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Advising on Part IVA

G.T. Pagone

CLE speaking notes to Tax Bar Association on 19 September 2007

The subject matter of my talk today is not the substantive provisions of Part

IVA, but rather, some of the obligations when giving advice on Part IVA and

some of the matters you might need to take into account when doing so. The

application Part IVA to a taxpayer can have many negative consequences:

reputational damage, penalties, costs and, of course, increased tax. A tax

adviser who is asked about the likely application of Part IVA, and gets it wrong,

potentially exposes a client to damage and could become personally liable to

professional sanction, peer criticism, legal action, or other penalty.

One can see how difficult it is to get the right answer about the application of

Part IVA by tracking through the history of many reported cases. Unanimous

decisions in one court may follow unanimous decisions the other way on

appeal: see Hart v FC of T (2002) 50 ATR 396 (Full Federal Court) and Federal

Commissioner of Taxation v Hart (2004) 217 CLR 216 (Full High Court). Such

dramatic differences cannot be explained as things of the past which are

unlikely to be repeated after decisions of the High Court. In Macquarie Finance

Pty Ltd v FC of T [2005] ATC 4829 the judges considered the application of

Part IVA after the High Court decision in Hart, but reached quite different

decisions: at first instance Hill J applied Part IVA with reluctance; on appeal

Gyles J thought the case a clear one for its application, whilst French and Hely

JJ did not.


At the centre of the difficulty for taxpayers and their advisers is that the

application of Part IVA depends upon a judgment about what a hypothetical

observer would, or might reasonably, conclude about another’s purpose when

taking into account only a specified series of matters. Any lawyer familiar with

modern literary criticism, from structuralism onwards, may see hidden in the

world of Part IVA a madhouse of uncertainties: see Roland Barthes, The

Pleasure of the Text, 1973; Umberto Eco, The Limits of Interpretation, 1990.

Part IVA assumes the existence of a model/objective observer of events

(somewhat like a model reader of a text) who is able reliably and predictably to

form a view about the purpose of one of the actors who the model observer is

viewing.

The task of applying Part IVA is given at first instance to the Commissioner by s

177F. His decision is reviewable on “appeal” to the AAT or to the Federal

Court and, by special leave to appeal, to the High Court. There are, therefore,

a great number of people who could potentially be asked to decide what the

hypothetical observer would, or might reasonably, conclude about the purpose

of one of the participants to a tax effective transaction. The task of the tax

adviser is to evaluate and predict such a decision by one of these many people.

In other words, the tax adviser’s role is that of evaluating and predicting what

someone else (one of the various individuals or panels of the ATO from case

officer to the Commissioner, any one of the AAT members, or any one of the

potential judges of a court, or the composite of tribunal or a court itself) is likely

to conclude about what the hypothetical observer would, or is reasonably likely

to, conclude was the dominant purpose of an actual participant of a transaction;

all this without, of course, enquiring into the actual purpose of that, or of any

other, participant. That task is not easy, but in seeking to perform it, it may be

useful to identify the context in which the opinion is being asked and what skills,

knowledge and experience the adviser brings to the enquiry.


There may be some taxpayers who are only interested in a barrister’s

conclusion about the application of Part IVA without needing to explore the

doubts, hesitations or reasons along the way. Frequently, however, the

taxpayer will need to be given enough information about the adviser’s

assessment and prediction to enable the taxpayer to make a meaningful

decision about whether to enter into the transaction, to maintain a position or to

incur litigation costs. The tax adviser’s position in such cases is like that of a

specialist medical practitioner who must so inform a patient so as to ensure that

the patient will be making an informed decision when undertaking risky surgery:

see Rogers v Whitaker (1992) 175 CLR 479. A medical practitioner has a duty

to warn a patient of a material risk inherent in a proposed treatment (Rogers v

Whitaker (1992) 175 CLR 479, 490; Bayer v Balkin (1995) 95 ATC 4609) and in

the case of the giving of some tax advice it may not be enough for an adviser to

express an opinion about the application of Part IVA without going on to explain

both the reasons for that conclusion and, perhaps more importantly, identifying

the matters which bear upon the confidence with which the opinion is held or

expressed: see Tip Top Dry Cleaners Pty Ltd v Mackintosh (1998) 98 ATC

4346; Carmody v Priestley (Sup Ct W.A) BC 200504173.

It is not uncommon to see opinions about the application of Part IVA that say

little or nothing about the matters which affect the confidence with which the

opinion has been expressed or is held. It is, of course, relatively easier for

conclusions to be reached upon stated facts than to do so after evaluating the

strength and reliability of those facts. However, an opinion that does not

evaluate the strengths, reliability or (at times) plausibility of the asserted facts

may leave the client vulnerable to challenge and damage. Such opinions do

little to enable the client to make a commercial or rational decision about

whether to take on a risk in the context of uncertain outcomes.


The greatest value a barrister can contribute to the decision-making process of

a taxpayer depends upon the barrister’s skills developed through litigation: that

is, the skills surrounding forensic testing of evidence and of argument. It will

frequently be useful, if not necessary, for the barrister advising a client to

indicate what risks there may be in the stated facts not being accepted as

asserted. Commercial explanations for transactions, and supposed

commercial benefits for specific forms of transaction, frequently turn out to have

less force or effect in practice. An explanation about the saving by corporate

restructuring loses its impact if the savings is relatively small or not acted upon

for other reasons. Non-tax collateral benefits given as the reason for doing a

transaction loses their explanatory force if they are unimportant in the overall

scheme of a taxpayer’s operations.

Considerations of this kind should frequently be conveyed to the client. It might

be prudent for advisers to look at their advice before being given and ask

whether it contains sufficient information to enable the receivers to make a fully

informed judgment about the risks they are assuming when they enter into a

transaction, maintain a position, or embark upon litigation. One of those risks is

the risk of reputational damage. It is not uncommon to find taxpayers having

no desire to defend an adviser’s tax opinion if to do so will damage the

taxpayer’s reputation in the market or damage its relations with the

Commissioner. Many large corporates have a low threshold for risk to

reputational damage that may be caused by involvement in tax disputes with a

hint or assertion of tax avoidance and, in such cases, a tax opinion might

usefully provide a meaningful evaluation of the issues necessary to enable the

decision-maker to consider. Such an evaluation should probably include the

possibility of the Commissioner applying Part IVA whatever the adviser’s view

about the correctness of the Commissioner doing so.


Adviser or Entrepreneur?

Tax advice is given in the context of a great range of complex legal and ethical

obligations. It sometimes happens that an adviser ceases to be giving advice

as a professional and embarks upon the activities of an entrepreneur. The

contrast between a solicitor’s professional legal practice and that of an

entrepreneur was considered by Brennan J in Leary v FC of T (1980) 32 ALR

221 at 240:

It has not been material to consider whether it is possible for the role of a professional adviser and the role of an entrepreneur properly to coincide or overlap, but the appearance of solicitors performing these respective roles in the present case leads me to invite attention to significant differences between the two functions. These differences do not arise out of any judicial view as to the lawfulness or morality of tax avoidance: as to which see Federal Commissioner of Taxation v Westraders Pty Ltd (1980) 11 ATR 24; Inland Revenue Commissioners v Westminster (Duke) (1936) AC.1; Latilla v Inland Revenue Commissioners (1943) AC.377 at p 381; In Estate of Vicars (1944) 45 SR.(NSW) 85 at p 93; Re Weston's Settlements (1968) 1 Ch 223 at p 245. They arise because the field of professional activity is co-extensive with a lawyer's professional duty. That duty is to give advice as to the meaning and operation of the law and to render proper professional assistance in furtherance of a client's interests within the terms of the client's retainer. It is a duty which is cast upon a lawyer, as a member of an independent profession, whether his services are sought with respect to the operation of taxing statutes, the provisions of a contract, charges under the criminal law or any other of the varied fields of professional concern. It is a duty which arises out of the relationship of lawyer and client.

But activities of an entrepreneur in the promotion of a scheme in which taxpayers will be encouraged to participate falls outside the field of professional activity; those activities are not pursued in discharge of some antecedent professional duty. Entrepreneurial activity does not attract the same privilege nor the same protection as professional activity; and the promotion of


a scheme in which particular clients may be advised to participate is pregnant with the possibility of conflict of entrepreneurial interest with professional duty.

See also Solicitors Liability Committee v Grey (1997) 147 ALR 154.

