Commissioner of Taxation v Consolidated Press Holdings Ltd [ 1999] FCA 1199

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY

NG1172 to NG 1183 of 1998

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT

BETWEEN:

COMMISSIONER OF TAXATION

Appellant /Cross Respondent

AND:

CONSOLIDATED PRESS HOLDINGS LIMITED

(ACN 008 394 509)

MURRAY LEISURE GROUP PTY LIMITED

(ACN 000 090 273)

CPH PROPERTY PTY LIMITED (ACN 000 031 747)

Respondents/Cross Appellants

JUDGE:	FRENCH, SACKVILLE AND SUNDBERG JJ
DATE:	7 SEPTEMBER 1999
PLACE:	SYDNEY

SUMMARY OF JUDGMENTS

This summary is intended to outline the principal issues and outcomes in the judgments which are published today. It does not form part of the Reasons for Judgment.

1 The two judgments which are published today concern the amounts of income tax payable by three companies which are Australian-based members of the Consolidated Press Group. The period for which their income tax liabilities are in dispute covers the four income years from 1 July 1988 to 30 June 1992.

2 The twelve appeals in this case were brought by the Commissioner of Taxation. He had issued assessments in various years to the three Australian companies. They objected to the assessments. The Commissioner disallowed their objections and the companies then appealed to this Court. Justice Hill set aside the Commissioner's decisions disallowing the objections to the assessments and remitted the matters to the Commissioner to be dealt with in accordance with his Honour's reasons.

3 Of the twelve appeals which the Commissioner has brought in this Court against his Honour's decisions he has succeeded in two concerning the application of the tax avoidance provisions of Part IVA of the Income Tax Assessment Act to one of the Australian companies, CPH Property Pty Ltd, formerly Australian Consolidated Press Pty Ltd. The ten remaining appeals by the Commissioner concern an alleged dividend stripping scheme involving Consolidated Press Holdings Ltd and Murray Leisure Group Pty Ltd and a debt defeasance transaction connected with the issue of bonds by one of the Group's overseas members. They have been dismissed. Eight cross-appeals by Consolidated Press Holdings and Murray Leisure Group relating to one aspect of their assessments have also been dismissed. The issue on which they cross-appealed, unsuccessfully, involved the application of so called thin capitalisation rules to one of their associate companies in the Bahamas.

4 The two appeals on which the Commissioner succeeded concern the financing of a failed takeover bid in 1989 by the Consolidated Press Group for a United Kingdom company, BAT Industries Plc. The Court has held that the financing arrangements were structured in such a way as to constitute a tax avoidance scheme for the purposes of Part IVA of the Act. The beneficiary of the scheme was Australian Consolidated Press, now known as CPH Property Pty Ltd. Our disagreement with his Honour's view was confined to the interpretation of one section of the Act (s 79D). Since that section has now been amended the same issue will not arise again.

5 An alleged dividend stripping scheme was the subject of the next two appeals brought by the Commissioner. Dividend stripping schemes are a form of tax avoidance scheme for which the Act makes particular provision in s 177E. There is no precise legal definition of such schemes. Generally speaking they involve a company which has accumulated profits. The shares in the company are purchased by a third party, the stripper. The stripper, who acquires a controlling interest, declares a dividend on the shares so converting the accumulated profits into dividends. This causes the value of the shares to drop so they can be sold at a lesser price. The selling shareholders get capital in their hands and the stripper usually gets a rebate on dividends and a tax "loss" on the difference between what it paid for the shares and what it sold them for.

6 The two appeals in question involved an alleged dividend stripping scheme connected with the replacement of the Consolidated Press Group's UK holding companies by similarly named companies incorporated in the Bahamas in 1990. Justice Hill decided that the transactions associated with the liquidation of the UK companies were brought about as part of a reorganisation of the Group which had to do with proposed changes to UK and Australian tax laws. The purpose of the transactions and the associated reorganisation was to avoid exposing members of the Consolidated Press Group to double taxation in the United Kingdom and in Australia. They were not brought about for the purpose of enabling Consolidated Press Holdings and Murray Leisure Group to receive capital instead of taxable dividend distributions even though they had that result. Hill J therefore concluded that there was no scheme "by way of or in the nature of a dividend stripping".

