Federal Court of Australia
Guardian AIT Pty Ltd ATF Australian Investment Trust v Commissioner of Taxation  FCA 1619
QUD 147 of 2020
COMMISSIONER OF TAXATION
DATE OF ORDER:
THE COURT ORDERS THAT:
1. Each of the appeals pursuant to s 14ZZ(a)(ii) of the Taxation Administration Act 1953 (Cth) be allowed.
2. Each of the respective objection decisions of the respondent be set aside.
3. In lieu thereof, each objection be allowed in full.
4. Each matter be remitted to the respondent for the making of the requisite amended assessments in accordance with the Taxation Administration Act 1953 (Cth).
5. The respondent pay the respective applicant’s costs of and incidental to each appeal, to be fixed by a registrar if not agreed.
1 It was the great, twentieth century, Swiss analytical psychologist, Dr Carl G. Jung who conceived of the concept of “synchronicity”, a word which has passed into the English language as descriptive of “events which coincide in time and appear meaningfully related but have no discoverable causal connection” (Oxford English Dictionary). As will be seen, the foundation for the assessments which are controversial in the present taxation appeals lies in it appearing to the respondent Commissioner of Taxation (Commissioner) that there is a meaningful relationship between particular events attended with adverse fiscal consequences, whereas the applicants contend that, in terms of adverse fiscal consequence, no such meaningful relationship exists, only synchronicity.
2 There are two separate taxation appeals for determination, with the applicants respectively being, Guardian AIT Pty Ltd (Guardian), as the trustee of the Australian Investment Trust (AIT) (in proceeding QUD 146 of 2020) and Mr Alexander Kurt Springer (Springer) (in proceeding QUD 147 of 2020). This reflects the Commissioner’s assessing approach, which was to issue what one might term primary income tax assessments to AIT and alternative income tax assessments to Mr Springer. In turn and reflecting this assessing approach, there are two separate objection decisions each of which has become the subject of an appeal instituted pursuant to Pt IVC of the Taxation Administration Act 1953 (Cth) (TAA). The two taxation appeals have been heard together on the basis that the admissible evidence tendered falls for consideration in respect of the determination of each.
3 As in any taxation appeal, the obligation which falls on the respective applicants is to prove that the assessments issued to them are excessive. Insofar as so doing depends on proof of particular facts, they are not obliged to prove these to demonstration, only on the balance of probabilities: s 140(1), Evidence Act 1995 (Cth).
4 The existence, ownership and capacity of particular entities and the occurrence of particular events, as related in the parties’ respective appeal statements, are not in themselves controversial and certainly proved by the evidence led by the applicants. In light of that, the following recitation of events draws upon those appeal statements. It will be necessary to add further detail to this recitation by reference to particular evidence given by Mr Springer and others.
5 Guardian was, on its incorporation on 7 May 1998, known as Springer Pty Ltd. On 14 December 1999, it changed its name to its present corporate name. Mr Springer owns, and always has owned, all of the issued shares in Guardian.
6 The AIT is a discretionary trust settled on 25 June 1998. It is governed by a trust deed of that date. Until he retired from that role on 14 November 1999, Mr Springer was the trustee of the AIT. On and from that date, Guardian was appointed, and has continued to act as, trustee of the AIT. On the evidence, Guardian acts, and has acted, in no other capacity. Further reference in these reasons for judgement to Guardian is thus to Guardian acting as trustee of the AIT.
7 In relation to the AIT, Mr Springer is the “Principal” (definition of “Principal”, cl 1.1 of the trust deed). One of the powers exercisable under the trust deed by the Principal is the appointment of “any person or corporation (not being the Settlor) determined by the Trustee or the Principal to be a Beneficiary for the purposes of this Deed” (definition of “Beneficiaries”, cl 1.1 of the trust deed). In June 2012, AIT Corporate Services Pty Ltd (AITCS) was incorporated. Thereafter, but also in June 2012, Mr Springer as Principal determined that AITCS be a beneficiary. AITCS thus became a member of the eligible class of beneficiaries in respect of which the trustee of the AIT may exercise a discretion (cl. 3 of the trust deed) to distribute income for the purposes of the AIT. Mr Springer is also, by definition (cl 1.1 of the trust deed), a member of the class of “Beneficiaries”.
8 Guardian as trustee of the AIT is the sole shareholder of AITCS.
9 On 28 June 2012, Guardian appointed the balance of the income of the AIT for the 2012 income year, being $2,640,209, to AITCS. The distribution of $2,640,209 was not paid to AITCS, creating an unpaid entitlement (2012 UPE).
10 On 17 April 2013, AITCS drew on its entitlement to the income of the AIT to discharge its liability to income tax for the 2012 income year of $792,062.
11 On 1 May 2013, AITCS declared a fully-franked dividend in the amount of $1,848,145 payable to the AIT. That dividend was paid by reducing the balance of the 2012 UPE of AITCS to the income of the Trust from $1,848,145 to nil.
12 On 23 June 2013:
(a) Guardian resolved that the amount of net income of the Trust for the 2013 income year attributable to franked dividends be set aside and held on trust absolutely for Mr Springer; and
(b) appointed a share of the net income of the AIT for the 2013 income year in the amount of $2,646,166 to AITCS.
The distribution of $2,646,163 to AITCS was not paid to AITCS, resulting in an unpaid present entitlement arising (2013 UPE).
13 On 14 February 2014, AITCS drew on its entitlement to the income of the AIT to discharge its liability to income tax for the 2013 income year of $595,845.30.
14 On 27 February 2014, AITCS declared a fully-franked dividend in the amount of $1,780,453 payable to the AIT. That dividend was paid by reducing the balance of the 2013 UPE of AITCS to the income of the Trust from $1,780,453 to nil.
15 On 23 June 2014:
(a) Guardian resolved that the amount of net income of the AIT for the 2014 income year attributable to franked dividends be set aside and held on trust absolutely for Mr Springer; and
(b) appointed a share of the net income of the Trust for the 2014 income year in the amount of $2,670,117 to AITCS.
The distribution of $2,670,117 to AITCS was not paid to AITCS, resulting in an unpaid present entitlement arising (2014 UPE).
16 On 20 March 2015, AITCS declared the $2,670,117 trust distribution in its income tax return for the year ended 30 June 2014, resulting in a tax liability of $801,034. AIT subsequently paid AITCS' 2014 tax liability, thereby reducing the amount of the 2014 UPE to $1,869,083.
17 On 18 March 2016, AITCS and the AIT entered into a loan agreement (that complied with s 109N of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936)) in the amount of the balance of 2014 UPE.
18 On 31 March 2016, AITCS declared a $1,471,775 trust distribution made to it by the AIT in the 2015 income year in its income tax return for that income year. This resulted in a tax liability of $441,532.50 for AITCS in respect of the 2015 income year.
19 On 2 May 2016, AIT repaid the balance of the loan to AITCS through the transfer of funds to a bank account held by AITCS.
20 Pursuant to the appointments of net income to AITCS by the AIT identified in the preceding paragraphs, the assessable income of AITCS pursuant to s 97(1) of the ITAA 1936 was in the respective income years specified below (and subject to any application of s 100A) as follows:
(a) income year ended 30 June 2012 - $2,640,209;
(b) income year ended 30 June 2013 - $2,646,166; and
(c) income year ended 30 June 2014 - $2,670,117.
21 In each of the 2012, 2013 and 2014 income years, Mr Springer was a resident of the Republic of Vanuatu.
22 On 17 November 2017, the Commissioner assessed AIT as being liable to income tax under s 99A(4A) of the ITAA 1936 on the basis that s 100A of the ITAA 1936 applied, together with assessments as to administrative penalties, in the following amounts:
Assessment under s 99A
23 For the purposes of these income tax assessments, and the present appeals, the Commissioner’s position was that, on or before 27 June 2012, Guardian (as trustee) and Mr Springer reached an understanding that in the then current income year and future income years:
(a) AITCS would be incorporated for the purpose of being made presently entitled to the income of the AIT;
(b) Guardian as trustee would benefit from the amount to which AITCS was made presently entitled; and
(c) Mr Springer would ultimately benefit from the amount to which AITCS was made presently entitled.
This, the Commissioner termed, the 2012 Understanding. The Commissioner’s contention was that the 2012 Understanding was a reimbursement agreement for the purposes of s 100A of the ITAA 1936.
24 Further or in the alternative, a separate position adopted by the Commissioner for the purposes of these assessments was that, on or before 23 June 2013, Guardian (as trustee) and Mr Springer reached an understanding that in the then current income year and future income years:
(a) Guardian as trustee would benefit from the amount to which AITCS was made presently entitled; and
(b) Mr Springer would ultimately benefit from the amount to which AITCS was made presently entitled.
25 This alternative position the Commissioner termed the 2013 Understanding. The Commissioner’s alternative contention was that the 2013 Understanding was a reimbursement agreement for the purposes of s 100A of the ITAA 1936.
26 The administrative penalties were imposed on Guardian as trustee of the AIT pursuant to s 284-145(1) of Sch 1 to the TAA on the basis that:
(a) , the steps outlined in paragraphs 7, 9, 10, 11, 12, 13, 14, 15 and 17 above constitute: an “arrangement” within the meaning of that term as used in the definition of “scheme” in s 995-1 of the Income Tax Assessment Act 1997 (Cth) (Scheme);
(b) apart from the adjustment provision of s 100A(1) of the ITAA 1936, Guardian as trustee of the AIT would derive a benefit from the Scheme; and
(c) it is reasonable to conclude that Guardian as trustee, AITCS and Mr Springer, or any two of them, entered into or carried out the Scheme, or part of it, for the sole or dominant purpose of Guardian as trustee of the AIT getting scheme benefits from the Scheme.
27 Pursuant to s 284-160(1) of Sch 1 to the TAA, the base penalty amount for each of these scheme shortfall penalties was calculated by the Commissioner for the purposes of the administrative penalty assessments issued to the AIT at 50% of the scheme shortfall amount on the basis that it was not reasonably arguable that s 100A of the ITAA 1936 did not apply to the arrangement.
28 On 5 January 2018, the Commissioner issued the following alternative assessments and assessments of administrative penalty to Mr Springer on the basis that Pt IVA of the ITAA 1936 was applicable:
Increase in assessable income
29 As to Pt IVA of the ITAA 1936 and for the purposes of the alternative income tax assessments issued to Mr Springer, the steps identified in paragraph 26(a) above were said by the Commissioner to constitute a scheme within the meaning of s 177A(1) of the ITAA 1936 (the Primary Scheme).
30 In the alternative to the Primary Scheme, the Commissioner posited a separate but not unrelated scheme within the meaning of s 177A in respect of each of the income years in question:
(a) the steps enumerated in paragraphs 7, 9, 10, 11 and 12(a) above constitute a scheme within the meaning of s 177A(1) of the ITAA 1936 (the 2012 related Scheme);
(b) the steps enumerated in paragraphs 12(b), 13, 14 and 15(a) above constitute a scheme within the meaning of s 177A(1) of the ITAA 1936 (the 2013 related Scheme); and
(c) the steps enumerated in paragraphs 15(b) and 17 constitute a scheme within the meaning of s 177A(1) of the ITAA 1936 (the 2014 related Scheme).
