FC of T v Hicks; FC of T v Hicks Beneficiary Pty Ltd; FC of T v Ierna

Judges:
Derrington J
Feutrill J
Hespe J

Court:

MEDIA NEUTRAL CITATION: [2025] FCAFC 171

Judgment date: 3 December 2025

Derrington, Feutrill and Hespe JJ

INTRODUCTION

1. This appeal concerns the application of s 45B and Part IVA of the Income Tax Assessment Act 1936 (Cth) ( ITAA 1936 ) to a series of steps that were carried out as part of a restructure by a private group of entities (City Beach group) in the year of income ended 30 June 2016 ( 2016 income year ).

2. Broadly, the issues in the appeal relate to a scheme that involved the distribution of capital to the shareholders of a company through the selective buy-back of shares in that company. On various grounds, the Commissioner contends the primary judge erred in failing to conclude:

(1) having regard to the relevant circumstances set out in s 45B(8), a purpose of a party to the scheme in entering into or carrying out the scheme was to enable a taxpayer to obtain a tax benefit as defined in s 45B(9); or alternatively
(2) having regard to the matters in s 177D(2), the dominant purpose of a party to the scheme in entering into or carrying out the scheme was to enable a taxpayer to obtain a tax benefit as defined in s 177C.

Summary of background to the restructure

3. The facts are set out by the primary judge at PJ [5]-[160]. The following summary is based on the primary judge's findings, subject to certain clarifications made on appeal.

4. The street wear fashion retailing business known as "City Beach" commenced in March 1985 and has at all times been conducted by the trustee of a trust, now known as the City Beach Trust ( CBT ). The trustee of that trust, Fewstone Pty Ltd, is a company controlled by Mr Hicks and Mr Ierna, the individuals who have at all times directed and controlled the operations of the City Beach business.

5. Prior to the restructure in the 2016 income year, the units in the CBT were held as follows:

(a) 14 units held by Mr Ierna, acquired prior to 20 September 1985;
(b) 1 unit held by the trustee of the Ierna Family Trust ( IFT ), acquired in June 1991; and
(c) 15 units held by the trustee of the William Hicks Family Trust ( WHFT ), acquired prior to 20 September 1985.

6. Each of the IFT and WHFT is a discretionary trust, the trustee of which was a company controlled by Mr Ierna and Mr Hicks, respectively. In the 2016 income year, the trustee of the IFT was Oxlade Pty Ltd and the trustee of the WHFT was Corkdon Pty Ltd.

7. The units in the CBT did not carry fixed entitlements to distribution of income. Instead, the trustee of the CBT had a discretion as to how the net income of the CBT was to be distributed. Prior to the restructure, the trustee of the CBT distributed the net income of the trust each year evenly between the trustee of the IFT (even though the IFT only held one unit) and the trustee of the WHFT. Because all of the net income of the CBT was distributed each year, the trustee of the CBT was not liable to

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income tax on that income, pursuant to Div 6 of the ITAA 1936. The CBT was not treated as a company for taxation purposes.

8. The trustee of each of the IFT and WHFT in turn distributed the net income of each of those trusts at the end of each income year. Each trustee distributed the net income of the trust to a corporate beneficiary.

9. Prior to the year ended 30 June 2012, Mastergrove Pty Ltd was the corporate beneficiary to which the net income of each of the IFT and WHFT was distributed. Mastergrove was ultimately controlled by Mr Hicks and Mr Ierna. Each of Mr Ierna and Mr Hicks were also the holder of A class shares in Mastergrove which carried non-fixed rights to dividends but no voting rights.

10. Mastergrove did not distribute all of its profits. Instead, it loaned moneys to Mr Ierna, Mr Hicks and their related entities, namely the trustee of the Ierna Property Trust ( IPT ) and the trustee of the Hicks Property Trust ( HPT ). The trustee of the IPT was controlled by Mr Ierna and the trustee of the HPT was controlled by Mr Hicks. More specifically:

(a) during the years ended 30 June 2006 to 30 June 2011, and in the year ended 30 June 2015, Mastergrove made a series of loans to the trustee of the IPT;
(b) during the years ended 30 June 2009 to 30 June 2015, Mastergrove made a series of loans to Mr Ierna;
(c) during the years ended 30 June 2009 to 30 June 2011 Mastergrove made a series of loans to Mr Hicks; and
(d) during the years ended 30 June 2010, 2011 and 2015, Mastergrove made a series of loans to the trustee of the HPT.

11. As loans made by a private company to its shareholders or to entities which were associates of its shareholders, the loans made by Mastergrove were subject to Div 7A of the ITAA 1936. To ensure that those loans were not treated for income tax purposes as dividends paid by Mastergrove, those loans were required to be made on terms that satisfied s 109N in Div 7A of the ITAA 1936. This required, amongst other things, that the loans be made at interest (at a rate that equalled or exceeded the benchmark interest rate for the year of income) and be for a term of no more than seven years.

12. As at 29 June 2016, the outstanding balances of the loans made by Mastergrove on terms that complied with Div 7A were as set out in the table below:

Loans made by Mastergrove

Borrower	Outstanding balance as at 29 June 2016
Mr Ierna	$4,154,805.80
IPT	$10,131,875.56
Mr Hicks	$3,987,705.93
HPT	$10,131,640.48

13. From the year ended 30 June 2012, the IFT and WHFT ceased to distribute their net incomes to Mastergrove. From the year ended 30 June 2012, the corporate beneficiary to which the net income of the IFT was distributed was a company named Ierna Beneficiary Pty Ltd and the corporate beneficiary to which the net income of the WHFT was distributed was a company named Hicks Beneficiary Pty Ltd.

14. Like Mastergrove, neither Ierna Beneficiary nor Hicks Beneficiary distributed all of their profits as dividends but rather loaned moneys to Mr Ierna and the trustee of the IPT (in the case of Ierna Beneficiary) and to Mr Hicks and the trustee of the HPT (in the case of Hicks Beneficiary). More specifically:

(a) during the years ended 30 June 2012 to 30 June 2015, Ierna Beneficiary made a series of loans to the trustee of the IPT;
(b) during the years ended 30 June 2012 to 30 June 2015, Ierna Beneficiary made a series of loans to Mr Ierna;
(c) during the years ended 30 June 2012 to 30 June 2015, Hicks Beneficiary made a series of loans to HPT; and
(d) during the years ended 30 June 2012 to 30 June 2015, Hicks Beneficiary made a series of loans to Mr Hicks.

15. As with the loans made by Mastergrove, these loans were made on terms that complied with s 109N in Div 7A of the ITAA 1936.

16. As at 29 June 2016, the outstanding balances of the loans made by each of Ierna

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Beneficiary and Hicks Beneficiary, on terms that complied with Div 7A, were as set out in the tables below:

Loans made by Ierna Beneficiary

Borrower	Outstanding balance as at 29 June 2016
Mr Ierna	$10,588,236.13
IPT	$1,097,170.95

Loans made by Hicks Beneficiary

Borrower	Outstanding balance as at 29 June 2016
Mr Hicks	$10,557,682.31
HPT	$1,224,031.19

17. Because the Div 7A loans were made on terms that required the periodical payment of interest and the repayment of principal, each of Mr Ierna, Mr Hicks, the trustee of the IPT and the trustee of the HPT required a source of funds to be able to service the Div 7A loans. In the years of income ended 30 June 2005 to 30 June 2013, Mastergrove paid dividends on the A class shares held by Mr Ierna and Mr Hicks to fund the payments of interest and principal repayments required under the Div 7A loans. The dividends paid by Mastergrove are set out in the table below:

Year of income ended 30 June	Total Dividends paid	Dividends paid per A class share
2013	$8,620,000	$4,310,000
2012	$9,200,000	$4,600,000
2011	$8,068,000	$4,034,000
2010	$7,000,000	$3,500,000
2009	$5,200,000	$2,600,000
2008	$4,740,000	$2,370,000
2007	$3,682,000	$1,841,000
2006	$3,054,000	$1,527,000
2005	$2,224,000	$1,112,000

18. The Commissioner accepted that in the year ended 30 June 2012 no Mastergrove dividends funded any repayments of the Div 7A loans made by Ierna Beneficiary or Hicks Beneficiary - hardly surprising given that no payments in respect of those loans were required in that initial year when Ierna Beneficiary and Hicks Beneficiary each became the corporate beneficiary of the IFT and WHFT.

19. The Commissioner also accepted that none of the dividends paid by Mastergrove in the year ended 30 June 2013 funded the repayment of the Div 7A loans made by Ierna Beneficiary or Hicks Beneficiary. In the 2013 income year, dividends paid by Ierna Beneficiary and Hicks Beneficiary were used to fund the repayments of principal and interest due on each of the Div 7A loans owed to Ierna Beneficiary and Hicks Beneficiary.

20. In the year ended 30 June 2014, no dividends were paid by Mastergrove, Ierna Beneficiary or Hicks Beneficiary.

21. In the year ended 30 June 2015, based on the material before the Court, Mastergrove paid dividends to each of the trustee of the WHFT and the trustee of the IFT. Those trustees then made distributions to Ierna Beneficiary and Hicks Beneficiary. The evidence does not establish that dividends from Mastergrove in the 2015 income year funded the repayments of the Div 7A loans owed to Ierna Beneficiary or Hicks Beneficiary.

22. As at 30 June 2016, Mastergrove had recorded in its accounts a retained earnings balance of $71,384,535 and had recorded in its income tax return a franking credit balance of $31,021,698. The balance sheet of Mastergrove as at 30 June 2016 disclosed cash and cash equivalents of $409 and current trade and other receivables of $47,143,090. Of that approximately $47 million ($46,749,716) was referable to pre-2009 unpaid present entitlements due to Mastergrove from the WHFT and IFT. The financial statements for the WHFT and IFT for the year ended 30 June 2016 were not before the Court. The balance sheet for each of the WHFT and IFT for the year ended 30 June 2015 disclose that the current assets of each of the WHFT and IFT were largely referable to pre-2009 unpaid present entitlements due to them from the CBT.

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These unpaid present entitlements were quarantined as a response to the Commissioner's position expressed at the time in Taxation Ruling TR 2010/3 that unpaid present entitlements due to a corporate beneficiary were themselves Div 7A loans. The financial statements for the WHFT, IFT and Mastergrove demonstrate that the source of wealth for the City Beach group was the CBT.

2014 proposal

23. In 2014, the advisors to Messrs Ierna and Hicks (Hanrick Curran) put forward a high-level proposal for either the transfer of the CBT business or the units in the CBT to a new company in consideration for an amount outstanding equal to the value of the business with that receivable then applied to discharging the Div 7A loans. The proposal was not further developed or implemented in 2014.

Summary of 2016 restructure

24. In the year ended 30 June 2016, Mr Ierna and Mr Hicks decided to undertake a restructure involving the following steps:

(1) Interposing a new company, Methuselah Holdings Pty Ltd, between unitholders in the CBT and the CBT. The interposition was implemented on 20 May 2016 by the unitholders in the CBT exchanging their units for shares in Methuselah, with the result that thereafter the sole unitholder in the CBT was Methuselah.
(2) After Methuselah became the sole unitholder in the CBT, Methuselah recording its intention to undertake a selective share capital reduction. The selective share capital reduction commenced on 23 May 2016 with the directors of Methuselah resolving to send a notice of meeting to shareholders. On 14 June 2016, the shareholders resolved that Methuselah cancel some of the shares issued to Mr Ierna and the trustee of the WHFT in consideration for the cancellation amount of $26 million payable to each of Mr Ierna and the trustee of the WHFT. Mr Ierna and the trustee of the WHFT each entered into a loan agreement (the Loan Agreements ) by which each of Mr Ierna and the trustee of the WHFT agreed to lend half of the cancellation amount to Methuselah "by way of forbearance from requiring Methuselah to pay the cancellation amount" with Methuselah having no obligation to pay interest or provide security and with the obligation to repay the loan being on demand.
(3) Each of Mr Ierna and the trustee of the WHFT entering into deeds of assignment to assign the debts owed to each of them by Methuselah under the Loan Agreements to Mastergrove, Ierna Beneficiary and Hicks Beneficiary in satisfaction of the outstanding balance of the Div 7A loans owed to each of Mastergrove, Ierna Beneficiary and Hicks Beneficiary by Mr Ierna, Mr Hicks, the IPT and the HPT.

25. The precise manner in which this discharge of debt owed by debtors who were not the assignees of the Methuselah debts was not explained - neither by the primary judge nor by the parties on appeal. In other words, the nature of the dealings between the creditors of Methuselah (Mr Ierna and the trustee of the WHFT) and the debtors of Mastergrove (Ierna Beneficiary and Hicks Beneficiary but not the trustee of the WHFT) was not explained.

26. With effect from 1 July 2016, Methuselah and CBT formed a tax consolidated group with Methuselah as the head company. It was intended that thereafter, rather than distributing the net income of the CBT through the series of family trusts, the net income of the CBT would be accumulated within Methuselah. As Methuselah and CBT would be members of the same consolidated group, no income tax consequences would arise in respect of transactions between Methuselah and the CBT.