7 There is, however, another limb to s 177E which catches "a scheme having substantially the effect of a scheme by way of ...dividend stripping". Hill J thought that some of the arrangements came within this limb. In the end, this did not matter because he found that the Commissioner had been wrong in deciding that there had been a distribution of profits of the relevant UK company. So he decided in favour of Consolidated Press Holdings and Murray Leisure Group.

8 On the appeal, the Court has decided that, because the arrangements were not entered into for the purpose of avoiding Australian tax, they could not be regarded as dividend stripping and did not come within either limb of s 177E. In other words, the arrangements did not even have the effect of a scheme by way of dividend stripping. In this respect, the Court has disagreed with Justice Hill's reasons. But the Court has reached the same result and so the Commissioner's appeals on the dividend stripping issue have been dismissed.

9 Then there were eight appeals brought by the Commissioner in respect of income said to have been earned by an overseas member of the Consolidated Press Group. This income was connected with the raising of funds by issue of bonds in Swiss francs in 1984 and 1985 and the assumption of liabilities under the bonds by a third party in 1989. This assumption of liability arrangement was called a debt defeasance agreement. The Commissioner argued that the Consolidated Press company which had effectively disposed of its liability under the bonds had made a gain from that transaction which amounted to income. He contended that the income should be attributed to the two Australian members of the Consolidated Press Group, Consolidated Press Holdings and Murray Leisure Group. We agreed with his Honour's conclusion that the alleged gain was not income of the kind which could be attributed to those companies under the Act. These eight appeals by the Commissioner were dismissed.

10 The same companies cross-appealed against his Honour's decision in respect of the same assessments but on another issue. They were liable to pay tax on income earned by one of the Consolidated Press Group based in the Bahamas. They wanted to offset, against the income earned by that company, interest payments which it made to other companies in respect of borrowings. His Honour held, however, that for certain purposes the Bahamas company had to be treated as if it were an Australian company largely funded by an overseas corporation. This meant that so called thin capitalisation rules under the Act applied and the interest payments were not deductible against that company's income except to a very limited extent. So that company's income had to be brought to account as taxable income of the Australian companies without the claimed deduction for interest. We agreed with his Honour's reasoning and dismissed the eight cross-appeals.

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY

NG 1172 of 1998

1173 of 1998

1174 of 1998

1175 of 1998

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT

BETWEEN:

COMMISSIONER OF TAXATION

Appellant

AND:

CONSOLIDATED PRESS HOLDINGS LIMITED

(ACN 008 394 509)

MURRAY LEISURE GROUP PTY LIMITED (ACN 000 090 273) CPH PROPERTY PTY LIMITED (ACN 000 031 747)

Respondents

JUDGES:	FRENCH, SACKVILLE AND SUNDBERG JJ
DATE:	7 SEPTEMBER 1999
PLACE:	SYDNEY

REASONS FOR JUDGMENT

Introduction

11 Consolidated Press Holdings Ltd ("CPH"), CPH Property Pty Limited, formerly known as Australian Consolidated Press Limited ("ACP"), and Murray Leisure Group Pty Ltd ("MLG") are all part of the Consolidated Press Group of Companies ("the Group"). CPH is the holding company for the Group and its ultimate shareholder is a private company owned by Mr Kerry Packer. These appeals concern the amounts of assessable income for tax purposes earned by each of the companies in the following years of income:

CPH - year ended 30 June 1990

ACP - years ended 30 June 1989 and 30 June 1991

MLG - year ended 30 June 1990

The issues raised by these appeals concern the application of Part IVA of the Income Tax Assessment Act 1936 (Cth) ("ITAA") to what is said to be a scheme whereby deductions relating to foreign source income are offset against taxable income. Those issues are raised in the two appeals relating to ACP. The other appeals involve the issue of dividend stripping, for which Part IVA makes specific provision in s 177E.

Factual Background in Outline

12 In April 1989, the Group initiated steps with a view to making a takeover bid for a United Kingdom company, BAT Industries Plc ("BAT"). The bid was to be made in conjunction with interests associated with Sir James Goldsmith and Mr Jacob Rothschild. It was anticipated that capital in the order of 250 million pounds sterling would be required. The relevant principals of the Group believed that the BAT takeover would yield substantial profits flowing from Consolidated Press International Ltd ("CPIL(UK)"). The expected profit was approximately one billion pounds sterling.