This distinction has assumed new importance with the enactment of the

promoter penalty provisions in Taxation Administration Act 1953. The conduct

that may expose a tax adviser to liability under these provisions is yet to be

tested but it may be worth bearing in mind that it was the view of Justice

Michael McHugh, writing extra judicially, that it was at least arguable that the

tax adviser might be guilty of aiding and abetting when giving professional

advice where the material facts are known and the professional advice is acted

on which encourages or assists a breach of the law: “Jeopardy of Lawyers and

Accountants in Acting on Commercial Transactions” Taxation in Australia (April

1988 at 551).

Predication Test

The application of Part IVA has been attended with great uncertainty. It may be,

perhaps, that certainty and predictability may be found in the predication test

which had inspired the enactment of Part IVA and is referred to in the

explanatory memorandum which accompanied its introduction into parliament.

An important bridge between section 260 and the current Part IVA was thought

at the time of enactment to be the predication test enunciated by the Privy

Council in the appeal from the High Court in Newton v F.C. of T. (1958) 98 CLR

2. In that case the Privy Council grappled with the principles by which to decide

when a transaction was to come within the operation of the anti-avoidance

provision. Their Lordships said at 8-9:

“In order to bring the arrangement within the section you must be able to predicate – by looking at the overt acts by which it was implemented – that it was implemented in that particular way so as to avoid tax. If you cannot so predicate but have to acknowledge that the transactions are capable of explanation by reference to ordinary business or family


dealing, without necessarily being labelled as a means to avoid tax, then the arrangement does not come within the section. Thus, no one, by looking at a transfer of shares cum dividend, can predicate that the transfer was made to avoid tax. Nor can anyone, by seeing a private company turned into a non-private company, predicate that it was done to avoid Div 7 tax … Nor could anyone, on seeing a declaration of trust made by a father in favour of his wife and daughter, predicate that it was done to avoid tax …”

This test required a consideration of the particular transaction to determine

whether the objectively ascertainable purpose of the transaction was to avoid

taxation. No inquiry into the actual motive or purpose (whether subjective or

objective) of the participants to the transaction was necessary. Rather, the test

contemplated a dispassionate assessment of the objective purpose of the

transaction itself. The essence of the application of this test was whether what

was attacked was to be explained as having been implemented in that

particular way so as to avoid tax. The focus of the inquiry was the transaction

itself, and the inquiry was about the objectively ascertainable purpose of the

transaction impugned.

In the Explanatory Memorandum accompanying the Bill introducing Part IVA it

is said:

“In following a course of interpretation which starts from a position that the section is not to be read literally, the courts have reached a point where, as expressed by a Justice of the High Court in 1977 ‘… the very restricted operation conceded to section 260 by the course of judicial decision and the generality of the language in which the section is expressed stand in high contrast …’” at pp.1-2.

The Explanatory Memorandum identified four categories of limitations on the

scope of section 260 as exposed by judicial decisions, namely:

“(a) The ‘choice principle’ is an interpretative rule according to which section 260 will not apply to deny the taxpayers a right of choice of the form of transaction to achieve a result if the Principal Act itself lays open to them that form of transaction. To do so does not alter the incidence of tax and this is so notwithstanding that the transaction in question is explicable only by reference to a desire to attract the operation of a particular provision of the Act and so achieve a reduction in liability to tax below what it would have been if that course had not been taken.


(b) The section is expressed in such a way that the purposes or

motives of the person entering into an arrangement are not to be inquired into in deciding whether the section applies to the arrangement. Rather, the ‘purpose’ of an arrangement is to be tested only by examining the effect of the arrangement itself.

(c) It is unclear whether an arrangement to which the section is found

to apply must be treated as wholly void or whether it can be treated as only partly void, ie., to the extent necessary to eliminate the sought-after tax benefit.

(a) The section does not, once it has done its job of voiding an

arrangement, provide a power to reconstruct what was done, so as to arrive at a taxable situation.”

The Explanatory Memorandum specifically explained that the proposed new

Part IVA was “designed to overcome these difficulties and provide – with

paramount force in the income tax law – an effective general measure against

those tax avoidance arrangements that – inexact though the words may in legal

terms be – are blatant, artificial or contrived” (my emphasis).

The predication test in Newton's case seems to have been thought by the

government of the day to be embodied in the provisions enacted in Part IVA

and, if for that reason alone, the test may continue to have importance to

Australian tax jurisprudence. The Explanatory Memorandum to the Bill

circulated by the then Treasurer (our current Prime Minister) identified the four

broad categories of limitations which had been perceived in the operation of

section 260 and said of the proposed new anti-avoidance provisions:

“The proposed new Part IVA, which this Bill would insert into the Principal Act, is designed to overcome these difficulties and provide – with paramount force in the income tax law – an effective general measure against those tax avoidance arrangements that – inexact though the words be in legal terms – are blatant, artificial or contrived. In other words, the new provisions are designed to apply where, on an objective view of the particular arrangement and its surrounding circumstances, it would be concluded that the arrangement was entered into for the sole or dominant purpose of obtaining a tax deduction or having an amount left out of assessable income”: EM at 2.

In the second reading speech by the Treasurer in the House of

Representatives he said:


“One possibility considered was to adopt the language of the Privy Council in the well-known decision in Newton’s case and, positive tests of inclusion having been expressed, make the new provisions inapplicable to schemes entered into in the course of ordinary business or family dealing. It has been decided, however, that the better test of what is blatant, contrived or artificial is the positive one that has been adopted. That test seems best to capture the essence of the views expressed by the Privy Council which, in fact, characterised an ordinary business or family dealing as representing a situation other than one in which it can be predicated that it was implemented in the particular way so as to avoid tax.” (Hansard, Second Reading speech at 2684).

The government saw the predication test enunciated by the Privy Council in

Newton’s case as its model for capturing the essence of what was to be caught

by the anti-avoidance provisions. The government elected not to propose an

exclusion in the terms of the language of the Privy Council in Newton’s case

where the scheme was entered into in the course of ordinary business or family

dealings. That was not, so it seems, because the government thought that

such dealings should come within the anti-avoidance provisions; but rather,

because the government thought that such dealings would not come within the

operation of the anti-avoidance provisions if the transactions were “in fact,

characterised [as] an ordinary business or family dealing” in the same way as

the Privy Council had said. Similarly, and of fundamental importance, the

criterion for determining whether something fell within the operation of the anti-

avoidance rule was whether the impugned scheme might be said to be, in the

words used by the then Treasurer in the second reading speech, “blatant,

contrived or artificial”. See also F. C. of T. v Spotless Services Ltd (1996)186

CLR 404 at 408.

The Decision in Hart’s Case: Objective Purpose The decision of the High Court in Hart’s case was concerned primarily with

determining how to conclude whether the dominant purpose of a scheme was

to secure a tax benefit. In that process the Court expressed views that may

lessen the importance of how the Commissioner identifies the scheme c.f.

Macquirie Finance per Hill J at [76] – [78], and also shed light upon a

controversial passage from Federal Commissioner of Taxation v Peabody


(1994) 181 CLR 359. The Court in Peabody had expressed itself in a way that

had given rise to a view that a set of circumstances might not come within the

definition of scheme if, as identified, the steps could not be regarded as a

scheme without being robbed of all practical meaning. In Peabody the Court

had said at 383-4:

“But Pt IVA does not provide that a scheme includes part of a scheme and it is possible, despite the very wide definition of a scheme, the conceive of a set of circumstances which constitutes only part of a scheme and not a scheme in itself. That will occur where the circumstances are incapable of standing on their own without being “robbed of all practical meaning” (40). In that event, it is not possible in our view to say that those circumstances constitute a scheme rather than part of a scheme merely because of the provision made by ss. 177D and 177A. The fact that the relevant purpose under s. 177D may be the purpose or dominant purpose under s. 177A(5) of a person who carries out only part of the scheme is insufficient to enable part of a scheme to be regarded as a scheme on its own. That, of course, does not mean that if part of a scheme may be identified as a scheme in itself the Commissioner is precluded from relying upon it as well as the wider scheme.”

In Hart the Court explained that these observations were not intended, and

could not be seen, as introducing an additional criterion to the operation of Part

IVA in addition to those found in the section itself: see Federal Commissioner of

Taxation v Hart (2004) 217 CLR 216, 237-8 [47].

