Insight,

No Avoidance Here – Taxpayer Wins Minerva Financial Group Pty Ltd v Commissioner of Taxation Appeal

AU | EN
Current site :    AU   |   EN
Australia
China
China Hong Kong SAR
Japan
Singapore
United States
Global

On 8 March, the Full Federal Court (FFC) found for the taxpayer and held that the general anti-avoidance rules (Part IVA) did not apply to the discretionary distributions made by the trustee of a securitisation trust.

Key Takeaways

This decision provides an important refresher on the operation of Part IVA of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) with key takeaways including:

  • taxpayers should ensure they have evidence surrounding the rationale for any scheme. While the Part IVA test is an objective test, the context of the arrangement can assist with ascertaining the dominant purpose;
  • the importance of assessing the 8 factors in section 177D(2) as a whole and not in isolation in forming a decision on dominant purpose of the scheme;
  • Part IVA does not pose a “but for” test, that is: a dominant purpose cannot be drawn merely because “but for” the tax benefit, another course of action would have been adopted; and
  • transactions in a wholly owned / commonly owned group effected by entries to intra-group loan accounts (rather than transfers of cash) are not unusual and should not of themselves suggest a dominant purpose of a scheme to obtain a tax benefit.

Bonus Takeaway Points

  • The restructure, in a manner to silo corporate vehicles from trust vehicles (with passive assets), was not a scheme to which Part IVA applied at first instance (and was not appealed by the Commissioner). This sets a precedent that the adoption of a stapled structure (and more specifically trusts holding passive assets) is not necessarily an arrangement to which Part IVA should apply.
  • There was a reiteration of the difference between cash and income, cash being fungible and, on this basis, comparing the flow of cash and flow of income cannot be used in evidencing a difference between form and substance of the scheme.
  • This case, like the first instance decision, indicates that Part IVA can apply to a trustee’s choice whether or not to distribute trust moneys i.e. making a beneficiary presently entitled to income. While the FFC held in favour of the appellant, there was no conclusion that Part IVA cannot apply to the trustee’s choice to distribute income, indicating it is not a “choice” exempt from Part IVA under section 177C(2)(a)).

Facts

The appellant, Minerva Financial Group Pty Ltd (MFG), is a member of a group of companies and trusts known as the Liberty group (Liberty) which provides non-bank financial services. The parent of Liberty was Jupiter Holdings B.V. (Jupiter) up to 12 April 2013, and Vesta Funding B.V. (Vesta) after 12 April 2013. Jupiter and Vesta are both incorporated in the Netherlands.

In 2007, Liberty group was restructured into a “trust silo” (Minerva Financial Group Trust (MFGT) and its subsidiaries) and “corporate silo” (MFG and its subsidiaries) in anticipation of an IPO. The key elements of the restructure were as follows:

  • MFGT was established with its units being held by the appellant, before being transferred to Jupiter;
  • Minerva Holding Trust (MHT) was established with one ordinary unit issued to MFGT and one special unit issued to Liberty Financial Group Pty Ltd (LF) and Minerva Credit Pty Ltd (a subsidiary of LF). From that date, units in new securitisation trusts were issued to MHT (eg, income and capital units). Under the constitution of the MHT:
  • MFGT was presently entitled to the Distributable Income of MHT as the holder of the Ordinary Unit (cl 13.8);
  • LF was presently entitled to Distributable Income of MHT as the holder of a special unit and any distribution was at the absolute discretion of the trustee (cll 13.5, 13.7); and
  • Absent the trustee exercising its discretion to make a distribution to a holder of a Special Unit, MFGT, as the holder of the ordinary units, was entitled to all of MHT’s Distributable Income.

The structure diagram of the group following the restructure is below (as produced in the FFC decision).

In tax years 2012 to 2015, MHT made considerable profits and distributed them to the trustee of MFGT and then to Jupiter. MHT was only subject to 10 percent withholding tax (as opposed to a corporate rate of 30%, if the income had flown to LF).

Decision at First Instance

The Commissioner determined that there had been a tax benefit in connection with a scheme for each of the tax years 2012 to 2015, to which Part IVA applied. The Commissioner issued amended assessments to which the appellant objected against. The Commissioner disallowed the objections and the appellant appealed to the Federal Court.

At first instance, the Commissioner relied on three schemes:

  • The establishment of the trust silo, with MHT being nominated as the income holder and the distribution of income from the securitisation trusts to MHT (“first scheme”);
  • The transfer of units in MFGT from the appellant to Jupiter. The Commissioner sought to impugn the transfer of units in MFGT from the appellant to Jupiter (“second scheme”); and
  • The failure by the appellant as trustee of MHT to distribute any more than nominal amounts of income to the special unitholders in MHT (being LF and one of its subsidiaries) (“third scheme”).

There was no dispute that each of the three schemes were a “scheme” for the purposes of Part IVA. There was also no dispute that the appellant obtained a tax benefit within the meaning of section 177C in each relevant year in respect of each scheme.

