Singapore Telecom Australia Investments Pty Ltd v Commissioner of Taxation

INTRODUCTION 1 The issues to be determined in this proceeding concern the transfer pricing provisions of taxation legislation. Specifically, the issues concern the application of those provisions to a Loan Note Issuance Agreement (the LNIA) between: (a) the applicant, Singapore Telecom Australia Investments Pty Ltd (STAI), a company incorporated and resident in Australia, as issuer of loan notes; and (b) Singtel Australia Investment Ltd (SAI), a company incorporated in the British Virgin Islands and resident in Singapore, as subscriber. 2 Both STAI and SAI are, and were at all material times, ultimately 100% owned by Singapore Telecommunications Ltd (SingTel), a Singapore-resident publicly listed company. 3 The immediate commercial context of the LNIA included the following. In June 2002, SAI sold 100% of the issued capital of Singtel Optus Pty Ltd (SOPL) to STAI, in consideration for approximately $14.2 billion. (References in these reasons to "$" are to Australian dollars unless otherwise indicated.) The consideration was satisfied (as to $9 billion) by STAI issuing ordinary shares to SAI and (as to approximately $5.2 billion) by STAI issuing loan notes under the LNIA to SAI. As a result of the transaction, and another transaction on 28 June 2002, STAI became a wholly-owned subsidiary of SAI. 4 The LNIA was entered into on 28 June 2002. It was subsequently amended by the following agreements: (a) an agreement dated 31 December 2002 (the First Amendment); (b) an agreement dated 31 March 2003 (the Second Amendment); and (c) an agreement dated 30 March 2009 (the Third Amendment). 5 Pursuant to the LNIA as originally entered into, on 28 June 2002 STAI issued ten loan notes (the Loan Notes) totalling approximately $5.2 billion to SAI. Each Loan Note was redeemable at any time, and the maximum period for an advance was the period commencing on the first day on which interest accrued on the advance and ending on the last day of the tenth year following the year in which the advance was made. The interest rate under the LNIA as originally entered into was the 1 year Bank Bill Swap Rate (BBSW) plus 1% per annum. The applicable rate was the interest rate multiplied by 10/9. 6 The First Amendment amended the LNIA by providing that the maturity date in respect of a Loan Note could not be later than the tenth anniversary of the issue date less one day. The amendment was expressed to have effect from the date when the LNIA was originally entered into (28 June 2002). The First Amendment attracted little attention in the course of submissions in the present case, and does not appear to be particularly significant for present purposes. 7 The Second Amendment amended the LNIA by making the accrual and payment of interest contingent on certain benchmarks being met. The amendment agreement also increased the applicable rate by adding a premium of 4.552%. Again, the amendment was expressed to have effect from the date when the LNIA was originally entered into. 8 The Third Amendment changed the interest rate by replacing the 1 year BBSW with a fixed rate of 6.835%. The applicable rate therefore became: (a) the interest rate (6.835% plus 1%) multiplied by 10/9; plus (b) the premium (4.552%). This produced an applicable rate of 13.2575%. 9 In October 2016, the respondent (the Commissioner) made determinations under Div 13 of the Income Tax Assessment Act 1936 (Cth) (the ITAA 1936) and under Subdiv 815-A of the Income Tax Assessment Act 1997 (Cth) (the ITAA 1997) relating to STAI and in respect of the years ending 31 March 2010, 2011, 2012 and 2013 (in lieu of the years of income ending 30 June 2010, 2011, 2012 and 2013). The determinations under Div 13 and under Subdiv 815-A were in the alternative to the other. 10 The Commissioner issued notices of amended assessment to STAI in respect of the years ended 31 March 2011, 2012 and 2013. Although determinations were made for four years, the effect of each determination for the year ending 31 March 2010 was a reduction in carry forward losses. Consequently, that adjustment was reflected in the amended assessment for the year ending 31 March 2011, which gave effect to the determinations for the years ending 31 March 2010 and 2011. 11 The following table, which is based on a table set out in STAI's written submissions, sets out key details regarding the actual interest paid by STAI to SAI in the years ending 31 March 2010, 2011, 2012 and 2013 and the deductions denied by the Commissioner's determinations: Year ending Actual interest paid Interest determined to be deductible Denied Deductions Increased taxable income/ decreased loss 31 March 2010 $1,022,939,526 $1,020,198,432 $2,741,094 $2,741,094 31 March 2011 $898,998,264 $423,994,155 $475,004,109 $475,004,109 31 March 2012 $669,769,864 $333,813,495 $335,956,369 $335,956,369 31 March 2013 $162,141,041 $81,068,245 $81,072,796 $81,072,796 Total $894,774,368 $894,774,368

12 In December 2016, STAI lodged objections against the amended assessments. In September 2019, the Commissioner disallowed STAI's objections. 13 STAI appeals to this Court pursuant to Pt IVC of the Taxation Administration Act 1953 (Cth) against the Commissioner's objection decisions. 14 Although the case involves both Div 13 of the ITAA 1936 and Subdiv 815-A of the ITAA 1997, the focus of argument on both sides was on Subdiv 815-A of the ITAA 1997. 15 The main issues to be determined under Subdiv 815-A can be summarised as follows. Under s 815-15(1) (set out later in these reasons), an entity (here, STAI) obtains a "transfer pricing benefit" if the matters set out in paragraphs (a) to (d) of s 815-15(1) are satisfied. Those paragraphs refer to the following facts and matters: (a) the entity is an Australian resident - here, there is no issue that STAI is and was at all relevant times an Australian resident; (b) the requirements in the "associated enterprises article" for the application of that article to the entity are met - here, the relevant article is Art 6 of the Agreement between Australia and Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, and the protocols to that agreement (the Singapore DTA) (set out below) and the relevant requirements are: (i) an enterprise of one of the Contracting States participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State - here, there is no issue that SAI (which is resident in Singapore) participated directly in the management, control and capital of STAI (which is resident in Australia) in each of the relevant years; (ii) conditions operate between the two enterprises in their commercial or financial relations which differ from those which might be expected to operate between independent enterprises dealing wholly independently with one another - this is one of the issues to be addressed; it will be referred to as the Conditions Issue; (c) but for the conditions mentioned in the associated enterprises article, an amount of profits might have been expected to accrue to the entity; and, by reason of those conditions, the amount of profits has not so accrued - this is another issue to be addressed; it will be referred to as the Profits Issue; and (d) had that amount of profits so accrued to the entity, the amount of the taxable income of the entity for the income year would be greater than its actual amount, or the amount of a tax loss of the entity for an income year would be less than its actual amount - this matter is consequential on the issues identified above. 16 STAI contends, in summary, that its actual cost of borrowing under the LNIA was not greater (and in fact was significantly less) than the costs that a party in STAI's position might be expected to have paid to an independent party acting wholly independently so as to achieve the same cash flow advantages as STAI actually achieved. Specifically, STAI contends that the effective credit spread of the LNIA over the life of the LNIA (which its expert witness, Mr Charles W Chigas, calculates to have been 144 basis points (bps) plus a withholding tax gross-up) is lower than the credit spread that might reasonably be expected to have been agreed in an arm's length debt capital markets (DCM) transaction between independent parties. 17 The principal difficulty with STAI's approach, in my respectful opinion, is that it departs too far from the actual transaction and the characteristics of the parties to that transaction, and thus departs from the approach required under Subdiv 815-A. The actual transaction involved a vendor and a purchaser of shares, and an issue of loan notes totalling approximately $5.2 billion by way of partial consideration for the acquisition of the shares. It did not involve a DCM bond issue. Further, I consider there to be significant differences between the terms of the LNIA and the terms of a typical DCM bond issue. A second difficulty with STAI's approach is that it involves the calculation (in hindsight) of the effective credit spread of the LNIA, and a comparison of this credit spread with that of an STAI-issued DCM bond issue, rather than an approach which focuses on what independent parties in the positions of SAI and STAI, dealing independently with each other, might be expected to have agreed in June 2002, and at the time of each relevant amendment to the LNIA. 18 For the reasons set out below, I have concluded as follows: (a) In relation to the Conditions Issue, I have concluded that conditions were operating between STAI and SAI in their commercial and financial relations which differed from those which might be expected to operate between independent enterprises dealing wholly independently with one another. The conditions are described later in these reasons. (b) In relation to the Profits Issue, I have concluded that a reliable hypothesis is that independent parties in the positions of SAI and STAI (and SingTel) might have been expected to have agreed in June 2002 that: the interest rate applicable to the loan notes would be the 1 year BBSW plus 1%, with the resulting amount grossed-up by 10/9 (that is, the same rate as was actually agreed in the original LNIA); interest under the loan notes could be deferred and capitalised; and, there would be a parent guarantee from a company like SingTel of the obligations of the company in the position of STAI. Further, having agreed to a transaction with these components in June 2002, a reliable hypothesis is that independent parties in the positions of SAI and STAI would not have agreed to make the changes contained in the Second or Third Amendments. The Commissioner has provided calculations of the interest that would have been payable for each year of the life of the LNIA on the assumption that the interest rate was the rate originally agreed by the parties and on the further assumption that the Second and Third Amendments did not take place. These calculations are set out in the "No Amendment Model" in calculations prepared by Mr Gregory Johnson, an expert witness called by the Commissioner, dated 8 August 2021 titled "STAI Alternative No Bridge and No Amendment Assumptions" (exhibit R4) (Mr Johnson's Further Calculations). A copy of the No Amendment Model is annexed as Annexure D to these reasons. On the basis of these calculations, I have concluded that, for each of the years ended 31 March 2010, 2011, 2012 and 2013, but for the conditions referred to in (a) above, an amount of profits might have been expected to accrue to STAI; and that, by reason of those conditions, the amount of profits has not so accrued. 19 It follows from those conclusions that STAI has not demonstrated that the amended assessments are excessive.

THE HEARING AND THE EVIDENCE 20 Due to restrictions in place during the COVID-19 pandemic, the hearing of this proceeding took place by video-conference, using Microsoft Teams. 21 The hearing was conducted with an electronic Court Book. This was supplemented with additional documents (also in electronic form). 22 STAI called one lay witness, Mr Paul O'Sullivan (Mr O'Sullivan), the Chairman and a director of SOPL. Mr O'Sullivan was the Chief Operating Officer of SOPL from September 2001 to August 2004. He was the Chief Executive Officer of SOPL from September 2004 to March 2012. He was a director of STAI from 27 September 2004 to 8 October 2014. Mr O'Sullivan's evidence-in-chief was largely contained in an affidavit dated 28 May 2020. Mr O'Sullivan also gave some additional oral evidence-in-chief. Mr O'Sullivan was cross-examined. Mr O'Sullivan gave evidence in a clear and straightforward manner. He demonstrated a good command of the material. 23 STAI called the following expert witnesses: (a) Dr William J Chambers, in relation to credit rating; and (b) Mr Charles W Chigas, primarily in relation to DCM matters, but also in relation to credit rating. 24 The evidence relating to credit rating was, in effect, one of the 'inputs' for the purposes of the DCM evidence. That is because the DCM evidence discussed a hypothetical DCM transaction by STAI (or a company in STAI's position). In order to consider the interest rate for that transaction, it was necessary to consider the credit rating of STAI (or the company in STAI's position). 25 The Commissioner called the following expert witnesses: (a) Mr Robert A Weiss, in relation to credit rating; and (b) Mr Gregory Johnson, in relation to DCM matters. 26 In relation to credit rating, Mr Weiss and Dr Chambers each prepared a report. Mr Chigas also referred to credit rating in his reports. In addition, a joint report was prepared by Dr Chambers, Mr Weiss and Mr Chigas dated 27 January 2021 (the Joint Credit Rating Report). These three witnesses gave evidence concurrently in relation to credit rating. 27 In relation to DCM matters, Mr Chigas prepared an initial report and a reply report, and Mr Johnson prepared a report. A joint report on DCM matters dated 26 January 2021 was prepared by Mr Chigas and Mr Johnson (the Joint DCM Report), and they gave evidence concurrently in relation to DCM matters. 28 I will outline the qualifications of the experts, and discuss their evidence, later in these reasons.

BACKGROUND FACTS 29 There is no real dispute about the background facts, which are set out in this section.

Corporate entities 30 SingTel is, and was at all material times, a publicly listed company resident in Singapore, principally engaged in the operation and provision of telecommunications systems and services. 31 On 1 May 2001, SAI was incorporated in the British Virgin Islands. It was resident in Singapore. At all material times, it was owned 47.59% by SingTel and 52.41% by Singapore Telecom Mobile Pte Ltd (Mobile), a company resident in Singapore and wholly owned by SingTel. 32 On 3 May 2001, STAI was incorporated in Australia. It is, and was at all material times, an Australian resident.

SAI's acquisition of CWO (2001) 33 Prior to October 2001, Cable & Wireless Optus Ltd (CWO) operated a telecommunications business known as "Optus" in Australia. Approximately 52% of the shares in CWO were held by a subsidiary of Cable & Wireless plc (C&W Plc). The balance was held by numerous public shareholders. 34 In March 2001, SingTel submitted a non-binding offer to C&W Plc to acquire 52% to 100% of CWO and was selected as the preferred bidder for CWO. 35 On 25 March 2001, SingTel entered into an Implementation Agreement with CWO with respect to implementing a transaction under which all CWO shareholders would be invited by the bidder (a non-Australian subsidiary of SingTel or SingTel itself) to dispose of their CWO shares, and SingTel then announced to the market that it had reached agreement with CWO on the terms of an offer to acquire CWO. This agreement was subsequently amended on 18 May 2001 (as so amended, referred to in these reasons as the Implementation Agreement). 36 Under the terms of the Implementation Agreement, SingTel was required (among other things): (a) to nominate a bid vehicle that was not an Australian resident, which was to make an offer to all CWO shareholders to acquire their shares on the terms set out in the Implementation Agreement; (b) to include alternative mechanisms for the disposal by a CWO shareholder of its CWO shares, including an option to have all or any of its shares bought back by CWO under a share buy-back; and (c) in the case of CWO shareholders who elected to take the buy-back alternative, to lend on a subordinated and interest-free basis to CWO the funds necessary for CWO to pay the price payable by CWO to its shareholders under the share buy-back. 37 On 18 May 2001, SingTel, through SAI, made a takeover offer for CWO. 38 On 20 August 2001, SAI and STAI entered into an option agreement (the Option Agreement) under which: (a) STAI was granted a call option to purchase CWO shares from SAI; and (b) SAI was granted a put option to sell the CWO shares to STAI. 39 The price of the CWO shares under the call option and the put option was the sum of the amount shown in SAI's accounts as the average price paid by SAI for the CWO shares, plus the incidental costs (such as transaction costs and interest) to SAI of acquiring and holding the CWO shares. 40 On 23 October 2001, SAI acquired 100% of the issued shares in CWO (comprising 2,143,668,118 ordinary shares, after deducting the shares bought back). 41 On 30 October 2001, the subordinated loan advanced by SingTel to CWO to fund the share buy-back was converted to 1,643,098,304 ordinary shares in CWO issued to SAI, which was equal to the number of CWO shares bought back by CWO. 42 The total consideration paid by SAI to acquire the 3,786,766,521 ordinary shares in CWO was S$13,002.4 million (approximately $14 billion), comprising: (a) S$7,225.9 million (approximately $7.8 billion) in cash; (b) S$4,559.9 million (approximately $4.9 billion) in SingTel ordinary shares; and (c) S$1,236.6 million (approximately $1.3 billion) in fixed rate securities. 43 To fund its acquisition of CWO, SAI obtained $3.5 billion in debt from SingTel and $10.484 billion in equity contributions from SingTel, either directly or via Mobile. 44 SingTel in turn obtained the funds required to fund SAI's acquisition of CWO (including the subordinated loan that SingTel made to CWO under the Implementation Agreement), as follows: (a) a S$1 billion (approximately $1.14 billion) issue of 5 year bonds with a coupon rate of 3.21%, issued on 15 March 2001; (b) a $3 billion short-term bridge facility obtained on 11 May 2001 for a term of 6 months (with options to renew for a further 6 months); (c) approximately US$700 million in 5 year and 7 year US bonds, issued on 6 September 2001, offered as part of the consideration for the takeover of CWO. 45 In late September and early October 2001, before completion of the acquisition of CWO SingTel identified that it needed to raise additional funding totalling approximately S$4.85 billion or US$2.8 billion (approximately $5.6 billion) in order to refinance the $3 billion short-term bridge facility (referred to above) and meet certain other commitments, and decided to raise that amount by putting in place new borrowings with an average debt maturity of 8 years. 46 In October 2001, shortly after the acquisition of CWO was completed, SingTel had a Standard & Poor's (S&P) credit rating of AA-. 47 It is convenient at this point to set out the rating scales of both S&P and Moody's, which are well-known rating agencies. Details of their rating scales are set out in the following table, which is based on Table 3 of the Joint Credit Rating Report: S&P and Moody's Rating Scales S&P Moody's Rating Category S&P Moody's Rating Category AAA Aaa Investment Grade BB+ Ba1 Non- Investment Grade AA+ Aa1 BB Ba2 AA+ Aa2 BB- Ba3 AA- Aa3 B+ B1 A+ A1 B B2 A A2 B- B3 A- A3 CCC+ Caa1 BBB+ Baa1 CCC Caa2 BBB Baa2 CCC- Caa3 BBB- Baa3 CC Ca C C D

48 The levels in the rating scales are referred to as "notches". 49 In November 2001, SingTel made a US$2.3 billion global bond issue, which was used to refinance short-term borrowings, including the $3 billion short-term bridge facility. 50 Following SAI's acquisition of CWO (on 23 October 2001), CWO changed its name to Singtel Optus Ltd (on 30 October 2001) and then to Singtel Optus Pty Ltd (referred to as "SOPL" in these reasons) (on 13 December 2001). 51 Following the acquisition, SOPL's credit rating was upgraded by S&P and Moody's to A+ and A2 respectively. I note that these ratings do not correspond with each other in the table set out in [47] above. The expert evidence was that, as at 2002, there was a split of one notch as between S&P and Moody's, with the Moody's rating being one notch lower than the S&P rating.

The period December 2001 to June 2002 52 In or around December 2001, a decision was made within SingTel that SAI would exercise the put option in the option agreement. 53 By 11 March 2002, Optus Finance Pty Ltd (a wholly-owned subsidiary of SOPL) had applied to refinance its syndicated bank facility of $2 billion (which was due to mature in December 2002) on the basis that SingTel would provide a guarantee. 54 In May 2002, Optus Finance Pty Ltd entered into a $2 billion bank facility (with a guarantee from SingTel). There is no evidence that SingTel charged Optus Finance Pty Ltd a fee for the provision of the guarantee. 55 In April 2002, the SingTel Board formally approved the decision that SAI would exercise the put option in the Option Agreement.

STAI restructure and entry into the LNIA (28 June 2002) 56 On 28 June 2002, SAI exercised the put option under the Option Agreement and STAI acquired all the issued shares in SOPL for a price of approximately $14.2 billion. This was satisfied by: (a) $9 billion of equity issued by STAI to SAI; and (b) approximately $5.2 billion of debt, by way of issue of the Loan Notes under the LNIA. 57 Also on 28 June 2002, SingTel transferred its shareholding in STAI to SAI for $2. 58 As a result of the transactions that took place on 28 June 2002, STAI became a wholly-owned subsidiary of SAI. STAI also became the holding company of a group of companies, including SOPL, that operated the Optus telecommunications business in Australia. 59 The following diagram shows the relevant entities in the group before STAI's acquisition of SOPL from SAI on 28 June 2002: 60 The following diagram shows the relevant entities in the group after STAI's acquisition of SOPL from SAI on 28 June 2002: 61 On 28 June 2002, SAI and STAI entered into the LNIA. Recital A stated that STAI proposed to raise financial accommodation by the issue of unsecured, registered and transferable loan notes, to be subscribed for by SAI, to partially fund the acquisition of shares in SOPL. 62 The provisions of the LNIA are described in more detail below. In outline, the key provisions of the LNIA were, in summary, as follows: (a) the "Interest Rate" was the 1 year BBSW, plus 1% per annum; (b) the "Applicable Rate" was the Interest Rate multiplied by 10/9; (c) interest accrued from the commencement of the LNIA, but was only payable if SAI issued a "Variation Notice" to STAI; (d) interest that accrued but was not paid was capitalised; (e) SAI could at any time require STAI to redeem the Loan Notes (cl 7.1); and (f) STAI could repay the Loan Notes at any time on one business day's notice (cl 7.3). 63 The provisions of the LNIA are now set out in more detail. The "Subscriber" was SAI and the "Issuer" was STAI. The following definitions were set out in cl 1.1 of the LNIA: Advance means the face value of a Note issue or proposed to be issued by the Issuer in accordance with an Issue Request together with any interest capitalised under clause 8.3. Applicable Rate means 10/9 of the Interest Rate. … Interest Period means, for an Advance, one month (or such other period or periods as the Holder may select in a Variation Notice), commencing on the first day on which interest accrues on an Advance, as specified in a Variation Notice, and ending on the date specified in that Notice. Interest Rate means the sum of the 1 Year Swap Rate (mid) as determined by the Australian Financial Markets Association (AFMA) and displayed on the "Interest Rates Swaps 10AM Page" (as displayed on Reuters page "IRSW10AM", Bloomberg page "AFRP 11 " or MoneyLine Telerate Pages 50352 - 50353) expressed as a percentage per annum and 1% per annum. The Interest Rate will be set on the Issue Date and on the first Business Day of the year and will not change during the year. … Issue Request means a notice from the Issuer to the Subscriber requesting the Subscriber to subscribe for Notes in accordance with this agreement. Issuer's Debt means, in respect of a Note, at any time the aggregate of: (a) the amount of each Advance which has not been repaid to a Holder; and (b) interest (including capitalised interest), fees and any other amounts owing at any time by the Issuer to a Holder whether under this agreement or a Note. Maturity Date in respect of a Note means the date specified in a notice from the Holder of the Note to the Issuer demanding redemption of that Note or Notes in accordance with clause 7.1 of this agreement. Maximum Period means, for an Advance, the period commencing on the first day on which interest accrues on an Advance, and ending on the last day of the tenth year following the year in which the Advance is made, or repayment of a Note, whichever occurs first. Note means a note issued in accordance with an Issue Request pursuant to Clause 5.1 in the form set out in Schedule 1. … Variation Date means the date of issue of a Variation Notice as specified in the Variation Notice. Variation Notice means a notice served by the Holder under clause 8.1. It may be in the form or having the effect of Schedule 2. 64 Clause 2.1 provided that SAI may, from time to time, subscribe for the Notes to be issued by STAI upon and subject to the terms of the LNIA. Clause 3 dealt with a Register of Holders. Clause 4 dealt with conditions precedent to Advances. Clause 5 dealt with Issue Requests. Clause 5.2 provided that each Note could have a face value, as agreed between the parties, of an amount up to $1 billion, which was repayable in accordance with cl 7. Clause 6 dealt with transfer of Notes. 65 Clauses 7 and 8 were as follows: 7. REPAYMENT OF ADVANCES 7.1 Maturity Date A Holder may at any time require the Issuer to redeem all or any Notes registered in the name of the Holder by notice in writing. The date on which the Holder specifies the relevant Note is to be redeemed is the Maturity Date. 7.2 Redemption and Payment On any Maturity Date, the relevant Note must be redeemed by the Issuer paying the Issuer's Debt in respect of that Note to the Holder. Upon redemption of any Note, the Note must be cancelled and removed from the Register in accordance with clause 3.3. 7.3 Prepayment On giving not less than one Business Day prior written notice to a Holder, the Issuer may prepay the Issuers Debt applicable to all or any of the Notes held by a Holder or Holders. 8. INTEREST 8.1 Holders may charge interest (a) Each Holder may at any time determine to charge interest on all or any of the Notes registered in the name of the Holder by serving a Variation Notice on the Issuer which specifies: (i) the Variation Date, (ii) the details of the Note to be varied, and (iii) the Interest Period. The Interest Period may be for a period of time before, including and after, the date of a Variation Notice. (b) If a Holder serves a Variation Notice, clause 8.2 to 8.4 (inclusive) will apply. (c) If a Holder does not serve a Variation Notice within the Maximum Period, clause 8.5 will apply. 8.2 Calculation of interest on issue of Variation Notice 8.2.1 Interest will accrue during an Interest Period on the relevant Advance at the Applicable Rate. 8.2.2 Interest: (a) will accrue from day to day in an Interest Period, (b) be computed on a daily basis on a year of 365 days, and (c) is payable on the last day of an Interest Period or such other time as agreed between the parties. 8.3 Payment of interest on overdue interest 8.3.1 Interest not paid when due may as at the due date for its payment be capitalised and form part of the Advance. 8.3.2 Payment of any amount of interest capitalised under clause 8.3.1 is not waived or postponed because of such capitalisation and the Issuer will continue to be in default in respect of such payment. 8.4 Place for payment of interest The Issuer must pay all interest instalments directly into such account as the Holder may nominate to the Issuer from time to time. 8.5 Calculation of interest for Maximum Period 8.5.1 Interest will accrue during the Maximum Period on the relevant Advance at the Applicable Rate. 8.5.2 Interest, to the extent not already due and payable as a result of the issue of a Variation Notice: (a) will accrue from day to day in the Maximum Period, (b) be computed on a daily basis on a year of 365 days, and (c) is only payable on the last day of the Maximum Period or such other time as agreed between the parties. 8.6 Accrual of Interest in Issuer's Accounts The Issuer may make provisions for accrued, but unpaid, interest in its accounts provided that a Holder will not be entitled to payment of any interest unless and until: (a) it serves a Variation Notice on the Issuer, or (b) the expiry of the Maximum Period. 8.7 Payment by 12.00pm without deduction or set off 8.7.1 All payments required to be made by the Issuer under this agreement or a Note must be made to a Holder in full in immediately available funds prior to 12.00pm on the relevant due date (or any earlier time specified) without any deduction. 8.7.2 The Issuer irrevocably and unconditionally waives any right of set off, combination or counterclaim in relation to any such payments. 8.8 Credit for payment 8.8.1 The Issuer will be given credit for a payment only upon its actual receipt by a Holder in immediately available funds in the currency in which it is due. 8.9 Application of payments 8.9.1 The Issuer irrevocably waives its right to determine the appropriation of any money paid to a Holder. All payments will be applied at the sole election of the Holder and any rule determining application of payments does not apply. If the Holder has not made an election it will be deemed to have applied payments in the manner and against such money which is payable, as is in its best interests. 8.10 Taxation If the Issuer is required to make any deduction or withholding in respect of Taxes (other than Excluded Taxes) from any payment due to a Holder under any Transaction Document, the Issuer: (a) must pay the deduction or withholding to the relevant Government Agency by the due date; and (b) promptly give the Holder any evidence it requires to prove that the payment has been made; 66 Clause 9 dealt with an indemnity if payment was received in a currency other than that of a Note. Clause 10 dealt with warranties and indemnities. Clause 11 dealt with events of default. Clause 12 dealt with the appointment of SAI as attorney for STAI. Clause 13 dealt with financial institutions duty and other duties, taxes and imposts in connection with the LNIA. Clause 14 dealt with notices. Clause 15 dealt with general matters. Under cl 15.5, the applicable law of the LNIA was New South Wales law. Clause 15.7 provided that the parties could only vary the agreement if the variation was in writing, signed by both the Issuer and the Holders. 67 Schedule 1 to the LNIA set out the form of a Note. The form stated that the amount was payable "on demand". Schedule 2 to the LNIA set out two forms of Variation Notice. 68 On 28 June 2002, STAI issued the Loan Notes to SAI, totalling $5,199,757,965, in the following tranches: (a) four Loan Notes of $1 billion each; (b) five Loan Notes of $200 million each; and (c) one Loan Note of $199,757,965. 69 On 1 July 2002, the group of companies headed by STAI elected to consolidate for tax purposes, with STAI as the head company of the consolidated group. This fact is noted for completeness. It is not significant for present purposes.

