider the question of penalties only in relation to that part of the deduction not allowed. For the sake of completeness, I also make a number of findings relevant to the question of penalties in the context of the application of Pt IVA.

(a) Part of deduction not allowed 379 In relation to that part of the deduction not allowable as a deduction pursuant to s 25-90 (see [233] to [256] above), the applicants submitted that it was reasonably arguable that the amount was allowable pursuant to s 25-90 and therefore any penalty arising from the application of s 284-145 of Sched 1 to the TAA should be reduced to nil. 380 In my view, that contention must be rejected. In the 2003 year, s 284-145 imposed liability for administrative penalties, inter alia, if you attempted to reduce your tax liabilities through a scheme and it was reasonable to conclude that the entities entered into or carried out the scheme for the dominant purpose of getting a scheme benefit from the scheme. That did not occur here. As the Full Court said in Federal Commissioner of Taxation v Star City Pty Ltd (No 2) (2009) 180 FCR 448 at [25], s 284-145 "does not address the situation in which a taxpayer has sought to obtain a benefit or tax advantage by claiming in a taxation statement … a deduction for a loss or outgoing … being a deduction to which, on the proper application of the legislation, the taxpayer was not entitled".

(b) Penalties and Pt IVA 381 As just noted, as part of the deduction was allowable pursuant to s 25-90 but not disallowed by operation of Pt IVA, I make the following findings for completeness. The issue before the Court was whether Noza had voluntarily told the Commissioner about the shortfall before the Commissioner told Noza that a tax audit would be conducted of its financial affairs for the period to which the shortfall relates. 382 If Noza had told the Commissioner about the shortfall before the tax audit commenced, any base penalty amount imposed on Noza would be reduced by 80% pursuant to s 284-225(2) of Schedule 1 to the TAA. If Noza voluntarily told the Commissioner about the shortfall after the tax audit commenced and telling the Commissioner about the shortfall can reasonably be estimated to have saved the Commissioner a significant amount of time and resources, then any base penalty imposed on Noza would be reduced by 20% pursuant to s 284-225(1) of Schedule 1 to the TAA. I will deal with each in turn. 383 In the 2003 year, s 284-225 of Schedule 1 to the TAA provided: (1) The *base penalty amount for your *shortfall amount or *scheme shortfall amount, or for part of it, for an accounting period is reduced by 20% if: (a) the Commissioner tells you that a *tax audit is to be conducted of your financial affairs for that period or a period that includes that period; and (b) after that time, you voluntarily tell the Commissioner, in the approved form, about the shortfall amount or the part of it; and (c) telling the Commissioner can reasonably be estimated to have saved the Commissioner a significant amount of time or significant resources in the audit. (2) The *base penalty amount for your *shortfall amount or *scheme shortfall amount, or for part of it, for an accounting period is reduced under subsection (3) or (4) if you voluntarily tell the Commissioner, in the *approved form, about the shortfall amount or the part of it before the earlier of: (a) the day the Commissioner tells you that a *tax audit is to be conducted of your financial affairs for that period or a period that includes that period; or (b) if the Commissioner makes a public statement requesting entities to make a voluntary disclosure by a particular day about a *scheme or transaction that applies to your financial affairs - that day. … "Tax audit" was a defined term. It meant "an examination by the Commissioner of an entity's financial affairs for the purposes of a taxation law": s 995-1 of the 1997 Act. 384 The applicants identified the following documents as having been provided to the Commissioner before the beginning of the tax audit and disclosing the "shortfall amount": 1. a letter dated 6 October 2004 from ITW Australia Pty Ltd, on behalf of Noza, to the Commissioner in response to a question from the Commissioner in a risk review in relation to the 2002 year of income. Noza provided the Commissioner with a detailed description of the relevant steps in Project Gemini. The description included identification of the quantum of the debt interest of $1,927,700,000 held by CSF in CSA and an explanation that the dividend payments on the redeemable preference shares issued by CSA would be treated as a debt deduction pursuant to s 25-90. The letter also identified the repayments due to be paid on the redeemable preference shares; 2. a letter dated 18 February 2005 from Noza, CSA and CSF to the Commissioner in which they sought a private ruling. The request set out the relevant transactions in Project Gemini and identified A$175,467,662 had been treated as interest for income tax purposes. No other documents were identified by the applicants. 385 When did the audit start? In a letter dated 21 February 2005, from the Commissioner to ITW Inc it stated: in accordance with previous discussions on 7 September 2004, we intend to commence an audit of the issues identified during the course of client risk reviews completed for the years ended 30 November 2001 to 30 November 2003 inclusive. (Emphasis added.) 386 After closing submissions, the Commissioner communicated to the Court that after a review of the documentation, he no longer contended that the tax audit commenced before the letters of 6 October 2004 and 18 February 2005. Accordingly, the Commissioner accepted that he did not commence an audit of the 2003 year until after 21 February 2005. 387 The issue which remains is whether the applicant disclosed the shortfall amount before commencement of the audit. I accept that a private ruling request can provide the disclosure: see s 284-225 and the Explanatory Memorandum to the A New Tax System (Tax Administration) Bill (No. 2) 2000, para 1.138. In relation to the 6 October 2004 letter, it did not disclose the shortfall amount. So much was conceded by Senior Counsel for the applicants when he described the disclosure as "indirect". 388 That leaves the 18 February 2005 letter. That letter dealt with withholding tax. It did not disclose a shortfall amount for the 2003 year or the deduction that would be claimed in the 2003 year. 389 For these reasons, I do not accept that either read separately or jointly, the 6 October 2004 letter and the 18 February 2005 letter constitute a disclosure of the shortfall amount prior to the commencement of the audit. Accordingly, I do not accept that the 25% penalty should be reduced by 80% of the amount assessed under s 284-225(2) of Sched 1 to the TAA. 390 Finally, there is the question of s 284-225(1) of Schedule 1 to the TAA. The applicants did not contend that they had satisfied s 284-225(1) and, no less importantly, led no evidence in relation to s 284-225(1)(c). I am not satisfied that s 284-225(1) is satisfied.

