FC of T v HART & ANOR
Judges: Gleeson CJMcHugh J
Gummow J
Hayne J
Callinan J
Court:
High Court of Australia
MEDIA NEUTRAL CITATION:
[2004] HCA 26
Gummow and Hayne JJ
The issue
20. The principal issue in this appeal is whether the general anti-avoidance provisions of Pt IVA of the Income Tax Assessment Act 1936 (Cth) (``the 1936 Act'') may be applied to disallow tax benefits obtained by taxpayers under what have become known as ``split loan facilities''. If that issue were to be resolved against the appellant (``the Commissioner'') the Commissioner would seek special leave to raise a further issue about whether amounts charged as interest on interest could be claimed by the respondents as deductions where both the interest, and the interest on interest, were charged under an agreement to lend money which was applied by the respondents in purchasing an asset used to gain or produce assessable income. The application for special leave to appeal on a ground raising that issue was referred to this Court.
21. Under a ``split loan facility'' a taxpayer borrowed money, applied part to a private or domestic venture (often, as in this case, the purchase of a principal place of residence), and applied the balance to the acquisition (here the refinancing) of an asset to be used for the purpose of gaining or producing assessable income. The loan agreement provided for the borrower to direct the application of the whole of the periodical payments required under the loan agreement to the satisfaction of that part of the loan used for private or domestic purposes. Interest on the balance of the loan was allowed to accrue and be capitalised and compounded.
22. Because the periodical payments required under the loan agreement would suffice to repay the whole of the capital sum lent, and the whole of the interest which would accrue during the term of the loan, the application of periodical payments to only part of the sum lent (and the interest accruing on that part) would repay that part of the loan quickly. In the meantime, the amount of interest charged on the balance of the loan would increase, and the capital sum owing on that account would rise, as interest was capitalised and then compounded. On the basis that this second part of the sum lent was applied to acquiring an asset used for the purpose of gaining or producing assessable income, the taxpayer claimed the amount of interest charged on this account as a deduction against assessable income pursuant to s 51 of the 1936 Act or, later, s 8-1 of the Income Tax Assessment Act 1997 (Cth) (``the 1997 Act'').
23. These reasons will seek to demonstrate that the Commissioner was entitled to make the determinations under Pt IVA which he made in relation to each of the respondents. The subsidiary issue about the deductibility of interest on interest does not arise.
The particular facts
24. In 1996, the respondents borrowed $298,000 from Permanent Custodians Limited. Austral Mortgage Corporation Pty Ltd (``Austral'') acted as agent for the lender and negotiated the terms on which the respondents borrowed the money. The respondents applied $95,112 of that sum to repay the amount outstanding on the mortgage of a house which they then owned and which they intended to hold for the purposes of letting and thus gaining assessable income. It is convenient to refer to this house as ``the investment property''. The balance of the amount borrowed ($202,888) was applied to pay the purchase price of a house which the respondents intended to occupy, some expenses they incurred, and an amount owing on a property which the first respondent's mother owned which was to be
ATC 4606
provided as an additional security for the transaction.25. The rate of interest payable on the loan could be varied by the lender. Interest accrued daily but was to be debited to the borrowers' loan account monthly. The respondents were bound to repay the loan by 300 monthly payments. The amount of each payment was calculated according to the prevailing interest rate at an amount which would repay the whole of the loan, and interest, over its term.
26. The loan agreement provided that upon request by the respondents, the lender would split the loan balance into a maximum of four separate loan accounts, and allocate the loan balance between those loan accounts in accordance with the respondents' request. It went on to provide that, while the loan amount was split into loan accounts, the loan agreement applied to each account as if the balance of each account was a separate loan and that, provided that the lender was not entitled to require the respondents to repay the loan in full immediately, the lender would credit all payments received by it among the loan accounts in accordance with the respondents' directions.
27. Pursuant to these provisions the respondents requested the lender to split the loan amount and requested that payments which they made should be allocated all to an account having as its opening balance $202,888. That is, the respondents directed that their monthly repayments be applied in satisfaction of that part of the loan which they had used for purposes other than their refinancing the investment property.
28. In consequence, the monthly repayments which the respondents made were credited to that part of the loan which they had used for private or domestic purposes. Interest charged on the part of the loan which the respondents had used to refinance the acquisition of an income-producing asset accrued and was capitalised and compounded.
29. In their amended returns for the year ended 30 June 1997, and again for the year ended 30 June 1998, the respondents claimed as deductions from assessable income interest which was charged on that part of the loan which had been applied to the investment property. In 1999, the Commissioner made determinations that amounts which, but for the operation of Pt IVA, would have been allowable to the respondents as deductions in the 1997 and 1998 tax years not be allowable. The Commissioner issued amended assessments for the 1997 tax year and assessments for the 1998 tax year which reflected the determinations. The respondents objected against these assessments; those objections, so far as now relevant, were disallowed.
30. Pursuant to Div 5 of Pt IVC of the
Taxation Administration Act
1953 (Cth) the respondents appealed to the Federal Court of Australia against the Commissioner's decision disallowing their objections. At first instance, the respondents' appeals were dismissed.
[16]
The tax benefits disallowed
31. It is important to notice the way in which the Commissioner calculated the amount of the deduction which was disallowed. The amount disallowed was part of the amount of interest claimed by each respondent as a deduction in each of the 1997 and 1998 tax years. The Pt IVA determinations made by the Commissioner did not state how the amounts disallowed were calculated.
32. The reasons given for the Commissioner's objection decisions did reveal the basis of the calculations. Those reasons drew a distinction between what was called ``additional interest'' and what was called ``the further interest amount''. The former (the ``additional interest'') was identified as the difference between the interest incurred on that part of the loan which related to the investment property, and ``the interest that would have been incurred if the borrower had applied the payments to the separate accounts''. The interest that accrued on unpaid interest was referred to as ``the further interest amount'', which we will refer to as the ``compound interest amount''. It is important to note that the additional interest ($96 and $365 for each of the respondents in the 1997 and 1998 financial years respectively) included the compound interest amounts ($67 and $315 for each of the respondents in the 1997 and 1998 financial years respectively). The Commissioner's reasons, having distinguished between these
ATC 4607
two types of interest, went on to conclude that the interest on interest (the compound interest amount) was not deductible under the general deduction provision (s 51 of the 1936 Act, which applied in the 1997 tax year, and s 8-1 of the 1997 Act, which applied in the 1998 tax year). But the Commissioner concluded that Pt IVA should be applied to disallow the additional interest which, as noted, includes the compound interest. (That is why the deductibility of interest on interest is a question which arises only if the Pt IVA issue is resolved against the Commissioner.) The amount of tax benefit identified, and disallowed, was calculated by taking the difference between the interest which the respondents claimed to be deductible (all interest charged to that part of the loan used for the investment property) and the interest which would have been charged on that part of the loan had it been a loan requiring periodical payments sufficient to pay both principal and interest over the term of the loan which the respondents had taken.Part IVA
33. Part IVA is engaged only where a tax benefit has been obtained, or would but for s 177F(1) be obtained. The tax benefit must be one obtained by a taxpayer in connection with a scheme to which the Part applies. In those circumstances the Commissioner may exercise the power given by s 177F to determine that either an amount is to be included in the taxpayer's assessable income or a deduction is to be disallowed in whole or in part.
34. The schemes to which Pt IVA applies are identified in s 177D. Leaving aside what s 177D says about the time and place at which a scheme is entered into or carried out, there are two elements that must be satisfied. First, it must be shown that the relevant taxpayer has obtained, or would but for s 177F obtain, a tax benefit in connection with the scheme. Secondly, it must be shown that having regard to eight matters ``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 enabling the relevant taxpayer and one or more other taxpayers to obtain a tax benefit in connection with the scheme.
35. The ``person'' whose purpose is to be identified under s 177D is the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme. Section 177D makes plain that the person whose purpose is to be identified may be (but need not be) the relevant taxpayer or one of the other taxpayers mentioned in the section.
36. The meaning of some of the expressions found in s 177D is amplified by some other provisions of the Part. Particular reference will be necessary to three of those provisions: first, the elucidation in s 177C of how a reference to ``the obtaining by a taxpayer of a tax benefit in connection with a scheme'' should be read; secondly, the definition of ``scheme'' in s 177A(1); and, thirdly, the elucidation in s 177A(5) of how a reference to a scheme or a part of ``a scheme being entered into or carried out by a person for a particular purpose'' should be read. Although it will often be convenient to begin any consideration of the application of the Part by attending to the operation of these elucidating and definitional provisions, approaching a particular case in this way must not be allowed to obscure the way in which the Part as a whole is evidently intended to operate.
