MACQUARIE BANK LTD & ANOR v FC of T

Judges:
Edmonds J

Court:
Federal Court, Sydney

MEDIA NEUTRAL CITATION: [2011] FCA 1076

Judgment date: 26 September 2011

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Edmonds J

Introduction

1. By the assessments under objection in these proceedings, the respondent ("Commissioner"), in reliance on the provisions of Pt IVA (Schemes to Reduce Income Tax) of the Income Tax Assessment Act 1936 (Cth) ("1936 Act"), seeks to cancel the tax consequences that would otherwise apply for the applicants as members of a consolidated group under Pt 3-90 (Consolidated Groups) of the Income Tax Assessment Act 1997 (Cth) ("1997 Act") in relation to a gain made by the applicant in NSD 106 of 2010, Mongoose Pty Limited ("Mongoose"), on the sale of its principal asset, shares in an Australian listed company, Minara Resources Limited ("Minara").

2. At the time when Mongoose sold the Minara shares it was a subsidiary member of a consolidated group of which the applicant in NSD 105 of 2010, Macquarie Bank Limited ("MBL") was the head company ("MBL consolidated group"). Consistent with the provisions of Pt 3-90 of the 1997 Act, in particular Divs 701 and 705, the gain on the sale of the Minara shares was returned by MBL as head company of the MBL consolidated group by reference to the difference between the proceeds of sale of the Minara shares ($480,336,947) and MBL's cost of bringing Mongoose into the MBL consolidated group ($438,928,590), a gain of $41,408,357. MBL, as head company of the MBL consolidated group, was assessed to tax as returned.

3. The Commissioner seeks to cancel that tax consequence because, on his view of the transaction and related transactions, they constituted a scheme entered into by the relevant parties for the dominant purpose of obtaining that tax consequence and related Pt 3-90 tax consequences; and tax one of the applicants on an alleged tax benefit, said to be obtained in connection with the scheme, calculated by reference to the gain that would have been derived by Mongoose on the sale of the Minara shares had it sold them when it was not a subsidiary member of the MBL consolidated group; namely, a gain of $318,507,469, calculated by reference to the difference between the proceeds of sale ($480,336,947) and Mongoose's actual cost of acquiring the Minara shares ($161,829,478).

4. The Commissioner's action in taxing the gain was obviously attended by uncertainty on his part as to which applicant to tax, so he taxed both. The Commissioner concedes that the amended assessment issued to each applicant were issued in the alternative and that both could not be correct. He further concedes that if one is correct, he would have to make a compensating adjustment pursuant to s 177F(3) of the 1936 Act excising from MBL's assessable income the gain of $41,408,357 returned by, and taxed to, MBL as head company of the MBL consolidated group in respect of the sale. In his closing written outline of submissions, the Commissioner submitted that for him to proceed otherwise than the way he did "while tax appeals are pending would risk a loss of the tax on $41 million to the revenue which on any view is properly assessable, if the appeals succeed". For obvious reasons, some of which were ventilated by the Full Court in
Futuris Corporation Ltd v Commissioner of Taxation 2007 ATC 4600(2007) 159 FCR 257, I reject that submission.

5. I have come to the conclusion, for the reasons which follow, that the Commissioner's action cannot be supported either by reference to the provisions of Pt IVA or otherwise; that the applications by way of appeal against the objection decisions of the Commissioner must be allowed; and that the objection decisions themselves must be set aside.

Acronyms and abbreviations

6. Throughout these reasons I have adopted acronyms and abbreviations to refer to entities or expressions which recur with some frequency. Where possible, I have adopted the same acronyms and abbreviations as appear in contemporaneous documents that are in evidence and/or documents filed with the Court. To facilitate a reading of these reasons, I have produced below a table setting out these acronyms and abbreviations.

Acronym/Abbreviation	Entity/Expression
Acts: 1936 Act 1997 Act	Income Tax Assessment Act 1936(Cth) Income Tax Assessment Act 1997(Cth)
Agency Proposal	The proposal described at [11] below
APRA	Australian Prudential Regulation Authority
ASIC	Australian Securities and Investments Commission
ASX	Australian Stock Exchange
Commissioner	The respondent, Commissioner of Taxation
Cornerstone investors	The institutional investors who gave a commitment to MECM to buy Minara shares
Glencore	Glencore International AG
Loan Agreement	The agreement between MALLC and MBL on 3 March 2004 referred to at [15(2)] below
MALLC	Mongoose Acquisition LLC
MatlinPatterson	MatlinPatterson LLC
MatlinPatterson group	All of MatlinPatterson, MPAM, MPGP, MPGA, MPGOP, MPGOPB, MALLC and Mongoose
MBL	Macquarie Bank Limited
MBL amended assessment	The amended assessment referred to at [24] below
MBL consolidated group	The consolidated group for the purposes of Pt 3-90 of the 1997 Act of which MBL was the head company and Mongoose was a subsidiary member
MBL determination	The determination referred to at [23] below
MECM	Macquarie Equity Capital Markets Ltd
Minara	Minara Resources Limited
Minara shares	The 165,633,430 ordinary shares in Minara held by Mongoose
Mongoose	Mongoose Pty Limited
Mongoose amended assessment	The amended assessment referred to at [22] below
Mongoose determination	The determination referred to at [21] below
MPAM	MatlinPatterson Asset Management LLC
MPGA	MatlinPatterson Global Advisers LLC
MPGOP	MatlinPatterson Global Opportunities Partners LP
MPGOPB	MatlinPatterson Global Opportunities Partners (Bermuda) LP
MPGP	MatlinPatterson Global Partners LLC
Relevant years of income	For Mongoose the year ended 31 December 2004 in lieu of year of income ended 30 June 2005; for MBL the year ended 30 September 2004 in lieu of year of income ended 30 June 2004
Sale Agreement	The agreement between MPGOP, MPGOPB and MBL on 3 March 2004 referred to at [15(4)] below.

The factual background and the impugned transactions

7. In January 2003, Mongoose, a company incorporated in Australia, made a takeover offer for all the shares in Minara Resources Limited ("Minara"), then called Anaconda Nickel Limited, which operated a nickel and cobalt mine in Western Australia. Minara was also a company incorporated in Australia and its shares were listed on the Australian Stock Exchange ("ASX").

8. At the time, Mongoose was wholly owned by Mongoose Acquisition LLC ("MALLC"), a limited liability company incorporated in Delaware, United States of America. MALLC was part of the MatlinPatterson group, a US private equity firm, having no ownership or other relationship with MBL.

9. The ownership structure of the MatlinPatterson group was depicted by a diagram in the relevant takeover documents, which is reproduced below:

• 1 General Partner of the Fund
• 2 MatlinPatterson Global Opportunities Partners (Bermuda) LP holds approximately 25% participating interest in the Fund

10. Mongoose's takeover was unsuccessful and it only succeeded in acquiring a 36% interest in Minara. The cost of that interest to Mongoose was $161,829,478. Glencore International AG ('Glencore'), Minara's principal shareholder, did not accept Mongoose's offer and retained a 47% interest in Minara.

11. In February 2004 MBL, having formed the view that MatlinPatterson would not wish to retain a minority stake in Minara (36%), made an unsolicited approach to MatlinPatterson to assist MatlinPatterson in a sale of the minority interest by organising, through a subsidiary, Macquarie Equity Capital Markets Ltd ('MECM'), a book build for the sale of the Minara shares in return for a commission ('Agency Proposal'). By this time, the ASX price for Minara had substantially increased. Discussions in relation to the Agency Proposal began in early February and continued until the weekend of 22-23 February, but MECM was not in the event appointed agent for MatlinPatterson (or Mongoose as its subsidiary) and the Agency Proposal did not proceed.