(5) WITHHOLDING TAX AND PT IVA - CSF 391 A further issue in the proceedings is whether Pt IVA authorised the Commissioner to determine that the dividend paid in 2003 by CSA to CSF in the sum of $222,655,981 was subject to dividend withholding tax under s 128B of the 1936 Act.

(a) Facts 392 The relevant facts have previously been described. For the purposes of this aspect of the appeals, the following events on 15 November 2001 are important: 1. 941 fully paid redeemable preference shares were issued by CSA for A$2,048,565.36 per share to CSF in exchange for a US$1 billion demand note: see [126] above; 2. 941 fully paid redeemable preference shares were issued by AFC for A$2,048,565.36 per share to CSA in exchange for the US$1 billion demand note: see [127] above; 3. AFC endorsed the US$1 billion demand note in favour of CSF and also issued a US$3 billion promissory note in favour of CSF, both in consideration for the purchase of certain royalty streams from CSF: see [128] above; 4. AFC transferred the royalty streams to SGTS in consideration for the issue by SGTS to it of nine shares of Series A preferred stock and 932 Series B preferred stock and the assumption by SGTS of AFC's obligations pursuant to the US$3 billion promissory note in favour of CSF: see [129] above. 393 The terms of the redeemable preference shares issued by AFC and CSA included the following: 1. that each shareholder would be entitled to receive a cumulative preferential dividend out of the profits of the issuer at the rate of 6% of the paid up capital of each share annually on 15 November (the 6% dividend): see [126], [127] and [247] above; 2. that failing payment, the unpaid amount of the dividend would be carried forward to the following year and a default dividend calculated at the rate of 4.5757% per annum of the unpaid amount would become payable to the shareholder: see [126], [127] and [247] above; 3. within 45 days of the fifth anniversary of the issue date, the redeemable preference shares were required to be redeemed for A$1,927,700 per share: see [126], [127] and [247] above. 394 The terms of the Series B SGTS preferred stock instruments provided that dividends were payable out of funds legally available representing the accumulated earnings of the company: Art 3 (see [130(2)] above). The terms of the CSA Preference Shares provided that dividends were payable out of the profits of the company: Art 3.1 (see [126] above). 395 Following completion of the Project Gemini transactions, SGTS, as assignee of the royalty streams, earned substantial royalty income from ITW Inc and Miller calculated as a percentage of the sales of those companies: Year ended 31 December Royalty income 2001 US$190,464,104 2002 US$457,792,740 2003 US$500,586,614