31 In relation to the alternative income tax assessments issued to Mr Springer, the Commissioner’s position was that, if the Primary Scheme had not been entered into or carried out, Mr Springer would, or might reasonably be expected to have had included in his assessable income the amounts of AITCS’s assessable income identified in paragraph 20 in the income years concerned, pursuant to s 98A(1) of the ITAA 1936.
32 In the alternative in relation to Mr Springer, the Commissioner’s position was that:
(a) if the 2012 related Scheme had not been entered into or carried out, Mr Springer would, or might reasonably be expected to have had included in his assessable income the amount of AITCS’s assessable income identified in paragraph 20(a) in the 2012 income year, pursuant to s 98A(1) of the ITAA 1936;
(b) if the 2013 related Scheme had not been entered into or carried out, Mr Springer would, or might reasonably be expected to have had included in his assessable income the amount of AITCS’s assessable income identified in paragraph 20(b) in the 2013 income year, pursuant to s 98A(1) of the ITAA 1936; and
(c) if the 2014 related Scheme had not been entered into or carried out, Mr Springer would, or might reasonably be expected to have had included in his assessable income the amount of AITCS’s assessable income identified in paragraph 20(c) in the 2014 income year, pursuant to s 98A(1) of the ITAA 1936.
33 In relation to the alternative income tax assessments issued to Mr Springer, the Commissioner’s position was also that, but for the operation of Pt IVA, the assessable income of AITCS in the relevant income years would be as identified in paragraph 20 pursuant to s 97(1) of the ITAA 1936. From this it was said by the Commissioner to follow that, in each of the relevant income years, Mr Springer obtained a tax benefit within the meaning of s 177C(1) of the ITAA 1936 in connection with the Scheme, being the amount of assessable income identified in paragraph 20 not being included in his assessable income.
34 Having regard to the matters set out in s 177D(2), the Commissioner’s position was that it would be concluded that one or more persons entered into or carried out the Scheme or part of it for the dominant purpose of enabling Mr Springer to obtain this tax benefit. The Commissioner’s position was that the persons and entities which entered into and carried out the Scheme or part of it included each of the Mr Springer, AITCS and Guardian (as trustee).
35 On this basis, the Commissioner’s position was that Pt IVA applied to negate the tax benefit obtained by Mr Springer by including the amount of assessable income identified in paragraph 20 in Mr Springer’s assessable income. His alternative assessments reflect this position.
36 The basis of the related administrative penalty assessments issued to Mr Springer by the Commissioner was that the position adopted by him was not reasonably arguable within the meaning of s 284-160(1) of Sch 1 to the TAA.
37 The foregoing then are the particular events which appeared to the Commissioner to be meaningfully related and attended, if not for the AIT then for Mr Springer, with the adverse fiscal consequences mentioned.
38 It is now necessary to add to this recitation of uncontested events, and occasion for assessed consequences, more detailed findings of fact based on the evidence.
39 Affidavit and oral evidence in the case was given by Mr Springer, one of his sons, Mr Eric Springer (Eric), Mr Daniel Shaffermann, a longstanding and trusted business associate of Mr Springer, and Mr Nigel Fischer, a chartered accountant of the firm Pitcher Partners, a longstanding accounting and taxation adviser to Mr Springer and companies and trusts controlled by him. Included in the exhibits to their affidavits or within court books tendered and also part of the evidence was contemporaneous email correspondence relating to the events described above. I thought each of these witnesses offered honest, candid, consistent evidence, which also sat well with this correspondence.
40 It is impossible to understand or objectively to characterise the events already related without placing them in the context of the then stage of Mr Springer’s business and family life and his decision to transition to retirement.
41 The following account of these subjects is based on my acceptance of Mr Springer’s evidence, supplemented by corroboration offered by Eric, Mr Shaffermann or, as the case may be, Mr Fischer.
42 Mr Springer hails from Canada. He migrated to Australia in 1991. He is, by original calling, an arborist. That occupation provided the springboard for a business career in Australia. That business career came to extend, via various corporate actors controlled by Mr Springer, described below, beyond forestry to olive farming, finance and property development and property investment. In that career, Mr Springer enjoyed considerable, although not invariable, success.
43 By the time of trial, Mr Springer had long been retired. Mr Springer’s transition to retirement commenced before, and was largely completed by, the end of the income years in question in the present proceedings. In these income years (and to this day) Mr Springer had two adult sons, Eric and his brother, Mr Richard Springer (Richard). Apart from his transition to retirement, Mr Springer’s care and concern for each of his sons is also a relevant consideration in the occurrence of the events already recited. The latter is not to say that Mr Springer’s relationship with his sons has been without its tensions, only that his care and concern has been enduring. Also part of the evidence, although but briefly mentioned, was that Mr Springer had been married but was divorced and had deliberately chosen to resolve matrimonial property settlement issues privately, rather than pursuant to litigation in the Family Court.
44 The corporate actors via which Mr Springer’s wider business career in Australia was conducted included:
(a) Springer Property Developments Pty Ltd (SPD);
(b) Paulownia Holdings Pty Ltd (Paulownia);
(c) Australian Agricultural Finance Pty Ltd (AAF);
(d) Queensland Forestry Holdings Pty Ltd (QFH); and
(e) Guardian as trustee of the AIT.
Where it is necessary to refer to these entities collectively, I term them the Springer Group (the Springer Group). Prior to the income years in question, Mr Springer also controlled other companies engaged in business activities, notably in relation to olive oil, but it is presently necessary only to make detailed reference to those in the Springer Group.
45 By the time of the income years in question:
(a) Guardian as trustee for the AIT held:
(i) 100% of the issued shares in QFH;
(ii) 99.9% of the issued shares in Paulownia; and
(iii) 67% of the issued shares in AAF.
(b) Mr Springer held:
(i) 100% of the issued shares in Guardian;
(ii) 100% of the issued shares in SPD;
(iii) 33% of the issued shares in AAF; and
(iv) 0.1% of the issued shares in Paulownia.
46 By the time of the income years in question, Guardian’s role was that of passive investment, including in the entities mentioned above. On the other hand, SPD, Paulownia, AAF and QFH were, in their time, operating, business venture companies. The distinction is an important one in the context of advice tendered to Mr Springer and decisions taken by him in relation to his transition to retirement. Further, while the businesses operated by these companies within the Springer Group had generally enjoyed success, AAF was an exception. The business operated by AAF had lost money.
47 The businesses conducted by the companies within the Springer Group were as follows.
48 Paulownia was incorporated on 2 August 1994 on Mr Springer’s initiative. Paulownia was a land holding company which owned approximately 5,000 acres of rural land which was rehabilitated to support plantation timber. The corporate name “Paulownia” is not coincidental. It refers to a very fast growing hardwood, which was Mr Springer’s particular specialty as an arborist.
49 AAF was incorporated on 21 November 1997 on Mr Springer’s initiative. AAF operated a finance business that loaned money to persons who invested in the Springer Group’s agricultural projects.
50 QFH was incorporated on 4 June 1998 on Mr Springer’s initiative. QFH was a land holding company. It owned approximately 3,000 acres of rural land which was rehabilitated to support plantation timber.
51 SPD conducted the business of property development following its incorporation on 2 August 1994. The property development activities conducted by SPD were wound down shortly before the establishment of the AIT (although SPD itself was not de-registered until 2011).
52 The establishment of the AIT has already been detailed. The AIT was established on the advice of Mr Springer’s then accountant (not Mr Fischer). The advice which Mr Springer received, and on which he acted, was to the effect that “operating a business through a trust structure would make your assets less vulnerable to legal action from creditors given that the businesses are high risk. A discretionary trust is also a useful estate planning tool.”
53 Following its establishment, the AIT, initially with Mr Springer as trustee and thereafter with Guardian assuming that role, conducted the business of industrial property investment. The AIT currently receives income in the form of passive rental income from properties it owns. For this purpose, the AIT currently owns properties at Eagle Farm and Hemmant in Brisbane, at Yatala in Gold Coast City, at Crestmead in Logan City, all in Queensland and at Sandy Bay in Tasmania. With respect to the operations of the AIT, Mr Shafferman was and remains a trusted source of advice for Mr Springer in relation to investment property management and the selection of suitable tenants.
54 By 2007, Mr Springer had made a decision to transition to retirement.
55 Mr Springer’s retirement decision was not precipitous. As far back as 2003, after another company controlled and which he recalled to be Australian Olive Holdings Pty Ltd sold shares which had entitlements to water rights, he started to reduce the scale of his involvement in business activities. Hitherto, he had undertaken active managerial involvement in the various companies he controlled, including those in the Springer Group.
56 The implementation of his transition to retirement was also not precipitous. Mr Springer decided that he should cause the various entities in the Springer Group gradually to wind down their respective business activities. In effect, what occurred was an informal winding up of the Springer Group at the initiative of its controller, Mr Springer, culminating in the de-registration of the companies concerned.
57 Also for the purpose of his transition to retirement, Mr Springer decided to take up residence in Vanuatu. This he did in late 2007. Mr Springer’s resultant understanding was that, on and from 1 July 2008, he ceased to be a resident of Australia for tax purposes. This understanding was not gainsaid by the Commissioner. Although he has since resumed Australian residence, Mr Springer was, on the evidence, a resident of Vanuatu in each of the income years in question in the present appeal. It was no part of the Commissioner’s case that either Mr Springer’s assumption of residence in that country or his maintenance of it in these income years was part of any reimbursement agreement or any scheme.
58 Some two years before Mr Springer made his decision to transition to retirement, he retained Mr Nigel Fischer, a chartered accountant and now managing partner of the firm now known as Pitcher Partners (formerly known as Johnston Rorke) to provide accounting and taxation services to the Springer Group and to him personally. In the provision of those services, Mr Fischer was assisted by a number of others within that firm, notably, in relation to the income years in question, another accountant, Ms Majella Burke. Ms Burke left the employ of Pitcher Partners in January 2015. Mr Fischer has not had any contact with her since then. However, Ms Burke worked to and under the supervision of Mr Fischer. Her involvement in that capacity is revealed in contemporaneous email correspondence in evidence.
59 It emerged in his cross-examination that a feature of Mr Springer’s operation of the Springer Group (and I infer earlier other companies controlled by him) was that no formal, forward operating budgets regarding cash flow needs were prepared. Rather, as Mr Springer agreed in his evidence, he engaged in a form of reactive management, meeting expenses as and when required or identified from funds available within the Springer Group (or, earlier, other companies controlled by him) at a given time. The retainer of Mr Fischer’s firm to provide advisory and accounting services to the Springer Group did not extend to a forward budgeting task. At most what occurred, as Mr Fischer confirmed in evidence, was an annual review, prior to the close of an income year, by his firm of the overall position of Mr Springer and of the companies and trusts controlled by him and of transactions which had occurred in the year to date. This review did not identify future cash flow needs as such, as opposed to identifying from transfers where those needs had occurred and what distributions should be made and to which entity.
60 This absence of budgetary formality is hardly unusual in a relatively small, closely controlled group of companies. Neither is an apparent practice, also revealed in Mr Springer’s cross-examination, of cross-subsidising operating debts within the Springer Group from those which had positive cash flows at a given time.