12. Instead an agreement was reached between MatlinPatterson and MBL for the sale to MBL of MatlinPatterson's indirect investment in Minara, on terms by which MBL would purchase MALLC and take the market and other risks on the subsequent sale of the Minara shares held by Mongoose.

13. At that time, late February 2004, the only difference in the ownership structure of the MatlinPatterson group from that depicted in the diagram reproduced at [9] above, was that MatlinPatterson Global Opportunities Partners (Bermuda) LP ("MPGOPB") had exchanged its 25% interest in MatlinPatterson Global Opportunities Partners LP ("MPGOP") for a 25% interest in MALLC. Thus:

14. MBL understood that if it acquired Mongoose it would be liable to pay tax on the net profit to it from the transaction, that is, the proceeds of realisation of the Minara shares less the cost to MBL of its investment and transaction costs. Concerns as to a potentially adverse operation of s 457 of the 1936 Act (part of the Controlled Foreign Companies provisions in Pt X of the 1936 Act) were the subject of consideration, advice and steps taken to avoid any adverse consequences of an arguable application of that provision.

15. On 2 and 3 March 2004 the following transactions took place:

• (1) MALLC declared a distribution of US$244 million to its members, MPGOP and MPGOPB;
• (2) MBL agreed with MALLC to lend it US$244 million ("Loan Agreement");
• (3) MALLC paid US$244 million to its members;
• (4) MBL and the members of MALLC entered into an agreement for the purchase and sale of the membership interests in MALLC for A$122,045,473 ('Sale Agreement');
• (5) the membership interests in MALLC were transferred to MBL;
• (6) senior executives of MBL, Messrs John Prendiville, Michael Carapiet and Richard Phillips were appointed directors of MALLC, and then of Mongoose; in consequence, MALLC became a resident of Australia for the purposes of the Acts, and MALLC and Mongoose members of a consolidated group, of which MBL was the head company; and
• (7) the directors of Mongoose resolved to sell the Minara shares using MECM as its broker.

16. Thus, Mongoose became a subsidiary member of the MBL consolidated group in consequence of, inter alia, MBL purchasing all the membership interests in MALLC from MatlinPatterson vendors, both non-residents of Australia, for $438,928,590 ($122,045,472.62 purchase price plus a liability of MALLC owing to MBL for moneys lent to MALLC in the sum of US$244 million ($316,883,117.38)).

17. The MatlinPatterson vendors of the membership interests in MALLC had sold their indirect interest in Minara for a gain of $277,099,112 ($438,928,590 less the cost to Mongoose of the Minara shares, $161,829,478). It is common ground that that gain was not subject to Australian income tax to the MatlinPatterson vendors being, as it was, a sale by non-residents of their respective interests in a non-resident company.

18. The Minara shares were sold by Mongoose on 4 March 2004 at a price of $2.90 per share.

19. As noted in [16] above, the cost to MBL of acquiring all the membership interests in MALLC was $438,928,590. That was also MBL's tax cost of Mongoose's interest in Minara for the purposes of Pt 3-90 of the 1997 Act (see Div 705). In consequence of Mongoose's sale of the Minara shares, for the year of income ended 30 September 2004 (in lieu of the year of income ended 30 June 2004), MBL returned, as head company of the MBL consolidated group of which Mongoose was, by then, a subsidiary member, an assessable gain of $41,408,357 being the difference between the proceeds of the disposal by Mongoose of the Minara shares ($480,336,947) and MBL's tax cost of Mongoose's interest in Minara ($438,928,590).

Common ground

20. It is common ground that, the application of Pt IVA aside, in the relevant year of income -

• (1) MBL did not derive a gain of $318,507,469; its gain, as head company of the consolidated group, was limited to that which it returned, namely, $41,408,357; and
• (2) Mongoose is deemed not to be a separate entity, and not to be liable to tax, in that part of the relevant year of income during which the gain was derived.

The determinations and amended assessments

Mongoose determination and amended assessment

21. On 5 June 2009 the Commissioner made a determination pursuant to s 177F of the 1936 Act ("Mongoose determination") in the following terms:

"I, Paul Duffus, Deputy Commissioner of Taxation, Large Business and International, in the exercise of the powers and functions delegated to me by the Commissioner of Taxation determine under paragraph 177F(1)(a) of the Income Tax Assessment Act 1936 (the Act) that the amount of $318,507,469 being a tax benefit that is referable to an amount that has not been included in the assessable income of Mongoose Pty Ltd, TFN … (the taxpayer) for the substituted accounting period 1 January 2004 to 31 December 2004 in lieu of year of income ended 30 June 2005, shall be included in the assessable income of the taxpayer for that year of income.

I further determine under subsection 177F(2) of the Act that the amount shall be deemed to be included in the assessable income of the taxpayer by virtue of section 102-5 of the Income Tax Assessment Act 1997.'"

22. On 23 June 2009 the Commissioner issued an amended assessment to Mongoose for the year ended 31 December 2004 (in lieu of the year of income ended 30 June 2005) including the sum of $318,507,469 in Mongoose's assessable income ("Mongoose amended assessment").

MBL's determination and amended assessment

23. On 5 June 2009 the Commissioner made another determination pursuant to s 177F of the 1936 Act ('MBL determination') in the following terms:

"I, Paul Duffus, Deputy Commissioner of Taxation, Large Business and International, in the exercise of the powers and functions delegated to me by the Commissioner of Taxation determine under paragraph 177F(1)(a) of the Income Tax Assessment Act 1936(the Act) that the amount of $318,507,469 being a tax benefit that is referable to an amount that has not been included in the assessable income of Macquarie Bank Ltd, TFN … (the taxpayer) for the substituted accounting period 1 October 2003 to 30 September 2004 in lieu of year of income ended 30 June 2004, shall be included in the assessable income of the taxpayer for that year of income.

I further determine under subsection 177F(2) of the Act that the amount shall be deemed to be included in the assessable income of the taxpayer by virtue of section 102-5 of the Income Tax Assessment Act 1997."

24. On 23 June 2009 the Commissioner issued an amended assessment to MBL for the year ended 30 September 2004 (in lieu of the year of income ended 30 June 2004) including the sum of $318,507,469 in MBL's assessable income ("MBL amended assessment").

The Commissioner's contentions

Identification of the scheme

25. By para 39 of his amended appeal statement dated 20 August 2010 in each proceeding, the Commissioner identified the 'scheme' as consisting of the following steps:

• "(a) On 2 March, the declaration of a distribution of US$244,000,000 by MALLC;
• (b) On 3 March, the entry into the Loan Agreement by MBL and MALLC;
• (c) On 3 March, the drawdown by MALLC of US$244,000,000 pursuant to the loan agreement;
• (d) On 3 March, the entry into the Sale Agreement pursuant to which MPGOP and MPGOPB sold their membership interests in MALLC to MBL.
• (e) On 3 March, replacement of the existing directors of MALLC and Mongoose with MBL appointees, the convening of meetings by the new directors of MALLC and Mongoose and the resolution of the new Mongoose directors to sell the Minara shares; and
• (f) On 3 and 4 March, the sale of the Minara shares by MECM on behalf of Mongoose, at a price of $2.90 per share."