37. Taking Pt IVA as a whole, it is clear that ss 177D and 177F(1) are the two provisions about which the Part pivots. Section 177F(1) provides:
``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;
- ...
ATC 4608
and, where the Commissioner makes such a determination, he shall take such action as he considers necessary to give effect to that determination.''
Part IVA falls for consideration only where the Commissioner has made a determination under s 177F(1). A determination can be made only where a tax benefit has been obtained (or, but for s 177F(1), would be obtained) by a taxpayer in connection with a scheme to which Pt IVA applies. It follows, of course, that the concepts of ``tax benefit'', ``scheme'' and ``scheme to which this Part applies'' all have their part to play in deciding whether the power given to the Commissioner by s 177F(1) can be exercised. But it is important to consider what the Act says about those concepts having regard to two considerations. First, the various defined terms must be given operation in the interrelated way which s 177F(1) requires. Each of the defined terms takes its place in a single provision permitting the making of a determination. Secondly, each of the definitions must be understood bearing in mind that the inquiry required by Pt IVA is an objective, not subjective, inquiry. The objective nature of the inquiry required is evident from s 177D, which identifies the schemes to which Pt IVA applies. It provides:
``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).''
``Scheme'' is defined in s 177A(1) as meaning:
``(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.''
It includes a reference to a unilateral scheme, plan, proposal, action, course of action or course of conduct.
[18]
ATC 4609
a part of a scheme being entered into or carried out by a person for a particular purpose is to be read [19]38. The last of the definitional provisions which must be noticed is s 177C(1) which describes how a reference in Pt IVA to the obtaining by a taxpayer of a tax benefit in connection with a scheme is to be read. It is to 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.''
The limitations on the reference that are identified in s 177C(2) were not said to be relevant and their detail need not be noticed.
Identifying the ``scheme''
39. It has become customary in Pt IVA cases to begin the inquiry by identifying what is said to be the ``scheme''. And often enough the Commissioner has sought to identify, as he did in these cases, both a ``wider scheme'' and a ``narrower scheme''.
40. This practice can be traced to what was said, both in this Court, and in the Full Court of the Federal Court, in
FC of T v Peabody
.
[20]
41. This Court, in its joint reasons, pointed out
[21]
``... [ i]f, within a wider scheme which has been identified, the Commissioner seeks also to rely upon a narrower scheme as meeting the requirements of Pt IVA,... there is no reason why the Commissioner should not be permitted to do so, [24]
See provided it causes no undue embarrassment or surprise to the other side.''per Gibbs J. XCO Pty Ltd vFC of T 71 ATC 4152 at 4155;(1971) 124 CLR 343 at 349
42. The actual decision in
Peabody
was that the Commissioner was not bound to the precise way in which he had identified the relevant scheme in that case. The Court said:
[25]
``... The erroneous identification by the Commissioner of a scheme as being one to which Pt IVA applies or a misconception on his part as to the connection of a tax benefit with such a scheme will result in the wrongful exercise of the discretion conferred by s 177F(1) only if in the event the tax benefit which the Commissioner purports to cancel is not a tax benefit within the meaning of Pt IVA. That is unlikely to be the case if the error goes to the mere detail of a scheme relied upon by the Commissioner. An error of a more fundamental kind, however, may have that result - where, for example, it leads to the identification of the wrong taxpayer as the recipient of the tax benefit. But the question in every case must be whether a tax benefit which the Commissioner has purported to cancel is in fact a tax benefit obtained in connection with a Pt IVA scheme and so susceptible to cancellation at the discretion of the Commissioner.''
(emphasis added)
As the Court pointed out
[26]
ATC 4610
43. Moreover, it is important to notice that ``scheme'' is defined, in s 177A(1), in terms that may not always permit the precise identification of what are said to be all of the integers of a particular ``scheme''. So much follows from the inclusion, within the statutory meaning, not only of arrangements that are not and are not intended to be enforceable by legal proceedings, but also of ``any scheme, plan, proposal, action, course of action or course of conduct''. This definition is very broad. It encompasses not only a series of steps which together can be said to constitute a ``scheme'' or a ``plan'' but also (by its reference to ``action'' in the singular) the taking of but one step. The very breadth of the definition of ``scheme'' is consistent with the objective nature of the inquiries that are to be made under Pt IVA.