The First Amendment (31 December 2002) 70 On 31 December 2002, SAI and STAI entered into the First Amendment. By this agreement, the LNIA was amended by providing that the maturity date in respect of a Loan Note could not be later than the tenth anniversary of the issue date less one day. Given that the issue date was 28 June 2002, I would calculate the tenth anniversary less one day as being 27 June 2012. I note that in STAI's submissions the date is said to be 26 June 2012. Nothing turns on this difference for present purposes. The amendments in the First Amendment were set out in clause 2 of the First Amendment: 2. VARIATION OF LOAN NOTE ISSUANCE AGREEMENT 2.1 Maturity Date (a) The Subscriber and the Issuer agree that, effective from the date of the Loan Note Issuance Agreement, the Notes issued under the Loan Note Issuance Agreement will mature on demand, but in any event no later than the tenth anniversary of the Issue Date less one day. (b) Consequently, the Loan Note Issuance Agreement is deemed to always have been entered into with the following definition of Maturity Date: "Maturity Date" in respect of a Note means the date specified in a notice from the Holder to the Issuer demanding redemption of that Note or Notes in accordance with clause 7.1 of this agreement, but in any event no later than the tenth anniversary of the Issue Date less one day. 2.2 Maximum Period (a) The Subscriber and the Issuer agree that, effective from the date of the Loan Note Issuance Agreement, the definition of Maximum Period is amended by deleting the words "last day of the tenth year following the year in which the Advance is made" and substituting those words with "Maturity Date". (b) Consequently, the Loan Note Issuance Agreement is deemed to always have been entered into with the following definition of Maximum Period: "Maximum Period" means, for an Advance, the period commencing on the first day on which interest accrues on an Advance, and ending on the Maturity Date, or repayment of a Note, which ever occur first. 71 Clause 3.1 provided that, as soon as possible after the agreement, STAI would provide amended Notes to SAI. By cl 3.2, it was agreed that the amended Notes did not constitute new obligations of STAI, but merely amounted to an amendment to the Notes on issue at the date of the agreement. By cl 4, the parties otherwise confirmed the terms of the LNIA.

The Second Amendment (31 March 2003) 72 On 31 March 2003, SAI and STAI entered into the Second Amendment. The Recitals to the agreement stated that SAI and STAI had agreed to make a number of amendments to the LNIA, in particular in relation to the circumstances in which interest may become payable by STAI in respect of a Note and consequently when a Variation Notice could be served on STAI. The Recitals stated that SAI and STAI agreed to make amendments in accordance with the agreement and that all amendments were to take effect as at the date of the LNIA. Further, it was stated that all Notes issued under the LNIA were deemed always to have been issued subject to the terms of the LNIA as amended by the agreement. 73 In outline, the amendments effected by the Second Amendment were as follows: (a) definitions of "Default Benchmark" and "Primary Benchmark" were introduced; (b) the expression "Benchmark", which was defined as meaning the Primary Benchmark and the Default Benchmark, was introduced; (c) the provisions relating to the accrual and payment of interest were amended with the effect that the accrual and payment of interest were contingent on the occurrence of a Benchmark; and (d) the Applicable Rate was amended by the addition of the "Premium", which was 4.552%. The Applicable Rate therefore became the sum of: (a) the Interest Rate (which was the 1 year BBSW plus 1%) multiplied by 10/9; and (b) the Premium of 4.552%. 74 The terms of the Second Amendment are now set out in more detail. Clauses 2.1 and 2.2 of the Second Amendment inserted new definitions into the LNIA and amended existing definitions: 2.1 Insertion of Definitions in the Loan Note Issuance Agreement The following definitions are deemed to have been inserted into the Loan Note Issuance Agreement effective from 28 June 2002. Accumulated Free Cashflow as at the commencement of any quarter, means the sum of all cashflow of the Optus Group for all quarters, commencing on the Issue Date and ending on the last day of the previous quarter that are designated as "free cash-flow" in the Management Accounts. Benchmark means the Primary Benchmark and Default Benchmark. A Benchmark occurs (if at all) when either Benchmark occurs. Break Costs means $1,538,000,000 or such other amount the Issuer and a Holder agree to be the Holder's genuine pre-estimate of the value of Premium it has forgone as a result of the Issuer's Debt being prepaid in accordance with clause 7.3. It must be calculated by the Issuer and Holder in good faith having regard to: (a) the time between prepayment of the Issuer's Debt and the Maturity Date, (b) if a Benchmark has not occurred the likelihood a Primary Benchmark will occur based on forecasts of results of the Consolidated Issuer Group, (c) the opinion of any expert retained by the Issuer or Holder, and (d) any other matters then relevant. Consolidated Issuer Group means the Issuer and its wholly owned subsidiaries. Default Benchmark occurs when any of the following occurs: (a) An announcement of, or board resolution to effect, a change in at least 50% of the ownership of the Issuer; (b) An Insolvency Event taking place in respect of the Issuer; (c) A dividend declared by the directors of the Issuer in excess of $50,000,000; (d) A return of capital of the Issuer in excess of $50,000,000 is approved by the holding company of the Issuer; or (e) Projected tax payable in any year in the Consolidated Issuer Group, based on the Management Accounts, before any interest expense arising from this Agreement, is determined to be in excess of $100,000,000. Default Interest Day is deemed to occur on the first day of the year in which a Default Benchmark occurs. Government Agency means any Australian: (a) state, federal or legal government department or authority; (b) statutory corporation; (c) government minister; (d) governmental, semi-governmental, administrative or judicial person; and (e) person (whether autonomous or not) charged with the administration of any applicable law. Management Accounts means accounts prepared by the Optus Group in accordance with generally accepted accounting principles and practices in Singapore so as to show a true and fair view of the results of the Optus Group for the relevant period and of their assets and liabilities at that date. Optus Group means SingTel Optus Pty Ltd ACN 052 833 208 and its subsidiaries. PBT is calculated as at the last day of a quarter based on profits and losses of the Optus Group for each quarter since the Issue Date as disclosed in the Management Accounts. It is the sum of all profits and losses before taxation of the Optus Group calculated for all quarters commencing on the first day of the next quarter after the Issue Date, as disclosed in the Management Accounts. Premium means 4.552%. Primary Benchmark occurs in a quarter, when, as at the last day of that quarter: (a) PBT was or exceeds $1,800,000,000; and (b) Accumulated Free Cashflow was or exceeds $2,050,000,000. Primary Interest Day means the first day of the quarter in which a Primary Benchmark occurred. quarter date means 31 March, 30 June, 30 September and 31 December in any year. quarter means each period of 3 months ending on a quarter date other than, (a) the first quarter which commences on the Issue Date and ends on the next quarter date, and (b) if the Maturity Date occurs on a date other than quarter date, the last quarter will commence on the day immediately after the previous quarter date and end on the Maturity Date. Regulatory Change means: (a) the introduction of, or change in, an applicable law or regulatory requirement or in its interpretation or administration by a Government Agency; or (b) compliance by the Holder or by related body corporate of the Holder with an applicable direction, request or requirement (whether or not having the force of law and whether existing or future) of a Government Agency. 2.2 Amendments to Existing Definitions The following definitions in the Loan Note Issuance Agreement are deemed to have been amended with effect from 28 June 2002. (a) The definition of "Applicable Rate" is deleted and the following definition substituted as follows: Applicable Rate means the sum of: (a) 10/9 of the Interest Rate, and (b) the Premium. (b) The definition of "Business Day" is amended by inserting the following words after the word "Sydney": "(other than a Saturday, Sunday or public holiday)". (c) In the definition of "Excluded Tax" delete the words: "Subscriber or". (d) In the definition of "Interest Period" delete: (i) the words "one month (or" and "other" in the first line; (ii) the bracket in the second line. (e) [The] definition of "Interest Rate" is deleted and the following definition substituted as follows: "Interest Rate during any year means the sum of: (a) the 1 Year Swap Rate (mid) as determined by the Australian Financial Markets Association (AFMA) and displayed on the "Interest Rates Swaps 10AM Page" (as displayed on Reuters page "IRSW10AM", Bloomberg page "AFRP 11 " or MoneyLine Telerate Pages 50352 - 50353) expressed as a percentage per annum, and (b) 1% as at the Issue Date and subsequently on the first Business Day of each year." (f) The definition of "Maturity Date" is deleted and the following definition substituted as follows: "Maturity Date in respect of a Note means the first to occur of: (a) the date specified in a notice from the Holder to the Issuer demanding redemption of that Note in accordance with clause 7.1, (b) the date on which the Issuer's Debt is prepaid in accordance with clause 7.3, or (c) the tenth anniversary of the Issue Date less one day." (g) The definition of "Maximum Period" is deleted and the following definition substituted as follow[s]: "Maximum Period means, for an Advance, the period commencing on a Default Interest Day or the Primary Interest Day (as the case may be) and ending on the Maturity Date." (h) In the definition of "Variation Notice" the cross reference to clause 8.1 is deleted and substituted with a cross reference to clause 8.2 (i) In clause 1.4.1 (d) add the following words at the end of the sentence: "except the first year which will commence on the Issue Date and the last year which will end on the last day of the Maximum Period". 75 Clauses 2.3, 2.4 and 2.5 amended clauses 7.1, 7.4 and 8 of the LNIA as follows: 2.3 Amendment to clause 7.1 2.3.1 The Subscriber and the Issuer agree that, effective from the date of the Loan Note Issuance Agreement clause 7.1 is amended by: (a) inserting the following words after the word "time" in the first line: "after a Benchmark occurs". 2.4 Insert new clause 7.4 2.4.1 The Subscriber and the Issuer agree that, effective from the date of the Loan Note Issuance Agreement, the following words are inserted as clause 7.4 7.4 Break Costs on Prepayment (a) Where a Benchmark has not occurred and the Issuer prepays the Issuer's Debt in accordance with clause 7.3 before the tenth anniversary of the Issue Date less one day, the Issuer must pay the Break Costs to the relevant Holder. (b) Where the Issuer prepays the Issuer's Debt under clause 7.3 on or after the day when a Benchmark has occurred but before the tenth anniversary of the Issue Date less one day, the Issuer must pay the Holder an amount equal to the Premium multiplied by the Advance for the remaining period from the date of prepayment up to the tenth anniversary of the Issue Date less one day. 2.5 Amendment to clause 8 The Subscriber and the Issuer agree that effective from the date of the Loan Note Issuance Agreement, clause 8 is deleted and the following substituted: "8. INTEREST 8.1 Payment of Interest Interest is not payable on a Note unless: (a) a Benchmark occurs; and (b) (i) a Holder serves a Variation Notice, or (ii) the Maximum Period expires. 8.2 Holders may charge interest (a) If a Benchmark occurs each Holder may at any time, and on more than one occasion, determine to charge interest on all or any of the Notes registered in the name of the Holder by serving a Variation Notice on the Issuer which specifies: (i) the Variation Date, (ii) the details of the Note to be varied, and (iii) the Interest Period. (b) The Interest Period may be for a period of time before, including and after, the date of a Variation Notice provided it commences, (i) if a Primary Benchmark occurs, on or after the Primary Interest Day; or (ii) if a Default Benchmark occurs, on or after the Default Interest Day For the avoidance of doubt, an Interest Period cannot exceed the Maximum Period. (c) If a Holder serves a Variation Notice, clause 8.3 to 8.4 (inclusive) will apply. (d) If a Holder does not serve a Variation Notice prior to the expiration of the Maximum Period, or if the Holder has served a Variation Notice or Notices are served and the Interest Period specified in the Variation Notice or Notices is less than the Maximum Period clause 8.6 will apply. 8.3 Calculation of interest on issue of Variation Notice 8.3.1 Interest: (a) will accrue from day to day during an Interest Period at the Applicable Rate, (b) will be computed on a daily basis on a year of 365 days, and (c) is payable on the last day of an Interest Period or such other time as agreed between the parties. 8.4 Payment of interest on overdue interest 8.4.1 Interest not paid when due may as at the due date for its payment be capitalised and form part of the Advance. 8.4.2 Payment of any amount of interest capitalised under clause 8.4.1 is not waived or postponed because of such capitalisation and the Issuer will continue to be in default in respect of such payment. 8.5 Place for payment of interest The Issuer must pay all interest instalments directly into such account as the Holder may nominate to the Issuer from time to time. 8.6 Calculation of interest for Maximum Period 8.6.1 Subject to clause 8.6.2 if a Benchmark occurs, interest will accrue during the Maximum Period on a relevant Advance, at the Applicable Rate. 8.6.2 Interest, to the extent not payable as a result of the issue of a Variation Notice or Notices: (a) will accrue from day to day in the Maximum Period at the Applicable Rate, (b) be computed on a daily basis on a year of 365 days, and (c) is payable on the last day of the Maximum Period or such other time as agreed between the parties. 8.7 Accrual of Interest in Issuer's Accounts The Issuer may make provisions for accrued, but unpaid, interest in its accounts provided that a Holder will not be entitled to payment of any interest unless and until a Benchmark occurs, and: (a) it serves a Variation Notice on the Issuer, or (b) the expiry of the Maximum Period. 8.8 Payment by 5.00pm without deduction or set off 8.8.1 Subject to clause 8.11 all payments required to be made by the Issuer under this agreement or a Note must be made to a Holder in full in immediately available funds prior to 5.00 pm on the relevant due date (or any earlier time specified) without any deduction. 8.8.2 The Issuer irrevocably and unconditionally waives any right of set off, combination or counterclaim in relation to any such payments. 8.9 Credit for payment 8.9.1 The Issuer will be given credit for a payment only upon its actual receipt by a Holder in immediately available funds in the currency in which it is due. 8.10 Application of payments 8.10.1 The Issuer irrevocably waives its right to determine the appropriation of any money paid to a Holder. All payments will be applied at the sole election of the Holder and any rule determining application of payments does not apply. If the Holder has not made an election it will be deemed to have applied payments in the manner and against such money which is payable, as is in its best interests. 8.11 Taxation If the Issuer is required to make any deduction or withholding in respect of Taxes (other than Excluded Taxes) from any payment due to a Holder under any Transaction Document, the Issuer: (a) must pay the deduction or withholding to the relevant Government Agency by the due date; and (b) promptly give the Holder any evidence it requires to prove that the payment has been made." 76 Clause 2.6 contained amendments to cl 11 of the LNIA. Clause 2.7 dealt with increased costs and regulatory changes. Clause 2.8 dealt with notices. Clause 2.9 contained amendments to the terms and conditions of each Note. Clause 2.10 contained amendments to the Variation Notice in Schedule 2. 77 By cl 3.1 of the Second Amendment, STAI and SAI otherwise confirmed the terms of the LNIA, subject to any consequential renumbering to give effect to the amendments. By cl 3.2, STAI agreed to issue Amended Notes in the form of Schedule 1. 78 The Primary Benchmark linked the accrual of interest under the LNIA to SOPL's financial performance. A Primary Benchmark was stated to occur when, as at the last day of a quarter, PBT was or exceeded $1.8 billion and Accumulated Free Cashflow was or exceeded $2.05 billion. The alternative to the Primary Benchmark was any of the five "Default Benchmarks", which included projected tax payable by the consolidated STAI group based on the Management Accounts, before interest payable under the LNIA, exceeding $100 million. 79 The Premium was calculated to compensate SAI for allowing what was estimated by SAI and STAI to be an interest-free period of approximately 3.5 years (i.e. the period from 28 June 2002 to 31 December 2005). The Premium was calculated by reference to a notional amount of compound interest for that period of approximately $1.54 billion. This included the 10/9 gross-up. It was estimated by SAI and STAI the interest-free period would continue to the quarter ended 31 December 2005, and that interest would become payable from the quarter ending on 31 March 2006.

The accrual and payment of interest 80 In the event, the Primary Benchmark was met in the 30 June 2005 quarter, and interest began to accrue on the Loan Notes from the first day of that quarter (i.e. 1 April 2005). No adjustment was made to the Premium to recognise the fact that STAI had met the Primary Benchmark earlier than was estimated in setting the Premium. 81 On 28 March 2007, SAI issued the first Variation Notice. The interest was payable on 2 April 2007. STAI borrowed funds from SOPL to fund the interest payment. 82 Thereafter, SAI issued 137 further Variation Notices. Each notice set out: (a) the details of the Loan Note to be varied; (b) the period or periods in respect of which interest was to be paid; and (c) the applicable rate or rates of interest in respect of the period or periods.

The Third Amendment 83 Although the Third Amendment was entered into on 30 March 2009, the amendments to the LNIA contained in that document were substantively agreed between SAI and STAI in October 2008. 84 On 31 July 2008, the CFO of SOPL asked two Optus employees "Can we make sure we close the loop on STAI additional facility and also the necessary renegotiation/refinancing of [the] current $5.2 bn facility", and asked "will it make sense for steve chubb (sic) to [meet] with us and give us views/advice from [EY]?", to which a positive response was received. 85 At this time, the LNIA was not due to mature for almost four years, on 27 June 2012. 86 In August 2008, a SOPL funding strategy paper considered whether SOPL should make a new bond issue. The paper commented (on page 4): Capital markets continue to remain difficult for issuers and reflect significantly higher pricing for longer term issues. Given Optus' modest funding requirements, desired flexibility, and existing funding mix at a group level, we do not believe that a debt capital market issue is appropriate in the current environment (see 5.1 below). It is however recommended that Optus update [its] capital markets documentation to maintain flexibility in accessing funding opportunities as and when they arise in the future should our funding needs change and market conditions improve (this may be more relevant at a SingTel level.) The funding strategy paper recommended that SOPL increase the existing syndicated loan (maturing in March 2009) from $700 million to $950 million and for 2010-maturing bonds to be considered later in 2009. 87 On 18 September 2008, STAI requested that SAI refinance the LNIA (after it reached maturity), sending a draft term sheet. 88 On 13 October 2008, Ms Tan Yong Choo of SingTel sent an email to Ms Samantha Chng and others of SingTel, relating to a variation of the interest rate of the LNIA. The email stated: "we will fix the rate at 6.373% on 30 Sep 2008 for future periods from FY 2010 onwards. No more caps and floor, too complex. We will let you know of progress." 89 On 20 October 2008, Ms Tan Yong Choo sent a further email stating: "[w]e shall use 6.835%, being the rate as at 26 Sep 2008 (used as a proxy for 30 September 2008), as the interest rate for the A$5.2 bil loan for future periods." The email also stated that two changes would be made: first, changing the variable rate to a fixed rate of 6.835% from 1 April 2009 onwards; secondly, "SAI to [provide] committed loan facility of A$X billion for X period after 2012". Fang Fang replied: "This is and should remain a SingTel email. We need not communicate with Optus on this. The 6.835% is a good proxy, subject to TP review". 90 On 23 October 2008, Mr Stephen Chubb of Ernst & Young provided observations from an Australian taxation perspective on the proposed change to the interest rate under the LNIA. 91 On 24 October 2008, Mr Paul Balkus of Ernst & Young sent an email to Mr Brett Nichols, Director - Treasury at SOPL. Mr Balkus made the following observations: 1. Just to be clear, when you state that your "rationale for the interest rate to be set a 6.853%" I assume you mean the base rate on which the margin and uplift is to be applied. That is, the actual interest on the loan (excluding the 4.552% premium) would be equal to (6.853+1)*10/9 or 8.72% - This is the interest rate that we need to ensure is "consistent with the arm's length principle". 2. Interest rate measurement date - Why are you using 10/10 rather than 30 September 2008? We understood that the effective date for the change in terms on the note was 30 September 2008? This is potentially significant given that the RBA dropped interest rates by 100bps on 7 October 2008. 3. Given that we are changing to a fixed rate instrument for three and half years we have used quoted rates for Australian Corporate Bond Index for A rated four year securities at 30 September 2008 (i.e. 7.9%). This rate would compare with your 3 year swap rate plus the 100bp margin (i.e. 6.435). In this regard what is your rationale for maintaining the same credit spread margin that was used on a 1 year swap rate? If I add the 100bps to the 6.435% to adjust for the RBA reduction in interest rates, it would appear that the margin for a four instrument would be 50bps higher. 4. As discussed, we need to make sure that the total interest charge including the uplift (i.e. 10/9) is within the arm's length range. Therefore, we would compare 8.72% (i.e. the actual interest that we propose charging on the loan) with the arm's length amount of interest which based on your calculation would be 7.853%. (i.e. the rate at which STAI could expect to borrow in the Australian market). Therefore, having regard to the above, our calculation would be as follows: A rated Australian corporate bond at 30 September 2008 7.9% Term out premium .4% New issue premium .5% Total 8.8%

This would then be compared to the 8.72%. given that 8.72% is lower we would then conclude that the 8.72% is arm's length. The key differences between our calculations are as follows: Measurement date - which can add as much as 100bps to the interest rate. New issue premium - we have assumed a lower amount (i.e. 50bps) recognising that it could potentially be higher. Margin - we have used A rated securities and you appear to have used the old 1% margin on a 3 year swap rate (our margin is 1.5% rather than 1%). 92 On 27 October 2008, Mr Chubb forwarded to SingTel and SOPL a further email from Mr Balkus and added, in relation to Mr Balkus's transfer pricing analysis, "this analysis does not consider the premium issue etc. which is out of scope at this stage". 93 On 28 October 2008, SAI sent a letter to STAI proposing a refinancing of the LNIA, which was due to mature in June 2012, and fixing a component of the interest rate under the LNIA. The letter stated: We refer to our earlier discussions in September and your letter of request dated 24 October 2008. We are pleased to offer the attached proposal for refinancing of the A$5.2bn Loan Note Facility which matures in June 2012. In consideration of SAI agreeing to provide a commitment in advance of the existing facility and to allow certainty on the quantum of interest for both parties for the remaining term of the existing Loan Notes, SAI proposes that the interest rate on the existing $5.2b facility be fixed. It is proposed that the floating AFMA swap rate currently used in paragraph (a) of the definition of "interest rate" in the existing loan facility agreement be substituted with a fixed rate of 6.835%. The remaining terms and conditions of the proposal are summarised in the attached proposed Term Sheet for the new committed facility. Long form documents will be prepared to reflect the terms of the Term Sheet and to deal with any related or consequential issues which the parties deem necessary. Please confirm your acceptance by 28 October 2008 of: (i) the proposed terms of the facility (as summarised in the proposed Term Sheet); and (ii) the proposed fixing of a component of the interest rate at 6.835% with effect from 1 April 2009. The attached term sheet set out the terms for a facility that would commence upon the maturity of the LNIA in June 2012. The margin for that facility was stated to be subject to prevailing market conditions. The interest rate was stated to be the aggregate of the margin and the bank bill rate multiplied by 10/9. 94 On 30 October 2008, STAI sent a letter to SAI confirming its acceptance of the proposal as set out in the letter of 28 October 2008 and the enclosed term sheet. 95 On 30 March 2009, SAI and STAI entered into the Third Amendment. In summary, this amended the definition of "Interest Rate" by replacing the 1 year BBSW with a fixed rate of 6.835%, with effect from 1 April 2009. As a result, the Applicable Rate under the LNIA became: (a) the Interest Rate (6.835% plus 1%) multiplied by 10/9; and (b) the Premium of 4.552%. This produced an Applicable Rate of 13.2575%. 96 In addition to the amendment to the definition of "Interest Rate", the Third Amendment (by cl 3) introduced a termination fee. Little attention was given to this amendment in the course of the present proceeding. Clause 4 of the Third Amendment was headed "Confirmation" and provided that, other than the amendments to the terms of the LNIA and any previous amendments thereto, STAI and SAI confirmed the terms of the LNIA and any previous amendments.

Total interest paid by STAI to SAI 97 The total interest paid by STAI to SAI pursuant to the Variation Notices referred to above was $4,903,096,322. 98 On 2 November 2011, SAI requested that STAI repay Loan Notes 9 and 10 (which totalled around $400 million) and pay interest on the face value of the Loan Notes in accordance with Variation Notices 113 to 130. 99 On 27 June 2012, the outstanding Loan Notes (totalling $4.8 billion) matured and SAI approved the advance of an Intercompany Cash Advance Facility Agreement to STAI in an amount of up to $5.2 billion. 100 During the term of the LNIA, STAI paid on behalf of SAI withholding tax in the amount of $490,309,632 (calculated as 10% of the total interest paid under the LNIA).

THE DETERMINATIONS AND AMENDED ASSESSMENTS 101 On 25 October 2016, the Commissioner made determinations under Div 13 of the ITAA 1936 and Subdiv 815-A of the ITAA 1997 relating to STAI and in respect of the years ending 31 March 2010, 2011, 2012 and 2013. A covering letter from the Australian Taxation Office (ATO) of the same date stated that the Subdiv 815A determinations were alternative to the Div 13 determinations. The amounts in the determinations are summarised in the table in [11] above. 102 By way of example, the determination under Div 13 of the ITAA 1936 for the year ending 31 March 2011 was as follows: DETERMINATION MADE PURSUANT TO SUBSECTION 136AD(3) AND SUBSECTION 136AD(4) OF THE INCOME TAX ASSESSMENT ACT 1936 ("THE ACT") TAXPAYER: SINGAPORE TELECOMMUNICATIONS AUSTRALIA INVESTMENTS PTY LTD ("STAI") Year ended 31 March 2011 (in lieu of year of income ended 30 June 2011) I, Jeremy Hirschhorn, Deputy Commissioner of Taxation, Public Groups and International, in the exercise of the powers and functions delegated to me by the Commissioner of Taxation: 1. find that, for the purpose of paragraph 136AD(3)(a) of the Act, STAI has acquired property under an international agreement; and 2. am satisfied, for the purpose of paragraph 136AD(3)(b) of the Act, that having regard to: a. the connection between any 2 or more parties to the international agreement; and b. to other relevant circumstances, that the parties to the international agreement or any 2 or more of those parties were not dealing at arm's length with each other in relation to the acquisition; 3. find that, for the purpose of subsection 136AD(4) of the Act, it is not possible or not practicable for the Commissioner to ascertain the arm's length consideration in respect of the acquisition of the property; 4. determine, for the purpose of subsection 136AD(4) of the Act, that the arm's length consideration in respect of the acquisition of property shall be the amount of $423,994,154; 5. find that, for the purposes of paragraph 136AD(3)(c) of the Act, STAI gave or agreed to give consideration in respect to the acquisition of the property and the amount of that consideration (that is, $898,998,263) exceeded the arm's length consideration determined by the Commissioner under subsection 136AD(4) of the Act in respect of the acquisition of the property (that is, $423,994,154); and 6. determine, for the purpose of paragraph 136AD(3)(d) of the Act, that subsection 136AD(3) should apply in relation to STAI in relation to the acquisition. It follows from the above that, for the purposes of the application of the Act in relation to STAI, consideration equal to the arm's length consideration in respect of the acquisition shall be deemed to be the consideration given or agreed to be given by STAI in respect of the acquisition. 103 By way of further example, the determination under Subdiv 815-A of the ITAA 1997 for the year ending 31 March 2011 was as follows: DETERMINATION MADE PURSUANT TO SECTION 815-30 OF DIVISION 815 OF THE INCOME TAX ASSESSMENT ACT 1997 ("THE ACT") TAXPAYER: SINGAPORE TELECOMMUNICATIONS AUSTRALIA INVESTMENTS PTY LTD I, Jeremy Hirschhorn, Deputy Commissioner of Taxation, Public Groups and International, in the exercise of the powers and functions delegated to me by the Commissioner of Taxation; 1. determine under paragraphs 815-10(1) and 815-30(1)(a) of the Act that the taxable income of SINGAPORE TELECOMMUNICATIONS AUSTRALIA INVESTMENTS PTY LTD be increased by the amount of $475,004,109 for the year ended 31 March 2011 (in lieu of income tax year 30 June 2011). 2. I further determine under paragraph 815-30(2)(b) of the Act, that the determination referred to in paragraph 1 is attributable to a decrease of $475,004,109 in allowable deductions of SINGAPORE TELECOMMUNICATIONS AUSTRALIA INVESTMENTS PTY LTD associated with the interest payments particularised in the Economist Practice Report Second Addendum issued on 25 October 2016, in the year ended 31 March 2011 (in lieu of income tax year 30 June 2011). 104 The letter from the ATO dated 25 October 2016 enclosing the determinations stated that the arm's length consideration had been calculated using a modified or updated version of a model referred to as the "Economist Practice model". Details of the updated model were provided in Attachment B to the ATO's letter. This included a table headed "EP Transfer Pricing Adjustment Calculations - Updated model" (EP Report). One of the points made in STAI's submissions is that the case now put by the Commissioner through his expert witnesses differs in material ways from the case based on the EP Report. This will be discussed later in these reasons. 105 As noted above, the Commissioner issued notices of amended assessment to STAI in respect of the years ending 31 March 2011, 2012 and 2013. STAI objected to the amended assessments. 106 On 27 September 2019, the Commissioner disallowed STAI's objections and provided reasons for decision. In the reasons for decision, the Commissioner primarily relied on Subdiv 815-A of the ITAA 1997; Div 13 of the ITAA 1936 was relied on in the alternative. In the covering letter from the ATO (dated 27 September 2019), reference was made to STAI's request for remission of the shortfall interest charge. The letter stated that: the request made for the year ending 31 March 2011 had been treated as an objection to the amended assessment; and the requests made for the years ending 31 March 2012 and 2013 had not been treated as valid objections. It was explained that there was no right to object to a shortfall interest charge imposed for those years unless the amount exceeded 20% of the tax shortfall amount; and that, in this case, it was 19.9% of the 31 March 2012 tax shortfall and 15% of the 31 March 2013 tax shortfall.