61 Mr Fischer to my observation was a careful, astute, prudent accountant. Like Mr Springer, he was an impressive witness. It was quite obvious that Mr Fischer well understood Mr Springer’s retirement aspirations, although wider aspects of Mr Springer’s personal and family life were only gradually revealed to him by Mr Springer. As they each confirmed, Mr Springer generally acted on Mr Fischer’s advice. It is necessary to say “generally” because, on the evidence, Mr Springer was no mere, uncritical cypher. On one notable occasion, Mr Springer expressly differed from the advice tendered. This was the result of a very particular care and concern which Mr Springer had arising from the circumstances of his son, Richard. I detail the reason for this below.
62 It was obvious, to my observation of Mr Springer, that he was sensitive to the respective circumstances of Eric and Richard. This, along with Mr Springer’s transition to retirement, his decision to relocate to Vanuatu and his experience from his career in business that not all are successful, are important determinatives in the occurrence of the events related above. Also important to understand in relation to those events is length and depth of Mr Springer’s knowledge and experience as an arborist. A concern which he voiced in cross-examination in relation to the disposal of particular businesses in the Springer Group was that they might be bought by persons who did not have that same depth of knowledge and experience. I accept, unreservedly, this evidence, as I do his evidence that this concern informed his thinking in relation to risk assessment when assessing advice about proposals for his transition to retirement.
63 An early sequel to Mr Springer’s acting in late 2007 on his decision to relocate to Vanuatu was that, on 27 June 2008, he resigned as director of each of the companies in the Springer Group of companies, except for AAF, with Mr Springer resigning on 1 April 2009. His son Eric was appointed the director of these companies in his place.
64 At the time, Eric had not long attained the age of majority (born in 1989). Eric continued in that role until 15 November 2012 when he relocated to the United States of America. He remained located overseas at the time of trial, giving his oral evidence via video-link from Whistler, British Columbia in Canada.
65 Eric was assisted in the day to day managerial decision-making in respect of the Springer Group and the gradual winding down of their businesses by Mr Shafferman. When one recalls Eric’s then age, this is unremarkable and exemplifies the trust and regard which Mr Springer had for Mr Shafferman. Upon Eric’s relocation overseas, Mr Shafferman came to take on the role of director.
66 None of this is to say, and no witness put forward, that Mr Springer became a disinterested recluse in Vanuatu in relation to the Springer Group. To the contrary, while he left the day to day management of the companies to Eric, assisted by Mr Shafferman, and then to Mr Shafferman alone, Mr Springer kept up to date with the affairs of the Springer Group and regularly discussed (via Skype) the group’s affairs (and investments) with each of them. Hardly surprisingly, Eric in particular, as he confirmed in evidence, gave considerable weight to his father’s views. After all, Mr Springer, either directly or indirectly, owned all of the shares in the companies in that group or effectively controlled those which did and had vast experience to offer. Further, in relation to the orderly winding down of the operations of the Springe Group, Mr Springer made a number of trips back to Australia to oversee some of the sales of land and other assets that he considered required his personal knowledge.
67 Mr Springer’s relocation to Vanuatu and his resignation from directorships in the Springer Group was the first phase of his transition to retirement. The second phase was the gradual winding down and then ultimate deregistration of SPD, Paulownia, QFH and AAF.
68 Mr Springer initiated this second phase in the 2011 income year. His evidence, which I accept, was that his aim was to “simplify his life”. On Mr Springer’s evidence, much lies behind that description, not just in terms of reduction of overall operating costs but also minimisation in retirement of business risks. Mr Springer’s aim is completely congruous with a transition to retirement. This aim was to be achieved by reducing the number of companies within the Springer Group of companies and, related to that, reducing overall accounting and other compliance costs. On the evidence, Mr Springer’s principal purpose, and the result of, this transition was the realisation of corporate assets and the continued operation of AIT as a passive investor.
69 The winding down of the operations of, culminating in the de-registration of, SPD, Paulownia, QFH and AAF occurred gradually over the period from 2010 to 2014. The firm Pitcher Partners and Mr Fischer and his subordinate Ms Burke in particular took or caused to be taken the necessary steps to secure the de-registration of these companies after their operations ceased.
70 SPD was the first to be de-registered. Inferentially, that it was the first does not look to have been coincidental, given that its property development activities had been wound down shortly before the establishment of the AIT. After that, it had been dormant. Upon Mr Springer’s initiation of the winding down, he had no further need to retain SPD. SPD was de-registered on 17 June 2011.
71 Paulownia was a different proposition in terms of ease of de-registration. By the 2011 income year, Paulownia owned timber plantations on five different properties situated near Bundaberg and Kingaroy:
(a) Island Creek (near Bundaberg);
(b) Palm Range (near Bundaberg);
(c) Mitchells Road (near Bundaberg);
(d) Kumbia (near Kingaroy); and
(e) Wooroolin (near Kingaroy).
These plantations had been developed by Paulownia but by the 2011 income year they were all leased to third parties.
72 The process of realising Paulownia’s assets began in 2010.
73 In the year ended 30 June 2011, Paulownia sold Kumbia and Wooroolin.
74 In the year ended 30 June 2012, Paulownia sold Palm Range, Island Creek and plant and equipment.
75 Paulownia was deregistered on 24 December 2014.
76 QFH owned a property, “River Bend”, situated near Bundaberg, on which it conducted a timber plantation business. River Bend was sold during the year ended 30 June 2011.
77 In 2012, Mr Springer received advice from Pitcher Partners via Ms Burke (a copy of the relevant correspondence is in evidence but it is unnecessary to set it out in detail) that the tax cost of winding up QFH would be significant. Despite this, Mr Springer’s evidence, which I accept, was that he considered that winding up this company was the most sensible thing to do, as QFH had previously traded in an active business and was no longer needed (and therefore unnecessary) for the generation of a future passive income. At the time, Mr Springer’s main concern was minimising the risk from past trading activities rather than the tax consequences of winding up the company. He recalled telling either Ms Burke or Mr Fischer words to the effect of “don’t worry about the tax, go ahead with liquidating QFH”. Mr Springer’s concern about risk from past trading activities was, as will be seen, by no means confined to QFH. That concern was, I find, an abiding consideration in his transition to retirement. It is, as I have already observed, congruent with his overall aim to “simplify his life”.
78 QFH was deregistered on 12 November 2014.
79 By the 2011 income year, AAF’s lending business had been dormant for some years. However, it retained a loan book in which there were number of bad debts - $1,056,430 in total in the 2009 income year and - $982,691.22 in total in the 2010 income year. AAF had no real property assets.
80 As Mr Springer related, and I accept, once the decision was made to wind up Paulownia and QFH it made sense also to wind up AAF. AAF was deregistered on 24 December 2014.
81 As is apparent from the foregoing, by the 2012 income year, the informal winding up of the Springer Group was well-progressed. Mr Springer related in evidence, and I accept, that, by the 2012 income year, he had formed the view that the companies in the Springer Group that had previously operated trading businesses (AAF, QFH, Paulownia and SPD) were no longer necessary.
82 On 27 June 2012, and on his own initiative, Mr Springer caused AITCS to be incorporated with Guardian as trustee for the AIT holding 100% of the issued shares. He did not seek express prior advice from, or the assistance of, Pitcher Partners in relation to this. Rather, he undertook the necessary incorporation processes online to incorporate AITCS himself. He had prior experience once before of so incorporating a company. Having so done and later on 27 June 2012, Mr Springer notified by email Ms Burke and Eric of the incorporation of AITCS.
83 While Mr Springer did not take express advice about incorporating AITCS or seek assistance for that purpose, his taking the initiative to do this was not completely coincidental or unheralded by more general advice. His thinking and acting were informed by a series of prior discussions with Ms Burke in which she had advised him about the process of re-organising the group and winding up the various companies. Mr Springer recalled, and I find, that, during one discussion with Ms Burke, she advised him with words to the effect of “you need to have a clean skin corporate beneficiary now that the existing corporate entities will be wound up” and “a new company would insulate the future wealth accumulated in a separate legal entity by providing protection from any litigation that might be commenced against the former operating entities involving the businesses they carried on”. This recollection is consistent with, and, as I find to be inherently likely, preceded, an email of 26 June 2012 which Ms Burke sent to Mr Springer.
84 Also included in evidence was a document headed “2012 Tax Planning Alex Springer”. This was an internal, Pitcher Partners document. There was no evidence that it was ever sent to, or adopted by, Mr Springer. At most, it may perhaps have provided an aide-memoir for Ms Burke in discussions but the effect of those discussions is as recalled by Mr Springer and, I find, as taken up in the email of 26 June 2012.
85 In the email of 26 June 2012, Ms Burke furnished Mr Springer with her view as to the 2012 income year tax liabilities of each of the Springer Group companies (the reference in the email to “PH” is, inferentially, a reference to Paulownia). She also stated:
This tax would be payable May 2013. However, if you wanted to deregister the companies before May 2013, you would need to pay the tax before doing so.
We are still working on GAIT Pty Ltd and the consequences of winding up this entity. However, your decision to wind-up this entity does not have to be made prior to 30 June 2012.
Our questions to you are:
1. What entity would you like the 2012 AIT distribution to go to? If you don't particularly need a ‘clean skin’ corporate entity, you can distribute to QFH (this would defer having to pay the $145k tax on windup of this entity).
2. If you wanted a clean skin corporate entity, we will need to discuss the shareholders and company name, directors etc and organise set-up this week.
3. It is worthwhile winding up PH on the basis that you only have tax of $461K to pay out nearly $6.5m of retained earnings.
4. The tax payable for AAF is as a consequence of the Myers debt forgiveness.
Once you have decided which companies to wind-up, we will issue instructions on step by step to windup.
After you have had a chance to digest this information, please give me a call to discuss.
[Emphasis in original]
86 The reference in this excerpt to “GAIT Pty Ltd” is, inferentially, a reference to Guardian. At that stage, it appears that the transitional planning for Mr Springer’s retirement extended even to the prospect of de-registering Guardian.
87 It seems inherently likely, having regard to Mr Springer’s evidence, and I find, that his recollection of Ms Burke’s use of the term “clean skin” in oral advice about the use of such a company was a sentiment subsequently taken up by Ms Burke in her email of 26 June 2012.
88 Clearly enough, Mr Springer understood the term “clean skin” to mean what one might naturally infer it meant, a company with no prior trading history. What is also clear enough from this email, and I find, is that, as at the time of its sending, no decision had been taken by Mr Springer to cause AITCS, or any other “clean skin” company for that matter, to be incorporated. Neither, at that stage, so I find, had any final decision been taken by him as to the recipient of a distribution from the AIT for the 2012 income year.
89 This then absence of any definitive decision by Mr Springer on these subjects is consistent with the evidence given by Ms Burke’s supervising partner in the firm, Mr Fischer, when shown the email of 26 June 2012 in the course of his cross-examination. At that stage, he did not know what decision Mr Springer would make on these subjects.
