The Federal Court has held that a taxpayer that carried on a financial services business entered into 2 schemes for the dominant purpose of obtaining a tax benefit. However, a third scheme identified by the Commissioner was found not to have been entered into for the dominant purpose of obtaining a tax benefit.
The taxpayer was a member of a group of companies and trusts that carried on a financial services business known as “Liberty Financial” (Liberty).
In 2007 and 2008 the Liberty group implemented a series of steps in anticipation of conducting an initial public offering (IPO) of “stapled securities” in the taxpayer and the Minerva Financial Group Trust (MFGT). Those steps included a decision to establish all future securitisation trusts under the Minerva Holding Trust (MHT) rather than under the main operating company in the Liberty group, namely Liberty Financial Pty Ltd (LF), as had been done in the past. The planned IPO did not proceed for a variety of reasons, including a downturn in global financial markets.
According to the Commissioner, the establishment of securitisation trusts under MHT and not LF had the effect of removing income that would have been derived within the “corporate silo” comprising LF and the taxpayer and instead having that income flow through the newly established “trust silo” comprising MHT and MFGT, ultimately to the non-resident owners, Jupiter Holdings BV (Jupiter), and later Vesta Funding BV. The effect of the income flowing through the trust silo to the non-resident owners was that the income was subject to 10% withholding tax instead of the 30% corporate tax rate that would have otherwise applied had it continued to be derived in the corporate silo.
In November 2016 and January 2017 the Commissioner made determinations under s 177F of ITAA 1936 to cancel the tax benefits obtained by the taxpayer. The Commissioner claimed that during the tax years ended 30 June 2012 to 30 June 2015 the taxpayer entered into or carried out 3 schemes for the dominant purpose of obtaining a tax benefit from each of them within the meaning of s 177D of ITAA 1936.
The 3 schemes identified by the Commissioner were broadly as follows:
• The first scheme comprised the establishment of corporate and trust “silos”, and the nomination of MHT as the residual income unitholder of the securitisation trusts established from 2009, and directing income from the securitisation trusts through MHT.
• The second scheme comprised the transfer of ownership of MFGT from the taxpayer to the ultimate parent company, Jupiter, in December 2007, and the failure of the taxpayer, as trustee of MHT, to distribute more than only nominal amounts of MHT’s distributable income to the corporate silo, instead distributing the majority of income to the trust silo.
• The third scheme was similar to the second scheme, except that it did not involve the transfer of ownership of MFGT from the taxpayer to Jupiter.
The Commissioner gave effect to the determinations by issuing amended assessments to the taxpayer for the tax years ended 30 June 2012 to 30 June 2015. After the Commissioner disallowed the taxpayer’s objections to the amended assessments, the taxpayer appealed against the objection decision.
The taxpayer contended that the decision by the Liberty group to hold newly formed securitisation trusts in a holding trust, separately from the operating assets of the business, was driven by a desire to optimise the Liberty group’s capital structure and improve access to funding, including by way of an IPO. It also pointed out that it had received consistent advice over the years that an IPO of stapled securities, consisting of a unit in a trust holding the group’s passive financial assets and a share in the company holding the group’s active assets was the optimal way to go to market. The taxpayer said that after the IPO planned for July 2007 did not proceed it would have been commercially irrational for Liberty not to have carried out the steps identified in the schemes relied on by the Commissioner.
The Commissioner contended that the dominant or prevailing reason for the taxpayer to undertake the actions constituting the first scheme was the tax benefit and not the commercial reasons argued by the taxpayer. In relation to the second scheme the Commissioner submitted that the change in structure effected by the scheme was not justified by its economic effect and the taxpayer did not provide evidence of any cogent commercial or other reason why it failed to distribute, or distribute more of, MHT’s distributable income to the special unitholders. In relation to the third scheme the Commissioner submitted that the dominant or prevailing reason for income being distributed offshore, rather than directed to the operating entity (LF), was the tax benefit of doing so.
The Federal Court set aside the Commissioner’s objection decision in part. It held that having regard to the factors in s 177D(b), the taxpayer did not enter into or carry out the first scheme for the dominant purpose of enabling it to obtain a tax benefit in connection with that scheme.
With respect to the second scheme and having regard to the factors in s 177D(b), the taxpayer entered into or carried out the scheme for the dominant purpose of enabling it to obtain a tax benefit in connection with that scheme.
Finally, having regard to the factors in s 177D(2), the taxpayer entered into or carried out the third scheme for the dominant purpose of enabling it to obtain a tax benefit in connection with that scheme.