Quantification of tax benefit; identification of counterfactual

26. By para 40 of his amended appeal statement in each proceeding, the Commissioner quantified the tax benefit and particularised the counterfactual by reference to which it was quantified, as follows:

"Mongoose (alternatively, MBL) obtained a tax benefit in connection with a scheme of $318,507,469 (being the expected proceeds of $480,336,947 less the cost of the shares $161,829,478) being the amount not included in its assessable income for the income year ended 31 December 2004 where that amount would have been included or might reasonably have been expected to have been included if the scheme had not been entered into or carried out.

Particulars

If the scheme had not been entered into or carried out it might reasonably be expected that Mongoose would have sold the Minara shares in accordance with the Agency Proposal for a price equal to $2.90 per Minara share."

Dominant purpose of persons who entered into or carried out the scheme

27. By para 41 of his amended appeal statement in each proceeding, the Commissioner contended:

"That having regard to the eight factors in s 177D(b), it would be concluded that the dominant purpose of the persons who entered into or carried out the scheme was to enable Mongoose (alternatively, MBL) to obtain the tax benefit."

28. Prior to that, by letter dated 15 June 2010 from the Commissioner's solicitors to the applicants' solicitors (at para 6), the Commissioner identified either or both of the following entities as parties which entered into or carried out the scheme with a dominant purpose of enabling Mongoose (alternatively MBL), to obtain a tax benefit:

• a. MBL;
• b. MPGOP and MPGOPB.

29. But in para 37 of his amended appeal statement in each proceeding, some two months later, the Commissioner put this issue in the following way:

"Whether, having regard to the eight factors in s 177D(b) of the ITAA36, it would be concluded that MBL, Mongoose, MALLC, MPGOP and/or MPGOPB entered into or carried out a scheme or any part of a scheme for the purpose of enabling Mongoose (alternatively, MBL) to obtain a tax benefit in connection with a scheme to which Part IVA applies."

30. The change is important and not only because two further persons - Mongoose and MALLC - are included as parties which are said to have entered into or carried out the scheme or part of the scheme for the relevant dominant purpose, but because none of the persons identified entered into or carried out all the steps in the scheme as identified by the Commissioner. The s 177D(b) issue in the case of each of those parties is not whether each entered into or carried out the scheme as identified by the Commissioner for the relevant dominant purpose, but whether each entered into or carried out that step or those steps (comprising part of the scheme) which each in fact entered into or carried out, for the relevant dominant purpose. The conclusion that might be drawn in terms of s 177D(b) for a party which entered into or carried out only part of a scheme, might be very different from the conclusion that might be drawn for the same party if it had entered into or carried out the whole scheme. The significance of this is explored at [66]-[74] below.

The statutory context

Part 3-90 of the 1997 Act: Consolidated Groups

31. Section 700-1 of the 1997 Act sets out what Pt 3-90 is about. It provides:

"This Part allows certain groups of entities to be treated as single entities for income tax purposes.

Following a choice to consolidate, subsidiary members are treated as part of the head company of the group rather than as separate income tax identities. The head company inherits their income tax history when they become subsidiary members of the group. On ceasing to be subsidiary members, they take with them an income tax history that recognises that they are different from when they became subsidiary members.

This is supported by rules that:

• (a) set the cost for income tax purposes of assets that subsidiary members bring into the group; and
• (b) determine the income tax history that is taken into account when entities become, or cease to be, subsidiary members of the group; and
• (c) deal with the transfer of tax attributes such as losses and franking credits to the head company when entities become subsidiary members of the group."

32. Section 700-5 provides an overview of Pt 3-90 as follows:

• " 700-5(1) The single entity rule determines how the income tax liability of a consolidated group will be ascertained. The basic principle is contained in the Core Rules in Division 701.
• 700-5(2) Essentially, a consolidated group consists of an Australian resident head company and all of its Australian resident wholly-owned subsidiaries (which may be companies, trusts or partnerships). Special rules apply to foreign-owned groups with no single Australian resident head company.
• 700-5(3) An eligible wholly owned group becomes a consolidated group after notice of a choice to consolidate is given to the Commissioner.
• 700-5(4) This Part also contains rules which set the cost for income tax purposes of assets of entities when they become subsidiary members of a consolidated group and of membership interests in those entities when they cease to be subsidiary members of the group.
• 700-5(5) Certain tax attributes (such as losses and franking credits) of entities that become subsidiary members of a consolidated group are transferred under this Part to the head company of the group. These tax attributes remain with the group after an entity ceases to be a subsidiary member."

33. Section 700-10 provides that the objects of Pt 3-90 are:

• "(a) to prevent double taxation of the same economic gain realised by a consolidated group; and
• (b) to prevent a double tax benefit being obtained from an economic loss realised by a consolidated group; and
• (c) to provide a systematic solution to the prevention of such double taxation and double tax benefits that will:
  • (i) reduce the cost of complying with this Act; and
  • (ii) improve business efficiency by removing complexities and promoting simplicity in the taxation of wholly owned groups."

34. Division 701 sets out the core rules of Pt 3-90. It relevantly provides:

" Common rule

701-1 Single entity rule

• (1) If an entity is a *subsidiary member of a *consolidated group for any period, it and any other subsidiary member of the group are taken for the purposes covered by subsections (2) and (3) to be parts of the *head company of the group, rather than separate entities, during that period.
• Head company core purposes
• (2) The purposes covered by this subsection (the head company core purposes ) are:
  • (a) working out the amount of the *head company's liability (if any) for income tax calculated by reference to any income year in which any of the period occurs or any later income year; and
  • (b) working out the amount of the head company's loss (if any) of a particular *sort for any such income year.
• Note: The single entity rule would affect the head company's income tax liability calculated by reference to income years after the entity ceased to be a member of the group if, for example, assets that the entity held when it became a subsidiary member remained with the head company after the entity ceased to be a subsidiary member.
• Entity core purposes
• (3) The purposes covered by this subsection (the entity core purposes ) are:
  • (a) working out the amount of the entity's liability (if any) for income tax calculated by reference to any income year in which any of the period occurs or any later income year; and
  • (b) working out the amount of the entity's loss (if any) of a particular *sort for any such income year.
• Note: An assessment of the entity's liability calculated by reference to income tax for a period when it was not a subsidiary member of the group may be made, and that tax recovered from it, even while it is a subsidiary member.
• (4) …

Head company rules

701-5 Entry history rule

For the head company core purposes in relation to the period after the entity becomes a *subsidiary member of the group, everything that happened in relation to it before it became a subsidiary member is taken to have happened in relation to the *head company.

Note 1: Other provisions of this Part may affect the tax history that is inherited (e.g. asset cost base history is affected by section 701-10 and tax loss history is affected by Division 707).

Note 2: Section 73BAC of the Income Tax Assessment Act 1936 overrides this rule for the purposes of the research and development incremental expenditure provisions.