What may, however, remain in dispute is how to determine the objective

purpose by which to apply Part IVA. The issue is important to taxpayers,

regulators and to the courts in adopting an appropriate standard to determine

the extent to which the shape of a transaction may be driven by its tax

consequences without falling foul of the anti-avoidance provisions. However the

existence of an actual purpose of securing a tax benefit is not the same things

as the statutory conclusion required by section 177D. The former is a question

of fact provable or not by evidence; the latter is a statutorily constructed

conclusion which is not concerned at all with the actual purpose of anyone.

Indeed, the need for the conclusion to be “objective” may be seen as a

deliberate policy move away from making the anti-avoidance provisions depend

upon an actual purpose of tax avoidance; in doing so, the legislature may be


thought to have adopted a predictable standard capable of application without

inquiring into the minds or motives of taxpayers. A necessary consequence of

an objective standard for the application of the anti-avoidance regime is that it

may apply even though those who entered into and carried out a transaction

did not do so to secure a tax benefit. The converse must be that the desire to

secure a tax benefit is equally irrelevant to the trigger for the anti-avoidance

regime to apply. The determining factor will be not an actual purpose, but how

transactions are effected. Thus, features in a transaction which only have tax

effects may colour the dominant purpose of the transaction as a whole; whilst a

desire to secure the favourable taxation consequence of an otherwise

commercial transaction will be irrelevant to an inquiry about tax avoidance.

Taxpayers frequently take into account the tax consequences of transactions.

Inevitably the tax consequences will have an impact upon the shape of a

transaction and in many cases tax laws are specifically intended to shape

taxpayer behaviour. In Federal Commissioner of Taxation v Spotless Services

Limited (1996) 186 CLR 404 the High Court at 416 appeared to accept the

appropriateness of tax laws affecting the shape of business transactions,

however, the Court went on to conclude at 423 that it was “the particular means

adopted” by the taxpayer in that case which led to the application of Part IVA.

The means by which a commercial transaction is effected is plainly relevant to

the operation of Part IVA if only because section 177D(b)(ii) compels a

consideration of the “form” of the “scheme”. Acknowledging that tax

considerations may influence the form of the transaction, therefore, necessarily

carries with it some tension between the application and the non-application of

the anti-avoidance provisions. The existence of planning documents are

frequently seen by the Commissioner as the “smoking gun” constituting

admissible proof in support of the conclusion required by section 177D for the

anti-avoidance provisions to be applied.

A reconciliation of that tension may lie in the importance to the application of

Part IVA of concepts which may be thought to underlie its operation and which

were expressed in the Explanatory Memorandum when first enacted. The then

Treasurer at the time placed emphasis on Part IVA applying to tax avoidance


arrangements capable of being described as “blatant, artificial or contrived” and

not to transactions of a kind that might be thought to be “of a normal business

or family kind, including those of a tax planinng nature”1 (my emphasis). In

adopting this form of words the then Treasurer explained that Part IVA was

giving effect to the predication test which had emerged from the decision of the

Privy Council in Newton v Federal Commissioner of Taxation (1958) 98 CLR 1.

In that regard, it was significant that tax planning as such was not thought to be

within the scope of Part IVA.

The relevance of actual purpose was dealt with again, perhaps more directly, in

Commissioner of Taxation v Hart (2004) 217 CLR 216. In that case Gummow

and Hayne JJ said at 243 [65]:

“In these matters, it is, of course, true that the money was borrowed to finance and refinance the two properties. Of course the loan was structured in the way it was in order to achieve the most desirable taxation result. But those are statements about why the respondents acted as they did or about why the lender (or its agent) structured the loan in the way it was. They are not statements which provide an answer to the question posed by s 177D(b). That provision requires the drawing of a conclusion about purpose from the eight identified objective matters; it does not require, or even permit, any inquiry into the subjective motives of the relevant taxpayers or others who entered into or carried out the scheme or any part of it.”

The Court was ultimately unanimous in its conclusion that Part IVA did apply to

the particular transaction by which the commercial objectives had been secured

by Mr and Mrs Hart. Indeed, it is in that context that the passage quoted

assumes particular significance. Their honours contemplated that certain actual

facts were neither determinative of the application of Part IVA, nor indeed even

relevant, to the question posed by section 177D(b). What their honours

excluded from a proper consideration of Part IVA were statements about why

taxpayers acted as they did or why the lender (or its agent) structured the

transaction as it was. In other words that the actual reason for a taxpayer

entering into a transaction, or the actual reason for the structuring of a

transaction, will not provide an answer to whether Part IVA will apply.

1 House of Representatives, Income Tax Law Amendment Bill (no 2) 1981, Explanatory Memorandum at 2-18.


Furthermore, as their honours made clear, statements about these matters are

irrelevant to the statutory question and therefore not part of the consideration

permitted by the section.

The Alternative Postulate: The Elusive Pimpernel

“We seek him here, we seek him there Those Frenchies seek him everywhere Is he in Heaven? Is he in Hell? That dammed elusive Pimpernel!”

The website for the Scarlet Pimpernel describes that famous character as

follows:

“The Scarlet Pimpernel is one of the major romantic literary characters of

the past century. He is an unlikely hero, an English nobleman who stands up for those persecuted by a corrupt French administration ... at great risk to himself. Created by a Russian baroness, he became the prototype for a succession of "super-heroes" in popular culture. Today, the Scarlet Pimpernel is a symbol of good triumphing over evil, of brave hearts standing up for the underdog and prevailing against a wicked and tyrannical system. In the 21st century, as we battle the effects of greed and corporate power, there is as much a need for the Scarlet Pimpernel as there was in ficticious [sic] times past.”2

What Gummow and Hayne JJ did consider both relevant and determinative in

the application of section 177D was explained by them in the very next

paragraph to that which I have quoted above. In it their Honours introduced the

concept of the “alternative postulate” [66] or the “counterfactual” as it is

sometimes called. Their Honours’ remarks were made in the context of the

application of section 177D(b) and, therefore, specifically in the context of

considering whether the conclusion called for by the section could be reached.

What their Honours said was:

“In the present matters, the respondents would obtain a tax benefit if, in the terms of s 177C(1)(b), had the scheme not been entered into or carried out, the deductions "might reasonably be expected not to have been allowable". When that is read with s 177D(b) it becomes apparent that the inquiry directed by Pt IVA requires comparison between the

2 The Scarlet Pimpernel, 2001, viewed 14 February 2007, <http://scarletpimpernel.com>.


scheme in question and an alternative postulate. To draw a conclusion about purpose from the eight matters identified in s 177D(b) will require consideration of what other possibilities existed. To say, as Hill J did, that "the manner in which the scheme was formulated and thus entered into or carried out is certainly explicable only by the taxation consequences" assumes that there were other ways in which the borrowing of moneys for two purposes (one private and the other income producing) might have been effected. And it further assumes that those other ways of borrowing would have had less advantageous taxation consequences.”

The reason for reference to the alternate postulate as a judicial aid to the

application of Part IVA is not hard to see. Section 177D may be thought to be

the linchpin for the anti-avoidance provisions and their application depends

upon a conclusion being drawn when evidence relevant to eight specified

matters is considered. What the section does not say, however, is what it is

about the facts relevant to those matters which will assist in drawing the

conclusion one way or the other. It is all very well for the section to require a

consideration of such matters as the manner in which a scheme is entered into

or its timing, but Part IVA is itself silent on what it will be about the manner or

the timing that will assist in pointing either for or against the application of the

anti-avoidance provisions. That is the context in which their Honours made the

observation that “the inquiry” (my emphasis on the definite article) directed by

the Part requires a comparison between the scheme in question and an

alternative postulate. In other words, that the inquiry about purpose needed a

comparison to be undertaken between what was done and something else in

order to determine whether what was done had the requisite purpose to trigger

section 177D.

Helpful though this dicta may be, it has perhaps given rise to other questions

and other debates. One such debate is about how and where the “alternative

postulate” is to be determined. In the passage quoted above, their Honours

referred to a consideration of “what other possibilities existed”. An inquiry into

“what other possibilities existed” might seem to call for a factual inquiry based

upon evidence. Indeed, it might be thought that this factual inquiry (if a factual

inquiry was what their Honours intended) was the same as that to be

undertaken for the purposes of determining whether a tax benefit had been

obtained under section 177C. On that view, presumably, the comparison for


177D purposes is between the scheme which produces the tax benefit and

something which (somehow) would not. Section 177C contemplates a

comparison between the tax effect of the scheme with what “would have” or

“might reasonably be expected” to have occurred had the scheme not been

entered into or carried out. The task requires a prediction based upon the

facts. That prediction must, of course, be more than a possibility and it must be

at least “sufficiently reliable to be regarded as reasonable”.3 In Peabody the

Commissioner had failed because it could not be established that a tax benefit

was obtained by Mrs. Peabody in the year of income4. In both Peabody (where

the issue arose in the context of whether there was a tax benefit) and Hart

(where the issues arose in the context of the conclusion about purpose) the

alternatives contemplated were other ways of securing the commercial

objectives which had been secured by the scheme.