396 On 14 November 2003: 1. SGTS paid a dividend in the sum of A$222,655,981, comprised of: A$108,837,942 Dividend payable but unpaid on 15.11.02. A$4,980,097 Interest payable in respect of the unpaid 2002 accrued dividend. A$108,837,942 Dividend payable on 15.11.03.

2. SGTS and AFC entered into the Dividend Distribution Agreement pursuant to which SGTS issued a promissory note to AFC in the sum of A$222,655,981; 3. AFC and CSA each paid a dividend in the sum of A$222,655,981, respectively to CSA and to CSF comprised of: A$108,837,942 Dividend payable but unpaid on 15.11.02. A$4,980,097 Default dividend payable in respect of the unpaid 2002 accrued dividend liability. A$108,837,942 Dividend payable on 15.11.03.

Payment in each case was effected by the endorsement of the SGTS Promissory Note. 397 On 24 November 2003, the SGTS promissory note was settled in full (along with A$77,311 of accrued interest) via an intercompany wire transfer of cash from SGTS to CSF: see [149] above. 398 On 13 May 2004, the board of directors of SGTS met and resolved that the declaration and payment of the dividend by SGTS on 14 November 2003, along with other miscellaneous actions, was ratified and made the acts and deeds of SGTS. 399 CSA was an Australian company and CSF was a US company.

(b) Withholding tax provisions 400 At all relevant times, the liability of a non-resident to pay withholding tax was determined by Div 11A of Pt III of the 1936 Act and specifically s 128B. 401 On 1 July 2001, amendments to the withholding tax provisions were made following the introduction of the debt / equity rules: New Business Tax System (Debt and Equity) Act 2001 (Cth). As a result of these amendments, amounts payable on the CSA Preference Shares would have been classified as interest instead of dividends and would have been subject to interest withholding tax under the 1936 Act instead of dividend withholding tax. Consequently, pursuant to Div 11A, had the amount been paid by CSA to CSF before 1 July 2003 it would have been subjected to interest withholding tax at a 10% rate. At that time, the US DTA did not affect the liability. 402 From 1 July 2003, the Protocol amending the US DTA came into effect, which had the effect, inter alia, of inserting a new Article 10 in the DTA: see [50] and [134] above. The Protocol was signed on 27 September 2001. However, it did not come into effect as a part of Australian law until 1 July 2003, after the passage of the International Tax Agreements Amendment Act (No 1) 2002 (Cth). 403 The effect of the amendment was to ensure that no tax, including withholding tax, would be payable in Australia on dividends paid to a company resident in the US, where that company beneficially owned 80% or more of the voting power in the Australian company which paid the dividend, and the other requirements of Art 16(2) or (5) were satisfied. 404 Pursuant to the US DTA (as amended by the Protocol), a payment from CSA to CSF would be characterised as a "dividend" because it would be "income from shares" within the meaning of Art 10(6) of the US DTA. That characterisation would override the characterisation in the 1936 Act. Article 10(3) provided that the withholding tax was reduced to nil if Art 10(3) applied. Article 10(3) of the US DTA applied if the person who was beneficially entitled to the dividends was a company that was a resident of the other Contracting State (namely, the US) that had owned 80% of or more of the voting power of the company paying the dividends for a 12-month period ending on the date the dividend is declared. This requirement was satisfied in this case. Accordingly, after 1 July 2003 a payment of the amount by CSA to CSF would be exempt from withholding tax. Indeed, the Commissioner accepted that but for the application of Pt IVA, no withholding tax was payable at the time that CSA purported to pay the dividend to CSF on 14 November 2003. 405 As noted at [134] above, on 11 September 2003, the International Tax Agreements Amendment Bill 2003 (Cth) was introduced. Section 3(2A) provided: After the commencement of this subsection, a reference in an agreement to income from shares, or to income from other rights participating in profits, does not include a reference to a return on a debt interest (as defined in Subdivision 974-B of the [1997 Act]). 406 That had the effect that, as from 5 December 2003, a dividend paid by CSA to CSF would be subject to the interest article in the US DTA, namely Art 11, rather than the dividend article, Art 10. 407 When s 3(2A) is read together with Art 11(2), which provided that "[s]uch interest may be taxed in the Contracting State in which it has its source, and according to the law of that State, but the tax so charged shall not exceed 10 percent of the gross amount of the interest", CSF would have become liable for withholding tax at a rate of 10% from 5 December 2003. There is no equivalent to Art 10(3) in Art 11. 408 Accordingly, as at 14 November 2003, when the dividend payment was purportedly made by CSA to CSF, s 3(2A) of the International Tax Agreements Act was not yet in force and Art 10(3) the US DTA had the effect of relieving CSF from any liability for withholding tax. 409 It is not in dispute that at the time of the payment of the dividend by CSA to CSF on 14 November 2003: 1. section 3(2A) of the International Tax Agreements Act did not yet apply; and 2. Art 10(3) instead applied, and its requirements being otherwise satisfied, the dividend was not subject to tax, or to withholding tax.