Note 3: …

701-10 Cost to head company of assets of joining entity

• (1) This section has effect for the head company core purposes when the entity becomes a *subsidiary member of the group.
• Assets to which section applies
• (2) This section applies in relation to each asset that would be an asset of the entity at the time it becomes a *subsidiary member of the group, assuming that subsection 701-1(1) (the single entity rule) did not apply.
• Note: See subsection 705-35(3) for the treatment of a goodwill asset resulting from the head company's ownership and control of the joining entity.
• Object
• (3) The object of this section (and Division 705 which relates to it) is to recognise the cost to the *head company of such assets as an amount reflecting the group's cost of acquiring the entity.
• Setting tax cost of assets
• (4) Each asset's *tax cost is set at the time the entity becomes a *subsidiary member of the group at the asset's *tax cost setting amount.
• (5) …

…

Entity rules

701-30 Where entity not subsidiary member for whole of income year

• Object
• (1) The object of this section is to provide for a method of working out how the entity core rules apply to the entity for periods in the income year when the entity is not part of the group. The method involves treating each period separately with no netting off between them.
• When section has effect
• (2) This section has effect for the entity core purposes if:
  • (a) the entity is a *subsidiary member of the group for some but not all of an income year; and
  • (b) there are one or more periods in the income year (each of which is a non-membership period ) during which the entity is not a subsidiary member of any *consolidated group.
• Tax position of each non membership period to be worked out
• (3) For every non-membership period, work out the entity's taxable income (if any) for the period, the income tax (if any) payable on that taxable income and the entity's loss (if any) (a non-membership period loss ) of each *sort for the period. Work them out:
  • (a) as if the start and end of the period were the start and end of the income year; and
  • (b) ignoring the operation of this section in relation to each other non-membership period (if any); and
  • (c) so that each relevant item is either:
    • (i) allocated to only one of the non-membership periods or to a period that is all or part of the rest of the income year; or
    • (ii) apportioned among such periods (for example, by Subdivision 716-A (see note to this subsection)).
• Note: Other provisions of this Part are to be applied in working out the taxable income or loss, for example:
  • • section 701-40 (Exit history rule); and
  • • Subdivision 716-A (about assessable income and deductions spread over several membership or non-membership periods); and
  • • section 716-850 (about grossing up threshold amounts for periods of less than 365 days).

  Subdivision 716 also affects the tax position of the head company of a group of which the entity has been a subsidiary member for some but not all of the income year.

• …
• Income tax for the financial year
• (4) The entity's income tax (if any) for the *financial year concerned is the total of every amount of income tax worked out for the entity under subsection (3).
• Taxable income for the income year
• (5) The entity's taxable income for the income year is the total of every amount of taxable income worked out for the entity under subsection (3).
• (6) The entity's income tax worked out under subsection (4) is taken to be payable on the entity's taxable income for the income year worked out under subsection (5), even if the amount of the tax differs from the amount that would be worked out by reference to that taxable income apart from subsection (5)."

35. Division 705 of Pt 3-90 sets out the rules for setting the tax cost of an entity's assets where it becomes a subsidiary member of a consolidated group. Subdivision 705-A deals with the basic case of a single entity joining an existing consolidated group. Section 705-5 is a guide to subdiv 705-A and provides:

"When an entity becomes a subsidiary member of an existing consolidated group, the tax cost setting amount for its assets reflects the cost to the group of acquiring the entity."

36. Section 705-10 deals with the application and object of subdiv 705-A in the following terms:

• "Application
  • (1) This Subdivision has effect, subject to section 705-15, for the head company core purposes set out in subsection 701-1(2) if an entity (the joining entity ) becomes a *subsidiary member of a *consolidated group (the joined group ) at a particular time (the joining time ).
• Object
• (2) The object of this Subdivision is to recognise the *head company's cost of becoming the holder of the joining entity's assets as an amount reflecting the group's cost of acquiring the entity. That amount consists of the cost of the group's *membership interests in the joining entity, increased by the joining entity's liabilities and adjusted to take account of the joining entity's retained profits, distributions of profits, deductions and losses.
• (3) The reason for recognising the *head company's cost in this way is to align the costs of assets with the costs of *membership interests, and to allow for the preservation of this alignment until the entity ceases to be a *subsidiary member, in order to:
  • (a) prevent double taxation of gains and duplication of losses; and
  • (b) remove the need to adjust costs of membership interests in response to transactions that shift value between them, as the required adjustments occur automatically.

Part IVA of the 1936 Act: Schemes to Reduce Income Tax

37. In the relevant years of income, the provisions of Pt IVA relevantly provided:

• " 177A Interpretation
  • (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.
  • taxpayer includes a taxpayer in the capacity of a trustee.
    • (2) The definition of taxpayer in subsection (1) shall not be taken to affect in any way the interpretation of that expression where it is used in this Act other than this Part.
  • (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.
  • (4) A reference in this Part to the carrying out of a scheme by a person shall be read as including a reference to the carrying out of a scheme by a person together with another person or other persons.
  • (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.
• 177B Operation of Part
  • (1) Subject to subsection (2), nothing in the provisions of this Act other than this Part … shall be taken to limit the operation of this Part.
  • …
• 177C Tax benefits
  • (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) …

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

    • (c) in a case to which paragraph (a) applies-the amount referred to in that paragraph; and
    • (d) …

  • …
• 177D Schemes to which Part applies
  • 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).

  • …
• 177EB Cancellation of franking credits-consolidated groups
  • Expressions to have same meanings as in section 177EA and Income Tax Assessment Act 1997
    • (1) Unless the contrary intention appears, expressions used in this section:
      • (a) if those expressions are defined in section 177EA-have the same meanings as in that section (subject to subsection (10) of this section); and
      • (b) otherwise-have the same meanings as in the Income Tax Assessment Act 1997.
  • This section and section 177EA do not limit each other
    • (2) This section does not limit the operation of section 177EA, and section 177EA does not limit the operation of this section.
  • Application of section
    • (3) This section applies if:
      • (a) there is a scheme for a disposition of membership interests in an entity (the joining entity ); and
      • (b) as a result of the disposition, the joining entity becomes a subsidiary member of a consolidated group; and
      • (c) a credit arises in the franking account of the head company of the group because of the joining entity becoming a subsidiary member of the group; and
      • (d) having regard to the relevant circumstances of the scheme, 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 a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling the credit referred to in paragraph (c) to arise in the head company's franking account.
  • Bare acquisition of membership interests
    • (4) It is not to be concluded for the purposes of paragraph (3)(d) that a person entered into or carried out a scheme for a purpose mentioned in that paragraph merely because the person acquired membership interests in the joining entity.
  • Commissioner to determine no franking credit
    • (5) The Commissioner may make, in writing, a determination that no credit is to arise in the head company's franking account because of the joining entity becoming a subsidiary member of the consolidated group. A determination does not form part of an assessment.
  • Effect of determination
    • (6) A determination under subsection (5) has effect according to its terms.
    • …
  • Section to apply to exempting credits
    • (11) This section applies to exempting credits arising in the exempting account of the head company of a consolidated group in the same way that it applies to credits arising in the head company's franking account.
• 177F Cancellation of tax benefits etc.
  • (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
    • …

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

  • (2) Where the Commissioner determines under paragraph (1)(a) that an amount is to be included in the assessable income of a taxpayer of a year of income, that amount shall be deemed to be included in that assessable income by virtue of such provision of this Act as the Commissioner determines.
    • (2A) …
  • (3) Where the Commissioner has made a determination under subsection (1) or (2A) in respect of a taxpayer in relation to a scheme to which this Part applies, the Commissioner may, in relation to any taxpayer (in this subsection referred to as the relevant taxpayer ):
    • (a) if, in the opinion of the Commissioner:
      • (i) there has been included, or would but for this subsection be included, in the assessable income of the relevant taxpayer of a year of income an amount that would not have been included or would not be included, as the case may be, in the assessable income of the relevant taxpayer of that year of income if the scheme had not been entered into or carried out; and
      • (ii) it is fair and reasonable that that amount or a part of that amount should not be included in the assessable income of the relevant taxpayer of that year of income;

      determine that that amount or that part of that amount, as the case may be, should not have been included or shall not be included, as the case may be, in the assessable income of the relevant taxpayer of that year of income; or

    • …"
• 177G Amendment of assessments
  • Nothing in section 170 prevents the amendment of an assessment at any time before the expiration of 6 years after the date on which tax became due and payable under the assessment if the amendment is for the purpose of giving effect to subsection 177F(3)."

