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Notes on the Westpac Case

On Avoidance Generally …

- No real need to look at pre-Ben Nevis cases [para 170]

- Ben Nevis is a “diplomatic rejection” of the orthodox principles of tax avoidance set out in Richardson J’s majority decision in Challenge [para 176]

- Ben Nevis mandates a more general enquiry as to the economic reality of the transaction [para 194]

- “Merely incidental” test gives the court scope to make “evaluative judgements” on transactions that also have a business purpose [para 211-212].  However the application of this test will be rare [para 619].

- The “social cost” of the arrangement, failure of the taxpayer to publicise the transaction and the fact that the advantages were only available to foreign-owned banks were not factors relevant to tax avoidance enquiry [para 577]

- The conduit rules do not require dividends to be passed through to foreign parent [para 610]

- The scale and intensity of tax shelter in this case far removed from individual purchaser’s use of leverage to acquire residential property [para 615]

On the transaction itself …

- Guarantee Procurement Fee (GPF) was not a financial arrangement [290] or incurred in deriving gross income [para 310] therefore not deductible! [see comment below]

- Viewed objectively the transaction did not make commercial sense [para 586] although it had a commercial purpose [para 590] (JP: what is the purpose of a transaction that makes no sense?)

- Bank’s investment was, in economic substance, a loan [paras 332 & 336] (although Harrison J does not appear to carry this idea through to his avoidance analysis).

- Harrison J focuses on the GPF as the core of the avoidance arrangement:

  • GPF did not satisfy any objective or fair measure of value [para 594].
  • It was not within an acceptable market range [para 439].
  • GPF did not serve a business purpose [para 594]
  • GPF was merely a device to share the tax benefit [paras 480-1 & 487].
  • When the GPS was removed from the transaction there was no element of profit [600].
  • GPF was a contrivance [595].

- The tax avoidance arrangement included funds raised to make the investment. [572] Commissioner entitled to reconstruct entire arrangement including funding costs [646].

Comment …

If GPF was the key element of the transaction that made the arrangement tax avoidance – how can the Commissioner reconstruct under GB 1 when, in practice, the contrivance failed to avoid any tax?

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