On 14 November 2012, the High Court, in the case of Mills v Commissioner of Taxation [2012] HCA 51, allowed an appeal against a Full Federal Court decision and set aside a determination of the Commissioner of Taxation (the Commissioner) to deny franking credits under a franking credit scheme relating to certain securities issued by the Commonwealth Bank of Australia (the Bank). 

This was a test case between the Commissioner and the Bank regarding the application of section 177EA of Part IVA of the Income Tax Assessment Act 1936 (the Act),  which has application to certain imputation benefit schemes.

While the decision will be welcomed by financial institutions planning hybrid securities issuances, with the release by the Assistant Treasurer on 16 November 2012 of an exposure draft of legislation amending Part IVA, the uncertainty of the ambit of operation of these general anti-avoidance provisions will unfortunately persist for some time yet.


The dispute came about as the Bank needed to raise Tier 1 capital (specifically, of the “non-innovative residual” type) for the purposes of APRA prudential standards and as a consequence issued ten million “PERLS V”, a stapled security comprising a preference share stapled to an unsecured promissory note issued out of the Bank’s New Zealand branch. The securities were treated as equity under Australia’s debt/equity tax rules and the holders of PERLS V were Australian residents that were entitled to quarterly distributions which would be fully franked.

Determination of Commissioner

The Commissioner made a determination under section 177EA(5)(b) of the Act to cancel the franking credits attaching to the PERLS V on the basis that the Bank entered into the scheme for the purpose of enabling the holders of PERLS V to obtain an imputation benefit. Some of the factors that the Commissioner took into consideration in making the determination were that:

  1. distributions on the PERLS V were sourced from profits of the Bank’s New Zealand branch which were not subject to tax in Australia; and
  2. the distributions were deductible to the Bank’s New Zealand branch in New Zealand.

The question before the High Court was whether the Bank entered into the scheme for the purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling the holders of PERLS V to obtain an imputation benefit. More specifically, the issue was whether obtaining imputation benefits was an incidental purpose. If it was, the precondition to section 177EA applying was not met and the Commissioner would not have had the power to make the section 177EA determination.

Relevance of Purpose

The High Court, in a judgment delivered on its behalf by its newest member, Gageler J, held unanimously that, from the perspective of a reasonable person, the Bank did not enter into the scheme for the purpose of enabling holders of PERLS V to obtain an imputation benefit. Specifically, the High Court ruled that the purpose of allowing holders to obtain franking credits was an incidental purpose of entering into the PERLS V scheme and that the dominant purpose was to raise Tier 1 capital.

The High Court ruled that the relevant circumstances to be taken into account included that the distributions were to be paid by the New Zealand branch of the Bank (without being subject to tax in Australia) and that the distributions would be deductible in New Zealand. Notwithstanding this, the High Court found that those circumstances had no material bearing on the conclusion that the purpose of providing holders of PERLS V with imputation benefits was only an incidental purpose to the main purpose of raising Tier 1 capital. As the purpose was only an incidental purpose, the necessary precondition to the Commissioner being able to make a determination under section 177EA was not present so as to enable the Court to order that the determination be set aside.


There have been very few cases on the potential ambit of operation of section 177EA and the High Court decision in Mills case provides valuable guidance in this regard. However, on 16 November 2012 the Assistant Treasurer released an exposure draft of legislation amending Part IVA so as to address what are described in the exposure materials as “technical deficiencies in the way in which Part IVA determines whether or not a tax advantage has been obtained in connection with an arrangement.” The amendments are proposed to apply from 16 November 2012 rather than from the original date of the announcement of proposed changes to Part IVA. We will be providing our analysis of the proposed changes in a Legal Update to be issued shortly. However, we believe that the potential ambit of operation of these amendments may be productive of uncertainty rather than clarity.