27. On appeal and by the time of the hearing before the primary judge, it was not disputed that:

(1) The rollover in Div 615 of the Income Tax Assessment Act 1997 (Cth) ( ITAA 1997 ) applied to the exchange by the former unitholders of their units in CBT for shares in Methuselah. This had the result that the units formerly held by Mr Ierna and WHFT continued to be regarded as pre-CGT assets in the hands of Methuselah and the shares issued by Methuselah to Mr Ierna and WHFT in exchange for their units were also deemed to be pre-CGT assets. The unit formerly held by the trustee of the IFT

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(which was not a pre-CGT asset) was deemed to have been acquired on the same date and for the same cost base in the hands of Methuselah as that unit had in the hands of the trustee of the IFT.
(2) Aside from the operation of s 45B or Part IVA of the ITAA 1936:
- (a) The cancellation of the Methuselah shares pursuant to the selective share capital reduction did not give rise to a taxable capital gain because those shares were deemed to be pre-CGT assets.
- (b) The proceeds of the capital reduction (in the form of the chose in action (the debt) owed by Methuselah) were not assessable to Mr Ierna or the trustee of the WHFT as a dividend for income tax purposes.
(3) The assignment of the Methuselah debt by Mr Ierna and WHFT in consideration for the discharge of the debts owed to Mastergrove, Ierna Beneficiary and Hicks Beneficiary was effective to discharge the Div 7A loans owed by Mr Ierna, Mr Hicks, the trustee of the IPT and the trustee of the HPT.
(4) Going forward, the net income of the CBT could be distributed directly to a corporate beneficiary, Methuselah, rather than requiring distributions through a series of family trusts.

The Commissioner's determinations

28. Relevantly, the Commissioner made determinations under s 45B(3) of the ITAA 1936, to treat the capital benefits (in the form of the proceeds for the selective share capital reduction) received by Mr Ierna and the trustee of the WHFT from Methuselah as unfranked dividends paid by Methuselah to Mr Ierna and the trustee of the WHFT.

29. In the alternative, relevantly, the Commissioner made determinations under s 177F of Part IVA of the ITAA 1936 to include a dividend and franking credit gross up in the assessable income of each of Mr Ierna and Mr Hicks on the basis that in the absence of the scheme, each of Mr Ierna and Mr Hicks might reasonably be expected to have received a franked dividend from Mastergrove in an amount equivalent to the amounts owed under the Div 7A loans made by each of Mastergrove, Ierna Beneficiary and Hicks Beneficiary.

30. Relevantly each of Mr Ierna, Mr Hicks and Hicks Beneficiary (as the beneficiary presently entitled to and therefore assessable on the entirety of the taxable income of the WHFT for the year ended 30 June 2016) objected to amended assessments issued to them, which were said by the Commissioner to be supported by the s 45B determination (in respect of Mr Ierna and Hicks Beneficiary) and / or the s 177F determination (in respect of Mr Ierna and Mr Hicks). Following the receipt of objection decisions, each of Mr Ierna, Mr Hicks and Hicks Beneficiary appealed to the Court.

Conclusions of the primary judge

31. The primary judge concluded that neither s 45B nor Part IVA applied and allowed the taxpayers' appeals.

32. The Commissioner now appeals the judgment of the primary judge to this Court.

GROUNDS OF APPEAL

Section 45B grounds of appeal

33. The Commissioner's original notices of appeal in so far as concerned the application of s 45B raised a single ground of appeal with 10 sub-grounds.

34. Distilled to their essence, by the grounds of appeal the Commissioner contended that the primary judge erred in failing to find that s 45B of the ITAA 1936 applied and instead the primary judge ought to have found that:

(a) there was a scheme under which Mr Ierna and Hicks Beneficiary obtained a tax benefit as defined in s 45B(9) (s 45B appeal ground (a));
(b) having regard to the relevant circumstances provided for in s 45B(8), 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 Mr Ierna and Hicks Beneficiary to obtain a tax benefit (as defined in s 45B(9)); and
(c) the Commissioner was consequently entitled to make a determination under s 45C in relation to the each of the capital benefits (each in the sum of $26 million) paid to each Mr Ierna and the trustee of the

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WHFT with the effect that those capital benefits were taken to be unfranked dividends (s 45B appeal grounds (i) and (j)).

35. The main errors of the primary judge were said to be:

(a) a failure to consider the circumstances identified in s 45B(8), other than s 45B(8)(a), (b) and (d);
(b) an incorrect approach to his consideration of s 45B(8)(a) (s 45B appeal grounds (b), (d), (e) (f) and (g)); and
(c) in his consideration of s 45B8(b), failing to find that Mastergrove had declared dividends in each of the 2005 to 2013 income years (s 45B appeal ground (h)).

36. Prior to hearing the Commissioner applied for leave to amend the s 45B grounds to make specific reference to the following errors said to be made by the primary judge in his consideration of s 45B(8)(d):

(a) a failure to consider the history of the flow of funds through the City Beach group, including a pattern of distributions from the CBT to Mastergrove or other corporate beneficiaries (amended ground (h)(ii)); and
(b) a failure to consider the fact that there was no history or pattern of either Methuselah or any associate of Methuselah making returns of capital (amended ground (h)(iii)).

37. Although the respondents objected to the grant of leave, they did not contend that the failure to raise those grounds in the original notice of appeal gave rise to any prejudice and addressed the substance of those grounds in their submissions. Given the limited nature of the amended grounds (essentially being by way of clarification and elaboration), the fact that notice of the proposed amendments had been provided to the respondents some months before the hearing and the explanation of the content of those grounds in the written submissions filed by the Commissioner in advance of the hearing, at the commencement of the hearing of the appeal, leave was granted to the Commissioner to file and rely upon the amended s 45B grounds.

Part IVA grounds of appeal

38. The Commissioner's original notices of appeal in so far as concerned the application of Part IVA of the ITAA 1936 raised a single ground of appeal with 17 sub-grounds.

39. Distilled to their essence, by the grounds of appeal the Commissioner contended that the primary judge erred in failing to find that Part IVA of the ITAA 1936 applied and instead the primary judge ought to have found that:

(a) Messrs Ierna and Hicks each obtained, but for the operation of Part IVA, a tax benefit in connection with a scheme in the 2016 income year by reason of the non-inclusion of amounts in their assessable income which amounts might have otherwise been reasonably expected to have been included in their assessable income as franked dividends paid by Mastergrove: Part IVA appeal grounds (a) to (i). More particularly, the errors of the primary judge were said to be:
- (i) The primary judge ought to have found that the Commissioner's alternate postulate was reasonable and would have achieved the same substantive economic effects as the scheme.
- (ii) The primary judge ought to have found that the taxpayers' alternate postulate was not reasonable and the Commissioner's alternate postulate was reasonable.
(b) one of the persons who entered into or carried out the scheme or any part of the scheme did so for the dominant purpose of enabling Messrs Ierna and Hicks to each obtain a tax benefit in connection with the scheme, having regard to the matters in s 177D(2): Part IVA appeal grounds (m)-(q). More particularly, the errors of the primary judge were said to be:
- (i) collapsing the s 177D(2) factors in to a global assessment of purpose rather than having regard to each of those factors; and
- (ii) in failing to find that there had been an adverse change in the financial position of each of the creditor companies as a result of the scheme because the Div 7A loans were replaced by receivables from Methuselah which were not interest bearing.

40.

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Prior to hearing the Commissioner applied for leave to amend the Part IVA appeal grounds to make specific reference to the primary judge's failure to properly apply s 177CB(4) in his consideration of the reasonableness of each of the Commissioner's and taxpayers' alternate postulate. The respondent taxpayers did not object to the grant of leave in respect of these amendments. At the commencement of the hearing of the appeal, leave was granted to the Commissioner to file and rely upon the amended Part IVA grounds.

THE LEGISLATIVE FRAMEWORK: SECTION 45B

41. Section 45B provides:

Purpose of section

(1) The purpose of this section is to ensure that relevant amounts are treated as dividends for taxation purposes if:

(a) components of a demerger allocation as between capital and profit do not reflect the circumstances of a demerger; or

(b) certain payments, allocations and distributions are made in substitution for dividends.

Application of section

(2) This section applies if:

(a) there is a scheme under which a person is provided with a demerger benefit or a capital benefit by a company; and

(b) under the scheme, a taxpayer (the relevant taxpayer ), who may or may not be the person provided with the demerger benefit or the capital benefit, obtains a tax benefit; and

(c) 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 a taxpayer (the relevant taxpayer ) to obtain a tax benefit.

Commissioner to determine that section 45BA or 45C applies

(3) The Commissioner may make, in writing, a determination that:

(a) section 45BA applies in relation to the whole, or a part, of the demerger benefit; or

(b) section 45C applies in relation to the whole, or a part, of the capital benefit.
A determination does not form part of an assessment.

…

Meaning of provided with a capital benefit

(5) A reference to a person being provided with a capital benefit is a reference to any of the following:

(a) the provision of ownership interests in a company to the person;

(b) the distribution to the person of share capital or share premium;

(c) something that is done in relation to an ownership interest that has the effect of increasing the value of an ownership interest (which may or may not be the same interest) that is held by the person.

(6) However, a person is not provided with a capital benefit to the extent that the provision of interests, the distribution or the thing done referred to in subsection (5) involves the person receiving a demerger dividend.

(7) For the purposes of this section, a non-share distribution to an equity holder is taken to be the distribution to the equity holder of share capital to the extent to which it is a non-share capital return.

Meaning of relevant circumstances of scheme

(8) The relevant circumstances of a scheme include the following:

(a) the extent to which the demerger benefit or capital benefit is attributable to capital or the extent to which the demerger benefit or capital benefit is attributable to profits (realised and unrealised) of the company or of an associate (within the meaning in section 318) of the company;

(b) the pattern of distributions of dividends, bonus shares and returns of capital or share premium by the company or by an associate (within the meaning in section 318) of the company;

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(c) whether the relevant taxpayer has capital losses that, apart from the scheme, would be unutilised (within the meaning of the Income Tax Assessment Act 1997) at the end of the relevant year of income;

(d) whether some or all of the ownership interests in the company or in an associate (within the meaning in section 318) of the company held by the relevant taxpayer were acquired, or are taken to have been acquired, by the relevant taxpayer before 20 September 1985;

(e) whether the relevant taxpayer is a non-resident;

(f) whether the cost base (for the purposes of the Income Tax Assessment Act 1997) of the relevant ownership interest is not substantially less than the value of the applicable demerger benefit or capital benefit;

(h) if the scheme involves the distribution of share capital or share premium-whether the interest held by the relevant taxpayer after the distribution is the same as the interest would have been if an equivalent dividend had been paid instead of the distribution of share capital or share premium;

(i) if the scheme involves the provision of ownership interests and the later disposal of those interests, or an increase in the value of ownership interests and the later disposal of those interests:

(i) the period for which the ownership interests are held by the holder of the interests; and

(ii) when the arrangement for the disposal of the ownership interests was entered into;

(j) for a demerger only:

(i) whether the profits of the demerging entity and demerged entity are attributable to transactions between the entity and an associate (within the meaning in section 318) of the entity; and

(ii) whether the assets of the demerging entity and demerged entity were acquired under transactions between the entity and an associate (within the meaning in section 318) of the entity;

(k) any of the matters referred to in subsection 177D(2).

Meaning of obtaining a tax benefit

(9) A relevant taxpayer obtains a tax benefit if an amount of tax payable, or any other amount payable under this Act, by the relevant taxpayer would, apart from this section, be less than the amount that would have been payable, or would be payable at a later time than it would have been payable, if the demerger benefit had been an assessable dividend or the capital benefit had been an assessable dividend.

(10) In this section:
scheme has the meaning given by subsection 995-1(1) of the Income Tax Assessment Act 1997.

42. The present case involves a capital benefit and is not concerned with a demerger benefit.

43. The section was enacted by the Taxation Laws Amendment (Company Law Review) Act 1998 (Cth) which amended the ITAA 1936 as a result of changes made to the then Corporations Law. The changes to the Corporations Law had, amongst other things, made it easier for companies to undertake returns of capital. Because returns of capital were not assessable income (unlike dividends), there was a concern that companies would more readily return capital than pay dividends to the detriment of the Commonwealth revenue.

44. One of the arrangements that the amendments to the ITAA 1936 sought to address was described in the Explanatory Memorandum to the Taxation Laws Amendment (Company Law Review) Bill 1998 (Cth) as "dividend substitution arrangements". The Explanatory Memorandum set out the following by way of overview:

1.1 As a result of changes to the Corporations Law, the Taxation Laws Amendment (Company Law Review) Bill 1998 (the Bill) will amend the Income Tax Assessment Act 1936 (the Act) and associated tax laws to prevent dividend

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substitution and capital streaming arrangements, and make various consequential amendments to the tax laws.

1.2 The amendments will introduce an anti-avoidance rule which applies where:

• a capital benefit is provided under an arrangement where a company or a person has a purpose, other than an incidental purpose, of conferring or obtaining a tax advantage in connection with the capital benefit as compared to the payment of a dividend having regard to certain listed factors; or

• capital benefits are streamed to shareholders who gain a tax benefit from the receipt of capital while dividends are paid to those who would not gain such a benefit, or shares are streamed to shareholders in lieu of unfranked dividends.

1.3 Where the anti-avoidance provision applies the capital benefit will be deemed to be an unfranked and unrebatable dividend in the hands of the taxpayer.

45. Section 45B was described in the Explanatory Memorandum as "an anti-avoidance provision" and contains a purpose subsection which provides that the provisions is to "ensure that certain payments that are paid in substitution for dividends are treated as dividends for taxation purposes": s 45B(1).

46. For s 45B to apply:

(1) There must be a scheme under which a person is provided with a capital benefit by a company.
(2) Under the scheme, a taxpayer (who may or may not be the recipient of the capital benefit) obtains a tax benefit.
(3) Having regard to the relevant circumstances of the scheme, it would be concluded that at least one of the persons who entered into or carried out the scheme (or any part of the scheme) did so for a purpose, other than an incidental purpose, of enabling a taxpayer to obtain a tax benefit.

