Rio Tinto Ltd v Commissioner of Taxation

Rio Tinto Ltd v Commissioner of Taxation - [2004] FCA 335 - FCA 2004 case summary — Zoe

[13]

BACKGROUND 1 The following factual background to the matters that fall for decision on the parties' notices of motion is taken from the applicant's counsel's opening. In January 1996 the applicant, formerly CRA Ltd, and RTZ plc, now known as Rio Tinto plc, an English corporation, combined as a dual‑listed company structure. In effect that involved a merger of the two companies. However they remain listed on their respective stock exchanges and retain their separate identities, but operate as if they together own their combined assets. The board of each company is identical. The shareholders of the applicant, being shareholders in an Australian company, remain entitled to receive franked dividends. In the lead up to and promotion of the dual listing, shareholders were informed that the applicant expected to continue to pay twice‑yearly fully franked dividends to its Australian shareholders. After the dual listing it was discovered that the applicant did not have sufficient franking credits to do this. One of the methods the applicant considered in order to supplement its franking credit balance was for it and two of its subsidiary companies to "borrow" shares in companies having surplus credits, and take franked dividends upon the shares while the applicant and the subsidiaries were shareholders. 2 In May 1997 the applicant became registered as the holder of shares in Bankers Trust Australia Ltd (BTA). Fully franked dividends declared in respect of the shares were paid to it while it was a shareholder. The applicant used the franking credits to pay fully franked dividends to its shareholders. A management fee and an assignment fee were payable to BT Investments (Australia) Ltd (BTIA) in connection with the transaction. 3 In his assessments the respondent treated the dividends paid by BTA as fully assessable and non‑rebateable income of the applicant, denied the availability of the franking credits, denied the deductibility of the fees, assessed income tax and franking deficits tax and imposed substantial penalties. The applicant's objections to the assessments were disallowed, and the applicant appealed against the objection decisions by filing applications in accordance with Order 52B of the Federal Court Rules.

[15]

THE STATEMENT 6 On 15 September 2003 the respondent filed a document headed "Respondent's Statement of Facts Issues and Contentions". In the document the applicant is referred to as CRA, its name at the time of the relevant transactions. The document contains this "Preamble": "The respondent relies on section 14ZZO(a) of the Taxation Administration Act 1953 ('TAA53'). The respondent also relies on section 14ZZO(b) of the TAA53 and, save for any facts expressly agreed or admitted in writing, puts the applicant to proof of all facts on which it seeks to rely. The respondent's perception of the facts is primarily derived from documents and information supplied by the applicant and its advisers. For the purpose of identifying the issues in dispute between the parties in these proceedings, the respondent states that, on the information currently available to him, it appears that the facts, issues and contentions are as follows." 7 Under the overall heading "Facts" and the subheading "A. The proceedings" the document records the applicant's appeal against the assessments, and then outlines the transaction referred to in [2]: "2. The issues in the proceedings arise from a 'divided assignment' transaction claimed by CRA to have been carried out by it and completed in Jersey before the time of the Commonwealth Budget at 7:30 PM Australian Eastern Standard time on 13 May 1997 by the execution of transaction documents. 3. Pursuant to the transaction documents CRA paid an assignment fee of $115,000,008.72 ('assignment fee') to BT Investments (Australia) Ltd ('BTIA'), in consideration for the assignment of the rights in respect of a dividend payable by Bankers Trust Australia Ltd ('BTA'). BTA paid an amount of $100,000,007.58 to CRA. 4. Pursuant to the transaction documents CRA asserts it became a shareholder in BTA by reason of registration on the BTA share register for approximately 2 hours in circumstances where CRA was from the outset contractually bound to retransfer its interest in the relevant shares and to be removed from the BTA share register, and was so removed. CRA claims that the amount of $100,000,007.58 derived by it was derived by it as a shareholder in BTA and the amount was a dividend. CRA did not obtain the attributes of a shareholder in a company, such as exposure to the risks and benefits of ownership, management, control or physical custody of scrip. 5. CRA claims to have realised a predetermined cash loss of $15,082,500.42 as a result of the transaction documents. CRA did not obtain any commercial benefit from the dividend assignment transaction. CRA claims to have obtained tax benefits. In the absence of the availability of such tax benefits, CRA would not have undertaken the dividend assignment transaction." 8 The document then recites the claims made in the applicant's objections to assessment, the respondent's decisions on the objections, and determinations made by the respondent under s 177F(1)(b) of the Income Tax Assessment Act 1936 (ITAA36) that various amounts should not be allowable as a deduction. 9 Under the subheading "B. The entities and the persons involved" the document first identifies the members of the CRA group consisting of CRA and its subsidiaries. It records the dual listing arrangement between the applicant and RTZ plc (commonly referred to as RTZ‑CRA). It then identifies other parties involved in the transaction: BTA, BTIA, Bankers Trust Company (BTCo), Campbell Investment (Australia) Pty Ltd, Campbell Investment Company, Barclays de Zoete Wedd Ltd, Mourant Du Feu Jeune (Mourant), the last being lawyers in Jersey.It then names the CRA group individuals who appeared to the respondent to have played a significant role in the planning and implementation of the arrangement. 10 The next subheading is "C. Background to the CRA group dividend assignment transactions". The sixteen paragraphs under this heading contain summaries of and quotations from various CRA group documents relating to:

[39]

Issues Respondent's contentions

Whether the amount of $100,000,007.58 received by the applicant was a dividend for the purposes of s 44 of the ITAA36. No
Whether the amount of $100,000,007.58 received by the applicant was assessable income under s 6‑5 of the ITAA97. Yes
Whether the amount of $100,000,007.58 was received by the applicant in the capacity of a trustee. Yes
If the amount of $100,000,007.58 was received by the applicant as a dividend for the purposes of s 44 and s 46(1), whether s 46(12) denied the entitlement to a rebate under s 46. Yes
If the amount of $100,000,007.58 was received by the applicant as a dividend for the purposes of s 44: 1. Whether that dividend was a dividend to which s 46A applied Yes (b) What was the amount of the dividend rebate to which the applicant was entitled pursuant to s 46A? Nil
If the amount of $100,000.007.58 was received by the applicant as a dividend for the purposes of s 6 and thus was a 'frankable dividend' within s 160APA ITAA36: (a) Whether that dividend arose out of, or was made in the course of, a scheme that was by way of or in the nature of dividend stripping or had substantially the effect of a scheme by way of or in the nature of dividend stripping for the purposes of ss 160APHA and 160APP of the ITAA36? Yes (b) What was the amount of the credit to the applicant's franking account pursuant to s 160APP of the ITAA36? Nil
Whether the payment of $115,000,008.72, or any part thereof, made by the applicant and described as a dividend assignment fee was an allowable deduction under s 8‑1 of the ITAA97. No
Alternatively, if the payment of $115,000,008.72, or any part thereof, made by the applicant was an allowable deduction under s 8‑1, whether that deduction constituted a tax benefit obtained in connection with a scheme to which Pt IVA of the ITAA36 applies. Yes
Alternatively, whether the transaction gave rise to a loss of $15,082,500.42 which was deductible under s 8‑1 of the ITAA97. No
Whether the payment of $82,500.00 made by the applicant and described as a management fee was an allowable deduction under s 8‑1 of the ITAA97. No
Alternatively, if the payment of $82,500.00 for management fees made by the applicant was an allowable deduction under s 8‑1, whether that deduction constituted a tax benefit obtained in connection with a scheme to which Pt IVA of the ITAA36 applies. Yes
Whether the level of additional tax by way of penalties has been correctly imposed and remitted? Yes

[67]