THE PRESENT PROCEEDING 107 By notice of appeal dated 11 November 2019, STAI appeals to this Court pursuant to Pt IVC of the Taxation Administration Act against the Commissioner's objection decisions. STAI seeks the following substantive relief: (a) to have set aside the Commissioner's objection decisions; (b) to allow the objections in full, or alternatively, to allow the objections in part as the Court may determine; and (c) to set aside the shortfall interest charge to nil, alternatively, to remit the matter to the Commissioner for reassessment in accordance with law. 108 The notice of appeal sets out 14 grounds relied on by STAI. 109 STAI bears the burden of proving that the amended assessments are excessive: Taxation Administration Act, s 14ZZO(b).

Subdivision 815A of the ITAA 1997 110 I will refer to the version of Subdiv 815-A of the ITAA 1997 compiled on 20 October 2016, which is the version provided in the parties' joint bundle of authorities. 111 Subdivision 815-A of the ITAA 1997 was enacted in 2012 by the Tax Laws Amendment (Cross-Border Transfer Pricing) Act (No 1) 2012 (Cth) and, pursuant to s 815-1 of the Income Tax (Transitional Provisions) Act 1997 (Cth) (Transitional Act), was made to apply retrospectively to income years starting on or after 1 July 2004. After the Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Act 2013 (Cth) received Royal Assent on 29 June 2013, Subdiv 815-A was replaced by Subdivisions 815-B to 815-D for income years commencing on or after 29 June 2013: Transitional Act, ss 815-1(2) and 815-15. 112 The object of the Subdivision is set out in s 815-5 of the ITAA 1997, which relevantly provides: 815-5 Object The object of this Subdivision is to ensure the following amounts are appropriately brought to tax in Australia, consistent with the arm's length principle: (a) profits which would have accrued to an Australian entity if it had been dealing at *arm's length, but, by reason of non-arm's length conditions operating between the entity and its foreign associated entities, have not so accrued … 113 Section 815-10(1) provides that the Commissioner may make a determination mentioned in s 815-30(1), in writing, for the purpose of negating a "transfer pricing benefit" (a defined expression, discussed below) an entity gets. However, s 815-10 only applies to an entity if (relevantly for present purposes) the entity gets the transfer pricing benefit under s 815-15(1) at a time when an "international tax agreement" containing an "associated enterprises article" applies to the entity. Here, there is no issue that the Singapore DTA is an international tax agreement. The expression "associated enterprises article" is discussed below. 114 Section 815-15(1) is the key provision for present purposes. It provides: 815-15 When an entity gets a transfer pricing benefit Transfer pricing benefit - associated enterprises (1) An entity gets a transfer pricing benefit if: (a) the entity is an Australian resident; and (b) the requirements in the *associated enterprises article for the application of that article to the entity are met; and (c) an amount of profits which, but for the conditions mentioned in the article, might have been expected to accrue to the entity, has, by reason of those conditions, not so accrued; and (d) had that amount of profits so accrued to the entity: (i) the amount of the taxable income of the entity for an income year would be greater than its actual amount; or (ii) the amount of a tax loss of the entity for an income year would be less than its actual amount; or (iii) the amount of a *net capital loss of the entity for an income year would be less than its actual amount. The amount of the transfer pricing benefit is the difference between the amounts mentioned in subparagraph (d)(i), (ii) or (iii) (as the case requires). The relevant entity for present purposes is STAI. There is no issue that the requirement in paragraph s 815-15(1)(a) is satisfied as STAI is an Australian resident. 115 The expression "associated enterprises article" is defined in s 815-15(5) as meaning: (a) Art 9 of the United Kingdom convention; or (b) a corresponding provision of another international tax agreement. There is no issue in the present case that Art 6 of the Singapore DTA is an associated enterprises article. 116 The relevant version of Art 6 of the Singapore DTA is that set out in the protocol amending the double taxation agreement that entered into force on 5 January 1990 (a copy of which was provided by the Commissioner to the Court on day 2 of the hearing). Article 6 of the Singapore DTA relevantly provides: Article 6 (1) Where- (a) an enterprise of one of the Contracting States participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State; or (b) the same person participates directly or indirectly in the management, control or capital of an enterprise of one of the Contracting States and an enterprise of the other Contracting State, and in either case conditions operate between the two enterprises in their commercial or financial relations which differ from those which might be expected to operate between independent enterprises dealing wholly independently with one another, then any profits which, but for those conditions, might have been expected to accrue to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly. Here, STAI accepts that the condition in paragraph (a) above is satisfied. That is, it is accepted that SAI (an enterprise of one of the Contracting States, Singapore) participates directly or indirectly in the management, control or capital of STAI (an enterprise of the other Contracting State, Australia). It is therefore unnecessary to consider the condition in paragraph (b). 117 Section 815-20, which relates to matters of interpretation, provides in part: 815-20 Cross-border transfer pricing guidance (1) For the purpose of determining the effect this Subdivision has in relation to an entity: (a) work out whether an entity gets a *transfer pricing benefit consistently with the documents covered by this section, to the extent the documents are relevant; and (b) interpret a provision of an *international tax agreement consistently with those documents, to the extent they are relevant. (2) The documents covered by this section are as follows: (a) the Model Tax Convention on Income and on Capital, and its Commentaries, as adopted by the Council of the Organisation for Economic Cooperation and Development and last amended on 22 July 2010; (b) the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, as approved by that Council and last amended on 22 July 2010; (c) a document, or part of a document, prescribed by the regulations for the purposes of this paragraph. 118 The effect of s 815-20 is modified by s 815-5 of the Transitional Act for the income years before 1 July 2012. Accordingly, the relevant OECD Transfer Pricing Guidelines for the 2010 and 2011 income years are the 1995 Guidelines and the relevant guidelines for the 2012 and 2013 income years are the 2010 Guidelines. I will refer to these respectively as the 1995 Guidelines and the 2010 Guidelines. 119 Section 815-30(1) relevantly provides that the Commissioner may make a determination of an amount by which the taxable income of the entity for an income year is increased. Section 815-30(2) provides: (2) If the Commissioner makes a determination under subsection (1), the determination is taken to be attributable, to the relevant extent, to such of the following as the Commissioner may determine: (a) an increase of a particular amount in assessable income of the entity for an income year under a particular provision of this Act; (b) a decrease of a particular amount in particular deductions of the entity for an income year; (c) an increase of a particular amount in particular capital gains of the entity for an income year; (d) a decrease of a particular amount in particular capital losses of the entity for an income year. 120 Section 815-35 deals with consequential adjustments, and s 815-40 deals with there being no double taxation.

Division 13 of the ITAA 1936 121 I will refer to the version of Div 13 of the ITAA 1936 compiled on 28 June 2013, being the version provided by the parties in the joint bundle of authorities. 122 Section 136AA deals with interpretation. Given the limited focus in this case on Div 13, I will not set out all of the relevant definitions. The definitions in s 136AA(1) include: property includes: (a) a chose in action; (b) any estate, interest, right or power, whether at law or in equity, in or over property; (c) any right to receive income; and (d) services. … services includes any rights, benefits, privileges or facilities and, without limiting the generality of the foregoing, includes the rights, benefits, privileges or facilities that are, or are to be, provided, granted or conferred under: … (d) an agreement for or in relation to the lending of moneys. 123 Section 136AA(3) relevantly provides: (3) In this Division, unless the contrary intention appears: … (d) a reference to the arm's length consideration in respect of the acquisition of property is a reference to the consideration that might reasonably be expected to have been given or agreed to be given in respect of the acquisition if the property had been acquired under an agreement between independent parties dealing at arm's length with each other in relation to the acquisition; … 124 Section 136AC provides: 136AC International agreements For the purposes of this Division, an agreement is an international agreement if: (a) a non-resident supplied or acquired property under the agreement otherwise than in connection with a business carried on in Australia by the non-resident at or through a permanent establishment of the non-resident in Australia; or (b) a resident carrying on a business outside Australia supplied or acquired property under the agreement, being property supplied or acquired in connection with that business; or (c) a taxpayer: (i) supplied or acquired property under the agreement in connection with a business; and (ii) carries on that business in an area covered by an international tax sharing treaty. 125 Section 136AD relevantly provides: 136AD Arm's length consideration deemed to be received or given … (3) Where: (a) a taxpayer has acquired property under an international agreement; (b) the Commissioner, having regard to any connection between any 2 or more of the parties to the agreement or to any other relevant circumstances, is satisfied that the parties to the agreement, or any 2 or more of those parties, were not dealing at arm's length with each other in relation to the acquisition; (c) the taxpayer gave or agreed to give consideration in respect of the acquisition and the amount of that consideration exceeded the arm's length consideration in respect of the acquisition; and (d) the Commissioner determines that this subsection should apply in relation to the taxpayer in relation to the acquisition; then, for all purposes of the application of this Act in relation to the taxpayer, consideration equal to the arm's length consideration in respect of the acquisition shall be deemed to be the consideration given or agreed to be given by the taxpayer in respect of the acquisition. (4) For the purposes of this section, where, for any reason (including an insufficiency of information available to the Commissioner), it is not possible or not practicable for the Commissioner to ascertain the arm's length consideration in respect of the supply or acquisition of property, the arm's length consideration in respect of the supply or acquisition shall be deemed to be such amount as the Commissioner determines.

APPLICABLE PRINCIPLES 126 The provisions of Div 13 of the ITAA 1936 and Subdiv 815-A of the ITAA 1997 have been considered in two recent judgments of the Full Court of this Court, Chevron Australia Holdings Pty Ltd v Federal Commissioner of Taxation (2017) 251 FCR 40 (Chevron) and Commissioner of Taxation v Glencore Investment Pty Ltd (2020) 281 FCR 219 (Glencore). In this section of the reasons, I will discuss these cases, focussing on their consideration of Subdiv 815-A, given the emphasis on that Subdivision in the present case.

The judgment in Chevron 127 In Chevron, separate reasons for judgment were delivered by Allsop CJ and Pagone J, with Perram J agreeing with the reasons of Pagone J. Chief Justice Allsop also indicated his agreement with Pagone J's reasons, subject to the reasons set out in the Chief Justice's judgment. 128 The assessments in issue in Chevron related to interest paid by an Australian company (referred to as CAHPL) to its US subsidiary (referred to as CFC) under an agreement between them titled Credit Facility Agreement. 129 Chief Justice Allsop discussed Div 13 of the ITAA 1936 at [2]-[66]. 130 Chief Justice Allsop discussed Subdiv 815-A at [67]-[96]. The relevant associated enterprises article for the purposes of that case was Art 9 of the US Treaty. By reason of the transitional provisions relating to s 815-20, the relevant OECD Guidelines for the purposes of that case were the 1995 Guidelines. 131 In Chevron, s 815-15(1)(a) and (b) were satisfied: see at [79]-[80]. The central issue was whether s 815-15(1)(c) was satisfied. As Allsop CJ noted at [81], that provision "posits a causal relationship between the 'conditions' referred to in Art 9 and 'an amount of profits which … might have been expected to accrue to the entity' but which has not so accrued 'by reason of those conditions'". Chief Justice Allsop continued at [82]-[83]: 82 The notion of conditions in Art 9 refers to the circumstances or environment that can be seen to operate between the two enterprises in their commercial or financial relations which are different to the circumstances or environment which would operate between independent enterprises. The word "conditions" is broad and flexible. The primary judge, at [582]-[583] of his reasons, referred to a number of individual conditions identified by the parties. Looking at the facts here one can, conformably with the way the respondent identified various conditions, see conditions operating between CAHPL and CFC which differ from conditions that might be expected to operate between CAHPL and an independent lender. Those conditions included the direction of the affairs of both companies and their relationship in respect of the on-lending of the funds raised by CFC by Chevron Treasury, in particular, by Mr Krattebol, such direction being in accordance with the best interests of the Chevron group, and in particular to bring about the most efficient corporate capital structure and the best after tax result for the Chevron group. 83 That condition or these conditions operated between CAHPL and CFC in their financial relations and was or were manifested in the Credit Facility. The inquiry then for the purposes of s 815-15(1)(c) is what "amount of profits" might have been expected to accrue, but did not by reason of the conditions. (Emphasis added.) 132 After setting out key parts of the 1995 Guidelines, Allsop CJ stated at [90]: The above discussion illuminates that the causal test in s 815-15(1)(c) based on Art 9 is a flexible comparative analysis that gives weight, but not irredeemable inflexibility, to the form of the transaction actually entered between the associated enterprises. A degree of flexibility is required especially if the structure and detail of the transaction has been formulated by reference to the group relationship and a "tax-effective" outcome (even if, as here, one that is not said to be illegitimate). The form of that transaction may, to a degree, be altered if it is necessary to do so to permit the transaction to be analysed through the lens of mutually independent parties. (Emphasis added.) 133 Applying these principles to the facts of Chevron, Allsop CJ stated at [92]-[93]: 92 The conditions operating between CAHPL and CFC if they were independent of each other would not include the direction by Chevron Treasury of the officers of both for the benefit of the group as a whole. The conditions between mutually independent CFC and CAHPL could, however, include CAHPL situated within the Chevron group and CAHPL being subject to the direction of Chevron for the benefit of the Chevron group. 93. In such circumstances, were CAHPL seeking to borrow for five years on an unsecured basis with no financial or operational covenants from an independent lender, in order to act rationally and commercially and conformably with the interests of the Chevron group to obtain external funding at the lowest possible cost consistently with any relevant operational considerations, it would do so with Chevron providing a parent company guarantee, if such were available. 134 Justice Pagone considered Div 13 at [111]-[134]. At [136]-[144], Pagone J considered and rejected a challenge to the constitutional validity of Subdiv 815-A. His Honour then considered and rejected a submission that assessments could not be made under Subdiv 815-A where there were existing determinations under Div 13: at [146]-[149]. 135 Justice Pagone considered Subdiv 815-A at [150]-[158]. At [152], Pagone J referred to the primary judge's findings regarding conditions operating between CAHPL and CFC in their commercial or financial relations which differed from those which might be expected to operate between independent enterprises dealing wholly independently with one another. Justice Pagone referred to the submissions on appeal for CAHPL and continued at [153]-[156]: 153 The interpretation to be given to Art 9(1) in its application in s 815-15(1)(b) must be in accordance with the rules of interpretation applicable to a treaty provision: see Thiel v Federal Commissioner of Taxation (1990) 171 CLR 338. Article 9(1) was described in SNF at 109 as attempting "to address at a high level of generality the problems thrown up by transfer pricing by providing for pricing as if the transaction had been between independent parties". The purpose of Art 9(1), as explained in SNF, and its function through the operation of s 815-15(1)(b), is to identify those conditions existing between enterprises in two countries affecting their financial or commercial relations. The identification of those conditions permits a broad and wide ranging inquiry into the relations existing between the enterprises concerned. There is not excluded from that inquiry the relationship existing between the parties such as parent or subsidiary. The factual inquiry of the conditions operating between the enterprises which needs to be undertaken is unconfined by the terms of Art 9(1), or by the terms of s 815-15(1)(b), by any circumstance other than that there be identified those conditions which bear relevantly and probatively upon whether they operate between the relevant enterprises "in their commercial or financial relations which differ from those which might be expected to operate between independent enterprises dealing wholly independently with one another". His Honour was, therefore, permitted to take into consideration, as conditions, the relations between CAHPL and CFC, and of other members of the Chevron group, notwithstanding that they were also identified as preconditions in (a) and (b) in Art 9(1). … 154 The third condition in s 815-15(1)(c) was that an amount of profits had not accrued which might have been expected to accrue to CAHPL but for the conditions mentioned in the Article. His Honour found that this condition was satisfied; that is, that an amount of profits did not accrue to CAHPL that might have been expected to accrue to CAHPL but for the conditions mentioned in Art 9(1). … 155 Section 815-15(1)(c) contemplated a relationship between the non-accrual of profits and the conditions mentioned in Art 9 by reference to a "but for" test. The determination of factual causation by reference to a "but for" test has been said to require the determination of whether something was "a necessary condition" of the "occurrence": see Wallace v Kam (2013) 250 CLR 375 at [16]; Strong v Woolworths Ltd (2012) 246 CLR 182 at [20]; March v E & MH Stramare Pty Ltd (1991) 171 CLR 506 at 515-516. In this case the inquiry about the existence of such a causative relationship (in that sense) required an evaluative judgment about whether the conditions mentioned in Art 9(1) were necessary conditions for the non-accrual of profits which might have been expected to accrue. The function of the condition in s 815-15(1)(c) is to determine those profits which had been excluded from assessability and is the legislative equivalent of the words found in Art 9(1), namely, that profit "but for those conditions, might have been expected to accrue to one of the enterprises, but by reason of those conditions, have not so accrued". … 156 The evaluative judgment required by Art 9 required comparing the conditions which operated between CAHPL and CFC with those expected to operate between "independent enterprises" but that did not require his Honour to compare CAHPL and CFC with a wholly stand-alone company. The purpose of the comparison is to determine whether profits have not accrued for tax in a jurisdiction which "might have been expected to accrue" but for the condition found to operate. His Honour was correct to reject CAHPL's contention that an "independent" company within Art 9 was a company which stood alone with no corporate affiliations. … The comparison which Art 9 required to be undertaken is akin to that contemplated by Div 13. The object was to determine whether conditions actually prevailing between the relevant enterprises differed from those which might be expected to operate if they had been independent and had been dealing wholly independently with each other. The hypothetical in that exercise is undertaken for the purpose of determining whether the dealing which actually occurred might have been expected to occur on different terms. That will generally require that the parties in the hypothetical will generally have the characteristics and attributes of the actual enterprises in question. The comparison required by Art 9 is expected to be undertaken in a practical business setting of potential transactions able to be entered into and which are to be used as a basis for a reliable hypothesis upon probative material. Ultimately the question was that of determining whether profits might have been expected to accrue to CAHPL if the transaction it entered into with CFC had been entered into where the conditions which operated between CAHPL and CFC did not operate, that is, where CAHPL and CFC had been dealing with each other wholly independently. The hypothetical thus required hypothesising circumstances in a dealing between an enterprise like CAHPL and an enterprise like CFC where, however, the conditions operating between them were between independent enterprises dealing wholly independently with each other. … His Honour was correct to assume on the evidence that what might be expected to operate between independent enterprises dealing wholly independently with each other was a loan by CAHPL with security provided by its parent at a lower interest rate. (Emphasis added.)