THE PRIMARY JUDGE'S CONCLUSIONS ON SECTION 45B

47. The primary judge's consideration of s 45B is set out at PJ [177]-[211].

48. The primary judge records (at PJ [177]) the Commissioner's position that the planning and implementation of Methuselah's selective share capital reduction was a "scheme" within the meaning of s 45B(10) of the ITAA 1936 (which picks up the meaning given by s 995-1 of the ITAA 1997). Although making no express finding on the issue, the reasoning of the primary judge proceeded on the basis that the selective share capital reduction was a "scheme" for the purposes of s 45B. The respondent taxpayers on appeal did not seek to contend that there was no scheme.

49. At PJ [178](a) and [179], the primary judge records the Commissioner's contention that under the scheme, Mr Ierna and the WHFT were each provided with a "capital benefit" within the meaning of s 45B(5) in the form of the capital returned to each of them. Although making no express finding on the issue, the reasoning of the primary judge proceeded on the basis that Mr Ierna and the WHFT were provided with a capital benefit under the scheme. The respondent taxpayers on appeal did not seek to contend otherwise.

50. The primary judge's reasons do not record any finding as to whether the relevant taxpayers (Mr Ierna and Hicks Beneficiary (as the beneficiary made presently entitled to the income of the WHFT in the 2016 income year)) "obtained a tax benefit" within s 45B(9). It was not contested in the appeal that each of Mr Ierna and Hicks Beneficiary would have been liable to pay more tax had the capital distribution been paid as a dividend.

51. The primary judge's reasons focussed on whether having regard to the relevant circumstances of the scheme, it would be concluded that a person who entered into or carried out the scheme did so for a purpose of enabling Mr Ierna and Hicks Beneficiary to obtain a tax benefit. In particular, the primary judge's consideration centred around the first factor in s 45B(8)(a).

52. The Commissioner had contended that the capital returned by Methuselah was attributable to profits of the CBT and therefore attributable to profits of an "associate" (as that term is defined in s 318 of the ITAA 1936).

53. The primary judge accepted that the trustee of the CBT (Fewstone) was an associate

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of Methuselah (PJ [182]) but doubted whether the profits of the CBT were profits of an associate because a trust, not being a legal person, could not be said to have associates and the trustee (Fewstone) had no profits of its own. The primary judge considered that s 318 drew a distinction between a trustee of a trust and the trust (see s 318(2)(c)). The primary judge nonetheless proceeded on the basis that the profits of the CBT were profits of an "associate": PJ [185].

54. The primary judge concluded that the capital returned by Methuselah was not "attributable to" profits of Methuselah or an associate.

55. The primary judge recorded that it was common ground that "attributable" as used in s 45B(8)(a) imports a causal connection between the capital benefit and the profits specified: PJ [188]. Reference was made to the decision of the High Court in
Commissioner of Taxation v Sun Alliance Investments Pty Limited (in liq) [2005] HCA 70; (2005) 225 CLR 488 at [79]-[81] (Gleeson CJ, Gummow, Kirby, Callinan and Heydon JJ) where, in the context of s 160ZK(5) of the ITAA 1936, the High Court held that it was the concept of causation rather than source with which s 160ZK(5) was concerned when that section spoke of a distribution that "could reasonably be taken to be attributable to profits that were derived". As s 45B(8)(a) did not refer to "could reasonably be taken to be", it was necessary that the profits actually be a contributory cause: PJ [191].

56. The primary judge accepted that "profits" was used in s 45B(8)(a) in accordance with its ordinary meaning: PJ [192].

57. The primary judge considered that having regard to its context (including its history), the purpose of s 45B was to ensure that companies do not "distribute what are effectively profits to shareholders as preferentially-taxed capital rather than dividend[s]": PJ [197]. A dividend as defined in s 6(1) of the ITAA 1936 expressly excludes amounts "debited against an amount standing to the credit of the share capital account of the company": PJ [198].

58. The primary judge concluded that the capital benefit received by Mr Ierna and the WHFT was attributable to Methuselah's share capital account as that was the company's only account: PJ [199]. Although the value of the units in the CBT had increased over time from its inception in 1985, Methuselah as a newly formed company only had share capital and did not have any profits: PJ [205] and [209].

59. The primary judge considered that, as a newly formed company, Methuselah had no pattern of distributions of dividends and returns of capital: PJ [204]. The primary judge found that none of its associates had a pattern of distributions of dividends and returns of capital. His Honour found (at PJ [204]):

Even if one looks to pre-existing entities within the City Beach group of companies, there is no "pattern" of dividend payments which, objectively, would support a conclusion that the $52 million was a substitute for a payment from profits. In the 2014 and 2015 income years, the evidence is that no dividends were declared by any of the companies in that group. In each of the 2010 to 2013 income years, dividends were declared by Mastergrove. But the only conclusion open in respect of these is that they were declared to meet the minimum required interest payments on the Division 7A loans, which then totalled $32,888,000.29. A corollary is that they were not paid to fund the repayment of the loans of Hicks Beneficiary or Ierna Beneficiary.

60. This finding was challenged on appeal. It is considered further below.

61. The primary judge found that Methuselah's share capital account was "genuine" and the selective share capital reduction was not a sham: PJ [205] and [207].

62. The primary judge considered (at PJ [208]) that "[o]bjectively, the two stages in the selective share capital reduction were directed to the ends of ensuring that":

(a) Methuselah, as a newly formed company, had what Messrs Ierna and Hicks, acting on and accepting on advice from Hanrick Curran, regarded as an appropriate balance of debt and equity;

(b) acquiring shares worth $23 million ($75 million, less $52 million);

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(c) taking advantage of the available rollover relief under Division 615-A; and

(d) viewing events more broadly, returning capital to Mr Ierna and Corkdon, as trustee of the WHFT, respectively, for extinguishing Division 7A loans.

63. The primary judge concluded at PJ [209] that:

It is clear to the point of demonstration that Methuselah had no profits, only its share capital account. On no objective view could the return of capital from that account to its shareholders be regarded as a substitute for the payment of a "dividend", as defined, to them. The payment to the shareholders was wholly "attributable to" (actually sourced in or caused by) Methuselah's share capital account. The method chosen had nothing to do with dividend substitution but was explicable by a purpose of taking advantage of Division 615-A rollover relief. Indeed, that was the distinguishing feature of what occurred in 2016 compared with what Hanrick Curran had proposed to Messrs Ierna and Hicks in 2014.

64. The primary judge concluded that s 45B had no application: PJ [211].

THE PARTIES' CONTENTIONS ON SECTION 45B

Commissioner's contentions

65. On appeal, the Commissioner reiterated his contentions that:

(a) the planning and implementation of the Methuselah selective share capital reduction was a "scheme" within the meaning of s 45B(10);
(b) Mr Ierna and the trustee of the WHFT were each provided with a capital benefit within s 45B(5) under the scheme,
and therefore s 45B(2)(a) was satisfied.

66. The Commissioner contended "[i]t follows that s 45B(2)(b) is satisfied as each of Mr Ierna and [Hicks Beneficiary] obtained a 'tax benefit' under s 45B(9)." In support of this contention, the Commissioner submitted that s 45B(1)(b) requires a comparison between the tax payable on a postulated assessable dividend and the tax paid as a result of the distribution of capital. The definition of "tax benefit" does not require the postulated dividend to be based on a reasonable expectation.

67. The Commissioner submitted that the issue for determination was whether s 45B(2)(c) was satisfied; in particular, whether having regard to the "relevant circumstances", the person or one of the persons, who entered into or carried out the scheme (or any part of that scheme) did so for a purpose (other than an incidental purpose) of enabling Mr Ierna and Hicks Beneficiary, respectively, to obtain a tax benefit. The Commissioner contended that the primary judge erred in concluding that s 45B(2)(c) was not satisfied.

68. The Commissioner contended that the primary judge erred in failing to have regard to all of the relevant circumstances specified in s 45B(8). The statute required that each of those matters be considered. The Commissioner further contended that as s 45B was an anti-avoidance provision, the "relevant circumstances" should not be interpreted narrowly. To do so would, it was said, defeat the purpose of the section.

69. In relation to s 45B(8)(a), the Commissioner contended that the primary judge failed to "substantively engage with" the question of whether the recorded increase in the net assets of the CBT were "profits (realised and unrealised) … of an associate" to which the capital benefit was attributable. The Commissioner contended that:

(1) The primary judge ought to have found that the recorded "increase in the value of the assets" held by the trustee of the CBT were the "profits of an associate" of Methuselah for the purposes of s 45B(8)(a), having regard to the ordinary meaning of profits.
(2) The primary judge ought to have found that the capital returned by Methuselah was attributable to those profits, rather than erroneously focussing on the fact that the balance sheet of Methuselah itself, as a newly incorporated company, did not disclose any profits. Section 45B did not require that the company that paid the capital benefit also had profits available for distribution as a dividend.
(3) The word "attributable" in s 45B(8)(a) did not require the profits to be the source of

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the distribution. A capital benefit, by definition, will not be sourced in the profits of the company making the capital distribution. The word "attributable" imported a causal requirement that was satisfied in the present case because Methuselah's share capital account was a reflection of the unrealised profits of the CBT.
(4) The selective share capital reduction steps had the effect of realising the unrealised profits of the trustee of the CBT.

70. In relation to s 45B(8)(b), the Commissioner contended that:

(1) The primary judge ought to have found that the circumstance in s 45B(8)(b) supported a conclusion that the capital reduction scheme "was for a purpose of obtaining a tax benefit".
(2) The primary judge erroneously focussed only on the dividends paid by Mastergrove in the 2010 to 2013 years of income. The relevance of this error was not explained nor is it apparent.
(3) In addressing the pattern of distributions of prior year dividends, the primary judge ought to have considered "the flow of funds throughout the group" including "the pattern of distributions from the CBT" which "were then distributed to Mastergrove … or other corporate beneficiaries". This was said to be demonstrative of a "relationship between the profits of the CBT and consequential dividends paid by the unitholders' associated entity at the direction [of] and for the benefit of Messrs Ierna and Hicks."
(4) The primary judge ought to have had regard to the fact that there was no pattern or history of capital returns by Methuselah or any associate.

71. In relation to s 45B(8)(d), the selective share capital reduction was only undertaken in respect of shares which were deemed (as a result of the application of the rollover in Div 615) to have been acquired prior to 20 September 1985 and were therefore pre-CGT assets. The shares held by the IFT were post-CGT shares and were not the subject of the selective share capital reduction. The Commissioner contended that in structuring the selective share capital reduction in this way "Messrs Ierna and Hicks, directly or indirectly enjoyed access to a significant part of the increase in value of the CBT business now reflected in the Methuselah shares tax free by way of a return of capital from Methuselah".

72. In relation to s 45B(8)(h), the Commissioner contended that the selective share capital reduction did not effect any substantive change to the interests held by Messrs Ierna and Hicks, as Mr Ierna continued to have an effective 50% interest in Methuselah, once account was taken of the interest held by the IFT.

73. In relation to s 45B(8)(k), the Commissioner contended that certain of the matters referred to in s 177D(2) of the ITAA 1936 in relation to the Part IVA issue "apply with equal force" to the scheme under s 45B". In particular:

(1) The manner in which the relevant scheme was entered into or carried out was said to have been based on advice that focussed on the benefit of the transaction being to extinguish the existing Div 7A loans with "no adverse tax impacts".
(2) Although the form of the relevant scheme involved a selective share capital reduction by Methuselah, in substance the scheme involved effectively capitalising the profits of the CBT to allow those profits to be accessed without income tax being payable.
(3) The share capital reduction was carried out on 29 June 2016, only weeks after the shares in Methuselah were issued on 20 May 2016 and only one day before the end of the 2016 income year when yearly repayments would otherwise have fallen due on the Div 7A loans.
(4) Each of the Div 7A loans were discharged in full and replaced with assigned rights to a loan from Methuselah with no interest payable.
(5) Each of the entities involved were closely related or connected.

74. The Commissioner contended that, having regard to all the relevant circumstances, the primary judge ought to have concluded that at least one of the persons who entered into or

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carried out the scheme did so for more than an incidental purpose of enabling Mr Ierna and Hicks Beneficiary to obtain a tax benefit.

Respondents' contentions

75. The respondents submitted that the primary judge's conclusion concerning s 45B was correct.

76. The respondents submitted that the Commissioner's submissions failed to have regard to the express statutory purpose of s 45B which is to relevantly treat amounts as dividends for taxation purposes if a payment of capital is made in substitution for a dividend: s 45B(1)(b).

77. The respondents sought to support those conclusions on the following grounds additional to those relied upon by the primary judge.

78. First, the primary judge ought to have found that there was no tax benefit under s 45B(9) because there was no possibility of Methuselah or an associate paying a dividend of $52 million.

79. Second, in addition to the s 45B(8) factors addressed by the primary judge, the following factors also point against "the requisite tax avoidance purpose":

(1) The relevant taxpayers did not have capital losses (s 45B(8)(c)).
(2) The relevant taxpayers were residents of Australia (s 45B(8)(e)).
(3) Section 45B(8)(f) has no relevance as the cancelled shares were pre-CGT.
(4) After the return of capital, Mr Ierna had a proportionately lesser interest in Methuselah than before the return of capital. This is an outcome that is different from that which would have followed had a dividend been paid (assuming a dividend could be paid): s 45B(8)(h).
(5) Sections 45B(8)(i) and (j) are not relevant.
(6) Given that there were no profits that could have funded an assessable dividend, none of the factors in s 177D point to a purpose of substituting a dividend with a capital payment. The factors do not rationally support a conclusion that a purpose was to provide a capital benefit in substitution for an assessable dividend. The substance of the scheme was the same as the former unitholders (now shareholders of Methuselah) selling their pre-CGT units to a new company that funded the acquisition of those units with debt and equity.

80. Third, in considering s 45B(8)(a), the primary judge ought to have:

(a) rejected the Commissioner's contention that the meaning of profits extends to an increase in the assets of the CBT;
(b) found that there were no profits (realised or unrealised) that were "capable of supporting a dividend";
(c) found that there was no recorded increase in the value of the assets held by the CBT immediately before and after the transfer of units to Methuselah; and
(d) therefore concluded that the value of the capital returned was not attributable to profits.

81. The respondents contended that the primary judge was correct to conclude (at PJ [191]) that the capital return was not "attributable to profits" because s 45B(8)(a) requires the existence of profits to be a contributory cause of the decision to return capital.

82. Although raising in a notice of contention that the primary judge ought to have found that the CBT was not an associate of Methuselah, as defined in s 318 of the ITAA 1936, in the course of hearing the respondents did not press that contention. The question is not whether a trust (being no more than a description of a relationship and not a legal person) is an "associate". It was accepted that the profits of the CBT were profits vested in the trustee of the CBT, in its capacity as trustee. The trustee of the CBT, in its capacity as trustee, was an associate of Methuselah and therefore the profits of the CBT, as vested in the trustee of the CBT, were profits of an associate.

CONSIDERATION OF SECTION 45B

Purpose of s 45B

83. Section 45B appears in Div 2 Sub-div D of the ITAA 1936 which deals with the assessability of dividends. By the terms of s 45B(1), it is directed to two particular forms of mischief:

(a) ensuring that amounts are treated as assessable dividends where the components

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of a demerger allocation as between capital and profit do not reflect the circumstances of a demerger; or
(b) ensuring that amounts are treated as assessable dividends if a distribution is made in substitution for dividends.

84. The Commissioner submitted that the operation of s 45B was "not controlled by" the objects set out in s 45(1)(b).

85. The Commissioner's contention is not accepted. Section 45B is to be read as a whole. In that regard, the following observations are made.

86. First, the express terms of s 45B(1) which articulate the purpose of the section, not in the form of a guidance note or a heading but as an enacted substantive provision of the legislation. Subsection 45B(1) is as much a part of the statutory text as the other subsections, including s 45B(2). It is required to be given effect and informs the construction of the other subsections of s 45B.

87. Second, the definition of tax benefit requires a comparison between the amount of tax in fact payable by the relevant taxpayer and the amount of tax that would have been payable by the relevant taxpayer if the capital benefit had been a dividend. The concept of tax benefit is framed around the comparative tax outcomes between the provision of a capital benefit and the payment of an assessable dividend.

88. Third, the specific relevant circumstances by which a purpose of a party is to be evaluated are directed at drawing a conclusion as to purpose based on whether a capital benefit has been provided instead of, or in substitution for, a dividend.

89. The first relevant circumstance looks to whether the distribution of capital is attributable to profits. If the distribution is so attributable, it would support a conclusion that the distribution of capital was made in substitution for a dividend. The explanation given in the Explanatory Memorandum of the first factor is in the following terms (emphasis added):

• the extent to which the distribution is attributable to profits of the company or an associate. For example, if a company makes a profit from a transaction, for example the disposal of business assets, and then returns capital to shareholders equal to the amount of the profit, that would suggest that the distribution of capital is a substituted dividend. On the other hand, if a company disposed of a substantial part of its business at a profit and distributed an amount of share capital which could reasonably be regarded as the share capital invested in that part of the business, the distribution of capital would not be seen as a substituted dividend because no amount would be attributable to profits;

90. The second relevant circumstance looks to the pattern of distributions of dividends and returns of capital. The explanation given for the second factor in the Explanatory Memorandum is (emphasis added):

the pattern of distributions by the company. For example, if ordinarily dividends of a certain amount are paid, but then the company instead makes proportionate returns of capital;

91. The existence and nature of the pattern of distributions of dividends and capital returns are to be considered in forming a conclusion as to whether the distribution of capital was made in substitution for a dividend.

92. The third to sixth relevant circumstances look to the tax attributes of the taxpayer to evaluate whether the taxpayer obtains a more favourable tax result from receiving capital benefits rather than dividends.

93. The seventh relevant circumstance expressly refers to a consideration of whether the ownership interest of the relevant taxpayer after the distribution of capital is the same as the interest would have been if an equivalent dividend had been paid instead of the distribution of capital: s 45B(8)(h).

94. It follows that s 45B is an anti-avoidance provision directed at a particular kind of mischief. The section needs to be construed in light of the particular mischief to which it is directed. To construe and apply the relevant circumstances accordingly does not defeat the intended operation of s 45B.

95. As explained above, there are three criteria for the application of s 45B relevant in the present case.

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Scheme

96. The first is that there is a "scheme" under which a person is "provided with … a capital benefit" (as defined in s 45B(5)) by a company: s 45B(2)(a). In this case, there was an arrangement (identified by the Commissioner as the selective share capital reduction) under which a distribution of capital was made by a company (Methuselah) to Mr Ierna and the trustee of the WHFT within s 45B(5)(b). The criterion in s 45(2)(a) is satisfied.

Tax benefit

97. The second is that under the scheme, a taxpayer (the relevant taxpayer) obtains a tax benefit. This looks to the tax effect of the scheme for the relevant taxpayer. In this case, the Commissioner identified (and assessed) Mr Ierna and Hicks Beneficiary as the relevant taxpayers.

98. Section 45B(9) defines the circumstances in which a relevant taxpayer obtains a tax benefit. Relevant to this case, it does so by reference to a comparison between the amount of tax in fact payable by the relevant taxpayer (absent the operation of s 45B itself) and the amounts of tax that would have been payable by that relevant taxpayer based on a particular alternate hypothesis - namely that the capital benefit had been an assessable dividend.

99. The respondent taxpayers sought to read into s 45B(9) a requirement that the alternate hypothesis for which it provides (the provision of an assessable dividend) be in fact possible or reasonably expected.

100. The respondents' submission is not accepted. There is nothing in the text of s 45B(9) which requires the alternate hypothesis of the payment of a dividend to a hypothesis that might reasonably be expected to have eventuated or to be something that would have occurred in the absence of the scheme.

101. By virtue of s 45B(9), relevantly, Mr Ierna obtains a tax benefit if an amount of tax payable by him would, apart from s 45B, be less than the amount that would have been payable if the capital benefit had been an assessable dividend. If the distribution of capital by Methuselah had been an assessable dividend, Mr Ierna would have had to pay more tax. Methuselah not having any franking credits, the assessable dividend would have been unfranked and in any event, Mr Ierna would have been liable to "top up tax" (being the difference between the value of the franking credits on a franked dividend and the top marginal tax rate payable by Mr Ierna as an individual).

102. By virtue of s 45B(9), relevantly, Hicks Beneficiary obtains a tax benefit if an amount of tax payable by it would, apart from s 45B, be less than the amount that would have been payable if the capital benefit had been an assessable dividend. If the distribution of capital by Methuselah had been an assessable dividend, Hicks Beneficiary would have had to pay more tax. Methuselah, not having any franking credits, the assessable dividend would have been unfranked.

Purpose of a party

103. The third criterion is that, having regard to the relevant circumstances of the scheme (identified in inclusive terms in s 45B(8)), it would be concluded that a person who entered into or carried out the scheme did so for a purpose of enabling the relevant taxpayer to obtain a tax benefit.

104. The "relevant circumstances" are not a checklist of factors which invite a "yes" or "no" answer, with the total of "yes" to be compared to a total of "no". They are factors directed to an evaluative exercise requiring the drawing of a conclusion as to a purpose of a party. That conclusion is to be drawn in light of the mischief to which the section is directed. The relevant circumstances are to be construed and applied in light of and to give effect to the statutory purpose of the section as identified in s 45B(1). The relevant circumstances are to be considered and weighted according to the extent to which they are probative of the conclusion that s 45B(2) requires to be drawn.

105. A conclusion is required to be drawn as to whether a participant party to the scheme entered into or carried out the scheme for a purpose of enabling the relevant taxpayer to obtain a tax benefit. That purpose element is not satisfied merely by showing that taxpayer was provided with a capital benefit. Nor is it satisfied by the mere fact that the taxpayer obtained a tax benefit. There must be a nexus between the scheme and putting the taxpayer in

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a position to obtain a tax benefit that they would otherwise have not been able to obtain. That is, it would be concluded that it was a purpose of a party to use the scheme as a means of enabling a taxpayer to obtain a tax benefit.

106. Having regard to the definition of tax benefit, the requisite purpose is a purpose of enabling a relevant taxpayer to pay less tax than the amount that would have been payable by the relevant taxpayer if the capital benefit had been an assessable dividend. If the relevant taxpayer would never have been subject to tax in respect of a dividend (directly as a recipient of the dividend or indirectly as a beneficiary of a trust presently entitled to the income of that trust) outside of the scheme, it is difficult to comprehend how a party to the scheme might be said to have carried out the scheme in order to enable the relevant taxpayer to obtain a tax benefit, as defined.

Attributable to profits - s 45B(8)(a)

107. The Commissioner's contentions in relation to the circumstance identified in s 45B(8)(a) suffered from a lack of precision and coherence. Section 45B(8)(a) directs attention to the extent to which a capital distribution is "attributable to" capital or "profits".

Profits

108. The Commissioner's contention that the primary judge ought to have found that the recorded "increase in the value of the assets" held by the trustee of the CBT were the "profits of an associate" of Methuselah for the purposes of s 45B(8)(a) confuses the concept of net assets and the concept of assets. An increase in assets as measured between two points in time is not a profit if the increase in assets is matched by an increase in liabilities (such as a loan) or an increase in the amount of capital subscribed. As Hill J observed in
CPH Property Pty Ltd v Commissioner of Taxation [1998] FCA 1276; (1998) 88 FCR 21 at 52, paid up capital is not capable of being a profit.

109. An increase in the value of net assets that is not referable to an increase in the amount of capital subscribed may however be a profit. An increase in the value of assets is a profit where the increase is an increase over and above the cost of acquisition of the asset. As Gibbs CJ said in
Commissioner of Taxation v Slater Holdings Pty Ltd [1984] HCA 78; (1984) 156 CLR 447 at 460, a "guide" to the meaning of profits was provided by Fletcher Moulton LJ in
Re The Spanish Prospecting Company Limited [1911] 1 Ch 92 at 98-99:

"Profits" implies a comparison between the state of a business at two specific dates usually separated by an interval of a year. The fundamental meaning is the amount of gain made by the business during the year. This can only be ascertained by a comparison of the assets of the business at the two dates.

…

We start therefore with this fundamental definition of profits, namely, if the total assets of the business at the two dates be compared, the increase which they shew at the later date as compared with the earlier date (due allowance of course being made for any capital introduced into or taken out of the business in the meanwhile) represents in strictness the profits of the business during the period in question.

110. As his Lordship also made clear (at 98), it is the increase in the value of net assets and not an enumeration of assets that is important. In other words, a profit is not shown by an increase in the number of items that are identified as assets in the accounts between two points in time.

111. Furthermore, the legal concept of profits is not limited to amounts recognised as profits in the books of account: Re Spanish Prospecting at 99. For example, the amounts recognised in accounts are subject to rules which may mean that unrealised increases in the market value of assets is not recognised arising "from the sound business view that it is better to underrate than to overrate your profits, since it is impossible for you to foresee all the risks to which a business may in future be exposed": Re Spanish Prospecting at 100. The value of assets that come to be owned by a company which it did not previously possess whether recognised in the accounts or not, may represent profits: Re Spanish Prospecting at 100-101.

112. The definition of profits articulated by Fletcher Moulton LJ is not of universal application but is a starting point: Slater

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Holdings at 460. In Re Spanish Prospecting, the word "profits" was considered in the context of an argument that referred to "profits (if any) arising from the business of the company". The limiting words "from the business" do not appear in s 45B(8)(a). Not all the observations of Fletcher Moulton LJ necessarily apply to the present context. The fundamental meaning of profits is the amount of gain made: see too
Commissioner of Income Tax (Qld) v Bank of New South Wales [1913] HCA 38; (1913) 16 CLR 504 at 519 (Isaacs, Gavan Duffy and Rich JJ). Profit refers to a comparison between the state of a business (or affairs of an entity) at the beginning and end of a financial period:
QBE Insurance Group Ltd v Australian Securities Commission [1992] FCA 697;
(1992) 38 FCR 270 at 285 (Lockhart J). In the context of a distribution, profits can refer to trading profits or an increase in the value of assets over the acquisition cost. In the present context, s 45B(8)(a) refers to "profits (realised and unrealised)". It follows that, in the present context, a gain may be made even if the asset has not been realised.

113. The Commissioner submitted that the primary judge erred in focussing too narrowly on Methuselah's balance sheet. As a newly incorporated company, Methuselah itself only had share capital. However, s 45B(8)(a) looks also to the profits of an associate and the primary judge failed to properly consider the position of CBT as an associate of Methuselah.

114. It may be accepted that the circumstance in s 45B(8)(a) may point to a party having the relevant purpose even if the company that paid the capital benefit itself had no profits available for distribution as a dividend. A likely example is where a new holding company is interposed over a chain of subsidiary companies, each with accumulated retained earnings.

115. In the present case, the evidence was that the value of the net assets of the CBT had increased from the time of its inception and that this increase was not attributable to an increase in capital contributed to the CBT. It may be accepted that there were unrealised profits in the CBT which as explained above were vested in the trustee of the CBT (in its capacity as trustee) and that the trustee of the CBT was, in that capacity, an associate of Methuselah.

Attributable

116. The Commissioner submitted that the capital distributed by Methuselah was "attributable" to the profits of the CBT because Methuselah's share capital account was a reflection of the unrealised profits of the CBT.

117. It may be accepted that the value that was recognised as share capital of Methuselah reflected the value of the units in the CBT which were exchanged for the shares issued by Methuselah. To the extent the value of those units reflected an increase in the net assets of the CBT (and not attributable to an increase in contributed capital to the CBT), the value of the share capital account of Methuselah was "attributable" to the unrealised profits that had accrued in the CBT. The increase in the net assets of the CBT was the reason for and was causative of the value of Methuselah's share capital: Sun Alliance at [79]-[80] (albeit in the context of s 160ZK(5)). Contrary to the submissions of the respondents, s 45B(8)(a) does not look to what was causative of the decision to return capital. The paragraph refers to the distribution of capital being attributable to profits.

Consideration of s 45B(8)(a)

118. In considering whether the circumstance in s 45B(8)(a) supports a conclusion that a party carried out the scheme for a purpose of enabling Mr Ierna and Hicks Beneficiary to obtain a tax benefit, it is necessary to have regard to the purpose of s 45B. As s 45B is directed to ensuring that capital distributions are treated as dividends if they are made in substitution for dividends, the circumstance in s 45B(8)(a) will support the conclusion as to purpose if the profits of the associate might have, in the absence of the scheme, been distributed as a dividend that would have been assessable to Mr Ierna and Hicks Beneficiary.

119. The profits of the CBT, as a trust that is not for taxation purposes treated as a company (cf a public trading trust), are not distributable as a dividend. A capital distribution by Methuselah could not in any sense be taken to be in substitution for a dividend that would otherwise have been paid by the trustee of the

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CBT out of the profits of the CBT. No distribution by the trustee of the CBT would have been assessable as a dividend to either Mr Ierna or Hicks Beneficiary.

120. Furthermore, the profits of the CBT which were referable to a period prior to Methuselah's acquisition of the units in the CBT were reflected in the value of the shares issued by Methuselah in consideration for those units. The value those CBT profits accumulated prior to Methuselah's acquisition of the CBT units were accordingly reflected in Methuselah's share capital account. A distribution of those profits to Methuselah some six weeks after Methuselah acquired the units in the CBT would not be a profit in the hands of Methuselah (and be a source for a dividend paid by Methuselah) if the distribution on the CBT units was a return of the investment made by Methuselah in the CBT. As the High Court observed "to one shareholder the distribution may be but a return of capital invested when he bought the share":
Commissioner of Taxation (NSW) v Stevenson [1937] HCA 72; (1937) 59 CLR 80 at 98 (Rich, Dixon and McTiernan JJ). In
Commissioner of Taxation (Cth) v Blakely [1951] HCA 17; (1951) 82 CLR 388, Latham CJ explained at 397:

[A shareholder] receipt may or may not represent a profit to a shareholder; for example, a shareholder may have paid a full market price for his shares, representing the estimated value not only of the capital assets of a company, but also of a shareholder's interest in undistributed profits of the company.

121. The Commissioner did not seek to submit that the capital distributed by Methuselah was "attributable" to the profits of any other related company. The assets of Methuselah were the units in the CBT. The value of the capital returned by Methuselah could only be attributable to the value of the CBT. The value of the CBT was not attributable to the profits of any other entity in the City Beach group.

122. The circumstance in s 45B(8)(a) does not support a conclusion that a person entered into or carried out the Methuselah selective share capital reduction for a purpose of enabling Mr Ierna and Hicks Beneficiary to obtain a tax benefit as defined in s 45B(9). The circumstance in s 45B(8)(a) does not support a conclusion that the selective share capital reduction was provided in substitution for the payment of a taxable dividend.

Pattern of distributions - s 45B(8)(b)

123. The Commissioner's contentions in relation to the application of s 45B(8)(b) also suffered from a lack of precision.

124. The Commissioner contended that the primary judge ought to have found that the circumstance in s 45B(8)(b) supported a conclusion that the capital reduction scheme "was for a purpose of obtaining a tax benefit". This is not the statutory question. The question posited by the statute concerns the conclusion about a purpose of a party to the scheme and whether it may be concluded that that person entered into or carried out the scheme for a purpose of enabling the relevant taxpayer to obtain a tax benefit, as defined in s 45B(9).

125. As explained above, the circumstance in s 45B(8)(b) informs a conclusion about the requisite purpose where the circumstance suggests that the distribution of capital by Methuselah was in substitution for a dividend paid by an associate of Methuselah which would have been included in the assessable income of the relevant taxpayer. It is not sufficient to show that a dividend might have been paid by an associate if that dividend would not have been included in the assessable income of the relevant taxpayer. The relevant circumstances in s 45B(8) are required to be considered in reaching a conclusion required by s 45B(2)(c). By its terms, s 45B(2)(c) links the concepts of scheme, tax benefit and purpose.

126. The basis for the Commissioner's contention that in addressing the pattern of dividends paid by associates of Methuselah, the primary judge ought to have considered "the flow of funds throughout the group" is not clear. It is not supported by the language of s 45B(1)(b). Furthermore, it is not clear how a relationship between the profits of the CBT and the benefits enjoyed by Messrs Ierna and Hicks demonstrates that the pattern of dividends paid by Mastergrove, Ierna Beneficiary and Hicks Beneficiary supports a conclusion that a person entered into or carried out the Methuselah selective share capital reduction in

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order to enable Mr Ierna and Hicks Beneficiary to obtain a tax benefit as defined in s 45B(9).

127. The Commissioner's contentions concerning s 45B(8)(b) focussed primarily on the pattern of dividends paid by Mastergrove. As is apparent from the determinations issued by the Commissioner under s 177F, a dividend paid by Mastergrove would not have been included in the assessable income of Hicks Beneficiary. Hicks Beneficiary was not a shareholder in Mastergrove and there was no pattern of distributions of profits by Mastergrove to WHFT (Mastergrove only paying a dividend to WHFT in the year ended 30 June 2015). Pointing to a history of dividends paid by Mastergrove could not support a conclusion that a person carried out the Methuselah selective share capital reduction in order to enable Hicks Beneficiary to obtain a tax benefit.

128. In any case, the primary judge in essence found that there was no pattern to the distribution of dividends by Mastergrove (which did not pay dividends in 2014) which would support a conclusion that a person carried out the Methuselah selective share capital reduction in the amount of $52 million in substitution for a dividend paid by Mastergrove. Mastergrove had never paid a dividend of that quantum. The Commissioner appeared to accept on appeal that the dividends paid by Mastergrove had not been used to fund any repayment of principal or payment of interest on the Div 7A loans owed to Ierna Beneficiary or Hicks Beneficiary.

129. In those circumstances, the pattern of dividends by Mastergrove (as an associate of Methuselah) does not support a conclusion that a person entered into or carried out the Methuselah selective share capital reduction in order to enable either Mr Ierna or Hicks Beneficiary to be liable for less tax than if a dividend had been paid in substitution for the capital reduction.

130. Having regard to the mischief to which s 45B is directed, s 45B(8)(b) looks to compare patterns of distribution of dividends and patterns of returns of capital in reaching a conclusion as to whether a return of capital has been made in substitution for a dividend. It is not an inquiry into patterns as an end in itself. In the absence of identifying a pattern of dividend distributions, the fact that there was no pattern of capital reductions by Methuselah or an associate does not of itself support a conclusion that a person entered into or carried out the Methuselah selective share capital reduction in order to enable either Mr Ierna or Hicks Beneficiary to be liable for less tax than if a dividend had been paid in substitution for the capital reduction.

Tax attributes that would influence the tax result if s 45B did not apply - s 45B(8)(c) to (f)

131. As explained above, s 45B(8) is not to be regarded as a checklist of circumstances the presence or absence of which is to be tallied up in some formulaic exercise. The circumstances in s 45B(8)(c) to (f) are each circumstances which would affect the tax (including withholding tax) liability of the relevant taxpayer if s 45B did not apply. Of these circumstances, it is s 45B(8)(d) which is applicable in the present case.

132. The shares in Methuselah which were the subject of the selective share capital reduction were pre-CGT shares. As such, there was a tax advantage to the selective share capital reduction because any capital gain made on the cancellation of those shares was not required to be included in the calculation of the relevant taxpayers' net capital gains.

133. The Commissioner contended that by reducing share capital so that the only shares cancelled were pre-CGT shares, "Messrs Ierna and Hicks, directly or indirectly enjoyed access to a significant part of the increase in value of the CBT business now reflected in the Methuselah shares tax free by way of a return of capital from Methuselah".

134. However, s 45B(2)(c) is not concerned with looking to see if it is possible to identify someone who enjoys a tax advantage at large. It looks to a purpose of enabling the relevant taxpayer to obtain a tax benefit as defined. Having regard to the statutory purpose of s 45B, the conclusion that a party had a requisite purpose carries with it a conclusion that the capital reduction was provided to the relevant taxpayers in substitution for a dividend that would have been assessable to them. In this case, the relevant taxpayers were Mr Ierna and Hicks Beneficiary; not Mr Hicks. Pointing to

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Mr Hicks as enjoying some sort of advantage does not address the issue of a purpose identified in s 45B(2)(c).

135. In any case, the share capital reduction was not required in order for Mr Ierna to be able to enjoy "access to a significant part of the increase in value of the CBT business" in a tax free way. Prior to the restructure, it was always open to Mr Ierna to access the increase in value of the CBT business by transferring his units in the CBT to a related entity. After the restructure, it was open to Mr Ierna to access the increase in value of the CBT business by transferring some of his shares in Methuselah to a related entity. It was not the selective share capital reduction that enabled Mr Ierna to access the value that had accrued pre-CGT.

136. The factor in s 45B(8)(d) in the circumstances of the present case is insufficient to support a conclusion that the selective share capital reduction was undertaken by any person in order to enable Mr Ierna and Hicks Beneficiary to obtain a tax benefit as defined in s 45B(9).

Whether capital return affected the interest held by the relevant taxpayer - s 45B(8)(h)

137. The Commissioner contended that the selective share capital reduction did not effect any substantive change to the interests held by Mr Ierna and the WHFT (the income of which was distributed to Hicks Beneficiary), once account was taken of the interest held by the IFT which was controlled by Mr Ierna.

138. The Commissioner's contention is accepted. The selective share capital reduction did not affect the ownership interest of WHFT - the proportionate interest of WHFT remained the same before and after the selective share capital reduction, just as it would have had the capital reduction been paid as a dividend. The selective share capital reduction affected the relative proportionate interest of Mr Ierna as compared to the IFT. However, read in context, s 45B(8)(h) is looking at substantive proportionate interest of the relevant taxpayer. Before and after the selective share capital reduction, Mr Ierna continued to have an effective 50% interest in Methuselah.

139. Viewed in isolation, the circumstance in s 45B(8)(h) is supportive of a conclusion that a person carried out the selective share capital reduction for a purpose that included the requisite purpose.

Any of the s 177D(2) matters

140. It is observed at the outset that the use of the word "any" in s 45B(8)(k) is likely infelicitous. Section 45B(8) purports to set out the relevant circumstances to which regard is to be had in drawing the conclusion as to a purpose of a person. In context, the word "any" should be read as a reference to "all" of the circumstances in s 177D(2) to the extent that those circumstances are applicable.

141. In so far as the relevant matters identified in s 177D(2) are concerned, we make the following observations.

142. First, the mere fact that Mr Ierna and Mr Hicks obtained tax advice in relation to the restructure, including the selective share capital reduction, does not support a conclusion that a person entered into or carried out the selective share capital reduction in order to enable Mr Ierna and Hicks Beneficiary to obtain a tax benefit as defined in s 45B(9). The advice discloses that the main concern of Mr Hicks and Mr Ierna was to facilitate the repayment of the Div 7A loans. It is difficult to see how the manner in which the selective share capital reduction was entered into or carried out supports a conclusion that it was undertaken in substitution for the payment of a dividend that would have been assessable to Mr Ierna and Hicks Beneficiary.

143. Second, the Commissioner contended that the substance of the scheme was to access the profits of the CBT by means of a selective share capital reduction. The substance of the scheme was in fact to facilitate the repayment of Div 7A loans by accessing the increase in the value of the units in the CBT. The profits of the CBT would never have been distributable as a dividend to the unitholders. Section 45B is not directed at capital reductions undertaken in substitution for a taxable distribution of trust income. Its purpose is much narrower: s 45B(1)(b). The capital reduction scheme did not enable Mr Ierna and Hicks Beneficiary to access value that had accrued to pre-CGT assets. Mr Ierna and Hicks Beneficiary had that ability irrespective of the selective share capital reduction.

144.

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Third, the timing of the scheme and the length of time over which it was carried out were driven by the need to repay the Div 7A loans and the need to meet notice requirements under the Corporations Act 2001 (Cth). Neither the timing nor the length of time over which the capital reduction was carried out suggest that a person who entered into or carried out the selective share capital reduction did so to enable Mr Ierna or Hicks Beneficiary to pay less tax than would have been payable had the capital reduction taken the form of a dividend.

145. The fact that the selective share capital reduction coupled with the assignment of the rights to a loan from Methuselah with no interest payable discharged the Div 7A loans in full supports a conclusion that the purpose of the scheme was to facilitate the repayment of the Div 7A loans. It does not point to a person entering into or carrying out the selective share capital reduction for a purpose of enabling Mr Ierna and Hicks Beneficiary to pay less tax than would have been payable had the capital reduction taken the form of a dividend.

146. Fourth, all the transactions, including the scheme, were engaged in by entities that were closely related or connected. In the circumstances of this case, the connection between the parties invites a close consideration of why the transaction was carried out the way it was carried out. Once so examined, it is apparent that, as the primary judge found (at PJ [208]), the persons entering into or carrying out the scheme did so for the purpose of enabling the discharge of the Div 7A loans whilst preserving the pre-CGT status of the Methuselah shares that were not the subject of the share cancellation. The persons entering into or carrying out the scheme did not have a purpose of enabling Mr Ierna and Hicks Beneficiary to obtain a tax benefit.