The Commissioner's grievance

38. The Commissioner's grievance - or the "taxation Alsatia" as he called it in his written submissions - is that the parties availed themselves of the Consolidated Groups provisions of Pt 3-90, in particular, the express provision of the legislation that where a subsidiary member joins a consolidated group, and subsequently disposes of an asset, the subsidiary member is not taxed on the difference between proceeds and cost (the profit actually or "in fact" made by the subsidiary), because of the operation of s 701-1, while the head company is taxed not on the profit "in fact" made by the subsidiary, but on the economic profit made by the head company (the cost to the head company of the acquisition of the subsidiary is pushed down to become the tax cost setting amount of the asset disposed of by the subsidiary (Div 705)), to avoid tax on a substantial portion of the gain on a once and for all transaction - the sale of the Minara shares - and not for purposes consistent with the objects of Pt 3-90 as set out in s 700-10.

39. The Commissioner's senior counsel articulated it in the following way: MBL devised a solution to realise a substantial part of the unrealised gain on the Minara shares without MatlinPatterson paying tax on that part of the gain and as a quid pro quo, MatlinPatterson ceded the balance of the gain to MBL. In his words: "[T]hey split [the proceeds] on a commercial basis. MatlinPatterson might have made a whole lot more profit on the deal [than MBL], but then they owned the [Minara] shares before this started, and so their bargaining position might have been thought to be a whole lot stronger".

40. This scenario was never put to any witness called on behalf of MBL; certainly not in those terms. Certain questions were put to Mr RN Upfold, an Executive Director within Macquarie Group Limited, in cross-examination concerning an email he sent to Ms Jess Walpole at MBL on Tuesday, 17 February 2004. The transcript reads (at 188):

"Now, going through the material in the email, it starts:

There are a number of ways to achieve this and they exist along spectrums of difficulty and time involved.

The first option, which you describe as easy and quick, is for MBL or SPV - is that special purpose vehicle? - Yes.

Continuing:

Acquires Mongoose LLC. Change residence of LLC by appointing Australian directors as head company in a consolidated group. We would be able to sell shares with no tax payable unless sale price in excess of cost, and no Australian tax on this for fund.

Who was 'fund'? - That was my impression at the time for the vendor, MatlinPatterson.

So you are referring there to the MatlinPatterson entity, or the vendor. Now, you were addressing there, were you not, the tax consequences of different possible structures for the Australian tax position of MatlinPatterson entities? - I was addressing how Macquarie might be involved in a transaction involving various entities, yes. That was what I was advising on.

But this - these paragraphs, paragraph 2 deals with the tax consequences for a MatlinPatterson entity; is that correct? - Yes, it would, insofar as Macquarie could be involved in the transaction. There would be consequences for the other side of the transaction.

And ensuring that no Australian tax was paid on this for the MatlinPatterson Fund was a matter at the forefront of your consideration in this email? - Not especially. I was more concerned with how Macquarie could be involved in the transaction.

How in a tax sense Macquarie could be involved in it? - Only tax, yes.

Because given your role and your expertise, the question that you understood you were being asked to advise on didn't simply concern how Macquarie Bank could buy Mongoose: it was how Macquarie could buy Mongoose with certain tax consequences; is that correct? - No, this question was only about buying an LLC. Jess Walpole was at the meeting when that was discussed, and she was puzzled as to what on earth Macquarie would do in buying an LLC if that was available. That is what this was responding to.

And it was responding to the tax consequences of buying the LLC? - That is what I put in the email. She didn't ask me that question.

But you understood, in light of your role at Macquarie and your expertise, you understood that she was asking you for assistance in relation to the tax consequences, rather than corporate law or some other consequence? - For Macquarie Bank, yes.

And you included in your consideration tax consequences for the MatlinPatterson Fund, at least in 1(ii)? - Yes, I did.

And you understood that to be included in the questions on which you were asked for assistance? - No, I wasn't. She only asked me about how Macquarie could buy an LLC. She was puzzled at the meeting when it arose.

Now, the issues in (i) about change of residence by appointing Australian directors, that is significant only for tax reasons, is it not? - Yes and now. It is significant for tax reasons, but it is part of Macquarie's corporate policy. If we buy a company, you have to appoint directors, and there is a policy on that. So, yes we would, once we acquired a company, appoint directors.

And appoint Australian directors? - We would in this case, certainly. That is a Macquarie policy.

And you would certainly do so in this case because appointing Australian directors would have consequences for the entity's ability to enter the Macquarie Consolidated Group? - Well, that doesn't - I was certainly comfortable that that would be the effect, and that was an effect that I was very happy with. But just to be clear, that is a Macquarie policy. I can't do anything about that.

But Ms Walpole wasn't coming to you to ask for your assistance in respect of Macquarie's policy as to residence of directors, was she? She was asking for assistance about tax? - Correct. Well, she was asking me for a comment about the LLC. I can't help writing about tax. That is what I do.

In terms of acquisition of the LLC, there were potentially two groups of issues, were there not? One group of corporate law issues, and one group of tax issues? - Yes, I think that is right. As far as I was aware, there were corporate and tax issues.

And you understood that your assistance had been sought in respect of the tax issues rather than the corporate issues? - I am not sure anyone asked me for my assistance in acquiring an LLC at this stage, but that is what I would be advising on.

Now, when we come further down to the demerger question, you see the steps there. See (iv)P/L. Was that a reference to the Australian resident company, Mongoose Pty Ltd? - Yes, it is.

And in (v) you are advising about demergers under CGT relief rules? - I am commenting on them, yes.

And you're commenting on capital gains tax for Mongoose Proprietary Limited? - Yes.

- and capital gains tax for MatlinPatterson fund? - Capital gains and revenue profit, it says, but yes.

Well, capital gains - you make an assumption in parentheses that there wasn't going to be a revenue profit? - Yes. That was a - at that stage I had no facts really.

Well, you had enough facts to give this outline of - ? - Certainly had a structure diagram, yes.

Yes. And you also there refer to no dividend withholding tax? - Yes.

Right. Who would that be significant for? Would that be significant for Macquarie or fund? - That would be significant for Mongoose Pty Limited.

The reference - the discussion under 2 is focussed primarily upon capital gains tax, but also on dividend withholding tax. Agree with that? - Yes, it is.

The Australian tax you refer to in 1(ii) would include capital gains tax? - Yes, it would.

And that, indeed, would be a primary issue for consideration in relation to a transaction of this kind? - For MatlinPatterson, yes, it would.

The capital gains tax implications were at the forefront of consideration in both options you put forward. Is that correct? - Yes.

What you were putting forward here was a solution to capital gains tax issues which might suit the tax planning needs of the MatlinPatterson entities? - I'm not sure I was presenting a solution. I was presenting an explanation of what role Macquarie might have in acquiring the LLC, but yes. Both would have tax impacts for MatlinPatterson, the vendor.

You were putting forward a possible solution? - Possible involvements of how we would buy the - the question that Jess raised was, what role would Macquarie have in buying an LLC? That's what I was trying to say, because this is a spectrum, and there are elements of risk, funding, management that vary between these two ends of the spectrum and - and a number of situations that are possibly in between. I had no idea what role Macquarie would play other than in answering a question that she asked, what role would we have in buying an LLC? What could we do?