The judgment in Glencore 136 In Glencore, a joint judgment was delivered by Middleton and Steward JJ, and a separate judgment (agreeing in the result) was given by Thawley J. 137 In relation to the associated enterprises article in issue in Glencore (Art 9 of the Swiss Treaty), the taxpayer did not dispute that some conditions operated between the relevant companies (referred to as CMPL and GIAG) which differed from those which might be expected to have operated between independent enterprises dealing wholly independently with one another; it was accepted that GIAG exercised financial and managerial control over CMPL's mine: see at [13] per Middleton and Steward JJ. 138 The relevant version of the Transfer Pricing Guidelines for the purposes of Glencore was the version published by the OECD in 1995: see at [15] per Middleton and Steward JJ. That version was referred to in their Honours' judgment as the "Transfer Pricing Guidelines". 139 At [152]-[153], Middleton and Steward JJ discussed the Transfer Pricing Guidelines (i.e. the 1995 Guidelines) and, in particular, the exceptions referred to in paragraph 1.37 of those Guidelines. As their Honours noted, the Guidelines refer to the need for a revenue authority to apply the "arm's length principle" to the "transaction actually undertaken by the associated enterprises as it has been structured by them". There are two exceptions to this principle which are expressed in paragraph 1.37 of the Guidelines: The first circumstance arises where the economic substance of the transaction differs from its form. … The second circumstance arises where, while the form and substance of the transaction are the same, the arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner and the actual structure practically impedes the tax administration from determining an appropriate transfer price. 140 Having set out the above quotation, Middleton and Steward JJ made the following observations regarding the Transfer Pricing Guidelines at [153]: We are hesitant to comment on the language used in these so-called exceptions. The language deployed is very highly generalised and is frustratingly opaque. Further, the discernible object of the Transfer Pricing Guidelines is that they are just that; they are only a guide as to how a revenue authority or a taxpayer might apply the "arm's length principle", or how an OECD member country might enact the "arm's length principle" into domestic law. In that respect, the various statements of abstract principle that may be found in the Transfer Pricing Guidelines may be contrasted with the much greater discipline and rigour in drafting that is usually found in domestic legislation. Of course, Subdiv 815-A obliges the Court to work out whether an entity has got a transfer pricing benefit consistently with these Guidelines, but only to the extent they are relevant. In that respect, where a relevant principle is expressed in nebulous terms, it may not be of much real assistance to the task of applying Subdiv 815-A to particular facts. 141 Their Honours stated, at [154], that in any event it was unnecessary to say anything more about the Transfer Pricing Guidelines because, in their Honours' view, and contrary to the view of the primary judge in that case, the Commissioner "did in fact apply Subdiv 815-A and Div 13 to the transaction actually undertaken by CMPL and GIAG". In their Honours' view, all the Commissioner sought to change was the consideration for the copper concentrate in fact supplied. 142 Their Honours discussed the legal capacity of the Commissioner to substitute a different formula or a different methodology in relation to price for the formula or methodology agreed to by the parties to a transaction. Their Honours first discussed this in the context of Div 13, and then stated that the same conclusion applied to Subdiv 815-A. Their Honours stated at [154]-[157]: 154 … Where parties to an agreement specify a price in dollar terms, or in the terms of another currency, Div 13 gives the Commissioner a clear power to substitute a different price which he considers to be the "arm's length consideration." Upon making his determination under s 136AD, that consideration is then "deemed" to be the relevant consideration received in respect of a given supply. Where parties do not specify an actual price, but rather agree that the consideration payable is to be determined by a formula or some other methodology, the Commissioner, in our view, is also permitted - in the sense of having a legal capacity - to substitute a different formula or a different methodology which he considers will result in the ascertainment of the arm's length consideration. The word "consideration", as Pagone J observed in Chevron at [133], "is not to be construed narrowly and includes that given by the acquiring party so as to move the agreement whether that be in money or in money's worth": Archibald Howie Pty Ltd v Commissioner of Stamp Duties (NSW) (1948) 77 CLR 143 at 152; [1948] 2 ALR 489.We agree. It is at least wide enough to include a pricing formula or some other methodology for the determination of price. 155 Our conclusion that the Commissioner has this legal capacity is a necessary consequence of the terms of s 136AD, which permit him to make a determination whereby the taxpayer is relevantly deemed to have received consideration equal to the arm's length consideration. In that respect, the term "consideration" necessarily directs one to identify those clauses in an international agreement which define the price payable for the supply of goods or services. A distinction must therefore be drawn between such a clause or clauses and other clauses found within an international agreement, including those which may indirectly bear upon price. This distinction may be unsatisfactory, particularly in practice, but is nonetheless mandated by the text of Div 13. Whether the Commissioner is authorised under Div 13 to ignore or reframe those other clauses which do not define the price payable must be very seriously doubted. Again, that is because of the language of Div 13. When the Commissioner makes his determinations under s 136AD, the legal consequence is limited to the taxpayer being deemed to have, in this case received, arm's length consideration as defined under s 136AA. Consistently with the usual rule about deeming provisions, the statutory fiction mandated by Div 13 should be construed strictly and only for the purpose which it serves: Federal Commissioner of Taxation v Comber (1986) 10 FCR 88 at 96; 64 ALR 451 at 458 per Fisher J; Financial Synergy Holdings Pty Ltd v Commissioner of Taxation (2016) 243 FCR 250; [2016] FCAFC 31 at [34] per Middleton and Davies JJ. There is thus no power or authority to substitute different terms of a contract where those terms are not seen as defining the consideration received, relevantly, for the supply of goods. Whether a term of a contract is to be characterised as such a term will need to be decided on a case by case basis. 156 In our respectful view, the same conclusion concerning the substitution of a different formula or methodology to ascertain the arm's length consideration applies to Subdiv 815-A. The "conditions" referred to in Art 9 of the Swiss Treaty must include the consideration paid, and where parties have chosen to select a form of consideration which is ascertainable by the use of a formula or some other methodology, the "conditions" referred to in Art 9 of the Swiss Treaty must include that formula or that methodology. In respect of the conditions in an agreement that only indirectly bear upon price, the extent to which the Commissioner can substitute different conditions if he considers that those conditions differ from those which might be expected to operate between independent enterprises dealing wholly independently with one another is a question for another day. 157 In our view, the reasons of Allsop CJ in Chevron support, at least with respect to Div 13, the foregoing conclusion. His Honour observed at [46]: … (Emphasis added.) 143 At [163], Middleton and Steward JJ stated: As was made clear in Chevron, Div 13 contemplates a hypothetical transaction entered into by independent parties dealing at arm's length with each other and Subdiv 815-A contemplates hypothetical conditions which might be expected to operate between independent enterprises dealing wholly independently with one another. … (Emphasis added.) 144 In the next section of their judgment, at [164]-[191] Middleton and Steward JJ considered the issue of the 'personality' of the parties to the hypothetical contract. While this discussion is largely directed to Div 13, reference is also made to Subdiv 815-A. It therefore appears that some, if not all, of the principles expressed in this part of their Honours' judgment are applicable to Subdiv 815-A. At [164]-[165], their Honours outlined the Commissioner's submissions. The Commissioner had submitted that both Div 13 and Subdiv 815-A required the hypothetical parties to the hypothesised copper concentrate transaction to be clothed with the very same attributes that CMPL and GIAG had at the relevant time (February 2007). The Commissioner's submissions were further set out in [165] as follows: In that respect, the presence of the pre-existing CMPL-GIAG agreement on different terms loomed large in the Commissioner's case. His case was built upon a comparison of the benefits conferred on CMPL by that contract as compared with the reduced cash benefits which were expected to arise by reason of the amendments made in February 2007. Why, it was asked, would a party in the position of CMPL have agreed to such a debilitating change of terms? It simply was not what an independent party dealing at arm's length with a buyer of copper concentrate would ever have agreed to. 145 Their Honours rejected the Commissioner's submissions at [166]: With respect, we think the Commissioner has asked the wrong question. As a result, whether the CMPL-GIAG agreement fell within that range of hypothetical contracts for the sale of copper concentrate which independent parties dealing at arm's length with each other might reasonably be expected to have entered into, did not feature in the Commissioner's analysis. Because the Commissioner was not asking the correct question, he submitted that there was no range of possible outcomes for this particular mine, but just one outcome, namely retention of the pre-existing terms as they were just before February 2007. 146 Justices Middleton and Steward then discussed the issue of the personality of the parties to the hypothetical contract in detail. Their Honours observed, at [169], that Chevron must be taken to have softened, at least to an extent, the conclusion expressed by the Full Court of this Court in Commissioner of Taxation v SNF (Australia) Pty Ltd (2011) 193 FCR 149 (SNF) at [98]-[99]. At [169]-[171], Middleton and Steward JJ endorsed the observations of Allsop CJ in Chevron at [42]-[44] in relation to Div 13. Having set out those paragraphs, Middleton and Steward JJ observed that they "neither support a test which is the 'utter disembodiment' of the actual parties from the hypothetical transaction, nor a test whereby the hypothetical party stands entirely in the shoes of the taxpayer". 147 At [176], Middleton and Steward JJ stated that the extent of depersonalisation in the case before them depended, to use the language of Allsop CJ in Chevron at [45], upon what was appropriate to the task of determining an arm's length consideration. Their Honours then set out seven relevant considerations at [177]-[186]: 177 First, one should commence with the simple and uncontroversial proposition that it is only those attributes or features which can affect the consideration which is receivable which should clothe the hypothetical seller of copper concentrate. 178 Secondly, it is only the objective attributes or features which should be included. In SNF at first instance (SNF (Australia) Pty Ltd v Commissioner of Taxation (2010) 79 ATR 193; [2010] FCA 635) Middleton J observed at [44]: Just as in a valuation, the focus is not on the subjective or special factors of the parties involved in the transaction (for example whether they were financially sound or not), but is on the transaction itself and the consideration paid. In this sense, the task is not dissimilar to that undertaken in a valuation: see, for example, Boland v Yates Property Corporation Pty Ltd (1999) 167 ALR 575; 74 ALJR 209; [1999] HCA 64 at [82]-[83] and Spencer v Commonwealth (1907) 5 CLR 418; 14 ALR 253. 179 Nothing said by this Court in SNF or in Chevron has led us to doubt the general correctness of this observation which we adopt. It means that one should include all of the objective circumstances of the actual CSA mine, such as the means of production, the levels of production, the costs of production, the size of the mine, its location, and any problems arising from the location (eg water supply issues), and so on. It would include the objective circumstances of the copper concentrate market as at February 2007, including what was being reported by Brook Hunt, and what CMPL had budgeted and forecasted about the market. It would also include being a wholly owned subsidiary of a multinational natural resources group, but that group would not necessarily need to be the Glencore Group. 180 Thirdly, we think that it would be appropriate to exclude any considerations that are the product of CMPL's non-arm's length relationship with GIAG and the broader Glencore Group. In our view, that would include whatever attitude or policy CMPL had formed about the issue of risk when selling to GIAG. Of necessity, any such attitude or risk would have been distorted by CMPL's lack of independence from GIAG. Inferentially, as a separate entity it is unlikely to have considered the issue of risk when selling to GIAG, save for its attempt to comply with Div 13 in the 2007 to 2009 years. It follows that the taxpayer's failure to lead evidence about CMPL's appetite for risk taking is not fatal. Nor is the failure to lead evidence about the Glencore Group's policy about risk taking (if any). Whilst such a policy, if it existed, might have been relevant, it was also, for the reasons given below, open to the taxpayer to discharge its onus on this issue through the opinions of Mr Wilson. 181 Fourthly, and in any event, because the issue of risk taking is so bound up here with the method or formula for determining the consideration payable for the sale of copper concentrate, the taxpayer was entitled to support the appropriateness of the particular formula chosen in February 2007 by reference to what an independent party in the position of CMPL might have done to address risk in the objective circumstances of the copper concentrate market at that time in selling either to an independent trader or smelter. For that purpose, it could legitimately adopt a more conservative approach to risk so long as it was commercially rational to do so, and it is what an independent party dealing at arm's length might reasonably be expected to have done. The Commissioner was entitled to do likewise in support of a different pricing formula. Such a conclusion is consistent with Div. 13 imposing an objective test: WR Carpenter Holdings Pty Ltd v Commissioner of Taxation (2007) 161 FCR 1; 241 ALR 636; [2007] FCAFC 103 at [27]. 182 Importantly for this case, in our view it was open to the taxpayer to form its own commercial judgment about how risk was to be assessed as at February 2007 in the hypothetical transaction between independent parties. It was also open for Mr Wilson to form such a commercial judgment arising from the fact that the CSA mine was a high cost venture, so long as that judgment was the expression of what an independent party acting at arm's length might reasonably be expected to have adopted. On behalf of the Commissioner, it was also open for Mr Ingelbinck to perform a similar exercise. It follows that choices which are open to be made about risk may affect the determination of the arm's length consideration. It also follows that there is likely to be more than one price which is an arm's length price. In that respect, a taxpayer is under no obligation to choose a pricing methodology which pursues profitability in Australia at the expense of prudence. There is no obligation to "maximise" profitability at the expense of all else. 183 Fifthly, the possibility of a range of arm's length outcomes, each of which would be sufficient to answer the statutory test, is supported by authority. As this Court said at [125] in SNF: But that does not mean, more generally, that there is only one arm's length consideration. Often enough, for example, goods will change hands at prices which are different to the market value for perfectly legitimate reasons such as a need to secure long term or large volume arrangements or with traded securities, a premium for control and so on. No doubt, it was for similar reasons that Dr Becker, the Commissioner's own witness, in response to the question '[a]nd you accept that, typically, there's not one arm's length price for a particular product?' answered '[t]hat's correct, yes'. 184 Sixthly, what controls the range of acceptable arm's length outcomes is the concept of what might reasonably be expected. As Pagone J observed in Chevron, that concept calls for evidence which supports a "sufficiently reliable" prediction which can be seen as reasonable. As his Honour said at [127]: The standard of reasonable expectation found in the words "might reasonably be expected" in s 136AA(3)(d) calls for a prediction based upon evidence. In Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359; 123 ALR 451 the High Court said at CLR 385; ALR 461: A reasonable expectation requires more than a possibility. It involves a prediction as to events which would have taken place if the relevant scheme had not been entered into or carried out and the prediction must be sufficiently reliable for it to be regarded as reasonable. The prediction contemplated by Division 13, like that contemplated by s 177C of the 1936 Act, involves an evaluative prediction of events and transactions that did not take place but the prediction must be based upon evidence and, where appropriate, upon admissible, probative and reliable expert opinion: see Commissioner of Taxation v Futuris Corporation Ltd (2012) 205 FCR 274; [2012] FCAFC 32 at [79]-[81]; see also Peabody v Federal Commissioner of Taxation (1993) 40 FCR 531; 112 ALR 247 at 256 (Hill J). 185 The Commissioner in his written submissions appeared to contend that the hypothetical mandated by Div 13 required a taxpayer to prove what independent parties would have agreed to be the arm's length consideration, rather than what independent parties might reasonably be expected to have paid or received. He relied on certain sentences in Chevron which appeared, on one view, to adopt a "would" test, but clarified during the hearing before us that he accepted that Div 13 mandates a "might" test. We respectfully agree with this clarification. We do not think that those sentences in Chevron were intending to convey a test at odds with the language of s 136AA(3)(c) and (d) of the 1936 Act. The statutory test relevantly requires the hypothetical price to be ascertained by reference to what might reasonably be expected to have been received or paid if the property had been supplied under an agreement entered into between independent parties dealing at arm's length with each other. In our view, Art 9 of the Swiss Treaty mandates a relevantly analogous inquiry. It refers to what might be expected and not to what would be expected. 186 Finally, in applying the foregoing a degree of flexibility and pragmatism is required. Whilst the onus remains on the taxpayer to discharge its onus of proof of demonstrating excessiveness in the amended assessments, one should not apply Div 13, or indeed Subdiv 815-A, narrowly. Predicting how independent parties dealing at arm's length with each other would price a wholly controlled transaction is a difficult and complex issue. That is especially so when one integer which here directly affects the consideration payable is the formation of a commercial judgment about risk taking. The Court should acknowledge, and take into account, the practical difficulties faced by both the taxpayer and the Commissioner in finding evidence that grounds what is sufficiently reliable, or which demonstrates that something is insufficiently reliable. The answer is not always to be found in overly lengthy and complex expert reports. Common sense is required. (Emphasis added.) 148 In relation to the issue of personality under Subdiv 815-A, Middleton and Steward JJ stated at [189] that Subdiv 815-A "applies in an analogous way to Div 13" and that "[b]oth must be applied flexibly". Their Honours cited with approval the observations of Allsop CJ in Chevron at [90]. Their Honours also cited with approval a passage from [156] of the reasons of Pagone J in Chevron. 149 Turning to the judgment of Thawley J in Glencore, his Honour agreed with the orders proposed by Middleton and Steward JJ, but expressed his own reasons in relation to the operation of Div 13 of the ITAA 1936 and Subdiv 815-A of the ITAA 1997. His Honour addressed Div 13 and Subdiv 815-A separately, in light of the significant differences in the statutory language and structure: see [248]. 150 His Honour addressed Div 13 at [249]-[272]. 151 At [273]-[281], Thawley J considered the 1995 Guidelines. At [280]-[281], his Honour referred to the two exceptions appearing in paragraph 1.37 of the 1995 Guidelines (set out at [139] above). At [278], Thawley J stated that, contrary to the primary judge in that case, he did not read the reasons of Allsop CJ in Chevron as stating or implying that the identification of the arm's length consideration must be based on the actual transaction as structured by the parties, save in the case of the two exceptional circumstances referred to in the 1995 Guidelines. At [280], Thawley J stated that Allsop CJ "was not applying the exceptions referred to in the 1995 Guidelines". Justice Thawley stated at [280]: Rather, the Chief Justice's reference to the two exceptions was merely to support the conclusion otherwise reached by his Honour from the text of Subdiv 815-A that the inquiry under s 815-15(1)(c) was one which required a "comparative analysis that gives weight, but not irredeemable inflexibility, to the form of the transaction actually entered between the associated enterprises": Chevron at [90]. 152 Justice Thawley considered Subdiv 815-A at [282]-[299]. After setting out the key relevant provisions, Thawley J noted at [288] that the real issue in dispute between the parties was the application of paragraphs (b) and (c) of s 815-15(1). His Honour outlined the steps involved and the focus of inquiry at [289]-[291]: 289 The first step, required by para (b), is to identify the "conditions" in Art 9, namely what "conditions operate between the two enterprises in their commercial or financial relations which differ from those which might be expected to operate between independent enterprises dealing wholly independently with one another". 290 The second step, required by para (c), is to identify whether "but for the conditions" in Art 9 an amount of profits might have been expected to, but did not, accrue to the entity. 291 The focus of the inquiry is on whether conditions operated between enterprises in their commercial or financial relations and, if so, what effect those conditions had. As mentioned above, the primary judge approached the task under Subdiv 815-A on the basis that it was not permissible to determine consideration otherwise than by reference to the agreement in fact entered into unless one of the exceptions in the 1995 Guidelines applied. In my view, this fails to give effect to s 815-15(1)(b) and (c) which focus on whether conditions operating between the entities affected the profits which accrued. 153 At [292], Thawley J stated that, if one of the exceptions in paragraph 1.37 of the 1995 Guidelines applied, it would be consistent with the 1995 Guidelines to determine that the effect of Subdiv 815-A in relation to the entity was that it got a transfer pricing benefit under s 815-15 that could be negated under s 815-10. Importantly, Thawley J then stated at [292]: … However, for the reasons which follow, I would not take the step taken by the primary judge and conclude that, in all cases where the two exceptions did not apply strictly according to the terms of those exceptions as identified in the 1995 Guidelines, the relevant transaction must always be taken exactly as found. 154 Justice Thawley set out his reasons for that view at [293]-[294]: 293 Firstly, Subdiv 815-A must be applied according to its terms and one could not give effect to the 1995 Guidelines if to do so would be inconsistent with the terms of the subdivision or would fail to allow its operation according to its terms. Section 815-15(1)(c) is engaged where "an amount of profits which, but for the conditions mentioned in the article, might have been expected to accrue to the entity, has, by reason of those conditions, not so accrued". If the conclusion were reached that the provision applied, that conclusion should be given effect even if the facts did not strictly fit within one of the two exceptions contained in [C.1.37] of the 1995 Guidelines. 294 Secondly, in any event, I do not read the 1995 Guidelines as specifying that the two situations identified are the only situations which might be regarded as "exceptional". As noted above, I do not read the decision of the Full Court in Chevron, or the reasons of Allsop CJ specifically, as authority for such a proposition. 155 Justice Thawley also stated at [296]-[299]: 296 In the first sentence of [156], Middleton and Steward JJ state that their conclusions with respect to the operation of Div 13 concerning the "substitution" of a different formula or methodology for ascertaining the arm's length consideration apply equally to Subdiv 815-A. Their Honours' conclusions in relation to Div 13 were, in summary, that the Commissioner may substitute clauses which define price, but not those which do not. In my view: (1) If the terms in the agreement which "define price" are arm's length terms, it would ordinarily be unlikely that those terms could be said to be "conditions" operating "between the two enterprises in their commercial or financial relations which differ from those which might be expected to operate between independent enterprises dealing wholly independently with one another". In those circumstances, it is difficult to see how they could rationally be substituted. (2) If the agreement contains terms which do not define price, and which would not be found in the agreement if it had been between independent enterprises dealing wholly independently with one another, it is difficult to see why those terms could not be substituted under Subdiv 815-A. Such terms may well amount to "conditions" operating "between the two enterprises in their commercial or financial relations which differ from those which might be expected to operate between independent enterprises dealing wholly independently with one another". If such terms affect the consideration payable or receivable, or profits, it is difficult to see why they should not be "substituted". 297 In my view, the language of Subdiv 815-A does not contemplate or require a distinction between terms which define price (which Middleton and Steward JJ consider can be substituted) and those which do not (which their Honours consider may not be substituted). In this respect, I note that their Honours' observation at [155] that "the term 'consideration' [in Div 13] necessarily directs one to identify those clauses in an international agreement which define the price" does not apply to the language of Subdiv 815-A. 298 That is not to say that it is irrelevant to look at the extent to which a particular clause affects consideration or profit. That is plainly and directly relevant. The point of difference is simply that what may or may not be "substituted" for the purpose of applying Subdiv 815-A does not turn on a potentially "unsatisfactory" categorisation of contractual clauses as ones which do or do not define price - see [155] of Middleton and Steward JJ's reasons for judgment. Subdiv 815-A, in its application to the present case, turns on the question of whether conditions operated "between the two enterprises in their commercial or financial relations which differ from those which might be expected to operate between independent enterprises dealing wholly independently with one another" - see s 815-10(2); Art 9. 299 As to the final sentence of [156], this implicitly acknowledges the possibility that conditions which do not define price may be substituted, a conclusion with which I agree. (Emphasis added.)

Summary 156 The following is a summary of some of the key propositions relating to Subdiv 815-A that in my view emerge from Chevron and Glencore: (a) In relation to s 815-15(1)(b) and the reference to "conditions" in the associated enterprises article (Art 9 of the US Treaty in Chevron but equally applicable to Art 6 of the Singapore DTA), at least two members of the Full Court in Chevron accepted that the "identification of those conditions permits a broad and wide ranging inquiry into the relations existing between the enterprises concerned" and that the factual inquiry into the conditions operating between the enterprises "is unconfined by the terms of [the associated enterprises article], or by the terms of s 815-15(1)(b), by any circumstance other than that there be identified those conditions which bear relevantly and probatively upon whether they operate between the relevant enterprises 'in their commercial or financial relations which differ from those which might be expected to operate between independent enterprises dealing wholly independently with one another'": Chevron at [153] per Pagone J (Perram J agreeing); see also at [1], [82] per Allsop CJ. (b) In relation to the causal test in s 815-15(1)(c), based on the associated enterprises article (Art 9 of the US Treaty in Chevron and Art 9 of the Swiss Treaty in Glencore, but equally applicable to Art 6 of the Singapore DTA), all members of the Full Court in Glencore endorsed the observation of Allsop CJ in Chevron at [90] that the test "is a flexible comparative analysis that gives weight, but not irredeemable inflexibility, to the form of the transaction actually entered into between the associated enterprises": see Glencore at [189] per Middleton and Steward JJ, at [280] per Thawley J. (c) At least two members of the Full Court in Glencore endorsed the observation of Allsop CJ in Chevron at [90] that the form of the transaction "may, to a degree, be altered if it is necessary to do so to permit the transaction to be analysed through the lens of mutually independent parties": see Glencore at [189] per Middleton and Steward JJ; see also at [280], [292], [297]-[298] per Thawley J. (d) At least two members of the Full Court in Glencore endorsed the observations of Pagone J in Chevron at [156] that the comparison required by s 815-15(1)(c) and the associated enterprises article "will generally require that the parties in the hypothetical will generally have the characteristics and attributes of the actual enterprises in question" and that in the circumstances of Chevron the exercise "required hypothesising circumstances in a dealing between an enterprise like CAHPL and an enterprise like CFC where, however, the conditions operating between them were between independent enterprises dealing wholly independently with each other": see Glencore at [190] per Middleton and Steward JJ; see also at [291] per Thawley J. (e) In relation to whether non-price terms of a transaction may be the subject of substitution in the exercise required by s 815-15(1)(c) and the associated enterprises article, I consider that this matter was left open by Middleton and Steward JJ: see the last sentence of [156] in Glencore. Thus, it is not clear to me that their Honours necessarily expressed a different view to that expressed by Thawley J at [296]-[298] of Glencore. I respectfully agree with the observations of Thawley J at [296]-[298] regarding the operation of Subdiv 815-A. However, as already indicated, it is not clear to me that Middleton and Steward JJ necessarily expressed a contrary view.

Outline of STAI's contentions 157 The key propositions advanced by STAI are as follows: (a) The financial position of STAI in June 2002 was that the $5.2 billion borrowing had to take into account the fact that, due to the capital expenditure programme SOPL had embarked upon, its cash flow was not expected to be sufficient to meet interest payments and other expenditure for the short to medium term. This expenditure and the operations of SOPL more generally were, however, expected to see SOPL become cash flow positive in the medium term and able to meet interest payments and other outgoings. (b) Thus the terms of a borrowing of $5.2 billion had to allow for the fact that STAI could not fund interest payments out of its cash flow for the short to medium term. The LNIA (as amended) provided a mechanism which effectively deferred and capitalised interest until SOPL met certain benchmarks, which were expected to be reflective of its ability to make interest payments consistent with its commercial objectives associated with its capital expenditure programme. Although the effect of the LNIA was to defer and capitalise interest, it did so in a manner suited to the parties' actual position, which was that of parent and subsidiary. The mechanism under the LNIA (as amended) was to provide for no interest to accrue until certain financial benchmarks had been attained. In order to compensate for the interest-free period, the mechanism chosen was to apply a premium of 4.552% to the interest rate after the benchmarks were achieved. (c) The terms of the LNIA (as amended) and the Loan Notes issued by STAI to SAI, although drafted in the context of related parties, were in substance and in economic effect substantially similar to the terms which independent parties in similar circumstances acting wholly independently with each other might be expected to have agreed. Both the EP Report and Mr Chigas proceed on the basis that the correct (or reasonable) comparable is a commercial loan of $5.2 billion taken out in June 2002 under which interest could be deferred and capitalised to suit the borrower's expected cash flows. The EP Report and Mr Chigas also proceed on the basis that payments of interest and principal were made on the dates they were actually made. (d) No amount of profits might have been expected to accrue to STAI in the years ending 31 March 2010, 2011, 2012 and 2013 which did not accrue by reason of any non-arm's length conditions operating between STAI and SAI in respect of the LNIA. This is because the interest rate which might be expected to be payable for a loan such as this might be expected to be no less than the effective interest rate under the LNIA. 158 STAI also makes the following contentions: (a) It is now common ground that a company in the position of STAI in June 2002 could have borrowed $5.2 billion without a guarantee. It is also common ground that the most economical, and likely only, source of debt in the amount of $5.2 billion for a term of 10 years for a party in the position of STAI was the US DCM in the form of a new issue transaction (coupled with a USD:AUD Cross Currency Interest Rate Swap (CCIRS)). The parties also agree that a taxpayer in the position of STAI would be expected to have had exposure to an AUD borrowing rather than a USD borrowing. It follows that the statutory inquiry under both Div 13 and Subdiv 815-A directs that a comparison be made between the interest and other amounts payable under the LNIA, on the one hand, and those payable under a hypothetical DCM transaction (including a CCIRS) providing for the deferral and capitalisation of interest between wholly independent parties, on the other hand, but with payment being made on the dates they were in fact made by STAI. (b) The terms and economic effect of the LNIA as it applied at the relevant time, although perhaps different in precise detail to that which might have been negotiated between unrelated parties with the benefit of experienced financing lawyers, are substantially similar and of similar commercial effect to terms that would be expected in a DCM transaction between independent parties where the borrower sought to defer interest payments to suit its expected cash flow. Such an arm's length agreement might reasonably be expected to provide for the deferral and capitalisation of interest in a manner having substantially the same economic effect as the LNIA. Accordingly, the substantive criteria under the transfer pricing provisions for the denial of the deductions claimed by STAI were not satisfied. (c) STAI's primary case is that the actual cost of the borrowing to STAI under the LNIA was not greater (in fact, it was significantly less) than the cost that a party in STAI's position might be expected to have paid to an independent party acting wholly independently so as to achieve the same cash flow advantages which STAI actually achieved. Specifically, the effective credit spread of the LNIA (approximately 144 bps plus a withholding tax gross-up) is lower than the credit spread that might reasonably be expected to have been agreed in an arm's length DCM transaction between independent parties. 159 STAI relies on the evidence of Mr Chigas. STAI summarises his approach as follows: (a) Mr Chigas looks to the actual borrowing and payments over the ten years and assumes a traditional DCM transaction with deferred and capitalised interest. That requires him to adjust for the interest free period and the fact that interest under the LNIA accrues only on the face value of the notes. (b) He does that by working out the effective credit spread on the actual borrowing and actual payments having regard to the dates on which the actual payments were made. That calculation results in an actual credit spread of approximately 144 bps. (c) He then applies this credit spread to the actual borrowing with assumed deferral and capitalisation of interest in a manner consistent with a DCM transaction in order to see what the transaction with the actual effective interest rate would look like. Thus, using the actual effective interest rate calculated by reference to the actual credit spread over the period of the loan he calculates what the semi-annual accrual and deferral/capitalisation of interest would look like. (d) He then uplifts the interest by 10/9 to allow for the actual withholding tax indemnity. 160 STAI makes the following submissions: (a) Assuming that the actual transaction was a traditional DCM borrowing with deferred and capitalised interest, Mr Chigas's calculation results in the same interest outgoing (including the 10/9 uplift) as was actually paid over the period, namely $4,903,096,322. Of this amount, $490,309,632 of withholding tax has been paid by STAI to the Commissioner on behalf of SAI. (b) Mr Chigas then determines that, had STAI actually borrowed in a DCM transaction with deferred and capitalised interest over ten years, the credit spread that might be expected to apply was 400 bps: see Exhibit 8 of Mr Chigas's first report dated 25 May 2021 at pp 86 and 87. (c) It follows that STAI's profits in the years ending 31 March 2010, 2011, 2012 and 2013 were not less (in fact, were greater) than those which might have been expected to accrue had the $5.2 billion been borrowed in an arm's length dealing between independent parties in substantially similar circumstances. 161 STAI contends that the case now advanced by the Commissioner through his experts is quite different to that which founded his determinations (and the objection decisions). STAI submits that the new case (assuming it can be advanced) is fundamentally flawed, for reasons set out in STAI's outline of submissions. STAI submits that there are four fundamental flaws with the Commissioner's approach. In summary, STAI submits: (a) The first flaw is the erroneous assumption that rather than STAI borrowing $5.2 billion for a period of ten years in June 2002 with the ability to defer and capitalise interest, one must hypothesise a bridge loan of $5.2 billion for 9 months without the ability to defer and capitalise interest, a new $5.2 billion term loan being negotiated in March 2003 for 9 years and 3 months with no ability to defer and capitalise interest, and an additional borrowing of $1.5 billion (although on this scenario $1.89 billion was needed) to cover interest payments due under the principal loan. (b) The second flaw in the Commissioner's case is the erroneous conclusion by his credit rating expert, Mr Weiss, that implicit (non-binding) parental support would be provided by SingTel, and indirectly by the Government of Singapore, which would elevate the hypothetical borrower's standalone credit rating by 6 to 8 notches (rather than 2 to 3 notches as opined by Dr Chambers). The issue of implicit support (if any) by Singtel as the indirect parent of STAI is irrelevant to the hypothetical task as such support is a "product of [STAI's] non-arm's length relationship with [SAI] and the broader [SingTel] Group" which should be excluded from consideration: see Glencore at [180]. (c) The third flaw in the Commissioner's case is his assertion that an independent borrower in the position of STAI might not have been expected to have fixed the interest rate under the LNIA in the middle of the Global Financial Crisis. (d) The fourth flaw relates to the withholding tax gross-up. Mr Chigas states, as appears to be uncontroversial, that loan agreements of this nature invariably have clauses which effectively indemnify the lender against withholding tax liabilities incurred by the lender.

