Case: Commissioner of Taxation v Hart [2004] HCA 26 ; (2004) 217 CLR 216
Outcome: cited
Assuming there was a tax benefit, s 177D requires attention to the question whether, having regard to the eight factors listed in para (b) "it would be concluded that" Mr Lenzo or any other person who entered into or carried out the scheme or any part of it "did so for the purpose of enabling [Mr Lenzo] to obtain a tax benefit in connection with the scheme". The purposes to be considered are those attributable to "relevant persons who entered into or carried out the scheme or any part of the scheme". Section 177D(b) is not concerned with attributing a purpose to "the scheme": Commissioner of Taxation v Hart [2004] HCA 26 ; (2004) 217 CLR 216 at [63] . The test of purpose is objective and not to be answered in whole or in part by reference to actual subjective purposes. If there is more than one purpose to be imputed, the question is whether the taxation benefit purpose was the dominant purpose. By that is meant the "ruling, prevailing, or most influential purpose": Federal Commissioner of Taxation v Spotless Services [1996] HCA 34 ; (1996) 186 CLR 404 at 416. The importance of setting aside subjective purposes whether they favour the taxpayer or the Commissioner's position was emphasised in the joint judgment of Gummow and Hayne JJ in Hart 217 CLR at [65] where, speaking of the structuring of the loan in issue in that case they said: Of course the loan was structured in the say 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 event 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. 121 The question posed by s 177D(b) is holistic. Each of the eight specified factors must be taken into account. But the decisionmaker, being the Commissioner, or a judge on appeal from the Commissioner, is not required to award points for each factor like a judging panel in an ice skating competition. The enumerated factors identify essential elements associated with entry into and implementation of the scheme in question and are to be considered together. Having regard to the submissions of both parties, I make the following observations in respect of each of the eight factors listed in s 177D(b): (i) As to the manner in which the scheme was entered into or carried out. 122 The marketing of the scheme as set out in the prospectus supports the proposition that it was to be entered into as a serious commercial project. On Mr Sammon's evidence it did not need to rely upon tax benefits in order to provide a sufficient financial return to qualify as an investment grade product. I do not consider that the evidence indicates any over-emphasis on tax benefits to be derived from the scheme. The marketing of any commercial investment product can draw attention to its tax benefits by rendering the gaining of those benefits the dominant purpose of the product. In this case, in my opinion, the tax benefits as marketed were subordinate to the reasonably based commercial returns albeit those returns, being high, carried a corresponding level of risk. 123 A second relevant aspect of the manner in which the scheme was entered into was said by the Commissioner to be related to the timing of Mr Lenzo's execution of the documents. This falls for consideration under the factor identified in s 177D(b)(iii). I consider that the fact that the scheme was entered into on 30 June 1998 and the execution of prepared proforma documents occurred on that date can be taken as indicative of a desire to obtain a tax benefit for the 1998 year of income. But while it goes into the balance in support of the Commissioner's contentions as to dominant purpose, it is not a factor to which, in this case, I attribute great weight. If there is a significant commercial benefit to be derived from an investment and an associated tax benefit, entry into the investment scheme on 30 June 1998 with a view to obtaining the tax benefit in that year is entirely consistent with a predominantly commercial purpose. 124 The round-robin upon which much emphasis was placed by the Commissioner carries with it the negative connotations traditionally associated with such apparently artificial transactions. I accept that Mr Lenzo's lack of awareness of that transaction is immaterial. However the significance of it for the assessment of a dominant purpose of obtaining a tax benefit for Mr Lenzo is not apparent. In a sense it overlaps with the question whether a tax benefit was obtained given the alternative of external financing to individual growers. It was not as though they were being offered non-recourse loans by Arwon. While the round-robin is a factor which in combination with other matters might support an inference of a dominant tax purpose, it is not determinative of the existence of such a purpose. Moreover it may be seen as an incident of the much more significant commercial purposes achievable with or without a tax benefit. 125 The Commissioner also pointed to the small initial outlay of $535 in the 1998 year of income and the obligation to make a payment of only $7,506 on 30 September 1998. He contended that the savings of $10,112.25 from the total tax deductions claimed of $20,850 exceeded the amount of the payment required on 30 September 1998. He went on to refer, under this heading, to the effect of the various agreements on Mr Lenzo's ability to claim tax deductions in 1999 and 2000. He also argued that only the amount of $7,506 actually paid out of the $20,315 nominally contributed by Mr Lenzo in terms of his liabilities was ever available to the manager for the pursuit of the commercial objectives of growing, harvesting and selling the Indian sandalwood. He contended that the amount of the initial maintenance fees and rent payable by Mr Lenzo was not related to the pursuit of those commercial objectives but reflected a desire to enable him to achieve tax savings in excess of the amount of his initial cash outlay in relation to the project. At one point in the submissions the Commissioner seemed to be slipping into a subjective test of purpose. 126 It was pointed out by counsel for Mr Lenzo that the $7,506 was paid from his own cash funds. His 1998 assessment issued in mid-November did not result in a tax benefit to him. Counsel submitted that there was no evidence that the borrowed funds in 1998 were not "available" for the management of the wood lots. Counsel pointed to financial statements of the EKS project manager which showed substantial funds available in the 1998 year. In 1998 and 1999 the EKS project manager had sufficient funds available for the management of the allotments. 131 It is true that but for the application of Pt IVA Mr Lenzo's deductions would be allowable under s 8-1 of the 1997 Act as business expenditures. It is plain however that a mere fact that a taxpayer claims a tax benefit does not mean that Pt IVA applies. As Gummow and Hayne JJ said in Hart [2004] HCA 26 ; 217 CLR 216 at [53] : The bare fact that a taxpayer pays less tax, if one form of transaction rather than another is made, does not demonstrate that Pt IVA applies. Simply to show that a taxpayer has obtained a tax benefit does not show that Pt IVA applies. (v) Any change in the financial position of the relevant taxpayer that resulted, will result, or may reasonably be expected to result from the scheme 132 The Commissioner simply submitted under this heading that the financial position of Mr Lenzo was improved by the tax savings which the scheme generated. He received immediate tax savings which exceeded his cash outlays in respect of the scheme in the 1998 and 1999 years of income. In the following years of income he would receive the benefit of deductions for interest accrued but unpaid and indemnity fees which would all but offset the actual cash outlays in respect of the indemnity fees. His exposure to further cash outlays would turn upon the success or otherwise of the plantation and the operation of the indemnity agreement at the completion of the scheme. Counsel for Mr Lenzo submitted that this factor is to assessed at the time that the relevant transactions were entered into. 133 The change in the financial position of Mr Lenzo that must be considered under (iv) is not limited to tax benefits but also the prospect of a commercial return which he has acquired by the investment. The evidence was clear that this was a real prospect although attended by the usual risks of any agricultural cultivation scheme. The forecast financial returns for this project were described as "attractive on a pre-tax basis". The forecast returns cannot, in my opinion, be dismissed as merely speculative. There was, on the evidence, a reasonable prospect of a return. (iv) Any change in the financial position of any person who has or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme.