Case: Commissioner of Taxation v Sleight [2004] FCAFC 94 ; (2004) 136 FCR 211
Outcome: considered
Section 177D(b) requires the decision-maker to consider the eight matters referred to in the paragraph, and those matters alone, and to decide on the balance of probabilities if a certain conclusion would be drawn: Peabody v Commissioner of Taxation (1993) 40 FCR 531 (' Peabody ') at 541 per Hill J (Ryan and Cooper JJ concurring); Calder v Federal Commissioner of Taxation (2005) 61 ATR 267 (' Calder ') at 290 [91]. The conclusion to be drawn is, in this case, as to the relevant taxpayer's purpose and by reason of s 177A(5) that means his or her dominant purpose. A relevant taxpayer may have more than one purpose and one of his or her purposes may be to obtain commercial benefits. However, if, having regard to the matters in s 177D(b) , his or her dominant purpose is to obtain a tax benefit in connection with the scheme, then Part IVA applies even if one of the relevant taxpayer's other purposes is to obtain commercial benefits: Commissioner of Taxation v Spotless Services Ltd [1996] HCA 34 ; (1996) 186 CLR 404 (' Spotless ') at 415-416; Commissioner of Taxation v Hart [2004] HCA 26 ; (2004) 217 CLR 216 (' Hart ') at 227 [16] per Gleeson CJ and McHugh J; Commissioner of Taxation v Sleight [2004] FCAFC 94 ; (2004) 136 FCR 211 (' Sleight ') at 229-230 [67] and 238-239 [113] per Hill J (with whom Hely J agreed); Calder at 291 [92]) . The question is to be determined objectively in the sense that the question is not as to the relevant taxpayer's subjective intention and purpose: Spotless at 421-422, 424; Hart at 233 [37], 243 [65] per Gummow and Hayne JJ; Peabody at 542; Calder at 291-292 [96]. What these propositions mean in this case is that the applicant's subjective purpose in entering into the scheme, even if a commercial one, is not of itself relevant. Furthermore, a decision-maker may conclude, after having regard to the matters in s 177D(b) , that the applicant had a commercial purpose in entering into the scheme but that will not assist him if it is otherwise concluded that his dominant purpose in entering into the scheme was to obtain a tax benefit in connection with the scheme. 74 The authorities establish that in relation to the matters in s 177D(b) in any particular case one matter may be decisive and in another case it may only be after a careful weighing of all matters that a conclusion can be drawn. Furthermore, some factors may be neutral, others may point towards a commercial purpose but the conclusion drawn from a consideration of all matters may support a conclusion of a dominant purpose to obtain tax benefits in connection with the scheme ( Sleight at 229-230 [67]; Calder at 290 [91]). 75 In [58] above I have identified the Tribunal member's conclusion with respect to this matter and the fact that he said the six matters he identified did not 'diminish' the finding that the applicant's prevailing purpose was to obtain tax benefits in connection with the scheme. The applicant submits the Tribunal member should have found that the six matters negated a finding of a prevailing purpose of obtaining tax benefits, or at the least diminished it. 76 It is important to appreciate the reasoning of the Tribunal member. He identified features relevant to the manner in which the scheme was entered into or carried out. He decided, after considering those features, that a conclusion of a dominant purpose of obtaining tax benefits should be drawn. With respect, the Tribunal member's use of the word 'diminished' is not entirely felicitous, but I think, reading his reasons as a whole, it is clear what he meant. I do not think he was saying the six matters should not be considered or should not be weighed in the balance. In my opinion, all the Tribunal member was saying was that weighing them in the balance they did not dissuade him from reaching the conclusion that, in relation to the manner in which the scheme was entered into or carried out, the applicant's prevailing purpose was to obtain tax benefits in connection with the scheme. 90 The Tribunal member was entitled to have regard to the round-robin arrangements in concluding that the applicant's prevailing purpose was to obtain tax benefits. The weight he placed on the matter is unclear but ultimately that was a matter for him, and the applicant's case is not advanced by referring to another case where a Judge said that he was not inclined to place a great deal of weight on the round-robin arrangements Sleight at 232 [77] per Hill J). 91 The Tribunal member did not err in law in his approach to the manner in which the scheme was entered into or carried out, and the conclusions he reached in relation to that matter were reasonably open to him. 92 The Tribunal member said that the form of the scheme was one whereby the applicant conducted a business of growing wine grapes and using a limited recourse loan, whereas the substance of the scheme was a passive investment which, but for the tax benefits, would ordinarily have been cast in a different form. He said that that difference pointed to a prevailing purpose on the part of the applicant to obtain tax benefits. 95 The approach taken by the Tribunal member in relation to this matter was consistent with the approach taken in decisions of this Court. In Sleight , Hill J said (at 233 [81]- [82]): 'There is a difference between the form and the substance of the present scheme. In form there is an option whether to farm alone or to employ the management company. There is a management agreement and financing and interest payments. The form, involving prepayment of management fee and interest is, it may be concluded readily, designed to increase the taxation deductions available to an investor. The substance is, however, quite different. As senior counsel for the Commissioner put it, in substance the investor is a mere passive investor in what, once the tax features are removed, is a managed fund where no deduction would be available, or perhaps an alternative characterisation of the substance of the scheme is an investment in shares in the Land Company which at the expiration of 15 years is to own the tea tree plantation. With respect to the learned primary judge it is not correct to say that form and substance are the same. Rather the particular shape the investment took was clearly fashioned in a way that would maximise the tax deductions. They were geared up by the loan agreement with up front interest payments. But for the tax deductions the form the investment might be expected to take would clearly relate more to the substance of what happened. Rather than a loan with prepaid interest where the loan was to be repaid out of the investor's profit share without recourse (achieved through the indemnity agreement) the substance is that the investor was to receive only a lesser share of profit over the term of the loan agreement. The loan allowed, also, the prepayment of the management fee and the deduction which emanated from that.' 96 I refer also to the Full Court's decision in Calder (at 295-296 [116]-[118]). 97 I did not understand the applicant to challenge the Tribunal member's conclusions in relation to this matter. 102 The Tribunal member said that the matter must be considered as at the date the scheme was entered into and he referred to the reasons of Carr J in Sleight at 255-256 [223]-[224]. The applicant did not take issue with that approach. 103 The applicant's first submission in relation to the Tribunal member's reasons in relation to this matter was that he had made an error in concluding that, according to the projections, the applicant would begin to derive after tax returns in 2007, that is, after 10 years. The applicant submitted that this was wrong and that the projections indicated after tax-returns after six years. As I understand the projections, the applicant is right in the sense that after about six years there are after-tax returns before repayments of the loan are taken into account. If repayments of the loan are taken into account there are only after-tax returns after 10 years. 104 I have no doubt that the Tribunal member did not misunderstand the effect of the projections. Earlier in his reasons he summarised the position accurately as follows: 'Moreover, until 2007, tax savings were, in substance, the only source of returns to the participant as follows: (a) From 1997-2001, the participant's returns were the result of tax savings which more than covered the cash payments required of him pursuant to the loan; (b) From 2003-2006, the project was expected to generate revenue of its own. However, in those years, the structure of the loan resulted in neutral cashflows to the participant who, after meeting his loan obligations was to be paid enough only to meet anticipated tax obligations. (c) Only in the latter years of the project, 2007-2012, when the loan was paid off, was the project expected to be cashflow positive to the participant by reason of revenue received from the proceeds of the project itself.'