90 As it happened, Mr Springer agreed with Ms Burke's reference to the option of a “clean skin” company, although he had no need for her firm’s assistance in the incorporation of such a company. That agreement was completely congruent with his averseness to the risk of using a company which had a trading history. It was, Mr Springer stated, and I find, his intention at the time AITCS was incorporated that this new company would replace the function of all the other operating companies which he had resolved informally to wind up. Mr Springer stated, and I find, that he also wanted the ability to use the new company as an investment vehicle in which he could accumulate income producing assets. These were, I find, the considerations which led him to opt, on either 26 or 27 June 2012, for a “clean skin” company.
91 Mr Springer stated, and I find, that, at the time he caused AITCS to be incorporated, he gave no consideration to, and had no discussions with anybody about, any future dividend or other payments from AITCS. The email of 26 June 2012 is noteworthy for the omission of any reference to such subjects. Mr Springer’s general practice was to look to his retained accountants for advice, often after prior discussions with him about what his requirements were at a particular time. At that time, as Mr Fisher related in evidence, and I accept, he had no expectation that a newly formed company, AITCS as it came to be, would “declare a franked dividend in relation to the income that it had received from the trust back to the trust”. This absence of expectation is also consistent with Mr Springer’s recollection of discussions with Ms Burke and with the contents of the email of 26 June 2012.
92 A good deal of time was spent cross-examining Mr Fischer in relation to his particular expectations in and in relation to particular income years. This was doubtless inspired by Federal Commissioner of Taxation v Consolidated Press Holdings Ltd (2001) 207 CLR 235, a Pt IVA case, in which, at , it was stated that “[a]ttributing the purpose of a professional advisor to one or more of the corporate parties in the case is both possible and appropriate”. The questions raised in cross-examination seemed to have been informed by viewing events in hindsight, rather than by reference to a position revealed by contemporaneous communications as between Pitcher Partners and Mr Springer and contemporaneous circumstances. The absence of reference in the email of 26 June 2012 to any proposal for the declaration of a franked dividend is an example of this. Another is that the thought that a dividend might possibly be declared in the 2013 income year stemmed not from Pitcher Partners but from Mr Springer himself.
93 On its incorporation, and in keeping with a role he had assumed in respect of other companies upon his father’s taking up residence in Vanuatu, Eric became the sole director of AITCS. On 15 November 2012, as, I find, a consequence of Eric’s then impending relocation to the USA, Mr Shafferman was appointed as co-director.
94 Prior to the financial year ended 30 June 2012, the companies in the Springer Group received trust distributions, depending upon their cash requirements, from the AIT. Mr Springer stated, and I find, that the decision regarding distributions was predominantly made on an “as needs” basis, depending upon which operating entity was expected to require funds for commercial or investment activities. Mr Springer stated, and I find, that he never had any pre-determined plans for distributions and no such plan was ever raised in the many discussions he had over the years with his accounts in Pitcher Partners or Eric and Mr Shafferman (or anyone else). This, I find, is completely consistent with the absence of forward budgets earlier mentioned.
95 Instead what occurred, following Mr Springer’s departure to take up residence in Vanuatu (and resignation as a director of Guardian), was that he was kept informed, by Ms Burke of Pitcher Partners, of and proffered his opinion about, the basis of the annual allocation of AIT's income for the given year. He was also kept informed by her of the accumulation of what would be his entitlement as a beneficiary of AIT.
96 Eric, as was his practice, acted in accordance with the draft resolutions and other formal documents which came to be drafted by Pitcher Partners after consultation with Mr Springer. After he became a director, Mr Shafferman adopted a like approach.
97 In relation to the distribution of AIT’s income for the year ended 30 June 2012, Mr Springer received on 29 June 2012 an email of that date from Ms Burke attaching a draft of the proposed trustee resolution for the distribution of AIT’s income for that year. She requested that Mr Springer arrange for Eric to sign this by 30 June 2012 and return it to her.
98 Mr Springer was happy with the proposed distribution although he could no longer recall whether or not he told Eric this. In any event, the resolution was signed by Eric, as the sole director of Guardian at the time.
99 In relation to the 2012 income year, there was no suggestion that, independently of Mr Springer or anyone in Pitcher Partners, Eric had an expectation that AITCS would “declare a franked dividend in relation to the income that it had received from the trust back to the trust”.
100 This then is the background to the 2012 distributions made by the AIT.
101 On 15 November 2012, Mr Springer received a letter from Pitcher Partners which, apart from enclosing various finalised 2012 income year returns for review and signature, contained advice of options as to how the AIT distribution in favour of AITCS could be dealt with. In that letter, a number of options were canvassed:
(a) The AIT paying out the as yet unpaid present entitlement of AITCS by transferring the amount thereof in cash to a bank account of AITCS; or
(b) AIT entering into a 7-year investment agreement with AITCS so that AIT could retain as a loan the amount of the unpaid present entitlement but be required to pay interest accruing annually on the loan.
Advice was also given that the payment by the AIT of the tax liabilities of AITCS would to that extent be considered payments of the AITCS’s unpaid present entitlement and of interest amounts owed by the AIT to AITCS.
102 On or about 16 November 2012, Mr Springer informed Ms Burke in words to the effect that he would “like to enter into a 7 year investment agreement”. As Mr Springer explained in evidence, at the time he was residing in Vanuatu and “whilst my son Eric was then a director of the trustee Guardian I was the only signatory on AIT's bank account and I thought that having cheques signed by me while overseas might be logistically difficult. In addition, at the time I wasn’t comfortable with transferring such a large sum to a new bank account over which I would have no control (at least initially). At this time I gave no consideration to the possibility of AITCS declaring a dividend”. Based on my assessment of Mr Springer as an honest witness and the absence of any reference to such a subject in the letter which he received from Pitcher Partners on 15 November 2012, I accept this explanation and find accordingly.
103 Mr Springer’s “absence of comfort” in relation to the payment of funds into an account over which he would have no control was not a passing concern It is also evident in what, on the evidence, is the next relevant exchange between him and Pitcher Partners in relation to dealing with the ongoing consequences of his resolve to informally wind up the Springer Group. This exchange occurred between 25 and 28 March 2013. At that time, Mr Springer was, apparently, in Mexico. The exchange was initiated by Ms Burke on 25 March 2013. The occasion for that appears to have been the setting up by then of a bank account for AITCS. With that, at least on the face of her email, in Ms Burke’s mind, was a concern on her part, arising from legislative changes, that a “cash transfer is required, [because] the trust has distributed profit to AIT Corporate Services PL, and the tax legislation now requires that the cash be ‘physically paid across’ to the company”. The “trust” is, obviously, the AIT. Her further concern was that, “if the company then loans the money back to the trust, this creates a Division 7A problem”. The “company” is, obviously, AITCS, while “Division 7A” cannot be understood other than as a reference to the provision of Div 7A of Pt III of the ITAA 1936. It is not necessary to pass upon whether such a concern was warranted, only to note that it resulted in Ms Burke putting to Mr Springer that an alternative to a cash transfer was to enter into “what is called an ‘investment agreement’ whereby the Trust has 7 or 10 years (depending on what option you choose) to pay across the profit entitlement and all that is required in the meantime, is a payment of interest each year at approximately 8%”.
104 What is particularly noteworthy about Ms Burke’s email of 25 March 2013 is the complete absence in it of any reference to the prospect of a later dividend being paid by AITCS.
105 That subject was raised, and, I find, raised for the first time, by Mr Springer of his own volition, in the response he made on 27 March 2013 (inferentially, Mexican time) to Ms Burke’s email of 25 March 2013. Materially, he stated:
I am not comfortable transferring that much money into an account that I have no control over. I therefore would like to enter into a 10 loan agreement with AIT and AIT Corporate Services P/L. The other option which I would do is to transfer to money directly to myself as l00% shareholder of AIT Corporate Services. The books could show the funds going directly to AIT Corporate Services and from AIT Corporate Services to me via a dividend payment. Would this comply with ATO requirements. I could then pay the 10% non resident tax on any interest generated.
Mr Springer offered in his evidence this explanation, which I accept to be his honest recollection, about his raising this dividend query, “I am not sure why I thought that as I now know that the shareholder of AITCS was the AIT. In any event this was the first time the thought of a dividend from AITCS might be paid had occurred to me.” This explanation apart, what is at least one reason for his raising the subject is apparent on the face of his email to Ms Burke. Mr Springer had a concern about a large amount of money sitting in a bank account over which he had no control.
106 In response, Ms Burke emailed Mr Springer advising that an alternative (to the investment agreement option) was for a dividend to be declared by AITCS on 1 May 2013 equal to the amount of the retained earnings. Mr Springer stated, and I find, that this was the first time Pitcher Partners (or anyone else, his own suggestion just mentioned apart) had raised the option of AITCS paying a dividend. Mr Springer stated, and I find, that, at the time, this option “seemed to me to be the simplest means of dealing with the problem of the unpaid income entitlement from the AIT”. Accordingly, on 28 March 2013, he responded to Ms Burke’s email, confirming he was happy with that proposal. Having regard to other evidence which he gave, one reason why Mr Springer was happy with this and, indeed, why he raised the subject of his own volition may well have been an apprehension on his part of a personal need at that time for money.
107 There was, before the end of the 2013 income year, a refinement of this proposal.
108 On 11 April 2013, Mr Springer received an email from Ms Burke, to which was attached an unsigned investment agreement and in which she informed him that, in addition to the paying of a dividend to clear the distribution payable to AITCS, Mr Fischer thought a 10 year investment agreement should be put in place as a safety net. Mr Springer stated, and I find that he understood that this would ensure that he (which includes the AIT and AITCS) “didn't fall foul of the Australian tax authorities”. Mr Springer recalled that he had been advised (inferentially in likelihood by Pitcher Partners, although he was not specific as to the source) at the time being advised that the Australian Taxation Office was undertaking “spot checks” on such loan agreements. In her email, Ms Burke asked Mr Springer whether he was happy for her to forward the investment agreement to Mr Shafferman for signing. There is no email response by Mr Springer to this but, in the result, Mr Shafferman, as director, signed the agreement. It is inherently unlikely that Ms Burke would have sent the document to Mr Shafferman without Mr Springer’s approval being by some means to hand. It may be, although Mr Springer had no specific recollection of this that he discussed this in advance with Mr Shafferman. However, as already related, Mr Shafferman was accustomed to acting upon the advice and related drafts of documents sent to him by Pitcher Partners.
109 Mr Springer had no express recollection of his involvement in June 2013 in decisions as to the allocation of income for the 2013 income year, save in one very particular and, as became apparent in his evidence, personal family respect. On 21 June 2013, Ms Burke emailed Mr Springer (apparently either still then in, or returned to, Mexico) a copy of a draft trustee resolution for the allocation of the AIT’s income for the 2013 income year. Notably, that draft resolution provided that the first $50,000 of “other income” would be allocated to Mr Springer’s son, Richard. As the minute of resolution came to be signed by Mr Shafferman, it contained no such distribution. Whilst he could no longer recall the details, Mr Springer’s evidence was, and I find (as it is so inherently inferentially likely, having regard to his account and the change that occurred) that he spoke to Mr Shafferman and Ms Burke and told them that Richard was not to receive a distribution that year.
110 What lay behind this was an explanation which Mr Springer related in evidence. Richard had been studying Medicine at Bond University and had suffered an injury to his back. One of the unfortunate effects of his treatment was that he became addicted to painkillers. Bond University discovered this and he was asked to leave the university. According to Mr Springer, Richard never recovered from this setback. He became unable to manage money and so Mr Springer supported Richard without giving him money directly- such as by paying directly his rent and other living expenses.
111 This change is, in my view, revealing, as is Mr Springer’s raising of his own volition the possibility of the payment of a dividend to him. On the whole of the evidence, Mr Springer placed particular faith and trust in the advice which he received from Pitcher Partners but it bears repeating that he was never an uncritical cypher. This inquiry in relation to a dividend is one example, his rejection of a proposed trust distribution to his son, Richard, is another.
112 These then are background circumstances which occurred in the 2013 income year to the uncontested events related earlier in these reasons for judgement.
113 As to events in and in relation to the 2014 income year, Mr Springer had no particular recollection of his involvement in the distribution of the net income of the AIT for that income year, although he accepted he had received an email of 17 June 2014, authored by Ms Burke, which was addressed to him and to Mr Shafferman. Once again, that co-addressing was not coincidental inferentially reflecting Ms Burke’s understanding of the formal directorship of Guardian as well as Mr Springer’s control over both that company and the AIT.
114 Enclosed with that email were draft minutes in respect of a trust distribution decision. In the result, this recommended distribution was adopted by Mr Shafferman on behalf of Guardian with the result that it resolved to distribute the sum of $2,670,117 to AITCS for the 2014 income year. This sum was not physically paid to AITCS. Mr Springer was aware of this.
115 Mr Springer stated, and I find, that he was not informed by either by Ms Burke or Mr Fischer about the prospect of a dividend being declared during this year or that he would ultimately receive it. Neither, he stated, and I find, did he raise a suggestion that it be paid. One reason for this may well have been, based on Mr Springer’s evidence, that, unlike in the previous income year, he did not then have any particular personal need for funds.
116 Sometime later but before the end of the 2014 income year, Mr Springer was informed by Mr Shafferman in word to the effect that, “based on advice received from Pitcher Partners, I am going to sign a loan agreement between AIT and AITCS converting the outstanding balance of the 2014 trust distribution into a loan.”: Such a loan agreement was subsequently made.
117 Mr Springer was aware of the 2015 trust income distributions made by the AIT and that a dividend was not declared by AITCS in this and subsequent income years. Mr Springer has no expectation of any further dividends from AITCS. The funds AITCS currently holds have been invested on term deposit. On or about 28 June 2015, AITCS was also made presently entitled to the “other income” of the AIT. Mr Springer received a distribution from the AIT of any franked dividends which had been paid to the trust.
118 On 3 May 2016, to Mr Springer’s knowledge, the AIT transferred $2,846,925 to the bank account of AITCS in full payment of the outstanding balances of the 2014 and 2015 trust distributions payable.
119 Against this background, and that of some further factual conclusions best identified when discussing the application, if any, of particular provisions of the ITAA 1936, I now consider whether the assessments have been proved to be excessive? Of the two appeals, it was common ground that Guardian’s was the lead case. I shall therefore consider it first.
Section 100A - Guardian
120 At the risk of over-simplification but flowing from the text of s 100A of the ITAA 1936, three principal issues are raised in relation to these assessments:
(a) Was there a reimbursement agreement, as defined?
(c) If so, did the present entitlement of AITCS in a given income year arise from such an agreement?
(d) If so, was that present entitlement attended with a tax avoidance purpose?
121 The relevant operative provision upon which the assessments depend is s 100A(1) of the ITAA 1936, which provides:
(a) apart from this section, a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate; and
(b) the present entitlement of the beneficiary to that share or to a part of that share of the income of the trust estate (which share or part, as the case may be, is in this subsection referred to as the relevant trust income) arose out of a reimbursement agreement or arose by reason of any act, transaction or circumstance that occurred in connection with, or as a result of, a reimbursement agreement;
the beneficiary shall, for the purposes of this Act, be deemed not to be, and never to have been, presently entitled to the relevant trust income.
[emphasis in original]
122 Obviously enough, because “reimbursement agreement” is a defined term the first issue, issue (a), is whether there was an agreement as defined at all.
123 Subsection 100A(1) posits, in s 100A(1)(b), as a condition of application, the existence of a relevant connection between a reimbursement agreement and a present entitlement. It is from that provision that the second issue, issue (b) arises.
124 If s 100A(1) is applicable, the effect of the deeming for which that subsection provides is that s 99A of the ITAA 1936 was applicable to Guardian, because, by that deeming, there was no beneficiary presently entitled to the net income of the AIT.
125 Subject to certain qualifications also specified in s 100A, a “reimbursement agreement” is defined by s 100A(7) as follows:
(7) Subject to subsection (8), a reference in this section, in relation to a beneficiary of a trust estate, to a reimbursement agreement shall be read as a reference to an agreement, whether entered into before or after the commencement of this section, that provides for the payment of money or the transfer of property to, or the provision of services or other benefits for, a person or persons other than the beneficiary or the beneficiary and another person or other persons.
Subsection 100A(8) provides:
(8) A reference in subsection (7) to an agreement shall be read as not including a reference to an agreement that was not entered into for the purpose, or for purposes that included the purpose, of securing that a person who, if the agreement had not been entered into, would have been liable to pay income tax in respect of a year of income would not be liable to pay income tax in respect of that year of income or would be liable to pay less income tax in respect of that year of income than that person would have been liable to pay if the agreement had not been entered into.
With its succession of negatives, s 100A(8) is awkwardly drafted. Working through these, its effect is remove from the agreements otherwise captured by s 100A(7) those which do not have as a purpose the removal or reduction of a liability to tax by a relevant person in a given income year. It is from s 100A(8) that the third issue, issue (c), is derived.
126 Also relevant is s 100A(13) in which “agreement” is defined in this way:
agreement means any agreement, arrangement or understanding, whether formal or informal, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings, but does not include an agreement, arrangement or understanding entered into in the course of ordinary family or commercial dealing.
[emphasis in original]
127 The occasion, as expressed in the relevant explanatory memorandum (Explanatory Memorandum to the Income Tax Assessment Bill (No.5) 1978 (Cth)), for the insertion of s 100A into the ITAA 1936 and its place in the general scheme for the taxation of trust income is described in the joint judgment of Hill and Sackville JJ (Beaumont J agreeing) in Federal Commissioner of Taxation v Prestige Motors Pty Ltd (1998) 82 FCR 195 (Prestige Motors). However, as is later made plain in Federal Commissioner of Taxation v Consolidated Media Holdings Ltd (2012) 250 CLR 503, to begin with such subjects would apt to distract from a necessary starting point, which is the text of the relevant provision. The discipline of such a textual focus is evident in the conclusions reached in Prestige Motors, at 220 and 220 – 221 respectively, that:
(a) there is no warrant for restricting the meaning of the word “person” in s 100A(8) to a beneficiary or a trustee of a trust;
(b) as a defined term, the meaning of “reimbursement agreement” is sui generis, uninfluenced by whatever meaning one might otherwise afford “reimbursement” when used adjectively.
128 A textual approach does support a submission made on behalf of Guardian. That submission was that, for s 100A to have application, the reimbursement agreement concerned must precede “the payment of money or the transfer of property to, or the provision of services or other benefits” (flowing from the text of s 100A(7)) and the present entitlement of the beneficiary (flowing from the text of s 100A(1)(b)).
129 As to the latter proposition, just such a construction of s 100A(1) was favoured by Hill J in East Finchley Pty Ltd v Federal Commissioner of Taxation (1989) 90 ALR 457 (East Finchley), at 473-474. Later, in Prestige Motors, in conjunction with Sackville J, Hill J cautioned about elevating an example cited in East Finchley on particular facts as to who might be expected to be a party to a “reimbursement agreement” into a settled construction of the reach of that definition. However, nothing in the joint judgment in Prestige Motors calls into question the view reached by Hill J in East Finchley that the effect of s 100A(1) was that the “reimbursement agreement” had to precede the present entitlement. Although the conclusion expressed by Hill J in East Finchley was given in the original jurisdiction, and is not therefore binding, I would only depart from it if I considered that conclusion clearly wrong. In this instance, looking at the text of s 100A(1), I respectfully consider his Honour’s conclusion to be clearly right.
130 The text of s 100A(7) supports, by analogy, a conclusion that the reimbursement agreement must necessarily precede “the payment of money or the transfer of property to, or the provision of services or other benefits”.
131 On the findings of fact which I have made above, what the Commissioner termed “the 2012 Understanding”, detailed above, just did not exist at all.
132 Like Hill J in East Finchley, at 474, I have no difficulty in accepting that a “reimbursement agreement” need not be legally enforceable and may be attended with great informality. How could it be otherwise in the face of the definition in s 100A(13)? But accepting this breadth of meaning, it must be possible to conclude that something answering the description of “reimbursement agreement” in s 100A(7) pre-existed the present entitlement. There is just no support for this in the contemporaneous evidence as to events in June 2012 on or prior to the resolution on 28 June 2012 which created the present entitlement of AITCS, not even a foundation for reasonable inference. A hypothetical contingency open in law but never considered is not sufficient to yield that. It is only many months later that even the possibility of the declaring of a dividend by AITCS emerges. The requisite temporal sequence is lacking. There is no “relevant connection”.
133 In itself, this is a reason for concluding that s 100A had no application in the 2012 income year so as to deem AITCS not to be, and never to have been, presently entitled to the relevant trust income of the AIT for that income year. There are others.
134 By virtue of the definition of “agreement” in s 100A(13) of the ITAA 1936, excluded from the application of s 100A is an agreement, arrangement or understanding entered into in the course of ordinary family or commercial dealing.
135 In June 2012, there was an agreement, arrangement or understanding entered into. The incorporation of AITCS, the appointment of AITCS as a member of the eligible beneficiary class of the AIT and the resolution by Guardian that AITCS be entitled to the relevant net income of the AIT for the 2012 income year were no coincidence. Mr Springer controlled Guardian and the AIT. He also controlled AITCS on and from its incorporation and, inferentially, was always going to control whatever “clean skin” company was incorporated and then introduced as a member of the class of eligible beneficiaries. The steps mentioned occurred pursuant to an agreement, arrangement or understanding. The parties to the agreement, arrangement or understanding were Mr Springer and Guardian. There was no need for AITCS, as the introduced beneficiary, to be a party to the agreement: Prestige Motors; Idlecroft Pty Ltd v Federal Commissioner of Taxation (2005) 144 FCR 501 (Idlecroft).
136 However, for reasons which follow, the agreement was entered into in the course of ordinary family or commercial dealing. And, as already found, no element of the agreement, arrangement or understanding as made in June 2012 in any way entailed the future payment of a dividend by AITCS.
137 It is inherently unlikely that parliament’s choice of language in excluding from the definition of “agreement” one entered into “in the course of ordinary family or commercial dealing” was coincidental. The correspondence between the exclusion and the choice of language adopted by the Judicial Committee of the Privy Council in Newton v Federal Commissioner of Taxation (1958) 98 CLR 1, at 8, to exemplify a class of transactions excluded from the purview of the then general anti-avoidance provision, s 260 of the ITAA 1936 – “transactions [that] are capable of explanation by reference to ordinary business or family dealing, without necessarily being labelled as a means to avoid tax” – is too uncannily similar for there to be a mere coincidence.