13 There were at that time two member companies of the Group which were incorporated in the United Kingdom, namely CPIL(UK) and Consolidated Press International Holdings Ltd ("CPIHL(UK)"). Their shares were entirely beneficially owned by CPH. Under the tax laws of the UK, each company was a UK non-resident, since its central management and control were outside the UK. Since neither company was a resident of the UK, it was not liable to pay UK tax on its world wide income. At the relevant times, the boards of directors of CPIL(UK) and CPIHL(UK) included Mr Kerry Packer and, as the primary judge put it, "various high profile individuals" resident in the UK, the United States and elsewhere.

14 It was necessary to arrange finance for the takeover. Mr D. Bourke, who was at that time the Financial Controller of ACP, had already obtained advice from Mr J. Cherry of Arthur Young, in August 1988, about the most advantageous means of channelling borrowings through to CPIL(UK) and CPIHL(UK). That advice had been received in connection with an unrelated refinancing proposal flowing from an earlier acquisition of the Valassis Group of companies which were American owned. The refinancing proposal had not proceeded. The same advice however was offered in relation to the funding of the BAT takeover and it was followed.

15 Central to that repeated advice, of which no record was kept, was the proposition that instead of funds borrowed by the Group being advanced directly to the company or companies which were to act as takeover vehicles, ACP should use the money to subscribe for shares in MLG. That company could in turn invest the funds raised by the issue of its shares to ACP in a new issue of redeemable preference shares by CPIL(UK). The latter company would then advance the funds to the takeover vehicle via some foreign structure. The "foreign structure" in this case was CP Investment (Singapore) Pte Ltd ("CPI(Sing)") which was incorporated in Singapore on 11 October 1988. This last element had to do with double tax treaties and interest withholding tax in the United Kingdom and not with Australian tax. The takeover vehicle was to be Hoylake Investments Ltd ("Hoylake"), a company incorporated in the Bahamas.

16 The advice from Arthur Young indicated, inter alia, that the suggested mix of borrowing and share subscription would obviate the effects of a proposed change to the law foreshadowed by the Australian Government with the issue of a consultative document on 25 May 1988. This proposed that, as from the 1989/90 tax year, the income of non-resident entities in which Australian residents had an interest should be taxed on an accruals basis, where the income was derived from low-tax countries. The consultative document contemplated that the use of indirect ownership rules by countries that enacted accruals legislation could entail the income of a particular foreign entity being subject to more than one country's tax legislation. In other words, the document contemplated the possibility of double taxation, although it was said that consideration would be given to the need for relief.

17 The steps taken by the Group in implementation of the advice with a view to the takeover of BAT, and their immediate sequelae, were as follows:

1. 28 April 1989 - ACP applied for and was allotted 600,000 redeemable preference shares at $1 each at a premium of $500 per share in the capital of MLG. The subscription price was $A300.6 million.

2. 2 May 1989 - Consolidated Press (Finance) Ltd ("CPF") lent ACP $A300.6 million to enable the share subscription to proceed.

3. 5 May 1989 - Westpac Banking Corporation advanced $US240 million to CPH.

4. 5 May 1989 - CPIL(UK) allotted 2,400,000 fully paid ordinary shares of $US100 each to MLG. This was funded from moneys advanced to CPH by Westpac.

5. 21 June 1989 - CPI(Sing) subscribed for 195 ordinary shares of GBP1 each in Hoylake at a premium paying GBP8,835,125 to Hoylake representing 32.5% of the Hoylake shares. The balance was held by interests associated with Goldsmith and Rothschild.

6. 10 July 1989 - MLG lent $US100 million interest free to CPIL(UK), equivalent to $A131,483,585.03. The funds came from the CPF US Dollar account with Westpac in the US and were treated as an advance by CPF to ACP to enable ACP to pay for the redeemable preference shares in MLG.

7. CPIL(UK) immediately lent the $US100 million to CPI(Sing) initially described as interest free. Nevertheless interest was charged at 15% pa until 6 October 1989 and thereafter at 16.25% pa.