Outline of the Commissioner's contentions 162 The Commissioner's contentions can be summarised as follows: (a) The hypothetical enquiry involved under each of Subdiv 815-A and Div 13 involves a reasonable prediction which has regard to what would be "commercially rational" in the circumstances of the parties. (b) It would not have been commercially rational for STAI and SAI to enter into a $5.2 billion debt on the terms of the LNIA if they were independent parties acting at arm's length. The terms and conditions operating with respect to the LNIA would not, at arm's length, be a "reasonable" or "sufficiently reliable" prediction (Chevron at [46], [127]; Glencore at [184]) in the circumstances, which include the parties' membership of a multinational group akin to the SingTel group. (c) It is implausible that SingTel would have permitted STAI to incur $5.2 billion of debt on the terms of the LNIA, including as amended, to an unrelated creditor. The alternative financing outlined by Mr Chigas, relied upon by STAI in these proceedings, is also implausible. STAI had other, significantly more attractive "options realistically available" to it (see the 2010 Guidelines, paragraphs 1.34-1.35, and the 1995 Guidelines, paragraphs 1.15-1.16), including the $5.2 billion financing proposed by Mr Johnson and, if implicit credit support did not elevate STAI's credit rating to the A-level (which the Commissioner disputes), the provision of a parent guarantee by SingTel. (d) The terms of the LNIA in its initial form and after each of the amendments included conditions in the commercial and financial relations of SAI and STAI which depart fundamentally from arm's length conditions. The DCM experts agree that no instrument with these terms existed, or exists, in the market. The Second and Third Amendments inflated the interest rate well over that which would be payable at arm's length, having regard to the credit quality of STAI's assets and that of the SingTel group. (e) The effect of the Second Amendment was to make the instrument interest-free for the period in which STAI did not have positive taxable income. The accrual of interest was stopped, so SAI did not have to recognise a liability for interest withholding tax in that period. The "benchmarks" appear to have been reverse-engineered to be met not at the time that STAI became profitable, but at the time it exhausted carried forward tax losses. Introducing the "premium" meant that if and when STAI was profitable and had consumed its carried-forward tax losses, interest deductions at a high interest rate would be used to reduce STAI's Australian tax. The Variation Notice mechanism allowed SAI to control when, and how much, interest was payable. (f) Independent parties would never agree to such terms. For example, when STAI and SAI agreed the Second Amendment: (i) STAI was exposing itself to the risk that the benchmarks would be met in the short term, in which case it would have to pay the premium rate of interest for almost the whole of the loan, an excessive interest rate given the credit quality of STAI's assets and the SingTel group - and be at the mercy of when the lender decided to issue Variation Notices or demand repayment. At arm's length, it is impossible to conclude that STAI would have borrowed on such terms. (ii) SAI was exposing itself to the risk that the benchmarks would not be met, in which case it would be making a 10-year loan of $5.2 billion for zero return. At arm's length, it is impossible to conclude that SAI would have lent on such terms. (g) The Third Amendment raised the interest rate even further, to 13.2575%, a high cost borne by STAI but recouped by SAI, the related lender. This was done at a time when the financial markets made such an amendment, had it been arm's length, most unsuitable. 163 The Commissioner relies on the evidence of Mr Weiss in relation to credit rating and Mr Johnson in relation to DCM matters. 164 The Commissioner is critical of the approach taken by STAI in reliance on Mr Chigas's evidence, and contends that it does not conform to the statutory tests under Subdiv 815-A. 165 The Commissioner further contends, in summary: (a) The correct approach involves identifying the conditions "which might be expected to operate between independent enterprises dealing wholly independently with one another", as required by s 815-15 and Art 6 of the Singapore DTA. What this requires is a flexible comparative analysis of the kind described in Chevron at [90]-[94] in order to identify the conditions which might be expected to have operated between SAI and STAI had "the transaction been structured in accordance with commercial reality with the parties dealing at arm's length": Chevron at [91]; see also at [131] and [156]. (b) In undertaking that exercise, the commercial circumstances of the parties and the terms of the actual transaction should be conformed to as much as is possible, while assuming the requisite independence. (c) The actual transaction here was the sale by SAI (a wholly-owned subsidiary of SingTel, acting at its direction) to STAI of the shares in SOPL in consideration for the issue of $9 billion of equity and $5.2 billion of debt on the terms of the LNIA. SingTel raised the finance to fund the original acquisition by SAI of the shares in SOPL, and the effect of the transaction between SAI and STAI was to push down to STAI the shares in SOPL and create new debt at the level of STAI without raising any new funds either for use in the business of STAI (or its subsidiaries) or to refinance the debt raised by SingTel to fund the acquisition of the shares in SOPL. (d) The debt under the LNIA was vendor finance for the acquisition of shares; it was not in form or substance a loan of money, let alone a bond raising or other borrowing in the financial markets. (e) Independent enterprises when evaluating the terms of the transaction embodied in the LNIA (in each of its iterations) would have compared the terms of the transaction with the other options realistically available to them and would only have entered into the transaction if they saw no alternative that was clearly more attractive: see Chevron at [88], [90]-[94]; 1995 Guidelines, paragraphs 1.15-1.16; 2010 Guidelines, paragraphs 1.34-1.35. If there is another realistically available option, the consideration in the actual transaction may be adjusted by reference to the profits that could have been obtained in the realistically available option: 2010 Guidelines, paragraphs 1.33-1.35, 9.60. This option is then a benchmark for determining the arm's length conditions that would apply in relation to the actual transaction, which involved vendor finance for the acquisition of the SOPL shares, and the resulting profits which might be expected to have accrued to STAI. (f) Both Mr Chigas and Mr Johnson identify that the most realistically available option for STAI to raise $5.2 billion of long-term funds from a third party lender or lenders to satisfy the obligation to pay the $5.2 billion of the purchase price to SAI, would be a borrowing in the US DCM. However, initially the LNIA was not long-term debt but rather a facility repayable on demand. (g) Mr Johnson identifies the commercially viable alternative third party financings for STAI which conform most closely to what actually transpired. He considers that an independent STAI would have done two separate financings: (i) a $5.2 billion interest-bearing debt (the Base Debt) - which would initially be a short-term 9 month bridging facility (which, Mr Johnson says, was in substance what the original LNIA was) from an Australian bank that was then refinanced on 31 March 2003 (the date of the Second Amendment) with a long-term USD bond (swapped into AUD). On neither facility would interest be "deferred" or contingent. There would have been no change to the facility on 30 March 2009 (the date of the Third Amendment), as an independent borrower would not have wanted or needed to refinance during the Global Financial Crisis, particularly not in the way that STAI did, if it had borrowed on arm's length terms; and (ii) a $1.5 billion medium-term revolving bank facility (the Ancillary Debt) - this facility would have enabled STAI to make regularly scheduled payments of interest on the Base Debt as would be seen in a typical arm's length loan, but also allow it to maintain the erratic schedule of payments that actually occurred under the LNIA. This Ancillary Debt reflects the substance of the deferral and capitalisation of interest under the LNIA (which would not occur under an arm's length transaction) by treating it as another borrowing (which is how it would occur under an arm's length transaction). (h) Mr Johnson's hypothetical transaction is a realistically available option which was open to STAI at the time it entered into the LNIA and at the time of the Second Amendment, and indicates how the LNIA would actually work, based on financings available in the third-party capital markets, if the parties to the LNIA had been dealing at arm's length. Mr Johnson's counterfactual conforms more closely to the actual LNIA (in its various iterations) than the counterfactual of Mr Chigas, and gives weight, although not "irredeemable inflexibility" to the actual transaction: see Chevron at [90]. (i) Mr Johnson applies his hypothetical to determine the amount of profits that did not accrue to STAI due to the non-arm's length conditions, and concludes that a financing on the above terms would have saved STAI $1.23 billion in interest repayments over the life of the loan (that is, from 28 June 2002 to 27 June 2012). (j) Critical to the disagreement between Mr Chigas and Mr Johnson regarding the pricing of the debt raised by STAI and hence whether profits did not accrue to STAI due to the non-arm's length conditions, and if so their amount, is the degree of uplift in STAI's credit quality for SingTel implicit support. For the reasons set out in his outline, the Commissioner submits that Mr Weiss's opinion on the impact of SingTel implicit support on STAI's credit rating is to be preferred to that of Dr Chambers and Mr Chigas. (k) However, if the Court concludes that the opinions of Dr Chambers and Mr Chigas on this issue are to be preferred to that of Mr Weiss, that is not the end of the matter. It is necessary to recognise the commercial reality that if STAI had been acting independently of SAI in relation to the LNIA at the time it was entered into and at the time of the Second Amendment, and had approached a lender or lenders seeking to raise $5.2 billion to pay that part of the purchase price for the shares in SOPL, it is likely that STAI would have sought a guarantee from SingTel if STAI's credit quality had not been enhanced through SingTel implicit support to "A" level credit quality. SingTel would, acting rationally, have given such a guarantee. (l) It is not in dispute that a borrowing of $5.2 billion by STAI with a parent guarantee from SingTel would have had the same credit rating as SingTel (i.e. AA-/A1), which would be one notch higher than the rating used by Mr Johnson in his calculation of the impact of the non-arm's length conditions on STAI's profits (and consequently profits foregone would be even higher). (m) There is no basis for Mr Chigas's view that if the hypothetical includes a SingTel guarantee, it is necessary to hypothesise that STAI would be required to pay a guarantee fee to SingTel calculated by reference to what a monoline insurer might be expected to charge as a third party guarantor, thereby increasing STAI's borrowing cost. 166 In opening, counsel for the Commissioner outlined three alternative cases (while emphasising that the burden was on the taxpayer to show that the assessments were excessive). These alternative cases are based on Mr Johnson's Further Calculations, which are described later in these reasons. The Commissioner's primary case is based on the Without Bridge Model. The Commissioner's secondary case is based on the No Amendment Model. The Commissioner's tertiary case is based on the No Third Amendment Model. A document was provided by senior counsel for the Commissioner that set out calculations based on each of these cases, including a comparison between the interest deductions allowed under the amendment assessments and the interest deductions that would be allowed under each of these cases. The effect of these calculations was that, if either the primary case or the secondary case were accepted, the amendment assessments would not have been shown to be excessive. No issue was taken with these calculations.

CONSIDERATION 167 I will now consider the evidence (both lay and expert) and the application of the statutory provisions to the facts and circumstances of this case. My consideration of these matters will be structured under the following headings: (a) Additional factual findings. (b) Credit rating evidence. (c) DCM evidence. (d) Subdiv 815-A of the ITAA 1997. (e) Div 13 of the ITAA 1936. (f) Other issues.

Additional factual findings 168 In addition to the findings set out in the Background Facts section of these reasons, I make the following factual findings, based largely on the evidence of Mr O'Sullivan. These additional findings relate to four topics, which are or may be relevant to the application of Subdiv 815-A and Div 13: (a) The financial position of SOPL. (b) Evidence relating to a parent guarantee. (c) Facts and matters relevant to the issue of implicit support. (d) The Third Amendment.

The financial position of SOPL 169 The financial position of SOPL is relevant to the financial position of its parent, STAI. The parties adduced evidence as to SOPL's financial position, and projections about its future financial position, at or about the time of the LNIA (28 June 2002) and the Second Amendment (31 March 2003). 170 As at October 2001, SOPL's financial projections included the following: net profit after tax (NPAT) was projected to decrease from $425 million in the year ending 31 March 2001 to $245 million and $264 million in the years ending 31 March 2002 and 31 March 2003 respectively. Further, free cash flow was projected to continue to be negative (-$905 million and -$459 million in the years ending 31 March 2002 and 31 March 2003 respectively), with positive free cash flow projected to be generated in the year ending 31 March 2004. 171 Companies in the telecommunications industry require a comparatively high level of capital expenditure. This means that it is necessary to raise funds to invest in capital infrastructure and then efficiently integrate and exploit those assets to generate income to earn a commercial return on the investment. 172 Given the cash flow challenges that were experienced by SOPL in the period around 2001-2002, there was a need to manage cash carefully, while maintaining the optimal level of capital expenditure to ensure that SOPL continued to be an effective competitor in the telecommunications market in Australia. 173 In or about May 2002, SOPL prepared a report titled "Optus Management's Discussion and Analysis of Financial Condition and Results of Operations" (MD&A report) for the year ending 31 March 2002. It was reported on page 14 that capital expenditure was $1,383 million in the year ending 31 March 2002. 174 In or about April 2003, SOPL prepared an MD&A report for the year ending 31 March 2003. In the year ending 31 March 2003, SOPL's cash capital expenditure was $875 million. 175 The following table, which is set out in paragraph 37 of Mr O'Sullivan's affidavit, and is based on SOPL's annual reports for the 2001 to 2005 financial years, assists to demonstrate the change in SOPL's cash flow position: Year 2001 2002 2003 2004 2005 $m $m $m $m $m Cash flow from ordinary activities 5,119.1 5,591.1 6,295.3 7,197.8 7,668.4 Payments from ordinary activities (4,071.4) (4,716.6) (4,694.3) (5,045.4) (5,383.6) Net Cash Provided by Operating Activities (A) 978.8 549.3 1,163.8 1,727.7 1,855.9 Capital Expenditure (B) (1,834.1) (1,383.2) (875.1) (859.0) (811.2) Free Cash Flow (C = A - B) (855.3) (833.9) 288.7 868.7 1044.7 Net increase (decrease) in cash 123.2 (204.5) (20.6) (11.7) 94.3

Evidence relating to a parent guarantee 176 During Mr O'Sullivan's oral evidence-in-chief, he was asked (on the basis of his experience at SOPL) what SingTel's attitude was to guaranteeing obligations of SOPL. He responded: Generally speaking, there was a real reluctance in almost all of our commercial activities to be relying on any form of parent guarantee. The authority levels were held such that it required significant escalation within the group, often to the board, if it was to be provided. The general philosophy, which, by the way, I subscribed to, is that a healthy business should be able to stand on its own two feet. In other words, it should be able to generate sufficient cash out of its operation to be able to cover its costs and to cover any investment as needed in capex, and to therefore be able to - to survive independently. 177 Insofar as STAI seeks to rely on this evidence on the question whether SingTel would have (or might be expected to have) provided a parent guarantee for STAI's obligations under a hypothetical arm's length transaction in place of the LNIA, I do not consider the evidence to be of any assistance. 178 First, the evidence was not directed to the provision of a guarantee of the obligations of STAI under the LNIA (or an arm's length transaction in its place), but rather a guarantee of the obligations of SOPL. 179 Secondly, Mr O'Sullivan was not involved in the preparation of the LNIA. Nor was he involved in any discussions or communications about the terms of the LNIA. Mr O'Sullivan's role at that time was an operational role within SOPL. He is therefore not in a position to give probative evidence about whether SingTel would have (or might be expected to have) provided a guarantee of STAI's obligations under the LNIA (or an arm's length transaction in place of the LNIA). 180 Thirdly, and in any event, the evidence is expressed in general terms. As noted above, in May 2002, SingTel provided a guarantee of the obligations of Optus Finance Pty Ltd (a subsidiary of SOPL) under a $2 billion facility.

Facts and matters relevant to the issue of implicit support 181 During his oral evidence-in-chief, Mr O'Sullivan was asked some questions about SingTel's ability to sell SOPL should it have wished to do so. He was taken to page 7 of SingTel's 2002 Annual Report, which referred to the SOPL acquisition and stated that, to manage the SingTel group's global operations, SingTel and SOPL "have merged their international carrier services, international network and international satellite businesses into integrated business units". Mr O'Sullivan gave evidence, which I accept, that the day-to-day operations of SOPL in Australia are centred around the mobile business, the consumer multimedia business (which delivers broadband and television directly into the home) and enterprise data networks, and these "remained independent, by and large, of SingTel, because they rely on systems, software and networks that are managed in Australia". Mr O'Sullivan gave evidence, which I accept, that had there been a requirement to dispose of SOPL, the integrations would not have affected this; those integrations could have been maintained through a commercial arrangement, or the integrations could have been separated at some stage.

The Third Amendment 182 Mr O'Sullivan was a director of STAI at the time the changes in the Third Amendment were substantively agreed (October 2008) and when the Third Amendment was entered into (30 March 2009). 183 During cross-examination, Mr O'Sullivan said that, in October 2008, he was aware of discussions going on about the amendment, but he was not involved in the discussions. Mr O'Sullivan accepted that he was not involved in settling the terms of the 28 October 2008 letter (see [93] above) and, in particular, the terms of the term sheet or the fixing of the rate at 6.835%. He stated that he left this to others, in particular the CFO and his team. 184 Mr O'Sullivan gives evidence, and I accept, that the Third Amendment was agreed between STAI and SAI at a time when external credit markets were experiencing extreme volatility as a result of the Global Financial Crisis. He gives evidence, and I accept, that 2008 was a difficult year for the SOPL and SingTel groups, given the rapid deterioration of the global financial markets, as well as a significant reduction in available liquidity for borrowers. 185 Mr O'Sullivan gives evidence in paragraph 57 of his affidavit that on 25 February 2009 he chaired a Board meeting of STAI where they discussed the LNIA, the issue of Variation Notices by SAI, and the subsequent amendment of the LNIA. He states that it was resolved that Murray King was to execute the Third Amendment, "to amend the interest rate from a floating to a fixed rate of 6.835% effective from 1 April 2009 and until the maturity of the LNIA in June 2012". Mr O'Sullivan states that he understood the rationale for this amendment to be "the need to obtain certainty over Optus' financing arrangement under the LNIA". 186 During cross-examination, Mr O'Sullivan was taken to a number of documents relating to SOPL's preparedness, at or about this time, to borrow on the basis of a floating rate. Mr O'Sullivan was taken to the SOPL funding strategy paper of August 2008 (referred to at [86] above). He was taken to the recommendation at paragraph 7.1 to increase the existing syndicated loan from $700 million to $950 million. He accepted that this appeared to be a floating rate exposure. Mr O'Sullivan was also taken to a $725 million facility entered into by Optus Finance Pty Ltd (a subsidiary of SOPL) on 13 November 2008. Mr O'Sullivan accepted that the cash advance component of the facility was a floating rate facility. 187 It appears from a document to which Mr O'Sullivan was taken during cross-examination that, on 7 October 2008, the Reserve Bank of Australia dropped interest rates by 100 bps. Mr O'Sullivan gave evidence that he expects that he would have been aware of this. 188 The following exchange then took place during the cross-examination: Right. Well, it wouldn't be an ideal time, then, to be fixing the rate under the LNIA if rates were dropping, would it?---Well, I think given the uncertain environment and the very dramatic events that are happening, this is October 2008, so I think we're seeing bank failures overseas, and the conversations I'm having, it's clear that a lot of the - the banks are closing their books. So I think there was a strong drive to secure facilities and to get some confidence about funding. You're talking about confidence of funding from third party lenders to Optus. Is that right?---Well, as the CEO of - of the company, I was very much fixated on making sure I had the cash flow needed to fund our capex, and so I was always exercised by being in control of our destiny and - and not having to rush it. So your concern was about the impact of the volatility of rates on cash flow?---Actually, my - my primary concern as the CEO and as a non-specialist in finance was making sure that if the environment deteriorated significantly that we would have sufficient cash and liquidity to be able to continue to manage the business effectively. Well, fixing the interest rate on a facility at the time when interest rates are dropping, variable rates are dropping, doesn't give you certainty about cash flow, does it?---Fixing - fixing a rate gives me certainty of what it will cost. But I should also add that I would have also relied on advice from the CFO and his team in terms of what we considered to be an appropriate strategy. 189 Having regard to Mr O'Sullivan's evidence as a whole, I have difficulty in accepting that the rationale for the Third Amendment (that is, the amendment to the floating rate component of the interest rate under the LNIA) was the need to obtain a certainty as to the interest rate under the LNIA (assuming this is what Mr O'Sullivan is referring to in paragraph 57 of his affidavit). As noted above, at or about the same time, SOPL was prepared to extend or increase its exposure to floating rate borrowings. Mr O'Sullivan's main focus appears to have been on cash and liquidity, rather than on whether the interest rate under an existing facility (with more than three years left to run) was floating or fixed. If and to the extent that Mr O'Sullivan was referring to the need to obtain certainty as to ongoing funding upon the end of the LNIA, it is difficult to accept this as the rationale. The LNIA had more than three years left to run, and there was no realistic suggestion that SAI (STAI's parent) would not extend the financial accommodation if needed.

Credit rating evidence 190 In this section, I outline the evidence of the three experts who gave evidence relating to credit rating: Mr Weiss (called by the Commissioner); Dr Chambers (called by STAI); and Mr Chigas (called by STAI). As noted above, the evidence relating to credit rating was, in effect, one of the 'inputs' for the DCM evidence.

The experts 191 Mr Weiss is a Managing Director at Global Capital Advisors, LLC. He has been a senior investment professional specialising in debt ratings for approximately 37 years. In late 1983, he joined S&P. He was employed there for about 12 years, until mid-1995. He joined S&P as a credit rating specialist, and ultimately became head of S&P's Global Energy Ratings Services. He then joined Bank of America as Vice President - Fixed Income Research - Energy Chemicals. After a brief period in this position, he was tasked with developing and managing the bank's global ratings advisory group and was named Global Head and Managing Director of Ratings Advisory. In March 2009, he joined Global Capital Advisors, LLC as a Managing Director with primary responsibility for providing ratings advisory services. 192 Dr Chambers is an Associate Professor of Finance (Emeritus) at Boston University's Metropolitan College. Between 1983 and 2005, he spent 22 years in the credit rating division of what is now S&P Global Ratings, previously known as Standard & Poor's Ratings Group. While at S&P, he undertook and supervised credit analyses on corporate entities, utilities, financial institutions, and governmental entities. For several years, he oversaw and was responsible for the credit ratings for all corporate entities domiciled outside the United States. Specifically, from 1983 until 1989, he was responsible for rating debt issued by sovereigns, municipalities, and government-owned institutions in countries including Australia. In 1990 and 1991, he headed S&P's Australia office where he was responsible for the quality of all ratings and the conversion of ratings previously assigned by Australian Ratings into the S&P rating scale. From 1992 through 1996, he had oversight over the rating of all corporate entities domiciled outside of the U.S. and the integration and harmonization of U.S. and foreign-domiciled corporate ratings. From 2000 until August 2005, he was a Managing Director of S&P's Risk Solutions group, which provided consulting advice to financial institutions and corporate entities regarding improvements to their own internal credit scoring systems. 193 I accept that both Mr Weiss and Dr Chambers are experts and highly experienced in the field of credit rating. Although they both have deep expertise in this field, Dr Chambers held more senior positions at S&P and was with the rating agency for a longer period of time. 194 Mr Chigas's evidence was primarily directed to DCM matters. However, he also expressed some opinions relating to credit rating in his first report. Consequently, he joined in the preparation of the Joint Credit Rating Report. Mr Chigas is an investment banker with over 30 years of experience in raising debt for corporations in the DCM. After completing a Master of Business Administration and working at GE Capital Corporation, in 1992 he moved to the DCM group at the First Boston Corporation (now Credit Suisse) where he was made a Managing Director in 1998. From 1999 to 2006, he worked in the DCM group at Goldman, Sachs & Co and at Deutsche Bank, where he was the Co-Head of the Debt Capital Markets - Origination Group. From 2006 to 2009, he worked as a portfolio manager at DiMaio Ahmed Capital, a multi-strategy fixed income hedge fund. He began his Orea Thea Advisory business in 2008. From 2011 to 2018, he was employed at Natixis Securities Americas LLC in the New York DCM Group as Head of Bond Market Origination. As a DCM originator, Mr Chigas has analysed and assessed debt issuers' credit metrics, estimated the credit impact of potential transactions on an issuer's credit rating, as well as having estimated a credit rating for unrated issuers. 195 In light of Mr Chigas's experience, I consider that he is qualified to express opinions in relation to credit rating issues. However, his level of expertise in relation to credit rating is not as great as that of Mr Weiss and Dr Chambers.

Overview of the experts' views 196 Important reference points for the purposes of the credit rating evidence are the S&P and Moody's rating scales, which are set out at [47] above. 197 The experts considered the credit rating of STAI on two bases: (a) first, on a stand-alone basis (that is, putting to one side implicit support); and (b) second, on an overall basis (that is, taking implicit support into account). 198 It is necessary to explain the notion of "implicit support". As explained in the Joint Credit Rating Report, both S&P and Moody's would incorporate the impact, if any, of implicit support provided by a parent should they rate an issuer that is a subsidiary or third-party debt issued by a subsidiary. Both S&P and Moody's published specific guidance concerning the need to critically assess the willingness and ability of the parent to provide such implicit support. While S&P's guidance identifies 13 specific factors as a basis for this analysis, Moody's provides certain scenarios or examples along with several factors to analyse when rating a subsidiary. The rating agencies specify that the first step in assessing implicit parental support for a subsidiary is the stand-alone rating indication of the subsidiary. The next step is to raise this to reflect the expected support of the parent. The agencies also recognise that a combination of factors, not any one specific factor, is analysed to determine implicit support. 199 Mr Weiss and Dr Chambers considered the issuer credit rating (referred to as ICR) of STAI as at four different dates: (a) 28 June 2002 (when the LNIA was entered into); (b) 31 March 2003 (the date of the Second Amendment); (c) 30 October 2008 (when the amendments in the Third Amendment were substantively agreed); and (d) 30 March 2009 (the date of the Third Amendment). 200 Mr Chigas examined the position as at 28 June 2002. 201 There is not a great deal of difference between the experts as to the stand-alone creditworthiness of STAI. The real difference between the experts concerns the extent of enhancement on account of implicit support provided by STAI's indirect parent, SingTel, and thus the overall issuer credit rating of STAI. All the experts agree that there would be some enhancement to STAI's rating. However, they differ as to the extent of the enhancement. 202 The following table, which is based on Table 2 in the Joint Credit Rating Report, summarises the views of Mr Weiss and Dr Chambers. (In Table 2, Dr Chambers's views are set out first, but in the following table I have set out Mr Weiss's views first for consistency of expression in these reasons.) Summary of Opinions: STAI's Overall Issuer Credit Rating Weiss Chambers Date Stand Alone S&P / Moody's Implicit Support Overall Rating (S&P / Moody's) Stand Alone S&P / Moody's Implicit Support Overall Rating (S&P / Moody's) 2002 BB/Ba2 6-7 notches A+ / A2 BB- to B+ / B1 to B2 2-3 notches BBB- to BB / Ba1 to Ba3 2003 BB/Ba2 6-7 notches A+ / A2 BB- to B+ / B1 to B2 2-3 notches BBB- to BB / Ba1 to Ba3 2008 BB/Ba2 6-8 notches A / Aa3 BB to BB- / Ba3 to B1 2-3 notches BBB to BB+ / Baa3 to Ba2 2009 BB/Ba2 6-8 notches A / Aa3 BB to BB- / Ba3 to B1 2-3 notches BBB to BB+ / Baa3 to Ba2

203 Mr Chigas's views, as set out in Table 2 of the Joint Credit Report, in summary, are that, as at 2002: STAI's rating indication on stand-alone basis would be in the BB category; the uplift for implicit support would be "modest"; and STAI's overall issuer credit rating would be BBB- to BBB. In oral evidence, Mr Chigas clarified that his reference to "modest" equated to 2-3 notches; in other words, his view on implicit support was the same as that of Dr Chambers. 204 I note that the rating agencies provide a single indicator of a rating. Mr Weiss followed this pattern, while Dr Chambers indicated a range of possible ratings, rather than a specific rating, in circumstances where he was expressing an opinion for the purposes of a court proceeding.