Whatever role, if any, section 177C might have in helping identify the

alternative postulate by reference to which the conclusion in section 177D

needs to be determined, there is little doubt that the four words “what other

possibilities existed” suggest a factual inquiry based on evidence. Recently

Edmonds J has said about this passage in Epov v Commissioner of Taxation

[2007] FCA 34 (31 January 2007):

“Whatever may be taken into account in determining the conclusion to be drawn under s 177D(b) as to the dominant purpose of a person in entering into or carrying out a scheme – the joint judgment of Gummow and Hayne JJ in Commissioner of Taxation v Hart (2004) 217 CLR 216 at [66] suggests that it goes beyond the matters in (i) – (viii) inclusive and extends to the tax benefit obtained by reference to the hypothetical construct upon which that tax benefit is quantified – that hypothetical construct is not determined by the matters in (i) – (viii) of s 177D(b), but rather by the evidence, and the inferences and judgments to be drawn therefrom.”

His Honour’s remarks are consistent with the reading of paragraph [66] to

which I have referred, namely, that it suggests that evidence beyond the

matters in section 177D(b) may be taken into account “in determining the

conclusion to be drawn” under the section. However, the proposition need only 3 Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359, 385. 4 Ibid, 384.


to be stated in those terms for there to be a doubt about whether the

suggestion was intended. The suggestion seems at odds with the view that the

purpose required to be found under section 177D requires a limited

consideration of factors only falling within the eight matters listed in the section

and nothing more. Furthermore, there is nothing in the express language of

section 177D which permits anything to be taken into account beyond the facts

relevant to the eight enumerated matters. Indeed, it is difficult to see how

matters outside those enumerated in section 177D “may be taken into account”

(to use the words of Edmonds J) for the specific purpose of section 177D when

the section itself does not appear to require (or permit) this.

There might, however, be an alternative reading of what their Honours meant in

[66]. In that regard it may be instructive to note that their Honours did not, as I

read them, appear to determine the existence of the section 177D purpose by

reference to any evidentiary consideration about what Mr and Mrs Hart may or

may not have done in fact. Rather, at [69] their Honours undertook a much

narrower inquiry, namely, to consider “how else the loan might have been

arranged”. In other words, what their Honours did was to focus upon the terms

of the scheme as actually entered into and to ask about that scheme whether

there were features about it that required a conclusion that the dominant

purpose was to secure the tax consequences which it produced. Their

Honours’ view against the taxpayers in that case were said by them to be

indicated by a consideration of “how else the loan might have been arranged”

rather than by recourse to evidence of what else Mr and Mrs Hart might have

done if they had not entered into the specific transaction in question. Indeed, a

consideration of “how else the loan might have been arranged” (my emphasis)

necessarily compels an inquiry into the details and interstices of the transaction

in question rather than an exploration outside of it.

On this view the reference in [66] to “what other possibilities existed” may be a

consideration of the mechanics of the particular transaction rather than an

encouragement to have regard to evidence, inferences and judgments beyond

the matters expressly referred to in section 177D(b). Support for that view may

perhaps be seen from the relationship between what was said in [68] and [69].


That is because the conclusion which in [69] was said to be indicated by a

consideration of “how else the loan might have been arranged” was in the

same sentence said to have been indicated by the conclusions described in the

immediately preceding paragraph. At [68] their Honours had said:

“There could be no doubt in these matters that the terms on which the loan was made available were explicable only by the taxation consequences for the respondents. If the scheme was identified as "all the steps leading to, and the entering into, and the implementation of the loan arrangements" the manner in which that scheme was entered into strongly suggested that the respondents (each a relevant taxpayer) entered into that scheme for the dominant purpose of obtaining a tax benefit. Further, if the scheme was identified in this way, the respondents, by giving the directions they did, carried out the scheme for that same dominant purpose. But so too, if the scheme is identified more narrowly (as the making of the relevant provisions in the loan agreement and the giving of directions under those provisions) the like conclusion would be reached. Both the manner in which that (narrower) scheme was entered into, and the manner in which it was carried out, strongly suggested the conclusion described.” (emphasis in original)

Thus, what their Honours did was to conclude that either of the schemes

identified by the Commissioner indicated the requisite dominant purpose

because they both exhibited features within them (and not by reference to other

possibilities that Mr and Mrs Hart might, but did not, enter into) which were

explicable only by the taxation consequences secured for the taxpayers.

It is also instructive to note the emphasis their Honours placed upon the word

“only” in the judgment. The effect in that case (if not in all) was to draw attention

to features of a transaction (or scheme) which were explicable only by the tax

consequences which the scheme as a whole would otherwise produce. In other

words, it may be that the application of Part IVA will on this view depend upon

identifying features in a scheme whose only explanation is the production of tax

consequences. The use for the word “only” cannot be read as substituting an

exclusive purpose test for the dominant purpose test found in the legislation. It

may, rather, be an indication that features in a transaction which is otherwise

directed to a non tax purpose will permit the application of the anti-avoidance

provisions where the particular features have as their only explanation the tax

outcomes they produce.


In Spotless the High Court had placed emphasis upon a consideration of “the

particular means adopted” by the taxpayer; the dominant purpose “in the

adoption of the particular scheme”; and in the extent to which the obtaining of a

tax benefit directed the taxpayers “in taking steps they otherwise would not

have taken by entering into the scheme” (see p 423). Such comments are

consistent with the argument put by senior counsel for the Commissioner in

Spotless to the effect that the section 177D conclusion was suggested by the

section itself and involved “the inquiry (having a regard to the eight matters)” of

whether the scheme was “so attended with elements of artificiality or

contrivance primarily directed to the obtaining of the tax benefit that any

commerciality of the scheme is overshadowed.” The argument is recorded at

408-9 as follows:

“[BRENNAN CJ. Is it your case that if, on examination of a scheme, there are steps in it which are explicable only by reference to a purpose of obtaining a tax benefit, and if those steps are sufficiently significant having regard to the whole of the scheme as to justify the conclusion that the dominant purpose of the scheme was to acquire that tax benefit, Pt IVA is attracted?] We would substitute "having regard to the matters set out in s 177D(b)" for "having regard to the whole of the scheme". The inquiry required by s 177D suggests the indicia by which the relevant conclusion is to be reached or rejected. If the conclusion be whether a person entered into the scheme for the dominant purpose of enabling the taxpayer to obtain a tax benefit, the inquiry (having regard to the eight matters) must necessarily be whether the scheme is so attended with elements of artificiality or contrivance primarily directed to the obtaining of the tax benefit that any commerciality of the scheme is overshadowed. Section 177D contemplates the possibility of its application to a commercial transaction. The mere presence of commercial elements will not oust the operation of Pt IVA. It is sufficient for its operation that it is concluded that the obtaining of a tax benefit was the dominant purpose of a person doing the things done or planned. That presupposes that a commercial purpose (i.e., not the obtaining of the tax benefit) was part of the purpose for entry into the scheme. Section 177D also contemplates that participants in a scheme other than the taxpayer do not or may not obtain a tax benefit: they too may not have entered into the scheme with tax benefit to them as their dominant purpose. [BRENNAN CJ. The elements of artificiality and contrivance, though sensible to those accustomed to s 260, lead to an evaluative judgment, do they not?] That is inevitable in the form of the section because one is directed only to eight particular matters. [TOOHEY J. The Act may require artificiality to be considered as part of the form and substance.]” (my emphasis)


Such a view fit in with what might be thought to have been Parliament’s

intention when enacting the provisions and would “happily” give effect to those

words in the explanatory memorandum about blatancy, artificiality and

contrivance. The other judgments in Hart are to similar effect. Gleeson CJ and

McHugh J at 227 [15] said:

“As Hely J correctly observed in the Full Court((29)), the fact that a particular commercial transaction is chosen from a number of possible alternative courses of action because of tax benefits associated with its adoption does not of itself mean that there must be an affirmative answer to the question posed by s 177D. Taxation is part of the cost of doing business, and business transactions are normally influenced by cost considerations. Furthermore, even if a particular form of transaction carries a tax benefit, it does not follow that obtaining the tax benefit is the dominant purpose of the taxpayer in entering into the transaction. A taxpayer wishing to obtain the right to occupy premises for the purpose of carrying on a business enterprise might decide to lease real estate rather than to buy it. Depending upon a variety of circumstances, the potential deductibility of the rent may be an important factor in the decision. Yet, if there were nothing more to it than that, it would ordinarily be impossible to conclude, having regard to the factors listed in s 177D, that the dominant purpose of the lessee in leasing the land was to obtain a tax benefit. The dominant purpose would be to gain the right to occupy the premises, not to obtain a tax deduction for the rent, even if the availability of the tax deduction meant that leasing the premises was more cost-effective than buying them.”