8. 11 July 1989 - a formal bid was announced in a press release.

9. 28 November 1989 - the funds lent by MLG to CPIL(UK) were used to pay for one million redeemable preference shares of $US100 each in CPIL(UK), allotted to MLG on that day.

10. April 1990 - the California Department of Insurance refused approval for the sale of Farmers Group Inc, which was a condition of the Hoylake bid.

11. 20 April 1990 - MLG's tax return for the year ended 30 June 1989 proceeded on the basis that s 79D of the ITAA as it then stood, applied.

12. 23 April 1990 - the bid for BAT was withdrawn.

13. 5 June 1990 - Hoylake went into voluntary liquidation.

18 In seeking advice about the foreshadowed Australian legislation from Mr Cherry in December 1989, Mr C.K. Mackenzie on behalf of the Group, indicated that he was "not particularly interested in avoiding the attribution of income, as seems to be the basic thrust and purpose of the new accruals legislation". He was "more concerned with the possibility that the group could suffer double taxation and/or be taxed in foreign jurisdictions to the detriment of the franking credits available to the ultimate parent corporation". A draft of the legislation was available in January 1990. Mr Cherry's advice was to relocate the holding companies from the UK to a tax haven.

19 By way of background, it should also be noted that on 15 March 1988 the UK Chancellor had announced proposed changes to tax legislation affecting non-resident UK companies such as CPIL(UK) and CPIHL(UK). The text of the announcement, relevantly, was as follows:

"-companies incorporated in the UK will be resident here for tax purposes. If these companies transfer their trade or business to non-resident companies, the existing rules to determine tax liability including that on capital gains will apply.

-companies incorporated in the UK before today but not resident here under existing rules will become resident here only after five years from today unless central management and control of the company is transferred to the UK in the interim.

..."

The announcement therefore contemplated a five year period of grace, during which management and control of the company would be transferred to the UK. After that time, a company incorporated in the UK, whether or not resident under previous rules, would be taxed on world-wide income.

20 On 22 March 1990, a meeting of directors of CPIL(UK) and CPIHL(UK) resolved to recommend to members that each company be placed in voluntary liquidation and that an extraordinary general meeting of members be called on 11 April 1990 to that end. The directors of each company also resolved to declare dividends payable to members on 8 May 1990 in relation to both ordinary and redeemable preference shares. The totals of the dividends declared payable by the directors of CPIL(UK) and CPIHL(UK) were $US100,000,000 and $US53,000,000 respectively. The stated aim of the final holding structure set out in the papers from the Directors' meeting was

"...to ensure that the passive income referred to earlier is attributed to Australia as thereby franked dividends may be paid to the shareholders, ie dividends which will be tax free in the shareholders' hands". (emphasis in original)

Replacement of the UK companies with entities based in the Bahamas or Bermuda would ensure that the passive income flowed tax free to Australia and that there was no possibility of double taxation. The term "passive income" is defined in s 446 of the ITAA and includes income by way of dividend.

21 In the event, the new holding structure was located in the Bahamas. Companies were incorporated there on 5 April 1990 under the names Consolidated Press International Holdings Ltd ("CPIHL(B)") and Consolidated Press International Ltd ("CPIL(B)"). On 12 April 1990, MLG and CPH agreed to sell some of their holdings in CPIL(UK) and CPIHL(UK) to CPIL(B). The consideration for the transfer of those holdings was to be by way of ordinary A class shares of $US1 in the capital of CPIL(B), in accordance with a valuation prepared by Ernst & Young. On this basis, a meeting of a committee of directors of CPIL(B) on 27 April 1990 determined that 452,346,000 shares would issue to CPH and 118,287,000 to MLG. No transfers to give effect to the agreements were ever registered in a Register of Members of either CPIL(UK) or CPIHL(UK), nor did the directors of either company approve any transfer or resolve to direct registration.

22 A further agreement for the sale by MLG of shares in CPIL(UK) to CPIL(B) was made on 7 May 1990. The number of shares was 2,400,000 fully paid at $US100 each. The consideration was 262,338,319 shares of $US1 each in CPIL(B), based on an Ernst & Young valuation of the same date. The separation of the sale of these shares from those the subject of the agreement of 12 April related to the timing of their acquisition and the incidence of Australian capital gains tax in relation to them.