General matters relating to stand-alone creditworthiness and implicit support 205 In this section, I set out some general matters relating to stand-alone creditworthiness and implicit support, based on the Joint Credit Rating Report. It appears that these matters are agreed between the experts. 206 Assessment of the stand-alone creditworthiness of the company is sometimes referred to as the stand-alone credit profile (or SACP) or the implied credit profile (or ICP). This assessment considers both business risk and financial risk. The combination of the stand-alone credit assessment and any imputation of implicit parental support results in a "company" or "issuer" credit rating (as noted above, this is referred to as ICR). A distinct process is consideration of the terms and conditions associated with any specific debt issue, such as pledged collateral, guarantees, or subordination. This step produces an "issue" rating, which may vary from the "issuer" rating. Although Mr Weiss's report provided "issue" ratings for the $5.2 billion debt in question, for present purposes it is sufficient to focus on the issuer credit rating. 207 The rating agencies assign letter ratings to denote relative differences in creditworthiness. Agencies typically use two different scales to distinguish between obligations that have an initial term to maturity of greater than one year (long-term ratings) from those with an initial term to maturity of less than one year (short-term ratings). There is generally a close link between the long-term and short-term ratings assigned to any debt issuer. The table set out at [47] above denotes all the rating categories. 208 The guidance provided by the rating agencies is clear that the creditworthiness of the subsidiary should be considered first and then that rating can be raised based on evidence of implicit support provided by the subsidiary's parent. This approach is termed "bottom-up". 209 The most critical issue in assessing parental support is what will happen should the subsidiary be in financial distress, rather than in better times. S&P states that "[i]t is important to think ahead to various stress scenarios and consider how management would likely act under those circumstances". The rating agencies have determined that the "bottom-up" approach does a better job of capturing this "what would happen if" exercise, since it requires its analysts to specifically consider those stress conditions and the factors which evidence potential support in those circumstances. The agencies' processes have two components to its analysis - willingness and ability to support. 210 Where a less creditworthy subsidiary enjoys the support of a higher-rated parent, the rating assigned to the subsidiary's obligations is frequently raised above the stand-alone rating to reflect the nature and extent of the parental support. Where an explicit, enforceable, unconditional guarantee of a debt obligation is provided, the rating of the subsidiary will be equalised with that of the parent. Where no explicit guarantee is provided, there can be a much wider range of potential outcomes for the subsidiary's rating vis-a-vis the parent's rating. As set out in the Joint Credit Rating Report, S&P's Corporate Ratings Criteria, 2002, states (at p 98): A weak subsidiary owned by a strong parent will usually, although not always, enjoy a stronger rating than it would on a stand-alone basis. Assuming the parent has the ability to support the subsidiary during a period of financial stress, the spectrum of possibilities still ranges from ratings equalization at one extreme to very little or no help from the parent's credit quality at the other. The greater the gap to be bridged, the more evidence of support is necessary. (Emphasis added in Joint Credit Rating Report.) 211 The Joint Credit Rating Report sets out the following extract from p 100 of S&P's Corporate Ratings Criteria, 2002. (For ease of reference, in the Joint Credit Rating Report and in the following quotation, numbers have been added to the list of factors.) No single factor determines the analytical view of the relationship with the business venture in question. Rather, these are several factors that, taken together, will lead to one characterization or another. These factors include: 1. Strategic importance - linked lines of business or critical supplier; 2. Percentage ownership (current and prospective); 3. Management control; 4. Shared name; 5. Domicile in same country; 6. Common sources of capital; 7. Financial capacity [of the parent] for providing support; 8. Significance of amount of investment; 9. Investment relative to amount of debt at the venture or project; 10. Nature of other owners (strategic vs. financial; financial capacity); 11. Management's stated posture; 12. Track record of parent firm in similar circumstances; and 13. The nature of potential risks. Some factors indicate an economic rationale for a close relationship or debt support. Others, such as management control or shared name, pertain also to a moral obligation, with respect to the venture and its liabilities. Accordingly, it can be crucial to distinguish between cases where the risk of default is related to commercial or economic factors, and where it arises from litigation or political factors. … Percentage ownership is an important indication of control, but it is not viewed in the same absolute fashion that dictates the accounting treatment of the relationship. … Clearly, there is an element of subjectivity in assessing most of these factors, as well as the overall conclusion regarding the relationship. There is no magic formula for the combination of these factors that would lead to one analytical approach or another. 212 While a wide range of factors is incorporated into the analysis, all factors are not equally weighted in the evaluation. S&P's Corporate Ratings Criteria, 2002, states at p 98: In general, economic incentive is the most important factor on which to base judgments about the degree of linkage that exists between a parent and subsidiary. This matters more than covenants, support agreements, management assertions, or legal opinions. 213 The Moody's criteria for assessing implicit parental support are much less explicit than that of S&P. Moody's identifies two different general scenarios when assessing parental support - one for financially weak subsidiaries with high risk and limited histories, and another for established subsidiaries with lower risk profiles. In paragraph 225 of the Joint Credit Rating Report, there is an extract that outlines the Moody's process. 214 During oral evidence, Dr Chambers accepted the proposition that there is "a continuum of implicit support outcomes from a no rating impact at one end to full equalisation with the parent at the other". The tenor of Mr Weiss's evidence suggests that he would also agree with the proposition.

STAI's stand-alone creditworthiness 215 The experts generally agree regarding the business environment facing STAI. In 2002, STAI's operating subsidiary, SOPL, was the second largest telecommunications company in the Australian market. Reflecting the telecommunications market worldwide, the sector was highly dynamic and competitive, with new and enhanced services being introduced and technological improvements a near-constant phenomenon. New and smaller competitors in the marketplace were challenging both Telstra and SOPL in this regard. As a consequence of this competition, all market participants were obligated to maintain substantial capital expenditure programs to maintain and/or expand their market share, as they simultaneously endeavoured to keep the prices of their offerings competitive. 216 Both Mr Weiss and Dr Chambers found that STAI's March 2002 financial forecasts provided a reasonable basis for the June 2002 analysis. These forecasts were then adjusted to include the $5.2 billion debt under the LNIA, which had not been incorporated into those original forecasts (T225-226). Likewise, the interest accruing under the LNIA was added to the interest figure in the March 2002 forecasts (T226). The experts assumed that the debt was owed to a third-party rather than to a related company (see T248, 307-308, 310-311, 401). 217 The experts observe in the Joint Credit Rating Report that, with the inclusion of the $5.2 billion LNIA debt, STAI carried a significant debt burden with an associated interest expense. This had the effect of reducing profitability. Further, substantial on-going capital expenditure was necessary to maintain the company's competitive position; this reduced cash flow. The combination of these factors was relatively weak credit metrics - high debt leverage and low interest coverage ratios. One critical question, the experts observe, was how quickly STAI might be able to demonstrate stronger financial ratios. 218 The experts' detailed analysis of the stand-alone creditworthiness of STAI on each of the relevant dates is set out in paragraphs 31-141 of the Joint Credit Rating Report.

Implicit parental support 219 The experts' views regarding implicit parental support, using both the S&P criteria and the Moody's criteria, are set out in paragraphs 142-316 of the Joint Credit Rating Report. 220 Mr Weiss's overall assessment of this topic can be summarised as follows (based on paragraphs 293-304 of the Joint Credit Rating Report): (a) Mr Weiss responds to a criticism that he used a "top down" rather than a "bottom up" approach by stating that his mode of expression does not imply that he did not start with his determination of a stand-alone credit profile; it implies only that the result is equalisation or near equalization with the parent rating. Mr Weiss states that implicit support can be viewed in two ways after determining the stand-alone credit rating: "bottom up" or "top down". Regardless of which terminology is used, the methodology applied is identical and recognises that, in general, the most important factor on which to base judgments about the degree of linkage that exists between a parent and subsidiary is economic incentive, and that no one factor determines the extent, if any, of implicit support. (b) Mr Weiss's analysis of implicit support considered the guidance provided by the S&P and Moody's criteria, and the optionality that each criteria discussed with regard to the degree, if any, that lift is justified. While there are differences in each agency's criteria, they both require the starting point of any analysis to be the determination of the stand-alone credit rating of the subsidiary. This is followed by the need to understand the strategic rationale and the strategic value of the subsidiary to the parent's group, and the willingness and ability of the parent to provide financial support to the subsidiary at any time, including should it encounter a situation that results in financial stress. (c) Mr Weiss's opinion is that SingTel has the willingness and ability - i.e. the financial capacity - to provide implicit support to STAI, and that it would not be affected by the presence of $5.2 billion of STAI debt as third-party debt raised by STAI as part of the $14.2 billion purchase price for SOPL. This recognises the circularity of the financing at STAI. Essentially, the $5.2 billion LNIA, assumed to be a third-party transaction, would be used to repay a portion of the cost incurred by SingTel in its acquisition of SOPL. The outcome would be no change to SingTel's ratings. The addition of the LNIA obligation to STAI on the consolidated STAI/SOPL rating would result in the standalone BB rating. This rating would then benefit from implicit support by SingTel to STAI. (d) An overriding consideration in Mr Weiss's assessment relates to (what he describes as) the fact that in making the SOPL acquisition SingTel understood the enormity of its decision, including: (i) the support of its major shareholder, Temasek, the manager of the Singapore government investment fund, and therefore of Temasek's 100% shareholder, the Singapore government; (ii) the importance of the similarity of the legal systems and governance protocols that exist between Singapore and Australia; (iii) the opportunity to own 100% of a major telecommunications company like SOPL, the number two telecommunications company in Australia, and substantially expand and diversify its sources of revenue outside the country of Singapore; and (iv) to immediately establish its second telecommunications hub in Australia, as one of four major telecommunications hubs in the region. (e) Mr Weiss refers to the views of S&P and Moody's with respect to the SOPL acquisition. Each agency stated it considered the importance of the Australian investment as key to SingTel's growth ambitions and strategic direction. SingTel understood the competitive environment in Australia. SingTel made the acquisition knowing it had the inherent financial strength and access to external capital to compete in the Australian telecommunications market. (f) Mr Weiss's implicit support opinion also considered (what he described as) the inherent and the formidable ownership chain of SingTel/Temasek/Singapore and the Singapore government's obvious desire to see its major telecommunications investment expand its reach into Australia as part of its growth strategy in the region. (g) The SOPL investment essentially doubles the size of the company. Over the 2003-2009 period, SOPL generated 64.5% of SingTel revenue, an EBITDA contribution in excess of S$2 billion per annum, which represents 53% of SingTel's group EBITDA, and 36.6% of SingTel's group free cash flow. (h) The acquisition resulted in SingTel becoming one of the five largest listed telecommunications companies in the Asia Pacific region (excluding Japan), having one of the region's most extensive multiple market cellular operations, having one of the most extensive and advanced data communications networks in the region, having a diverse revenue stream, and very importantly, a greater size and scale than the stand-alone SingTel and SOPL groups, with potential to achieve greater expansion and profitability over time. (i) Mr Weiss recognises the role judgment and experience play in rendering an opinion with respect to how many notches of lift can be attributed to implicit support based on the guidance in the rating agency criteria. There is no restriction on lift resulting in near equalisation, or equalisation, absent an explicit guarantee. (j) Mr Weiss provided a number of examples to show that the rating agencies' criteria allow for multiple notch lift. These are set out in Table 27 in Joint Credit Rating Report. 221 Dr Chambers's overall assessment of this topic can be summarised as follows (based on paragraphs 305-306 of the Joint Credit Rating Report): (a) Dr Chambers expresses the view that it is clear from both agencies' guidance that a bottom-up approach is to be applied in assessing implicit support. Both agencies state that such support should only be attributed where it can be clearly justified and demonstrated, not merely assumed. (b) Evaluation utilizing S&P's more detailed guidance or the more general guidance of Moody's yields a mixed result - some factors suggest strong motivation for inferring such support, while others clearly indicate more modest motivation or lack any tangible justification at all. There is no historical experience on which to judge what SingTel might do in the event of distress at STAI. Further, given the relative size of the SingTel group absent STAI, its group of minority interests in foreign subsidiaries which might preclude ready access to liquid assets, and uncertainties as to whether SingTel's indirect major shareholder, the Singapore government, would approve of propping up an offshore subsidiary, it is unclear as to whether SingTel would have the means to provide significant support on a timely basis. These uncertainties and qualifications could perhaps have been overcome with more explicit evidence of support by SingTel for STAI and a more established track record. This is not to argue that SingTel would necessarily fail to provide support in the future in the event of significant distress, but the guidance provided by both S&P and Moody's indicate that one must be cautious and see clear evidence of such support rather than simply inferring it in the absence of concrete evidence. As a consequence, with the application of either the S&P or the Moody's guidance, there can be justification for only a modest uplift of STAI's stand-alone rating by 2 or 3 notches. 222 Mr Chigas's overall analysis of implicit support is set out at paragraphs 307-316 of the Joint Credit Rating Report. It is not necessary to set these paragraphs out.

Evaluation 223 On balance, and with respect to Mr Weiss, I prefer the views expressed by Dr Chambers as summarised in the table in [202] above. It is unnecessary to consider Mr Chigas's views, which reach a similar position to that of Dr Chambers. My reasons for preferring Dr Chambers's view are as follows. 224 First, Dr Chambers appears to have adopted a more cautious approach than Mr Weiss to the assessment of implicit support. This seems to me to better reflect the S&P criteria and the Moody's criteria for assessing implicit support. 225 Secondly, Dr Chambers maintained his opinions during cross-examination, and explained in clear and persuasive terms the reasons why he holds those opinions. For example, Dr Chambers was taken during cross-examination to the S&P ratings for SOPL as at 3 December 2001 and 9 October 2002. He explained why he maintained his opinions notwithstanding certain passages in those documents. In particular, Dr Chambers explained the difference between the position of SOPL and the position of STAI, stating that "a high level of support for a highly rated entity is different than a high level of support for a low rated entity". He continued that, in his opinion, "a high level of support for SOPL would be very similar to two or three notches that is what I attributed to STAI. I think that's a high level of support and would bring the rating of SOPL up very close to … the published rating of A+" (T240; see also T289-290). 226 Thirdly, in a number of places in his report, Mr Weiss seems to have adopted a "top down" rather than a "bottom up" approach to the issue of implicit support. The experts are agreed that a "bottom up" approach is the approach required by S&P and Moody's. Although Mr Weiss said that the difference was merely one of terminology, I consider that it may in fact be more than that, and that he has, at least to some extent, adopted a "top down" approach: see, for example, paragraphs 264-269 of Mr Weiss's first report. 227 Fourthly, Mr Weiss's analysis does not consider, or fully consider, whether SingTel would be prepared to provide ("stump up" was the expression used during cross-examination) the $5.2 billion debt voluntarily at a time when STAI was in distress. 228 I note for completeness that while the oral evidence of Mr O'Sullivan set out at [181] above was not available to the experts when they prepared their reports, Dr Chambers confirmed that it is consistent with his analysis.

DCM evidence 229 In this section, I outline the evidence of the two experts who gave evidence relating to DCM matters: Mr Chigas (called by STAI); and Mr Johnson (called by the Commissioner).

The experts 230 Mr Chigas's qualifications and experience are outlined at [194] above. 231 Mr Johnson is a Managing Director of Global Capital Advisors, LLC (the same firm as Mr Weiss). Mr Johnson joined Global Capital Partners, LLC as a Managing Director in 2013 following a 23-year career at Bank of America, where he held a variety of positions in the Capital Markets Group including Head of International Debt Capital Markets. His experience includes advising on several hundred transactions in multiple currencies involving tens of billions of US dollar equivalent value and encompasses issuance from companies located in 20 different countries. His transactional experience includes both public and private issues and numerous "first-of-their kind" transactions involving structural as well as market innovation. During his career as a DCM professional, he was involved in every aspect of advising, structuring, underwriting, pricing, selling and documenting the placement of debt securities. He worked with corporate issuers, investors, lawyers, rating agency personnel as well as numerous DCM specialists. He dealt with numerous credit rating and restructuring issues. 232 I consider both Mr Chigas and Mr Johnson to be experts with a high level of experience in relation to matters relating to the DCM.

Outline of Mr Chigas's views 233 In order to understand the approach taken by Mr Chigas, it is useful to start with the questions he was asked, as set out in paragraph 15 of his first report: (i) Please identify any conditions which operate between SAI and STAI in respect of the LNIA (as amended from time to time) which differ from those which might be expected to operate between independent enterprises dealing at arm's length and in substantially similar circumstances; and (ii) If there are such conditions provide your opinion, based on your training, expertise and experience, as to whether there are any, and if so what amount of, profits which but for those conditions might have been expected to accrue to STAI by reason of such conditions. (Emphasis added.) 234 I note that the questions set out above do not conform to the statutory test under Subdiv 815-A. In particular, the first question asked Mr Chigas to identify conditions which operate between SAI and STAI "in respect of the LNIA". In contrast, Art 6 raises the question whether conditions operated between the enterprises "in their commercial or financial relations" (see [116] above), a broader enquiry.

Outline of Mr Chigas's views relating to "conditions" 235 In section 4 of his first report, Mr Chigas undertakes a comparison between the terms of the LNIA and the terms of a DCM bond issue. 236 For the purposes of this exercise, Mr Chigas has considered the LNIA as amended by the Second Amendment, as distinct from the LNIA as originally entered into. This is apparent from fn 45 on page 15 of the first report. This is a footnote to Table 2, which is where Mr Chigas compares the terms of a DCM bond issue with the terms of the LNIA. The footnote indicates that Table 2 deals with the LNIA "as amended". That Mr Chigas is addressing the LNIA as amended by the Second Amendment is confirmed by the reference on page 17 of the first report to a "Benchmark Event" in the context of STAI's interest obligations under the LNIA. As discussed above, the concept of a "Benchmark" was only introduced with the Second Amendment. In oral evidence, Mr Chigas confirmed that he took account of the amendments in the Second Amendment, as he viewed these amendments as "clarification" of the LNIA. 237 Mr Chigas expresses the view, in paragraph 29 of his first report, that "the overall structure of the LNIA is consistent with a bond issued in the DCM". Mr Chigas's analysis is set out in Table 2 and the discussion that follows. In Table 2, he sets out the various terms of a DCM bond issue (including bond term variations), and then assesses whether the corresponding term of the LNIA conforms fully, significantly or partially. Further, as explained in paragraph 30 of his first report, Mr Chigas considers the financing terms of the LNIA and assesses whether each term is as expected in an arm's length transaction or differs from what would be expected in an arm's length transaction. In oral evidence, Mr Chigas clarified that where he refers in paragraph 30 of his first report to an "arm's length transaction" he is referring to a DCM transaction as referred to in paragraph 29 of his first report (i.e. a DCM bond issue). 238 Mr Chigas's view (as set out in his first report) as to whether the various financing terms of the LNIA are as expected, or differ from what would be expected, in a DCM bond issue can be summarised as follows: (a) deal size - expected; (b) maturity - expected; (c) interest payment / capitalisation - expected; (d) optional redemption - expected; (e) amortisation - expected; (f) security - expected; (g) covenants - expected; (h) redemption notice - expected; (i) known withholding tax - expected; (j) issuer structure - differs; (k) interest rate - differs; and (l) future withholding tax- differs. 239 In relation to "issuer structure", Mr Chigas's view is that, under the actual structure, the debt service and all expenses and taxes at SOPL (the operating company) were paid before cash flow was available to be distributed to STAI (the holding company); this is described as "structural subordination", in the sense that the debt under the LNIA is structurally subordinated to the operating company's expenses etc. Mr Chigas's states that the structural subordination is frequently mitigated by the operating subsidiary providing a guarantee of the debt of the holding company. Thus, Mr Chigas would have expected the LNIA to have been guaranteed by SOPL if it had been a DCM bond issue. This part of Mr Chigas's report is concerned with an operating company guarantee (i.e. a guarantee by SOPL of STAI's obligations) as distinct from a parent guarantee (i.e. a guarantee by SingTel of STAI's obligations). 240 In relation to "interest rate", Mr Chigas states that in the corporate DCM, a bond's coupon is typically a fixed rate, but a floating rate is also commonly issued. He states that the maturity of a floating rate note may extend out to 10 years, but is typically 3 or 5 years. He states that interest payments and resets can be structured to be either annual, semi-annual or quarterly. Mr Chigas expresses the view that the "basic elements of the LNIA interest rate structure are consistent with, substantially similar to and significantly conforming to these DCM bond terms observed in arm's length third party transactions", but the actual percentage interest charged on the LNIA differs from what he would have expected. 241 In relation to "future withholding tax", Mr Chigas expresses the view that transactions in the "Yankee DCM" (that is, the market segment within the DCM for foreign issuers) commonly include a provision that addresses a potential future change in tax policy. Mr Chigas states that a "Yankee" borrower's bond structure typically includes a "change of law" optional redemption in the event there is a change in the future to regulations or withholding tax payments on the interest paid; in contrast, the LNIA does not have such a provision. Mr Chigas states that the structure in the LNIA exposes STAI to an unlimited liability for future, unknown costs. 242 In the Joint DCM Report, Mr Chigas accepted that the mechanism for SAI to issue Variation Notices was unique in nature, but said that it did not ultimately have an adverse effect on STAI's profits. Similarly, in the joint report, Mr Chigas accepted that the ability of SAI to "put" the debt to STAI at any time, which was the position under the original LNIA before the Second Amendment, would not be found in an arm's length financing, but this had no adverse effect on STAI's profits. 243 In cross-examination, Mr Chigas accepted that whereas under the original LNIA interest could be deferred and capitalised, under the LNIA as amended by the Second Amendment the obligation to pay interest was contingent on reaching the benchmark, and as at March 2003 it was possible that the benchmark would not be met. 244 Mr Chigas accepted during cross-examination that all the examples that he had given in his reports and the Joint DCM Report of bonds issued in the DCM where interest was deferred were bonds where interest was payable "come what may, albeit it might be deferred in terms of when the investor receives its money". Mr Chigas was asked whether he would expect to see in the DCM a bond where the payment of interest is contingent upon the issuer meeting certain financial benchmarks. He responded that they are not common, but they exist. In relation to a bond to raise $5.2 billion, he accepted that he would not expect to see the lender being prepared to accept interest on a contingency or related to the financial performance of the issuer. 245 In cross-examination, Mr Chigas accepted that he had not addressed in any of his reports whether an arm's length borrower in the position of STAI would be expected to agree, at the time of the Second Amendment, to pay a premium of the amount of 4.552% for the deferral of interest under the Second Amendment. 246 In relation to the Third Amendment, which substituted for the 1 year BBSW a fixed rate of 6.835%, Mr Chigas said during cross-examination that he had not analysed the specific rate. He explained that "part of the consideration of not being able to analyse the swap is that they were qualitative elements of receiving a commitment to refinance the LNIA in 2012 that were also included, which were impossible, very difficult to quantify into the swap rate". Mr Chigas accepted that at the time the 6.835% was agreed to be substituted for the 1 year BBSW rate in the LNIA, the 1 year BBS rate was dropping quite significantly. In this regard, Mr Chigas was taken to Chart 8 at page 44 of Mr Johnson's report. Mr Chigas rejected the proposition that "it did not make sense" for STAI in October 2008 to fix the rate to apply from 1 April 2009.

Outline of Mr Chigas's views as to the profits that might have been expected 247 In paragraph 57 of his first report, Mr Chigas outlines the question that he is addressing in section 5 of his first report: The following analyzes the profits that might have been expected to accrue to STAI but for the conditions in the LNIA that differ from what would have been expected in an arm's length transaction in substantially similar circumstances. Thus, what Mr Chigas is considering in this section of his report is the profits that might have been expected to accrue to STAI but for the conditions of the LNIA that he has identified (in the previous section) as differing from what might be expected in a DCM bond issue (i.e. the conditions he refers to as issuer structure, interest rate, and future withholding tax). 248 In order to analyse this question, Mr Chigas undertakes the following steps: (a) first, he determines a credit rating for STAI; (b) secondly, he determines the "market based pricing for STAI based on the relative value analysis of STAI to the comparable issuers' actual borrowing costs in 2002"; (c) thirdly, he calculates the "actual effective borrowing cost on the LNIA"; and (d) fourthly, he determined the profits that, but for the relevant conditions, might have been expected to accrue to STAI, by comparing (c) with (b). 249 The first step concerns the topic of credit rating, which has been discussed above. Mr Chigas expresses the view in his first report that STAI should be ascribed a BBB-/Baa3 credit rating. This is consistent with the view he expresses as to STAI's overall issuer credit rating in the Joint Credit Rating Report. 250 Mr Chigas's second step is to determine a market based pricing. As I understand it, in this second step, Mr Chigas is calculating an indicative credit spread for a DCM bond issue by STAI in June 2002 on financing terms that are comparable to the LNIA. In oral evidence, Mr Chigas described this step as "coming … up with a capital markets price" (T536). He said he determined what he would estimate to be STAI's "indicative pricing" and accepted that he was "assuming … a bond issue of some US 2.9 billion in the DCM by an issuer comparable to STAI" (T576). 251 This part of Mr Chigas's report involves reference to a "coupon" and a "credit spread", which he explains in fn 87 as follows: A coupon is the addition of a credit spread and an underlying benchmark. Credit spreads are determined based on the individual issuer and is the focus for determining an issuer's borrowing cost. … 252 Mr Chigas sets out the pricing terms for DCM issues by companies in the communications sector in 2002 with 10 year maturities. As these transactions had a USD fixed credit spread, he swaps these to an AUD 10 year floating credit spread. He identifies transactions that he considers comparable having regard to, among other things, the credit rating that he has attributed to STAI. Thus he focusses on transactions where the issuer's credit rating was in the range of mid triple-B. Mr Chigas plots the AUD floating credit spreads to identify a trendline. Mr Chigas then adjusts for the financing terms of the LNIA, some of which increase, and some of which decrease, the credit spread. This produces an indicative STAI credit spread between 395 and 415 bps, which for convenience he rounds to a credit spread of 400 bps. 253 Mr Chigas's third step is to calculate the actual effective borrowing cost on the LNIA. Mr Chigas's calculations are set out in Table 8 in his first report, a copy of which is annexed as Annexure A to these reasons. This table is a debt service schedule that calculates the equivalent effective LNIA credit spread pre-withholding tax. Mr Chigas states that this credit spread is the equivalent to the credit spreads paid to third party investors in arm's length transactions (by which I understand Mr Chigas to be referring to DCM bond issues) and the appropriate credit spread for comparative purposes with the comparable issuers. 254 For each annual period, the table uses a "base rate" and adds the credit spread to determine the applicable interest rate for the period. For the base rate, the table uses the 1 year BBSW for the years up to the year ending 31 March 2009 and 5.6143% for the subsequent years. The figure of 5.6143% was provided to Mr Chigas by those providing instructions to him. Senior counsel for STAI said that the figure of 5.6143% came from an Australian Taxation Office schedule of calculations, and that it was a base rate that STAI had agreed to use. Senior counsel for the Commissioner then said that it is a figure which the Commissioner has accepted as a fixed rate from 1 April 2009. I therefore proceed on the basis that there is no issue about Mr Chigas's use of this figure in his calculations. 255 Mr Chigas's analysis accrues and capitalises interest each period at the applicable interest rate. The pre-withholding tax interest payments made on the LNIA are applied to the principal balance on the dates paid, in accordance with the Variation Notices, in the column labelled "Interest Paid". These total STAI debt service payments, inclusive of the withholding tax are in the second to the far right column. 256 The table performs the following mathematics (as explained in Mr Chigas's first report): (a) the credit spread, highlighted in yellow at the top of the table, is added to each period's respective base rate, setting each period's interest rate; (b) interest is calculated on an actual/365 day basis and capitalised semi-annually to the principal balance on each 30 September and 31 March; (c) the principal balance is reduced on the dates actual debt service payments were made by STAI per the Variation Notices; (d) STAI's total debt service payments, inclusive of withholding tax, are in the second column from the right; (e) the interest due for each period is grossed up by 10/9 for withholding tax; this amount is in the farthest right column - the totals of: (i) STAI total payments; and (ii) the interest due grossed up for the withholding tax, both equal $4.903 billion; (f) the credit spread is determined by calculating interest and withholding tax in the schedule equal to the actual debt service and withholding tax paid by STAI of $4.903 billion; these totals are highlighted in yellow at the bottom right of the table; and (g) the principal balance at maturity is $4.8 billion, as it was under the LNIA. 257 The analysis "solves" for a credit spread of 143.7 bps (see the figure in yellow at the top of the table), which Mr Chigas rounds to 144 bps. In other words, a credit spread of 144 bps generates a total amount of interest which, when grossed-up by 10/9, equals the total amount of interest actually paid by STAI under the LNIA. 258 Mr Chigas's fourth step relates to the profits which might have been expected but for the conditions he has identified in section 4 of his report. 259 Mr Chigas first considers the profits that might have been expected but for the difference in the "issuer structure". Insofar as Mr Chigas would expect to see an operating company guarantee (which the LNIA does not have), Mr Chigas states that he assumed that an SOPL guarantee had been provided in the arm's length transaction. 260 Mr Chigas discusses the possibility of a parental guarantee, stating: "An explicit guarantee will result in the subsidiary receiving the credit rating of the parent and investors having full direct recourse to the parent company." He states that a SingTel guarantee on the LNIA that was a full and unconditional guarantee would result in the LNIA receiving the same credit rating as SingTel (AA-/A1), with investors having direct reliance on the credit profile of SingTel. Mr Chigas then calculates the credit spread for a SingTel guaranteed transaction, having regard to certain market transactions and then making adjustments. The adjustments include an S&P rating adjustment for SingTel to A+. This process produces a credit spread of 205 to 215 bps for a SingTel guaranteed transaction. 261 Mr Chigas considers the possibility that a guarantee fee might be charged for the provision of a guarantee. He expresses the following views at paragraph 125 of his first report: A guarantee imposes a real liability and incremental costs on the guarantor. Therefore, it is reasonable that a guarantee fee is paid to the guarantor assuming an arm's length transaction. Fees for guarantees and credit support are commercially reasonable and commonly observed in the financial markets. In my experience guarantee fees are paid to a guarantor in many different types of transactions. 262 Mr Chigas calculates the potential fee STAI may have paid SingTel assuming an arm's length transaction, applying a 50% to 75% fee sharing methodology. He expresses the view at paragraph 129 that, had the LNIA been guaranteed by SingTel, a fee of 95.5 bps to 146 bps "could have been" paid to SingTel. If this fee is incorporated, the resulting total credit spread to STAI is, in Mr Chigas's view, in the range of 300 bps to 360 bps. 263 Mr Chigas's analysis can therefore be summarised as follows: (a) The effective rate under the actual LNIA was a credit spread of 144 bps. (b) A DCM transaction with a parent guarantee from SingTel, with no guarantee fee payable by STAI, would have had a credit spread of 205 to 215 bps. (c) A DCM transaction with a parent guarantee from SingTel, with a guarantee fee payable by STAI, would have had a total credit spread of 300 to 360 bps. (d) A DCM transaction with no parent guarantee would have had a credit spread of 400 bps. 264 Mr Chigas expresses the view that the total cost of the debt to STAI in the scenarios presented in (b), (c) and (d) above are all above the actual LNIA effective credit spread of 144 bps. Therefore, he concludes, no profits were forgone, and no profits could have been expected to accrue to STAI. 265 Mr Chigas then discusses the "interest rate" condition, being another condition which differed from what he would have expected. Mr Chigas states that, based on his experience in the DCM the indicative market credit spread of STAI with an operating company guarantee (i.e. no SingTel guarantee) of 400 bps is reasonable for the market conditions at the time and assuming a BBB-/Baa3 credit rating. 266 Table 11 in Mr Chigas's first report summarises the effect on the expected profit (loss) that accrues to STAI had the credit spread been either the result of the mid triple-B "trendline" intersection on 28 June 2002 of 343 bps or the market based credit spread he calculated of 400 bps. Mr Chigas expresses the view that, in each of these two scenarios, STAI has a greater interest expense as well as a greater liability than in the actual scenario because the LNIA outstanding principal balance increases due to capitalised interest. The figures in that table may be summarised as follows: (a) for the actual scenario, the credit spread is 144 bps, and the total interest including withholding tax is approximately $4.9 billion; (b) for the "trendline" scenario, the credit spread is 343 bps, and the total interest including withholding tax is approximately $7 billion; and (c) for the "market" scenario, the credit spread is 400 bps, and the total interest including withholding tax is approximately $7.7 billion (as detailed in Exhibit 8 to Mr Chigas's first report). 267 In cross-examination, Mr Chigas was taken to Table 11 and Exhibit 8 of his first report. He accepted that the difference between the interest incurred under the LNIA (approximately $4.9 billion) and the interest (including the escalation) under the "market" scenario (approximately $7.7 billion) was approximately $2.8 billion.

Outline of Mr Johnson's views 268 Mr Johnson was asked to address the following questions (as set out in paragraph 35 of his report): a. Based on your training, expertise and experience, please identify any conditions which operate between SAI and STAI in respect of the LNIA (as amended from time to time) which differ from those which might be expected to operate between independent enterprises dealing at arm's length and in substantially similar circumstances. b. If there are such conditions, provide your opinion, based on your training, expertise and experience, as to whether there are any, and if so what amount of, profits which but for those conditions might have been expected to accrue to STAI but which have, by reason of such conditions, not so accrued. (Emphasis added.) I note that the formulation of question (a) is directed to the conditions operating between the parties "in respect of the LNIA". Therefore, the comment made at [234] above applies equally here. 269 In relation to credit rating, Mr Johnson relies on the opinions expressed by Mr Weiss in his report. 270 In relation to an operating company guarantee (as distinct from a parent guarantee), Mr Johnson's view is the same as Mr Chigas's view. In paragraph 44 of Mr Johnson's report, he states: "In a typical holding company arm's length financing, SOPL (the operating company) would have guaranteed STAI's (its parent company's) debt."

Outline of Mr Johnson's views relating to the "conditions" 271 Mr Johnson considers the LNIA as originally entered into in section 6 of his report. In summary, he expresses the following views: (a) The uncertainty created by the Variation Notices as structured in the original LNIA would not have been acceptable to an independent borrower or lender. (b) The put/call provision (i.e. clauses 7.1 and 7.3) as structured in the original LNIA would not have been acceptable to an independent borrower or lender. (c) The "non-money" provisions (i.e. general terms and conditions not directly related to interest rate, fees or repayment terms) of the original LNIA in aggregate, and individually, would not have been acceptable to an independent borrower. 272 Mr Johnson calculates that the initial interest rate under the LNIA was 7.27%, calculated as follows: the interest rate of 6.55% (based on the 1 year BBSW rate on 28 June 2002 of 5.5450% plus 100 bps) multiplied by 10/9. Mr Johnson expresses the view that STAI could have borrowed at a lower rate for 9 months commencing 28 June 2002 from third-party domestic Australian banks. 273 Mr Johnson expresses the view that the original LNIA was structured in a way that either party could terminate the arrangement at any time; if, as an independent entity, STAI were seeking a financing which allowed such flexibility for completing a more permanent financing at a later date, it would have completed a short-term bridge facility in the bank loan market. Mr Johnson expresses the following views at paragraph 100 of his report: On the date the Original LNIA was put in place [28 June 2002], SOPL was one quarter of the way through a year during which it expected to significantly improve its operating results, increasing EBITDA by 50%. Given the expected strong improvements in operating results, it is unlikely that an independent STAI would have sought to finalize its entire debt capital structure through a single long-term tranche financing in late June 2002. By delaying long-term financing until it was in a stronger financial position, STAI could have reasonably expected to lower its cost of capital. (Footnotes omitted.) 274 Mr Johnson expresses the view that the original LNIA in fact functioned exactly like a short-term facility; the Second Amendment altered the terms of the original LNIA so dramatically that in his opinion it should be viewed as a de facto new financing. 275 Mr Johnson estimates that the interest rate for a 1 year $5.2 billion bridge loan facility for STAI on 28 June 2002 was BBSY plus 60 bps or BBSW plus 65 bps. This is based on an assumed credit rating for STAI of A+/A2 (Mr Weiss's view). 276 Mr Johnson considers the Second Amendment in section 8 of his report. He expresses the view that the net effect of the changes was the conversion of the original LNIA and the Loan Notes from a short-term financing from which either lender or borrower could easily and at no cost withdraw into a long-term arrangement from which the borrower could not withdraw without penalty and the lender could not withdraw until certain events occurred. 277 In relation to the LNIA as amended by the Second Amendment, Mr Johnson expresses the following views, in summary: (a) The uncertainty created by the Variation Notices, which continued in the LNIA after the Second Amendment, would not have been acceptable to an independent borrower. (b) The potential structural problems of deferring cash interest under the Benchmark provisions would not have been acceptable to STAI as an independent borrower. (c) The calculations of the Premium and Break Costs under the LNIA as amended by the Second Amendment would not have been acceptable to an independent borrower. (d) The "non-money" provisions in aggregate, and individually, would not have been acceptable to an independent borrower. 278 Mr Johnson expresses the view that an independent borrower would not have found the LNIA structure and pricing acceptable given its access to the USD bond and AUD bank markets on 31 March 2003. 279 Further, Mr Johnson expresses the view, in relation to the LNIA as amended by the Second Amendment, that an independent borrower would have sought to limit some of the floating interest rate exposure built into the LNIA and would have sought a more neutral 50/50 fixed/floating position. 280 Mr Johnson considers the LNIA as amended by the Third Amendment in section 9 of his report. He expresses the following views, in summary: (a) As an independent entity, STAI was not at any realistic risk of losing its financing under the LNIA during its last 3 and a half years, though it would actually have been better off if it did. (b) An independent borrower would not have found the rate of 6.835% acceptable. (c) Even if an independent STAI had borrowed under the LNIA as amended by the Second Amendment, it would not have sought during the Global Financial Crisis to either refinance or convert a 100% floating rate financing into a 100% fixed rate financing of the same maturity 5 months before its next interest rate reset.

Outline of Mr Johnson's views as to the profits that might have been expected 281 In section 10 of his report, Mr Johnson considers alternative financings to the LNIA. This section of the report responds to the second question that Mr Johnson was asked to address. Mr Johnson explains that, while he had in earlier sections identified conditions which operated between STAI and SAI in respect of the LNIA which differed from those that he would expect to see between independent entities dealing at arm's length, not all of those conditions impacted STAI's profits. Those that in his opinion did directly affect STAI's interest expenses and therefore profits include: • Pricing of a short-term financing as a long-term financing (Original LNIA); • Retroactive application of non-current market conditions (2nd LNIA); • Benchmark provisions structured with only downside for the Borrower (2nd LNIA); • Premium and Break Costs based on non-current market conditions (2nd LNIA); • Uneconomic cost of floating rate compounded interest (2nd LNIA); • Unnecessary refinancing of secure long-term funds 3½ years early (3rd LNIA); and • Fixed rate pricing based on inappropriate commitment fee (3rd LNIA). 282 Mr Johnson expresses the following views, and outlines his approach, at paragraphs 207-209 of his report: 207. In order to answer this second question, I have considered what alternative third-party arm's length financings would have been available to STAI in lieu of the LNIA and how such financings would have allowed STAI to avoid the non-arm's length costs associated with the conditions detailed immediately above. Such arm's length financings could have been used by STAI to pay A$5.2 billion of the purchase price for the shares in SOPL, negating its need to borrow such funds from SAI. Given SAI no longer needed to lend A$5.2 billion to STAI, this would have then allowed SAI/Singtel to repay the third-party external debt raised at the parent level to fund the Optus acquisition. The net result of these transactions would thus have been for the overall Singtel third-party group debt to remain unchanged. 208. In determining appropriate commercially viable alternative third-party financings for STAI, I have not altered the cash payment stream that STAI actually made, although I have never dealt with a borrower at any time whose interest rate payments reflected such a random and unscheduled outlay of cash as those made by STAI over the life of the LNIA. Nonetheless, I have constructed what I consider to be the viable alternative financings that would have allowed STAI to forego current cash interest payments through 1st Q 2007 and make the same cash payments it actually made. 209. In my opinion, the Original LNIA and the 2nd LNIA functioned as a short-term financing and a long-term financing, respectively. The 3rd LNIA was intended to function as a medium-term financing; but, as previously discussed, an independent STAI would not have wanted or needed to essentially refinance its entire debt structure in the midst of the GFC. 283 Mr Johnson's analysis is set out in Chart 19 (titled "Base Case Model"), a copy of which is annexed as Annexure B to these reasons. This model reflects the costs of an initial bridge financing on 28 June 2002, followed by Base Debt and Ancillary Debt refinancings on 31 March 2003. In Mr Johnson's Base Case, he has not assumed that a refinancing would have occurred on 30 October 2008, as his structure reflects the assumption that, as an independent borrower, STAI would have swapped proceeds of its fixed rate Base Debt USD bond issue into a 50/50 fixed/floating AUD liability in accordance with SingTel's Treasury policies and procedures. As such, there would be no pressure to fix additional amounts during the Global Financial Crisis. 284 In Mr Johnson's Chart 19, the total interest expense of the third-party debt is summarised at the bottom of the column headed "Total Period Interest". A grey shade on a date represents a fiscal year end. Annual interest rates have been used, so interest accrues based on the amount outstanding for the period, but is not paid (i.e. added to the Ancillary Debt) until the end of the year. The cash payments are subtracted from the outstanding Ancillary Debt on the same dates as they were paid under the Variation Notices. 285 In order to facilitate comparison of the periodic third-party debt interest expense with that of the interest expense of the LNIA, Mr Johnson has used 1 April of each year as the interest rate reset date for floating rate obligations. 286 The amount of debt outstanding under the Ancillary Debt can be seen in the "Ancillary Borrowing (EOP)" column. The Ancillary Debt hits a maximum of $1.9 billion on 31 March 2007, but is paid down two days later to under $1.5 billion. The Ancillary Debt is first drawn on 1 April 2003 to finance the interest due on the Bridge Facility of $243 million. It does not exceed $1 billion until 31 March 2006, and is back below $1 billion within two years. 287 On 7 January 2010, the payment under the Variation Notices exceeds the amount outstanding under the Ancillary Debt, and therefore becomes a cash surplus instead of a borrowing. Mr Johnson has applied the base swap rate for the period as the reinvestment rate. 288 On the basis of this analysis, Mr Johnson expresses the opinion that the LNIA resulted in excess interest rate expense of approximately $1.235 billion (see the figure at the bottom of Chart 19) over the course of the 10-year borrowing. Mr Johnson then adjusts for a $3.2 million loss that would have resulted from hedging the floating rate Ancillary Debt to an approximate 50/50 fixed/floating rate exposure; the excess interest expense is thereby reduced to just over $1.23 billion. 289 Mr Johnson therefore expresses the opinion that an estimated $1.23 billion in profits should have accrued to STAI if it had not borrowed under the provisions of the LNIA as amended from time to time and had instead borrowed from the bank and DCM.

The Joint DCM Report 290 In paragraph 6 of the Joint DCM Report, Mr Chigas and Mr Johnson set out a number of matters that are agreed. These include: 3.2. Conditions operated between SAI and STAI which differed and did not differ from those which might be expected to operate between independent parties dealing at arm's length. … 3.5. The provision in the Variation Notices that gave the Lender the ability to require payment of interest earned at any time of its choosing [footnote: For the 9-month period from inception until the LNIA Second Amendment in March 2003, thereafter once a Benchmark event has occurred] has not been observed by either DCM Expert in a debt capital markets transaction. ... 3.7. All call feature in a floating rate note or financing is common. 3.8. The put exercisable at par at any time in the LNIA would not be found in an arm's length third-party long-term financing. 3.10. STAI's most economic and likely only source for the quantum of $5.2 billion of third-party, long-term funds would have been a US DCM new issue transaction coupled with a CCIRS. … 3.13. Optus or STAI could have raised the equivalent of $5.2 billion in the US DCM without a SingTel Guarantee. 3.14. STAI could have utilized a SingTel guarantee, but such financing would have been at a higher all-in cost to STAI after payment of a guarantee fee had been made to SingTel on an arm's length basis. 3.15. The Optus bank facility could likely have been put in place without a SingTel guarantee, albeit at higher costs. 291 In an addendum to the Joint DCM Report, Mr Johnson qualified his agreement with the proposition in paragraph 3.14 above. Mr Johnson indicated that he would like to add the underlined words as shown in the paragraph below: 3.14. STAI could have utilized a SingTel guarantee, but such financing would have been at a higher all-in cost to STAI after payment of a guarantee fee had been made to SingTel if such a fee had been required under Australian transfer pricing regulations to be paid on an arm's length basis. Mr Johnson said during cross-examination that he made the addendum because he wanted to make clear that he was not opining on Australian law because he was not qualified to do so.

Mr Johnson's Further Calculations 292 In the course of opening, senior counsel for the Commissioner handed up a document prepared by Mr Johnson titled "STAI Alternative No Bridge and No Amendment Assumptions" dated 8 August 2021 (referred to in these reasons as "Mr Johnson's Further Calculations"). Mr Johnson confirmed when he gave evidence that he had undertaken these calculations. No issue was taken with the correctness of the calculations. The document sets out Mr Johnson's calculations in respect of four further scenarios (referred to as "models"): (a) The Without Bridge Model. A copy of this model is annexed as Annexure C to these reasons. This model reflects the impact on Mr Johnson's Base Case if one assumes the alternative Bridge Financing pricing is not applicable, and the pricing of BBSW + 100 bps as provided in the original LNIA applies, for the period from 28 June 2002 to 31 March 2003 (i.e. the period of the LNIA before the Second Amendment). All other assumptions under the Base Case (before the 10/9 escalation) remain unchanged. This model results in an excess interest expense of approximately $592 million (before the 10/9 gross-up) and approximately $658 million (after the gross-up). (b) The Guaranteed Without Bridge Model. This model reflects the impact on Mr Johnson's Base Case if one assumes the alternative Bridge Financing pricing is not applicable, and the pricing of BBSW + 100 bps as provided in the original LNIA applies, for the period from 28 June 2002 to 31 March 2003. Additionally, it is assumed the Base Debt and Ancillary Debt are guaranteed by SingTel. All other assumptions under the Base Case (before the 10/9 escalation) remain unchanged. This model results in an excess interest expense of approximately $726 million (before the 10/9 gross-up) and approximately $807 million (after the gross-up). (c) The No Amendment Model. A copy of this model is annexed as Annexure D to these reasons. This model reflects the impact on the LNIA interest deductions if one assumes the original LNIA terms remain in place over the life of the financing and the Second and Third Amendments do not take place. These calculations are not based on Base Debt or Ancillary Debt comparisons, but rather on the provisions and rates as provided under the original LNIA, with the exception that it is assumed interest is accrued and capitalised to principal every 31 March. As explained by Mr Johnson in oral evidence, this calculation is "BBSW plus one per cent for the credit spread for the entire period". Details of the BBSW (and the BBSW plus 1%) are set out in the right hand part of the first table. This model results in an excess interest expense of approximately $670 million (before the 10/9 gross-up) and approximately $745 million (after gross-up). (d) The No Third Amendment Model. This model reflects the impact on the LNIA interest deductions if one assumes the terms of the LNIA as amended by the Second Amendment remain in place after 31 March 2003, and the Third Amendment does not take place. These calculations are not based on assumptions of Base Debt or Ancillary Debt comparisons, but rather are based on the calculations and interest rates used by STAI in determining its interest rate deductions under the LNIA with the only exception being there is no conversion to a fixed rate financing in April 2009. As this scenario does not require compounding considerations (due to the 4.552% interest premium), calculations and comparisons include the effect of the 10/9 escalation. This model results in an excess interest expense of approximately $487 million (this amount includes the 10/9 escalation). 293 By reference to the calculations contained in the Without Bridge Model, it can be seen that the interest that had accrued under the actual LNIA at the time of the Second Amendment (31 March 2003) was approximately $286 million - see the first line of the first table under the heading "Base Bond Interest Due". (It will be recalled that, in preparing these calculations, Mr Johnson did not include the bridge facility and instead assumed that the LNIA proceeded in accordance with its terms during the first 9 months.) In closing submissions, senior counsel for STAI made clear that STAI accepts that calculation of the interest that had accrued under the LNIA as at 31 March 2003. The effect of the Second Amendment was that STAI was relieved of the obligation to pay the amount of approximately $286 million that had accrued up to that point.

Evaluation 294 I express the following views, at this stage, about the DCM expert evidence. I will consider this evidence further in the context of considering the application of Subdiv 815-A, in the next section of these reasons. 295 Mr Chigas and Mr Johnson have undertaken quite different exercises. Mr Chigas has, in simple terms, 'priced' the LNIA as if it were a DCM bond issue by STAI in June 2002. He has then compared this 'arm's length price' with the actual effective price of the LNIA, and concluded that the interest actually paid under the LNIA was less than the 'arm's length price'. On the other hand, Mr Johnson has considered what STAI and SAI might reasonably be expected to have done if they had been independent parties. Further, he has considered this as at the date of the original LNIA, the date of the Second Amendment and the date of the Third Amendment. He has described the transactions that he considers STAI and SAI, assuming they were independent parties, might reasonably be expected to have entered into. 296 In relation to Mr Chigas's evidence, I express the following views: (a) Insofar as Mr Chigas has, in his first report, addressed "conditions" operating as between STAI and SAI, he has addressed only conditions in the LNIA, as distinct from conditions operating between STAI and SAI in their commercial or financial relations, which is the question raised by Art 6 of the Singapore DTA. This is not a criticism of Mr Chigas; it is a consequence of the question he was asked to address. (b) Insofar as Mr Chigas expresses the view that "the overall structure of the LNIA is consistent with a bond issued in the DCM", I have difficulty in accepting this view in relation to a number of aspects of the LNIA as amended by the Second Amendment. In particular, I have difficulty in accepting that the Benchmark concept and the associated clauses are consistent with a DCM bond issue. Further, the terms of the LNIA regarding the giving of Variation Notices do not appear to be consistent with a DCM bond issue. These terms created significant uncertainty for the parties, which is unlikely to have been agreed to in a DCM bond issue. (c) Moreover, by addressing the LNIA as amended, Mr Chigas has not directly addressed whether the changes effected by the Second Amendment might be expected to have been made if the parties were independent. For example, he has not directly considered whether an independent SAI might be expected to have agreed to relieve an independent STAI of the obligation to pay approximately $286 million in accrued interest. 297 In relation to Mr Johnson's evidence, I express the following views: (a) The comment set out in [296(a)] above applies also with respect to Mr Johnson's evidence. (b) One of the issues with Mr Johnson's evidence is that he has proceeded on the basis of the credit rating analysis of Mr Weiss. As set out above, I prefer the views on credit rating of Dr Chambers. This means that part of Mr Johnson's analysis is predicated on a credit rating for STAI that I do not accept. However, as discussed below, if a parent guarantee from SingTel (or a company like SingTel) were provided, the credit rating of STAI would be equalised to that of SingTel, which would be at least as high as the credit rating assumed by Mr Johnson in his report. (c) In the course of cross-examination, Mr Johnson made a concession that, as things progressed in the preparation of his report, he had "lost sight of" the fact that the notes were issued as partial consideration for the sale of the shares. In closing submissions, senior counsel for STAI criticised Mr Johnson's hypotheticals because, among other things, he did not have regard to the capacity of the parties as vendor and purchaser of shares. In my view, as discussed below, in applying Subdiv 815-A to the facts of this case, it is necessary to have regard to the capacities of the parties as vendor and purchaser of shares, and the fact that the notes were issued as partial consideration for the acquisition of shares. This needs to be borne in mind in weighing Mr Johnson's evidence. However, this issue does not deprive Mr Johnson's evidence of all relevance. (d) Insofar as STAI challenged Mr Johnson credit, I reject those submissions. I consider that Mr Johnson approached the task of giving expert evidence with independence. He made appropriate concessions in the course of oral evidence. Although Mr Johnson and Mr Weiss are part of the same organisation, I am satisfied that appropriate arrangements were put in place to ensure that they prepared their reports independently of each other. Further, I do not consider that the fact that Mr Johnson had previously advised the Australian Taxation Office affected the independence of his opinions in the present case.

Overview 298 I now turn to the application of Subdiv 815-A to the facts of this case. The key provisions of Subdiv 815-A have been set out above. Under s 815-15(1), an entity (here, STAI) obtains a "transfer pricing benefit" if the matters set out in paragraphs (a) to (d) of that subsection are satisfied. As noted in the Introduction to these reasons, those paragraphs refer to the following facts and matters: (a) the entity is an Australian resident - here, there is no issue that STAI is and was at all relevant times an Australian resident; (b) the requirements in the "associated enterprises article" for the application of that article are met - here, the relevant article is Art 6 of the Singapore DTA and the relevant requirements are: (i) an enterprise of one of the Contracting States participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State - here, there is no issue that SAI (which is resident in Singapore) participated directly in the management, control and capital of STAI (which is resident in Australia) in each of the relevant years; (ii) conditions operate between the two enterprises in their commercial or financial relations, which differ from those which might be expected to operate between independent enterprises dealing wholly independently with one another - this issue is referred to in these reasons as the "Conditions Issue"; (c) but for the conditions mentioned in the associated enterprises article, an amount of profits might have been expected to accrue to the entity; and, by reason of those conditions, the amount of profits has not so accrued - this issue is referred to in these reasons as the "Profits Issue"; and (d) had that amount of profits so accrued to the entity, the amount of the taxable income of the entity for the income year would be greater than its actual amount, or the amount of a tax loss of the entity for an income year would be less than its actual amount - this matter is consequential on the issues identified above. 299 The issues outlined above need to be considered in respect of each relevant year (i.e. the years ending 31 March 2010, 2011, 2012 and 2013) given the express link between s 815-15(1)(c) and (d) and the wider statutory context (including ss 815-20, 815-30 and 815-35). 300 Further, in circumstances where the LNIA was a 10 year transaction, it is necessary to consider the issues in relation to the whole life of the LNIA, not just the LNIA as it stood during the years ending 31 March 2010, 2011, 2012 and 2013. There does not appear to be any issue between the parties about this. Both parties, in their evidence and submissions, addressed the whole life of the LNIA. Unless one goes back to the beginning of the transaction, that is, when the LNIA was entered into, one cannot sensibly apply the provisions of Subdiv 815-A to the years ending 31 March 2010, 2011, 2012 and 2013.