Here their honours accept that Part IVA may have no application where, all

things being equal, a tax benefit may be the operative reason for a transaction

being entered into. Thus, the potential deductibility of an outgoing may be

important, and in that sense determinative, in a decision to enter into a

transaction, without invoking Part IVA. Indeed, as their honours point out,

without more “it would ordinarily be impossible to conclude” that the dominant

purpose of the transaction was the tax benefit which it secured, notwithstanding

its importance. What struck down the transaction in question was, thus, not that

the tax benefits were important, but that the structure (that is, the way in which

the transaction was entered into) depended entirely for its efficacy upon tax

benefits generated by arrangements between the respondent and the lender

that had “no explanation other than their fiscal consequences”: see 228 [18].


Thus, their honours also considered that the critical feature was the presence in

an otherwise commercial transaction of particular features directed only to

securing a tax objective. It is that which may compel the conclusion that the

dominant purpose of the transaction done in that way was to secure the tax

benefit. Callinan J reached the same conclusion: see 262 [95]. His honour

identified those features of the transaction directed to the obtaining of a tax

benefit and asked rhetorically what other purpose or purposes could have

made commercial or other sense apart from the tax benefit which those

features secured. In that context, his honour noted the absence of material

before the Court which, by inference, might have been thought to justify the

commerciality of those features of the transaction (that is, of the transaction

done in that way) which were productive of the tax benefit: see 262 [95].

On this view, the dominant purpose contemplated by section 177D is to be

found where a scheme (using that word in a neutral and non pejorative sense)

is entered into with some element which has no explanation other than the

fiscal outcome which it produces. That is consistent with, and gives effect to,

the view that Part IVA applies only to arrangements that may be described as

“blatant, artificial or contrived” because it is in features that justify such a

description that the operation of Part IVA will depend. It is also consistent with

the view expressed by the then Treasurer in the explanatory memorandum

when introducing the provisions, that they would not apply to arrangements of a

normal business or family kind “including those of a tax planning nature”. That

is because the actual purpose of achieving a favourable taxation consequence

would be neither determinative nor relevant to a consideration of whether the

anti-avoidance provisions apply.

In each case the key to the application of the anti-avoidance provision must lie

in the elements of structuring, which in popular language might be regarded as

“blatant, artificial or contrived”, to secure taxation consequences; or in the

language of Gummow and Haynes JJ in a “comparison between the scheme in

question and an alternative postulate where that alternative postulate” assumes

the same commercial outcome as secured by the relevant scheme. The

comparison required is between what was done with how else it might have


been done. In other words what the actual scheme is to be compared with is an

alternative means of achieving the same commercial outcome; it is not an open

inquiry into what else might have been done independently of the non-tax

outcomes which the actual scheme achieved. Gummow and Hayne JJ

emphasised that the conclusion about purpose will require a consideration of

“what other possibilities existed”, but those other possibilities are about other

ways of achieving the same outcome rather than what other transactions might

have been entered into. That may be why their Honours remarked that the

conclusion expressed by Hill J assumed “that there were other ways in which

the borrowing of moneys for this purpose (one private and the other income

producing) might have been effected”.

Advisor’s Purpose

The passages from Hart may also help to understand an aspect of the decision

in Federal Commissioner of Taxation v Consolidated Press Holdings Limited

(2001) 207 CLR 235. An issue in that case was whether the relevant purpose

could be attributed from a tax advisor to one of the people contemplated by

section 177D. In that case the court concluded that the purpose of an advisor

could be attributed to a relevant person and in doing so said:

“The finding made by Hill J, set out above, was criticised both in the Full Court and in this Court on the ground that, as the case was particularised by the Commissioner, the persons who entered into or carried out the scheme were CPIL(UK), MLG and ACP. They were the persons referred to in s 177D; not some unidentified advisors. There is no point in making a finding about what would be concluded concerning the purpose of an advisor unless that purpose is then attributed to a relevant person. It is reasonably clear that, albeit in a slightly elliptical fashion, Hill J was doing that. He was justified in doing so. As was mentioned above, it is to be expected that those who participate in a complex, international, commercial transaction will be concerned about its tax implications, and will seek expert advice. Attributing the purpose of a professional advisor to one or more of the corporate parties in the present case is both possible and appropriate. In some cases, the actual parties to a scheme subjectively may not have any purpose, independent of that of a professional advisor, in relation to the scheme or part of the scheme, but that does not defeat the operation of s 177D. If, in the present case, there had been evidence which showed that no director or employee of any member of the Group had ever heard of s 79D, that would not conclude the matter in favour of the taxpayer. One of the reasons for making s 177D turn upon the objective matters listed


in the section, it may be inferred, was to avoid the consequence that the operation of Pt IVA depends upon the fiscal awareness of a taxpayer.”: 207 CLR 235 at 265 [95].

It is sometimes thought that the purpose of the advisor contemplated in that

case was an actual subjective purpose of securing a tax benefit. However, such

a view would not be consistent with what the High Court has expressly said in

Hart, especially concerning the irrelevance of “why the lender (or its agent)

structured the loan in the way it was”: see (2004) 217 CLR 216 at 243 [65]. The

purpose “of” an advisor as contemplated in Consolidated Press Holdings may

readily enough be discerned consistently with the principles set out above from

the elements of the scheme, rather than as an actual state of mind, or an actual

purpose independent from the mechanics of a scheme. The attribution of the

purpose in that way is similar to the adoption by a person of the architectural

plans of a structure. The critical feature is not the actual purpose of the

architect or the advisor, but rather that the purpose of the advisor is

incorporated into the structural plans.

An important feature in the design of Part IVA was that it should operate

objectively in the sense that the operation of the anti-avoidance provisions was

not made to depend upon the actual purpose of a taxpayer. In Consolidated

Press Holdings the Court inferred that one of the reasons for making section

177D turn upon objective matters was to avoid its operation being made

dependent upon the “fiscal awareness of a taxpayer”: see at 265 [95]. The

same may be said about the fiscal awareness of the taxpayer’s advisor: that is,

that the objective secured by Part IVA was to make the provisions depend upon

objective matters. Those objective matters are as consistent with the exclusion

of the actual awareness of a taxpayer as they are with the exclusion of the

actual awareness of the taxpayer’s advisors. In each case the provisions can

be seen to apply where a purpose can be discerned objectively (that is, on the

face of the terms, operation and implementation of the transaction) without

regard to an actual purpose of an advisor as a proven fact. On that view

recourse to an advisor’s purpose is a conclusion that the purpose may be

discerned from what the advisor implemented through the scheme (and

relevantly discerned through a consideration of the circumstances in the eight


factors), rather than by evidence of an actual purpose independent of the

scheme itself. It is thus in what the scheme achieved that the conclusion about

purpose depends; or to use perhaps a glib expression: you determine purpose

from that which is done, not from what is said.

In that context it is perhaps worth recalling that the “finding” referred to in the

passage quoted from the decision in the High Court is not a finding of an actual

purpose as distinct from the result produced by the structure which was

adopted. The relevant passage setting out the “finding” of the primary judge

was quoted in the decision of the High Court as follows:

“Hill J concluded:

‘With some doubt I am of the view that a conclusion would be drawn that the dominant purpose of some person who participated in the scheme, and in particular those (perhaps not Mr. Cherry, but there were others) who advised the group at Arthur Young and later Ernst & Young, was to bring about the result that a deduction would be allowed ... which, but for the scheme, would have been disallowed ... because of the application of s 79D. I reach this conclusion because it seems to me that the interest deduction was more immediate than the adoption of a neutral structure for non interference with tax credits.’” 5

The purpose described by Hill J of an advisor was that which he described as

“to bring about the result that a deduction would be allowed”. His honour did not

find as a fact that any person actually had a purpose of any such kind. His

honour’s “finding” followed from his understanding of what result the structure

achieved rather than being a matter of evidence about what people actually

thought or actually sought to achieve independently from what the structure did.