(c) Pt IVA of the 1936 Act 410 As noted earlier, the Commissioner submitted that Pt IVA applied to authorise him to determine that the dividend paid in 2003 by CSA to CSF in the sum of $222,655,981 was subject to dividend withholding tax under s 128B of the 1936 Act.

(i) Scheme 411 The scheme for the purposes of s 177A(1) of the 1936 Act was described by the Commissioner as the respective decisions to pay and the actual payment of the following amounts on 14 November 2003: 1. the purported dividend paid by SGTS to AFC; 2. the purported dividend paid by AFC to CSA; and 3. the purported dividend paid by CSA to CSF. 412 CSF did not dispute that the scheme identified by the Commissioner was capable of being a scheme for the purposes of s 177A(1) of the 1936 Act.

(ii) Tax benefit 413 Section 177F(2A) provides that where a tax benefit in the form of the avoidance of withholding tax has been obtained, or would but for that section be obtained, by a taxpayer in connection with a scheme, the Commissioner may determine that the taxpayer is subject to withholding tax under s 128B. 414 Section 177CA provides: (1) This section applies in relation to a particular amount if a taxpayer is not liable to pay withholding tax on an amount where that taxpayer would have, or could reasonably be expected to have, been liable to pay withholding tax on the amount if a scheme had not been entered into or carried out. (2) For the purposes of this Part, if this section applies in relation to an amount, the taxpayer is taken to have obtained a tax benefit in connection with the scheme of an amount equal to the amount mentioned in subsection (1). (Emphasis added.) 415 In the present case, the "amount" is the payment of $222,655,981 by CSA to CSF. The Commissioner contended that CSF received a tax benefit within the meaning of s 177CA in relation to that amount because, in the absence of the scheme which had the effect of bringing the payment forward to 14 November 2003, the amount would have been paid later and withholding tax would have been payable. So, for example, if the amount had been paid by CSA to CSF after 5 December 2003, it would have been subject to withholding tax at 10%. 416 CSF rejected that contention. It submitted that the "amount" referred to in s 177CA is a reference to an actual payment, and not to a hypothetical payment never made. In particular, CSF submitted that s 177CA was premised on the existence of such an amount with the object of attacking arrangements where the form of an actual payment was modified to avoid withholding tax. CSF submitted that its construction of s 177CA was supported by an ordinary and natural construction of the words used in Pt IVA. In relation to its submission that the section was premised on the existence of a pre-existing amount, CSF referred to the following sections: 1. s 177CA which refers to "an amount" in respect of which withholding tax would have been payable if a scheme had not been entered into or carried out; 2. s 177F(2A) which refers to the Commissioner making a determination that the taxpayer is subject to withholding tax "on the whole or a part of that amount"; 3. s 177F(2C) refers to a determination being given to the "person who paid the amount"; and 4. the statutory fiction created by s 177F(2F) is limited to a fiction that withholding tax was always payable in contradistinction to s 177F(2), which does not create a further fiction that a payment was made when one was not in fact made. I accept CSF's contention that the phrase "particular amount" in s 177CA is a reference to the amount of withholding tax avoided by reason of the entry into of the scheme.. 417 CSF also referred to the following extracts from the WHT EM, which introduced s 177CA, as further support for its construction of s 177CA. The WHT EM stated at pars 2.35 and 2.36 as follows: 2.35 New subsection 177CA(1) will specify a particular amount (of interest, dividends or royalties paid to the taxpayer) to which section 177CA is to apply. Such an amount will have both of the following characteristics: · as a result of the entering into or the carrying out of a scheme, the taxpayer is not liable to pay withholding tax on the amount. (The existing definition of 'scheme' contained in section 177A(1) applies to this subsection); and · there is a reasonable expectation that, if the scheme had not been entered into or carried out, then a liability to the taxpayer for withholding tax on that amount, would have arisen. 2.36 Where there is a 'new subsection 177CA(1) amount' new subsection 177CA(2) will apply to designate that amount to be a tax benefit. New subsection 177CA(2) further specifies that the tax benefit is taken to have been obtained by the taxpayer. … (Emphasis added.) 418 CSF submitted that the references to an "amount" in respect of which a liability to pay withholding tax "would have arisen" provided further support for the construction that s 177CA is premised upon the actual payment of an amount to a non-resident. 