The Conditions Issue 301 The issue to be considered is whether conditions operated between SAI and STAI in their commercial or financial relations which differed from those which might be expected to operate between independent enterprises dealing wholly independently with one another. 302 I will consider the Conditions Issue in respect of three periods: (a) the period from 28 June 2002 to 31 March 2003, that is, from the date the LNIA was entered into to the date of the Second Amendment; (b) the period from 31 March 2003 to 30 March 2009, that is, from the date of the Second Amendment to the date of the Third Amendment; and (c) the period from 30 March 2009 to 27 June 2012, that is, from the date of the Third Amendment to the end of the LNIA. 303 In my view, during the period from 28 June 2002 to 31 March 2003, the following conditions operated between SAI and STAI in their commercial or financial relations which differed from those which might be expected to operate between independent enterprises dealing wholly independently with one another: (a) STAI was 100% owned by SAI, and both were ultimately 100% owned by SingTel; (b) the common directorships and executive positions as between STAI, SAI, SingTel and SOPL that existed during this period - these are set out in Appendix B to the Commissioner's outline of submissions; (c) SingTel introduced debt via SAI rather than directly from SingTel as this allowed "SingTel to more efficiently manage its interest cashflow in the future, without repatriating interest income to Singapore"; (d) the terms of the LNIA regarding Variation Notices, which gave SAI the ability to require payment of interest at any time of its choosing; and (e) the "put" feature of the LNIA (i.e. SAI's ability to put the debt to STAI). 304 Insofar as (a) and (b) above are concerned, there does not appear to be any real issue that these are "conditions" in the relevant sense. 305 In relation to (c), this statement was made in a facsimile message from Ms Jeann Low (SingTel's Group Financial Controller) to Mr Pat O'Sullivan (SOPL's CFO) dated 13 March 2003 (CB tab 189). Although the message is dated after the LNIA was entered into, the message states that it "summarises the historical basis and key commercial drivers for the acquisition financing and structuring" of SingTel and Mobile's ownership of SOPL. The document is referred to in the Commissioner's outline of submissions, which makes clear that the Commissioner relies upon the quotation set out in (c) above in respect of this issue. I consider that the email supports a finding to the effect set out in (c) above. 306 In relation to (d) above, this matter is agreed as between the DCM experts (see paragraph 6, item 3.5, of the Joint DCM Report). 307 In relation to (e) above, this matter is also agreed as between those experts (see paragraph 6, item 3.8, of the Joint DCM Report). 308 I do not consider the interest rate applicable under the original LNIA (the 1 year BBSW plus 1%) to be a condition that operated between SAI and STAI in their commercial or financial relations which differed from that which might be expected to operate between independent enterprises dealing wholly independently with one another. The Commissioner does not suggest that the interest rate in the original LNIA is other than an arm's length consideration. 309 Turning to the period from 31 March 2003 (when the Second Amendment was entered into) to 30 March 2009 (when the Third Amendment was entered into), in my view the following conditions operated between SAI and STAI in their commercial or financial relations which differed from those which might be expected to operate between independent enterprises dealing wholly independently with one another: (a) the condition referred to in paragraph [303(a)] above; (b) the common directorships and executive positions as between STAI, SAI, SingTel and SOPL that existed during this period - these are set out in Appendix B to the Commissioner's outline of submissions; (c) the condition referred to in paragraph [303(c)] above; (d) the terms of the LNIA as amended by the Second Amendment that had the effect that the interest that had accrued under the LNIA (approximately $286 million) was treated as not having accrued; (e) the terms of the LNIA as amended by the Second Amendment regarding benchmarks and the Premium; (f) subject to the terms regarding benchmarks, the terms of the LNIA as amended by the Second Amendment regarding Variation Notices; and (g) subject to the terms regarding benchmarks, the "put" feature of the LNIA as amended by the Second Amendment. 310 In relation to (a), (b) and (c), I refer to my comments at [304]-[305] above. 311 In relation to (d), I would not expect an independent party in the position of SAI to agree that the interest that had already accrued under the LNIA, which was a substantial sum, should be treated as not having accrued. There does not appear to be any commercial reason why an independent party in the position of SAI would agree to forfeit a sum of this size in this context. The term therefore differs from what might be expected to operate between independent enterprises. 312 In relation to (e), I would not expect independent parties in the positions of SAI and STAI to agree to the terms regarding benchmarks and the Premium. The effect of these terms was that the accrual and payment of interest were contingent on certain financial benchmarks being met. Given that it was possible that these benchmarks would never be met, it is very difficult to see why an independent enterprise in the position of SAI would agree to such terms. Further, the Premium was calculated to compensate SAI for allowing what was estimated by SAI and STAI to be an interest-free period of approximately 3.5 years. If the financial benchmarks were met earlier, STAI would pay the Premium over a longer period of time. If the financial benchmarks were met later (or not at all), STAI would pay the Premium over a shorter period of time (or not at all). The terms thus exposed each party to significant commercial risk. There does not appear to be any commercial rationale for these terms. It is very difficult to see why independent enterprises would agree to such terms. 313 In relation to (f) and (g), I refer to my comments at [306]-[307] above regarding the corresponding "conditions" during the earlier period. 314 In relation to the interest rate applicable under the LNIA as amended by the Second Amendment, it is convenient to consider this in the context of the Profits Issue, which is discussed below. 315 Turning to the period from 30 March 2009 (when the Third Amendment was entered into) to 27 June 2012 (when the LNIA came to an end), each of the conditions that I have identified in [309] above also operated during this period. For the same reasons, in my view these conditions operated between SAI and STAI in their commercial or financial relations and they differed from those which might be expected to operate between independent enterprises dealing wholly independently with one another. 316 In relation to the interest rate applicable under the LNIA as amended by the Third Amendment, again, it is convenient to consider this in the context of the Profits Issue, which is discussed below.

The Profits Issue 317 The issue is whether, but for the conditions identified above, an amount of profits might have been expected to accrue to STAI; and, by reason of those conditions, the amount of profits has not so accrued. 318 As discussed above, this involves forming a reliable hypothesis based on probative material as to what independent parties in the positions of SAI and STAI might have been expected to have done. The associated enterprises article and s 815-15(1)(c) generally require that the parties in the hypothetical have the characteristics and attributes of the actual enterprises in question, here, SAI and STAI. 319 It is therefore appropriate to proceed on the basis that the party in the position of STAI in the hypothetical is a member of a multinational corporate group like the SingTel group. For the same reasons, it is appropriate to proceed on the basis that the party in the position of STAI is a holding company of an operating subsidiary like SOPL. 320 Insofar as the first of these propositions is concerned, namely the assumption that the party in the position of STAI is a member of a group like the SingTel group, this is amply supported by authority: see Glencore at [179] per Middleton and Steward JJ; Chevron at [92] per Allsop CJ, at [156] per Pagone J (Perram J agreeing). If and to the extent that STAI submits that, because in reality SingTel's ownership of STAI is through SAI, and because in the hypothetical SAI and STAI are independent of each other, the party in the position of STAI should not be treated as part of a group like the SingTel group (T760), I do not accept that submission. The overarching consideration is that the enterprises in the hypothetical should generally have the characteristics and attributes of the actual enterprises. Giving effect to this consideration requires the party in the position of STAI to be treated as a member of a group like the SingTel group. It is not necessary for the purposes of the hypothetical to address the precise ownership structure whereby this is the case. 321 As both parties emphasise in their submissions, the hypothetical should be as close as possible to the actual transaction. In the circumstances of the present case, the hypothesis is a transaction between a vendor and a purchaser of shares, where loan notes totalling $5.2 billion are issued by the purchaser as partial consideration for the acquisition of the shares. The loan notes are assumed to be issued pursuant to a loan note agreement with a term of 10 years (or 10 years less one day). These matters do not appear to be controversial. Both parties in their submissions proceeded on this basis. 322 In my view, having regard to the facts and circumstances as described earlier in these reasons, a reliable hypothesis is that independent parties in the positions of SAI and STAI (and SingTel) might have been expected to have agreed in June 2002 that: the interest rate applicable to the loan notes would be the 1 year BBSW plus 1%, with the resulting amount grossed-up by 10/9 (that is, the same rate as was actually agreed in the original LNIA); interest under the loan notes could be deferred and capitalised; and, there would be a parent guarantee from a company like SingTel of the obligations of the company in the position of STAI. Further, having agreed to a transaction with these components in June 2002, a reliable hypothesis is that independent parties in the positions of SAI and STAI would not have agreed to make the changes contained in the Second Amendment. In particular, they would not have agreed to introduce the benchmark terms and add the Premium of 4.552%. Further, having agreed to a transaction with the components described above in June 2002, a reliable hypothesis is that independent parties in the positions of SAI and STAI would not have agreed to make the changes in the Third Amendment. That is, they would not have agreed to change the component of the interest rate that was the 1 year BBSW to a fixed amount of 6.835%. It follows that, in my view, in the hypothesis, the interest rate of the 1 year BBSW plus 1%, with the resulting amount grossed-up by 10/9, would have (or might be expected to have) continued through the whole life of the LNIA. 323 My reasons for forming these views are as follows. 324 In relation to a parent guarantee, while there was no parent guarantee in the actual transaction, this was of course unnecessary because the parties to the transaction, SAI and STAI, were both wholly-owned by the same company, SingTel. However, in the hypothesis of a transaction between independent parties in the positions of SAI and STAI, the logic of the situation strongly points to a parent guarantee being provided. The size of the transaction is very large - the company in the position of SAI is providing 'vendor finance' of $5.2 billion. In these circumstances, it is reasonable to expect that the company in the position of SAI would require security. Further, if a parent guarantee were not provided, the interest rate applicable to the loan notes is likely to be higher, and the total interest payable in respect of the loan notes is likely to be much greater. I have concluded that the opinion of Dr Chambers is to be preferred to that of Mr Weiss as regards the overall issuer credit rating of STAI. This means that there is a material difference between the credit rating of SingTel (AA-/A1) and that of STAI (BBB- to BB / Ba1 to Ba3) at the relevant time (June 2002). These credit ratings should be assumed for the purposes of the hypothesis. Making that assumption, if a parent guarantee were not provided, the interest rate applicable to the loan notes is likely to be higher, and the total interest payable in respect of the loan notes is likely to be much greater. In these circumstances, the parent company in the position of SingTel is likely to prefer to provide a guarantee rather than allow its wholly-owned subsidiary (the company in the position of STAI) to pay a much greater amount in interest (which would likely affect the parent's financial position). Given the size of the transaction (vendor finance of $5.2 billion), even a small increase in the interest rate results in a large dollar amount of additional interest being payable. 325 I note the fact that SingTel provided a guarantee of Optus Finance Pty Ltd's $2 billion bank facility. I note also that the S&P rating for SOPL dated 9 October 2002 (CB tab 258) includes a statement that, although SingTel provided that guarantee, "it will undertake a cost benefit analysis before providing a guarantee for future debt raising". For the reasons set out in the preceding paragraph, any such cost/benefit analysis undertaken by a parent in the position of SingTel would be likely to conclude that a guarantee should be provided. 326 The analysis set out above is supported by the evidence of Dr Chambers in the following passage, which was part of opening remarks he made during the concurrent evidence session: Well, the parent is going to make a rational decision: "Should I borrow at a low rate by means of guaranteeing the obligation by issuing debt myself and on lending it to the sub or do I pay a premium to the marketplace to let this entity borrow on its own?" And the parent is going to make a very rational decision to minimise its overall cost of funding, and that is what we see in many cases. So many companies do fund subsidiaries internally because they can borrow at a lower rate. Why aren't the subs out there borrowing on their own name? It's because the market really doesn't have a lot of faith in that implicit support in terms of lowering the risk that they're facing, and if they were, they would be borrowing on the subs name without any explicit support. It's essentially what Mr Chigas said earlier today. So I think that there's a very rational expectation. We don't see a lot of instances where they say, "Well, there's only a couple of notches of implicit support evident because there's this huge differential between the parent's and the sub's rating." That doesn't happen because the subs don't borrow in the public market on that basis. If we see that kind of differential, then their parent will guarantee the obligation, or they issue debt and fund it - fund it internally within the organisation to lower the cost of funds, and it's a very rational behaviour on their part. … (Emphasis added.) 327 I note that the evidence in the present case does not include evidence comparable to that in Chevron, namely that there was a policy of the group to borrow externally at the lowest cost, and that the parent would generally provide a guarantee for a subsidiary that was borrowing externally: see Chevron at [63]. However, I do not consider the presence of such evidence to be essential to a hypothesis that there might be expected to be a parent guarantee. For the reasons set out above, in the circumstances of this case, I consider that if the parties were independent, it might be expected that there would be a parent guarantee. 328 Insofar as STAI contends that, if the hypothesis includes the provision of a parent guarantee, it might be expected that a guarantee fee would be charged by the parent to the subsidiary, I do not accept that contention. This proposition was largely based on Mr Chigas's evidence. However, Mr Chigas's evidence on this point (see [261]-[262] above) is expressed in very general terms. Moreover, his evidence regarding the amount of any fee appears to be speculative. He states in his first report that a fee of 95.5 bps to 146 bps "could have been" paid to SingTel. There does not appear to be any probative evidence to hypothesise that, assuming the provision of a parent guarantee, a guarantee fee might be expected to be charged. I note also that there is no evidence that SingTel charged a guarantee fee for guaranteeing the obligations of Optus Finance Pty Ltd under its $2 billion bank facility. 329 I turn now to consider the interest rate applicable to the loan notes in the hypothesis. The interest rate under the actual original LNIA was the 1 year BBSW plus 1%. There is evidence that this rate was considered to reflect an arm's length consideration. Mention has already been made of the message from Ms Low to Mr Pat O'Sullivan dated 13 March 2003 (see [305] above). In the course of describing the "key attributes" of the original LNIA, the message refers to: • An arm's length interest rate (grossed up to take into account interest withholding tax ("WHT")) was included in the Agreement as provided by Optus Treasury. 330 The evidence also includes an email dated 25 June 2002 (three days before the LNIA was entered into) which provides context for the decision to set the interest rate at the 1 year BBSW plus 1% (CB tab 330). The email is from Mr Alan Bolitho to Mr Mark Wilson and Mr Nichols. Mr Bolitho's position was Lease & Asset Finance Manager at SOPL. Mr Wilson held the position of Tax Director at SOPL, while Mr Nichols was the Director -Treasury at SOPL. The email sets out a proposed definition of the "Interest Rate", which matches the definition that appears in the original LNIA (see [63] above). The email goes on to state: The 1% margin is based on several factors: • Our latest three year issue was in the range 0.35% to 0.4% p.a. (but is for a considerably shorter term). The 1 Year Swap Rate assumes interest is paid / compounded quarterly, therefore a 'zero coupon' rate would be higher than the reference rate, which I am taking into account in the 1% p.a. margin. • SingTel's 10 year Euro Bonds are currently trading at 0.99% p.a. above LIBOR (Source: report on Credit Spread Movement by ABN AMRO's International Bond Research Desk dated 25 June 2002) 331 Thus the interest rate in the original LNIA appears to have been chosen to reflect an arm's length interest rate. It is notable that, in identifying what was considered to be an arm's length rate, regard was had to the margin applicable to SingTel's bonds. Thus the actual parties approached the matter of identifying an arm's length interest rate by reference to SingTel's credit rating. 332 I do not consider the expert evidence provides a basis to depart from this as the interest rate that might be expected between independent parties. Mr Chigas's calculation of a "market based pricing" (i.e. a credit spread of 400 bps) is not, in my respectful opinion, of assistance for present purposes. The pricing proceeds on the basis that STAI is the issuer and has a credit rating in the mid triple-Bs. For the reasons set out above, I consider that it is reasonable to expect a parent guarantee, which would have the effect of equalising the credit rating of the company in STAI's position with that of its parent (a company like SingTel). Further, I consider there to be other difficulties with Mr Chigas's analysis. It is conducted as at June 2002, but on the basis of the LNIA as amended by the Second Amendment (in March 2003). As already indicated, I consider that the analysis as at June 2002 should take place without reference to the March 2003 amendments. Mr Chigas's analysis is based on the actual LNIA, rather than a hypothesis which excludes from consideration the "conditions" identified in the preceding section of these reasons. It is unclear to what extent this affects the credit spread he has estimated. However, it raises a question as to whether his analysis is able to be relied on for present purposes. 333 Further, insofar as Mr Chigas expresses a view that a DCM transaction with a parent guarantee from SingTel (with no guarantee fee) would have a credit spread of 205 to 215 bps, I do not consider this to be of assistance for present purposes. Mr Chigas's analysis proceeds on the assumption that SingTel's credit rating would "likely have been placed on negative watch, or downgraded prior to the financing when the rating agencies would have been approached for a rating confirmation". However, there does not appear to be any firm foundation for this assumption. More generally, the analysis suffers from the difficulties discussed in the preceding paragraph (apart from the point relating to the credit rating of STAI). 334 In Mr Johnson's first report (at page 70) he responded to Mr Chigas's evidence regarding the pricing of a SingTel-guaranteed obligation. He provided some evidence regarding the credit spread of a SingTel-issued bond. In the Joint DCM Report (at page 113) Mr Chigas responded to this evidence. In a table on that page Mr Chigas sets out, in the first column, his calculations of the AUD floating credit spreads that correspond to the figures in the second column, which are the USD spreads provided by Mr Johnson. There was a substantial challenge to Mr Johnson's estimates on the basis that the material upon which he relied was not based on actual trades. In my view, there is force in this challenge to Mr Johnson's figures. 335 For these reasons, I consider that independent parties in the positions of SAI and STAI might be expected to have agreed an interest rate of the 1 year BBSW plus 1%. 336 Insofar as, under the original LNIA, the applicable rate was the interest rate multiplied by 10/9, a gross-up of 10/9 appears to be common in international borrowings of the type under present consideration. I consider that independent parties in the positions of SAI and STAI might be expected to have agreed to such a gross-up. 337 I consider that independent parties in the positions of SAI and STAI might be expected to have agreed that interest could be deferred and capitalised. The hypothetical includes that the party in the position of STAI is the holding company of an operating subsidiary like SOPL. This brings in to the hypothesis the cashflow position and the projected cashflow position of SOPL. In light of this, the independent parties might be expected to agree that the company in the position of STAI could defer and capitalise interest. 338 I now turn to the Second Amendment. As set out above, in my view, having agreed to a transaction with the above components in June 2002, a reliable hypothesis is that independent parties in the positions of SAI and STAI would not have agreed to make the changes contained in the Second Amendment. There does not appear to be any commercial rationale for the Second Amendment. There was a suggestion in STAI's submissions that the Second Amendment was needed to address SOPL's cashflow issues. However, the original LNIA already permitted STAI to defer and capitalise interest, and this has been incorporated into the hypothesis. Thus, cashflow issues affecting SOPL do not provide a commercial rationale for the Second Amendment. It seems more likely that, as submitted by the Commissioner, the aspect of the Second Amendment that stopped the accrual of interest (at least for a time) was directed at withholding tax issues. Further, there is no witness evidence as to the commercial rationale of the Second Amendment. 339 It seems most unlikely that independent parties in the positions of SAI and STAI would have agreed to the terms of the Second Amendment. I refer to the discussion at [311]-[312] above, in the context of the Conditions Issues. That discussion applies equally here. Accordingly, a reliable hypothesis is that independent parties would not have entered into the Second Amendment. 340 I now turn to the Third Amendment. As set out above, in my view, having agreed to a transaction with the components described above in June 2002, a reliable hypothesis is that independent parties in the positions of SAI and STAI would not have agreed to make the changes in the Third Amendment. I have discussed Mr O'Sullivan's evidence regarding the change to the relevant component of the interest rate (that is, the change from the 1 year swap rate to a fixed rate of 6.835%) at [182]-[189] above. For the reasons there set out, I do not accept that the need to obtain certainty as to the interest rate payable under the LNIA was the rationale for the change to the interest rate. Nor do I accept that the need to obtain certainty as to ongoing funding upon the end of the LNIA was the rationale for the Third Amendment. 341 Further, on the hypothesis that SAI and STAI were independent parties, and that (as at October 2008) the interest rate under the transaction remained the 1 year BBSW plus 1%, it is difficult to accept that they would have (or might be expected to have) agreed, in October 2008, to change the 1 year BBSW component to a fixed rate of 6.835%. While the Global Financial Crisis affected the availability of funds, and credit spreads were lengthening, the floating rate was generally dropping. Given that the credit spread under the transaction was already agreed to be 1%, there does not appear to be any good commercial reason to change the 1 year BBSW component of the interest rate to a fixed rate of 6.835%. Further, in circumstances where the transaction had about 3.5 years left to run, there would not appear to be a need to agree to change the relevant component of the interest rate in order to secure a commitment to further financial accommodation. 342 Further and in any event, there is no expert evidence that the figure of 6.835% was an arm's length substitute for the 1 year BBSW (whether with or without a commitment to ongoing financing upon the end of the transaction) at the time of the Third Amendment (or at the time the changes were substantively agreed). Mr Chigas made clear during cross-examination that he had not addressed the specific figure (see [246] above). Thus, there is no expert evidence as to whether 6.835% was an arm's length substitute for the relevant component of the interest rate. In the absence of any commercial rationale, and in the absence of expert evidence that the figure of 6.835% was an arm's length substitute for the 1 year BBSW at the time of the Third Amendment (or the time the changes were substantively agreed), I consider a reliable hypothesis to be that independent parties in the positions of SAI and STAI would not have agreed to make the changes in the Third Amendment. 343 STAI relies heavily on Mr Chigas's analysis, which has been outlined above. The principal difficulty with this approach, in my respectful opinion, is that it departs too far from the actual transaction and the characteristics of the parties to that transaction, and thus departs from the approach required under Subdiv 815-A. The actual transaction involved a vendor and a purchaser of shares, and an issue of loan notes totalling approximately $5.2 billion by way of partial consideration for the acquisition of the shares. It did not involve a DCM bond issue. Further, as already indicated, I consider there to be significant differences between the terms of the LNIA and the terms of a typical DCM bond issue (see [244] and [296(b)] above). A second difficulty with Mr Chigas's, and thus STAI's, approach is that it involves the calculation (in hindsight) of the effective credit spread of the LNIA, and a comparison of this credit spread with that of an STAI-issued DCM bond issue, rather than an approach which focuses on what independent parties in the positions of SAI and STAI, dealing independently with each other, might be expected to have agreed in June 2002, and at the time of each relevant amendment to the LNIA. The difference between the two approaches can be illustrated as follows. As set out in [266]-[267] above, the difference in interest between Mr Chigas's actual scenario and his "market" scenario is approximately $2.8 billion - the difference between $4.9 billion and $7.7 billion of interest. Mr Chigas does not ask whether an independent party in the position of STAI in June 2002 might be expected to have agreed to the interest rate applicable under his "market" scenario; it is not the way that he has approached the issues. However, for the reasons already indicated, I consider that the matter needs to be approached in that way. 344 STAI places particular reliance on the first sentence of [180] of the judgment of Middleton and Steward JJ in Glencore. In that sentence, their Honours stated: "we think that it would be appropriate to exclude any considerations that are the product of CMPL's non-arm's length relationship with GIAG and the broader Glencore Group". STAI relies on this sentence to submit that any implicit support by SingTel of STAI should be excluded from consideration. STAI also relies on this sentence to contend that the provision of a parent guarantee from SingTel should be excluded. Further, STAI submits, if a parent guarantee is to be assumed, then one would also impute a guarantee fee, on the basis that the parties are at arm's length from each other. I do not accept these submissions. The first sentence of [180] in Glencore was directed to a particular aspect of the facts of Glencore, namely the particular attitude or policy to risk-taking within the group: see the balance of [180], set out at [147] above. This was a product of CMPL's non-arm's length relationship with GIAG and the broader Glencore Group, and therefore to be excluded from the analysis. However, what is clear from [179] of Glencore is that the fact that the relevant company is a member of a group is not to be excluded from the analysis. It follows that the possibility of implicit support is not excluded from consideration (although this aspect of the submission does not appear to go anywhere as I have preferred Dr Chambers's evidence to that of Mr Weiss). It further follows that the possibility of a parent guarantee (with or without a guarantee fee) is not excluded from consideration. For these reasons, I do not consider the first sentence of [180] of Glencore to be saying that the provision of a parent guarantee is excluded from the analysis or that, if a parent guarantee is hypothesised, it is to be on the basis of a guarantee fee. 345 For these reasons, I conclude that, in the hypothesis, the same interest rate as agreed by the parties in the original LNIA would have (or might be expected to have) applied through the whole life of the transaction. This is the basis upon which the No Amendment Model was prepared (see Annexure D to these reasons). That model indicates, for each of the years ending 31 March 2010, 2011, 2012 and 2013, the cash payments of interest that were actually made and the interest that would have been payable if the interest rate in the original LNIA applied throughout the life of the LNIA (i.e. assuming that the Second Amendment and the Third Amendment did not occur). The model proceeds on the basis that interest is accrued and capitalised to principal every 31 March. That is an appropriate assumption, consistent with my reasoning set out above. 346 I therefore conclude that, for each of the years ending 31 March 2010, 2011, 2012 and 2013, but for the conditions identified in the preceding section of these reasons (headed "The Conditions Issue"), an amount of profits might have been expected to accrue to STAI; and by reason of those conditions, the amount of profits has not so accrued. The amount of profits for each year is to be calculated by reference to the No Amendment Model. 347 I further conclude that, for each of the years ended 31 March 2010, 2011, 2012 and 2013, had that amount so accrued to STAI, the amount of its taxable income for the year would be greater than the actual amount, or the amount of its tax loss would be less than the actual amount. 348 It follows that, for the purposes of s 815-15(1) of the ITAA 1997, STAI obtained a "transfer pricing benefit" in respect of each of the years ending 31 March 2010, 2011, 2012 and 2013.

Division 13 of the ITAA 1936 349 As already indicated, the focus of both parties' submissions was on Subdiv 815-A of the ITAA 1997. I will therefore deal with Div 13 of the ITAA 1936 relatively briefly. 350 As with Subdiv 815-A, although the relevant years for present purposes are the years ending 31 March 2010, 2011, 2012 and 2013, to apply the provisions in the context of this case it is necessary to look at the whole of the life of the LNIA. 351 Section 136AD(3) has been set out above. Addressing the issues raised by that provision, my views are as follows: (a) Whether the taxpayer has acquired property under an international agreement. In my view, the taxpayer, STAI, has acquired property. This can be identified as either: (i) the rights under the LNIA (noting that "property" is defined as including "services", and "services" is defined as meaning "rights … provided … under … an agreement for or in relation to the lending of moneys"); or (ii) the shares in SOPL. Further, the property was acquired under an "international agreement" as defined in s 136AC, on the basis that a non-resident (SAI) supplied property under the agreement otherwise than in connection with a business carried on in Australia by the non-resident at or through a permanent establishment of the non-resident in Australia. (b) Identification of the consideration that was actually given or agreed to be given for the property. This is relevantly the interest actually paid by STAI to SAI under the LNIA during each year of the life of the LNIA. The amount for each year is set out in the No Amendment Model (Annexure D to these reasons) in the second table under the heading "Cash Payments". (c) Identification of the consideration that might reasonably be expected to have been given or agreed to be given in respect of the acquisition of property if it had been acquired under an agreement between independent parties dealing at arm's length with each other in relation to the acquisition. For the reasons given above, I consider the arm's length interest rate to be the 1 year BBSW plus 1%, with the resulting amount grossed-up by 10/9 (that is, the same rate as in the original LNIA). The arm's length consideration for each year of the life of the LNIA is set out in the No Amendment Model (Annexure D to these reasons) in the second table under the heading "Accrued NET Interest + 10/9 Escalation". 352 It follows that, pursuant to s 136AD(3) of the ITAA 1936, to the extent of the determinations, for the years ending 31 March 2010, 2011, 2012 and 2013, consideration equal to the arm's length consideration in respect of the acquisition is deemed to be the consideration given or agreed to be given by STAI in respect of the acquisition.

Other issues 353 In its outline of submissions, STAI submits that an issue arises in this case as to whether the Commissioner can defend the amended assessments on a basis which is inconsistent with his determinations, citing Channel Pastoral Holdings Pty Ltd v Commissioner of Taxation (2015) 232 FCR 162 (Channel Pastoral) at [11]-[12], [81] (in the context of Pt IVA of the ITAA 1936). STAI submits, in summary, that the determinations were based on the methodology in the EP Report, and the methodology adopted by Mr Johnson (upon which the Commissioner now relies) is inconsistent with that in the EP Report. I do not accept those submissions. While it may be accepted that there are differences between, on the one hand, the approach taken in the EP Report and, on the other, the approach taken by the Commissioner in his primary, secondary and tertiary cases, the fundamental point is that the determinations under Subdiv 815-A proceeded on the basis that STAI obtained a "transfer pricing benefit" and the case presented by the Commissioner in this proceeding is consistent with that. Likewise, the determinations under Div 13 proceeded on the basis that STAI gave or agreed to give consideration that exceeded the arm's length consideration, and the case presented by the Commissioner in this proceeding is consistent with that. I consider Channel Pastoral to be distinguishable. In that case, the Court was dealing with the situation where the relevant counterfactual sought to be relied on by the Commissioner would not have resulted in the head company of the tax consolidated group obtaining a tax benefit. For the reasons already given, the present case is not comparable. 354 STAI's notice of appeal seeks an order that the shortfall interest charge be set aside, or alternatively that the matter be remitted to the Commissioner for reassessment according to law. However, STAI has not advanced any submissions in its outline of submissions about the shortfall interest charge. It is assumed that this order was sought in the notice of appeal as a consequential matter, and that no issue is sought to be agitated about it.

CONCLUSION 355 For these reasons, I accept the Commissioner's secondary case which is based on the No Amendment Model. On the basis of the calculations handed up by senior counsel for the Commissioner during opening, it follows that STAI has not shown the amended assessments to be excessive. The appropriate order is therefore that the appeal be dismissed. There does not appear to be any reason why costs should not follow the event. At this stage, I will make an order that the parties provide a proposed minute of orders to give effect to these reasons. I certify that the preceding three hundred and fifty-five (355) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Moshinsky.

Associate: Dated: 17 December 2021 Annexure A Mr Chigas's first report, Table 8 Annexure B Mr Johnson's report, Chart 19 (Base Case) Annexure C Mr Johnson's Further Calculations - Without Bridge Model Annexure D Mr Johnson's Further Calculations - No Amendment Model