The emphasis upon what the scheme achieved to determine purpose rather

than upon an actual purpose of taxpayer, advisor or other person, should have

about it important consequences for Part IVA. Chief amongst them is greater

certainty. Part IVA can be seen as achieving greater certainly and predictability

if its application depends upon looking at the scheme itself (that is at what was

5 Ibid at 263 [93] citing from CPH Property (1998) FCR 21 at 42.


done, how it was done, and the consequences of doings things in that way)

rather than upon what the actors, advisors or taxpayers thought or said. A

second consequence may be a refocusing of the application of Part IVA upon

those elements of structuring that are “blatant, artificial or contrived.”

Tax Benefit Whether or not the decision in F.C. of T. v Hart (2004) 217 CLR 216 has, or

has not, had the effect of lessening the significance of the identification of a

scheme more generally (see Macquarie Finance Ltd v F.C. of T. [2004] ATC

4866 at 4884 paras [76]-[78]), the fact is that the existence of a tax benefit is

essential to the application of Part IVA. It is, after all, only a tax benefit which

the Commissioner is able to “cancel” pursuant to section 177F(1). Similarly, the

conclusion required by 177D is one required to be made concerning the

obtaining of a tax benefit for the relevant taxpayer.

Whether there is a tax benefit will be a question of some significance for

corporate taxpayers in the context of consolidations. There are still many

uncertainties about the meaning and effect of the definition of tax benefit in

section 177C. Accordingly, the potential application of Part IVA will need to

identify and consider each of the potential tax benefits that may come within the

definition. However, the section excludes from the operation of Part IVA those

tax benefits which come within the exclusionary provisions found in section

177C(2). This is significant to corporates in the context of consolidation

because the formal trigger for consolidation is the making of a choice under

section 703-50 and a tax benefit which is attributable to the making of a choice

expressly provided for by the tax acts is generally excluded from the operation

of Part IVA.

Section 703-50 of the consolidations provision gives, in express terms, “a

choice” for a company to consolidate, and, indeed, is headed by the words

“[c]hoice to consolidate a consolidatable group”. The consequences of

choosing to consolidate include that some consolidated entities will no longer

be assessable to the income that they have derived and that others will obtain


tax deductions that would not, or would not reasonably, have been allowable to

them but for the decision to consolidate. There are, of course, many other

consequences, but one consequence is that the decision to consolidate will

typically produce a “tax benefit” within the meaning of section 177C(1) in Part

IVA. Such “tax benefits” will not come within Part IVA, however, if they are

attributable to the making of a “choice” as provided for in section 177C(2).

The legislative trigger of “choice” in the consolidations provisions may prima

facie seem to enliven the exception to Part IVA in section 177C, however the

exclusion of Part IVA provided for in section 177C(2) is conditional upon two

important qualifications. The first qualification, is the need for the relevant tax

benefit to be “attributable” to the making of the choice. The second qualification

is that there not be a scheme entered into or carried out for the purpose of

creating any circumstances or state of affairs, the existence of which was

necessary to enable the choice to be made.

Attributable

What meaning and content will ultimately be given to the word “attributable”

remains to be seen, however it does call for some sufficient relationships to

exist between the tax benefit and the choice. The degree of sufficiency may still

be an area for debate and exploration but it is unlikely that the requirement that

the tax benefit be attributable to the choice will be satisfied merely by satisfying

the “but for” test: see Justice Graham Hill, “Scheme New Zealand”, (2003) 1

eJournal of Tax Research, 147 at 153. In other words it may not be sufficient to

come within the safety of the exception that a choice was made. What section

177C(2) requires is the attribution of the tax benefit to the choice, and this may

require a closer relationship between the two than merely that the choice was a

necessary procedural or formal requirement made before the tax

consequences of consolidation could flow. In the end, it may involve some

recourse to an evaluation and judgment based upon common sense and

experience rather than logical analysis6.

6 See March v E&MH. Stramare Pty Ltd (1991) 171 CLR 506


The meaning of the words “attributable to” has been considered judicially on a

number of occasions. In Commissioner of Taxation v Sun Alliance Investments

Pty Ltd [2005] HCA 70 the Court said:

“It is the concept of causation, rather than source, with which s 160ZK(5) is concerned. In determining whether the plaintiff's loss of employment was "attributable to" the provisions of the Local Government Act 1972 (UK), Donaldson J in Walsh v Rother District Council said:

"These are plain English words involving some causal connection between the loss of employment and that to which the loss is said to be attributable. However, this connection need not be that of a sole, dominant, direct or proximate cause and effect. A contributory causal connection is quite sufficient."

Nothing, either in the text of s 160ZK(5) or in its objects as expressed in

the explanatory memorandum on the Bill for the Taxation Laws Amendment Act (No 2) 1994 (Cth), indicates that a narrower meaning should be presently ascribed to that phrase.” 7

In Law v Repatriation Commission (1980) 29 ALR 64, Toohey J considered the

meaning of the words “attributable to” in s 101(1)(b) of the Repatriation Act

1920 (Cth), which provided that upon the incapacity or death of any member of

the armed forces “whose incapacity or death has arisen out of or is attributable

to his war service” the Commonwealth shall be liable to pay to the member or

his dependants or both a pension in accordance with that Act. His Honour

interpreted “attributable to” as follows –

“As to the expression ‘attributable to’, Donaldson J, in Walsh v Rother District Council [1978] 1 All ER 510, concluded at 514: ‘… these are plain English words involving some causal connection between the loss of employment and that to which the loss is said to be attributable. However, this connection need not be that of a sole, dominant, direct or proximate cause and effect. A contributory causal connection is quite sufficient.’ In my view para (b) of s 101(1) requires no more than that the death of a member of the Forces have some causal connection between the condition of carcinoma of the lung and the member’s war service.”

7 Ibid at 578-580, [80]


In Law the Applicant was a widow whose husband had died of lung cancer.

The Repatriation Tribunal was required to grant the pension unless it was

satisfied beyond reasonable doubt that there were insufficient grounds for

granting it. The Court held that the husband’s death was attributable to his war

service, because he had developed the habit of smoking cigarettes while

serving with the armed forces. The Applicant was therefore entitled to a war

widow’s pension under the Repatriation Act. The Full Federal Court dismissed

an appeal: (1980) 47 FCR 57 and in doing so Bowen, CJ and Brennan and

Lockhart JJ said at 68:

“It seems clear that the expression ‘attributable to’ in each case involves an element of causation. The cause need not be the sole or dominant cause; it is sufficient to show ‘attributability’ if the cause is one of a number of causes provided it is a contributing cause.”

The interpretation of “attributable to” in Law v Repatriation Commission has

been applied by Australian courts on several subsequent occasions, most

involving the Repatriation Act but a few of which involved other legislation.8

The case law thus suggests that the phrase “attributable to” imports a

requirement of causation. In that context Law’s case and the other decisions in

which it has been applied suggest that a thing may be attributable to an event

even though the event was only one of a number of contributing factors.

However, it would be unsafe to assume that a court would regard the degree of

connection that was considered sufficient in Law as sufficient in the context of s

177C(2). Law’s case required a court to consider whether an individual

qualified for a pension and, therefore, might attract an interpretation favourable

to a claimant. The case also involved the application of an unusual standard of

proof.

Debates about attribution, like debates about causation (if the two in this

context are not the same), are amongst the most difficult to resolve and the

application of the words are not likely to be easy in many cases. For example, a

8 See for instance Oddy v Fry & Ors; Unreported decision of McDonald J of the Supreme Court of Victoria, 22 May 1997 Butterworths Unreported Cases BC9702242 at 30, affirmed by the Victorian Court of Appeal in Fry v Oddy [1999] 1 VR 557).


scheme designed to produce a tax benefit indifferently to consolidation would

seem not to be attributable to the choice to consolidate even though, upon

making the choice, the tax benefit is enjoyed by the head company. On the

other hand there may be many transactions where the tax benefit is more

intimately linked to the choice of consolidation itself. The restructure of a

company group to consolidate those companies best able to utilise losses

already in existence might produce a tax benefit which is more likely to be

attributable to the choice to consolidate.