44. Nothing in subsequent decisions of the Court detracts from these conclusions about the operation of the definition of ``scheme''. In
FC of T v Consolidated Press Holdings Ltd
&
Anor
, the Court held
[27]
45. Against this background it is necessary to come to one other aspect of what was said in
Peabody
which appears to have loomed large in the argument of the present matters below. The Court said
[29]
46. This statement must be understood as having been directed to the issues of procedural fairness which underlay the issue presented in that case. Could the Commissioner, at trial or on appeal, point to some steps (narrower than those first identified by the Commissioner as the relevant scheme) and say that those steps constituted a scheme? As the Court went on to say,
[32]
``... In that event, it is not possible in our view to say that those circumstances constitute a scheme rather than part of a scheme merely because of the provision made by ss 177D and 177A. The fact that the relevant purpose under s 177D may be the purpose or dominant purpose under s 177A(5) of a person who carries out only part of the scheme is insufficient to enable part of a scheme to be regarded as a scheme on its own. That, of course, does not mean that if part of a scheme may be identified as a scheme in itself the Commissioner is precluded from relying upon it as well as the wider scheme .''
(emphasis added)
The last sentence of this passage reveals that the Court's focus, not surprisingly, was upon the question raised in the appeal: was the Commissioner precluded from advancing a particular argument.
47. The reference to circumstances being ``robbed of all practical meaning'' appears to have been understood in the Full Court
[33]
ATC 4611
expression. What Lord Pearce said would be ``robbed of all practical meaning'', if one part of an arrangement were to be isolated from other parts, was the sub-section, not the arrangement. Thirdly, and most importantly, there is no basis to be found in the words used in Pt IVA for the introduction of some criterion additional to those identified in the Act itself. There is no reference to a scheme having some commercial or other coherence. Far from the Part requiring reference only to the purpose of those who carry out all of whatever is identified as the scheme, s 177D(b) specifically refers to it being concluded ``that the person, or one of the persons, who entered into or carried out... any part of the scheme '' did so for the purpose of enabling the relevant taxpayer (alone or with others) to obtain a tax benefit in connection with the scheme (emphasis added).Identifying the scheme in the present matters
48. At the trial of these matters the Commissioner had identified
[37]
49. In the Full Court, emphasis was given
[38]
50. The scheme to be identified must, of course, meet the definition of ``scheme'' set out in s 177A(1). But, in addition, the scheme to be identified must be a ``scheme to which this Part applies'': one which is entered into or carried out by a person for a purpose of the kind identified in s 177D(b) where a taxpayer has obtained, or would but for s 177F obtain, a tax benefit in connection with the scheme.
51. It is important to bear steadily in mind that, as was pointed out in the joint reasons of six members of the Court in
FC of T v Spotless Services Limited
&
Anor
,
[41]
52. There is no doubt that ``tax laws affect the shape of nearly every business transaction''.
[45]
``... A particular course of action may be, to use a phrase found in the Full Court judgments, both `tax driven' and bear the character of a rational commercial decision. The presence of the latter characteristic does not determine the answer to the question whether, within the meaning of Pt IVA, a person entered into or carried out a `scheme' for the `dominant purpose' of enabling the taxpayer to obtain a `tax benefit' .''
(emphasis added)
ATC 4612
Always the question must be whether the terms of the Act apply to the facts and circumstances of the particular case.
53. The bare fact that a taxpayer pays less tax, if one form of transaction rather than another is made, does not demonstrate that Pt IVA applies. Simply to show that a taxpayer has obtained a tax benefit does not show that Pt IVA applies. With these considerations in mind, it is sometimes said that it is necessary to read Pt IVA in a way that will not bring ``ordinary'' transactions to tax. It is obvious that the content of such a proposition turns entirely upon what is meant by ``ordinary''.
54. Similar considerations can be seen to lie behind contentions that it is necessary to read the definition of ``scheme'' more narrowly than the terms used in the Act would require. In the present matters, Hely J said
[47]
55. What the Commissioner identified in these matters as the wider scheme falls within the definition of ``scheme''. That is, all of the steps leading to, and the entering into, and the implementation of the loan arrangements can be understood as together constituting a ``scheme''. Those steps were a scheme, plan, or course of action. One of the purposes of that scheme was, of course, to provide money for the financing and refinancing of the two properties. But so, too, the steps said by the Commissioner to have constituted the narrower scheme (the provision of the loan permitting both the division of the loan and the direction of repayments to one portion, coupled with the respondents' direction of their repayments to the home loan portion of the loan) can also be identified as a course of action, scheme, plan or action. Not only is that so, the steps identified as constituting the narrower scheme can be seen to have formed a part of the wider scheme.