419 The Commissioner rejected that construction on the grounds that it was contrary to the purpose of the provisions and would lead to the absurd result that s 177CA could have no application to schemes that operate by altering the timing of a payment so as to give rise to a tax benefit. Instead, the Commissioner submitted that provided there is an "amount", in this case $222,655,981, and provided there is a scheme, the entry into of which avoids a liability to pay withholding tax, then s 177CA can apply. 420 In support of that construction of s 177CA, the Commissioner raised four points: 1. CSF's construction was purely grammatical without having regard to the Parliamentary intent of those provisions: cf Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation (1981) 147 CLR 297 at 321 and CIC Insurance Limited v Bankstown Football Club Limited (1997) 187 CLR 384 at 408. 2. it is contrary to Parliament's intention, as expressed in the WHT EM, that s 177CA have a comprehensive operation with respect to schemes to avoid withholding tax. The Commissioner referred to paragraphs 2.2, 2.12 and 2.30 of the WHT EM: 2.2 The purpose of these amendments is to provide a mechanism within the Act to effectively counter withholding tax avoidance arrangements in a general and comprehensive way … 2.12 … to provide a mechanism within the Act to effectively counter withholding tax avoidance schemes in a comprehensive way it has become necessary to expand the effect of Part IVA to include avoidance of withholding tax on an amount of interest, dividends or royalties because of a scheme as defined in Part IVA. … 2.30 New section 177CA will be inserted into Part IVA. This section will extend the operation of Part IVA to arrangements which avoid an amount of withholding tax which would otherwise be levied under s 128B. 3. if CSF's submission was correct, then arguably s 177D(b)(iii) would not be taken into account which would be inconsistent with Parliament's intention that all of the s 177D(b) factors remain relevant to withholding tax schemes as recorded in paragraph 2.41 of the WHT EM: The proposed legislation makes no amendments to section 177D. Its provisions therefore apply without alteration to new section 177CA in the same way as to section 177C. 4. CSF's submission was inconsistent with the way in which withholding tax is levied. The Commissioner submitted that ss 177CA and 177F(2A) contain no reference to years of income because it is not imposed by assessment but by imposing a withholding tax liability with respect to amounts paid with the withholding tax liability automatically becoming a debt owed to the Commonwealth: see ss 128B and 128C of the 1936 Act. Accordingly, it would be inconsistent with the basis on which withholding tax is levied to interpret s 177CA as requiring a particular temporal requirement. 421 In the end it is unnecessary to resolve the dispute. At the time the scheme was entered into (14 November 2003) and at the time the "amount" was paid (24 November 2003), the law did not impose withholding tax on dividends paid by CSA to CSF, nor was there any means to modify the form of the payment of any such dividend to create such a liability. As a result, no counterfactual can be devised or hypothesised whereby it can be concluded that dividend withholding tax would, or might reasonably be expected, to have been payable on a payment made in November 2003. That is because all such dividends, regardless of form, were exempt from tax where the requirements of Art 10(3) were satisfied. Put another way, the obligation to pay dividends annually had existed since November 2001. That obligation was cumulative. The right to further dividends arose on 15 November 2003. There was no suggestion (and nor could there be) that the fact the arrangements were entered into in 2001, or their content, formed part of the scheme. 422 The identification of the scheme is important. The Commissioner contended that the payment was brought forward. The date the obligation fell due (15 November 2003) was established in November 2001 and was not altered. The amount was discharged by the endorsement of a promissory note which was not only due but paid on 24 November 2003. At both 15 and 24 November, the law did not impose withholding tax on dividends paid by CSA to CSF. 423 It is not permissible to assess the existence of a tax benefit by law which was introduced after the payment of the "particular amount". As Hill J decided in CPH Property Pty Ltd v Federal Commissioner of Taxation (1998) 88 FCR 21 at 42: In my view the application of the Part can only be tested with respect to the obtaining of a tax benefit in accordance with the law as applicable to the time the scheme is entered into or carried out. That observation was endorsed by the Full Federal Court on appeal: Commissioner of Taxation v Consolidated Press Holdings Ltd (No 1) (1999) 91 FCR 524 at 552. 424 For these reasons, I do not accept that there is tax benefit to be cancelled pursuant to ss 177CA and 177F of the 1936 Act and Pt IVA does not apply to the scheme identified by the Commissioner.