For the purpose of making the choice The second qualification in section 177C(2) is that the relevant scheme was not

entered into or carried out “for the purpose of creating any circumstances or

state of affairs the existence of which is necessary to enable” the choice to be

made. In the context of consolidations there may frequently be a live issue

about when it can be said that the scheme was entered into or carried out for

the purpose of making the choice.

The meaning and application of the second qualification in section 177C(2) is

difficult and troublesome at the best of times, but they are even more difficult

and troublesome in the context of consolidation. The ultimate question which

arises is whether it can be said upon the evidence that the scheme was

entered into or carried out for the stated purpose. That, however, will require an

evaluation of the entire evidence and a conclusion reached about the purpose

for which the scheme was entered into or carried out.

One of the first things that might be noticed in this exercise is the legislature’s

apparent contemplation that a scheme may satisfy both the purpose test in

section 177C(2) as well as the purpose test in section 177D. Whether entering

into or carrying out a scheme may have more than one dominant purpose is yet

to be considered by the courts. It may seem curious to say that there can be

more than one dominant purpose of something, however the legislature has, in

the one set of provisions, enacted at the same time, postulated that the

entering into or carrying out of the one scheme may satisfy two descriptions of


purpose, namely that in section 177D and that in section 177C(2). It may be,

thus, that the one dominant purpose is capable of more than one description,

each satisfying the different requirements of difficult sections.

Whether or not entering into or carrying out a scheme can have more than one

purpose is complicated by other aspects of the terms of the provisions. A

difference between sections 177C(2) and 177D is that the latter requires a

conclusion about purpose having regard to enumerated matters, whereas the

former does not. Another difference between the two provisions is that section

177D is expressed in terms of the purpose of a nominated person, whilst

section 177C(2) is expressed in term of the action or activity of entering into or

carrying out the scheme. In any event, section 177D requires a statutory

conclusion to be drawn, whereas section 177C(2) is expressed in language

which appears to require the finding of actual facts. On its face, section

177C(2) may thus be directed to the actual purpose of entering into or carrying

out the scheme and in that task is directed to the finding of a purpose without

express statutory direction about the matters which are to be taken into account

in finding that fact (that is, there is no equivalent in the purpose requirement in

section 177C of the factors in section 177D(b)(i) to (viii).). It may be possible,

therefore, for the purpose found under section 177C(2) to be different in fact

and in law from that found under section 177D.

Creation of circumstances or state of affairs necessary The application of Part IVA to the choice to consolidate also calls for an

evidentiary investigation into the purpose of entering into or carrying out the

scheme, whatever its legal character or evidentiary foundations. If the purpose

is found to be the creation of the circumstances or state of affairs necessary to

make the choice to consolidate, there will be a tax benefit within the meaning of

section 177C (and therefore section 177D).

The essential circumstances or state of affairs, the existence of which are

necessary to enable the choice to be made in the context of consolidations, is

that there be a consolidatable group for the purpose of section 703-50, as


defined by sections 703-10 and 703-15. There may be many cases where

steps need to be taken, or things need to be done, to create the circumstances

or state of affairs which permit consolidation in a particular way. It is, therefore,

likely that a tax benefit may be found to exist in many cases where there have

been steps taken, including reorganisations, that permit the consolidation as

chosen. That is, that some companies will have been constituted as

consolidatable groups for the specific purpose of enabling consolidation of

those specific companies alone, that others will have been added to, or

removed from, the consolidatable group to enable consolidation of a group with

or without them, etc. In each such case it is likely that the definition of tax

benefit will be satisfied and that it will be necessary to proceed to the next step

in the analysis of whether Part IVA applies.

The likelihood that group reorganisations may prevent reliance upon the

exception in section 177C(2) raises an important question of policy about the

relationship between anti-avoidance objectives of Part IVA and the legitimate

operation of legislation designed to confer tax benefits where those tax benefits

can only be secured by some reorganisation or restructuring. When Part IVA

was enacted it included the provisions in section 177C(2) which excluded from

the definition of tax benefit all those choices and elections provided for by the

Assessment Act. The theory behind the exclusion might be explained by

reference to the section 260 jurisprudence which preceded Part IVA: namely,

that the “choice principle” was to be removed except only to the very limited

extent that the legislation itself conferred a tax benefit by a statutory provision

expressly providing for an election, choice, etc; see: Case W58 (1989) 89 ATC

524 at 536; Ryan v F.C. of T. [2004] AATA 753 paras [32] and [35]. Thus, the

concession conferred by section 177C was not to be available if the taxpayer

needed to construct the conditions necessary to come within the statutory

choice. Seen in that way there was a clear attempt to overcome what had been

thought to be the problems in W.P. Keighery Pty Ltd v F.C.T (1957) 120 CLR

66, Mullens v F.C.T (1976) 136 CLR 290, Slutzkin v F.C.T (1977) 140 CLR 314

and Cridland v F.C.T (1977) 140 CLR 330. In other words, the taxpayer would

lose the benefit of any concession if the entitlement to the concession

depended upon the construction of the preconditions to the entitlement.


The new consolidations provisions has ushered in a regime which section 700-

10(c) describes as a “systemic solution” but which may not readily fit the mould

contemplated when section 177C(2) was first enacted. To come within the

terms of the consolidation regime it may be necessary to undertake structural

changes and reorganisations. A question which arises is how can those

changes and reorganisations be accommodated within the structure, language

and jurisprudence of Part IVA. Accommodation may perhaps be obtained

through a concessional construction of the requirement in section 177C(2) of

“attribution” and of the characterisation of the purpose of creating of

circumstances or the state of affairs necessary to make the election. Both the

Commissioner and the Courts may need to interpret these statutory conditions

in light of the evident intention in the consolidations regime to bring about

changes and reorganisations. A problem for such an approach, however, may

be that the words in section 177C(2) may lack the nimbleness to excise from

the definition of tax benefits the very reorganisations compelled and

contemplated by the new regime. If not, it may be to section 177D that all will

need to look for assistance.

Roll-overs Some reorganisations in the context of consolidations have necessitated using

the roll-over provisions. In that context it may be necessary to consider the

application of section 177C(2A) which provides other exclusions form the

definition of tax benefit. That section provides:

“A reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme is to be read as not including a reference to:

(a) the assessable income of the taxpayer of a year of income not including an amount that 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 where:

(i) the non-inclusion of the amount in the assessable

income of the taxpayer is attributable to the making of a choice under Subdivision 126-B of the Income Tax


Assessment Act 1997 or an agreement under Subdivision 170-B of that Act; and

(ii) the scheme consisted solely of the making of the

agreement or election; or

(b) a capital loss being incurred by the taxpayer during a year of income the whole or part of which would not have been, or might reasonably be expected not to have been, incurred by the taxpayer during the year of income if the scheme had not been entered into or carried out where:

(i) the incurring of the capital loss by the taxpayer is

attributable to the making of a choice under Subdivision 126-B of the Income Tax Assessment Act 1997 or an agreement under Subdivision 170-B of that Act; and

(ii) the scheme consisted solely of the making of the

agreement or election.”

It is useful to compare the language in s 177C(2A), which applies to a choice to

roll over an asset under Subdivision 126-B, to that employed by s 177C(2)

which is applicable to choices generally. Section 177C(2A) only applies if the

scheme consisted solely of the making of the agreement or election whereas s

177C(2) operates if the scheme was not entered into or carried out by any

person for the purpose of creating any circumstance or state of affairs the

existence of which is necessary to enable the relevant election to be exercised.

The explanation for the difference was stated in the Explanatory Memorandum

that accompanied Taxation Laws Amendment Bill (No 2) 1998 (which

introduced s 177C(2A) and amended s 177C(2) to exclude it from applying to a

rollover election under Subdivision 126-B) as follows:

“1.65 As all or part of a capital loss may reduce a capital gain and thus reduce assessable income, paragraph 177C(2)(a) may apply to a capital loss to which new paragraph 177C(2)(c) also applies. Consequently, item 5 amends subparagraph 177C(2)(a)(i) so that it will not apply to an amount which has not been included in assessable income, where that benefit is attributable to a declaration, election or selection, giving of a notice or exercising of an option that was made under section 160ZP or 160ZZO.