19 The respondent took issue with the applicant's "pleadings" submission recorded in [16]. It was said to be inconsistent with the language of Order 52B rule 5. The statement is to be a succinct outline of the "Commissioner's contentions and the facts and issues in the appeal as the Commissioner perceives them". In most cases the respondent, not having been a participant in the relevant factual events, will have an imperfect knowledge of those events. It was submitted that it was doubtless for that reason that it is the Commissioner's perception of the facts and issues that is to be succinctly outlined. 20 It was then said that the applicant's contentions are not supported by any decision of the Court, and are inconsistent with the observations of Hill J in Evans v Federal Commissioner of Taxation (1989) 89 ATC 4540 at 4544 that the practice of the Court, before the introduction of Order 52B, requiring the parties to file a statement of issues, was a "less formal procedure" for defining the issues "than would be involved in the filing of pleadings". 21 The respondent also contended that the applicant's stance is inconsistent with the long‑standing practice of making provision in orders for the applicant to request particulars of the respondent's statement. That provision was made in the present case. Before the applicant was required to file its own statement, it is entitled to ask the respondent for further and better particulars of his statement. Here, however, the applicant requires the respondent to anticipate all matters that might be the subject of a request for further particulars, and provide them in the initial statement. It was then said that it is inappropriate to impose pleading type obligations on the respondent, because he has only second‑hand, hearsay knowledge of the relevant transactions. Finally it was submitted that the applicant's stand was inappropriate when it, having the burden of proof, has given no indication as to the nature of its case, or the means by which it proposes to discharge that burden, with the result that neither the Court nor the respondent knows what matters are ultimately likely to be in dispute in the proceeding.

[72]

"If, as is the case in the present matter, there is more than one such matter upon which the Commissioner's state of mind is of the essence of the assessment, the Commissioner should arrive at and record his satisfaction or lack of it as to each of these matters along with its factual basis. It should not be left as it is in the present case for the court to draw inferences as to whether such a matter was considered by the Commissioner, and, if it was, as to what [was] his relevant state of mind with respect to it. Further, … the Commissioner must expose to the taxpayer, particularly if so requested, both his state of mind at the relevant time and its basis." 24 In Evans v Federal Commissioner of Taxation (1989) 89 ATC 4540 at 4544 Hill J, referring to the pre‑Order 52B practice of ordering a statement of issues, described the practice as "a less formal procedure than would be involved in the filing of pleadings to define the issues". In Saffron v Federal Commissioner of Taxation (1991) 22 ATR 131, decided before the introduction of Order 52B, Beaumont J said at 135: "Strictly speaking, we are not here concerned with a formal pleading. This is an informal pleading ordered pursuant to the court's general powers to give directions with a view to identifying the real questions in dispute …. The statements of facts, issues and contentions may not be pleadings in a technical sense. But they are intended to serve the same purpose as pleadings, that is, to identify the real issues." 25 In Bartlett v Federal Commissioner of Taxation (2003) 54 ATR 261 at 265 Hill J said: "The court should be able to expect that the issues stated by the parties properly reflect the matters which are to be raised in a tax appeal where the Statement of Facts, Issues and Contentions are intended to take the place of pleadings so that both parties to the litigation know what the case is which they have to meet. Particularly a taxpayer should know in advance what construction of a section is to be advanced by the Commissioner if that construction differs from the construction which the taxpayer has clearly adopted." 26 The respondent asserted that, as a result of the usual provision in taxation directions that the taxpayer be at liberty to seek further particulars, it has become the accepted practice that "matters such as the identification of the steps involved in an alleged Part IVA 'scheme' occur through the provision by the Commissioner of a response to an appropriate request provided by the taxpayer". As the respondent pointed out, that appears to have happened in Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359. It may be doubted, however, whether there is any accepted practice. The applicant pointed to four recent Part IVA cases in which the steps were identified in the statement itself. See Binetter v Federal Commissioner of Taxation (2003) 53 ATR 646, Bridgestone Australia Ltd v Federal Commissioner of Taxation (2002) 51 ATR 449, Federal Commissioner of Taxation v Mochkin (2003) ATC 4272 and Spassked Pty Ltd v Federal Commissioner of Taxation (2003) ATC 4184. 27 The applicant called in aid the extrajudicial observations of Beaumont J in Anatomy of a Federal Court Tax Case (2000) UNSW Law Journal 237 at 238‑239. Having described the Statement of Facts, Issues and Contentions as the "central point of reference in every tax appeal", his Honour said: "The Statement is divided into three distinct parts as follows: · First, a comprehensive statement of the facts, including background or historical facts, which the particular party, in accordance with its own professional advice, contends ought to be found by the Court. … … the Crown is expected to act, and does act, as a 'model' litigant, so that it may be anticipated that the Commissioner's response to the taxpayer's statement of facts will not seek to put in issue facts which the Commissioner ought not to place seriously in question. … · Thirdly, the statement of contentions is also a novel feature …. Under the modern system of pleading, propositions of law need not be pleaded. Rather, what is required of modern pleading is no more than a statement of the facts relied upon to establish the cause of action asserted. However, in a tax appeal the statement of contentions of the party concerned must propound all the necessary ingredients of the claim for which, as a matter of legal substance, that party contends …." These observations are the source of the applicant's submission at [16].