(iii) Dominant purpose 425 Even if there was a tax benefit (contrary to the view that I have formed), I do not accept that it could be concluded that the dominant purpose of any part of the Commissioner's scheme was to obtain a tax benefit. The following facts are worth restating: 1. the parties entered into arrangements for the funding of an acquisition and sale of certain royalty streams in 2001. For the reasons set out in [293] to [376] above, the dominant purpose of those arrangements was to obtain US state tax benefits and to facilitate protection of ITW Inc's intellectual property; 2. part of those arrangements included the issue by CSA of redeemable preference shares using standard terms for the payment of dividends and for the redemption of the shares after five years. The Commissioner did not submit that the terms used were, to any extent, modified or altered to avoid a liability for withholding tax; 3. the terms of issue of the CSA Preference Shares required the payment of a fixed dividend amount on 15 November each year. That obligation was an expected feature of redeemable preference shares, was cumulative and subject to default dividend interest; 4. in accordance with its terms, a dividend was paid in November 2003: see [135] to [148] above. That dividend included payment of the dividend for the 2002 year (payment had been suspended for one year) and a dividend amount representing interest on the unpaid 2002 dividend. Nothing was done to alter the form or amount of the dividend to avoid withholding tax. 426 Against the background of those facts, I turn to consider the factors in s 177D(b).

Manner 427 The Commissioner submitted that the decision to pay the amount of $222,655,981 was "contrived" to ensure that the payment was made prior to 5 December 2003 after which date withholding tax would have been payable on the payment from CSA to CSF. 428 In support of that contention, the Commissioner referred to the fact that there were not sufficient accumulated earnings for the dividend to be paid by SGTS to AFC: see [139] to [144] above. I accept that there were not sufficient accumulated earnings for the dividend to be paid by SGTS to AFC. However, for the reasons stated at [208] to [213] above, I do not accept that it invalidated the payment of dividends from SGTS to AFC and the subsequent dividends that flowed through to CSF. 429 I accept that the decision to pay the amount of $222,655,981 was made prior to 5 December 2003, after which date withholding tax would have been payable on the payment from CSA to CSF. I do not accept that that decision was "contrived".

Form and substance of the scheme 430 I accept that the economic and commercial substance of the scheme was the three payments on 14 November 2003, namely a payment by SGTS to AFC, a payment by AFC to CSA and a payment by CSA to CSF. I do not accept that the form of the scheme was different from its economic and commercial substance. Why? The premise which underpinned the Commissioner's contention - that no dividend could properly be paid by SGTS to AFC - was contrary to the facts and the law: see [208] to [213] above.