23 On 31 March 1990, an entry was made in the general ledger of CPIL(UK), debiting the $US100,000,000 payable by that company on 8 May 1990. A similar entry was made in the general ledger of CPIHL(UK) on 20 April 1990 in respect of the $US53,000,000 payable by it on 8 May 1990.

24 On 16 May 1990, the two United Kingdom companies resolved to go into voluntary liquidation and liquidators were appointed on that day. The members of each company also resolved to authorise the liquidators to distribute the whole or any part of their assets to the members in specie. On the same day, each of CPH and MLG by its duly authorised attorney, authorised and directed the liquidators of CPIL(UK) and CPIHL(UK) to pay direct to CPIL(B):

"(a) any payments consequent upon the crediting of dividends declared by the Company on 8^th May, 1990; and

(b) any distributions to members of the Company in the course of the winding up of the Company in respect of shares presently registered in the register of members in our name,

direct to [CPIL(B)] in place of any payment or distribution to us."

The direction may have been thought necessary because CPIL(B) at this time had not yet become registered as a member of either CPIL(UK) or CPIHL(UK).

25 On 17 May 1990, the liquidators of CPIHL(UK) assigned to CPIL(B) the first $US53,000,000 of a debt of $US84,220,334.05 due to CPIHL(UK) by Conpress (Singapore) Pte Ltd. This was expressed to be in full and final satisfaction of the liability of CPIHL(UK) to pay CPIL(B) the sum of $US53,000,000 by reason of the declaration of dividend payable on 8 May 1990. Similarly, on the same day, the liquidators of CPIL(UK) assigned to CPIL(B) the first $US106,751,299.80 of a debt due to CPIL(UK) from CPI(Sing). This was expressed to be, as to part, a payment by CPIL(B) on behalf of CPIL(UK) of the $US100 million dividend payable on 8 May 1990.

26 On 8 June 1990, the liquidators of CPIHL(UK) and CPIL(B) agreed that the liquidators would distribute in specie to CPIL(B) the balance of CPIHL(UK)'s assets. The assets of CPIHL(UK) identified in the agreement were certain shares held by the company and debts due to it by CPI(Sing) and another company. By a deed of assignment executed the same day, CPIHL(UK), by its liquidators, assigned the debts (totalling $US183,334,200.02) to CPIL(B).

27 CPH, in its income tax return lodged for the year of income ended 30 June 1990, returned a net assessable capital gain in relation to the sale of shares in CPIL(UK) and CPIHL(UK) as follows:

(i) Sale of shares in CPIHL(UK) $A12,737,013

(ii) Sale of shares in CPIL(UK) ( 1,225,608)

$A11,511,405

28 MLG, in its income tax return lodged for the year of income ended 30 June 1990, returnable assessable capital gains in relation to the sale of shares in CPIL(UK) as follows:

(i) Sale of shares in CPIL(UK) on 12 April 90 $A22,696,550

(ii) Sale of shares in CPIL(UK) on 7 May 90 17,436,403

$A40,132,953

29 Assessments of income tax issued variously to CPH, MLG and ACP for the years of income ended 30 June 1990 and 30 June 1991 and are the subject of these proceedings. The assessment for the year ended 30 June 1990, which issued to CPH on 21 December 1994, adjusted the net loss of $52,742,535 set out in its income tax return to a taxable income of $83,423,359. The adjustment was effected by deeming dividends to have been received from CPIL(UK) and CPIHL(UK). On 21 December 1994, the delegate of the Commissioner made a determination for the purposes of s 177F(1) of the ITAA in respect of CPH. The Commissioner determined that CPH, in the year of income ended 30 June 1990, had obtained, or would but for the operation of s 177F have obtained, a tax benefit of two amounts, namely $69,681,830 and $49,726,875, being amounts which would not otherwise have been included in CPH's assessable income.

30 Although the determination did not say so, the sum of $69,681,830 was the Australian dollar equivalent of the dividend of $US53,000,000 declared by CPIHL(UK) on 22 March 1990. The sum of $49,726,875 was the Australian dollar equivalent of that portion of the dividend of $US100,000,000 declared by CPIL(UK) on 22 March 1990 attributed by the Commissioner to CPH.