But she didn't need to consult you if buying the LLC where the only objective; you were consulted with a view to obtaining a very specific tax outcome - that of no CGT on the disposition of the Minara shares held by Mongoose? - That's not true.

Well, that's what these two matters are directed to, is it not? - They mention those, yes, but she asked me - she was puzzled as to what role Macquarie could have in buying an LLC. I don't think she had experience in it, and I was telling her we could have all sorts of roles, depending on how we were going to fund it, if we were funding it, how much risk we were going to take. So the range. That's all it's doing. A spectrum, and yes, it's dealing with tax because that's what I do."

41. After a short consultation with his junior counsel, the Commissioner's senior counsel then put to Mr Upfold:

"Could I suggest that the answers that you've given about the questions that were put to you are not frank?"

Mr Upfold effectively rejected this suggestion before objection was taken to the question. The questions to which reference was being made in that question were not identified, but even if it is a reference to some or all questions in the extract from the transcript in [40] above, I do not agree that Mr Upfold's answers were "not frank". My review of the transcript confirms my view at the time that Mr Upfold answered all questions put to him in a direct and forthright manner and to the best of his recollection, conceding as he did, that his tax expertise was the catalyst for much of what he put in the email because: "That is what I do". It was subsequently submitted by the Commissioner that I should not accept Mr Upfold's evidence. I make it quite clear, that I accept Mr Upfold's evidence without reservation. On the other hand, insofar as his evidence is seen as going to the s 177D(b) issue (I am unable to perceive as to what else it might go to), it needs to be said at the outset that the s 177D(b) issue, if it arises in this case and on my view of other issues it does not, is to be determined objectively, by reference to the eight matters referred to therein, and not by reference to the personal or subjective purposes of those involved in the process, be they advisers or participants. The contemporaneous documents in evidence and their explication by reference to the events that occurred are more likely to contribute to an informed conclusion on the s 177D(b) issue than the oral evidence, over seven years later, of a witness involved in those events; particularly if the latter is inconsistent with the former.

42. In response to the Commissioner's grievance as put in [38] and [39] above, senior counsel for the applicants made the point, which is undoubtedly correct, that it is an inevitable consequence, and a design feature of the legislation expressly accepted and adopted by the legislature (s 700-1, s 705-5), that the cost base of the asset to the head company will commonly be greater than its cost to the subsidiary.

43. However, the real problem for the Commissioner in the present case is that he seeks to cancel, in reliance on the provisions of Pt IVA, tax consequences intended by Parliament to be conferred on a company, such as Mongoose, joining a consolidated group irrespective of whether it, or other persons, had as its or their purpose in joining, taking advantage of those consequences. Whereas, where Parliament was concerned with a company joining a consolidated group for the purpose of taking advantage of a tax consequence, for example, enabling franking credits to arise in the head company, it amended Pt IVA to deal with the problem by denying the credits: see s 177EB(3) and (5); see too, paras [10.23] and [10.24] of the Explanatory Memorandum to New Business Tax Systems (Consolidation) Bill (No. 1) 2002.

44. The Commissioner seeks to overcome this problem by reliance on what can only be described as an "elastic" construction of the provisions of Pt IVA, and its interaction with the relevant provisions of Pt 3-90. For example, he submitted:

"The applicants' submission is, in substance, that Part IVA operates subject to the single entity rule in s 701-1 of the 1997 Act. The consequence of the applicants' submission is that Part IVA is incapable of applying to a scheme that would otherwise fall within its terms where by reason of, and as a result of the scheme, an entity becomes a subsidiary member of a tax consolidated group thus immunising Mongoose from the application of Part IVA. Part IVA cannot be sterilised or limited in this way."

The fact that upon entry into the MBL consolidated group, Mongoose ceases to be a separate entity liable to tax and becomes part of MBL as head company of the group, does not, with respect, sterilise or limit the operation of Pt IVA, in some way offending s 177B.

The Commissioner's position on the alternative assessments and determinations

45. The Commissioner's position with respect to which alternative he primarily relies on seemed to undergo a metamorphosis during the course of the hearing. At the outset, he seemed to place primary reliance on the MBL determination and the MBL amended assessment to give effect to the MBL determination. This is what one might expect where a subsidiary member of a consolidated group enters into a scheme to which s 177D applies: the Commissioner is authorised to make a determination under s 177F(1), but the authorised determination will be (in a para (a) case) one to include an amount in the assessable income of the head company, to which for tax assessment purposes the activities of the subsidiary member are, by s 701-1, attributed. However, it obviously became apparent to the Commissioner during the course of the hearing that, having regard to his identification of the counterfactual, upon which the tax benefit the subject of the MBL determination was predicated, namely, that Mongoose would have, or might reasonably be expected to have, sold the Minara shares otherwise than as a subsidiary member of the MBL consolidated group, MBL could never, and did not, obtain such a tax benefit from such a sale.

46. By the time of making final submissions towards the conclusion of the hearing, the Commissioner's primary position had shifted to continued reliance on the MBL amended assessment but on the basis that it gave effect to the Mongoose determination. In fairness to the Commissioner, this was foreshadowed at para 43 of his amended appeal statement in both proceedings.

47. His secondary or fallback position towards the conclusion of the hearing was that, if the Mongoose determination was not, or could not be, given effect by the MBL amended assessment, reliance was placed on the Mongoose amended assessment as giving effect to the Mongoose determination. This was foreshadowed at para 42 of the Commissioner's amended appeal statement in both proceedings.

48. Finally, the Commissioner's third or default position towards the conclusion of the hearing was his primary position at the outset, namely, that the MBL amended assessment gave effect to the MBL determination. For the reasons given at [45] above, this default position cannot be sustained and must be rejected.

49. I turn to address the Commissioner's remaining positions.

50. Both his primary and secondary positions rely on the Mongoose determination, namely, a tax benefit quantified at $318,507,469 said to be obtained by Mongoose in connection with the scheme by reference to the gain that was not, but might reasonably be expected to have been, included in its assessable income for the relevant year of income if Mongoose had sold the Minara shares otherwise than as a subsidiary member of the MBL consolidated group.

51. There was considerable argument from both sides of the bar table on the issue of the authority of the Commissioner to make this determination. For the applicants it was said that even if Mongoose was a 'taxpayer' as defined by s 6(1) of the 1936 Act, it was not capable of obtaining a tax benefit, at least one comprising its non-derivation of assessable income because, for the purpose of determining its liability to income tax, it was deemed not to be a separate entity and events relating to it were deemed to occur in relation to MBL, not Mongoose. Put another way, after Mongoose joined the MBL consolidated group, even if it was a "taxpayer" as defined, it was not liable to be assessed as a "taxpayer", viz, "a person deriving income or deriving profits or gains of a capital nature". For the Commissioner it was said that once it was accepted that Mongoose is a "taxpayer" as defined, s 177F authorised the making of a determination to include an amount in its assessable income in the circumstances contemplated by the section; that it could not be assessed on such income, a matter the Commissioner disputed, was beside the point. While not actually deciding this point because I am of the view, for other and better reasons detailed below, that the Commissioner's primary and secondary positions cannot be sustained, I incline to the view that the Commissioner's view on this issue may be correct and that the Mongoose determination is authorised by s 177F. After all, the determination is made on the hypothesis that at the time Mongoose sold the Minara shares it was not a subsidiary member of the MBL consolidated group and on that hypothesis Mongoose was certainly capable of deriving assessable income and, in consequence, capable of obtaining a tax benefit by its non-derivation.