[99]

"In considering whether the payment of a dividend (in this subsection referred to as the 'relevant dividend') by the relevant company arose out of, or was made in the course of, a transaction, operation, undertaking, scheme or arrangement by way of dividend stripping, the Commissioner shall take into consideration: (a) whether the effect of the payment of the relevant dividend by the relevant company to the shareholder, or the effect of that payment and of the payments of any other dividends that have been or are likely to be made by the relevant company to the shareholder has been, or would be, to reimburse the shareholder wholly or substantially for the amount or amounts paid by him in respect of the acquisition of any relevant property; (b) whether the value of any relevant property immediately after the time when the relevant dividend was paid was substantially less than the value of that relevant property at the time when it was acquired by the shareholder and, if so, whether the reduction in value was wholly or mainly attributable to the payment of a dividend to the shareholder by the relevant company; (c) whether the right to receive dividends in respect of any relevant property consisting of shares in the relevant company is, by reason of any provision in the constituent document of the company or of any agreement, limited as to the total of the amounts that may be paid as dividends in respect of the shares or as to the source of the profits from which, or the period during which, dividends may be paid in respect of the shares; and (d) any other relevant matters." 40 In arriving at the conclusion that s 46A applies, the Commissioner must have been satisfied that the dividend arose out of, or was made in the course of a transaction etc by way of dividend stripping. And he must have reached that state of satisfaction after having taken into consideration the matters listed in s 46A(3). But there is no mention in the document of any facts or matters that form the basis for the respondent's state of mind. I refer to Barwick CJ's judgment in Kolotex quoted at [23]. Nor is there any reference to the sub‑s (3) matters - either whether those in pars (a), (b) and (c) existed or whether any other matters were taken into consideration under par (d). Nor is there any statement of the facts or matters that led the respondent to conclude that the correct amount of the dividend rebate was nil (see Issue 5(b)).

[118]

PART IVA 50 The document records in pars 9 to 11 the making of determinations under s 177F(1)(b) that the amounts of $100,000,007.58, $82,500.00 and $15,000,001.14, being tax benefits referable to a deduction being allowable should not be allowable. There is no other express reference to Part IVA in the "Facts" part of the document, other than in par 8. Issues 8 and 11 relate to the three s 177F(1)(b) determinations referred to above: the first and third amounts together totalling the $115,000,008.72 the subject of Issue 8, and the other being the amount in Issue 11. 51 As appears from [14], the respondent of his own volition provided particulars of the contention that Part IVA was activated by the transaction. As appears from [26] there was some disagreement as to whether in cases where the respondent relies on Part IVA there is a practice that information be provided by way of particulars rather than in the Order 52B statement. I can see no justification in a case raising Part IVA for not including the facts and contentions relating to that issue in the statement itself. It is true that Part IVA will often be the respondent's alternative case. But as I have said in another connection, it is just as important for the taxpayer to know how an alternative case is put as it is to know the primary case. 52 The material in the particulars is in some respects deficient. There is no assertion by the respondent that it should be concluded from the purposes of s 177D that a party to the scheme alleged entered into or carried out the scheme, or part of it, for the sole or dominant purpose of enabling the applicant to obtain a tax benefit in connection with the scheme. That can perhaps be inferred in the circumstances. However, it should be stated so as to highlight the consequential need for a statement of the facts upon which reliance is placed to support the conclusion required by s 177D. See Bridgestone at [24] and cf Federal Commissioner of Taxation v Casuarina Pty Ltd (1971) 127 CLR 62 at 72. 53 Section 177D refers to the conclusion that "the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme". The particulars do not identify which party or parties had the requisite purpose. 54 Complaint was made by the applicant about the description of the persons who entered into the scheme. See pars (b) and (c) of the description at [14]. It was contended that the parties must be named. See Bridgestone at [18]. The respondent goes some way towards satisfying this requirement by adding to the general description of the persons involved a list of ten corporations and seven individuals who entered into or carried out the scheme. However their names are introduced by the words "Without limiting the generality of the above". It would have been preferable for the document to have said that on the information available to the respondent, the persons who entered into or carried out the scheme were the named persons. The document reserves the respondent's position to amend the particulars in the light of later acquired information. 55 Section 177F(1)(b) confers a discretion on the respondent to determine that a deduction should be disallowed. The facts relied upon for the exercise of the discretion should be disclosed.