Conclusion as to s 45B

147. By the terms of s 45B(1), s 45B is directed at a specific kind of arrangement, whereby capital is returned by a company in lieu of or in substitution for a dividend paid by that company or an associate of that company. The section is not engaged merely because the Commissioner identifies an entity in a group with profits available for distribution and another company makes a capital return.

148. In the present case, the Commissioner was "quite clear" in his oral submissions that the Commissioner had never attempted to predicate where the assessable dividend would come from because "on the Commissioner's construction of s 45B, he was not required to do so". The Commissioner's submissions seeks to divorce the application of s 45B from its express purpose and is untenable. Inferentially, the Commissioner's contentions in relation to s 45B(8) may be understood as:

(1) The capital return was attributable to the profits of the CBT and therefore may be considered to be in substitution for those profits.
(2) Having regard to the pattern of the distributions by Mastergrove, being to fund the servicing of the annual interest and principal repayments required to be made on the loans owed to Mastergrove, the capital return by Methuselah should be regarded as a payment made in lieu of a dividend paid by Mastergrove.

149. In so far as the first proposition is concerned, the relevant purpose of s 45B is to tax amounts as unfranked dividends where the amounts are capital distributions made in substitution for dividends: s 45B(1)(b). It is not to tax amounts as unfranked dividends where it might be said that capital distributions are made by a company in substitution for a distribution of net income by the trustee of a trust.

150. In so far as the second proposition is concerned, the Commissioner's case on s 45B seemed to rest, at least in part, on an unarticulated premise that because the repayment of the Div 7A loans could have been funded by the payment of a dividend by Mastergrove, the capital that was returned by Methuselah ought to be treated as an unfranked dividend by operation of s 45B. However, s 45B has a narrow scope of operation.

151. Given the context and purpose of the capital return by Methuselah was to fund the repayment of the Div 7A loans owed to each of Mastergrove, Hicks Beneficiary and Ierna Beneficiary, the pattern of dividend distributions by Mastergrove does not support a conclusion that a purpose of a party of entering into or carrying out the scheme was for the capital returned by Methuselah to be provided

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in substitution for a dividend paid by Mastergrove. The amount of the outstanding balances owed on the Div 7A loans made by Ierna Beneficiary and Hicks Beneficiary equalled a significant proportion of the $52 million returned by Methuselah. The dividends paid by Mastergrove had not been applied to fund the annual interest and principal instalments due on the Ierna Beneficiary and Hicks Beneficiary Div 7A loans: PJ [204].

152. The facts do not support a conclusion that the capital return by Methuselah was paid in substitution for an assessable dividend from Mastergrove in order to enable either Mr Ierna or Hicks Beneficiary to obtain a tax benefit. It was not a purpose of a party in entering into or carrying out the scheme to enable each of Mr Ierna and Hicks Beneficiary to obtain a tax benefit.

153. For these reasons, s 45B does not apply in the present case.

PART IVA

THE LEGISLATIVE FRAMEWORK: PART IVA

154. Relevantly, Part IVA of the ITAA 1936 enables the Commissioner to make a determination to include an amount in the assessable income of a taxpayer where a taxpayer has obtained a tax benefit in connection with a scheme to which the Part applies.

155. Part IVA applies to a scheme if it would be concluded, having regard to the matters identified in s 177D(2), that a person who entered into or carried out the scheme (or part of the scheme) did so for the dominant purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme.

156. The application of Part IVA therefore requires:

(a) a "scheme";
(b) a taxpayer obtaining a tax benefit in connection with the scheme; and
(c) an objective conclusion, having regard to the matters identified in s 177D(2) that a person entered into or carried out the scheme for the dominant purpose of enabling the relevant taxpayer to obtain the tax benefit.

157. The obtaining by a taxpayer of a tax benefit is defined in s 177C. Relevantly, s 177C(1)(a) provides:

(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;

158. By amendments made in 2013 by the Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Act 2013 (Cth), s 177CB was inserted into Part IVA. It relevantly provides:

(1) This section applies to deciding, under section 177C, whether any of the following ( tax effects ) would have occurred, or might reasonably be expected to have occurred, if a scheme had not been entered into or carried out:

(a) an amount being included in the assessable income of the taxpayer;

…

(2) A decision that a tax effect would have occurred if the scheme had not been entered into or carried out must be based on a postulate that comprises only the events or circumstances that actually happened or existed (other than those that form part of the scheme).

(3) A decision that a tax effect might reasonably be expected to have occurred if the scheme had not been entered into or carried out must be based on a postulate that is a reasonable alternative to entering into or carrying out the scheme.

(4) In determining for the purposes of subsection (3) whether a postulate is such a reasonable alternative:

(a) have particular regard to:

(i) the substance of the scheme; and

(ii) any result or consequence for the taxpayer that is or would be achieved by the scheme (other than a result in

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relation to the operation of this Act); but

(b) disregard any result in relation to the operation of this Act that would be achieved by the postulate for any person (whether or not a party to the scheme).

THE PRIMARY JUDGE'S CONCLUSIONS ON PART IVA

159. The primary judge's consideration of Part IVA is set out at PJ [212]-[237].

160. The primary judge accepted that income tax considerations in part informed the events of the 2016 restructure, but considered that this did no more than reflect the reality of business life: PJ [212].

161. The primary judge accepted that the following steps particularised by the Commissioner constituted a "scheme" for the purposes of Part IVA (at PJ [214]):

(a) the recommendation and implementation of the selective share capital reduction of shares in Methuselah;
(b) the entry into the Loan Agreements; and
(c) the entry into the deeds of assignment by which the debt due by Methuselah to Mr Ierna and the trustee of the WHFT was assigned to Mastergrove, Ierna Beneficiary and Hicks Beneficiary to discharge the Div 7A loans owed to each of those entities by Messrs Ierna and Hicks and their related entities.

162. The Commissioner had identified the tax benefit obtained by Messrs Ierna and Hicks as the non-inclusion of a dividend and franking credits in the 2016 year of income. This tax benefit was based on an alternate postulate that involved Mastergrove paying a fully franked dividend to Messrs Ierna and Hicks in the total amount of $52 million, sufficient to discharge all of the Div 7A loans.

163. The primary judge did not consider this alternate postulate to be one that might reasonably be expected to have occurred in the absence of the scheme.

164. The evidence, according to the primary judge, was that Mastergrove had never paid dividends in order to "provide for any repayments by Ierna Beneficiary and Hicks Beneficiary": PJ [218]. It followed that there was nothing in the past course of conduct that supported a conclusion that the payment of a $52 million dividend by Mastergrove would or might reasonably be expected to have occurred if the scheme had not been entered into or carried out. The primary judge also found that, on the evidence, neither Mastergrove nor any other entity in the City Beach group had paid dividends in the 2014 or 2015 years of income: PJ [220]. This finding was accepted on appeal as incorrect. Mastergrove, Ierna Beneficiary and Hicks Beneficiary each paid a dividend in the year ended 30 June 2015.

165. A dividend from Mastergrove had never been proposed to Messrs Ierna and Hicks in 2014 and the primary judge accepted the evidence of the advisor to Messrs Ierna and Hicks (Mr Lee) that such a proposal had never in fact occurred to him: PJ [221].

166. The primary judge found that by 2016, the Div 7A loans needed to be repaid.

167. The primary judge found that Mastergrove had provided a guarantee to financiers of the City Beach group. The primary judge found that on the Commissioner's alternate hypothesis, Mastergrove's net assets would have been diminished by $52 million (by reason of the payment of the postulated dividend), adversely affecting the value of the security provided by Mastergrove to a third party financier, at a time when that financier (ANZ Banking Group) was seeking increased security (at PJ [222]).

168. The primary judge found that the substance of the Commissioner's alternate postulate was different from the substance of the scheme. The substance of the scheme, according to the primary judge, was that Methuselah's share capital was reduced by $52 million and replaced with debt owed by Methuselah. That debt was assigned by the creditors to repay the Div 7A loans owed to Mastergrove, Hicks Beneficiary and Ierna Beneficiary. The substance of the Commissioner's alternate postulate was that the Div 7A loans were repaid by stripping out $52 million from Mastergrove.

169. The primary judge found that the scheme had results or consequences for Messrs Ierna and Hicks, aside from the obtaining of the identified tax benefit, which the Commissioner's alternate postulate

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did not have. These "non-tax benefit" results were identified at PJ [225] as follows:

(a) Mr Ierna's shareholding in Methuselah was reduced from 46.67% to 39.13%;
(b) the Div 7A loans from Ierna Beneficiary and Hicks Beneficiary were repaid in full; and
(c) the Div 7A loans from Mastergrove to Messrs Ierna and Mr Hicks were repaid in full.

170. Because the primary judge considered that the Commissioner's alternate postulate did not have these same "non-tax benefit" results, the primary judge considered that the Commissioner's alternate was not reasonable: PJ [226].

171. The primary judge accepted as reasonable the taxpayers' alternate hypothesis that "had the 'scheme' not been entered into or carried out, the unitholders in CBT would just have transferred their units to Methuselah for market value in consideration for shares worth $23 million and cash of $52 million payable on the terms of the loan agreements. In turn, that loan receivable would have been assigned to the creditor companies in repayment of the Division 7A loans": PJ [229].

172. The primary judge found this alternate hypothesis to be supported by the evidence.

173. The primary judge considered that s 177CB(4) required him to disregard the loss of pre-CGT asset status that a disposal of units in the CBT would have entailed, in assessing the reasonableness of the alternate postulate: PJ [230].

174. The primary judge considered that this alternate postulate featured the same substance as the scheme and achieved the same non-tax results: PJ [231].

175. The primary judge concluded that neither Mr Ierna nor Mr Hicks obtained a tax benefit of the kind identified by the Commissioner.

176. The primary judge considered that the conclusion that Part IVA did not apply to the scheme was also supported by a consideration of the factors in s 177D. The primary judge assessed these on a global basis (at PJ [233]-[235]):

[233] One certainty which follows from any objective examination of the facts in light of the considerations specified in s 177D is that the dominant purpose of the "scheme" was never [to] avoid the inclusion of a $26 million dividend in the assessable income of Messrs Ierna and Hicks. Objectively, the dominant purpose was always to use pre-CGT assets, namely units in the CBT, to repay the Division 7A loans. This purpose was overarching…

[234] Objectively, by the 2016 income year, given the structure by which the CBT business was conducted, financing requirements for the conduct of that business, existing third party finance facilities and related securities and net assets at their command (apart from units in the CBT), Messrs Ierna and Hicks no longer had any room to manoeuvre in relation to the Division 7A loans. These loans needed to be repaid by the end of that income year. Their accountants, Hanrick Curran had foreseen in 2014 such a difficulty. This time, in 2016, Messrs Ierna and Hicks accepted the advice tendered. That entailed the disposal of the units in the CBT. The sugar coating was that, this time, Division 615-A rollover relief was available on such a disposal.

[235] One of the s 177D considerations is a change in the financial position of any taxpayer connected with the scheme (s 177D(2)(f)). As the applicants correctly submitted, on the evidence, there was no change in the financial position of the creditor companies namely, Mastergrove, Ierna Beneficiary and Hicks Beneficiary, under the "scheme". Before that "scheme", these creditor companies had an asset (the Division 7A loans); after the "scheme", they had another asset (the loans from Methuselah) of equal value. That is one marker that the dominant purpose was repaying the Division 7A loans.

THE PARTIES' CONTENTIONS ON PART IVA

177. The High Court delivered its decision in
Commissioner of Taxation v PepsiCo Inc [2025] HCA 30 after the hearing for these proceedings. The parties were invited to file written submissions on any matters arising from

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PepsiCo. Submissions were received from both parties.

Commissioner's contentions

178. The Commissioner contended that the primary judge erred in concluding that Messrs Ierna and Hicks did not obtain a tax benefit under s 177C(1)(a).

179. The Commissioner contended that the primary judge erred in accepting the taxpayers' alternate postulate because it was contended that that alternate postulate was not reasonable having regard to s 177CB(4). The Commissioner submitted that:

(1) A tax benefit under s 177C is based on an alternative to the scheme (what would, or might reasonably be expected to, have happened instead of the scheme). Here, the scheme was narrowly defined to be the steps carried out after Methuselah had become the sole unitholder in the CBT. A reasonable alternative therefore had to proceed from the premise that the transfer of the units in the CBT had occurred. It was submitted that the transfer of units to Methuselah could form no part of the alternate postulate.
(2) The taxpayers do not succeed by demonstrating that the Commissioner's alternate postulate is unreasonable. Unlike PepsiCo this is not a case where the taxpayers can demonstrate that there was no reasonable alternative to the scheme.
(3) The primary judge's conclusion that the Commissioner's alternate postulate was not reasonable was based on the following errors of fact:
- (a) The primary judge erred in finding (at PJ [220] and [204]) that the only dividends paid by Mastergrove were in the 2010 to 2013 years of income.
- (b) The primary judge erred in finding that the Mastergrove dividends paid in 2010 to 2013 were limited to the amount needed to meet the interest payments on the Div 7A loans. In fact, the dividends paid by Mastergrove were sufficient to meet the minimum interest and annual principal repayments that were required to be made on those loans.
- (c) The primary judge erred in finding that Mastergrove had never paid dividends in order to provide for any repayments to Ierna Beneficiary or Hicks Beneficiary. According to the Commissioner, the series of cash transfers made in 2014 and 2015 included both a payment of dividends by Mastergrove in the 2015 year and repayments of the loans from Ierna Beneficiary and Hicks Beneficiary although the connection between the two was not articulated.
- (d) The Commissioner did not have to precisely spell out how all of the Div 7A loans would be repaid from a dividend from Mastergrove given that funds had been transferred within the group to meet minimum annual repayments in the past (as the use of the loans from Methuselah due to its shareholders to discharge loans owed by entities other than the shareholders of Methuselah demonstrates).
- (e) The primary judge erred in finding that a dividend of $52 million by Mastergrove would have decreased the value of security provided to third party financiers.
(4) Mastergrove had sufficient retained earnings to pay a dividend of $52 million in the 2016 income year.
(5) The primary judge erred in concluding that the only means of repaying the Div 7A loans was via disposal of the units in the CBT. That conclusion was based on the evidence of Mr Lee that Messrs Ierna and Hicks did not have the financial resources to pay top up tax that would have been payable had they received a franked dividend. The liability to top up tax is not a matter that can be taken into account in evaluating the reasonableness of an alternate postulate: s 177CB(4)(b). The finding was otherwise contrary to the evidence.
(6) The reduction in Mr Ierna's shareholding in Methuselah as a result of the scheme was not beneficial and in any case was inconsequential given the combined interests controlled by Mr Ierna represented 50% of the interests in Methuselah.

180. The Commissioner contended that the primary judge should have concluded that a

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person who entered into or carried out the scheme did so for the dominant purpose of enabling Messrs Ierna and Hicks to obtain a tax benefit (in the form of the non-inclusion of an amount in their assessable income). The Commissioner contended that the primary judge's global consideration of purpose was erroneous.

181. The Commissioner submitted that the primary judge ought to have focussed on the means by which the scheme facilitated the objective of repaying the Div 7A loans. Each of the s 177D(2) factors were said to support the "conclusion as to the s 177D purpose":

(a) The Part IVA scheme was said by the Commissioner to involve a "contrived series of steps, devised and carried out within a short period of time, based on advice that focused on the benefit of extinguishing the Div 7A loans with 'no adverse tax impacts', and involved uncommercial loan agreements (with no interest or security provided)".
(b) The form of the scheme was a selective share capital reduction but the substance of the scheme was said to be "a realisation" of pre-CGT capital gains without a corresponding loss of pre-CGT status on the remaining shares. There was no commercial imperative for the selective share capital reduction.
(c) The scheme began to be carried out immediately after the issue of shares in Methuselah on 20 May 2016 over a period of less than 6 weeks and its timing were said to support "the contended for dominant purpose". The Commissioner submitted that the repayment of the Div 7A loans could have been achieved more directly by a payment of a dividend from Mastergrove.
(d) Absent the application of Part IVA, by undertaking the scheme, Div 7A loans owed by Messrs Ierna and Hicks and by the trustees of the IPT and HPT were discharged, thereby conferring value on each of those entities, without any amount being included in their assessable income.
(e) The only difference between the scheme and the Commissioner's counterfactual was that under the Commissioner's counterfactual, Messrs Ierna and Hicks would have been liable to pay an amount of tax equal to the difference between the franking credits on a fully franked dividend and the top marginal tax rate applicable to them as individuals. The dominant purpose of the advisor in formulating the scheme was said to be the avoidance of this top up tax.
(f) The primary judge ought not to have concluded that the value of the Div 7A loans was equal to the value of the loans due by Methuselah given that interest bearing loans were replaced with interest free loans. The financial position of the creditor companies was adversely affected by the scheme.
(g) The scheme effected no substantive change in the ownership of Methuselah "despite the scheme's complexity".
(h) The entities involved in the scheme were closely connected to Messrs Ierna and Hicks.

Taxpayers' contentions

182. The taxpayers contended that the Commissioner's alternate postulate was not reasonable because:

(1) The Commissioner's alternate postulate did not provide for how the Div 7A loans from Ierna Beneficiary and Hicks Beneficiary were to be repaid. Not all of the Div 7A debtors were either shareholders of Mastergrove (and therefore would not have been recipients of a dividend from Mastergrove) or shareholders of Methuselah. At the hearing, the taxpayers conceded that it would be disingenuous to rely upon a lack of specificity in the postulated funds flow when the taxpayers had not sought to explain the basis of the funds flows that occurred under the scheme.
(2) There was no evidence that Mastergrove had paid dividends to fund repayments of the Div 7A loans owed to Ierna Beneficiary or Hicks Beneficiary. Mastergrove had never paid a dividend of $52 million and did not have the available cash to fund the payment of such a dividend.
(3) The Commissioner's alternate postulate failed to take into account the lack of cash resources of the taxpayers to pay top up tax on a dividend from

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Mastergrove.
(4) The substance of the Commissioner's alternate postulate was different from that of the scheme because the Commissioner's alternate postulate had a different consequence for Methuselah and instead reduced the net assets of a different entity, Mastergrove. The scheme also resulted in a reduction in Mr Ierna's shareholding in Methuselah which would not have occurred under the Commissioner's alternate postulate.

183. The taxpayers contended that there was no reasonable alternative to the scheme and so, in accordance with PepsiCo, there is no tax benefit.

184. In any event, the taxpayers contended that they had proven what might reasonably be expected to have happened if the scheme had not been entered into or carried out and had demonstrated that under that alternate, no amount would have been included in the assessable income of Messrs Ierna and Hicks.

185. The taxpayers also contended that the primary judge did not err in his conclusion as to dominant purpose nor his global assessment of purpose in reaching that conclusion. The dominant purpose of the persons who entered into or carried out the scheme, the taxpayers submitted, was to repay the Div 7A loans using pre-CGT assets.

CONSIDERATION OF PART IVA

186. There was no dispute that the steps identified by the Commissioner constituted a "scheme" for the purposes of Part IVA. The two issues arising on appeal concern the correctness of the primary judge's conclusion that Messrs Ierna and Hicks did not obtain a tax benefit and that, in any case, the dominant purpose conclusion required by s 177D could not be drawn.

Tax benefit

187. The principles relevant to the issue of whether a taxpayer obtains a tax benefit in connection with a scheme were recently considered by the High Court in PepsiCo, albeit in connection with as assessment made under s 177P of Part IVA.

188. Particularly following that consideration, the following relevant principles emerge:

(1) Whether a taxpayer obtains a tax benefit in connection with a scheme requires a consideration of what might reasonably be expected to have happened in the absence of the scheme: PepsiCo at [204] (Gordon, Edelman, Steward and Gleeson JJ).
(2) What might reasonably be expected to have happened in the absence of the scheme is a matter for the Court to find, based on the evidence and the circumstances: PepsiCo at [211].
(3) The alternative to the scheme must be reasonable. The determination of what is reasonable must be made in accordance with s 177CB: PepsiCo at [207].
(4) In determining whether an alternative is reasonable, particular regard must be had to the economic substance of the scheme and the non-tax results or consequences for the taxpayer achieved by the scheme: PepsiCo at [212], [214].
(5) In determining whether an alternative is reasonable, regard must not be had to any result in relation to the operation of "this Act" (as the term is defined in the ITAA 1936) that would be achieved by the postulate for any person: s 177CB(4)(b) of the ITAA 1936.
(6) Taxpayers bear the onus of showing that they did not obtain a tax benefit. One way they can do this is to show that there is no reasonable alternative to the scheme in fact entered into or carried out by the parties. However, that is an unusual case: PepsiCo at [212]. Taxpayers do not discharge their onus merely by showing that the Commissioner's postulate is not reasonable: PepsiCo at [211].

189. It is the Court's task to find what might reasonably be expected to have happened if the scheme had not been entered into or carried out, based on the facts, circumstances and totality of the evidence. The Commissioner's contention that he can constrain the scope of the Court's examination of the circumstances by the manner in which he particularises the scheme is not accepted. As the High Court said in PepsiCo at [209]-[210]:

[209] In Trail Bros, the plurality of the Full Federal Court observed, in relation to s 177C, that "[t]he legislation requires a

ATC 30805
comparison between the relevant scheme and an alternative postulate" and that "[t]he alternative postulate requires a 'prediction as to events which would have taken place if the relevant scheme had not been entered into or carried out and that prediction must be sufficiently reliable for it to be regarded as reasonable'". As their Honours stated, "[a] reasonable expectation requires more than a possibility".

[210] In the later decision of the Full Federal Court in RCI, the Court put the correct position in these terms:

"Even if a taxpayer establishes that the Commissioner's counterfactual is unreasonable, it will not necessarily follow that [the taxpayer] has established that the assessment is excessive. That is because the issue is not whether the Commissioner puts forward a reasonable counterfactual or not; it is a question of the court determining objectively, and on all of the evidence, including inferences open on the evidence, as well as the apparent logic of events, what would have or might reasonably be expected to have occurred if the scheme had not been entered into."

190. The finding of the alternate to the scheme is a finding of objective fact and must be based on facts and evidence. It is not a finding that is made in an artificial vacuum divorced from reality or from the wider context and circumstances. As the Full Court said in
Commissioner of Taxation v Trail Bros Steel and Plastics Pty Ltd [2010] FCAFC 94; (2010) 186 FCR 410 at [29]-[31] (Dowsett and Gordon JJ):

The particular activity or the events that would have, or might reasonably be expected to have, taken place in the absence of the scheme and which are identified as a result of the objective enquiry are not confined or defined by the scheme … The "integers" that are relevant to that objective enquiry are not limited …

It is contrary to the express words of s 177C (including s 177C(2)), its context and its purpose to exclude particular integers from a prediction about what would happen or might reasonably be expected to happen. Put another way, absent particular integers, the enquiry would not be an objective enquiry as required by s 177C but a prediction of what would happen or might happen having regard to only a sub-set of the integers available to a taxpayer. That is not the object of Pt IVA.

191. Where a scheme is carried out as part of a wider set of transactions, the identification of the alternate postulate may involve modification to those associated or connected transactions if that is what the evidence suggests. The Explanatory Memorandum to the 2013 amendments which introduced s 177CB makes this apparent at [1.86]-[1.87]:

The amendment makes it clear that when postulating what might reasonably be expected to have occurred in the absence of a scheme, it is not enough to simply assume the non-existence of the scheme - the postulate must represent a reasonable alternative to the scheme, in the sense that it could reasonably take the place of the scheme.

Such a postulate will necessarily require speculation about the state of affairs that would have existed if the scheme had not been entered into or carried out. This may include speculation about the way in which connected transactions would have been modified if they had had to accommodate the absence of the scheme.

192. In the present case, the scheme identified by the Commissioner began to be carried out immediately after the issue of shares in Methuselah on 20 May 2016 and did not include the interposition of Methuselah. The share capital reduction occurred in close connection with the interposition of Methuselah, both in terms of timing and in the context of a commercial imperative to repay the Div 7A loans without creating more Div 7A loans. The reasonable expectation as to what might have occurred instead of the scheme might impact the manner in which the interposition of Methuselah occurred. The Commissioner cannot, by his articulation of the scheme, artificially confine the identification of what might be expected to have occurred if the scheme had not been entered into or carried out

ATC 30806

or require a finding to be drawn that is contrary to the evidence.

193. The question for determination by the Court is what, as an objective matter of fact, might reasonably be expected to have happened if the scheme had not been entered into or carried out. The evidence supports a finding that the selective share capital reduction was entered into and carried out as part of a wider series of transactions, commencing with the interposition of Methuselah to which Div 615 of the ITAA 1997 applied. The scheme was entered into or carried out as a refinement of a proposal put forward but not pursued in 2014 which would have involved the sale of the units in the CBT to a new company.

194. The primary judge found that, based on the totality of the evidence and the foundation facts, had the scheme not been entered into or carried out the unit holders in the CBT would have transferred their units in the CBT to Methuselah in consideration for shares in Methuselah and an amount of cash owed by Methuselah: PJ [229]. Under this alternative, neither Mr Ierna nor Mr Hicks would have been required to include in their respective assessable income an amount of $26 million. Mr Ierna's units were pre-CGT assets. Mr Hicks was not the owner of units in the CBT and he was not a beneficiary presently entitled to the income of the WHFT in the 2016 income year. Furthermore, the units held by the trustee of the WHFT were pre-CGT assets.

195. The Commissioner contended that the taxpayers' alternative postulate was not reasonable because it had been rejected in 2014. The Commissioner relied upon a statement from
Commissioner of Taxation v Ashwick (Qld) No 127 Pty Ltd [2011] FCFCA 49; (2011) 192 FCR 325 at [153] (Edmonds J) and
Commissioner of Taxation v Spotless Services Ltd [1996] HCA 34; (1996) 186 CLR 404 at 422 (Brennan CJ, Dawson, Toohey. Gaudron, Gummow and Kirby JJ). The Full Court said in
Commissioner of Taxation v Guardian AIT Pty Ltd ATF Australian Investment Trust [2023] FCAFC 3; (2023) 115 ATR 316 at [164] (emphasis added):

[T]he very commercial outcome which would result from an investment or loan agreement by AITCS was in fact rejected by Mr Springer when he proposed the payment of a dividend by AITCS. By the time AITCS's present entitlement was created on 23 June 2013, Mr Springer had evidenced no desire for a loan agreement. The taxpayer's rejection of an alternative at the relevant time is important evidence in determining what would have occurred in the absence of the scheme :
Federal Commissioner of Taxation v Ashwick (Qld) No 127 Pty Ltd [2011] FCAFC 49; (2011) 192 FCR 325 at 372-3 [153(12)] (Edmonds J).

196. As the context of the statement makes apparent, where the evidence shows that the taxpayer had rejected a commercial consequence of an alternate postulate, the evidence of that rejection can be important evidence in determining what would have or might reasonably be expected to have occurred if the scheme had not been entered into or carried out. It is not the mere fact that the alternate postulate was rejected that is important but why it was rejected: see further
Commissioner of Taxation v Spotless Services Ltd [1996] HCA 34; (1996) 186 CLR 404 at 418 and
Commissioner of Taxation v Spotless Services Ltd [1995] FCA 958; (1995) 62 FCR 244 at 284 (Cooper J).