52. It is at the next level, giving effect to that determination, that problems arise for the Commissioner.

53. On the assumption that a determination can only be given effect to by the issue of an assessment to the taxpayer whose assessable income is to be increased, an assumption which I will examine further below in relation to the Commissioner's primary position, the Mongoose determination could only be given effect to by the issue of an assessment to Mongoose (the Commissioner's secondary position). In my view, that is just not possible on the facts of the present case where Mongoose is a subsidiary member of the MBL consolidated group and, as such, is not a separate entity liable to tax.

54. Part IVA does not authorise the Commissioner to issue an assessment including an amount in the assessable income of a subsidiary member of a consolidated group. The Commissioner's s 177F power to take 'such action as he considers necessary' is not at large. It is limited to action which gives effect to a determination. A determination under s 177F only informs the calculation of a taxpayer's assessable income on a particular hypothesis: it does not and cannot authorise the exclusion of a company from a consolidated group in fact so as to constitute it an entity liable to tax, nor authorise the Commissioner to disregard s 701-1 or s 701-30 and assess the subsidiary member in disregard of those provisions.

55. Where Parliament intended that a provision elsewhere in the Acts should have effect notwithstanding the operation of Pt 3-90 and the single entity rule in s 701-1, it has expressly so provided: in Pt IVA itself, in subs (3) and (5) of s 177EB, in relation to determinations that a franking debit should accrue or that a franking credit should be denied, in ss 73BAA to 73BAG in relation to research and development concessions; and in s 165-212E of the 1997 Act, in relation to the same business test for carry forward losses. Had it been the legislative intent that a determination under s 177F should impose tax on a subsidiary member of a group notwithstanding the provisions of s 701-1, it is to be expected that such intent would have been carried into effect by express provisions, as was done in s 177EB and in s 73BAA to 73BAG of the 1936 Act and s 165-212E of the 1997 Act. Absent some express authority in the Acts, s 177F does not authorise the Commissioner to disregard s 701-1 and treat a subsidiary member of a consolidated group as an entity liable to tax.

56. For these reasons, the Commissioner's secondary position cannot be sustained and must be rejected.

57. The Commissioner's primary position is that the MBL amended assessment gives effect to the Mongoose determination. In the first place, this position assumes that the Commissioner can issue an assessment, to a different taxpayer to the taxpayer the subject of the determination. As observed in [54] above, the Commissioner's s 177F power to take "such action as he considers necessary" is not at large. It is limited to action which gives effect to a determination. The issue of an assessment to taxpayer A including an amount in his assessable income hardly gives effect to a determination to include an amount, even the same amount, in the assessable income of taxpayer B. But the Commissioner points to the case of the trustee of a trust estate and a beneficiary of that trust estate: according to the Commissioner, a determination might be made to include an amount in the assessable income of the trustee, as trustee, with effect being given to the determination by the issue of an assessment including the same amount in the assessable income of a beneficiary. In support of such a course, the Commissioner relies on what was said by Greenwood J in
McCutcheon v Commissioner of Taxation 2008 ATC ¶20-009(2008) 168 FCR 149 at [34]. However, in my view, a determination to include an amount in the assessable income of a beneficiary of a trust estate must be made in respect of that beneficiary; not the trustee. It is only where the amount is to be assessed to the trustee under s 99 or 99A that the determination would be made in respect of the trustee. So much is confirmed by the Explanatory Memorandum to the Bill which introduced Pt IVA into the 1936 Act in relation to the definition of "taxpayer", where it is said (at 8):

"The definition of 'taxpayer' in sub-section (1) as including a taxpayer in a trustee capacity is designed to refer to those situations where a trustee is - for example, under section 99 or 99A of the Principal Act - subject to tax in respect of some or all of the net income of a trust estate. The definition will make it clear that Part IVA can be applied in such a case."

58. It is not necessary that I come to a concluded view on this point because the facts of McCutcheon are very different from the facts of the present case. Even assuming the Commissioner can give effect to a determination to include an amount in the assessable income of a trustee, as trustee, by issuing an assessment to include the same amount in the assessable income of a beneficiary, and I have considerable doubt that he can, it says nothing about his authority to do so outside the context of a trust estate, trustee and beneficiary; and nothing about his authority to give effect to the Mongoose determination by the MBL amended assessment in the present case.

59. In his written submissions, the Commissioner made reference to a passage from the work of GT Pagone, Tax Avoidance in Australia (The Federation Press, 2010) at 130 where the learned author writes:

"A determination of a tax benefit obtained by an entity in a consolidated group may only be capable of being given effect to by an assessment to the head entity which might in some circumstances be an entire stranger to the scheme."

In my view, this passage says more in support of the rejection of the Commissioner's secondary position than it does to support the Commissioner's primary position.

60. As I said in [45] above, where a subsidiary member of a consolidated group enters into a scheme to which s 177D applies, the Commissioner is authorised to make a determination under s 177F(1), but the authorised determination will be (in a para (a) case) one to include an amount in the assessable income of the head company, to which for tax assessment purposes the activities of the subsidiary member are, by s 701-1, attributed. Effect is then given to that determination by the issue of an assessment including the amount in the assessable income of the head company. Indeed, that is what the Commissioner did in the present case and was his primary position at the outset of the hearing. It only receded in the order of reliance on his realisation that having regard to the hypothesis upon which the MBL determination was made, MBL could never, and did not, obtain the alleged tax benefit.

61. Even if it is possible and permissible in certain limited circumstances to give effect to a determination to include an amount in the assessable income of one taxpayer by the issue of an assessment including the amount in the assessable income of a different taxpayer, and that one of those limited circumstances may include the issue of an assessment including an amount in the assessable income of a head company of a consolidated group to give effect to a determination to include that amount in the assessable income of a subsidiary member of that group, the present case is not one of them. In my view, any assessment to give effect to an anterior determination to include an amount in the assessable income of a taxpayer must be factually consistent with the hypothesis upon which that determination is predicated, whether the assessment is issued to the taxpayer referred to in the determination or a different taxpayer. The MBL amended assessment is not factually consistent with the hypothesis upon which the Mongoose determination is predicated - that Mongoose sold the Minara shares otherwise than as a subsidiary member of the MBL consolidated group - and it follows, in my view, that the MBL amended assessment cannot, and does not, give effect to the Mongoose determination.

62. It follows, in my view, that the Commissioner cannot rely on either the MBL amended assessment or the Mongoose amended assessment and, in the former case, whether reliance is placed on it giving effect to the MBL determination or the Mongoose determination. This would be sufficient to uphold the applications in both proceedings and set aside the respective objective decisions, however, in the event that these proceedings go further, I was asked to consider and determine whether:

• (1) Mongoose did obtain the alleged tax benefit in connection with the scheme identified by the Commissioner; and, if so whether,
• (2) any one or more of the parties identified as having entered into or carried out the scheme, or any part of the scheme, did so, having regard to the eight matters in s 177D(b), for the dominant purpose of enabling Mongoose to obtain a tax benefit.

63. I propose to do so, but only on the basis of the Commissioner's primary position towards the conclusion of the hearing, namely, that the MBL amended assessment gave effect to the Mongoose determination.

Application of Part IVA

Tax benefit

64. The issue here is whether the tax benefit as quantified represents the tax outcome upon the hypothesis of what would have occurred, or might reasonably be expected to have occurred, if the scheme as identified had not been entered into or carried out.