31 An objection to the CPH assessment was disallowed on 21 December 1995. That objection decision was the subject of appeal number NG 76 of 1996. The appeal was allowed by Hill J, who made an order setting aside the decision. His Honour's judgment on that assessment is the subject of appeal NG 1172 of 1998 by the Commissioner of Taxation to this Court.

32 The Commissioner's delegate also issued a determination on 21 December 1994 in respect of MLG for the year of income ended 30 June 1990. This was in substantially the same terms as the determination for CPH, except that the tax benefit was said to be $81,748,275. This amount was the Australian dollar equivalent of that portion of the dividend of $US100,000,000 declared by CPIL(UK) attributed by the Commissioner to MLG.

33 On the same day, an assessment issued to MLG adjusting its taxable income of "Nil", as set out in its income tax return for the year ended 30 June 1990 to $94,434,357. The adjustment was based in part upon deemed dividends received from CPIL(UK). These elements of the adjustment were made pursuant to determinations by an Assistant Commissioner of Taxation that the amounts represented tax benefits which had been obtained or would, but for the operation of s 177F be obtained in connection with a scheme to which Part IVA of the Act applied. Again, the scheme relied upon what was said to be a dividend stripping scheme pursuant to s 177E.

34 The assessment so issued was the subject of objection, disallowance and appeal to Hill J by MLG. On 14 October 1998, in proceedings NG 72 of 1996, Hill J allowed the appeal and set aside the objection decision. His Honour's judgment is the subject of appeal number NG 1173 of 1998 by the Commissioner to this Court.

35 On 21 December 1994, the Commissioner also issued assessments to ACP (now CPH Property Pty Ltd) for the years ended 30 June 1989 and 30 June 1991. The assessment for the year ended 30 June 1989 added back to the previously determined taxable income a deduction of $9,882,740 for interest quarantined. This was set off by a deduction in the same amount of "Section 80G losses transferred from Consolidated Press (Finance) Ltd". The adjustment was supported by a determination that the interest sum represented a tax benefit that had been obtained or would, but for s 177F of the ITAA, be obtained in connection with a scheme to which Part IVA of the ITAA applied. Additional tax of $3,815.51 was raised in respect of the allegedly incorrect return.

36 The relevant assessment for the year ended 30 June 1991 issued as an amended assessment and, on the same basis as the 1989 return, disallowed a deduction of $24,435,073 for interest quarantined. This was offset by deductions allowed in the same amount so that the adjusted taxable income was $80,731,384, only $10,000 more than the previously adjusted taxable income.

37 These two assessments were objected to and both of the objections were disallowed. By appeals NG 68 and 66 of 1996, Hill J allowed the applications and set aside the objection decisions. These decisions by his Honour are the subject of appeals NG 1174 and 1175 of 1998 brought by the Commissioner to this Court.

Statutory Framework

38 There are two principal elements to these appeals, the first of which involves the construction of s 79D of the ITAA and, related to that, the operation of Part IVA. The second concerns the specific provisions of s 177E of the ITAA in relation to dividend stripping.

39 It is convenient first to set out the relevant provisions of Part IVA including s 177E, and then to refer to s 79D. The provisions of Part IVA set out are those in force at the relevant times.

40 Part IVA is entitled "Schemes to Reduce Income Tax". It was inserted into the ITAA in 1981. It confers upon the Commissioner, by virtue of s 177F, a discretion to cancel a tax benefit obtained by a taxpayer in connection with a scheme to which Part IVA applies.

41 The word "scheme" is defined in s 177A:

"177A(1) In this Part, unless the contrary intention appears:

"scheme" means:

(a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and

(b) any scheme, plan, proposal, action, course of action or course of conduct;"

The definition is elaborated relevantly in two subsections:

"177A(3) The reference in the definition of "scheme" in subsection (1) to a scheme, plan, proposal, action, course of action or course of conduct shall be read as including a reference to a unilateral scheme, plan, proposal, action, course of action or course of conduct, as the case may be.

177A(5) A reference in this Part to a scheme or a part of a scheme being entered into or carried out by a person for a particular purpose shall be read as including a reference to the scheme or the part of the scheme being entered into or carried out by the person for 2 or more purposes of which that particular purpose is the dominant purpose."