138 Of course, meaning and effect must be given to the text chosen by parliament, not to the “muffled echoes of old arguments”: Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404 (Spotless Services), at 414. But where parliament itself has chosen to listen to that echo and to enshrine it in the text of legislation, giving meaning to that text does not in my view preclude at least understanding what the “old argument” entailed.
139 It was submitted on behalf of Guardian that such an understanding was offered in observations made by Heerey J in Rippon v Federal Commissioner of Taxation (1992) 23 ATR 209 (Rippon), a case which arose under s 260 of the ITAA 1936. In elaborating upon his understanding of an “ordinary business or family dealing”, Heerey J, at 213, referred to the historically unremarkable use and benefits of adopting a corporate structure when about to embark on a new business venture. His Honour further stated, at 214, with reference to the use of a discretionary trust:
A person with a family who establishes a business will often want to use a legal structure to achieve the result that some or all of the financial benefits which, hopefully, the business will generate will go to family members. Both legal obligation and natural love and affection encourage such an objective. The adoption of a structure that will achieve it is, to my mind, an ordinary family dealing. It is comparable to one of the examples of ordinary business or family dealings given by the Privy Council in Newton immediately following the passage quoted in this judgment, viz a declaration of trust made by a father in favour of his wife and daughter: see 98 CLR at 9. Whether the structure actually chosen is a company with different classes of shares or a discretionary trust or a combination of both, such an arrangement does not necessarily bear the stamp of tax avoidance, notwithstanding that the person establishing the structure may be better off in terms of his personal tax liability compared with his position were he to embark on the new venture as a sole trader on his own account.
140 These observations are, with respect, helpful in terms of an understanding of the “old arguments”. But the position remains that they are not a substitute for the text adopted by parliament.
141 In the joint judgment in Spotless Services, at 415, and in the context of Pt IVA of the ITAA 1936, reference was made to a “false dichotomy” between on the one hand, “a ‘rational commercial decision’ and on the other to the obtaining of a tax benefit as ‘the dominant purpose of the taxpayers in making the investment’”. That same point was later emphasised in Federal Commissioner of Taxation v Hart (2004) 217 CLR 216 (Hart). Yet in the text of s 100A and unlike in Pt IVA, a dichotomy is overt in the definition of “agreement” in s 100A(13). As Hill and Sackville JJ observed in Prestige Motors, at 216, the “only exclusion” from the great generality of what constitutes an “agreement” as defined is “an agreement, arrangement or understanding entered into in the course of ordinary family or commercial dealing”.
142 Textually, in relation to s 100A, if there is no “agreement”, as defined, s 100A(7) can have no application. This difference as between the definition of “agreement” in s 100A(13) and the definition of “scheme” in s 177A(1) of the ITAA 1936, and this consequence in relation to the absence of application of s 100A(7), may well offer another example of the awkward drafting in s 100A. But it is that text which has been approved by parliament. And, given the exclusion present, it is not to say that purpose is irrelevant to the construction and application of the definition of “agreement” in s 100A(13).
143 The construction of s 100A adopted in Prestige Motors and Idlecroft binds me. Indeed, that construction carries particular authority, as the discussion by the High Court of s 100A in Raftland Pty Ltd v Federal Commissioner of Taxation (2008) 238 CLR 516 (Raftland), at  proceeded on the basis that each of these cases was correctly decided. However, neither in Prestige Motors, Idlecroft nor in Raftland was it necessary to consider the effect, in relation to any possible application of s 100A(7), of a conclusion that an agreement, arrangement or understanding was entered into in the course of ordinary family or commercial dealing.
144 Read in context, the adjective “ordinary” in “ordinary family or commercial dealing” has particular work to do. It is used in contradistinction to “extraordinary”. It refers to a dealing which contains no element of artificiality. This is confirmed by reference to the relevant explanatory memorandum, where one finds reference to addressing the mischief of specially introduced beneficiaries having a fiscally advantageous status. This explanatory memorandum confirms what a reading of s 100A would suggest, which is that the section is directed to addressing, according to its terms, “trust-stripping”.
145 As it happens such an understanding of “ordinary family or commercial dealing” does accord with what the Judicial Committee in Newton and Heerey J in Rippon did not regard as tax avoidance.
146 Returning to the facts, Mr Springer was, in June 2012, well-embarked on a transition to retirement. As I have found, he wanted to “simplify his life” and much lay behind that. He had lengthy experience of business. He had experience of a business which had not proved successful – AAF. It is clear to the point of demonstration from his evidence that he wanted in his retirement, and hardly unsurprisingly, to minimise the prospect that any risks from the trading life of particular corporations carry over into that retirement. That was always the attraction for him of a “clean skin” corporate beneficiary in the eligible beneficiary class for the AIT. Mr Springer put his apprehension of risk with what I thought was impressive, spontaneous, unpretentious, compelling candour in this direct way in the course of his cross-examination:
I sold the business – business to somebody who was a lawyer and knew nothing about trees. So my risk, when he went broke, was that well, not only would he go broke but then they would, perhaps, somehow, wrap me into it and somehow I would get sued. So I was just trying to protect myself from any possible legal implications of being involved with somebody who had previously gone broke.
In this answer, Mr Springer’s first person reference to “I” in relation to the selling of the business is a reference to the selling of a business by a corporation controlled by him. The balance of the first person references in this answer are, as I understood them, references to his being made personally liable for any corporate vendor fault. There was no suggestion that this apprehension was contrived or irrational. Nor, as to the latter, reasonably could there have been, given legislative provision for individuals to be made personally liable for any misleading or deceptive conduct by a corporation.
147 Later, towards the close of his evidence, Mr Springer gave, to my direct observation, transparently honest answers to similar effect:
And did that inform your decision about not using any of the operating companies any further?---Well, I was just worried they would come back and bite me and that was the reason I wanted to get rid of those old companies and have a new one was so that nothing would come out of the past and attack me.
The last thing you wanted in retirement?---Exactly.
148 By the start of the 2012 income year, there was a pattern of sorts with AIT during the time when Mr Springer controlled actively trading corporations which were eligible. Such corporate beneficiaries usually received a large trust distribution with much lesser distributions being made to one or the other or each of Mr Springer’s by then adult sons, Eric and Richard. In the 2011 income year, Guardian also resolved to distribute 100% of the franked dividends received by the AIT to Mr Springer. Notably, it was only franked dividends, on which Australian tax had already been paid at corporate level, that were distributed to Mr Springer. Further, inferentially reflecting the prevailing, reactive managerial style, trust distributions were not in any formal way the result of prior forward-budgeting decisions. In this sense, they had an ad hoc quality both in amount and selected corporate beneficiary. So the pattern I have mentioned has a clarity in hindsight that it never had in prospect. In the 2012 income year, Guardian resolved that all franked dividends and all interest income received by the AIT be distributed to Mr Springer and that, of other income, $45,000 be distributed to Richard, with the balance being distributed to AITCS.
149 There came a point in Mr Springer’s transition to retirement when that distributions to a corporation which was actively trading, or had actively traded, no longer made commercial or family sense. That point was reached in June 2012.
150 Of course, in a sense, AITCS was a “specially introduced” corporate beneficiary. But the purpose of that introduction in June 2012 is wholly explained by Mr Springer’s desire to minimise risk in retirement and to have a new separate legal entity to which trust distributions (as an alternative to existing members of the class of eligible beneficiaries) might be made and as a vehicle which might be used for passive investment and wealth accumulation. The introduced corporate beneficiary, AITCS, enjoyed no special tax status under Australian law. Further but related to that, never having traded, it did not even bring with it whatever tax advantage there may have been in carry forward losses from such trading. The documents contemporaneous to June 2012 reveal a complete absence of contemplation by anyone in Pitcher Partners or Mr Springer personally that AITCS be used as a vehicle for streaming via dividend payments. Axiomatically, in law that was possible but that was never a feature of any prior plan.
151 Introducing a corporate beneficiary which had never traded, and never would, achieved the desired risk minimisation. It allowed the shielding of distributed income and accumulated wealth from any creditors of individuals who were also members of the class of eligible beneficiaries. It then provided a legal entity separate from those individuals via which wealth might be accumulated and invested. It also retained the advantage, always hitherto present with other but now no longer needed corporate members of the eligible beneficiary class of the AIT, of not having to make a large distribution in a given year to an individual, be that individual Mr Springer or one or the other or each of his sons. There are familial, not just commercial risk minimisation, advantages in such flexibility. And, on the evidence, Mr Springer had a fractious, not fractured, relationship with his sons and a fractured relationship with a wife. Also a consideration in terms of flexibility was that, as at June 2012, although also a member of the eligible beneficiary class, Mr Springer was a non-resident for Australian taxation purposes. There also existed the contingency, realised in practice as it happened in December 2012 with Eric, that a son might in the future also choose to live abroad.
152 For those in business, trade or private practice in a profession or other occupation, risk minimisation is not just a consideration at the point of embarking on such a venture or even while one is actively embarked on the venture. At least amongst the prudent, and Mr Springer is a member of that class, it endures as a consideration as one transitions into retirement and in retirement. One obvious reason for this is that limitation periods for civil proceedings do not cease on an individual’s retirement. The risk minimisation benefits of the limited liability company either alone or in conjunction with a discretionary trust described by Heerey J in Rippon are not confined to the outset of a venture. Also at the other end of a venture, their employment does not necessarily bear the stamp of tax avoidance. More aptly, in terms of the language employed in the definition of “agreement” in s 100A(13), their employment is not necessarily incompatible with an “ordinary family or commercial dealing”. In this particular case, and for the reasons given, the incorporation of AITCS, its appointment as a member of the eligible beneficiary class and the resolution to make a distribution to it of trust income were each nothing more than an ordinary family or commercial dealing.
153 It was put on behalf of the Commissioner that the evidence did not support a conclusion that wealth accumulation was ever a purpose of the introduction of AITCS as a corporate, beneficiary because that did not occur in practice. However, not only do I accept that this was a purpose of its introduction but that purpose was realised in practice. By 30 June 2014, AITCS, which had come into existence but two years earlier, had retained earnings of $1.9 million. By 30 June 2019 AITCS had retained earnings of $3.18 million. AITCS did exactly what in June 2012 it might do and continue to do throughout a retirement of indefinite duration.
154 For these reasons, it follows that no “agreement”, as defined, was made in June 2012. For that reason, s 100A(7) could have no application in that income year.
155 Even if there were such an “agreement”, s 100A could still have no application, because that agreement did not provide for “the payment of money or the transfer of property to, or the provision of services or other benefits for, a person or persons other than the beneficiary or the beneficiary and another person or other persons”. As was stated in Raftland, at , with reference to s 100A(7), “It is, however, necessary that a reimbursement agreement provide for the payment of money, transfer of property or the provision of services or other benefits to a person other than the beneficiary.” The agreement made in June 2012 provided only for the payment of money to a beneficiary, AITCS. It went no further. It could not therefore be a “reimbursement agreement”.
156 Given the way the definition of “agreement” is cast, a conclusion that an agreement, arrangement or understanding was entered into in the course of ordinary family or commercial dealing necessarily also means that there was, in the 2012 income year, no “agreement’ as defined, to which s 100A(8) could have application.