[123]

CONCLUSION 58 The amended document filed on 24 October 2003 falls seriously short of the statement contemplated by Order 52B rule 5(a)(v). The most important deficiency is the absence of any stated basis for the contentions in the table of Issues and Contentions. The issues are sufficiently stated, save for the omission of clear identification of alternative cases. But more is required than a "Yes" or "No" answer to the question posed by each issue. I share Beaumont J's extrajudicial view at [27] that the statement of contentions "must propound all the necessary ingredients of the claim for which, as a matter of legal substance, that party contends". It is now well‑established that the statement takes the place of pleadings so that after the exchange of statements the parties to a tax appeal know the case each has to meet. A statement that leaves a taxpayer uncertain as to how the case is put against it is embarrassing and oppressive. A statement that does not disclose the facts on which the respondent has based his assessment and the manner in which he has arrived at it, suffers from these twin vices. I have identified in my consideration of the Issues the deficiencies in these respects. I do not consider they can be remedied by ordering further particulars or by leaving the matter to be resolved by a request for further particulars under par 5 of the consent order of 5 September 2003. The mechanism contemplated by that paragraph has its place to supplement or fill out a statement that constitutes a genuine attempt to comply with the requirements of rule 5, but suffers from insufficient detail. But refuge cannot be found in the customary order for further and better particulars in a case such as the present that is structurally wanting in important respects. I have expressed the view that facts and contentions in relation to a Part IVA case should be contained in the rule 5 statement, even when reliance on Part IVA is the respondent's alternative case. Had the material in the Part IVA particulars letter of 4 November 2003 appeared in the amended document of 24 October 2003, the gaps in it may have been capable of being filled by particulars. 59 I am conscious that much of the information missing from the statement is available to the applicant in the documents referred to at [56]. I have taken this into account in exercising my discretion as to the order to be made under Order 41 rule 5 or under the inherent jurisdiction. However, as I have indicated earlier, Order 52B was made in the knowledge that it will have been preceded by the respondent's decision on a taxpayer's objection, and I am unable to conclude that this provides a reason for not making the order I would otherwise make. 60 I will order that within 28 days the respondent file and serve a Statement of Facts, Issues and Contentions in compliance with Order 52B rule 5, and that the document filed on 15 September 2003 entitled "Respondent's Statement of Facts Issues and Contentions" and that filed on 24 October 2003 entitled " Respondent's Amended Statement of Facts Issues and Contentions" be removed from the Court file. 61 While the applicant claims that the documents that have been filed do not disclose the case mounted against it, the claim rings somewhat hollow. I have considered whether the fact that most of the information that is not contained in the documents filed is otherwise in the applicant's possession should be reflected in the order for costs. However I have concluded that it should not. The statement takes the place of pleadings, and an appellant taxpayer is by the Rules entitled to have a proper statement just as much as a respondent is entitled to pleadings disclosing the case against it. It is no answer to the requirement for a statement of claim that the respondent well knows aliunde the case against him. The applicant should not suffer a penalty for insisting on its right to a proper statement. I certify that the preceding sixty-one (61) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Sundberg.

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