56. The central question then becomes, would it be concluded, having regard to the eight matters listed in s 177D(b), that a person who entered into or carried out the wider scheme, the narrower scheme, or any part of either scheme, did so for the dominant purpose of enabling the respondents to obtain a tax benefit in connection with the scheme?
The application of s 177D(b)
57. It is convenient to consider the application of s 177D(b) in these matters by reference to the discussion of that subject in the Full Court. Hill J, with whose reasons in relation to Pt IVA the other members of the Court agreed, directed chief attention to three aspects of s 177D(b). They were, first, the manner in which the scheme was entered into or carried out (s 177D(b)(i)); secondly, changes in the financial position of the respondents, the lender and the lender's agent (s 177D(b)(v) and (vi)) and other consequences (s 177D(b)(vii)); and, thirdly, the conclusion that was to be reached having regard to those features.
58. Of the first of these matters, Hill J said
[48]
59. Of the second group of considerations (those referred to in s 177D(b)(v), (vi) and (vii)) his Honour noted
[49]
ATC 4613
respondents paid off the home loan faster than they otherwise would. No other financial or other kind of consequence was mentioned.60. In this Court, the Commissioner submitted that there were three other relevant changes in the financial position of the respondents that had been brought about by the scheme. Those changes were, first, that, if the respondents were entitled to deduct all of the interest (including compound interest) attributed to that part of the loan used in connection with the investment property, they would pay less tax and would have more disposable income than they would have had if they had taken a loan on other terms. The second change, so the Commissioner submitted, was that, because interest would continue to accrue and be capitalised on that part of the loan used for the investment property, the amount owing on that account would increase to an amount well above the value of the investment property. Thirdly, as noted above, although the interest rate charged was commercially competitive, it was nevertheless marginally higher than would have been charged under the Austral standard principal and interest loans (for both home and investment financing) that were available to the respondents. In other words, so the Commissioner submitted, the respondents willingly agreed to pay a higher rate of interest than was available to them. No doubt account can and should be taken of these consequences of the scheme.
61. Hill J said that taking what, in substance, was a single advance and permitting its division into two parts might, ``
[
t]o some extent'',
[50]
62. Having said
[51]
``... On any view of the matter the dominant purpose of the scheme which included the borrowing by [ the respondents] of funds used to finance and refinance the two properties was the obtaining of funds to permit them to do so.... The scheme was directed to a commercial end , the borrowing of money for use in financing and refinancing the two properties. That is what a reasonable person would conclude was the ruling, prevailing or most influential purpose of [ the respondents] in entering into or carrying out the scheme.''
(emphasis added)
63. Several points must be made about this reasoning. First, if some distinction was intended to be drawn between identifying the dominant purpose of a relevant person and the dominant purpose of the scheme , the latter inquiry is not required by s 177D and is irrelevant. Section 177D requires consideration of the purposes to be attributed to relevant persons who entered into or carried out the scheme or any part of the scheme.
64. Secondly, as his Honour had earlier noted,
[53]
ATC 4614
``A particular course of action may be both tax driven, and bear the character of a rational commercial decision. The presence of the latter characteristic does not determine in favour of the taxpayer whether, within the meaning of Pt IVA, a person entered into or carried out a `scheme' for the dominant purpose of enabling a taxpayer to obtain a tax benefit.''
65. In these matters, it is, of course, true that the money was borrowed to finance and refinance the two properties. Of course the loan was structured in the way it was in order to achieve the most desirable taxation result. But those are statements about why the respondents acted as they did or about why the lender (or its agent) structured the loan in the way it was. They are not statements which provide an answer to the question posed by s 177D(b). That provision requires the drawing of a conclusion about purpose from the eight identified objective matters; it does not require, or even permit, any inquiry into the subjective motives of the relevant taxpayers or others who entered into or carried out the scheme or any part of it.
66. In the present matters, the respondents would obtain a tax benefit if, in the terms of s 177C(1)(b), had the scheme not been entered into or carried out, the deductions ``might reasonably be expected not to have been allowable''. When that is read with s 177D(b) it becomes apparent that the inquiry directed by Pt IVA requires comparison between the scheme in question and an alternative postulate. To draw a conclusion about purpose from the eight matters identified in s 177D(b) will require consideration of what other possibilities existed. To say, as Hill J did, that ``the manner in which the scheme was formulated and thus entered into or carried out is certainly explicable only by the taxation consequences'' assumes that there were other ways in which the borrowing of moneys for two purposes (one private and the other income producing) might have been effected. And it further assumes that those other ways of borrowing would have had less advantageous taxation consequences.