Provisions relevant to the operation of Part IVA are contained in s 177B, but none of those is in issue for present purposes.

42 Section 177D defines the schemes to which Part IVA applies and is in the following terms:

"177D This Part applies to any scheme that has been or is entered into after 27 May 1981, and to any scheme that has been or is carried out or commenced to be carried out after that date (other than a scheme that was entered into on or before that date), whether the scheme has been or is entered into or carried out in Australia or outside Australia or partly in Australia and partly outside Australia, where -

(a) a taxpayer (in this section referred to as the "relevant taxpayer") has obtained, or would but for section 177F obtain, a tax benefit in connection with the scheme; and

(b) having regard to -

(i) the manner in which the scheme was entered into or carried out;

(ii) the form and substance of the scheme;

(iii) the time at which the scheme was entered into and the length of the period during which the scheme was carried out;

(iv) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme;

(v) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme;

(vi) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;

(vii) any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out; and

(viii) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi),

it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme or of enabling the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer or is the other taxpayer or one of the other taxpayers)."

The concept of "tax benefit" is explained in s 177C which, in the relevant parts, provides:

"177C(1) Subject to this section, a reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to -

(a) an amount not being included in the assessable income of the taxpayer of a year of income where that amount would have been included, or might reasonably be expected to have been included, in the assessable income of the taxpayer of that year of income if the scheme had not been entered into or carried out; or

(b) a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out;

and, for the purposes of this Part, the amount of the tax benefit shall be taken to be -

(d) in a case to which paragraph (b) applies - the amount of the whole of the deduction or of the part of the deduction, as the case may be, referred to in that paragraph."

Subsections (2) and (3) are not relevant for present purposes.

43 The special case of dividend stripping is covered in s 177E, which is headed "Stripping of Company Profits", and is and was at all relevant times in the following terms:

"177E(1) Where -

(a) as a result of a scheme that is, in relation to a company -

(i) a scheme by way of or in the nature of dividend stripping; or

(ii) a scheme having substantially the effect of a scheme by way of or in the nature of a dividend stripping,

any property of the company is disposed of;

(b) in the opinion of the Commissioner, the disposal of that property represents, in whole or in part, a distribution (whether to a shareholder or another person) of profits of the company (whether of the accounting period in which the disposal occurred or of any earlier or later accounting period);

(c) if, immediately before the scheme was entered into, the company had paid a dividend out of profits of an amount equal to the amount determined by the Commissioner to be the amount of profits the distribution of which is, in his opinion, represented by the disposal of the property referred to in paragraph (a), an amount (in this subsection referred to as the "notional amount") would have been included, or might reasonably be expected to have been included, by reason of the payment of that dividend, in the assessable income of a taxpayer of a year of income; and

(d) the scheme has been or is entered into after 27 May 1981, whether in Australia or outside Australia,

the following provisions have effect:

(e) the scheme shall be taken to be a scheme to which this Part applies;

(f) for the purposes of section 177F, the taxpayer shall be taken to have obtained a tax benefit in connection with the scheme that is referable to the notional amount not being included in the assessable income of the taxpayer of the year of income; and

(g) the amount of that tax benefit shall be taken to be the notional amount.

177E(2) Without limiting the generality of subsection (1), a reference in that subsection to the disposal of property of a company shall be read as including a reference to -

(a) the payment of a dividend by the company;

(b) the making of a loan by the company (whether or not it is intended or likely that the loan will be repaid);

(d) any transaction having the effect, directly or indirectly, of diminishing the value of any property of the company.

177E(3) In this section, "property" includes a chose in action and also includes any estate, interest, right or power, whether at law or in equity, in or over property."

The key expression "dividend stripping" is not defined.