65. On the evidence, and the logicality of events that are in evidence, I would conclude that Mongoose did obtain a tax benefit in connection with the scheme as identified because I am of the view, and would find, that if the scheme, as identified, had not been entered into or carried out, Mongoose might reasonably be expected to have sold the Minara shares under the Agency proposal and derived a gain equivalent in amount to the alleged tax benefit; that was the parallel course being pursued at the time and no other course presents itself as a reasonable expectation; everything else is pure speculation. This is not a case involving a sale of an asset pursuant to an internal group reorganisation where the size of the tax consequence attaching to that course of action might objectively lead one to the conclusion that it is not a reasonable expectation that the reorganisation (including the proposed sale) would have proceeded in the face of that consequence: cf.,
RCI Pty Limited v Commissioner of Taxation 2011 ATC ¶20-275[2011] FCAFC 104 (22 August 2011).

Dominant purpose

66. As noted in [29] above, the Commissioner's case was that one or more of MBL, Mongoose, MALLC, MPGOP and/or MPGOPB entered into or carried out the scheme as identified (see [25] above) or part of that scheme for the purpose of enabling Mongoose (alternatively, MBL) to obtain a tax benefit in connection with that scheme. For the reasons given in [45] above, the MBL alternative can be put to one side. It is not clear from the particulars in para 37 of the Commissioner's amended appeal statement reproduced at [29] above whether the Commissioner's case was that it was a sole or dominant purpose upon which he relied. However, the latter is sufficient and was consistent with the Commissioner's oral argument. In any event, I propose to read those particulars as if they contained the word "dominant" before the word "purpose".

67. As I observed at [30] above, none of the identified parties entered into or carried out all the steps in the scheme identified at [25] above and it is therefore necessary to reach a conclusion, having regard to each of the matters in s 177D(b), as to whether any identified party entered into or carried out that step or those steps (comprising part of the scheme) which that party in fact entered into or carried out, for the relevant dominant purpose, namely, to enable Mongoose to obtain a tax benefit.

68. Looking at each of the steps in the scheme identified by the Commissioner and reproduced at [25] above:

• (i) Only MALLC entered into or carried out step (a) - the declaration of the distribution of US$244,000,000 by MALLC;
• (ii) MBL and MALLC entered into or carried out step (b) - the entry into the Loan Agreement;
• (iii) only MALLC entered into or carried out step (c) - the drawdown by MALLC of US$244,000,000 pursuant to the Loan Agreement;
• (iv) MPGOP, MPGOPB and MBL entered into or carried out step (d) - the entry into the Sale Agreement by MPGOP and MPGOBP agreeing to sell to MBL their membership interests in MALLC;
• (v) MALLC, Mongoose and MBL entered into or carried out step (e) - replacement of the existing directors of MALLC and Mongoose with MBL appointees, the convening of meetings by the new directors of MALLC and Mongoose and the resolution of the new Mongoose directors to sell the Minara shares; and
• (vi) Only Mongoose entered into or carried out step (f) - the sale of the Minara shares by or on behalf of Mongoose.

69. In other words, MALLC entered into or carried out steps (a) to (c) inclusive and step (e); MBL entered into or carried out steps (b), (d) and (e); Mongoose entered into or carried out steps (e) and (f); while MPGOP and MPGOPB entered into or carried out step (d).

70. To reach the conclusion specified in s 177D(b) it is necessary to have regard to each of the eight matters which are there specified, which may variously point toward or away from the requisite conclusion, or which may not point in either direction because factually they are not relevant; provided all matters are taken into account, it is possible to arrive at the conclusion as to purpose by making a global assessment of the facts:
Commissioner of Taxation v Consolidated Press Holdings Limited 2001 ATC 4343(2001) 207 CLR 235 at [94];
Commissioner of Taxation v Sleight 2004 ATC 4477(2004) 136 FCR 211 at [67];
Commissioner of Taxation v News Australia Holdings Pty Ltd 2010 ATC ¶20-191(2010) 79 ATR 461 at [15]. In the circumstances, that is the approach I propose to take in the present case.

71. In relation to MALLC, I would not conclude, by reference to the eight matters in s 177D(b), that MALLC entered into or carried out any, or collectively some or all, of steps (a), (b), (c) and (e) for the dominant purpose of enabling Mongoose to obtain a tax benefit. To the contrary, I would conclude that steps (a), (b) and (c), above and together, were entered into or carried out by MALLC for the dominant purpose of avoiding any potential adverse operation of s 457 of the 1936 Act. The Commissioner eschewed reliance on such avoidance as giving rise to a tax benefit, understandably so, because those steps enabled MALLC, and not Mongoose, to obtain immunity from the operation of s 457. Step (e), so far as MALLC is concerned, involved no more than changes in the personnel of its directors and the convening by them of future meetings of the board. None of the eight matters in s 177D(b) lead me to conclude that step (e), either alone or together with steps (a), (b) and (c), was or were entered into or carried out by MALLC for the dominant purpose of enabling Mongoose to obtain a tax benefit.

72. In relation to MBL, I would not conclude, by reference to the eight matters in s 177D(b), that MBL entered into or carried out any, or collectively some or all, of steps (b), (d) and (e) for the dominant purpose of enabling Mongoose to obtain a tax benefit. To the contrary, I would conclude that steps (b), (d) and (e), either alone or together, were entered into or carried out by MLB for the dominant purpose of profit-making - making a greater profit than would otherwise be made by MBL from the Agency Proposal - albeit attended with greater commercial risk.

73. In relation to Mongoose, I would not conclude, by reference to the eight matters in s 177D(b), that Mongoose entered into or carried out any, or alternatively both, of steps (e) and (f) for the dominant purpose of enabling it to obtain a tax benefit. To the contrary, I would conclude that steps (e) and (f), either alone or together, were entered into or carried out by Mongoose for the dominant purpose of selling the Minara shares. Any tax benefit of the kind relied on by the Commissioner, came as a result, or as a consequence, that, at the time Mongoose sold the Minara shares, it was already a subsidiary member of the MBL consolidated group. Those steps, alone or together, could not have been entered into or carried out by Mongoose for the dominant purpose of obtaining a tax benefit. The tax consequences of the sale of the Minara shares flowed from the fact that, at the relevant time, it was already a subsidiary member of the MBL consolidated group.

74. In relation to MPGOP and MPGOPB, I would not conclude, by reference to the eight matters in s 177D(b), that MPGOP and MPGOPB entered into or carried out step (d) for the dominant purpose of enabling Mongoose to obtain a tax benefit. To the contrary, I would conclude that step (d) was entered into or carried out by MPGOP and MPGOPB for the dominant purpose of selling their respective economic interests in the Minara shares, and to do so without suffering Australian income tax on the profit they each made on the sale of those interests.

Conclusion

75. For the reasons set out at [66] to [74] above, if, contrary to my conclusion at [62] above, the Commissioner can rely on the MBL amended assessment to give effect to the Mongoose determination and if, as I have found at [65] above, Mongoose did obtain a tax benefit in connection with the scheme identified by the Commissioner, nevertheless I would not conclude, having regard to the eight matters in s 177D(b), that any one or more of MBL, Mongoose, MALLC, MPGOP and/or MPGOPB entered into or carried out that part or those parts of the scheme that each in fact entered into or carried out for the dominant purpose of enabling Mongoose to obtain a tax benefit.

76. The conclusion at [75] above provides a further basis upon which to allow the applications in both proceedings; and to allow them with costs.