67. In these matters, demonstrating that there was another way in which the money might have been borrowed was very easy. Austral (the lender's agent) went to great lengths to give to the respondents (and presumably anyone else interested in similar proposals to borrow money for two purposes) material that identified the advantages that would be obtained by taking a split loan instead of other forms of loan. Much of this material was tendered in evidence at trial. It included elaborately worked examples illustrating how quickly the home loan could be paid off and how large were the tax benefits which could be obtained. As one of the brochures published by Austral, and given to the respondents, put it (by reference to a ``working example''):
``By structuring your loan using Wealth Optimiser you obtain these potential benefits:
- • Your home loan portion is paid off in 4 years, 6 months... This is approximately 20 years less than the old way, and
- • You obtain increased deductible interest on your investment loan portion...
All by paying exactly the same monthly amount as you would have normally .''
68. There could be no doubt in these matters that the terms on which the loan was made available were explicable only by the taxation consequences for the respondents. If the scheme was identified as ``all the steps leading to, and the entering into, and the implementation of the loan arrangements'' the manner in which that scheme was entered into strongly suggested that the respondents (each a relevant taxpayer) entered into that scheme for the dominant purpose of obtaining a tax benefit. Further, if the scheme was identified in this way, the respondents, by giving the directions they did, carried out the scheme for that same dominant purpose. But so too, if the scheme is identified more narrowly (as the making of the relevant provisions in the loan agreement and the giving of directions under those provisions) the like conclusion would be reached. Both the manner in which that (narrower) scheme was entered into, and the manner in which it was carried out, strongly suggested the conclusion described.
69. It is then important to return, for a moment, to an aspect of the issues discussed earlier concerning the identification of the scheme. The conclusions just described, as being indicated by the manner in which the scheme was entered into or carried out, are indicated by a consideration of how else the loan might have been arranged. They are not conclusions which depend upon identifying the scheme in one of the ways put forward by the Commissioner rather than another.
70. As has already been pointed out, it would be wrong to treat any conclusion drawn from the first of the eight matters mentioned in s 177D(b) as determinative. All eight must be considered. When the remaining seven are
ATC 4615
examined in these matters it will be seen that either they tend to point to the same conclusion as the manner in which the scheme was entered into or carried out, or they are neutral. None points against the conclusion that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling each respondent to obtain a tax benefit in connection with the scheme.71. As Hill J rightly pointed out, the form and substance of the scheme (s 177D(b)(ii)) also point to the purpose of a relevant person obtaining a tax advantage. What was one advance, to be repaid by 300 instalments, was treated as if it were two separate loans. The only persons obtaining any advantage from the treatment were the respondents. And the only advantages which they obtained depended upon the taxation treatment resulting from the application of payments and accumulation of interest for which the scheme (however identified) provided. It was these results in relation to the operation of the Act (but for Pt IVA) which would be achieved (s 177D(b)(iv)) and these results would improve the financial position of the respondents (each a relevant taxpayer) (s 177D(b)(v)). The only other consequence for them would be the compounding of interest attributable to the investment portion of the loan (s 177D(b)(vii)). No other person (in particular, neither the lender nor the lender's agent) would gain or suffer financially (s 177D(b)(vi)) or sustain any other consequence (s 177D(b)(vii)). And the only connection between the lender, the lender's agent and the respondents was that created by the loan arrangement, apart, of course, from the relationship of marriage between the respondents.
Conclusion and orders
72. It follows that the conclusion required by having regard to the eight identified matters was that asserted by the Commissioner. Having regard to those matters it would be concluded that the dominant purpose of the respondents in entering into and in carrying out the scheme was to obtain the tax benefit which the Commissioner's determination cancelled.
73. It is, therefore, not necessary to consider the further question which the Commissioner sought to raise about allowing a deduction for interest on interest. The Commissioner's application for special leave to appeal on the ground that the Full Court erred in its treatment of this question should be dismissed.
74. The appeal should be allowed. The Commissioner agreed that he should pay the respondents' costs in this Court in any event. The orders made by the Full Court on 26 November 2002 should be set aside and the appeal to that Court be dismissed with costs.
Footnotes
[16][17]
[18]
[19]
[20]
[21]
[22]
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