44 The operative provision of Part IVA allowing for cancellation of tax benefits is to be found in s 177F. For present purposes it is only necessary to set out s 177F(1):

"177F(1) Where a tax benefit has been obtained, or would but for this section be obtained, by a taxpayer in connection with a scheme to which this Part applies, the Commissioner may -

(a) in the case of a tax benefit that is referable to an amount not being included in the assessable income of the taxpayer of a year of income - determine that the whole or a part of that amount shall be included in the assessable income of the taxpayer of that year of income; or

(b) in the case of a tax benefit that is referable to a deduction or a part of a deduction being allowable to the taxpayer in relation to a year of income - determine that the whole or a part of the deduction or of the part of the deduction, as the case may be, shall not be allowable to the taxpayer in relation to that year of income;

and, where the Commissioner makes such a determination, he shall take such action as he considers necessary to give effect to that determination."

45 Section 79D of the ITAA was enacted in 1988 to cure a deficiency in the legislation relating to limitations on deductions which were connected with the derivation of foreign income. Prior to its enactment the general provisions of s 51(1) dealing with deduction of business expenses in relation to deductions connected to foreign source income were affected by s 51(6). In effect, s 51(6) quarantined deductions connected to the derivation of foreign source income in the year of income. As the learned trial judge explained it, there were two perceived deficiencies in s 51(6) which led to the enactment of s 79D. It quarantined only deductions under s 51(1) and not under other provisions of the ITAA. Further, it did not deal with cases where there were foreign losses. His Honour said:

"These related defects were cured by ensuring that s 79D operated to extend the quarantining to "any deductions allowed or allowable" provided that they related to the relevant class of foreign income."

The terms of s 79D relevant to the years of income ended 30 June 1989 and 1990 were as follows:

"(1) Where the amount of a class of income derived by a taxpayer in a year of income from a foreign source is exceeded by the sum of:

(a) any deductions allowed or allowable from the assessable income of the taxpayer of the year of income that relate exclusively to income of that class derived from that source; and

(b) so much of any other deductions allowed or allowable from that assessable income (other than apportionable deductions) as, in the opinion of the Commissioner, may appropriately be related to income of that class derived from that source;

the deductions to which paragraphs (a) and (b) apply shall be reduced respectively by amounts proportionate to those deductions and equal in total to the amount of the excess.

(2) In subsection (1) "class of income" and "foreign source" have the same meanings as in section 160AFD."

The definitions of "class of income" and "foreign source" in s 160AFD then appeared in subss (6) and (7) as follows:

"160AFD(6) For the purposes of this section:

(a) interest income constitutes a single class of income;

(b) offshore banking income constitutes a single class of income; and

160AFD(7) In this section -

"foreign source" in relation to a taxpayer, means -

(a) a business carried on by the taxpayer at or through one or more permanent establishments in a foreign country; or

(b) any other business, commercial or investment activity carried on by the taxpayer in a foreign country."

46 A new s 79D was introduced in 1991 applicable to assessments for the 1990-1991 year of income. The new s 79D reads as follows:

"(1) Where:

(a) apart from this section, there are one or more foreign income deductions of a taxpayer in relation to a class of assessable foreign income in relation to a year of income; and

(b) either:

(i) the taxpayer did not derive any assessable foreign income of that class in the year of income; or

(ii) the taxpayer derived assessable foreign income of that class in the year of income and its amount is exceeded by the sum of the foreign income deductions;

then, for the purposes of this Act, those deductions are reduced respectively:

(d) where subparagraph (b)(ii) applies - by amounts proportionate to those deductions and equal in total to the amount of the excess referred to in that subparagraph."

The Sequence of the Reasoning of the Learned Primary Judge

Section 79D and Part IVA

47 The Commissioner contended before the learned trial judge that, in relation to ACP, there were two schemes to which the provisions of Part IVA of the ITAA applied. Each scheme was said to have begun with ACP's application for shares in MLG, and in the case of the CPIL(UK) scheme, to have ended with the allotment of shares in that company to MLG and, in the case of the CPIHL(UK) scheme, the allotment of shares by that company to MLG.<

BETWEEN:	COMMISSIONER OF TAXATION Appellant
AND:	CONSOLIDATED PRESS HOLDINGS LIMITED (ACN 008 394 509) MURRAY LEISURE GROUP PTY LIMITED (ACN 000 090 273) CPH PROPERTY PTY LIMITED (ACN 000 031 747) Respondents
JUDGES:	FRENCH, SACKVILLE AND SUNDBERG JJ
DATE OF ORDER:	7 SEPTEMBER 1999
WHERE MADE:	SYDNEY