The proceedings turned on whether, based on the factors set out in section 177D, a reasonable person would conclude that a party entering into or carrying out any part of the scheme did so for the dominant purpose of enabling the appellant to obtain a tax benefit.

At first instance the Court held that Part IVA did not apply to the first scheme, but that it applied to the second and third schemes on the basis that there was no evidence by the appellant (other than the tax benefit) as to why it only distributed nominal amounts of income from MHT to the unitholders in the relevant years and accordingly the dominant purpose of the scheme must have been to obtain a tax benefit.  

Full Federal Court Appeal

On appeal, the FFC in a single judgement allowed the appeal, setting aside the decision of the primary judge and remitting the matter to the Commissioner for reassessment.

The FFC at [60] reiterated the relevant principles of Part IVA in a helpful (and what we predict will be an often cited) manner before considering the issues in question, being each of the section 177D factors to ascertain whether there was a dominant purpose of the scheme to obtain a tax benefit.

The manner in which the scheme was entered into or carried out

The FFC held that the manner in which the appellant came to exercise its discretion did not support a conclusion that any party entered or carried out the scheme for the dominant purpose of enabling the appellant to obtain a tax benefit. The FFC came to this conclusion by looking at the context post restructure, the role of each of the entities and the manner in which the distributions were made.

Form and substance of the scheme

The FFC agreed with the Primary Judge in that the substance (that MFGT benefited from its ownership of ordinary units in MHT) was the same as the form of the arrangement.

The FFC did not agree that the form and substance were different owing to the fact that while net income flowed to MFGT, the funds associated with MFGT’s income flowed to LF in the form of loans. The FFC held that as cash flows and income flows are distinguishable, with cash as fungible, the substance and form of arrangement were not different.

The time at which the scheme was entered into and the length of the period during which the scheme was carried out

The FFC held that the timing was a neutral matter as it was a factor of the MHT constitution.

The result in relation to the operation of ITAA36 that, but for Part IVA, would be achieved by the scheme

The FFC held this factor was neutral as the scheme, via the distribution of income to Jupiter/Vesta, had real economic and financial consequences to them that would not have flowed had the income been distributed to LF.

The FFC emphasised that pointing to a tax benefit of the scheme, or that less tax would be paid in another scenario, does not support a conclusion that the dominant purpose of any of the parties to the scheme was to enable the taxpayer to obtain a benefit, and that it must be considered in light of the other factors.

Any change in the financial position of the relevant taxpayer / any person in connection with relevant taxpayer that has resulted, will result, or may reasonably result be expected to result, from the scheme  

The fifth and sixth factor were considered together. The FFC rejected the Commissioner’s argument that LF’s financial position was negatively impacted because LF had less retained earnings and capital adequacy on the basis that it:

  • (a) overlooked the real economic and financial advantages to Jupiter/Vespa, as any increase to LF’s retained earnings would have been at the expense of Jupiter/Vespa;
  • (b) the evidence does not support a finding that the non-exercise of discretion caused it to have a lower capital adequacy ratio and thereby jeopardised its credit rating;
  • (c) merely because LF’s financial position changed does not automatically support a conclusion that the scheme was carried out for the dominant purpose of obtaining a tax benefit; and
  • (d) there is no evidence LF suffered a detriment other than the obvious consequence that it did not receive the distributions, as it remained profitable, solvent and maintained its credit rating in each of the relevant years; and it otherwise received management and administration fees.

Any other consequence for the relevant taxpayer, or for any person referred to in paragraph (f), of the scheme having been entered into or carried out

The FFC considered the factor was of no assistance because neither party identified any non-fiscal or non-financial consequences which is what the factor is directed towards.

The nature of any connection between the relevant taxpayer and any person whose financial position is affected as a result of the scheme 

While the entities were connected by common ownership and the connection enabled distributions to be paid by entries to intercompany loan accounts, as it was accepted by the Court at first instance (and not challenged on appeal) that the creation of the corporate silo and trust silo was not a scheme to which Part IVA applies, the connection between the entities is of no consequence in determining whether there was the requisite dominant purpose.

Conclusion

The FFC found for the appellant, a win for the taxpayer, signalling the importance of looking at the context of the arrangement, including the commercial parameters and wholistically analysing the 8 factors in section 177D, and a timely reminder of the difficulty of proving a dominant purpose to obtain a tax benefit.

LATEST THINKING
Insight
This week, the Federal Government formally shelved its ‘nature positive’ reform legislation after failing to secure support for the bills in the Senate.

06 February 2025

Publication
In our APAC Climate Guide, experts across the region share their insights as they help clients to navigate the transition. We look at the incentives encouraging clean energy, how carbon markets are expanding, the growth of sustainable finance and the role of the private sector. We also look at focus areas in each jurisdiction, from wind power in Japan to electric vehicles in China.

05 February 2025

Insight
As of Monday 3 February 2025, all wind farms in Queensland will be subject to impact assessable development as a result of legislative changes pushed through on Friday 31 January 2025.

03 February 2025