157 If, however, s 100A(8) of the ITAA 1936 fell for consideration as posited by the Commissioner, the inevitable conclusion would be that the purposive test which it posed excluded s 100A(7) from application.
158 In East Finchley, at 474, Hill J observed of s 100A(8) that:
It will be recalled that s 100A(8) requires the purpose of entering into the relevant arrangement to be the reduction of a liability of some person to income tax. It requires the hypothesis to be formulated as to what income tax would become payable if the relevant agreement had not been entered into.
[emphasis in original]
His Honour’s choice of language in this observation flows from the text of s 100A(8), where “would have been liable”, “would not be liable” or “would be liable” are employed. Nothing later said in Prestige Motors, Idlecroft or Raftland calls into question the correctness of that observation.
159 It was submitted on behalf of Guardian that, in the employment in s 100A(8) of “would”, parliament had opted for a higher level of hypothetical, predicative conclusion than if “might” had been used. Reference was made to McCutcheon v Federal Commissioner of Taxation (2008) 168 FCR 149 (McCutcheon), at  in which Greenwood J, in considering s 177C(1)(a) of the ITAA 1936, observed that “might reasonably be expected to have been included”, “seems to contemplate a lower threshold of prediction” than “would have been included”. His Honour immediately qualified that observation by noting that, in Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359 (Peabody), at 385, the Court (Mason CJ, Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ) concluded that a “reasonable expectation” involves “a prediction as to events which would have taken place if the relevant scheme had not been entered into or carried out and the prediction must be sufficiently reliable for it to be regarded as reasonable”.
160 As a matter of ordinary English, and the observation made by Greenwood J in McCutcheon was obviously so based, I respectfully agree that “might” contemplates a lower level of prediction than “would”. However, as his Honour’s immediate, qualifying reference to Peabody demonstrates, “might” is not used in isolation in s 177C(1)(a) but rather in a phrase, “might reasonably be expected”. Further, the observation made by Greenwood J in McCutcheon was provoked by the alternative posed in s 177C(1)(a). There is no such alternative in s 100A(8). In that subsection, “would” just carries its ordinary English meaning. Insofar as anything more need be stated as to what s 100A(8) requires, it was stated by Hill J in East Finchley.
161 The Commissioner’s counterfactual was that the trust income would have gone directly to Mr Springer instead of to AITCS. Given the beneficiary class for which terms of the AIT trust deed provide, that counterfactual is, undoubtedly, grounded in a lawful possibility. While acknowledging that possibility, Guardian submitted that this would never in fact have occurred. It submitted that the only two rational and reasonable counterfactuals as to what would have occurred in the 2012 income year, absent the Commissioner’s posited reimbursement agreement, were either that AITCS would have received and retained in full its unpaid present entitlement in cash, as it in fact did in in respect of the 2014 unpaid present entitlement, or it would have invested it with Guardian in accordance with a Div 7A compliant loan agreement, as it did on 12 April 2013, before the dividend was paid in that income year.
162 Guardian supported this submission by relying by analogy, with observations made by Jessup J in AXA Asia Pacific Holdings Ltd v Federal Commissioner of Taxation (2009) 77 ATR 829, at . There, and with reference to the hypothetical posed for the purposes of Pt IVA, his Honour stated:
The exercise thus postulated, in my view, is wholly one of fact-finding. A fact is not disqualified, a priori as it were, from consideration merely by reason of it having been an element of the scheme which was in place. To the contrary: what the taxpayer and his or her associates in fact did in the commercial circumstances which existed is likely to shed much light on what they would have done in the absence of the scheme, and in some cases to be, as a matter of prediction, elements of that counterfactual.
An appeal by the Commissioner against the orders made by Jessup J was dismissed (unanimously as to the Pt IVA aspect): Federal Commissioner of Taxation v AXA Asia Pacific Holdings Ltd (2010) 189 FCR 204. There is nothing in the joint judgment of Edmonds and Gordon JJ on the appeal, with which, as to Pt IVA, Dowsett J agreed, which calls into question the correctness of this statement by Jessup J.
163 The required prediction in s 100A(8) is indeed sufficiently similar to make this statement relevant by analogy. The test posited is an objective one and the onus of proof falls on the taxpayer. But one way in which this onus of proof can be discharged is via proof as to what the prevailing circumstances were and what was in fact done in light of them by the taxpayer and its, her or his associates. The prevailing circumstances may not, and in this case were not, confined to the commercial. Prevailing personal, including family, circumstances may be pertinent, even decisive, in terms of predication as to what would have occurred.
164 As with the test in Pt IVA, evidence from a person such as Mr Springer or even Mr Fischer is relevant but in no way determinative, because the test is an objective one.
165 In terms of prevailing circumstances, that Mr Springer was in transition to retirement in the 2012 is clear. Also clear and uncontrived is his concern about risk from the past trading activities of corporations in the Springer Group. Flowing from these overarching considerations was a need for a “clean skin” corporation to be the recipient of distributions from the AIT and to accumulate and invest wealth. Yet further, and as Mr Fischer’s evidence highlighted, Mr Springer was already a wealthy man. As at 30 June 2012, he had unpaid present entitlements in the AIT of $10.63 million. In addition to that, he had loaned the trust some $3.84 million. There was no suggestion that loan was irrecoverable. He just did not need the trust distribution posited by the Commissioner in order to enjoy his retirement.
166 Mr Fischer’s evidence was that, in these circumstances, he would never have recommended to Mr Springer the payment of such a distribution. It bears repeating that such evidence is in no way determinative. But it does accord with what, objectively, especially in the circumstances mentioned, “would have” occurred. Either AITCS would have received and retained in full its unpaid present entitlement in cash or it would have invested it with Guardian in accordance with a Div 7A compliant loan agreement, or perhaps some combination of these. Neither of these counterfactuals entailed any tax consequence for Mr Springer personally.
167 For these reasons also, s 100A had no application in the 2012 income year.
168 Unlike in the 2012 income year, and as an uncontroversial finding, by the time AITCS became presently entitled to trust income in the 2013 income year, consideration had been given to the payment of a dividend by AITCS and a franked dividend had been paid. However, as at time of the resolution which resulted in that present entitlement, 23 June 2013, whether AITCS would again pay a dividend was wholly conjectural. Neither then nor beforehand was there any agreement, arrangement or understanding between Mr Springer and Guardian that this would happen. The email correspondence from Pitcher Partners sent in January 2014 is eloquent. This reveals that it was not until some six months after the trust distribution resolution that Pitcher Partners put to Mr Shafferman in relation to how to deal with the unpaid present entitlement for the 2013 income year were the options of a payment in cash or the payment of a franked dividend. There is no suggestion that this email was a contrivance for later fiscal evidentiary purposes.
169 It was not until 27 February 2014 that AITCS declared a fully franked dividend.
170 Of course what is disclosed by the January 2014 email is not determinative. But this accounting firm was an influential adviser. And what is in the advice is consistent with all of the background circumstances. Mr Springer remained in transition to full retirement; indeed, that longstanding plan was further advanced. There remained a need for AITCS, a “clean skin” corporate beneficiary, for risk minimisation, flexibility and wealth accumulation and investment purposes. Also by then, the theoretical contingency of an adult son relocating overseas had, in the person of Eric, been realised. Both as at the time of the 2013 income year trust distribution and, for that matter thereafter, Mr Springer remained, independently of any distribution or dividend, a wealthy man.
171 What the Commissioner termed the 2013 Understanding just did not exist as between Mr Springer and Guardian. Further, for like reasons to the 2012 income year, this was just an ordinary family or commercial dealing. Yet further, again for like reasons to those given in respect of the 2012 income year, what “would have” occurred was that AITCS would have received and retained in full its unpaid present entitlement in cash or it would have invested it with Guardian in accordance with a Div 7A compliant loan agreement, or perhaps some combination of these. The Commissioner’s postulated distribution to Mr Springer would never have occurred. That was never more than a, lawful, theoretically available possibility.
172 I have already referred to the clarity of hindsight in relation to the cross-examination of Mr Fischer. But the caution which attends hindsight also attends a conclusion for the purposes of s 100A(8) as to what “would have” occurred and, for that matter, what “might reasonably be expected” for the purposes of s 177C(1)(a). In submissions, Guardian drew attention to a reminder about that offered by Gleeson CJ in Rosenberg v Percival (2001) 205 CLR 434, at , in relation to proof of causation in an action for damages for negligence grounded in a failure to warn:
In the way in which litigation proceeds, the conduct of the parties is seen through the prism of hindsight. A foreseeable risk has eventuated, and harm has resulted. The particular risk becomes the focus of attention. But at the time of the allegedly tortious conduct, there may have been no reason to single it out from a number of adverse contingencies, or to attach to it the significance it later assumed.
A similar cautionary note attends concluding what “would have” occurred. Of course, the Commissioner’s case also looks to what had occurred in the past. But unless one appreciates that what is occurring is ad hoc from year to year repetition can in hindsight lead one to predict what “would have” occurred based upon a supposed pattern or anterior plan where in truth there is none.
173 For these reasons, s 100A had no application in the 2013 income year.
174 As to the 2014 income year, there was no dividend sourced from a present entitlement of AITCS. So it is a curiosity how, even if the 2013 Understanding existed in fact, and it did not, s 100A has application. The only anterior forward plan was that, in the context of Mr Springer’s transition to retirement and for reasons already canvassed, a “clean skin” corporate beneficiary would be introduced into the AIT’s eligible beneficiary class so as to be able to receive trust distributions, accumulate wealth and make passive investments. That plan never went any further than that. Everything else was ad hoc from year to year. Section 100A had no application in the 2014 income year.
175 It follows that, in respect of each income year in question, Guardian has succeeded in proving the income tax assessment concerned to be wholly excessive. It thus also follows that the penalty assessments are wholly excessive. The objection decision must be set aside and the matter remitted to the Commissioner or the making of the requisite amended assessments.
Part IVA – Mr Springer
176 Because Guardian has been wholly successful in is appeal, and because the assessments made of Mr Springer were alternative assessments, it is absolutely necessary to consider whether Mr Springer has proved these alternative assessments to be excessive.
177 Over the period covered by the income years in question, Pt IVA was amended (by the Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Act 2013 (Cth), Act No 101 of 2013), principally so as to insert an entirely new section, s 177CB, but also so as to insert a new version of s 177D. Neither party submitted that, in the circumstances of this particular case, these or more minor amendments of Pt IVA which occurred over the income years in question required any particular differentiation as between versions of Pt IVA, income year by income year, in a consideration of whether Mr Springer had discharged his onus of proving the assessments made of him personally to be excessive. I have not therefore embarked on any such consideration.
178 The definition of “scheme” in s 177A is very broad. As Gummow and Hayne JJ stated in Hart, at , “The very breadth of the definition of ‘scheme’ is consistent with the objective nature of the inquiries that are to be made under Pt IVA.”
179 The Commissioner formulated a primary and a number of alternative, narrower schemes, as set out above.
180 Disparate views have been expressed in the High Court as to the purpose of the Commissioner’s identifying a scheme. One purpose of the identification of a scheme upon which the Commissioner relies is to prevent embarrassment or surprise to the applicant party in a taxation appeal or review: Hart, at  per Gummow and Hayne JJ. It may be accepted that mere imprecision or error by the Commissioner would not necessarily prove resultant assessments to be excessive. However, imprecision in the identification of a “scheme” may make objectively discerning, as at the time when a scheme was entered into or carried out, a purpose of obtaining a tax benefit or a dominant purpose of obtaining that tax benefit very difficult.