197. Here the evidence of the reasons why the 2014 proposal was rejected was somewhat vague. The primary judge made the following finding at PJ [60]:

The 2014 proposal did not proceed at that time. On the whole of the evidence, it is more likely than not that Messrs Ierna and Hicks were not then persuaded it was urgent enough, because each was reticent about the CGT consequences in the future, if the new holding company sold the City Beach business or, as the case may be, the units in the CBT to a third party, and had a related desire to preserve the pre-CGT status of units in the CBT and avoid the substantial State transfer (stamp) duty which would be payable on the transfer of either the business or the units.

198. On appeal, it was not disputed that the 2014 restructure was rejected by Messrs Ierna and Hicks because of their concern about losing the pre-CGT status of the units (Div 615 not having been factored into the 2014 proposal)

ATC 30807

and their view that the restructure was not urgent.

199. The reasons for the rejection of the 2014 proposal do not result in that proposal not being a reasonable alternative to the scheme. First, by 2016, the urgency of the need to address the Div 7A loans had become apparent: PJ [221]. Second, the concerns about the loss of pre-CGT status and the potential future CGT consequences are matters that must disregarded in considering whether an alternative postulate is reasonable. The loss of pre-CGT status is a result in relation to the operation of the ITAA 1936 and ITAA 1997 that would be achieved by the postulate and must be disregarded by reason of s 177CB(4)(b). Third, the primary judge found that substantial State transfer duty was paid under the transactions as carried out. It necessarily follows that a liability to substantial State transfer duty does not make the taxpayers' alternative postulate unreasonable.

200. The Commissioner in oral submissions also contended that the taxpayers' alternate postulate had a different substance from the scheme and was therefore not a reasonable alternative based on s 177CB(4). The Commissioner contended that the substance of the scheme involved accessing the net assets of an associate whereas the taxpayers' alternate postulate did not involve accessing the net assets of an associate.

201. That submission is not accepted. As a matter of economic substance, the scheme involved accessing the value of the net assets of the CBT. It was that net asset value that was reflected in the share capital account of Methuselah. The transfer of the units in the CBT would have accessed that same source of value by a realisation of the value of the units in the CBT.

202. It follows that there was no error in the primary judge's finding that the taxpayers had demonstrated that if the scheme had not been entered into or carried out, there would have been a transfer of the units in the CBT to Methuselah for shares and a receivable, which receivable would have been assigned to the Div 7A creditors in consideration for the discharge of the Div 7A loans. Under that alternative postulate, no amount would have been required to have been included in the assessable income of Messrs Ierna and Hicks. It follows that the taxpayers have discharged their onus of showing that they did not obtain a tax benefit in connection with the scheme.

203. This conclusion makes it unnecessary to consider the taxpayers' alternative contention that there was no alternative to the scheme as entered into or carried out. It is sufficient to observe that in the case of related party transactions, it is very unlikely that a taxpayer will be able to demonstrate that there was no reasonable alternative to the scheme. As the High Court explained in PepsiCo:

[212] … in unusual cases, a taxpayer may demonstrate the absence of a tax benefit by establishing that there is no postulate that is a reasonable alternative to entering into or carrying out the scheme.

…

[219] Critical facts, unique to these appeals, enabled PepsiCo to demonstrate that there were no other reasonable alternative postulates and therefore no relevant tax effect. The first is that the substance of the Scheme (as properly construed and characterised) included that the price paid for concentrate was for concentrate and nothing else. The second is that the Scheme was a product of arm's length dealings between unrelated parties.

[220] Third, the absence of a royalty was market standard, a substantive element of the business model which was adopted by the PepsiCo Group.

204. The conclusion that the taxpayer had positively demonstrated what might reasonably be expected to have happened if the scheme had not been entered into or carried out also makes it unnecessary to consider whether the primary judge erred in concluding that the Commissioner's alternative was not itself reasonable. For completeness we make the following observations:

(1) The Commissioner has identified some errors of fact made by the primary judge in his consideration of the Commissioner's alternate postulate. For example, the evidence did not support a finding that Mastergrove had provided a guarantee to the ANZ Banking

ATC 30808
Group.
(2) We are not satisfied that the primary judge erred in concluding that Mastergrove had not paid dividends to fund the servicing of the Div 7A loans made by Ierna Beneficiary or Hicks Beneficiary. The cashflow diagrams said to support the Commissioner's contentions do not disclose the payment of dividends by Mastergrove in the year ended 30 June 2014. It is not apparent from those diagrams how the dividend paid by Mastergrove on 1 July 2014 could be said to fund the instalment of the loan repayment made by Mr Hicks to Hicks Beneficiary in the year ended 30 June 2014 or by Mr Ierna to Ierna Beneficiary in the year ended 30 June 2014.
(3) We do not accept the taxpayers' contention that the Commissioner's alternate is unreasonable because it fails to have regard to the adverse cash flow impact on the taxpayers that would result from the payment of top up tax on a dividend. The taxpayers sought to distinguish between the inclusion of an amount in assessable income and the cash flow consequences of discharging a liability to income tax. The taxpayers contended that the cashflow consequences to them resulting from the discharge of a liability to pay top up tax is not, for the purposes of s 177CB(4)(b), a "result in relation to the operation of this Act". That contention is not accepted. "This Act" is defined in s 6(1) of the ITAA 1936 to include Sch 1 to the Taxation Administration Act 1953 (Cth). Section 255-1 of that Schedule deems "a tax-related liability" to be a pecuniary liability to the Commonwealth. Item 37 of the table in s 250-10(2) of the Schedule provides a tax related liability to include a liability to pay income tax. The liability to pay income tax is a liability that results from the operation of "this Act". The financial consequences of discharging that liability is "a result in relation to the operation of this Act".
(4) Section 177CB(4) requires particular regard to be had to the result or consequence for the taxpayer achieved by the scheme in evaluating whether a postulate is a reasonable alternative. In the circumstances of this case involving commonly controlled related entities, it is doubtful that an alternative which results in neither a reduction in Mr Ierna's individual proportionate shareholding in Methuselah nor a change in the net assets held by Methuselah is necessarily not a reasonable alternative to the scheme by reason of s 177CB(4). Section 177CB(4) may permit assessment of the result or consequence for Mr Ierna of both the scheme and the alternate postulate by having regard to the combined interests controlled by Mr Ierna. Under both the scheme and the Commissioner's alternate postulate, the interests controlled by Mr Ierna represented 50% of the interests in Methuselah. Similarly, from the viewpoint of the City Beach group which was managed and controlled jointly by Messrs Ierna and Hicks, both the scheme and the Commissioner's alternate postulate resulted in a reduction in the indebtedness of Messrs Ierna and Hicks and the IPT and HPT at the expense of a reduction of the net assets of entities they ultimately controlled (whether it be Mastergrove or Methuselah).

Section 177D(2) factors

205. Given we have concluded that neither Mr Ierna nor Mr Hicks obtained a tax benefit in the form of an amount not being included in their respective assessable income which amount might reasonably be expected to have been included if the scheme had not been entered into or carried out, it is unnecessary to consider the issue of dominant purpose.

206. However, we make the following observations.

207. It is not readily apparent why a share capital reduction followed by an assignment of resulting receivables is more contrived than the payment of a dividend followed by an assignment of resulting receivables. To the extent that there is unexplained contrivance, it appears to be in the assignment of receivables owed to one entity in consideration for the discharge of loans owed by other entities. By undertaking the scheme, Div 7A loans owed by Messrs Ierna and Hicks and by the trustees of the IPT and HPT were discharged, thereby conferring value on each of those entities. However, the Commissioner's Part IVA determination has not sought to

ATC 30809

include an amount in the assessable income of either the IPT or HPT.

208. The fact that a transaction is entered following the receipt of tax advice or the fact that the advice refers to "no adverse tax consequences" does not of itself support a conclusion that the dominant purpose of a person was to enable the taxpayers to obtain a tax benefit in the form identified and sought to be cancelled by the Commissioner.

209. As explained above in the context of s 45B, the s 177D(2) factors are not a checklist of questions to which the answers are "yes" or "no". Caution must be taken in linking the factors in s 177D(2) with the enabling of the obtaining of the identified tax benefit. As was explained by Carr J in
Eastern Nitrogen Ltd v Commissioner of Taxation [2001] FCA 366; (2001) 108 FCR 27 at [89]-[90]:

The primary judge, in my respectful opinion, fell into error on one other point. At pars 117 and 118 it can be seen that his Honour took into account, and regarded as important, the additional tax benefits derived by the appellant through having the sale and lease-back transaction occur during the year ended 30 September 1999. That benefit was identified as being the offsetting of a balancing charge by certain depreciation allowances arising out of the completion by the appellant of its new nitrate plant expansion.

The tax benefit identified by the respondent, and upon which he relied for the determination made under s 177F, was the deduction of the rentals. He did not rely on the offsetting of the balancing charge which resulted from the sale of the ammonia plant occurring in the same tax year as the commissioning of the new expansion to the appellant's nitrate plant. That factor would have no bearing on the amount of the rentals which might be deductible in that year. Had he so chosen, the respondent might well have included the depreciation advantage as a relevant tax benefit. In that situation, the timing of the sale and lease-back of the ammonia plant would clearly have been relevant. But that was not the tax benefit referred to in the respondent's determination and that was not the basis upon which the case was fought. The timing to which his Honour referred would not have affected the deductibility of the rentals. The net total of the appellant's deductions might well have been affected. But that, in the circumstances to which I have just referred, was in my view a separate matter.

210. In the present case, the nexus between the so-called "uncommercial nature" of the terms of the loan agreements with no interest or security and the obtaining of a tax benefit in the form of the non-receipt of a dividend from Mastergrove is not readily apparent. The Commissioner's alternate postulate did not identify the mechanics by which a payment of a dividend by Mastergrove would discharge the Div 7A loans owed by entities other than Messrs Ierna or Hicks or identify the mechanism by which the Mastergrove dividend would be expected to be paid. Mastergrove did not have $52 million in available cash. This suggests that a Mastergrove dividend would also have involved the creation of receivables and the assignment of those receivables to discharge the Div 7A loans. The basis for the Commissioner's contention that the payment of a dividend by Mastergrove would have more directly achieved the repayment of the Div 7A loans is not apparent.

211. In relation to the form and substance of the scheme, it had always been open to the unitholders of the CBT to sell their pre-CGT units. The scheme did not enable the former unitholder of the CBT to realise pre-CGT value that was not otherwise available to them. It was not the scheme that enabled the shareholders in Methuselah to avoid an amount being included in assessable income. Furthermore, it was not the selective share capital reduction which preserved the pre-CGT status of the units or deemed the shares in Methuselah to have been acquired pre-CGT. Each of those was a function of the rollover in Div 615. The Commissioner has not sought to contend that there was a scheme to enable the unitholders to take advantage of that rollover.

212. As explained in the context of s 45B, the timing of the scheme was driven by the desire to have the Div 7A loans repaid prior to the end of the end of the income year whilst taking into account Corporations Act

ATC 30810

requirements. The Commissioner's postulated dividend would have had similar timing constraints.

213. The Commissioner contended that the financial consequences of the scheme pointed to a person having the relevant dominant purpose. The Commissioner contended that the scheme adversely affected the financial position of the Div 7A creditor companies because the Div 7A loans had been interest-bearing whereas the substituted receivable due from Methuselah was interest free.

214. The primary judge proceeded on the basis that an interest free loan due by Methuselah was of equal value to the interest-bearing loans due by Messrs Ierna and Hicks: PJ [235]. The Commissioner had not sought to contend that the Div 7A loans had been discharged for less than their full value. Nor had the Commissioner based the identification of the obtaining of a tax benefit by reference to an alternate postulate that specified an interest-bearing receivable from Mastergrove as the method by which the Mastergrove dividend would be expected to be paid. In these circumstances, the relevance of the Commissioner's contention that the primary judge erred in finding that there was no adverse change in the position of the Div 7A creditor companies is not apparent.

215. The efficacy of both the Commissioner's counterfactual and the scheme to effect a discharge of all the Div 7A loans depended ultimately on the fact that the financial resources of the City Beach group were at the direction and control of Messrs Ierna and Hicks. In those circumstances, it is not clear how the fact that all the entities are connected supports a conclusion that the selective share capital reduction was undertaken in order to enable Messrs Ierna and Hicks to obtain a tax benefit.

Conclusion as to Part IVA

216. The difference between the scheme and the alternate postulated by the Commissioner to demonstrate the obtaining of a tax benefit is that the scheme involved a corporate distribution by Methuselah in the form of a capital reduction whereas the Commissioner's alternate postulated a comparable distribution by Mastergrove in the form of a dividend. Both the scheme and the alternate relied upon by the Commissioner involve the application of the proceeds of the corporate distribution to the discharge of Div 7A loans owed by debtors that included persons who were not recipients of the distributions. Both the scheme and the alternate postulated by the Commissioner were in that sense contrived and explicable only by the connection between the parties.

217. At its essence, the Commissioner in this case has sought to apply Part IVA to include an amount in assessable income based on the fact that he has been able to identify another way in which the Div 7A loans may have been repaid which would have resulted in more tax becoming payable. The bare fact that a taxpayer pays less tax, if one form of transaction rather than another is made, does not demonstrate that Part IVA applies:
Commissioner of Taxation v Hart [2004] HCA 26; (2004) 217 CLR 216 at [53] (Gummow and Hayne JJ);
Minerva Financial Group Pty Ltd v Commissioner of Taxation [2024] FCAFC 28; (2024) 302 FCR 52 at [60](4) (Besanko, Colvin and Hespe JJ).

DISPOSITION

218. The Commissioner's appeals are dismissed.

THE COURT ORDERS THAT:

1. The appeal be dismissed.
2. The parties are to be heard on the question of costs.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

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