Timing 431 The Commissioner submitted that the timing of the scheme was dictated by two events, without which the scheme would not have proceeded. 432 First, the US DTA came into effect in Australia on 1 July 2003, the Protocol having been signed by the US and Australia on 27 September 2001. Under the US DTA, no withholding tax was payable on dividends where the recipient of the dividends held more than 80% or more of the shares in the paying company. 433 Secondly, the International Tax Agreements Amendment Bill 2003, which was introduced on 11 September 2003, clarified the operation of the dividend provisions of the US DTA, such that amounts treated as a return on a debt interest were not to be characterised as dividends: Explanatory Memorandum, International Tax Agreements Amendment Bill 2003, paragraphs 3.9-3.19 and [402] to [409] above. 434 I accept that the payment by CSA to CSF on 14 November 2003 was, therefore, in the "window" in which no withholding tax was payable. However, I do not accept that the timing is determinative. As the Commissioner submitted, a withholding tax liability is imposed with respect to amounts paid with the withholding tax liability automatically becoming a debt owed to the Commonwealth: see ss 128B and 128C of the 1936 Act. When the dividend was paid, no withholding tax was payable.

Result Achieved by the Scheme 435 The Commissioner submitted that the result but for the scheme was that CSF was not liable to pay withholding tax on the amount of $222,655,981. But that was the law as at the date of the scheme.

Change in financial position of the taxpayer from the scheme 436 The steps in the scheme affected the financial position of CSF. It would have received the gross amount and not the net amount of the dividends. But that was what the law was at the date of the scheme.

Change in financial position of any connected person from the scheme 437 The transactions took place within a wholly-owned group of companies. 438 The scheme had the effect that, within the ITW Group, intra-group liabilities with respect to accrued dividend payments were discharged through the payment of the promissory note. The financial position of the group, when viewed as a whole, is such that the payments (including the relevant payment from CSA to CSF), was altered only insofar as there was a reduction in the withholding tax liability of the group on the dividend payments received by CSF. A reduction that was legally permissible - that was what the law provided at the time of the scheme.

Any other consequences of the scheme for the taxpayer or any connected person 439 The Commissioner accepted that there were no other consequences of the scheme for the taxpayer or any other person and that this factor was neutral.

Nature of connection between the taxpayer and persons affected by the scheme 440 All of the relevant entities are members of the one corporate group, namely the ITW Group.

(d) Conclusion 441 The parties entered into arrangements for the funding of an acquisition and sale of certain royalty streams where the dominant purpose of those arrangements was to obtain US state tax benefits and to facilitate protection of ITW Inc's intellectual property. The arrangements included the issue by CSA of redeemable preference shares using standard terms for the payment of dividends and for the redemption of the shares after five years. It was not suggested that the terms used were, to any extent, modified or altered to avoid a liability for withholding tax. Nor was it suggested that the size of the dividend reflected anything other than an ordinary market return on an instrument of that nature. 442 The terms of issue of the CSA Preference Shares required the payment of a fixed dividend amount on 15 November each year. That obligation was and remains an expected feature of redeemable preference shares. 443 In accordance with the ordinary commercial terms of the CSA Preference Shares, a dividend was paid in November 2003. That dividend included payment of the dividend for the 2002 year (payment had been suspended for one year) and a dividend amount representing interest on the unpaid 2002 dividend. Nothing was done to alter the form or amount of the dividend to avoid withholding tax. Indeed, given that no withholding tax was then payable, nothing could be done to make dividend withholding tax payable on the dividend paid given CSA's ownership by CSF. 444 For these reasons, I do not accept that it could be concluded that any party to the scheme had a dominant purpose of obtaining the alleged tax benefit.

D. CONCLUSION AND ORDERS 445 Given the complexity of the issues in these proceedings, I will direct the parties to bring in orders to give effect to these reasons for decision by 4.00pm on 18 February 2011. I certify that the preceding four hundred and forty-five (445) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gordon.