181 Also in Hart, for Gleeson CJ and McHugh J, at , identification of the scheme had an importance beyond procedural fairness, because it pervaded each of s 177C, s 177D and s 177F. For their Honours, it had importance in determining both dominant purpose (s 177D) and tax benefit (s 177C). And Gummow and Hayne JJ accepted in Hart, at , that the “fundamental question remains whether, having regard to the eight matters listed in s 177D(b), ‘it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer [alone or with others] to obtain a tax benefit in connection with the scheme’”?
182 So broad is the definition that the steps and course of conduct identified by the Commissioner as the Primary Scheme could constitute a “scheme”, as defined. But, as at June 2012, there was nothing pre-ordained about either the declaring on 1 May 2013 by AITCS of a fully-franked dividend payable to the AIT or the like declaring of a fully franked dividend by AITCS on 27 February 2014. These were just theoretical contingencies open in law by the enlarging of the eligible beneficiary class of the AIT so as to include another corporation. However, as the contemporaneous correspondence in June 2012 reveals, even the existence of that theoretical contingency was not then adverted to.
183 Although this is a consideration made expressly pertinent by s 177D, the purpose, objectively, and certainly not the dominant purpose, of the Primary Scheme as identified by the Commissioner was never the streaming of a franked dividend to AIT and thence to Mr Springer. There is a contrivance or artificiality about the Primary Scheme, but that contrivance or artificiality is that of the Commissioner, informed by the false wisdom of hindsight.
184 It is permissible just to adopt a global approach in relation to the eight factors identified in s 177D(2). Were I to adopt such an approach in relation to the Commissioner’s Primary Scheme, then the conclusion I would reach, in keeping with a similar predication yielding one reason why s 100A is inapplicable to Guardian, would be that, the dominant purpose of Mr Springer, Guardian and, for that matter, even AITCS (controlled by Mr Springer in any event) or Mr Fischer, was always, on and from 27 June 2012, the minimisation of risk to Mr Springer in retirement and having a new corporate beneficiary in AIT’s eligibility class to which distributions might be made instead of to an individual and which might, into the indefinite future, serve as a vehicle for wealth accumulation and passive investment. This was always the “ruling, prevailing, or most influential purpose”: Spotless Services, at 416.
185 The like conclusion about the Primary Scheme can be reached by consideration in individual detail of the factors specified in s 177D but first it is convenient to examine s 177C.
186 In relation to s 177C and as mentioned above, the Commissioner’s position is that, if the Primary Scheme had not been entered into or carried out, Mr Springer would, or might reasonably be expected to have had included in his assessable income the amounts of AITCS’s assessable income in the relevant income years pursuant to s 98A(1) of the ITAA 1936.
187 In all respects, the onus of proving the assessments made of him to be excessive, never shifts from Mr Springer. In relation to s 177C, I am bound to follow what was said by the Full Court in RCI Pty Ltd v Federal Commissioner of Taxation (2011) 84 ATR 785 (RCI); 2011 ATC 20-275. The following statement by the Full Court in RCI, at  to , is applicable to the Primary Scheme:
Discharging the true onus
133 It has been said on more than one occasion in recent times that how a taxpayer goes about discharging the onus of proving that the taxpayer did not obtain a tax benefit in connection with a scheme, or of proving that the taxpayer only obtained a tax benefit less than that determined by the Commissioner, is a matter for the taxpayer: Trail Bros (at FCR 420 ; ATR 790 ; ATC 11,218 ; ALR 49 ).
134 It may, for example, lead evidence that the taxpayer would have undertaken a particular activity, or adopted a particular course, in lieu of the scheme; or it may lead evidence that the taxpayer would not have undertaken a particular activity, or adopted a particular course, in lieu of the scheme: see, for example, [Federal Commissioner of Taxation] v News Australia Holdings Pty Ltd (2010) 79 ATR 461; 2010 ATC 20-191. Generally, such evidence is unlikely to be sufficient to discharge the onus unless it is supported by objective indicia to be gleaned from the context and matrix of underlying or “foundation” facts, as they have been called: see McCutcheon v [Federal Commissioner of Taxation] (2008) 168 FCR 149 at 163 – 169  –  … per Greenwood J as well as the logic of the taxpayer’s counterfactual having regard to the commercial or financial aspirations and limitations of the parties to the scheme; without such support, such evidence is likely to be regarded as no more than purely speculative.
135 On the other hand, in a given case, such evidence may not be necessary because, for example, the result of any objective enquiry as to the counterfactual is, at best, inevitable or, at worst, compelling. In such a case, the failure to lead evidence to say that the taxpayer would have undertaken a particular activity or adopted a particular course, in lieu of the scheme; or the failure to lead evidence that the taxpayer would not have undertaken a particular activity, or would not have adopted a particular course, in lieu of the scheme, will not lead to the taxpayer failing to discharge the onus.
136 Yet again, a taxpayer may not lead any direct evidence, but establish that there is no tax benefit through expert evidence: see Futuris Corporation Ltd v FCT (2010) 2010 ATC 20-206; 80 ATR 330. And as Peabody itself establishes, the absence of any tax benefit obtained in connection with the scheme might be established by demonstrating the illogicality of the taxation consequences upon which the Commissioner’s counterfactual is predicated, in that case the lack of any rebate of tax on dividends on the Kleinschmidt shares held by TEP Holdings as trustee.
188 In this case, Mr Springer has sought to discharge the onus of proof by a combination of evidence – his own, that of Mr Fischer and, overwhelmingly and underpinning and consistent with his and Mr Fischer’s evidence, by reference to contemporaneous correspondence and events. For like reasons to those already given in relation to the s 100A based assessments of Guardian, and even allowing for whatever difference there may be between “would have” and “might reasonably be expected”, the Commissioner’s posited counterfactual is not just something which might not reasonably be expected to have occurred but for the Primary Scheme. It is, with respect, against all reason.
189 It is clear to the point of demonstration that what might reasonably be expected to have occurred is that AITCS would have received and retained in full its unpaid present entitlement in cash or it would have invested it with Guardian in accordance with a Division 7A compliant loan agreement, or perhaps some combination of these. The loan agreement option would have had attraction to Mr Springer, because of an expressed concern on his part about leaving a large amount of funds in a bank account over which he had no control. There is contemporaneous support for such a predication in the form of such loan agreements. The Commissioner’s postulated distribution to Mr Springer would never, ever, have occurred. There is Mr Fischer’s emphatic evidence to this effect. No competent adviser would have recommended such a course. Yet further, Mr Springer just did not need the money and would never, in this respect, have acted contrary to Mr Fischer’s advice. And neither Eric nor Mr Shaffermann would have embarked on a frolic of their own.
190 The result is that there is no tax benefit.
191 Even if there were, consideration of the eight factors in detail serves only to reinforce a conclusion as to an absence of a dominant purpose to obtain a tax benefit.
192 The manner in which the scheme was entered into or carried out was that the appointment of income to the corporate beneficiary, AITCS, in each year created a present entitlement which was unpaid. The dividend was declared in each of the following two income years in order to set off that unpaid present entitlement, thereby ensuring that there would not be a deemed dividend under Div 7A. So much is clear on the contemporaneous evidence set out above, initially as a sequel to the subject of a dividend later having been raised by Mr Springer. The form and substance of the scheme were identical. The timing of the dividend was in each instance shortly before the end of an income year, and concerned with ensuring the provisions of Div 7A would not be infringed (which would have resulted in a deemed dividend).
193 The operation of the ITAA 1936, but for Pt IVA, is that AITCS was assessed to (and paid) tax on the income to which it was presently entitled at the corporate rate. Further, Div 7A did not operate to deem any of the 2012, 2013 or 2014 unpaid present entitlements to be a dividend. In the 2013 and ’14 years of income, the appointment of the fully franked dividends to Mr Springer were, pursuant to s 128D of that Act, non-assessable, non-exempt income, because he was a non-resident at the time.
194 When one looks to the subject of any change in Mr Springer’s financial position, during the 2012 income year Mr Springer did receive an appointment, but his financial position in that income year did not change as a result of the Primary Scheme. It was only the following year that he received a fully-franked dividend via the corporate beneficiary, AITCS. Mr Springer did not receive any benefit or part of any part of the income that was appointed to that corporate beneficiary. There was no collateral arrangement by which he benefitted, in substance, from that income at all. Similarly, in the 2013 and 2014 income years, Mr Springer’s financial position only improved to the extent of the franked dividends. The improvement in his financial position is not explicable by any tax benefit. As was put on his behalf, “He was entitled to cash as a consequence of the appointments and that’s how his financial position improved.”
195 Looking to any change in the financial position of any person connected to Mr Springer, AITCS accumulated substantial assets, being a sequel to its present entitlements. But the improvement in its financial position is not explicable by any tax benefit but rather by the income to which it was entitled. That, in particular, is very difficult to reconcile with a dominant purpose on the part of any relevant person to obtain a tax benefit.
196 Another factor to consider is any consequence for Mr Springer or any other person of the Primary Scheme. Assuming that there was a scheme as postulated by the Commissioner, it fulfilled its purpose of asset protection and other benefits for a man in advanced transition to full retirement including a related purpose of the accumulation of assets by AITCS. All of this accorded with objective circumstances about a transition to retirement. It also accorded with Mr Fischer’s evidence as to various non-tax benefits why he would recommend a trust appointing to a corporate beneficiary. One consequence of the scheme was that the corporate beneficiary thereby had the flexibility as to if and when it declared a dividend. But the payment of such a dividend, franked or otherwise was never a dominant purpose. It was just an inherent feature, beneficial in the contingency it offered, of a corporate beneficiary.
197 As to the nature of connection, there was undoubtedly was a connection between Mr Springer and, relevantly, AITCS, as there was also a connection between Mr Springer and Guardian and the AIT. But the attractions in AITCS had everything to do with Mr Springer’s stage of life, his apprehensions as to risk and his family circumstances. I have already canvassed these above. Neither individual nor collectively do these factors led to a conclusion that there was any dominant purpose to obtain a tax benefit by any relevant actor – Mr Springer (or any entity controlled by him), Eric, Mr Shaffermann or Mr Fischer.
198 The position is no different if one looks alternatively to what is termed above the 2012 related scheme, the 2013 related scheme or the 2014 related scheme. Indeed, in relation to the 2014 related scheme, the position is even more stark. This “scheme” entailed nothing more than the appointment of income to a corporate beneficiary and the entry into a compliant loan agreement. For reasons already canvassed, the income concerned one might never, reasonably, expect that income would have been appointed directly to Mr Springer.
199 For these reasons, Mr Springer’s appeal must be allowed and the Commissioner’s objection decision set aside. In lieu thereof, it should be ordered that his objection to the 2012, 2013 and 2014 income tax assessments be allowed in full.
200 I add that a necessary corollary of the allowance of the appeals by Guardian and by Mr Springer is that there is no foundation for the penalty assessments.