1.66 The lack of protection under subsection 177C(2) to loss transfers

or rollovers under sections 160ZP and 160ZZO could result in Part IVA canceling the benefit granted by these provisions in


'normal' or 'ordinary' rollover situations. To avoid this occurring, new subsection 177C(2A) is inserted to provide that the making of an agreement under section 160ZP or an election under section 160ZZO does not itself constitute a scheme for the purposes of Part IVA. [Item 7] New paragraph 177C(2A)(a) applies to a tax benefit relating to a reduction of assessable income, and new paragraph 177C(2A)(b) applies to a tax benefit in relation to a capital loss being incurred. Consequently, Part IVA could only apply in such cases if the making of the agreement or election was part of a wider scheme which had as its sole or dominant purpose the creation of a capital loss which would not have existed if the wider scheme had not been entered into.

1.67 Subsection 177C(3) deems the non-inclusion of an amount in

assessable income or the allowance of a deduction to be expressly attributed to a declaration, election or selection, giving of a notice or exercising of an option if, but for it, the amount would have been included in assessable income or the deduction not allowed. Item 8 repeals and replaces it with a new subsection 177C(3) which applies not only to the non-inclusion of income or the allowance of a deduction, but provides that the incurring of a capital loss will be attributable to a declaration, election or selection, giving of a notice or exercising of an option if the capital loss would not have been incurred if the declaration, election or selection, giving of a notice or exercising of an option had not been made.”

Section 177C(2A) was, thus, introduced to limit the circumstances in which

taxpayers may rely upon the making of a choice under Subdivision 126-B to

avoid the application of Part IVA. Despite the commentary in the Explanatory

Memorandum about the amendments being directed towards schemes entered

into for the purpose of generating capital losses, the narrower test in s

177C(2A) is applicable whenever a choice is made under Subdivision 126-B. In

many cases where roll-over relief is sought in the context of consolidation it

may be difficult to satisfy the requirement of section 177C(2A) that the scheme

consisted solely of the making of the operative agreement or election: often the

scheme may be capable of being seen as part of something wider. Time to test the 177D purpose The time when the scheme was entered into or carried out and the law at the

time will both be relevant to the inquiry as to purpose. In CPH Property Pty Ltd

v F.C.T [1998] ATC 4983, Hill J said:


“The time for testing the dominant purpose must be the time at which the scheme was entered into or carried out and by reference to the law as it then stood.”

His honour made these observations in the context of an argument that a

scheme may have been entered into at a time before the operative effect of the

law. In the context of consolidations the time for testing dominant purpose may

become a crucial question for many reasons. The Commissioner may be

confronted with a variety of schemes entered into at different times before the

operative date of the consolidations law. The earlier the date of the scheme the

less likely the conclusion on the facts that it was entered into to secure any tax

benefit specifically provided by the consolidations legislation.

Whether the dominant purpose required by section 177D can be satisfied for a

scheme completed before the coming into force of the consolidations legislation

is an open question. In CPH Hill J went on to say:

“It is unnecessary to consider what the case may be if the entry into the scheme and the carrying act of the scheme were in different income tax years, and in one of those years the law different from that in another.”

The implication from the passages quoted from the reasons for judgment of Hill

J is that a scheme which is completed in a year of income prior to the years in

which the tax benefit arises is not within the contemplation of Part IVA. His

Honour’s reservation was only in the case where the change in law occurred

between the year of income in which the scheme was entered into and the year

of income in which the scheme was carried out. His honour was in no doubt,

however, that it was not reasonable to conclude that a scheme was designed to

obtain a tax benefit which the law did not provide for at the time when the

scheme was entered into. Immediately preceding the first of the passages

quoted his Honour had said:

“It is interesting here to note the problem of adopting the amended version of s 79D and applying to it the Part IVA analysis. All the steps said to constitute the plan were carried out in the 1990 tax year, that is to say prior to the amendment made to s 79D applicable in the year of income ended 30 June 1991. How would it be reasonable to conclude that these steps were designed to attract the amended s 79D when that section was


not even law at the time the steps were taken? In my view the application of the Part can only be tested with respect to the obtaining of a tax benefit in accordance with the law as applicable to the time the scheme is entered into or carried out. It cannot be tested retroactively after the scheme has been entered into and carried out merely because in the meantime the law has changed in respect of assessments for that year.”

It is likely that these observations will come to be tested in the context of the

consolidations regime. In Electricity Supply Industry Superannuation (Qld) Ltd v

F.C.T [2003] FCAFC 13 the Full Federal Court upheld the application of section

177EA to a scheme entered into long before the enactment of section 177EA,

but those provisions are particular and the same conclusion may not be readily

available under the other provisions of Part IVA.

It might be said against his Honour’s view, and in favour of the view that a

scheme designed to secure a prospective benefit may be caught by Part IVA,

that if there is nothing in Part IVA itself that expressly precludes its application

to a scheme completed prior to the change of legislation but directed to

securing the benefits of that prospective change or to avoid its burdens. There

may be many situations in the context of consolidations where there have been

reorganisations of consolidatable groups which secure benefits, or avoid

burdens, well into the future, but where the schemes to achieve those results

were completed before the operative date of the legislation. There are also

likely to be many situations of the case expressly reserved by his honour,

namely where the scheme was entered into pre enactment but carried out post

enactment. In that case there seems less reason to expect that Part IVA could

not apply.

Problems of implementation A fertile field for interesting disputes may be in the implementation of Part IVA

to a consolidated group. A problem of implementation may lie in the single

entity rule. The essence of the rule, and the essential element of

consolidations, is that each subsidiary of a consolidated group ceases to be a

separate entity for tax law purposes: see section 701-1. On that basis it is


relevant to ask such questions as: how can Part IVA apply to companies that

for tax law have ceased to exist; to which company can the Commissioner

make determinations; and, how can compensating adjustments be made? It

may be that those drafting the consolidations legislation knew the answers to

these procedural/implementation questions. If so, it would have been useful if

they had been indicated in the mass of words to have been printed about

consolidations. We must assume that the present mechanics of Part IVA were

thought sufficient by our legislators to deal with the consolidations world.

The first step to implement Part IVA by the Commissioner requires the making

of a determination to cancel a tax benefit by the taxpayer: section 177F. The

first question raised by this step is "who is the relevant taxpayer" for this

purpose. If the taxpayer is the subsidiary, it has ceased to be a separate entity

for tax purposes. The significance of this piece of semantics is not just that the

entity may not be capable in law of being the subject of a determination but,

more importantly, that the entity through which the head company receives the

tax benefit does not in law itself obtain the tax benefit: the effect of the law is to

give the tax benefit to the head company.

Another aspect of the same problem arises from the fact that the taxpayer who

is by force of law made to obtain the tax benefit under consolidation may not

have been the taxpayer for whose benefit the scheme was entered into or

carried out. Section 177F(1) only permits the cancellation of a tax benefit

obtained by a taxpayer. On one view the relevant taxpayer under

consolidations must be the head company. However it may not be possible to

say about the scheme, as is required by section 177D, that it was entered into

or carried out for the purpose of enabling that taxpayer to obtain that tax

benefit. Such problems are likely to be many and acute during the transitional

phase. It can scarcely be assumed that the consolidations legislation was

intended to prevent the application of Part IVA. On the contrary, the working

presumption must be that the new rules were thought capable of working with

Part IVA on its current terms. Thus it may be that the taxpayer for section 177F

purposes must still be taken to be the subsidiary of a consolidated group where

the scheme was directed to securing a tax benefit to that entity notwithstanding


that it will be obtained by the head company upon or through consolidations.

The relevant taxpayer will, of course, be the head company if the scheme can

be said to have been to secure the tax benefit for that taxpayer whether

through consolidations or otherwise.

In each case the next step for the Commissioner to take is "such action as he

considers necessary to give effect to that determination": section 177F(1). In

FCT v Jackson [1990] 90 ATC 4990 the Full Federal Court expressed the view

that the only way for the Commissioner to give effect to a determination was by

making an assessment: c.f. FCT v Stokes [1997] 97 ATC 4001. The breadth of

the power conferred upon the Commissioner by these words in section 177F(1)

may yet to be fully explored, but it can be assumed that it includes the power to

raise an assessment and, presumably, an assessment against the head

company whether or not the scheme had been one to obtain a tax benefit by

the head company.

G. T. Pagone Owen Dixon Chambers West 28 March 2007

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